Friday, September 27, 2013

Solutions To Life's Problems

Teleportation. Telekinesis. Telepathy. Transmutation. A discovery to reliably reproduce any or all of the preceding would, I dareseay, cause one's stock to do a ....errrr.... ummm..... moonshot. In fact, one that would look remarkably similar to the adjacent chart. Sadly, these abilities remain consigned to the entertaining realm of Perry Rhodan (my ages-ago adolescent reading addiction).

But something has produced the rocket-fuel to propel the stock represented in the adjacent chart into a celestial orbit - something that should cause a certain amount of interest and intrigue amongst the more curious of investors, be they momentum or reversion-oriented, as well as those merely with a sense of humor.

The company is a Tokyo-listed outfit, #2453, better known as JAPAN BEST RESCUE SYSTEM LTD.  It's moniker itself begs further investigation. "Do they manufacture emergency rope ladders?", one might ask. "Fire-extinguishers"? "Utility helicopters"? No, nothing so utilitarianly-concrete. Deferring to the oracle of Bloomberg, however, I begin to imagine why investors might be so hot & heavy for its shares. According to their business description:
 "Japan Best Rescue System Co., Ltd. provides solution services for troubles in daily life"
Vague and cryptic, but brilliant. On this basis one might jump to a rapid conclusion: the increasing difficulties in the lives of the average person must translate directly into more customers and more business. Yes! That must be it. Why indeed didn't I think of it??  They must be the "Go To" guys for EVERYTHING. Eldest daughter wants to marry a Korean? Hassled by Yakuza? Black-listed from your fav hostess bar? Need a 10am tee-time this Sat at Ashinoko C.C.? Youngest son never comes out of his room because he is playing video games all day long? Heavy rain but you forgot your umbrella? Boss is continually overbearing? Japan Best Rescue System has the answer... Awesome.

 But wait! I missed the fine print. This is NOT it at all. Here, (again) according to Bloomberg: 
Its services include repair for locks, glass, and plumbing systems. The Company offers a membership to customers and provides services through a network of franchisees and co-operate shops.  
Google elucidates further on it's business as:
The Call Center segment offers key replacement services, automobile-related services and other life-related emergency services. The Membership segment offers motorcycle stolen compensation services and other daily problem solving services. The Corporation Collaboration segment offers representative call center and customer support services. The Member Store segment develops and manages stores and cooperation stores. The Small-amount and Short-term Insurance segment offers underwriting services for small-amount and short-term insurances. The Automobile Leasing segment leases automobiles. The Others segment offers support services for self-developed home security products. On February 27, 2013, it acquired a 46.2% stake of a Japan-based company. As a result, it hold a 58.6% stake in the Japan-based company up from 12.4% stake. 
Oh, ummm, yeah. It seems the founder broker down on his scooter late one night and everyone was closed, so he was stuck. As he result, he saw opportunity in his misfortune (and others' laziness) and set about to capitalize upon it. All well and good, but if it cannot teleport freight, and don't have a cure for cancer, Best Rescue must be VERY good then at providing its services or its customers must be both absolutely desperate and solvent to warrant a nearly nine-fold increase in their shares. I, myself, am unable to judge. Whatever the case, it sure looks like there was a sea-change back in April.  

Fortunately, there is a source of information: a highly reputable Sponsored By The Company Research Report. To save you the time, here are the highlights: results at all their businesses kinda suck except for the the handyman callout subscription service which is growing nicely, more than compensating for all the other crap which Net/Net in May, led to an upward revision to sales and net for end of this FY. Nothing earth-shattering. In mid-July they also announced they bot a minor stake of shares in 2482 Yume no Machi Souzou Iinkai which runs a home delivery service for sundries. I guess the business adjacenies make a nice fit: the plumber dispatched to fix your leak can bring you a pizza too. And  in Aug, they also announced a stock-split - nuclear power for small-float, un-owned  listed co.s in Japan. 

