Vladimir Putin: The Antithesis of a Success Story

The annexation of Crimea may remain Putin’s only success in his Cold War against the United States.

USA_vs_RussiaFor more than a year, a typical evening news program on Russian television would open with a standard statement: “Tonight, we begin our broadcast with events in Ukraine.”

Then, the entire half-hour format would be devoted to the iniquities of the “Kyiv junta” and successes of the heroic Donetsk and Luhansk fighters, with little or no mention of what was happening elsewhere in the world or, for that matter, in Russia – as though Russians’ own country had fallen from the face of the earth.

In addition, several very popular talk shows hosted by famous TV personalities have been wholly dedicated to the task of maligning Ukraine, its people and its government.

The national fixation would seem strange, considering repeated official claims that the Russian Federation has no troops in eastern Ukraine.

A proxy war

But the truth is that the Russian government doesn’t believe it is fighting Ukraine. It is fighting in Ukraine and its real adversary is the West and more to the point, the Great Satan itself, Washington.

Vladimir Putin confirmed this yet again in the odious TV documentary “Crimea: the Path to the Motherland,” which aired across Russia last weekend, by calling the United States “the true puppeteers” of the Ukrainian revolution.

Anniversary celebrations of the annexation of Crimea in Russia have a distinctly hollow ring. An initial success in Russia’s war against the United States was achieved because, as Putin also admits in the film, he had insidiously planned the annexation of Crimea for a long time and because the Ukrainian army was completely unprepared to defend the peninsula.

After that, the war has not been going especially well.

On the contrary, all of Putin’s plans have failed. After the flight of buffoonish Viktor Yanukovych, Ukrainians have been able to elect a legitimate government and to build a stronger, battle-hardened military.

Ukraine’s economy is struggling, but it has not collapsed and bankruptcy is now unlikely, given the $17.5 billion aid package approved by the International Monetary Fund earlier this month. Slowly but surely, the Ukrainian economic system is undergoing the necessary reforms that have been delayed by a quarter of a century.

Meanwhile, Putin’s Novorossiya project, had envisioned annexing eastern and southern portions of Ukraine to connect by land to Crimea and to link with the breakaway Transnistria region of Moldova. The project has failed miserably, shrinking to the size of two small, lawless and starving “People’s Republics.”

Compounding failures

Outside of Ukraine, a wider war against the West has been going even worse.

The European Union shrugged off Gazprom’s bluff, demonstrating that Russia needs European customers for its natural gas much more desperately than Europeans need the gas to keep warm in winter. And all the while Europe continues to diversify its sources of supplies of natural gas — away from Russia.

When Putin signed a deal with the Chinese last year, offering them Siberian gas at fire sale prices, Russia’s European customers yawned.

Russia’s bellicose stance has done nothing to shore up international oil prices, either. Even though Russia produces around 10% of world crude oil, its price has been falling steadily since mid-2014 and is now plumbing fresh multi-year lows, with the Brent benchmark trading below $54 per barrel.

Last year, when the United States and its allies imposed sanctions on Russia, Putin banned food imports from those countries in return. But if he had hoped to damage their economies, it was a resounding flop.

Even the EU, Russia’s major trading partner, shrugged off those sanctions rather easily, finding new markets for its food products. Russia’s own economy, meanwhile, has been reeling. Food prices in particular have rocketed, and quality and selection have deteriorated sharply.

Anger met with indifference

Russia’s obsession with its war against Washington is in sharp contrast to Washington’s complete indifference to Russia. Back in 2004, a friend wrote an op-ed for the Wall Street Journal which they titled “Russia off the Radar Screen,” discussing how inconsequential Russia had become in world affairs.

But at least back then it was not “rising from its knees” and flexing its muscles. Now, the situation is different. Moscow has redrawn international borders and has started a war in Europe. Moreover, it has revived the Cold War and is spending its remaining rubles on building up its military.

Nevertheless, the American media continue to ignore Russia and its leader. Take recent events, for instance, when Putin had disappeared for more than a week, cancelling important international and domestic meetings. The Russian and Ukrainian portions of the Internet exploded with intense speculation.

Fantastical versions ranged from a stroke to a palace coup and from a secret visit to his girlfriend’s maternity ward in Switzerland to a descent to the underground nuclear bunker. In the United States, there has been some lazy speculation in the media on the subject of “Where is Mr. Putin?” but it was certainly not front-page news.

National Public Radio, the U.S. equivalent of the BBC, never even mentioned Putin’s disappearance in its hourly news summary.

