Tuesday, February 25, 2014

A Message To Shorts ?!?!?

Collective punishment has been employed extensively throughout history, long preceding the Geneva Convention and its modern consideration as a war crime. Occupying or invading powers used such forms of retaliation primarily against the wider group to discourage attacks on their own - particularly by resistance or guerrilla forces - to great demonstrative effect. Far from punishing perpetrators, it's primary goal is for show - to make others contemplating similar actions aware of the potential, dramatic consequences.

When a penny stock doubles or triples, it is tempting to imagine nefarious operators pumping and dumping, in process, lightening the investment accounts of unsuspecting victims. And one would, most often, not be mistaken in such an assertion. Moving the prices of such (often fictitious, or nearly fictitious shells) is, after all, both easy and cheap. And in the off-chance the company itself proves uncooperative, well, one might surmise bad things might follow to key people. As one crawls up the cap scree, however, it gets more expensive for operators to move the price. Not only is there is a greater diversity of shareholders, who, in response to to a pump, might themselves very well dump before the operators themselves, but companies themselves might use the pop to issue stock, or make takeover plays with newly inflated scrip. Of further interest to the curious, in the grey areas, exist some bold traders who, with capital and a long leash, have learned the dark art of reflexively employing similar techniques (both long and short) to push entities into, and out of indices, dragging the not inconsiderable community of indexers (and their investors) haplessly along with them. Such operations are not without considerable risk, but thoughtfully researched and executed, more than compensate the brave with commensurate rewards. Get it right, and you can shift your considerable position to index funds who are reasonably obliged to purchase the stock, or buy back your short from their sale of shares in the eliminated company who market cap no longer qualifies them for inclusion (as the very result of the perps considerable short sales).

Sometimes operators - either alone in collusive groups - do manage to operate upon much larger companies. Sometimes this is because the operator themselves is a leviathan, and is willing to take their collective investment to well into the high teens precent of shares out. Sometimes, because the proverbial moons align, where price momentum, a narrow float, and other useful considerations allow something that, to traders or tape-readers, comes close to a classic "corner", of the likes perpetrated by The Hunt Brothers in silver, or Volkswagen shares by their friendly cousins at Porsche AG.  The former was well-chronicled in Timothy Green's book "Beyond Greed", whilst the latter remains the subject of lawsuits by embittered hedge fund managers, suckered and snookered at their own game - lawsuits as hypocritical as David Einhorn's attempted pursuit of the "Micron Leaker", given that Mr Einhorn himself saw nothing amiss with dumping his entire 14% Punch stake the moment he discovered materially non-public info regarding the companies likely share sale.

One might ask whether these two subjects - the notion of "Collective Punishment" and "The Corner" -  intersect at a now $2bn dollar market cap Japanese electronics manufacturer called "Micronics" (Code# 6871).  One could talk about absolute and relative valuation, growth prospects, market share, competitive analysis etc., all of which are at odds with a 60-fold increase in its share price since the start of 2013. As the chart up and left reveals, this is NOT a typo. SIXTY FOLD. And as with the focus of previous post about Altisource (AAMC), Micronics is not a penny-stock - depressed as its 2013 market cap was. They have no cure for cancer; they do not possess 3-D printing patents; they have nothing directly to do with the internet be it - gaming, e-payments, nor are they involved in biotech or nuclear cleanups or the newly-awarded Olympic games.

But whatever such incidentals as thematics fundamentals or valuation may reveal, they are more than likely wholly irrelevant to what very-well might be the world's single greatest non-micro-cap ramp-of-a-move. Yes, Mirconics is witnessing a recovery in their business and associated profit - an event that could (being generous) support a YEN2000 share price assuming one attaches a >20+ multiple to peak earnings, as it saw it do during the last recovery and accumulation in 2006. THAT move would have been nearly a 10-bagger from the depths it plunged - impressive by any means.

Apologists for such a move might suggest it is merely old-school retail speculation - the kind that vaulted Godo Shusei (2533), Nippon Carbon (5302), Matsuzakaya (8235) and Shinegawa Refractories (5351) to previously unimagined heights in back in1991, though these were likely the result of index art manipulation games employed on the least liquid names in order to game the absurdity of the Nikkei 255's price-weighting calculation method.

