Friday, October 31, 2008

$3,000,000 For Half-An-Hour is Cheap!!!

Though some will find Wednesday night's Phila. Phillies "World Series" victory (surely an exaggerated title?!) remarkable, others were equally if not more astounded at the half-hour USD$3 million infomercial splurge by the Obama campaign, reportedly watched by (depending upon one's source) 25 to 33 million Americans (or is it households?). The grey man trailing was quick to chastise the leader for such extravagance, but then, of course, he would given his purse of loose change, botox, and duct tape. I have no doubt he would have done the same were he so able. Ignoring the partisanship, however, I will put to you that I think Americans on all sides miss its true significance.

While others were aghast at the cost, I was stunned by the pittance. ONLY USD $3,000,000 for half an hour of prime time with electorate of the most powerful nation on earth? No wonder reality TV is the rage if that's the miniscule value afforded one-half hour of the nation's undivided attention (excepting to make popcorn and pull a beer out of the fridge). Indeed look at the spend of the Oil Industry or Automobile sector lobby groups and one will begin to see how pathetically cheap it is to buy policy, and why the returns to rent-seeking investments far outstrip the return on capital expenditure.

But Obama's campaign has miraculously been financed in the main from large numbers of individual donations. And with the popular vote, not nearly as lopsided as the electoral vote, one would be forgiven for wondering why the grey challenger has not inspired similar broad-based financial support? Surely, the demographics of his supporters would suggest they are more-than- able (in comparison to the Dems dems) to provide the money. It is almost as if The People, (and here please forgive my idealism) or the motivated majority, are contributing to a campaign that seeks to repurchase the Public Interest from the corporate rent-seeking interests who've wielded the power-levers for the last three decades leaving us in our sad rudderless predicament. And a fine thing too, for rent-seeking is a pathetically selfish and short-sighted endeavor, more often than not preventing competition, innovation, adaptation, and capital investment in manufacturing, while encouraging parasitic and imprudent pursuits in the financial realm, that characterize an environment devoid of a sense of Public Interest. German pets do not receive Credit Card special offers, nor are French households teased with low-rate combustible mortgages completely outside the realm of the applicants probable future ability to service it. Yet, for three decades, The People in the USA have come to accept such malformed oddities as a "normal" element of capitalism, despite the reality that The People will ultimately underwrite and social the downside, the larger it becomes.

I look at the $3 million for half-an-hour and I see incredible possibilities to educate the nation about policy and their interests and thereby broaden the mandate for change - not with ubiquitious, whitewashed Maoist slogans - but with a slickly non-patronizingly put-together educational pieces that might go something like:
(fade in with voiceover by Colin Powell) ...."Here is America. We spend nearly 15% of GDP on Healthcare and a large minority are not, or insufficiently covered. Approx 28% of private expenditure is spent on administration. Here is France and Canada. They spend 10% of GDP on Healthcare and EVERYONE is covered. They spend approximately 3% of each healthcare dollar on administration. The different is astoundingly large! $350,000,000,000 dollars!!! What could America do with the $350 billion we might save? We could nearly balance our budget. Provide proper body armour to our troops. We could improve our primary and secondary educational system and public transport, invest in much-needed child-care. We could subsidise housing for the indigent and the truly needy, make long-term investments in sustainable energy and associated R&D, perhaps cure cancer.......
Or imagine how little money it would take to effectively educate and counter the demagoguery against higher carbon taxes:
(fade in with voiceover by Morgan Freeman)
"No one WANTS higher energy taxes (except maybe the manufacturers of bicycles). I certainly don't. But over-intensive energy use in America comes at an outrageously high price that collectively hurts all of us: it stultifies our national competitiveness against our economic competitors who've chosen forward-looking energy policies for the 21st century where hydrocarbons are scarcer and more expensive which of course costs us much-needed jobs; it impoverishes our national finances by the continuous trade deficits such use forces us to run, ultimately leading to higher interest rates, inflation and yes, higher taxes; it jeopardizes the environment that we will bestow upon our children; and it emboldens Freedoms' political adversaries by filling their coffers instead of using the hard-earned wealth to improve the society in which we live. For years, we've hoped that common sense and individual responsibility would prevail over personal choice, but history has proved this assumption to be false. Only "price" can meaningfully change consumption behaviour in a free society. But "price" rarely effects longer-term supply/demand conditions, investment necessities, or negative externalities, such that when market prices fall, people naturally become lazy and backslide. We are of course, only human. To counter this, and in the long-term interest of citizens, this nation, and our children's futures, over the next eight years, we will phase in meaningfully higher carbon taxes that will encourage more intelligent energy-use and civic-minded behaviour, the result for which we will all be better off...
Or how about the financial education ditty.
(Fade in to voice over by Warren Buffett):
"Good evening everyone. I am Warren Buffett and you probably know me a the richest man in the world. I didn't inherit it, nor did I win the lottery though I will admit I have had some luck, such as being born in America, having the benefit of a no-nonsense education, and a paper route at a young age. For those looking for advice let me begin by telling you that Jim Cramer is an idiot. So is Larry Kudlow, and Arthur Laffer. It is likely that your stock-broker and your mortgage consultant are also idiots are little better than snake-oil salesmen." I drive an old car. I live in a modest house almost certainly beneath my means. I save. And I invest wisely.I am suspicious of "something for nothing", and rarely borrow, or accept promises from people whom I believe are unlikely to pay..... etc. etc.
Three-million dollars for half an hour of prime-time!!! Oh, the value-for-money....