Further plumbing the depths (no pun  intended) of this paid-for-research-gem, I finally strike the gold I am looking for. They are entering the environmental clean-up business.  In February it seems, this company bought a 3rd party allocation of shares giving them majority control of a nacsent enterprise that - get this - manufactures algae that topically absorb radioactive strontium & cesium. I think the idea is that you spray their green sludge on the effected area (say the Fukushima access road), then lease their street-scrubber-vaccuum-cleaner-thingie that sucks up the sludgy (now contaminated) water which is subsequently dried out in pans leaving a green strontium-cesium residue that that can be more easily, and we are told, safely, disposed of. It is, I must admit, pretty awesomely clever.  And timely. It is, an easy "1032" on the barometric scale of Thematic investing.  And so we have the answer to why a US$30mm market cap company is now a US$280mm - an investment return that venture capitalists are undoubtedly kicking themselves for missing.

I do not pretend to know how big the strontium & cesium clean-up market is globally. I hope, for the sake of my children it is, and remains, small - not that I wish Best Rescue ill-will in their investments. I do of course have my doubts that the venture supports Best Rescue's present market cap and eye-watering annual returns.  That is neither here nor there in regards of this post. What matters (to me) is that while their core business appears squarely focused upon handy-man dispatch contracts, I am disappointed, for I am waiting to invest in THE REAL THING - the company that, genie-like, as Bloomberg relates: provides solution services for troubles in daily life.... 

Thursday, September 26, 2013

Another One Bites The Dust (v.3.0)

Things, people, and/or ideas believed to have integrity now seemingly compromised...(the second third (newly!) updated and expanded version). The bear market in integrity continues unrelentingly...

US Govt Agency Data Release
The UK National Health Service
Swiss Train Safety
Nick Clegg
IM Confidentiality 
BBC Management & Oversight
Risk Parity
Segregated Customer Accounts
Investment Consultants
Bloomberg Privacy
Dark Pools
London FX PM Closing Prices
Meredith Whitney

Reinhart & Rogoff
Jérôme Cahuzac
Japanese Yen
Jamie Dimon/JP Morgan
Banca Monte dei Paschi di Siena 
IKEA Meatballs

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?

Friday, September 13, 2013

Dick Fuld and The Agony of Defeat

Where is Dick Fuld?  This is the title of the well-read, extended Bloomberg/BusinessWeek piece yesterday, that reminded me of Vinko Bogataj.  Who pray-tell is Vinko Bogataj?  He is the former Slovenian ski jumper, who, for more than a decade represented one of the most famous (or rather infamous) and iconic images on American television. His notoriety resulted from a truly spectacular wipe-out off of a ski-jump platform - a fall that was prominently featured on the Intro to ABC's Wide World of Sports. Bogataj was representing what was the former Yugoslavia at the World Championships in the Bavarian resort of Oberstdorf in the spring of 1970. It was his third jump of the day. Visibly heavy Snow was falling and the ramp was fast. Midway down, Bogataj attempted to abort his jump, but unfortunately lost his balance and careened out of control, off the end of the ramp, tumbling and cartwheeling wildly, then crashing through a retaining fence near stunned spectators before coming to a painful halt. Fortunately - and surprisingly given the ferocity of the crash - Bogataj suffered only a mild concussion. Though he returned to jumping the next year, he never duplicated his prior successes and retired from competition, after which he became a ski instructor, supplementing his income by operating a forklift at a factory in his native Slovenia. Ask any American over the age of 40 about this swatch of video history, and they will confirm that Bogataj was, and forever will be, known as the vivid image of the "Agony of Defeat".

Fast-forward to 2008. A venerable investment bank that suffered from neglect by Amex only to rise phoenix-like again under the leadership of Dick Fuld to reclaim a seat at Wall St.'s table, spectacularly crashes and burns. To the astonishment of bystanders, Fuld, like Bogataj, miraculously is unscathed, walks away, but never recovers his old form. He becomes a pariah. People shun him, and his new life is a shadow of the old. He is being sued. He has to sell assets. He retains only a few close friends. He terminates his pilots' training. It also pointed out, to his credit that he drank his own Kool-Aid, and unlike many other famous extractors, financially went down with his ship (more than they), and has in a gentlemanly manner refrained from filing claims against the Lehman estate comp due and deferred comp. Should we feel sorry for him? Should we even care?  This is story in Bloomberg Business Week. It had many gawkers so people are interested...or at least like a bit of schaudenfreude.   