Hollow threats

Now in the same Crimea documentary, Putin declared that if his annexation of Crimea had not gone smoothly, he was prepared to activate Russia’s nuclear forces. In retrospect, it was, potentially, the scariest nuclear crisis since the Cuban missile standoff more than half a century ago.

It certainly signals the return to Cold War rhetoric. Then, reappearing in public the next day, Putin also put 40,000 Russian troops and the Northern Fleet on full alert.

Not only did Wall Street stage a rally on the same day, but the DAX index of German stocks set a new record, rising above 12,000 for the first time ever – even though Germany, of course, is in the immediate proximity of the scary Russian Bear.

Putin’s attempts to do enough damage to the West to get noticed are reminiscent of Ella the Cannibal, a character in the Soviet satirical classic The Twelve Chairs (written, incidentally, by two Odessa natives, Ilya Ilf and Evgeny Petrov).

Having seen the picture of Miss Vanderbilt, the daughter of the American railroad magnate, on the cover of a French fashion magazine, Ella pulls all the stops to compete. She goes on a buying spree, severely straining her family budget.

Ella’s efforts are fairly innocuous. Not so Putin’s. He’s clearly determined to raise the ante until the world sits up and pays attention.

Watching Washington ignore his antics may be amusing, but it is also a little surreal and quite scary. It seems that the Russian president is not going to rest until Barack Obama calls him to the negotiating table.

Judging by how little attention has been paid to his efforts to date, it seems it will take no less than some form of nuclear blackmail.

It may be a far-fetched notion, but it could certainly happen. As Russian opposition leader Boris Nemtsov said in an interview not long before he was murdered on Feb. 27, “You should be aware that Putin is completely insane.”

Mr. Putin goes to India

Edward Tj GeretyWhen it comes to the much debated and much promised tilt to Asia, it seems that President Vladimir Putin is winning the game.

In the last six months, he has signed two major long-term gas supply deals with China. Major new pipelines are to be built from East Siberia – funded by the Chinese. In total, Mr. Putin has snapped up at least 20% of the Chinese market for the next two decades.

His next stop is New Delhi to meet the new Indian Prime Minister Narendra Modi. Another major energy deal will be signed, which will involve both Rosneft, Russia’s main oil producer, and Gazprom.

While the details are not yet public, it seems that Mr. Putin will be signing a deal which gives Russia a key strategic role in meeting India’s energy requirements for many years to come.

Mr. Putin starts with a weak hand

Without a doubt, Russia’s economy has been much damaged by the fall in oil prices. There also is the risk of further damage from the creeping impact of sanctions designed to punish Russian behavior in Ukraine. The ruble falls day by day and there has been a large exodus of capital from Russia.

The Russian economy remains dependent on oil and gas production and exports. The state budget is just beginning to be adjusted downwards, as it becomes clear that revenues in 2015 will not match the planned figures – all of which were based on world oil prices of $90 a barrel or higher.

This is a weak hand – but President Putin is playing it well. He knows the global energy market better than any western leader and has seized the opportunity. That is why he is signing large-scale, long-term deals with two of the very few countries in the world that are anticipating rising demand and hence an increasing import requirement.

From Russia’s perspective, the deals sacrifice price to market share. Mr. Putin is more interested in securing export volumes than in the price paid. As the Chinese and the Indians well understand, the world has moved into a buyers’ market.

In neither the Chinese or Russian case are the buyers frightened by the prospect of dependence on Moscow. They will have other supply lines and must be well aware that in a market of surplus gas, Russia cannot afford to risk its future by using supply as a political tool.

Asia is the market of the future

However, at a moment of strategic weakness, Moscow is in no position to impose political terms – a fact which makes the deals all the more attractive to the buyers.

Mr. Putin’s tilt to Asia is rational for a resource-dependent economy. With North America soon to be effectively self-sufficient, Asia is the market of the future.

Mr. Putin’s approach – cool and logical, reflecting the realities of the new global economy – contrasts with the complexities of the U.S. position. That position remains mired in past commitments to old allies such as Taiwan and in domestic political concerns over issues such as human rights. That is a topic one can bet President Putin never raises on his foreign trips.

More serious, though, is the continuing American reluctance to accept that the world as a whole has not become a U.S. sphere of influence. China, and now India, are significant powers which have to be treated as such. Lecturing to others is not a good basis for an effective foreign policy.

Mr. Putin goes to New Delhi not as a leader of a superpower, but as a salesman. As a salesman, you have to start by using what the customer wants and working to provide whatever is required.

To succeed in the tilt to Asia, the United States would do well to start by listening and by treating others as sovereign powers with interests of their own. If it doesn’t, it may find that the world is starting to organize itself without the United States.