Wednesday, October 29, 2008

Why Reinsurers Should Be Boring

There is nothing conceptually wrong with reinsurance. And there is nothing conceptually wrong with aggressive investment management, provided the pursuer is willing to take their lumps like a man, and doesn't need the capital for anything so pedestrian as paying claims, or providing one's family with sustenance on a proverbially rainy day. But just as aggressive investment managers might be ill-advised to play around and get too cute with reinsurance (lest they hubristically overlook the obvious or fine print), so too might reinsurers be better served by eschewing aggressive investment management. "Too clever by half" goes the old saw, the most recent casualty which is GreenlightRe, though XL, Max Re, and even primary insurer Aetna all have been left with egg on their respective corporate facades.

Pity David Einhorn (corrected - tnx Theodore)! He wasn't the first onshore investor stretching the limits of risk-transfer by employing smoke-and-mirrors in order to try to save a few tax dollars to [hopefullly] allow investors to roll-up their (and his) investment gains offshore - in the process self-servingly securing locked-in capital for his hedge fund. And Pity David (oops again - tnx GN) Einhorn's insurance investors! Many of whom paid above book and subsequently ate double-expenses just to access the fabled wunder-trader, only to discover that what they thought was bona-fide alpha was in fact little different and just a fallible as a fake Rolex bought curbside.

MaxRe, ill-fated tax-dodge of Moore Capital scion Louis Bacon (the III or is the IV???!)too has never failed "to miss an opportunity to miss an opportunity". Or said another way for the sake of clarity, there is no pothole they've failed to hit - whether in underwriting, investment management, or regulatory. Perhaps this is kharmic payback for one's inherent intentions, scupppered much as Commodities Corp/Orix's Stockton Re was. The chart right shows Max Capitals relative performance against a "real" reinsurer, AXS. And as for XL Capital - now less than ten cents on the dollar - one seriously must ask the question whether or not their eyes were ever on the ball, or whether they had eyes at all, so spectacularly poor was their sub-prime market-timing, investment allocation (to Credit and hedge funds), and insurance risk-management.

Yes, I think the message is that there is something to be said for business focus. "Core competency" or sticking to one's knitting. Boring, steady focus, and plodding progress. For a wise man once told me: "Don't break the law, when you're breaking the law...". I've thought about this pearl many times, in many different situations. And I think the same advice might be taken on board by those tempting the underwriters OR the risk-investors fate...

Monday, October 27, 2008

Stuff vs. Claims on Producers of Stuff

WOW! Spot Gold vs. mining behemoth Newmont. Contrarians with capital, risk appetite and safe custodial arrangements take note. NEM is at 1.2x book, 5x ev/ebitda and 10x '09 and '10 forecast EPS. OK its got a billion or so of debt coming due, but if you can't refinance against the most world-class deposits of gold-in-the-ground, then no one has any hope.

Here we have Barrick, the enfant terrible of Canadian mining. Ouch! Someone has been puked. Many people in fact have been puked. And looking at this price action, one would be forgiven for wondering if anyone is left with positions. Here too, ABX is "at book", 9 to 12x low and high ests for '09 and '10, and under 6x ev/ebitda. And they are sporting a FCF yield of 4 to 5%.

