BEARNOBULL’S WEEKENDER

The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.

Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.

(…) Humans are inherently bad at predicting the future. It’s a defect all too apparent in the corporate world, and in the business of managing complex geopolitics.

But some people have better track records than others, and the ways in which they think about questions and arrive at their projections offer clues as to how the rest of us might become more successful forecasters.

A group of researchers isolated these traits in a study tied to a geopolitical forecasting tournament arranged by an R&D group run by the US director of national intelligence. (…)

The best forecasters were the brightest, both in terms of cognitive ability and political knowledge. But many other traits and behaviors mattered as well. Thinking style is important; people who are actively open-minded performed significantly better. They’re much more willing to consider unorthodox ideas or results, and to stray from the theories and beliefs they’re comfortable with.

(…) The researchers found that being instructed to recognize and avoid bias and to use outside views had a huge impact. So did training in probabilistic approaches, like using forecasting models to average the likelihood of all possible outcomes for a given question. People who simply spent more time pondering each question also did better, as did those who habitually updated their forecasts when new information came in.

Feedback and attitude matter, too. Over the course of the tournament, team members got frequent updates on their Brier scores (a measurement of the accuracy of probabilistic predictions) and how they compared to those of other participants in the exercise. Those who saw forecasting as a skill to be developed and responded to the feedback were more accurate.

Teams are (much) better than individuals

The tournament lent itself to an experiment where people could be divided into a range of different work environments. Some of the University of Pennsylvania’s 743 team members—computer scientists, mathematicians, and financial investors among them—worked on their forecasts independently. Others worked in groups of up to 15 where they could freely debate and share predictions. The groups were trained extensively in how to work well together to help their teammates produce better forecasts.

The people working in groups performed significantly better than those working alone, with forecasts that were about 10% more accurate. Working in a team boosted the effect of other positive attributes, like intelligence and open mindedness.

There are negative aspects to working on a team, like the potential to mistakenly follow a crowd, or the tendency to end up in factions. But the positive aspects—such as the opportunity for dissent to arise, the diversity of knowledge to draw on—outweighed them.

The reality remains that forecasting financial markets is a fools’ game. Using factual historical data to gauge probabilities of future trends and adjust the asset mix based on individual risk aversion profiles is the only sensible way to go.

We can safely assume that robots will shortly replace most forecasters. Shimon and the Shimis are not yet there but what they do is nevertheless music to our ears…

Rest assured that when our future robotic overlords come on the scene, they’ll have a sweet sense of rhythm.

The Robotic Musicianship Group at Georgia Tech has been working on Shimon, a musical robot that can improvise melodic accompaniment, for about six years now. And for three years, they’ve added Shimi — a small, smartphone-connected bot that can respond to music with dance and sound — to the mix.

6 amazing minutes: http://wapo.st/1CgKPWD

NEW$ & VIEW$ (30 JAN. 2015): Housing Back To Normality; EU Deflating; Earnings.

U.S. HOUSING
U.S. Pending Home Sales Decline in December and for All of 2014

The National Association of Realtors (NAR) reported that pending sales of single-family homes declined 3.7% last month (+6.1% y/y) following a revised 0.6% November increase, last month reported as 0.8%. For all of last year, pending home sales declined 3.5% and reversed most of the 4.5% gain in 2013.

Home sales in the Northeast fell 7.5% last month (+6.3% y/y) and nudged 0.4% lower for the full year. Sales in the West declined 4.6% in December (+6.3% y/y) and were off 6.9% during all of 2014. Home sales in the Midwest fell 2.8% (+1.9% y/y) and retreated 5.8% for the year. In the South, pending home sales declined 2.6% last month (+8.6% y/y) and fell 1.4% during the whole year.

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Fingers crossed But there is hope:
Best year in a decade for household formation

The best labour markets in a decade proved very favourable to household formation in 2014. According to just-released data, the number of occupied housing units surged 1.7 million through the year ending Q4 2014. As today’s Hot Charts shows, that was the best showing in a decade. Unfortunately, the trend has yet to improve for owner-occupied housing: the homeownership rate actually declined to a new multi-year low of 63.9% in Q4. All of the new demand for housing was
actually for rental units. As shown, the proportion of household that are renters ended the year at a 20-year high of 36%.

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Household formation which has ben so weak since the financial crisis is back to its long term range (red dot on ISI chart below).

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The latest report showed that household formation increased by 1.66 million from a year earlier, with 2 million more renter households and 350,000 fewer owner households.

We now have the homeownership rate also back to pre-bubble, more normal range…(chart from CalculatedRisk)image

…right after rentals are not as available, rents have soared and mortgages have become much more affordable vs rentals.image

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The housing market can begin to behave more normally. Young adults employment is rising nicely and mortgage rates are falling along with gas prices. Young families can now afford a house which offers an exit for the move-up segment.

Eurozone Consumer Prices Fall Sharply Consumer prices in the eurozone fell more sharply and more broadly in January, heightening the risk of a slide toward deflation that the ECB hopes to halt and then reverse through its new bond-buying program.

The European Union’s statistics agency said on Friday that consumer prices were 0.6% lower than in January 2014, having fallen 0.2% on an annual basis in December. The decline in prices was the largest since July 2009.