Did you know these economic facts about China … with an intro.

chinaI remember back in the 1980s, as the Japanese were buying everything in the United States that was nailed down and a lot of other things that were (think Rockefeller Center). As a New Yorker, that day in 1989, was pretty solomon day, as it was suppose to be the end of American domination. Then the Japanese economy collapsed and in 1995 they were forced to sell and Old Glory was raised once again over The Rock.

“American was back, Baby!” was the rallying cry, as the Reagan legacy of pro-business deregulations really kicked-in and the US economy picked up massive speed with the birth and development of the Internet.  The American Dream was viable for anyone with a garage and a dream.  But as dad always use to say, “What goes up, must come down.” And on a dark day in March of 2000 the Internet went POP!

Less than two years later in the middle of New York’s Financial District two building came tumbling down and again the whispers started that the American Century were over. The stock markets were shut down and when they opened ten days laters so much red ink was flowing that accounting companies started buying red ink in bulk.  Then the Bush II’s administration put tax cuts into place and a quick recovery took place.  Once again, “America was back!” but 1995 was hiding in the economic good news.

In 1995, Bill Clinton’ signed the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act,  a cornerstone of Depression-era regulation. He also signed the Commodity Futures Modernization Act, which exempted credit-default swaps from regulation. In 1995, Clinton loosened housing rules by rewriting the Community Reinvestment Act, which put added pressure on banks to lend in low-income neighborhoods. Economist predicted that these legislative acts would negatively impact the markets in eight to ten years.

Fast-forward to 2007 and the markets again go “puff.”  The American Dream was again … on life support and fading fast.

Then the United States elected President Obama promising that all this would change.  His administration along with a Democratic Congress passed the largest stimulus bill in history.  Which focused more on funding the sex lives of beetles and STD prevention than actual job creating projects.  This was followed by other economic policies that heavily regulated business including how rainwater was to flow off one’s personal structure.  The American Corporate Tax Rates became the highest in the industrial world.  Which made me think of the Smooth-Hawley Tariff Act in 1930.

This all gave rise to US companies moving out of the United States and to southeast Asia and this brings us to the Chinese Economic Boom.  The Communist State in October of this year, out did the Capitalists at their own game and restored the country’s former global economic preeminence.

So did you know?

  • Back in 1820, China was by far the world’s largest economy.
  • Two centuries ago, China’s GDP was twice that of India’s, the world’s second-largest economy at the time.
  • In 1820, China’s economy was six times as large as Britain’s, the largest economy in Europe — and almost 20 times the GDP of the still-fledgling United States.
  • On a per capita basis, China’s GDP in 1820 reached 84% of the global average.
  • By 1870, China’s per capita GDP had fallen by one third — to just 60% of the world average.
  • China’s economic decline in the second half of the 19th century was, in part, the result of the devastation of China’s agricultural lands following the Opium Wars and the Taiping Rebellion.
  • China also lost ground economically in the 19th century as Western nations grew wealthier from the Industrial Revolution.
  • As recently as 1980, China’s per capita GDP was equal to just 24% of the world average.
  • In the late 1970s, Deng Xiaoping began to implement market-based reforms that would lead to China’s economic modernization.
  • After two decades of rapid economic growth, China’s per capita GDP in 2000 was back up to 56% of the global average, almost where it stood in 1870.
  • After three decades of economic reforms, by 2010 China’s per capita GDP was equal to 103% of the global average.


BUT and life always holds a but … there is a housing and credit bubble building in China and the question is will its economy be able to handle it?
Maybe someday soon we will once again be proclaiming … “America’s back, Baby!’

The Numbers behind why shale oil prices are falling

Shale-OilWhy are shale plays getting hit so hard?

The short answer is, because oil is dropping. West Texas Intermediate has gone from $105 to $85 in three months.

But a large part of the problem has to do with the way shale drilling is financed.

Let’s say you own a shale company and you want to finance drilling a well in, say, the Bakken. You need $10 million (I am just using $10 million as an example). You have a demonstrated reserve value from the well of, say, $20 million.

Here’s how you might finance the $10 million deal. First, get a line of credit from a bank based on the value of the reserves. In turn, the lender becomes a secured creditor. Let’s say that based on a value of $20 million, a secured lender is willing to put up $5 million.

You can fund another $2 million from your own cash flow. Now you have $7 million.

For the remaining $3 million, you go to the high-yield debt market, which of course is an unsecured creditor.

Here’s what the deal looks like:

Secured creditor: $5 million
Cash flow: $2 million
Unsecured creditor: $3 million (high yield)
Total: $10 million
This is simplified, but you get the point.