Pan-American Silver has suffered a similar fate, with similar values revealed undoubtedly through similar puking. Clearly, here too, "financial regurgitation" remains the operative word, with wife knife-catchers, and cow-tippers, no where in sight.

Finally, we see the result of over-exhuberance by the owner, chief and largest shareholder, Aubrey Mclendon, who being bulled beyond belief borrowed (oh such alliteration!) heavily to acquire even more stock than he'd fed himself over the years. By most accounts, he is NOT a nice man, so one perhaps shouldn't shed too many tears, but where most independent crude producers are historically rich to the product, here - thanks to Mr M - CHK is historically cheap to the product. If you've got the dry powder, go to town, for the moment even a whiff of risk-appetite returns, you'll have 20% in the bag before you can say "Jack Sparrow"

Thursday, October 23, 2008

Wednesday, October 22, 2008

AIG's Sagely Advice

I arrived at the airport yesterday, and as I made my way through the terminal to get my luggage, staring me in the face was a large glass-enclosed advertisement from AIG - and this is the honest-to-goodness truth - that read:

"Know your exposures before it's too late, or else your exposures will get you!!" - AIG Insurance & Reinsurance

I guess they are speaking from experience....

Sunday, October 19, 2008

Gertler: The Interview

Whether it is Jeremy Paxman, Tim Sebastian, Lise Doucette or Owen Bennett-Jones, the Beeb has evolved an interview-style unparalleled in the english-speaking world for its confrontational directness. 

The Interview, while one of the BBC's least-aggressive forums still provides sufficient "punch" to make it a worthwhile weekly essential. This past Saturday saw NYU Economist and Bernanke academic sidekick Mark Gertler under the gun of award-winning Owen Benett-Jones, and the result is worth listening to for all interested in the evolution of the current de-leveraging, revulsion and soon-to-deepen recession. While perhaps a touch too sanguine in comparison to Nouriel Roubini's, he does provide valuable perspective to temper the hyperbole from the media whose use of increasingly-heated and inflated adjectives to depict even ordinary market phenomena should be troubling to those trying to maintain objectivity on affairs. 

Check it out here: BBC: The Interview 

Saturday, October 18, 2008

Experimental Failure...?!?!

It has been several weeks now since CERN's historical experiment with its new Large Hadron Collider was postponed due to technical failure. Physicists were decidedly forlorn and media observers cynically laughing in their beards. But now, after some time has passed, I will wonder out loud to you as to whether they might not have missed something important in their respective scientific disappointment and journalistic jadedness?

Perhaps it wasn't a failure? COULD it in fact inadvertently have been revealing something profoundly important about the early moments before the big bang? You can see where I am going with this: I propose to you that the experiment could be seen as evidence suggesting that those astral moments immediately prior to the Big Bang were characterized by, yes, technical problems. Cosmic indigestion so to speak,, or, for those of a more religious persuasion, God's albatross-like reticence to give birth to the universe, if only to take but a few moments longer (with the power of His omniscience) to ruminate upon whether the entire venture would, in the long-run, be a worthwhile affair. And while these were obviously overcome - evidenced by the fact of our very existence - these very systemic imperfections have persisted right through to the present day, from our piss-pot treatment of The Environment, Americans' election of the Bush administration (twice!), global resource allocation imperfections, to the local optimisation failures of reconciling short-sighted parochial selfishness with the greater public interest and systemic stability.

I know I willl still be anxiously waiting for the results from CERN when they successfully complete their historic particle collisions. But in the meantime, they should take some solace in perhaps having contributed yet further evidence to the fragility of the Universe, and by extension the brittleness of human systems - particularly our modern financial system - left to their Randian outcomes.

Tuesday, October 14, 2008

The Brown Doctrine: A How-To Guide

10. Fail to prevail in Leadership Contest. Tell anyone who'll listen the Chancellor of the Exchequer is the most important job in the world. Piss in Mandelson's and Campbell's drinking water at every opp.

9. Use Smoke and Mirrors (Service Cuts, Outsourcing, partial privatizations, PFIs etc) to make budget look better than it is. Take credit for global economic happenstance and serendipity.

8. Support transfer of Monopolies from public ownership to private ownership leading to real losses in service and markedly higher prices.

7. Pursue beggar-thy-neighbor tax policies vs. continental "friends" (admittedly leading to Chelsky football pre-eminence)

6. Pursue beggar-thy-neighbor regulatory policies vs. other financial centres (England rules! Franco-Germanism Sucks!!)
5.5 Encourage Stealth invasion of France via Ryannair and EasyJet.