No. Something else is at work here. It is no ordinary speculative move or typical squeeze. It is a corner by ballsy operators. If the measure of success is the heights achieved by the share price, then they have been successful. They were in fact successful by any yardstick at the end of the calendar year 2013, an endpoint that raises suspicions as to whether the ultimate purchaser(s), whether individually or in concert, (who BTW have not filed requisite change of ownership details with the MoF), collected performance fees with respect to their achievements. And though shorts were granted a brief respite, the doubling again from YEN 5,000 to YEN 10,000 this month is curious. What is the endgame? Perhaps it is to squeeze the shorts completely in order to defray the eventual costs of exiting, which will come inevitably, and will be painful for longs on board for the ride. This is possible, but it ignores the breathtaking increase of risk. Perhaps, this unthinkable move is intended as a demonstrative form of collective punishment to shorts, who in the ordinary course of business, make operations more expensive, and less profitable, for speculative groups operating pump and dumps, and attempted corners on the long side. Killing innocents for the actions of the few has long proved to be an effective deterrent for future insurrections. Killing the shorts in a demonstrative show of force in Micronics, just might have the same effect upon pesky traders with a penchant for shorting the absurd.

Finally, one might wonder, for the sake of market integrity, just where is the MoF and exchange surveillance stand - whatever their residual loathing of (mostly foreign) short sellers might be….  

Wednesday, February 19, 2014

Something for Nothing ??

For a skeptic, I am generous in granting "the possible" underlying an investment thesis in pursuit of something like a boundary to its worth, however incredulous it, or its assumptions, may be. One can subsequently quibble over the details be it the forecasts, rates of discount, exogenous risk factors and so forth. As a skeptic, I am often at odds with the optimist, or a central case that involves the alignment of astral bodies, but it is rare that I just don't get the thesis, however flawed it's assumptions may be or prove to be, or however misplaced my Scottish sense-of-doubt.

AAMC is one of those rare instances where I continue to rub my eyes in disbelief at the market value attributed to income streams yet to materialize, however magical the annointed touch (and ownership) of Mr Erbey, or lucrative fruits of contractual obligations that will eventually flow to this obscure, though highly-prized vehicle, whose market cap peaked at more than $2,500,000,000, and currently resides still-north of the two-large-unit mark. My feelings oscillate between derision, awe, and wonderment. The awe derives from the reality that its value, as attributed by "the market", has increased twenty-fold in not much longer than it takes to bake a cake, emphasizing that it this not a twenty-fold increase in a penny stock. It is $2.2 billion of market cap approx 30% of which Mr Erbey, if he so chooses, can monetize into real currency to buy real things like a Yellowstone Club chalet, Gulf. IV or London Chelsky-Prospekt town home. And, for all we know, through structured transactions he may have already constructively done so. The wonderment derives from my ignorance into what future course of events will provide this fee-splitting recipient entity with the demonstrably large cash flows required to justify its ambitious market value (a wonderment which is less a skeptic's DOUBT as to their eventual arrival than a cry for some numerical quantification and justification). Network effects, scalability, rapid adoption and a global market are concepts I find easy to understand, and visualize in a spreadsheet with figures that rapidly add zeros to the end of increasingly-large numbers over time, and while I freely admit that I am not well-wired to invest effectively in this way on the long-side, such tangible forecasts of growth scare the bejesus of out of me on the short-side. This wonderment then leads to a plea: will someone please share their spreadsheet of the same for AAMC - the one that spawns additional zeros in future years like cancerous cell division - to satisfy my curiousity.