Now, let’s look at what happens when oil starts to drop fast, which is exactly our scenario.

That secured creditor with the line of credit? He’s getting nervous, because now instead of reserves worth $20 million for your project, those reserves are now worth only, say, $16 million.

That’s a problem. The line of credit you will be able to get will drop because as the price of oil drops banks don’t want to lend as much

So, instead of $5 million, your secured creditor will only lend $4 million, and at a higher rate. Now you need $6 million more.

Another problem: because the price of oil is down, you can’t contribute as much from your cash flow, so instead of $2 million that you contribute, you can only contribute $1 million.

That’s $5 million total. You still need another $5 million, and now you have to go to the high-yield market.

Except the high-yield market is aware of your problems, and they want a higher interest rate too.

So here’s what this new deal looks like:

Secured creditor: $4 million
Cash flow: $1 million
Unsecured creditor: $5 million
Total: $10 million

This is a problem, because you are:

1) making less money from selling oil,
2) shelling out a lot more money in interest to your creditors.

As oil drops, you now run an increased risk of cash flow problems, and there is default risk in the debt.

So you are making less money, and your one cheap source of financing (the line of credit) is shrinking, forcing you to go to high yield.

You are in a debt spiral.

Get it? So, at what point does all this start to get problematic? That’s not easy to answer, because every company is different. There are different yields from different wells, and some have more gas than oil.

But there’s no doubt that things get a bit difficult for some producers when oil is in the low $80’s, which is where it is heading now.

And rather than differentiate between companies…which is what analysts are paid to do…there is a lot of indiscriminate selling. Oil vs. gas, doesn’t matter. Sell and ask questions later.

Here’s another point: the depletion rate is very high in these wells. You are literally squeezing oil from a rock. It can be on the order of 80 to 90 percent depletion over a couple years. So you have to constantly keep drilling new wells to meet the production quota.

And there really isn’t a lot of options. They have to drill, or they don’t have cash flow. And they still have to make the interest payments!

IPO fever is infecting Wall Street

IPOIPOs and Secondaries Surge

Alibaba’s (NYSE:BABA) IPO last week – which amounted to $21 billion in value – was the biggest in history. It was also wildly successful, as the stock surged by 38% on its first trading day. However, the US IPO market was already heating up before Alibaba’s debut: Q2 2014 saw the heaviest issuance since Q4 2007.

Recall that in spite of the fact that NBER later dated the beginning of the recession to Q4 2007, there was zero awareness that a recession might even be in store at the time. In October of 2007, shares in companies that would be bankrupt and in need of bailouts a few months later were still trading in the stratosphere (Fannie Mae’s common stock changed hands for $70, shares in mortgage insurer Ambac did likewise – the latter eventually fell to less that 2 cents). The opinion of the bien pensants at the time was that the “sub-prime mortgage credit crisis was well contained,” and the DJ Transportation Average even climbed to a new all time high in May of 2008. So Q4 2007 was definitely still a fairly good time to flog IPOs.

The time is even better now – in the wake of Alibaba’s IPO, 2014 is already all but certain to break previous issuance records. Here is a chart showing the pre-Alibaba situation as of Q2:

By Q2 2014, 160 IPOs had been issued – almost as many as in the 7 quarters Q1 2009-Q3 2010. 2011 and 2012 were relatively quiet years, but that has changed in 2013 as the market continued to surge. 2014 is well on its way to becoming a record year.

As PwC reported on the Q2 2014 numbers:

“The market for initial public offerings (IPOs) finished on a strong note late in the second quarter of 2014, recording the highest quarterly deal volume since the fourth quarter of 2007. Interest in new equity issues is expected to remain healthy heading into the third quarter, driven by continued investor demand for growth and a strong equities market environment, according to IPO Watch, a PwC US quarterly survey of IPOs listed on U.S. stock exchanges.

According to PwC, there were 89 public company debuts in the second quarter of 2014, representing $21.5 billion in proceeds raised. On an annual basis, this represents an increase of 41 percent over the 63 public listings in the second quarter of 2013, and a 63 percent increase over the $13.2 billion raised. For the first half of the year, there were a total of 160 IPOs, generating $32.4 billion in proceeds compared to 97 IPOs totalling $21 billion in the same period the previous year. The IPO market saw a spike in activity beginning in mid-June, with 25 IPOs (28 percent of IPOs) pricing during the final three weeks of the second quarter.”

