Saturday, October 27, 2012

Another One Bites The Dust (updated again)

Things, people, and/or ideas believed to have integrity now seemingly compromised...(the updated and expanded version)

Wen Jiabao as "Humble Servant of The People
Lance Armstrong
Top Ten Lists
Austerity as an Economic Panacea
Harvard Students' Academic Honesty
BLS Statistics
Cyclical Recovery
Book Reviews
Strong Computer Passwords
'Organic' Food
Money Velocity
Undecided Voters
The Food Pyramid
Purity of '.999 Fine Gold Bars
Penn State Football
"Top of the Pops" 
Fareed Zakaria
The "risk-free" rate
LIBOR as a Benchmark
Public Sector Pensions
HFT as a Beneficial Provider of liquidity
Diversifying properties of Hedge Fund's
Einstein's Theory of Special Relativity 
Celtic Rangers
Macroeconomic Forecasts
John Paulson
FRB Open Market Operations
Standardized Educational Testing
Swiss National Bank
A Relaxing Cruise
WTI as Oil Benchmark 
Olympus Corp.
Payment Protection Insurance
HM Revenue & Customs
Sony Playstation Network
Social Mobility
Actuarial Return Assumptions for Pension Funds
Ryan Giggs
France   AAA
Boob Jobs
David Einhorn
Nuclear Power
Deepwater Drilling
Tiger Woods
Professional Cricket
Professional Cycling
High-Frequency Trading
Professional Baseball
Professional Tennis
Municipal Bond Underwriting
The Catholic Church 
Track & Field Athletics
NCAA Sports
US Congress
UK Parliament
Analyst Research
Credit Ratings
Newtonian Physics
The Stock Market
The Food Pyramid
Incentive Stock Options
Reinsurance Brokerage 
Lou Dobbs
The Mortgage-Backed Securities Market
Hedge Funds
Social Security
Government Balance Sheets
Tooth Fairy

Errr ummm Professional Wrestling is starting to look good by comparison - at least it makes no pretensions to be anything other than it is. What's left?

Tuesday, October 02, 2012

My (Not so) Golden Rules About Investing (And Not Investing)

Trolling the blogosphere, it seems to be the season for sharing one's so-called Golden Rules of Investing. So here goes.....

Cassandra's 25-3/4 (or so) Tungsten-Filled Golden Rules          

#25-3/4. Do as I do - not as I say - but do it without delay! (NB: 13F-HR's are too late!)  
#25-1/2. The trend is your friend....errrr....ummm.....except when its not.  
#25-1/4. Whatever kind of metaphorical market animal you are (bull, coq, chicken, weasel, whatever), always remember that Pigs Get Slaughtered.
#25. Buy "The Best of Breed" companies.....unless they are priced at levels preceding the moment when Pigs Get Slaughtered, or when the trend is not your friend, or I am saying the opposite of what I am doing.   
#24. NEVER short "Best of Breed" companies...except when Pigs Are Getting Systematically Slaughtered in other "Best of Breed" companies (but don't get piggy puking out the pigs). 
#23. Cut your losses short and let your winners ride - but not when pigs are getting slaughtered 
#22. No one ever made a dime by panicking ... unless apparently you're following the previous rule #23 which says you should cut your losses short and let your winners ride.
#21. NEVER double-down (except when you have material non-public information and deep pockets) or if you're Ed Thorp, or if you're playing at The Martingale Room. 
#20. "Systems" always stop working (Even if they DID actually work at one point). So forget about asking about their "system": what you really want to know about is their Plans B&C for when it DOES stop working (and why they're not using them NOW).
#19. Diversify to control risk - except if you are Eddie Lampert
#18. Don't own too many names - unless you're Ed Thorp or diversifying to control risk per the above rule 
#17. Invest in what you know - unless you don't know a whole lot about those things. 
#16. Buy when others are (almost finished being) fearful. 
#15. Buy when there is blood in the streets - but only after it has dried a little bit. 
#14. But NEVER buy when the blood in the street is your own. (See rule #23 above)
#13. Never catch a falling knife (unless you know why it's falling and/or approximately when it's likely to stop). Catching a rather dull falling knife, however, is OK. (NB: IF you ignore this rule and try to catch the falling knife, and discover it is hazardous, and the street becomes stained with your blood, see rule #23 above).
#12. Leverage is poison! (unless you're doing risk-parity and then it's sorta kinda seems theoretically OK, but then again, maybe not just when yields are near zero and everyone else is doing risk-parity or has risk-off asset allocations and...)
#11. Cranking up risk in order to target return when vol is low is like smoking a cigarette out of your butt-hole - it's just stupid. 
#10-1/2.  A great coder is worth at least six fraternity brothers.  
#10. NEVER allocate money to anyone who feels the need to sum their aggregate number of years experience to some impressively large number. 
#9.  NEVER invest with anyone with an improbably-inflated CV. If he's embellished his Starbucks-fetching experience while an intern into something rather more grandiose - imagine what he (and it will be an egotistical 'He') is capable of fabricating in regards to his investment strategy and performance!