5. Encourage and Stoke Biggest Housing Bubble in the World (Yay!! Isn't this grrreat!?!? More Champers greenbelt invasion all around)

4. Encourage and Stoke Biggest Shadow-banking, Hedge Fund, Private Equity bubbles leading [temporarily] to raging bulls in
the market for leased Aston-Martins, and East-European call-girls. (New Labour: "Your welcome....send cheques here...)

3. Express Bewilderment and Derision at the mention that anything is wrong. (Bubble? What bubble...?!?)

2. Ignore the "POP!!" and Subsequent Loud Hissing. (Our banks our just fine thankyouverymuch)

1. X-Broon-Man To The Rescue: ("ahm gannae teck the lead on this - ah told yah so's fer ever this was gannae blow" - "Jings! 'ave ah gottae do evrythin' by me bloomin' self?")

Sunday, October 12, 2008

Brown Disingenuity

I do wish Gordon Brown would just Shut-Up. Every statement about the credit crunch is qualified by "Crisis/Credit Crunch/etc....WHICH STARTED IN AMERICA". And in this, he is, in no uncertain terms, attempting to absolve himself and new labour and hoist the blame upon the Americans. Now, by now, everyone will know that I am left-of-center, and by instinct naturally sympathetic to labour. But just as there was a lot of smoke-and-mirrors by new labour on the fiscal side (with PFIs, further lame-ass privatizations etc.), so too was Gordon Brown presiding over the largest continuous unadulterated real estate price rises Europe had ever seen with nary a thought or comment about the eventual effects upon bank-balance sheet, public finances, financial system risks, almost assuredly because of political repurcussions (The Carter Effect - Don't announce negative news). And so, now, he continues the charade by including in the same breath the fact it was the America's fault, and American disease, a yankee virus, when the reality is that it was homegrown, encouraged, and milked by Mr Brown for all it was worth until such time the chickens came home to proverbially roost. Shame on you, Mr. Brown. Shame! Shame! Shame!

Thursday, October 09, 2008

Shit Happens

Shit happens. Whether by happenstance, negligence or for no apparent forecastable reason, things beyond our control sometimes go awry. It could be that that the short-term funding sources of your longer-term leveraged illiquid assets dry up. Or perhaps you were the victim of vicious rumours (only partly true) and a concerted short-selling campaign, or that the equity benefactors of your hedge fund just decided en-masse that they prefer "vintage wines" (which at least they can drink), or worse, "gold". Maybe you've just discovered your prime-broker is belly-up and your assets are in fact not segregated (reading fine print should be a prerequisite to managing other people's money) or maybe you've been sufficiently unluckly to find out that ALL your clients are private equity firms, or that your widget business is, in fact, unduly correlated to household expenditure.

Yeah shit happens. But how does a company"hedge" themselves or, at least attempt to protect the enterprise with which they are charged with stewarding from the most egregious of the vicissitudes of flying shit? "Capital Structure" would be a fine place to start, for while one might actuarially diversify one's customer base, or revenue streams, events may cause even the best attempts to come unstuck and find themselves correlated. So one can only do what one can do, and relying upon the munificence and continuity of creditors (e.g. Fortis: "Here Today Where Tomorrow?) is of questionable prudence, begging the question as to the wisdom of pursuing uber-optimized capital strucutures championed by Stern-Stewart, which pryed the door open for carpetbagging Activists to cajole and blackmail managements to swap debt for equity, clean out the rainy-day kitty and the suspend contributions to pension funds, in order to tart-up short-term earnings to provide a quick exit thus leaving the ravaged enterprise without a Plan-B (unless one considers selling more equity at rock-bottom prices or convertible preferreds as usurous rates an acceptable Plan-B).

Weather, is notoriously unpredictable, as perhaps is predicting the precise moment when capital markets close. But eschewing umbrellas or prudent financial management for the sake of placating activists, speculators, and yes asymmetrically-incented senior management carries risks that do not merely threaten the share price at some indeterminate time in the future, but in the extreme, threatens all constituents - management, suppliers, customers as labour, both past and present, not to mention The Public who must pick-up the tab of the job-losses, and plug the holes of retirement shortfalls. Proponents of such dubious pedal-to-the-metal balance-sheet engineering would do well to ruminate upon the old joke about the man who tempts fate by leaping off the skyscraper, giving progress reports as he descends past each floor: "So far, so far so good"....