(emphasis added)

Following on the heels of the successful Alibaba listing, the IPO calendar is brimful. 11 IPOs and 2 secondaries are coming to market over just the first three days of this week, 3 of which are quite large, at $460 m. (ICL secondary), $1.1 bn. (AVAL secondary) and $3.4 bn. (CFG/Citizens Financial IPO) respectively. One doesn’t get a $21 billion IPO every day, so Alibaba is not necessarily the yardstick determining what should be called “sizable.”

Alibaba on its day of listing – priced at $68/share at its IPO, it ended the day at $93.89.

How Many Offerings Can the Market Digest?

If the IPO activity in Q3 so far is any indication, the market is facing quite a big surge in supply. So far, IPO activity was easily outgunned by stock buybacks in terms of value, but the money that funds buybacks isn’t growing on trees either. Much of it is borrowed, so at the very least one has to find investors willing to buy the bonds corporations issue to finance some of their buyback activity.

This was not particularly difficult hitherto, given that the domestic US money supply has increased by a cool $5 trillion since early 2008 (another $300 billion and the increase will amount to 100% since then), courtesy of the merry pranksters at the Fed.

However, as we recently noted, after hitting a record high in Q1, stock buybacks actually retreated somewhat in Q2. Usually it is held that a combination of declining buyback activity and surging offerings could eventually weigh on the market.

However, while large stock buybacks definitely lend some support to the market by shrinking the overall share float, they always surge in conjunction with rising share prices and decline when share prices fall. So in a way they seem more effect than cause, as the managers of listed corporations apparently believe it is better to buy high rather than low, and the higher the better. Just as one can interpret large stock buybacks as bullish because they shrink the share float, one can state that a big surge in IPOs and secondaries proves that there is great demand for shares – after all, if demand were not exceptional, it wouldn’t be possible to price so many of them.

As with other investment assets, one cannot just employ a simplistic supply-demand analysis comparing new supply of stocks (IPOs) to the supply that is being retired (buybacks). After all, the vast bulk of the demand for stocks exists in the form of reservation demand, just as is the case with e.g. gold. Or putting it differently: the most important factor influencing the level of stock prices is the decision by current owners of stocks to either hold or sell at prevailing prices. The traders and investors at the margin who trade in the market every day are merely a mirror of the urgency of people to hold stocks rather than cash or vice versa.

It is not a case of demand exceeding supply, since demand and supply always balance – the number of stocks that are bought every day is exactly equal to the number that is sold. Rising prices only mean that buyers are prepared to pay more, and potential sellers aren’t prepared to sell unless they receive higher prices. This changing of hands of stocks and cash also makes all “money on the sidelines” arguments essentially useless. At the end of a trading day, the same amount of money is on the sidelines as at the beginning of it – only its ownership has changed (leaving aside the fact that additional money is created nearly every day by the Fed and commercial banks).

We would argue that a surge in IPOs and secondaries is indeed directly comparable to a surge in buybacks. Once it becomes extreme, it increasingly becomes a contrary rather than a confirming indicator. Along similar lines, the huge surge in margin debt that could be observed in recent years is also a confirming indicator until it hits extremes in terms of both absolute and relative levels (relative to market cap for instance). At that point, it becomes a contrary indicator.

The question is now whether it is possible to gauge what levels of buybacks and/or IPO activity can be called “extreme.” Unfortunately, there are no fixed yardsticks for this, given the continual change in the supply of money (which is almost always growing in the modern-day fiat money system, but not always at the same rate), as well as changes in the society-wide demand for money that occasionally happen.

So one has to consider all sides of the equation, and something that can be stated as a matter of empirical observation is that market peaks and peaks in IPO and buyback activity tend to occur after money supply growth has already been slowing down for some time. We are now in such a time period: money supply growth has begun to slow, while buyback activity has achieved a record in H1 2014 (in spite of the slowdown in Q2, both quarters together have produced a record half yearly amount), while IPOs and secondaries are obviously surging at breakneck speed at present, both in terms of the number of offerings as well as of the value issued. Unfortunately, this still doesn’t tell us when and from what level the market will succumb – it is merely another sign suggesting caution is increasingly warranted.


The surge in IPOs is best seen as a sentiment indicator. It is not so much the absolute number of IPOs or their value that is important, but the fact that they are surging at an ever accelerating pace and hitting new records. In addition, this happens while the market (in terms of cap-weighted indexes) is trading near record highs and the vast money supply growth that has supported the boom is beginning to slow noticeably. A simple supply/demand analysis like that published by firms like TrimTabs cannot account for the reservation demand factor. It will be a change in this demand component that will bring about the next major trend change.

Charts by: PcW and StockCharts

How to keep the King as an American!

