Natural Gas Languishing

It's been a long time since I've written a post on the markets. Mostly this is because I had very little of worth to say in these tumultuous times, although I have been trying my luck. When everything goes up and down in unison like a well-choreographed chorus line in response to every news headline, there just isn't too much to say, except perhaps to stand aside.

There is one chart that came to my attention: that of the natural gas futures ETF. If we look at the following technical chart we can see that it has been in a straight-line (logarithmic) decline for the past year. The price is almost perfectly trapped between the 50-day EMA and the lower Bollinger Band.

Volume over this period is noticably higher than the previous 12 months. However, in the volume crescendo around Labour Day last year there was no reversal of the trend. Now as we appear to be approaching a similar peak in volume will the result be different?

I am betting that the trend will break, by investing in a mid-sized Canadian producer. If I'm right, there is an opportunity for some out-sized returns. If I'm wrong, I believe the downside is only moderately risky since the company appears to be doing a decent job matching capital expense and debt servicing to market rates for the raw product.

The US natural gas storage story is somewhat problematic. There is clearly a loss of long-term equilibrium between production and consumption, so there is still some potential for an additional price decline. I believe that as the broader market stabilizes and more producers shutter wells in response to the low prices there could be a sharp upswing in the price of natural gas.

Hopefully I'm right, but I do not claim any special insight into this commodity market. Investment is never without risk.

On Avoiding Publication of Paid Android Apps

A while back I decided that we would shelve all of our Android application plans. This was not a comfortable decision since we had bet on Android and made the requisite investment. The reason is very simple: we see no prospects to build a viable business for paid applications.

The problems with Google's Android Market are legion and have been widely discussed, including by me. Until Google and its carrier partners address these problems there is no money to be made. The Android Market seems set to be a playground for only hobbyists and perhaps for some companies that want to at least establish a brand presence. Major problems with the Android Market are the difficulties for users to purchase applications and a load of commercial and technical problems that Google and the carriers ignore or simply shift blame onto the application publishers.

Of course this does not mean there is no money to be made today. It is that the revenue potential is small. A casual perusal of the paid apps in the Market indicate that even the very best titles are making no more than a few tens of thousands of dollars. This is for an installed base of over 1 million G1 phones.

But why not take the plunge anyway and establish a brand presence that levers the substantial installed base for our free apps? There are a few good reasons not to do so:

• Support: Every published app needs to be supported. This requires being available for answer questions, resolve bugs and establish a regular pattern of new features. Support has a minimum cost while costs scale more slowly than sales. Therefore, support is a burden if sales are low. It also removes resources from other, potentially more-valuable work.
• Brand damage: With the numerous technical problems with downloads, user credential verification, copy protection and more that Google is deaf to and the carrier (T-Mobile) deflects to and blames the publisher, there is a serious problem with supporting our brand. In other words, Google's problems are staining the publishers' reputations.
• Merchandising: We are a Canadian company, which Google Checkout neither supports nor has indicated any time when it will be supported. To sell on the market today we would have to establish a US entity solely for this purpose. If (when) they do support Canada, it is unclear if they will support pricing in the users' currencies; today they only support pricing in the currency of the publisher's country which creates purchasing woes.
  

In short, the costs of publishing a paid app to the Android Market at this time exceeds the combined benefits of revenue and brand awareness. We will continue to monitor the situation and will revisit our position if there are substantial improvements to the Market. This is a shame since the Android technology meets our requirements so well.

Driving Patent Reform

Patents are a problem. If you don't patent you face the risk of having someone else patenting your invention, and then coming after you. If you do patent you spend a lot of money for no clear return. Then there's the matter of others' patents that can make it impossible to operate your business without infringing. Even if you don't infringe, courts often side the patent holder regardless. The problem is pernicious, broad and very expensive.

There has been much talk of patent reform, ranging from getting the patent office (USPTO in the US) to pay attention to more and better prior art, to disallowing business method and software patents, better tests for obviousness, and improved legal processes. It isn't hard to find deeply passionate proponents both pro and anti reform. My own views run more in the pro reform direction, but are not extreme. I see some benefits to patents and legal protections, outside of those strictly pertaining to technology start-ups.

With this background, I found this article quite interesting, which notes that the USPTO now issues a majority of patents to foreigners and that the trend is accelerating. We could see a time in the not-distant future, perhaps only 5 years, when non-US corporations use the US patent and legal systems to seriously imperil US-based corporations. This is simply statistical since patent disputes will increasingly involve foreign corporations charging US corporations with infringement, using US courts and patents.