The latest drop in inflation was driven largely by falling energy prices, but also by declining prices for manufactured goods as businesses passed on some of the savings they have made on their energy bills. Food prices also fell, while prices of services rose more slowly than in recent months.

The core rate of inflation fell to 0.5% from 0.7% in December. (…)

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Disappointed smile Digging into Eurostat data, I found that core inflation collapsed 1.9% MoM in January. If core prices remain unchanged, core inflation will turn sharply negative YoY in March (1.3%). Prices of Services, up 1.0% YoY, actually dropped 0.6% MoM in January and have declined 1.4% since peaking last August.

Eurozone Consumers Expect Prices to Fall

(…) For the first time since early 2010, consumers expect prices to fall over the coming 12 months. And they aren’t alone: whether they are manufacturers, service providers or retailers, businesses also expect their selling prices to decline over the coming year.What the ECB fears most of all is that consumers and businesses will grow accustomed to falling prices, and adjust their behavior accordingly. Many economists and central bankers believe that falling prices don’t by themselves constitute deflation. For that chronic condition to take root, consumers and businesses have to cut back on spending because they expect prices to fall further, the outcome being a decline in output and employment that pushes prices even lower.

Fingers crossed EU CONSUMERS SPENDING

Pointing up There is mounting evidence that households are increasing their spending on goods and services other than energy. Figures from France also released Friday showed household spending rose by 1.5% in December, three times faster than economists had expected. While retail sales rose less sharply in Germany—by 0.2% from the previous month—that increase followed two months of strong rises. Compared with December 2013, sales were up 4.0%.

A bounce in consumer spending aided an acceleration in Spain’s economy during the fourth quarter, statistics institute INE said Friday. The eurozone’s fourth-largest economy grew 0.7% in the three months to December, compared with the previous quarter, INE said. That is equivalent to an annual pace of growth of 2%, INE added. In the third quarter, it had posted 0.5% growth from the earlier period. (WSJ)

South Korea Stares Into the Deflationary Abyss

As Japanese exporters enjoy an earnings boost from the weakened yen, their rivals in South Korea are struggling with a stronger won. Hyundai Motor’s net income fell 14 percent in 2014, the biggest decline since 2008. The automaker’s subsidiary, Kia Motors, suffered a 22 percent drop in profits, with earnings in the fourth quarter collapsing 54 percent. The picture isn’t bright for Korean retailers, either. Consumers are spending less at department stores Lotte Shopping and Shinsegae.

The bad results are adding to worries that the South Korean economy may soon stumble into a Japan-style deflationary trap. Consumer prices rose just 0.8 percent in December compared with a year earlier, and Samsung Securities expects prices in 2015 to rise less than 1 percent. From last October to December, the economy grew 0.4 percent over the previous quarter, and domestic demand contracted 0.6 percent. (…)

Korea’s consumers are stretched, with household debt at 87 percent of GDP, the highest in Asia. Unfortunately for Koreans looking to policymakers for solutions, the government and the central bank can’t agree on the extent of the problem. The Bank of Korea on Jan. 15 lowered its 2015 GDP growth forecast to 3.4 percent, but the next day the nation’s vice finance minister insisted the government was sticking with its forecast of 3.8 percent growth. Even the central bank’s lower number is too optimistic for some private-sector economists. Samsung Securities expects growth of 3 percent, while BNP Paribas puts it at 2.8 percent. (…)

Russia Cuts Interest Rates The Bank of Russia unexpectedly cut interest rates, painting a gloomy economic picture and prompting the ruble to fall.

The central bank cut its key rate by two percentage points to 15% after raising rates six times over the past year. The deposit rate was cut to 14%, while the repo rate went down to 16%.

The ruble weakened sharply in response, with the dollar jumping to 72 against the Russian currency from under 70 beforehand.

Oil-Price Slide Hits LNG Markets

The price of LNG, a key fuel source for power generation particularly in northern Asia’s economic powerhouses, fell to $7.45 per million metric British thermal units on January 28, according to the Japan/Korea Marker published by Platts, a pricing agency, its lowest level since June 2010.

Just a year ago LNG—natural gas that has been supercooled to a liquid at minus 160 degrees Celsius so it can be transported on tankers—was trading at around $20 a mmBtu in Asia. As recently as October it was trading at around $14 a mmBtu. (…)

Over the next two years over 60 million tons a year of new LNG supply is expected to come on stream, a flood of new supply not seen since Qatar, the world’s largest natural gas exporter, started major operations in 2007-2008. (…)

Several high-cost gas projects, from Australia to North America, that were under scrutiny when prices started weakening are now almost certain to stall or be adapted, analysts say. (…)

EARNINGS WATCH

As of last night, 211 companies (56.8% of the S&P 500’s market cap) have reported. So far, earnings ex-energy are seen up 8.3% (8.0% yesterday). Total S&P 500 EPS are seen up 5.1% (4.6% yesterday) excluding the likelihood of continued beats. So far, they are beating by 4.5% (4.4%).  Revenues ex-energy are up seen 4.1%. (RBC)