For me, the story is classic personification of hubris, rather than evil criminality. Hubris in business. Hubris in a fantasy-land lifestyle-of-the-rich-and-famous caricature. But, as Fuld is in the process of discovering, it is often ephemeral, and the fall both humbling and painful (not that it will, or should, garner any sympathy).  Strangely, I do feel some some sympathy for him. The pain of adjustment and change must be excruciating, as the ego is weaned from gluttony to near-starvation.  And it must do so in the likely absence of transformational tools to deal with it, whilst still-clinging to a charmed life that is no more. But before you buy that box of Kleenex, no one should feel too sorry for a guy with a $25mm Park Ave pad, and a pair of $20mm homes on the beach and in SunValley...  

For years Bogataj had little clue regarding his notoriety as ABC's image of the Agony of Defeat until he was tracked down by a Pulitzer-winning American sports-writer with keen sense of human interest. And his story, while momentarily tragic, played out happily.  Fuld, will likely not be as fortunate in his Agony of Defeat.

Tuesday, September 10, 2013

The Great Temptation or Why Asset Mgmt Firms Will Fail The Marshmallow Test

Consider for a moment the temptation of managing a large mutual fund (and ETF) complex (or, if you are in the UK, a Unit Trust or similar regulated collective investment scheme) on which you earn relatively small but steady fees on large AUM, alongside a stable of hedge funds upon which you ostensibly earn larger management fees and incomprehensibly-ginormous-to-ordinary-human-being performance fees on more moderately-sized AUM. If you cannot guess where I am going with this, you are either:  (a) unusually scrupulous, or, (b) have never worked in cut-throat finance or trading. For the avoidance of doubt: rarely has Wall St. (& the City) failed to unsalubriously exploit the spoils yielded by the nexus of opportunity and incentive (e.g. HFT, JPM's manipulation of western power markets, tainted research, CDOs of sub-prime mortgages, insider trading, mis-selling PPI, banks' collective gaming of Libor, etc. etc. etc.). And that is just in finance.

Consider that on any given day, one learns of incredible feats of extraction in some industry or vertical (today WSJ highlighted the $2bn bonanza executives lavished upon themselves in the For-Profit education sector), and contrast that (according to the BBC) against the scruples and integrity of First World War British Captain Robert Campbell who, as a POW in Germany requested - and was granted leave - by Kaiser-Willie-Deux in order to visit his dying mother on the basis of "his word" and promise to return to the POW (which he in fact did). Jamie Dimon, David Einhorn or Phil Falcone would of course just call him a chump or an idiot. We truly live in different times in which numero uno is ultimo primo. Capt. Campbell knew however, that his actions or dishonor would in future directly impact other POW officers in potentially the same predicament. And so, in those different times, he returned to present himself as a captive at the POW camp, after which he set his best efforts upon tunneling his way back out.

As convergence in asset management gathers pace, with Hedge Fund managers offering "long-only" vehicles and services, and long-only shops and fund complexes pulling out all the proverbial stops to launch and gather assets for all things 2&20, investors are being asked in these different times 'to trust' - yes, to T-R-U-S-T (in boldfaced upper-cased font) - that their investment manager(s) will conjure integrity, pass the marshmallow test, and will not make cannon-fodder out of their non-performance-fee-paying, non-hedge-fund clients as managers pursue The Really Big Prize, the Fuck-You prize, the one that lets you Fly Private at will or purchase Professional NHL Hockey Teams, simply because you can. This, at a time when the currency of TRUST is, I believe, at all-time low.

Try as I might, I cannot see how this will end well - for integrity in general, or non-hedge fund investors in particular.

Granted, conflicts between adjacently-managed hedge funds and long-only funds are not a prerequisite for dishonesty or malfeasance. No shortage exists in other spheres outside finance. But if one believes, as I do, that humans beings will rarely fail to miss an opportunity to steal a cookie when: (a)  the jar is full (b)  the jar is conveniently-placed and (3) few - outside others who have a reasonable appreciation and appetite  for cookies - are in a position to monitor the cookies, then it follows that, with these conditions met, the temptation for investment managers will likely prove irresistably-great.  