AmericanKingFlagThe news that Burger King is planning on purchasing Tim Hortons of Canada to take advantage of the lower 15 percent Canadian tax rate should not surprise anyone. Free enterprise means that companies seek to do business in locations where the most profit can be kept. There’s nothing wrong with this perspective. Tax inversion is simply a variation on supply and demand. Economies are in demand that provide for low taxation.

I am not rigidly Darwinian in my viewpoint regarding capitalism; I do believe companies have a corporate responsibility to pay their fair tax share, particularly when they enjoy the benefits of what many believe to be the strongest economy in the world, the United States. Sure, they need to pay up, but there needs to be more progressive thinking about taxation of corporate revenues or we are going to read about tax inversions every week.

Perhaps what should be put in place is a quid pro quo perspective on job creation and taxation. This would be no different than the tax benefits given to companies that invest in capital expenditures. Create jobs and you get tax credits. Incentivize companies and they will come to the table.

Jobs to China? Maybe not if it pays to keep jobs here. Burger King to Canada? Maybe not if they hire more people here in the United States.

Here’s a thought on how this might work: Let’s say a corporation agrees to hire 1,000 employees. Those employees would create tax revenue for the federal government as well as tax deductions for the employing corporation. Instead of the government trying to receive a net increase in tax revenue, couldn’t the government give a credit back for the taxes paid by the hired employees? The net result would be a wash for the government but the overall economy would expand.

An expanding economy would mean more money circulates in the economic system. Given that the U.S. economy is 70-percent consumption, that should help move the U.S. economy forward and a virtuous economic cycle would create further economic growth. In the end, the government benefits because of increased taxation from sales. Increased economic growth means more Americans are employed and companies are not tempted to buy companies in Canada.

This tax plan would not be protectionist but instead positively encourage companies to do their part in spurring economic growth.

The United States economy is already managed enough as it is. With an interventionist Federal Reserve and a government insisting on massive regulations, free enterprise is already on ropes. This might be highly wishful thinking, but let’s not penalize companies for being creative in seeking higher profits. Let’s instead incentivize them to keep capital in the United States and a hire workers.

New York’s Proposed Rules on Bitcoin is Dividing its Base

bitcoin and Edward Tj GeretyA new battle has opened in the battle over Bitcoin.

Since New York became the first state to propose virtual currency regulations two weeks ago, Bitcoin enthusiasts have had a mixed reaction on whether the new rules will help legitimize the virtual currency or whether they will thwart innovation and threaten the very freedom that Bitcoin was meant to promote. The draft legislation has also exposed a division among virtual currency companies with enough resources to comply with the regulations and those without.

On Tuesday, some Bitcoin supporters are planning to send an open letter to Benjamin M. Lawsky, New York State’s top financial regulator, requesting more time to comment on his proposed legislation.

“Many of us are individuals or small start-ups operating on limited budgets without access to extensive legal resources,” the letter states. “This imposes a substantial burden as we seek to understand the proposed rules and their current and future impacts on our businesses, open-source projects and educational research.” The letter also refers to “inconsistent statements” and opaque language in the draft regulations.

The letter, which has about 400 signatures, including many big names in the virtual currency industry, says the 45 days allotted for comments is not enough time for interested parties to provide adequate feedback on “both the broad scope and detailed components of the proposed rules.” The letter requests 45 additional days.

“We really want to make this a collaborative and engaging process with regulators,” said Austin Walne, who wrote the letter. “We want to have a dialogue, and we want more time to have it.”

A self-described technologist and Bitcoin enthusiast, Mr. Walne teamed up last week with Elizabeth Stark, an entrepreneur, to gauge reaction to the letter. The response, they said, was overwhelming. Hundreds of people, including executives from Bitcoin companies backed by venture capital, as well as students and users of Reddit, signed the letter. Among those who have added their signatures are Barry Silbert of SecondMarket, who runs a Bitcoin investment fund, and executives from the Bitcoin company BitPay.

When it was introduced in 2009 by a programmer, or group of programmers, Bitcoin appealed to anti-establishment enthusiasts and technology buffs who operated on the fringes of the financial system. Now, as virtual currency becomes more accepted in the mainstream, start-ups could find themselves unable to comply with regulations that seem to favor more established financial companies.

“If only companies that have already raised tens of millions of dollars in funding can succeed, we can say goodbye to the Bitcoin start-up ecosystem,” Ms. Stark wrote in an opinion article on TechCrunch last week. “In effect, New York’s proposed regulations will throw the baby out with the bathwater.”