#8.  NEVER invest with an investment manager who buys and then increases positions in less-liquid securities at higher and higher prices (unless those prices are likely to be demonstratively requited by per share growth metrics)

#7.  Be entirely skeptical of an investment manager who touts his self-professed superior research skills, proprietary channel checking methods, or interns sent to dumpster-dive to gain an edge. This is almost certainly first-class balderdash.
#6.  If your broker says you're his first call (and you believe him) you're an idiot.
Always assume you are the LAST one to receive a "tip" or sell-side research. Prop Desks, friends&family of potentially anyone in the research publishing & distribution chain, SAC, MW all will have had the chance to act upon it before you. 
#5.  If you pay an upfront load for the 'privilege' of investing in a fund, you're an idiot. 
#4.  If you invest in a hedge fund with anything less than annual incentive-fee crystallization, you're an idiot.  
#3.  The moment your Advisor, Letter-Writer,  Investment Guru mentions "Hyperinflation" or "Government Conspiracy" - run away in the other direction as fast as you can. 
#2-1/2.  To catch a gopher, you've got to think like a gopher.  
#2.  NEVER subsidize losers with winners - unless you're diversifying to control risk - where rule#23 will tell you to sell your losers and let your winners ride - unless the losers are "what you know" and therefore you SHOULD be investing in it - doubly-so if you have material non-public information, and especially if there is Blood In The Streets -  unless of course it's your own blood, in which case you should return to #23 and sell your losers - at least until tomorrow when you wake up and see that there is blood in the Street and you remember to be greedy when the others are fearful...
#1.  Never listen to other peoples Golden Rules - particularly those filled with Tungsten.

I Didn't Mean To Steal From You

Polite applause for the Financial Services Authority who upheld their April decision which found the now-Swiss-based Stefan Chaligné, manger of the near $130mm Iviron Hedge Fund, guilty of market abuse for his Dec 31st 2007 gratuitous ramping of US and European shares held in his portfolio. He was, the FT reported, fined GBP900,000, ordered to repay profits/fees resulting from the umm... errrr ..... [shenanigans, tomfoolery, charade, escapade, peccadillo] (please choose one), and banned for life from the UK Securities Industry. Mr Chaligné, it would seem, in the last hours, of the last day of the performance measurement and crystallization year, simply could not resist the temptation of buying more of that which he already owned, in sizes which - relative to exchange volume and liquidity - allowed him to his goose performance by nearly 300bps. ***Sigh*** It was not reported precisely how it came to the FSAs attention (the SEC? NYSE? Whistleblower? Jilted mistress or ex-wife) nor whether or why US authorities, too, who might wish to make a statement about the integrity of their preserve, have not sought similar charges or prosecution being that the sins certainly ran afoul of US securities laws forbidding the creation of false and misleading markets. 