Apparently, some have such a spreadsheet or merely great confidence (or both) - in the thesis that will provide the cash-flow and the certitude of their arrival, evidenced by the large positions this unusual entity occupies in their portfolios. Long Pond Capital LP, Luxor Capital, Sab Capital Group, Tiger-Eye Capital, White-Elm Capital have (and it is not understatement) massive positions in this (with massive defined as a huge slug of said Hedge Fund investor's capital by any sensible risk-manager's measure). This is rounded out by FMR, Cap Research and Neuberger all with sizable positions, though not in relation to their behemoth size. Now, you would not be wrong if you detected a tad of derision (complementing the awe and wonderment), for all the arboreal southern-Connecticut-sounding buyers (except Long-Pond) appear to have hitched their investors' monetary wagons in Q3, no doubt the primary accelerating force in taking the shares from $250 at the end of Q2 to $500 at end of Q3. Together, (with the big-3), they represent approximately 50% of shares-out (80% with Erbey's apparent 30%), causing marginal purchases to have an amplified impact on the market price, and anyone who's been short, rather blue-in-the-ass. Though there is no evidence of collusion or a cartel, (however tempting this would be amongst friends) collectively, purchasers have, in Q3 and Q4 created "a lot of something-out-of-nothing".

Some will argue that mark-to-market is of less importance.  They will discount ebbs and flows in market value fully understanding that they are, rather often, ephemeral.  That may be true for a principal  investor with said shares in their portfolio, but it is not most NOT for a hedge fund manager purchasing, holding, and/or purchasing more of said shares, . The Hedge Fund Manager, it should be highlighted, for the avoidance of doubt, realizes their profitable interest at the end of the performance period, (rather often Dec 31st.) crystallizing their profit share - independent of whether market-to-market profits are ultimately realized. They do, for the sake of fairness, concede to the investor a "high-water mark", before which they will not extract further performance, but this is a small bone of uncertainty with little tangible value, juxtaposed against the certainty of receiving what are to most observers, unimaginably-large sums of money.  What remains for the investor, again for the avoidance of doubt, is still something ephemeral - minus 20% of the "profit" after costs. So looms that little chestnut known as "principal-agency conflicts".

Some (me included) will wonder why AAMC increased 40-fold from its opening print. Have it's prospects dramatically improved or was its initial post-spin-off price meaningfully undervalued (or perhaps both)? From cursory inspection, there appears to be no shortage of Machiavellian shell games within the Ocwen ecosystem that involve carving-up income streams and optimizing ownership amongst vehicles and and their domiciles.  The benefits to non-executive shareholders may be uncertain, but the potential advantages for optimally-structured executive owners to advantage from aggressive structuring shouldn't be lost. Housing recovery convictions have also firmed. Some prescient investors flagged AAMC early, touting it's target value incredulously at multiples above the post spinoff price - upwards of $250 to $300 a share - which it quickly achieved via a dramatic triple in Q2 of '13. Allowing for a large error term in their forecasts, one might grant $500/shr (a $1bn market cap equivalent) - the heights it climbed by the end of Sept 2013, and which was the basis of quarterly filings of the last known positions. Yet with further little change in the housing market, or the firm's idiosyncratic prospects during Q4, AAMC's shares went positively priapic straight into the end of the year performance hedge fund finish line, taking the shares to more than $1000, and the market value of AAMC well north of $2bn. This may be coincidence, happenstance, or serendipity. Only the DTC may know.

Of course, it is possible that, $2bn is the correct value for AAMC, and that Mr Erbey gifted a massive increase market value to potential purchasers when AAMC was spun out. This may even be likely, for the tax consequences of transferring interests to more advantageous structures at low value are far more advantageous than doing the same the same at high value. If so, nice work if you can get it. However, I cannot purge from my skeptical mind that there is something more to the story than a bull-case for growing earnings in an Ocwen affiliate; more than short squeezes and hard-to-borrow securities. I remain curious, and think investors in funds with large positions would be prudent, themselves to understand what motivated their agents to accumulate large concentrated positions in an illiquid stock, and/or perhaps more importantly, to hold and even increase said positions to what to the uninformed is the point where hope might legitimately begin to exceed potential. And, if you find out and wish to share it, I will happily share it here.  

