Tuesday, January 17, 2006

New Shock & Horror: Livedoor Fraud

The Nikkei fell nearly 3% today, and the Topix more than 2% ostensibly because of accusations by the authorities that affiliates of Livedoor conspired to manipulate the price of Livedoor shares. Particularly hard hit were "growth" stocks, and issues that had been run up rather quickly during the last quarter, month, weeks, & days.

Although the "F" word was the excuse (fraud, that is, though those specs with large concentrated longs would be forgiven for thinking otherwise), the correction should surprise no one. That the Japanese market is overheated is of similar understatement to positing Dick Cheney lacks charisma, or that Lewis "Scooter" Libby lacks honor. For the JASDAQ, Small-cap, and Midcap indices have all taken out their prior late 1980's bubble-induced all-time highs, and the vaulting of share prices in Q4 of 2005 were carny-like in their provision of fun, amusment (and profit!!) for many investors (though I truly believe that "investors" is a misnomer, and we require a new linguistic or vernancular to describe precisely WHAT they are). Double were positively pedestrian. Triples were commonplace. Quadruples....hardly rare. Even five-baggers were not singular occurances. The result: buyers beware. Value has become more elusive, and though there remain some hiddden asset or undervalued asset plays, and some potential balance-sheet restructurings and some yet-to-be-realized cyclical recovery plays the fundamental business risk, and the market-cap and liquidity risk that one must shoulder is more meaningful than ever before.

But the ironic thing about the Livedoor accusations being the trigger is that the entire move in Q's 3 & 4 of 2005 has been characterized by the rarefied (in Japan) property of price-momentum. And not the non-vintage kind, but uber-momo or super-persistence, of the types that "corners" are made of. Large and well-heeled investors it seems - whether growth or value, or Fidelity, Sparx, Capital Research, BGI, MAC, Alliance, ML, Bleichroder, Steel Partners, T-Zone, or SFP have all come to the realization that it is better to buy a lot of a little and do it more or less continuously (especially when "it matters" like when incentive fees are being paid, than to leave the vagaries of performance (and performance fees!!) to chance or the vicissitudes of "the market".

And it must be said that in 2005 the conditions were remarkably favorable for such undertakings. Shorts were few and far between, and those that were there knew better than to short stocks that were going up. A significant part of the marginal supply of stock was held by government authorities (BOJ, DICJ, etc.), and the small, and mid, and broad indicies were being bought at the expense of more cap-sensitive ETF's, Nikkei larger-skewed TOPIX 300 and core indices. Combine this with an environment where everyone (officials, investors, regulators, maangement) is interested in, and thrilled by, higher share prices that no one cares HOW they get (or got) there.

This assymetry of concern is pervasive in all markets. People only care about manipulation, fraud (whatever the extent), and the impairment of the market mechanism as a means of efficiently discovering prices and allocating scarce resources when share prices are going down and tax-payers are losing wealth. No matter that dark fiber is omnipresent across America or that people's retirements will be more humble than might have been the case had the TMT bubble & fraud NOT occured. The price action in Japan from late August through the present has been positively shameful in many respects, not least of which is the cynical weight-of-money investment styles adopted by the named and shamed investors. Ultimately, they will receive their so-called 'just desserts' since the market typically taketh-away in greater quantities than it giveth, and such now-large and concentrated positions will provide an interesting spectacle in reverse predatory trading.

If you are they, or an investor of theirs, wish them (and yourselves) luck as you will need it. If you are NOT either, then you should be setting your sights upon them and their pregnant positions, flooding the torpedo tubes and arming your weapons.

No comments: