Tuesday, November 22, 2011

Memo From ICAB

M E M O R A N D U M 



Dear Citizen of the Western World, 

Although you've probably noticed, evidenced by the numbers of you have been camped in dirty underwear, without privvies, in various public places, even as winter approaches, we have some bad news for you.

1. Most of us are poorer than we realize
Whether personally as an asset owner whose share of The Tab hasn't come fully due, or as an ordinary citizen where the State's claim upon your future cash flows hasn't been fully applied, or as creditors where the haircut (s) have yet to be fully imposed or negotiated, or as retirees or future retirees whose promises of future cash flows (or the age at which you retire) are unlikely to be fulfilled as previously believed in like quantities or relative purchasing power, you are worse off than you currently believe or realize. How much so is anybody's guess,but its probably MORE than you imagine though LESS than the Goldbugs fear. Accordingly, we recommend that everyone include an F-Factor Discount (technically known as a Fudge Factor) when totaling our individual net worth statements and begin adjusting to the idea when imagining one's next holiday in the sun, luxury kitchen refurbishment, or leveraged purchase of the latest Vorsprung durch Technik

2. Most of us will continue to get poorer in real terms.
There are more than 7 billion people on the planet, many of whom would gladly do what most of us do for less and for longer. Much less. And they are. And they will continue to want, and do so.  Some of course are unable, due to obvious limitations of geography, nonetheless, the inexorable downward pressure upon wages and (at least over the next few decades) Malthusian upwards pressure upon resource prices will continue to squeeze us. If one is a consumer, and one is accustomed to consuming significantly more than one produces, this will be rather unfortunate. Life, however, is full of choices and undoubtedly all people so pressured, and without a fairy godmother, or a very well-funded trust fund holding good title of hard and/or solvent assets, must face them. Do not believe demagogues who promise that in the absence of producing something of value which others desire or require and can trade for/pay for, that we do not or will not have to make such choices, however big or small. We will, whether the markets force us by austerity and subsequent deflation, or whether they arrive via eventual inflation as a result monetization.  So in preparation, we advise everyone to please start thinking about what is most important to you, and your family. Hints:  Food (the veritable kind); Decent Affordable Healthcare; Public Order: Education; Safe Bicycle Routes, More Efficient transportation, Drinkable Wine, perhaps, but not necessarily in that order.      

3. We are suffering from a variety of maladies. 
Whether or not we realize it, most of us are ill. Many are suffering from a form of Financial Phlebitis (known as Vastly Enlarged Expectations), both in terms of what, and the quantity of which we think the World (The State, Your County, Municipality, Parents, Employer, Union, Children, Deity of Choice, etc.) owes us, and what we think is deserved by virtue of our annointed presence on this planet.  Some of us suffer from behavioural disorders such as Self-Attribution or Hindsight Bias'  that causes one to discount the impact of one's luck (dumb or otherwise) or society's contribution towards one's success, possibly coupled with a tinge of Sociopathic Grinch''s Disease. Still others amongst us (for the avoidance of doubt including but not limited to: Bankers, the Auto Industry, Big Pharma and other rent-seekers) have a form of Financial Munchausen syndrome.  Together, these afflictions threaten everyone's health, not to mention law, order, stability, and welfare.  We recommend everyone take steps to confront their own particular disorders and attempt to self-heal what they can which begins with the arrest of self-delusionary behaviour. For those amongst us who are adept AT helping themselves, but are seemingly unable TO help themselves, we will be offering special group therapy for such financial kleptomaniacs called "Looters' Anonymous".  

Fortunately there is some good news.  For most of us, it will (once Euro systemic adjustments are enacted) likely remain safer, and more pleasant to live where we are (excepting those of us in Blighty or the bowels of certain US Cities) than in most developing cities and countries. For Americans, our land and our corporations are rich, our people innovative resourceful (when the mood strikes) and adaptive (errr when forced). Our higher education system (ex Bob Jones U) is still the envy of the world, and there remains enormous low hanging fruit (from infrastructure, investment in energy efficiency, and wholesale healthcare reorg, education urban renewal, progressively higher marginal tax rates) to help transit from where we are to where we ought to be in order to sustain a reasonably healthy stable civic and economic life should we find the pragmatic will (which we highly recommend) and the leadership. For Europeans, our lands, heritage, and patrimony are rich, our expectations are suitably moderate (except in Blighty), our savings are large across all of our nations (excepting Blighty), our households underleveraged (except in Blighty), our companies technologically fit, our aggregate current and trade accounts are in rough balance, our healthcare systems efficient -enough in cost and outcomes, and our educational systems of good quality, affordable and meritocratic (except in Blighty). The gaps we must respectively bridge, while different, are neither insurmountable nor even a huge distance from where we presently are. But the time for dithering, aversive or avoidance behaviour has passed, and ask all of us please, be one idly rich, merely fortunate, a farmer or worker, shareholder, civil servant, pension beneficiary, manager, teacher or student to act pragmatically, and in the better interests of ALL of our children.  

Yours truly,

International Citizens Advice Bureau

Sunday, November 13, 2011

dEaR sanTA

dEaR sanTA

i KNoW iTs eaRlY buT i wOUld bE so hApPy iF fOr Xmas yOu cOuLD mAke soME of mY XmAS wISheS cOMe trUE..... 

1. Some pragmatic compromise between American political parties

2. a Chemistry set with some instructions on transmuting scrap metals into Gold (which I could quietly though parsimoniously hoist upon the goldbugs).

3. a reasonably accurate flashing red "Bullshit Detector" light to be built into all TVs in order to warn The Audience when whatever they are watching is stretching the boundaries of fact or credulity.  

4. A single-payor US health-insurance company with mandatory purchase, an aggressively accurate usual & customary remibursement rate; a  target to pay the average of developed market costs for pharma, and a fair method of sharing the cost of those unable to afford the averaged premium across the risk pool.   

5. A full set of Ahmadinejad, Netanyahu, and Assad Voodoo Dolls, complete with pins and a few awesomely effective incantations

6. A pair of woolly Athletic Socks - the left to stuff into the mouth of George Osbourne (if there's room with his foot); the right one reserved for Glenn Beck or Sean Hannity.

7. A permanent increase in spec margins for commodity traders, as well as a significant increase in FX Bucket Shop margins and some high-touch regulation. 

8. A FTTH connection AND a soapbox to let the world know of the complete, utter and total ineptitude of Virgin Media's installation team.

9. Some proper asphalt for the impoverished Brits for them to begin to resurface their abominable system of so-called roads.

10. Lots of nice fresh snow in the western alps over xmas and new years.

P.S. - and if you have room, we'd love a hamper with some Kalamata olives, a couple of litres of sun-baked Kotsifali or Xinomarvo red, some Feta and Haloumi cheese, Cretan Olive Oil and a 6-month charter of a Suezmax tanker to help our needy Greek friends....

Thursday, November 10, 2011

Monkey on Your Back

This is my last word on Olympus. There are more gripping things going on elsewhere. First, the Facta investigative reporters who originally uncovered and drew attention to the suspicious accounts at Olympus should be commended. They should be commended for their perseverance. Without their work, it is possible that the abuse could have escaped notice for who knows how long. They did not however, as far I understand, connect the dots nor understand why.

There is an analogy here. Madoff clients (Fairfield Sentry I believe) were ascribed the return on their statements apparently via OTC split-strike conversion positions. These were long stock with hedged option combinations that however exercised guaranteed a rate of return - like a futures calendar spread implied a rate of return equivalent to the promised return. Of course at the time, few (certainly not me) knew, nor even imagined that the positions and the statements themselves were pure fabrication. We (myself and colleagues) believed that he was doing something else (front-running, impact-trades, something more risky that he wish not to reveal, etc.)which, to satisfy reporting requirements, he booked accordingly. It was sufficiently plausible for the trusting, the auditors (who were bent), and the ignorant, even though there wasn't ever sufficient underlying activity to relate to the OTCs on the statement. The reason, in the end, we now know.

The transactions highlighted by Facta indeed were similar in intent to Madoff's fake bookings which was to hide something with something plausible. And they were similar in that once in the spotlight, both fell to pieces since both were rather implausible. That is, in my opinion, where the similarities end. Madoff was in its entirety, a fraud, excepting a modest broker-dealer. Olympus, from what I understand from  conversations with someone purportedly close to the original repair-bond transactions which the sham advisory fees were seemingly meant to dispose of, had large financial investment losses - large enough when the company had YEN 150 billion market cap, that disclosure would materially impact their balance sheet hence financing, not to mention the embarrassment. The zaitech activities, often made possible by essentially "free financing" from the issuance of bonds with attached warrants, leaving them with cheap funds to invest, but little expertise to properly take advantage of it, resulting in loss-making investment assets, but fixed-obligations to be repaid eventually.  Oooops.

But Olympus today, has a balance sheet 10-times (or some similar multiple) the size of that from 1990. A billion dollar loss in 1990 was HUGE. In 2010, its BIG, but relatively manageable. Altis, Gyrus, Turbochef or whatever these were called, are to a certain extent irrelevant in that they were coincidental. They were transactions costs - some small fraction - in relation to what they were attempting to dispose of. This is not condoning it. This is trying to plausibly explain it. IF they lost 50% of the true value of these operating gnats, it would be rounding error in the Olympus equation. The advisory fees, after all were NOT siphoned, but used settle the outstanding investment losses, presumably with their "Michael-Clayton-like fixers" or repair-bond arrangers.

The fears of investors presently are valid: Is that EVERYTHING? If they did it to repair the balance sheet, might they not have done it to the income statement too? Like Leeson's suicidal cover-up, could one mistake have led to much larger losses in covering it up?? Are there lawsuits and penalties that might arise creating large future liabilities for present Olympus shareholders? Are their financing arrangements threatened? Could they be delisted? Bond covenants and so forth....  All worth asking.

That said, zaitech is dead and buried. When the drugs wore off, it was embarrassing, with the most incompetent long since transferred to the corporate travel office in the cellar. It is highly likely the losses and repair transactions were all the investment losses. And to be fair to Olympus, it wasn't like it was Michael Vick and Dog Fighting: everyone was doing it at the time (ask anyone foreign who structured similar transactions in Tokyo).  Olympus was different, I think, ONLY in that by 2003, they still hadn't come clean (like Yakult Honsha and others) or disposed of them. It is likely that they hadn't accumulated MORE for reasons just stated, but sti had the so-called Monkey on their Back.

Could they have been diddling the income statement? Yes, of course, but...practically it is a different story and more difficult to continue to diddle an income statement. There are just too many people with information. Knowledge of a repair bond on the balance sheet can be limited to a few people - and the foreigners involved were bound to strict confidentiality, before the atmosphere regarding such transactions visibly soured. And for a company with numerous subsidiaries with different year-ends, can be hidden from even well-intentioned auditors for years. And it is likely they didn't need to.  But I cannot say for certainty (and there are perhaps few people that can). BUT, I might turn this around and ask "IF they were systematically diddling the income statement, why would you appoint a gaijin as your CEO?" I do not think they would.

I can discuss the other risks, with even less certainty. Could they be delisted? Yes, but the precedent is that it is unlikely. Could they be sued? There is a cultural aversion to litigiousness, but possibly I suppose. And could bank financing be in jeopardy? This seems highly unlikely. Japanese banks are not so mercenary with corporate kin, and Olympus IS a big customer, and the web of responsibility spreads far and wide, so I cannot see a Japanese bank lender murdering a still-solvent client, however tainted they may be, for everyone has some dirty laundry in their cupboard.          

And so, when I look at it, and ask the questions, I arrive back where I started YEN 300 ago: while not pretty, this endeavor, and the subsequent farcical cover-up was legacy business. If you've reason to believe otherwise, or that it goes deeper and is more pervasive (i.e. the income statement) then please let me know if for no other reason than to be kind to someone who is by nature, loss-averse (over the longer-term).

Tuesday, November 08, 2011

Olympus: Capitulation

....although  surrender might be more apt, capitulation is more accurate. For Kikukawa remains. This says a few things to me.

First, as I surmised, it says to me that Kikukawa may have been precise in earlier statements. He probably wan't responsible for the transactions. He wasn't cooking the income statement, but trying to get the shit off of his shoe. He was culpable for being a "good" company man and [attempting to] protect his colleagues who arranged and executed the dirty deed, as well perhaps, the honour of the 40,000 employees - even if it didn't work out that way. .

Second, I think the market has it rather wrong in their reaction. The admission should have been very reassuring to investors. This is not Enron. There were (most likley) not fictitious revenues and sham businesses. Repair bonds were a specific utlitarian approach to a very specific cultural problem. The roach theory, I believe, shouldn't be applied here, because using the Occam Principle I applied effectively in nailing the cause in the first instance, one wouldn't go to the lengths that Olympus went to, finally, after two decades, to dispose of hidden zaitech losses without disposing of them in full. I am surprised the market doesn't see it thus.  "Limit down" is likely the wrong reaction to the resolution of the mystery, leading to the wrong price.

In regards to the right price, I might not be much help here. Yen 850 of sales, Yen 650 billion of debt but a trillion Yen of assets, with Yen 85 billion of depressed EBITDA. MDT and EW in the USA with clean balance sheets trade from 7 to 17x EITDA, but are purer plays in Med Eqt, and Olympus has the shitty but large camera division. I would have thought, at the least, this should support a market cap of 400 billion perhaps 500, since the Endoscopic jewel is about a third of turnover, but very profitable.  This is double to two and half times where one could have bought as much as they desired this morning. More than 15% of shares outstanding were traded today.

While I do not condone Kikukawa's actions, I think it does not make sense (from investors' point of view) to group what I would call one-off  shame-based accounting fraud with systematic book-cooking fraud of the likes of Worldcom, Enron, Adelphia, and Parmalat.  I think this affair,  particularly, the public demands of large Japanese portfolio investors themselves for truth, marks another tell-tale enroute (albeit the slow one) to eventual  corporate redemption in Japan, rather than, as investors believe, a more perditious route to ignominy.

Call me an optimist. I feel no shame in this.

Thursday, November 03, 2011

Broke, Broker, Brokest

Farewell then
MF Global....
no more.

You've been 
like chewing-gum
stuck to your

Who would've
thought your
shareholders would 
Phil Bennett?

might've been
a suitable 

would be 
more apt.

"From Ashes 
to Ashes, 
to bust"
Will be your 

Tuesday, November 01, 2011

Buried Treasure

I love FinViz.  Great charts. Free data. Well-architected. Industry and sector groupings and drilldowns.  Great screener with functional groupings. Thin-client with fast GUI and slick heat-maps. ADRs, dual-listed coverage as well as ETFs and futures (along with spot FX and metals). And continuous charting for 24hr markets. Copious ,well-summarized financial data, ratios, both historical and estimated, as well as their first derivative, along with links to income statements and balance sheets, as well as detailed news, insider transaction history, and I am sure I've left a few things out.  And that is just the "free" part for which one seemingly pays by watching a few banner ads. What more could you ask for?  Watch out Bloomberg.

Yet something bugs me, for a comprehensive, apparently free, reasonably bug-free offering (which itself is not to be taken for granted in the world of financial software).    I am surprised though, that people...users...as well as machiavellians aren't asking some questions, for we do not know who they are, nor what they are doing with the our (yours and mine) usage data, which in aggregate is potentially valauble to the nefarious and the data-crunching opportunists. 

Like the Olympus fiasco of my past three posts, when one sees inexplicably weird and sub-optimal corporate behaviour, one's bullshit detectors should be cranked up several notches. In Olympus' case, the question was: Why would they do something like this? And the answer could only be one of two: either they are stealing or have stolen (for whatever reason) OR its a ruse obfuscating the truth. That's it. One could rightly ask yours truly why CDT sub-optimally and seemingly irrationally refuses banner ads or paid links. The answer, which doesn't stretch credulity, is simply that I enjoy writing (despite my piss-poor editing), and find it a [selfishly] useful to have a structured and disciplined way to work through my thoughts and expose them to the rigour of scrutiny by others, including those who do not agree with me. Indeed, if self-promotion were at the root, I certainly wouldn't write anonymously, and if traffic and money were my motivation, I would trade links and conjure-up daily drivel to drive traffic, however irrelevant.   