Monday, October 06, 2008

Portfolio Management Ashoura

I just finished reading the Sept monthly letters from TPG, Greenlight, Cerberus and Tontine on Deal Breaker (thanks to Greg Newton at Naked Shorts). Pease forgive my feelings of deja-vu, for not only have I seen it before, but I've even scripted it for them.

Inside, there is lots of blame shoveled around - mostly upon desperation or foolishness of others, the market environment, the seeming unprecedentedness of it all, along with small dose of mea culpa for not doing better. Then, there is the wrapping of their culpability under a cloak of relative performance - since inception, vs. Chinese stock indices, vs. peers, even vs. the returns of the Calumet Auxiliary Women's On-Line Investment club - as if repeating a mantra (any mantra) justifying one's longer-term self-worth will wash away the sins of losing 60% of investor equity in heartbeat on a portfolio of very concentrated, super-high beta, massively correlated bets, or with hindsight, to forlornly validate the decision to go "all-in" (yet again) on black following sixteen quarters of "blacks". Aw shucks, it was "red", sorry...

There is little mention of the wisdom of the Hedge Fund Model of using serendipitous momentum-correlated equity to borrow stochastically-available credit, shoulder the burdens of complete counterparty-risk to access the leverage, in order to pile into crowded trades for which there is little exit until after the embers have finished smouldering. Nor is there much mention of why they were willing to bet everything that this wasn't the big one when the tide had rather obviously begun washing out a year a go, the chain of events unfolding had been in one direction only, and the weather wane of liquidity, growth, and sustainability was pointing south. There wasn't even a grown-up sober attempt call a spade "a spade" to say something like you just don't get 100% returns on the upside without risking near-total annihilation on the fat negative tail. This of course was not addressed.

But now we are a week into October. And another 10+ percent down. And another set of crowded trades is being liquididated. No, this cannot be good. This is unlikely to repair damage done in September. Or validate one's assessment of unimaginable values. Indeed, these moves look terminal to those that wore them.

I am naturally suspicious of mis-guided or disingenuous self-flagellation such as that depicted in the inset photo above. This spate of letters strikes me as a form of "portfolio management ashoura", a rehearsed and stylized self-flagellation that misses the point and many of the lessons wrought by the event itself.

Wednesday, October 01, 2008

Sam Zell is a God ! (well, almost...)

I do not know Sam Zell. And I cannot tell you whether or not he is a nice man, charitable or selfish. He looks warm, fuzzy, and indeed almost grandfatherly in many of his photographic depictions (see left). What I can tell you is that his decision to sell his real estate behemoth, Equity Office Properties (Fmr Ticker: EOP) in November 2006 (closing in Feb 2007) was the epitome of counter-trend prescience, bucking the prevailing crowd by unloading at supremely elevated valuations on the offer-side of the market to buyers who were apparently more flush with cash and agency zeal than foresight. BANG! went the gavel! YOURS!!! (for $34 billion $102 million 305 thousand dollars thankyouverymuch).

By comparison, the chart below shows the fate of Manhattan Class-1 Office REIT SL Green & Co (Ticker SLG) and it isn't a pretty site. Not that SLG's earnings estimates have deviated much from what they were. Oh no. This is about ratings compression, and the (probable and correct) wisdom of the market (and thus price) running roughshod over the innovation of sparse earning information.

Most portfolio managers, investors, traders and fence-swinging hedgies aspire to "tagging it" just so, wearing it as a badge of honor for the rest of one's life, like Nils Taube in 1987. Even those of us who are more comfortable and adept at playing percentages, cannot help but admire such exemplary market-timing perfection, the flip-side of the horror we (or at least yours truly) would view the late-cycle OTT dismemberment of ABN.

So today, Sam Zell, when the best in the business (ahem, except for John Paulson) are recipients of the ego-cleansing of-a-lifetime, and all market participants are in need of something to smile about, in honor of your not-be-underestimated feat, it matters not whether you are a nice guy, or a prick, I tip my hat you...

(erratum: the inset photograph, despite the likeness to Sam Zell, is of course, NOT Sam Zell, but Burl Ives. However, his attire was more appropriate for this post than anything Sam Zell would be caught dead wearing, so I've left it, as much for its aptness as for the fact that Burl Ives was the first vinyl record I would play on my parents phonograph when old enough to figure out how to work it)