Yet (polite) applause is still in order, I think, if for no other reason than because the FSA bothered to follow through at all on an ostensibly small, though apparently blatant case of abuse. This view is not setting the bar of justice (no pun intended) very high, but since such abuse is more-than-rampant, it is a signal to traders that they DO (however remotely) risk losing one of the best gigs in town if they are caught, not that this even is the end of the world since like Mr Chaligné and other before in similar predicament, can simply pack-up and move to, say, Geneva.
I emphasize "polite" because, according to the FT, in the appeal ruling, the three-member panel were willing to agree with Mr Chaligné that he "probably" wasn't trying intentionally to cheat his investors - apparently on the grounds that most were friends and family as well as himself. In the decision they say (to paraphrase) despite his obvious lying and willful neglect of civilized behaviour and the rule of law, it was insufficient to categorically brand him a sociopath whose intention was to profit at the expense family and friends, because (get this): what kind of guy would intentionally steal from his friends, family and self??!?. Well, where does one start with THAT one. 
First, what are family and friends to a sociopath? Not much besides cannon-fodder one would be forgiven for surmising. Perhaps his allowance was too small for his lifestyle. Perhaps he had penis-envy of the bigger-swinging dicks. Who knows. But, we do know that the fact of the matter WAS that he directly stole several hundred thousand euros. One can infer that he was below high-water mark before the ramp, since IF he was positive for the year with no hurdle, the theft would have been nearer to EURO 600,000. His argument thus may have been predicated upon the fact as he was on the wrong side of zero, and since he didn't have profits, he couldn't have been intentionally trying to steal money from them. But since he earned SOME performance fees as a result (but not 20%-like fees on a 2.7mm goosing) the ramps must have swung the fund from loss to profit for the year as a result. I think this is a bullshit excuse, and am surprised the FSA saw some merit to leave open the possibility it was somehow unintentional.

Second, the FSA only demanded he pay back investors the fees he dishonestly earned by ramping the shares. Sadly for his family, and his perhaps his now-former-friends, they likely lost a tidier sum on the difference between his average cost in and average cost out in addition to transaction costs and additional management fees charged on the subsequent, inflated, beginning of period assets. Experience suggests that the market can spot such ramps a mile away and unless it is one's intention to continue to buy gobs of stock, reversion will be short and sweet and without the ramper being able to liquidate his/her position. He should have been made to pay FULL restitution of imputed losses to investors. Mr Chaligné also asked that fines be directed to investors in the fund (himself!), and this is, again, absurd. Any fines should defray the agency's costs in pursuing the matter, for the market integrity which benefits the public interest, full-stop.
Third, he used the lamest excuse - i.e. the "Dog Ate My Homework" alibi, which in this case was that he was fearful that "his stocks might come under attack by short sellers". WHAT??!?? This is laughable, and in itself should cause he FSA to quadruple penalties and disregard any potential goodwill. Primarily because IF that was, in fact, a concern and not a completely irrelevant and oxymoronically bogus factoid, then the broker could have been given a limit order to maintain price, and IF the price DID come under attack by nefarious aliens or black-hats lurking and conspiring against his stocks, to support it, rather than sending it scurrying up the flagpole resulting from an order that specifically instructed his brokers to put the stocks up as much as possible. Second, even if we ignore this, as vigilantes are frequently told: two wrongs do not make a right. An experienced fiduciary - of the non-sociopathic variety - takes advantage of short-selling attacks to buy stock cheaper, and do it scale-down AT THE CHEAPEST PRICES. They then explain to their family and friends how smart they were buying stock CHEAP at the end of the year, rather than buying it at ever-upwards in a thin market, at prices that will certainly bugger them (financially). And then there is the chestnut about the quantity. IF the intention was to prevent getting devalued at year-end by short-sellers, there was no need to give orders of magnitudes of prevailing liquidity - especially on New Year's Eve, Dec 31st, typically a half-day of trading. It is uncertain why the FSA gave him the benefit of what should have been, beyond the shadow of doubt.