My speculation is that this outcome could finally drive serious patent reform in the US, when it is US businesses that are primarily imperiled by infringement of weak and questionable patents. That is, the issue will become intensely political. I will be watching developments to see if I might be right. If the US does reform, however, it is not clear is other countries will follow suit with their own patent systems. The political forces are complex and difficult to predict.

Paper Tax Return

I am a believer in paper tax returns. This seems to make me a bit of a throwback in this age of very good software packages that assist with completing personal tax returns and online filing. Yet I am no stranger to software, having worked in the field and also having spent my career in technology. With the looming filing deadline I thought I'd explain my reasons for sticking with paper.

For most people, tax returns are pretty straight-forward exercises. The inputs and the claims are known, and usually don't change much from year to year. Sometimes there are complications, including (for those of us in the technology field) stock options, capital gains and losses, more than one employer in a tax year, consulting fees, and so on. Once you've figured out a particular line item, you know it and likely do not need a reminder every year.

While this may seem reasonable, most would argue that there are benefits to tax software. The ones I hear most often are:

• Hints on what to claim and forms to use;
• Inclusion of all possible forms;
• Arithmetic; and
• Automated filing.

To get these benefits you need to purchase a software package every year. Price varies, but let's say that with taxes it's around $25. That is very affordable, especially considering the software typically allows several filings, which accommodates most families. There are costs, however, in using the software. These include: installing the software, learning how to use it, navigating the various screens and hints, and figuring out what questions to ask. Of course, you need to do similar tasks with paper.

Do not expect to get top-notch personal advice on how to structure your and your families claims. That is best done by a professional. Hints are not good enough; you need to know whether to follow-up on a hint, its various side-affects and implications, and you can't be certain that you're getting all the possible advice for your situation. It's helpful but far from perfect. If you need professional advice, get it. It matters not whether you use paper or software

The arithmetic the software performs can save a lot of time spent poking at a calculator, all while worrying whether you've got all the right items included in every calculation. Except, CCRA doesn't care about your calculations. They do it all over again based on the information (inputs) you provide. In this era of linked databases and feeds from your employers and financial institutions, they may find information you've forgotten to include. The only benefits of you doing the calculations are to get a feel for whether you're making suitable claims (and have the opportunity to adjust the filing to get better results) and to avoid penalties if you owe them money and fail to remit the required amount. Unless you have a particularly complex financial life, the first benefit is not substantial - you simply claim everything possible, and you don't need to deal with complex and contrary interactions. To see the second benefit you would have to fall into the minority of filers who aren't claiming a refund. If your primary income is a salary, you almost certainly will qualify for a refund. You get no benefit from correct arithmetic if you are getting a refund. So why bother? Get the numbers close enough for personal comfort and let the government computers do the precise calculations.

Some years I do not have all the forms in the paper package the government mails me. In those cases they are easily available online. I don't find this process to be much of a burden. Some situations, such as long lists of equities purchases and sales, don't have a suitable form: you provide this in a separate list, which I already have in a spreadsheet that I maintain throughout the year. I just print it off.

Instead of automated filing, I lick a couple of stamps and shove the envelope into a mailbox. This is cheap and easy.

Everyone has their reasons for choosing software over paper, even if it's merely out of habit. I have used software in the past but returned to paper when I saw no substantial benefits and got frustrated with dealing with installing new software every year and dealing with all the superfluous questions it would ask me. I can do my paper returns in a couple of hours. That works for me.

Broadband by the Byte

There is nothing fundamentally wrong with broadband providers charging for usage, or by any other measure they choose. This is central to a successful free market model, where the unrestricted interplay between competing businesses and customers will tend to business models and price levels that establish a sustainable equilibrium. A minimum level of competition is, however, required to give consumers an equitable say in the market's invisible hand. That is what's missing in the broadband market. All this quibbling over particular price points today is merely a distraction from the larger issues.

There are some good reasons why competition is scarce. Perhaps the preeminent one is that a large capital outlay, along with disruptive construction in our cities, makes it prohibitive for entrepreneurs. The dearth of capital in the present market coupled with the a deeply-entrenched base of incumbents form an almost insurmountable barrier to newcomers. Wireless has better prospects, but not by all that much.