The regulations, introduced by Mr. Lawsky’s office, the Department of Financial Services, are intended for virtual currency companies operating in New York and include rules on consumer protection, the prevention of money laundering and cybersecurity. A “BitLicense” would be required for Bitcoin exchanges and for companies that secure, store or maintain custody or control of the virtual currency on behalf of customers. Merchants that accept Bitcoin for payment, like Overstock.com, would not need to apply for a license.

Mr. Lawsky said the rules, the product of a nearly yearlong review, are intended to inspire consumer confidence and promote commerce by encouraging more companies to come to New York.

Still, virtual currency start-ups have taken issue with the extent of the regulations, some of which are stricter than existing rules for traditional financial institutions. Opponents of the rules have argued that start-ups simply don’t have the resources to comply with certain licensing requirements, including onerous reporting rules, hefty capital requirements and robust cybersecurity programs.

“I think most people were surprised that it is such a broad, sweeping regulation,” said Jim Harper, global policy counsel at the Bitcoin Foundation. “It seems meant to create an entirely new regulatory regime for Bitcoin.”

The public currently has 45 days from July 23 to comment on the proposal, after which Mr. Lawsky’s office intends to make changes to the rules and send them back out for review for another 30 days. So far, Mr. Lawsky said, his office has received “thousands of comments” on the proposed regulations.

Though there has been vocal opposition to the rules, there is also a significant camp that considers the rules an important step to bringing Bitcoin and other computer-based currencies into the mainstream.

“This is a very good thing for Bitcoin,” Gil Luria, an analyst at Wedbush Securities, said when the regulations were introduced. “It may end up being one of the most important milestones in the development of Bitcoin.”

Mr. Lawsky said on Tuesday that he was willing to address concerns that the regulations as they stand would squeeze smaller companies. He said he would also consider extending the comment period.

“This is certainly a unique situation where we’re trying to regulate in an evolving, high-tech, innovative environment, and we want to make sure we get it right,” Mr. Lawsky said. “We will certainly think through very carefully the very obvious comment that, when it’s a small start-up, they’re going to have less resources in terms of compliance.”

Why I keep buying ACI

Few sectors have been more hated over the past few years than coal. Coal companies have come under pressure for a number of reasons, including slowing growth in China, low natural gas prices, and opposition from the Obama administration. As shown by the chart below, Arch Coal (ACI) has not been the only coal stock to suffer over the past few years. However, at this point, I believe ACI is an interesting speculative investment idea, and I recently bought back into the stock.

Edward Tj Gerety and ACI

ACI data by CNBC

No Debt Maturities Until 2018

One of the main reasons why I feel comfortable taking a chance with ACI is that the company does not have any debt due until 2018. ACI also has more than $1 billion in cash. In December 2013, the company made a smart move by completing a tender offer for its $600 million worth of senior notes due in 2016 along with issuing $350 million worth of senior secured notes due in 2019. The fact that ACI does not have any debt maturities until 2018 means that the company has a time window for coal prices to improve.

Coal Prices Could Improve

Prices for both metallurgical coal, used for steelmaking, and thermal coal, used for power generation, have been under significant pricing pressure due to a number of factors. ACI is a major producer, and holds significant reserves, of both metallurgical and thermal coal. At the moment, the metallurgical coal business appears to be more troubled than the thermal coal business. However, both metallurgical and thermal coal prices are low for the same basic reason: supply is currently greater than demand. Of late, thermal coal prices have been helped somewhat by rising natural gas prices. Moody’s has said that most of U.S. metallurgical coal production including mines operated by Peabody Energy (BTU) and Walter Energy (WLT) is unprofitable and as much as half of global output is unprofitable at current prices. In my view, the current price is unsustainable. Cliffs Natural Resources (CLF), a major producer of iron ore and metallurgical coal, recently announced that it plans to idle its Pinnacle Mining Complex which produced 2.8 million tons of metallurgical coal in 2013. Other leading miners have also said announced plans to idle mines or are considering idling mines due to current market prices. In addition to a reduction in supply due to mine idling, coal prices could also benefit from a stronger global economy which could lead to a rapid increase in power generation. Another potential catalyst for thermal coal is a more favorable Presidential administration, towards coal, in 2016. SA contributor Equity Watch laid out the more in depth bull case for coal in a recent piece and I tend to agree.

Hedge Funds Buying Arch Coal

Citadel Advisors, the massive hedge fund run by Ken Griffin, recentlyincreased its stake in ACI to more than 5.4%. Another noted hedge fund manager, Jim Chanos, also recently purchased a stake in ACI. Chanos’ move is interesting because he has an extremely negative outlook on the coal industry. Chanos is said to be short all of the major U.S. coal producers with the exception of ACI. While investors should never make decisions based on the holdings of high profile investors, I believe the fact that these two noted investors are long ACI is a positive.