But back to FinViz. They (unlike CDT) are delivering real data, which costs real money. They must have a small army of programmers to insure integrity, along with a serious set of servers and distribution agreements to technologically deal with what is worldwide popularity. The data vendors rarely provide this quantity of data for redistribution without a pound of flesh, in order to discourage people who, like FinViz might just do it better and cheaper.  We do not know how many premium subscribers they have, or their ad revenue, but even with the network effect, I wonder aloud whether these revenues are sufficient to support the aforementioned cost structures for what is essentially US-only data. 

What do we know? They are hosted in Eastern Europe - Slovakia I think. No one, rather surprisingly, takes credit for what is a very well-engineered product. Go and try to find out about it, and get back to me. Even Tyler Durden of the inexplicably popular ZeroHedge has (apparently) been unmasked by the NY Post, such is the desire of people to know who or what is behind the curtain. But we do not see FinViz in the list of anyone's Private Equity portfolio (as far as I know).  There are no contacts. No marketing (other than through affiliate sourcing paid via Paypal).  Why? 

Admittedly, they could be taking some sort of long view. Give it away. Get users hooked. Drive traffic, and then perhaps, like Google, Facebook or Linked-In, worry about revenues later. But then one might ask: why the secrecy? Why not drum up publicity and hype? Give interviews. Attend conferences. That of course would generate untold free advertising. And why only the US market? There is another possibility - one from the dark side. Perhaps, a cynic might suggest, it is a so-called Honey-pot. Imagine the treasure-trove of information gathered from screening user activity and instrument quotes. Imagine the potential edge that a data-miner could achieve in correlating this private information to short-term market moves, in a way similar to the airlines' pricing algorithms that modulate prices according to not demand, but enquiry traffic. A large Doctor's convention in Nassau might elicit initial enquiries without bookings giving the airlines vital information to adjust prices upwards and maximize revenues at the customers' zero-sum expense without being "picked-off". Look at it, and it moves. Like a carpet dealer in the souk, "Oh, you like it? The price is ____" (which is price times 2). In the world of trading, this information could at its darkest, empower a form of speculative front-running, or merely allow an HFT market-maker to shade quotes and quantities in the correct direction. Of course, Bloomberg and Reuters have the same opportunities, but they have far too much to lose by compromising their integrity. But an anonymous eastern-european website would not have the same integrity cost function. What if it were actually - in part or whole, in collusion or in partnership -  a large HFT/Market-maker such as Citadel, Getco, Timber-Hill, Susquehanna or Spear-Leeds Honeypot, funded at arms length even in exchange for vital real-time access to what is not far from pre-trading interest and information. Conspiracy theorists let loose your inner imagination and recall the elaborate Honeypot setup in The Sting, where the punter was enticed into placing bets where the racing results and therefore the odds were known in advance!    

And then, there is the little chestnut of the backtesting information derived from their backtester. Imagine for a moment having an army of unpaid but highly-motivated researchers - some daft, others savants, but all generating "strategies" with more or less complex heuristics,  but all with objective measurements: estimated P&L. And you have the results individually, and in aggregate by classes of undertaking. This is like having the bore-hole results from prospectors, for free, without paying for the work or with royalties, and the ability to dig in the same place and spot without filing for, or paying for a mining concession. Of course Bloomberg could do the same. But FinViz is anonymous. There are no attestations or representations as to what they may be doing with the wealth of information gathered from the site. No mention or warnings about conflicts of interest. Perhaps there is more binding contractual detail in the fine print of the Elite subscription. This I cannot say. 

As I began this missive, I adore Finviz. I use it regularly and often. Quality kit. I just wish they were more forthcoming, and, until such time that the veil is lifted, I will remain both curious and cautious.