As a society (which includes our governments), we need to decide once and for all if broadband is to be a free market business or a regulated utility. What we have instead is a combination of public relations bafflegab and political grandstanding, all in an attempt to gain favour with an increasingly-confused general public. This is an area that is crying out for some political leadership.

If broadband is to a fully private-sector business, governments should be aggressive in easing entry of new broadband providers. By this I do not mean the regulated wholesale DSL market we have in Canada (although it does help), but lower barriers to spectrum acquisition and terrestrial rights-of-way. With tax revenue challenges, we have instead seen these become revenue-generating opportunities for governments, which in the end don't generate sustainable tax revenue or promote broadband competition.

If broadband is to be a regulated utility, let's do it right and implement it fully. This is counter to the prevailing views of contemporary governments, even those with a leftward slant, and so is unlikely to achieve any meaningful traction in the near future. Outside of the government, the general population seems to be generally averse to strict regulation. Right or wrong, a return to strict telecommunications regulation is unlikely, which brings us back again to the need to enable competition.

One telco and one cable company in a region (and recall that wireless is owned by the telcos so it is not an independent third choice) is insufficient for effective competition. Sure it's better than just one provider, but an oligopoly still tilts the business-consumer equilibrium in the favour of business. We get the worst possible outcome: weak and inefficient businesses and high consumer prices. Whether those prices are determined by bytes, maximum bandwidth or flat-rate is irrelevant.

I would love to offer a prescription to the present dilemma, except I don't have one. We are going to continue to flop around in the no-man's-land between the regulatory past and the present, defective free market for some years to come. As consumers we can at least keep up the pressure by quickly defecting when faced with unattractive pricing changes from our broadband providers.

Avoiding Financial Black Swans - Or Not

If you're familiar with the book "The Black Swan", you will be familiar with the thinking of its author Nassim Taleb. His understanding of the inter-relationships among financial instruments and with the environment in which they operate has made him financially successful, and sought after as a commentator in these difficult times. In this Financial Times article he puts forward 10 steps to avoid future black swans in the world's financial system.

As others are pointing out, it is unlikely that they would be implemented; the plan is not in the interests of those wielding power, despite how they may protest the opposite. It is nevertheless interesting to look at his prescription for some insights to understanding the system. I am adding my own commentary to the points that interest me. Refer to the FT article for his full text, from which I am only quoting extracts.

As you'll read, I suspect that his 10 steps are unimplementable, either in whole or in part.

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.

This is a call for a form of negative feedback like you can find in electronic amplifiers: a comparator feeds an error signal back into the amplifier's input to cancel the distortion due to the amplifier. The bigger the error, the bigger the correction. In the financial system, the problem is quite a bit more difficult since determining the nature and amplitude of a reliable and predictable error signal can be difficult without imposing a large regulatory cost.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing.

This is a simple prescription: those who create losses should not be permitted to shift those losses to others, and those with gains, even if it's the public in the form of government, should not shift those gains into others' hands. The problem is that if step 1 is not followed we find ourselves in this ludicrous situation of the public taking on private sector losses to keep the system functional. When the situation stabilizes, government (the people) should not transfer any gains from distressed assets to the private sector. It's ours! Political ideology of those with power tends to ideals (naturally) rather than pragmatic solutions.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. ... It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

The problem is: whose hands are clean? Not only that, those with the dirtiest hands possess the bulk of the knowledge of the system and how to manipulate it to recover from the crisis. There is no time for others to be scrutinized, put in charge, learn what's what and then implement effective solutions.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. ... No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

Hidden in this is the essential difference between labour and capital. Bottom-tier workers are uninvolved with making critical corporate decisions and are therefore compensated as labourers, primarily with salary. Owners (stockholders) get no salary but profit from wealth creation (company valuation) and operating income (dividends). The problem is with senior management who must be compensated for their labour and, because of their key role in directing the company, share to some extent the same risks and benefits of the owners so that their interests are aligned. The concept is good, but subject to abuse by both managers and directors (directors have private interests that may not be representative of all the owners). Even when they fail, managers keep their salaries and can earn lucrative termination payouts, which the boards are happy to agree with to recruit the talent they want in management.

I once read a novel (the name isn't important since it is otherwise unremarkable) where there was a society that recruited their leadership by election, but without the consent of the candidates. If elected (they cannot refuse to serve!) all their assets are assigned to the treasury. At the end of their term, if the treasury is increased they get their proportional share of that increase. They suffer a proportional loss for any decrease. That way they share the fate of the society's institutions. It's an interesting fable but it is just a fable. Just try to recruit a CEO in the real world who would agree to this particular deal: it won't happen.

5. Counter-balance complexity with simplicity...

The problem isn't complexity, but rather transparency. We live in a complex world and it is reasonable to expect complexity in its mechanisms. Do we expect the innards of our favourite electronic toys to be simple? No, but we do expect them to be transparent to those with domain knowledge, or at least comprehensible manuals. It should be possible for those giving us financial advice to understand the products they are recommending. With transparency, clients can make them accountable for when they give bad advice (incompetency) or defraud us (criminality).

6. Do not give children sticks of dynamite, even if they come with a warning. Complex derivatives need to be banned...

This sounds like the war on drugs: just say no! Who gets to say when a thing is too complex for us to understand and accept the risks? We don't need nannies: there should be scope for personal responsibility and failure. See my comment in point 5 regarding advisors.

7. Only Ponzi schemes should depend on confidence. ...we need to be in a position to shrug off rumours, be robust in the face of them.

Fiat currencies are largely supported by confidence, both in the currencies' intrinsic value and the market transactions based on those currencies. They are inseparable from governments and politics since all are in the public domain. Many of our social programs are Ponzi schemes, where so-called contributions by citizens go into the general treasury, not the named programs, and payouts come from current accounts. This is very similar to Madoff's fraudulent scheme, except since he had no taxation power the scheme could not be sustained.

8. ...Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is ... a structural one...

This is where regulation can help, by making leverage visible and then prohibiting critical institutions, both public and private, from becoming too leveraged. This is one reason Canadian banks have done well in this crisis. Instead, $2 trillion of assets got leveraged into $62 trillion, in part by multi-stage leverage schemes that made a mockery of traditional, and conservative, banking practices.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. ... markets ... do not harbour the certainties that normal citizens require...

There is no certainty: it is a mirage. Conservative investors were equally burned in this crisis. Remove the foundation and the entire edifice comes down, no matter how well-cared for any one room is kept by its occupants. Cash hasn't proved to be safe, and neither has real estate nor businesses focussed on the necessities of life, like food. Get over it. Yes, find good advisors, but realize that every form of wealth placement entails risk.

10. ...Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

While we're at it let's eliminate poverty, hunger, wars and mosquitoes. We can't, and we should not deceive ourselves that we can somehow create a utopia. Human nature does not allow for it. Let's focus on creating and sustaining strong institutions with enough checks and balances, and with transparency at all stages, to reduce the likelihood of catastrophic failures in future. Many people in powerful positions, both in government and in business, saw value in being willfully blind and in deliberately hobbling those with the ability to intervene. This must be prevented. Unfortunately we must move incrementally since, unlike a car mechanic, we have to keep the engine running while we rebuild it.

We live in the real world, with real people, where overly-simplistic solutions don't work. Let's not deceive ourselves. I would like to think that Taleb's prescription could be followed, but I am not that optimistic. It will be partially implemented, however it will be an imperfect and temporary solution. Vigilence must be a permanent feature since ways will be found to game the new rules, no matter what those rules may be.

Bandwidth Cost of Wireless VoIP

One of the reasons put forth by wireless carriers for why they prohibit VoIP on their networks is that it is a bandwidth hog. This is not true. Compare codecs typically employed by SIP-based VoIP services (e.g. G.723) and those for standard cell phone telephony (AMR) and this truth is immediately evident. The thing is, if you are unfamiliar with the technologies involved their complaint can sound legitimate.

There are differences between VoIP and standard mobile telephony that are worthy of comparison, once you get past the false raw bandwidth argument. Let's take a brief tour of some of these.

First, the bandwidth for voice and data are segregated on the radio link. This is very much like the segregation for voice and data on DSL (wired telephony) and DOCSIS (cable telephony), which I covered in an earlier article. The radio voice 'channel' is engineered for voice traffic patterns whereas the data 'channel' is engineered for the more bursty nature of currently-popular services such as web browsing, email, and photo sharing. For most users who do not use smart phones, the total data consumption for (standard) voice is higher than for data. With smart phones, the balance swings in the other direction.

For example, 1,000 minutes of VoIP using G.723, with packet overhead, is in the vicinity of 400 MB (including lots of assumptions, and no reduction for silence suppression), in each direction. A big bugaboo here is that the traffic is equal in both directions, which is different than for most other data applications, and is not accounted for in typical mobile network engineering models. As many people are aware, this is similar to the engineering for DSL and DOCSIS data bandwidth engineering.