Coal is arguably the most hated market sector right now. However, some recent examples of hated sectors that have turned to market darlings include airlines, solar, and financials. I think it is likely that coal prices are nearing a bottom and prices could move much higher over the next few years. Due to its lack of debt maturities until 2018 and hedge fund ownership, I believe ACI is an attractive way to speculate on a bottom for coal.

Disclosure: I have maintained positions on and off since 2010 in ACI and currently have added it to my portfolio and plan to remain bullish and increase my holdings.

Life after Bitcoin?

Edward GeretyWhile Bitcoin grabs headlines, a little-noted rival promises to supercharge all currencies old and new, fiat and cyber. An open-source programming system called the Ripple protocol could transform commerce and banking by making dollars, yen, euros, bitcoins, and even loyalty points virtually interchangeable.

The Ripple protocol, based in part on the system behind Bitcoin, is a payment and currency exchange system that erases the barriers between fiat currencies while also embracing digital currencies and other representations of value, ranging from gold to frequent flyer miles. It goes beyond Bitcoin by providing a code system that leaves no currency—including bitcoins—out.

Right now anyone can make limited use of the Ripple system by signing up with financial gateways such as SnapSwap and Bitstamp for quick cross-currency exchanges between dollars, euros, bitcoin, and more. The greatest value for most people will come if banks and other institutions implement the protocol to streamline their operations. Then all sorts of transactions would become simpler, quicker, and more secure. Many people would not even know Ripple was involved; they’d simply notice that their banks got better.

The system is being developed as open-source code by Ripple Labs, a Silicon Valley startup backed by Google Ventures, Andreessen Horowitz, and other leading funders. Like TCP/IP, the protocol that powers the World Wide Web, the Ripple protocol enables developers to create cheaper, speedier and more secure ways to perform transactions that are more laboriously executed by existing technology based on fiat currencies and pre-internet methods.

The key to Ripple is its distributed, decentralized nature. “It offers a way to confirm financial transactions without requiring a central operator,” says Chris Larsen, Ripple’s CEO. That saves both money and up to days’ worth of time. While the Bitcoin system also bypasses a central operator, its transactions take minutes rather than seconds to process, according to Larsen.

Financial organizations have already begun adopting the Ripple protocol. In May 2014, Germany’s Fidor Bank became the first bank to use the Ripple protocol. Its customers can now send money in any currency instantly and at a cost lower than typical bank rates through Fidor’s money transfer products.

Some larger financial institutions have also taken baby steps to help their customers learn about or participate in Ripple. For example, Bank of America (BAC) and Wells Fargo (WFC) offer easy ways for customers to send money to SnapSwap, the Ripple gateway that lets people buy digital currencies and performs exchanges in more than a dozen fiat currencies including the dollar, euro and pound. Such initiatives, now in their infancy, may pave the way for more active participation by major institutions.

Meanwhile, eleven financial gateways are now implementing the Ripple technology to facilitate transactions within the network. They are SnapSwap, Bitstamp, rippleCN, The Rock Trading, RippleChina, Justcoin, rippleSingapore, btc2ripple, Coinex, Bitso, and Ripple LatAm.

The latest gateway, Ripple LatAm, was launched on June 12 by AstroPay. The United Kingdom-based regional service, which covers Brazil, Chile, Colombia, Mexico, Argentina and Uruguay, will connect Latin American businesses with their counterparts in Asia, Europe and North America for faster and more affordable remittances, merchant payments and other transactions.

The longer-term prospects for leveraging Ripple are enormous. Perhaps the biggest first step any large financial organization could take would be to use it to offer faster, cheaper currency exchange services. According to the Bank for International Settlements, the global foreign exchange volume reached $5.3 trillion a day in 2013. This growing market is ripe for the taking.

The window of opportunity is open wide, but it could start to narrow. Already a London start-up, TransferWise, has raised $25 million to implement a peer-to-peer technology enabling people around the world to swap currencies at much lower rates than current bank transfer fees.

Beyond currency exchange, banks might also use Ripple to develop next-generation payment vehicles to replace obsolescent credit cards or to expand into cloud storage by offering virtual safety deposit boxes. Banks could also use Ripple to create innovative new smartphone apps and forge alliances with tech-savvy organizations that live by transactions, such as Walmart and IBM.  Such developments could facilitate a renaissance in community growth by greasing the wheels of services such as microloans, helping to create jobs. And if Ripple becomes widely adopted, the result could be a whole new medium of exchange—“money 2.0” or “supermoney.”