Monday, February 03, 2014

An About-Face Regarding ZH Conspiracy Theories

Enigma House
1 Underabigrockov Square

RE: An Apology

Dear ZeroHedge,

I am sorry. Evidently, I was wrong about conspiracy, more specifically, the US Government's pursuit of what must be one of, if not THE world's biggest: the hoovering-up (no pun intended) storage and analysis of the entire world's digital and voice information. In the past, I derided your cherished belief in a US Government Puppeteer-like Plunge-Protection Team on the Ockham-inspired grounds that it would be virtually impossible to undertake what was alleged without at least some whistle-blowers, co-conspirators and/or enablers coming forward with evidence to expose such actions. I was quick to point out the glaring inconsistency to your argument that mocked what you saw as the US Government's apparent ineptitude in Agriculture, Healthcare, Securities Market regulation, Welfare, Military Purchasing, Industrial Policy, FEMA, as well as Fiscal and Monetary policies, yet somehow managed to confer an ability to implement and perpetuate Machiavellian manipulations and direct interventions in financial markets to great success (and to the chagrin of perma-bears and pessimists alike) without ever getting get caught.

Now, looking at what the NSA has accomplished, more or less without general disclosure until recently, ranging from their ability to access and subsequent archiving of every digital and voice communication, to the ubiquitous tools built-in to every device and every information orifice everywhere in order to access whatever it wants, whenever it so desires, it is apparent that not only is the US Government awe-inspiring in the scope, breadth and efficiency of what it can accomplish when it sets it sights on it, but people are now ascribing near-omnipotence to its abilities, so much so that at a dinner the other night, I was told in no uncertain terms, that "they" can activate one's phone - even when it's powered off - and use it to listen to surrounding conversations. Irrespective of whether or not it's true, the point is that it's powers and abilities are now-deemed so great, detractors are afraid of what and how (whether premeditatedly or inadvertently) they might be used.

Of course, the government has not been without their successes in the past in areas such as funding university research, DARPA, US Nuclear Weapons development, NASA, Hubble, TVA, National Highway System, NOAA, USGS, CDC, etc. These are conveniently expunged from Libertarian derision of The State. But Snowden's revelations of the NSA's awesome prowess, giving it near-total electronic omniscience, should humble observers and silence all doubters, irrespective of whether or not one agrees with their objective, and give the US Government maximum respect for its powers of organization, implementation and efficiency, to the point where even a skeptic like me must concede the possibility that a PPT might, at the very least, actually exist. I'm not saying it (an Oz-like Wizard at the helm) DOES, but it seems that such a minor undertaking, in light of recent revelations, is well within their capabilities.  What say YOU WikiLeaks?

So impressive is the US Govt's can-do mobilization of resources to achieve an objective when it wants to, one can only imagine the inspired possibilities were our now-exposed, highly-motivated, best and brightest, to tackle something like Single-Payer Healthcare, ubiquitous quality Education, forward-thinking Energy Policy, and even Inequality. Vanquished is the image of the US Government as a tree-house for plodding lazy job-for-life postal workers, replaced with not only "men-with-a-plan", but the wherewithal to realize it with the same focus that put Neil Armstrong on the moon (understanding ZH'ers reservations as to the veracity of this event).
Somewhat more controversially, consider that with the NSA's complete-and-total data-acquisition and mining infrastructure at its disposal, we might banish Medicare fraud, Welfare cheats, Defense contractor malfeasance, Co.'s flouting  environmental regulations, Govt contractor bid-riggings, bridge-closings, bogus analyst recommendations, HFT collusion, Bernie Madoff, self-detonating CDOs, and even incontrovertibly-nail GOOG, AMZN, & SBUX for rather obvious and cynical tax evasion ploys are surely just a hop, skip and several keystrokes away. No wonder the latter are becoming uncomfortable with their prior cooperation. A tad Orwellian, one might ponder? Perhaps. But since it is out there, is it not worth asking whether our (and it IS "ours") rather impressive machinery might not, at the very least, be targeted at enhancing the wider Public Interest in more generally protective ways? "No more secrets" cuts both ways.   
Once again, mea culpa for doubting you, and I look forward to your help in conceiving how awesomely the US Government will achieve similar efficiency and success in Healthcare, Education, and Transport when we approach these issues with equal resolve, as we have demonstrated in the manipulation of markets and God-like elimination of all secrets from the electronic sphere.

Yours truly