There are issues beyond just raw bandwidth usage, especially upstream, that are in the mix. I talked about some of this in my Controlling The Phone series. First, let's consider the idea of using a common VoIP base for all telephony on mobile phones, including telephone service from the carrier itself. One technical advantage is that the currently-segregated voice and data bandwidth can be combined. The negative (technical) consequences include loss of service quality assurance since data traffic load is out of the carrier's direct control; additional work in the network would be needed to manage traffic priority, including the use of DPI (deep packet inspection).

A second technical problem is that VoIP, at present, must be implemented in software. Unlike the current firmware implementations, with its dedicated and optimized chips, software VoIP is expensive with regard to power consumption and is, generally, vulnerable to the security and privacy risks associated with all computer systems and applications. Until these issues are dealt with (and there is a demand for the chips that would include a stable version of VoIP software in firmware on dedicated chips), VoIP on mobile phones is merely a niche for enthusiasts using smart phones since the carriers will not migrate to VoIP.

Further, there is the matter that if the carriers migrate to VoIP they lose the argument for prohibiting and blocking competitive VoIP services. This would inevitably require them to compete on a equal basis with everyone else with a VoIP solution. Obviously this is not in their immediate interest.

It may be some time before we see a seamless VoIP experience on mobile phones. When we do, I expect that the fact that it is VoIP will disappear since it is ultimately just technology. The mass market is not the realm of technophiles, but rather people that simply want a phone that is reliable and does what they want.

Government on the Edge

It is error alone which needs the support of government. Truth can stand by itself.
--Thomas Jefferson

There has been a surfeit of stories recently about peculiar behaviours and decisions by our federal government. Better minds than mine are perplexed at what's going on.

After the rudderless Martin government was booted from office it was a relief to have Harper installed as prime minister. A minority Conservative government seemed a sure cure since they would be restrained from going off in any radical directions while also bringing a sense of normalcy and stability under Harper's moderating influence. Martin, for all his personal qualities, proved far better at attaining power than wielding it.

As time has gone on, and with no fundamental changes due a subsequent election and a stillborn constitutional crisis, the veneer of civility has been wearing thin on the government side of the house. For me this became more noticable during a recent spate of news. In no particular order these include:

• The government getting bullied by the courts to come to the defense of a death row inmate in the US. This is more interesting in regards to the 'punishment' ideology of the government since Smith's life is almost entirely out of our hands, which I believe is appropriate.
• The stain of religious fundamentalism on science policy that is undermining some very promising Canadian-based scientific research and our international credibility. These guys, including the science minister, don't even seem to understand why they're being ridiculed.
  
• Opaque, cruel and likely unconstitutional treatment of a falsely-accused citizen, by preventing him from coming home under a series of even more outrageous reasons. This charade started with the previous Liberal government and the Conservatives are more than eager to carry this sputtering torch.
• A seemingly unending flip-flopping of positions and opinions on the economy and recession that only serves to demonstrate just how flummoxed the government is in regards to figuring what, if anything, to say or do. One day everything is fine, the next it's the end of the world as we know it, then everything's coming up roses again or at least it's not as bad as it might be. All while the course of the economy spirals ever downward and we throw ourselves into a generation-long pit of national debt.
• Uncompromising, not-our-problem approach to our one Guantanamo prisoner despite tampered evidence, his qualification as a child soldier, and lack of legal transparency and due process.
• Possible interference into the timing of a TSB report on a subject that was seemingly nonthreatening to the government, only because there was a slight risk of poor optics during the election.

I titled this post as I did because the Conservative government appears to be walking along a fence that is becoming ever narrower. On one side the fence is being gradually eaten away by the more extremist elements from within their own party, while on the other side is the increasingly-successful scrutiny of the media and opposition parties. That fence is getting to be so narrow that I have a feeling Harper will ultimately fall from his perch, either into the arms of his party's more extreme core constituency or into the maws of his enemies. It's all very interesting.

Is this good for Canada? I wish I knew the answer to that question. Perhaps the more-important question is, if not Harper are we ready for a resurgent Liberal party under Ignatieff? That troubles me since I am not convinced that the Liberals are all that terribly reformed from their previous corrupt practices, and I have absolutely no idea what sort of government Ignatieff would provide. Either way, 2009 is turning into a most interesting year in Canadian politics.