I do not have a particularly evil or cunning mind, but I can, without great difficulty, imagine morally challenging situations  - chinese walls, or not - the kind where the incentives of almost everyone involved will be, in marshmallow parlance, to eat it now, rather than take one's chances later, irrespective of the elevated gains accruing to the patient. Imagine the fund complex, sweet on a stock, who've accumulated an elephantine position in the same. Their HF will likely have shared in the feast (and the benefits upon the marks of continued accumulation) transmuting the appropriate debits from their investors' accounts, into credits of their own. Now (we'll call them "BlueRock Mgmt" or "BlackBay Partners") Black&BlueRockBay have soured on the portfolio firm's prospects. Of course they can unwind together. But The Temptation for the HF to unwind in front of the larger positions - because it's smaller and more nimble, and it can, and because it likely has limited transparency - and because its AUM has a much higher beta to performance, to unwind, must be excruciating...both for the managers of the HF, and their managers.  How excruciating? Well that likely depends upon HF performance in more or less inverse proportions. Or if they are feeling less-bold, they can sell calls, or buy puts, or for the truly greedy, unwind AND go short well-before the MotherShip has fully left orbit. I'd even posit that, as a result of such increasing adjacencies, window-dressing activity around performance crystallization periods would increase lock-step in line with the opportunities to game the fee-structure disparities - entirely related to the increased ability to impact prices from the much larger scale of adjacent assets. That's the basic blue-print. Moreover, there are large asymmetries in the intensity of managers (and their management's) interests for banking short-term profit, rather than waiting for long vesting periods for their ownership interests, or building long-term value of their firm. Short-termism seems to trump patience in most circumstances outside the partnership structure

Scoffers might argue that in the long run, they will be discovered.  One might point out that economies of scale across the functional areas of an investment management firm - in research, compliance, back-office, trading, portfolio management, technology, and marketing - make such combinations not only sensible but deterministic. One might highlight the integrity of certain trusted individuals or firms. And they might well be right to do so. But such a view remains panglossian in failing to address the inherent conflicts between the two undertakings, the payoff asymmetries and more-than-ample opportunity that in many other similar conflicted situations would lead to large transfers of wealth from investors in long-only collective schemes to investors and, as importantly, managers and manager's managers of Hedge Funds. And should such a firm erect truly impermeable Chinese walls - separating research, portfolio management, trading, possibly even risk-management, so whithers the argument for the economies of scale outside of share a back-office and a (ummm... errrrr... trusted?!?) brand-name.      

By this point in my missive, interested parties will be protesting ferociously, and preparing their counter-points, if not for me, then for their potential investors, their existing investors, and their existing  investors' investors. Ignoring the absurdity of the average HF fee structures, ignoring the alpha vs. beta debate (because this is, of course, NOT a diatribe AGAINST HFs) but rather a spotlight on the burgeoning pregnancy of conflicts between traditional AM and HFs that result from adjacency, and taking on board proponents likely counterpoints, I ask investors to consider aspects common to much of the fraud and malfeasance.  Most - excepting the most sociopathic - do not embark upon a grand pre-meditated fraud a-la "The Sting".  They do not set out to be fraudsters. In fact, rather the opposite. They embark upon a venture that has a plausible kernel of success at its core. Madoff, Lauer, Peter Young, Leeson,  Tom&Jack@BeaconHill, all apparently took a perditious route as a result of something that didn't go their way as expected. All, in their own ways, shared the existence of easy opportunity which they could call upon in that moment of errrr..... ummm..... personal need, shame, embarrassment, or greed. All expected their transgressions to be temporary and transitory. Of course there comes a point of no return, and here, their actions diverge down their respective paths of ignominy and the rest is history.
The point is, their intentions at the outset were precisely the intentions of those who will try and convince investors that potential conflicts of interest are not a problem, and their risk therefore inconsequential because of integrity, controls, compliance, surveillance, skin-in-the-game blah blah blah. They want it all, but as an investor, you needn't give it to them at your expense.