But what has NOT been contemplated, and the truly pernicious act of systematically painting a false and mis-leading market is the potential impacts the deception (not theft but deception) would have upon the decisions and perceptions of both present and future investors. As you may remember, this was the basis for the first 'shot across the bow' by regulators to Hank Greenburg at AIG (and which should have sent AIG shareholders scurrying for the exits). AIG for a decade traded at a large premium to other insurers and reinsurers because of its smooth earnings growth and, perhaps more importantly, its better-than-market underwriting results, which gave credence to its claim that it was a better, smarter and more disciplined underwriter. We now know they were managing (read intentionally smoothing) their earnings. And they were busted for this. But Hank was unrepentant. He implied it was NOT a sin because he didn't steal from investors - just moved earnings from one period to another, a common act in the insurance world (which AIG and Warren Buffet would help facilitate for you for a price). But you see, AIG was also using such unsavoury methods to transform the nature and characterization of earnings by turning underwriting losses into investment losses. So this wasn't understating earnings to save for a rainy day - the way reinsurers have operated since time began - but intentionally trying to fool all the insurance analysts and rating agencies and investors in order to convince them that AIG was better than they actually were. This illusion of quality likely caused much over-investment in AIG at higher-than-was-justified prices, and probably allowed them finance themselves at basis points less than might have otherwise been possible and grow at rates higher than otherwise possible. A seemingly small white lie causing large malinvestment. In fact, one might argue further that IF AIG had been seen as the not-so-special underwriter that they were, they might not have been able to insure the amount of subprime which they did. OK, these are a lot of ifs, but it IS a slippery slope in the descent towards insolvency. Or between increasing investor allocations or the liquidation of your hedge fund.

Mr Chaligné of course is no Hank Greenburg. And stealing from friends and family may not, after all, have been the primary objective. But the FSA should be chided for leaving the door open that it might have been vanity, when the very obvious greater sin went uncommented upon which has the grail of boosting performance to grow your business to entice more investors to give you their capital on the basis of that performance (and risk deception) which is, in the view of this investor, forever unforgivable.

Monday, October 01, 2012

No Wheelbarrows Required

To be sure, there is much derision being directed towards QE, in general and QE3 in particular. Permabearish writer-strategist-entertainers Faber & Edwards use such hyperbolic language as "The Fed Will Destroy The World", a soundbyte made for and lapped up by the ZeroHedge faithful frightened that QE is a conspiracy that is about to cause hyperinflation. Others are more measured and eloquent, but no less critical.

So it comes as some surprise that the eminent Johns Hopkins economist, advisor to TheGoldStandardNow.Org, and renowned specialist in Global Hyperinflation(s) Professor Steve Hanke, in an interview with Massar & McKee over at Bloomberg not only completely dismissed the idea that hyperinflation (or Hyperinflation) is lurking around the corner or ready to pop-up its head like a angry gopher, but explained that contrary to the popular belief that an excess of money is resulting from all the QE exercises - the alleged money that has caused paranoid chicken-littles to make a beeline to Home Depot and purchase a wheelbarrow for imminent use - Dr Hanke suggests that there is not enough money, and that it's this shortfall (not its price) which is holding back the growth of the economy.

Hanke's argument rests upon the fact while the Fed's balance sheet has indeed grown this "State Money" (as he terms it) is a small fraction of the overall money supply - which he terms Private Money, conjured privately by financial institutions, it has grown much less than the overall money supply has shrunk. So not only does Dr Hanke NOT fear hyperinflation, he believes the balance of risk remains DEFLATION, and that under the circumstances the Fed is not doing enough.

Now, it is important to understand that he is NOT a Krugmanerian. Or a SimonJohnsonian. Hanke believes the problem is regulation - both Dodd-Frank Basel III, the combination of which is causing banks not NOT to increase their balance sheets (depsite the excess of reserves) but to continue to Shrink their balance sheets. So he would very much prefer rollback of these to QE which is a far cry from liking QE. But he is pragmatic in ackowledging that under the circumstances of deleveraging, the Fed - far from causing inflation - is just barely keeping things from deflating, view not dissimilar to Richard Koo's interpretation. So in a nutshell, remove the chastity belts from the banks, and growth (and employment) will return.

Personally I am sympathetic towards the view that QE(eze) is a tempest in a teapot and will prove to have little to no inflationary impact so long as broad money is shrinking. And I also think there is potential merit in delaying Basel III should this be helpful to general confidence. As for the Fed's ability to exit QE if authorities make a U-Turn and follow his advice, he is less sanguine - a fear I do contemplate when trying to estimate how many phone-calls it would take to offload 4 or 5 Trillion dollars in longer-duration Treasury or MBS securities. For sound-money lovers, fiscal conservatives, Ron Paul or Paul Ryan or any inflation-phobist, however, it is worthwhile to listen to a rational view contrary to their own by on of their own.