As a Hedge Fund investor, this shouldn't frighten you. In fact, it should, and probably will excite opportunity-detector in the most astute of you, the same way SAC excited you: an edge, is an edge, is an edge, so do not ask questions, put the moral compass back in the drawer, and the net transfers will likely be made in your general direction in your favor at the expense of someone less astute and, well, more trusting. However, if I were a long investor in a collective investment scheme assuming what I will term as a large and growing "adjacency risk, I cannot think of the mitigating circumstance(s) that would give me comfort with the exception that they are managing my index fund. Even here, you may be skimmed as there will be a reasonable incentive for the adjacently-managed HF to secure hard-to-borrow shares at less than market rates - an easy pilfer in a highly untransparent unaudited stock-loan market market.

What, would give me comfort as an allocator? Full publicly-available transaction level transparency across the entire fund complex - both public funds and private partnerships, the way it is in Canada. Even if delayed a a quarter, if there is something to be found, it will be found here. Second, culpability both personally and financially, by direct portfolio managers, and supervisors including holdbacks and clawbacks. Neither is complicated, nor difficult. Managers' own back-office systems, or independent administrators can spit out time and sales with great accuracy and easy at the click of button. And no one is asking them to do so in real time (quarterly dumps are fine). Marshmallow-eaters will of course use hyperbolic language such as "draconian disclosure" to describe this, but Canadian firms and managers seems to be doing just fine thank-you-very-much. They will wheel out the "threats to proprietary strategy" or competitive advantage, but none of these pose a threat to the public interest for none of this affects the real flow of capital to enterprises, but only the shuffling of paper in the secondary markets between existing game-players. Until then, however, investors should have the dial of bullshit detectors set to "High", and prepare their due-diligence questions accordingly.    

Monday, September 09, 2013

The Ten Commandments (of HFT)

If Moses were alive today, what might he have been doing? Perhaps a down-on-his-luck former SOES Bandit? Perhaps a refugee from Lehman or Bear Stearns  ?  Contemplating the Exodus from the lawless  Kingdom of Pharaoh Neferjamie Dimonhotep II where remnants of The Bear tribe remain enslaved in the vast expanses of the Corporate Trust & Agency Group?  Perhaps, but I think he'd be in Chicago, where the Supreme Being slipped him an updated version of the Ten Commandments (of HFT)....

1)  Exchange co-location with 10GB Ethernet is God. Exchange(s) shalt have no other HiFTers before Thou.
2)  Thou shalt not speaketh nor make images of strategies or their technical details.
3)  Thou shalt not maketh markets in liquid instruments, nor collect rebates, in vain.
4)  Honor the Holy Sabbath day which is for re-compiling code and beta-testing.
5)  Honor thy exchanges, legislators, and thy best C++/ KDB+ programmers
6)  Thou shalt not allow oneself to be killed by large orders.
7)  Thou shalt not alow oneself to be caught whilst spoofing or quote-stuffing.
8)  Thou shalt not be stolen from [more than 35% of the time] (or thou will spend thoust time doing MSWindows Sys Admin for an accounting firm in Poughkeepsie).
9)  Thou shalt avoid losses on others false quotes.
10) Thou shalt not covet thy neighbors positions in fast, event-driven, or cascading markets.  

Friday, September 06, 2013

Financial Haiku Open Weekend

It's that time again: Financial Haiku Open Day. The last one, was almost five years and was a stonking success with some near perfect compositions. I'll print the first few trades and look forward to your generous contributions. Make Bashō proud....

Tesla's Recoil

Buying blocks of Tesla
Roman candles! You shuffle
off this mortal coil.

Dog Days

Summers or Yellen?
Fido sleeps on the back porch
Corn fixes carbon.

Ode to S.A.C.

I am not guilty
Mosaics are my passion
It's complicated.


Rock. Paper. Scissors.
"Should I stay or should I go now"?
Love you! Hate you! Meh...


Got any Gold? I do...
Glass is always half-empty
The game's frickin' rigged!