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.... 

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...


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


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


Wen Jiabao as "Humble Servant of The People
Lance Armstrong
Top Ten Lists
NYSE
Facebook
Austerity as an Economic Panacea
Harvard Students' Academic Honesty
BLS Statistics
Cyclical Recovery
Book Reviews
Strong Computer Passwords
Toyota
'Organic' Food
Money Velocity
Patents
Undecided Voters
Hospitals
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.
TEPCO
Payment Protection Insurance
DSK
HM Revenue & Customs
Sony Playstation Network
Google
Privacy
Social Mobility
Actuarial Return Assumptions for Pension Funds
Marmite
Ryan Giggs
Acupuncture
USA Govt AAA
France   AAA
Voicemail
Boob Jobs
Snooker
David Einhorn
Nuclear Power
Deepwater Drilling
Tiger Woods
Professional Cricket
Sumo
Professional Cycling
High-Frequency Trading
Professional Baseball
FIFA
Professional Tennis
Municipal Bond Underwriting
The Catholic Church 
Track & Field Athletics
NCAA Sports
US Congress
UK Parliament
Analyst Research
Credit Ratings
Banks
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?

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.

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.    

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.  

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.


Trading

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


ZeroWhinger

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

Financial Psalm No. 16

Financial Psalm No. 16

16:1   Preserve me, Gold, for in you do I take refuge.

16:2   My portfolio, you have saveth, and it sayeth: “You are my Saviour.

Apart from you, I have no good thing...not even Bitcoins”

16:3   As for the Silver and Oil which is in the earth,

they are also excellent ones in whom is my delight.

16:4   Their sorrows shall be multiplied who diversifyeth into other assets.

Their offerings of bonds I will not accept,

nor hold such paper on my lists.

16:5    Gold, well-assayed, is my preference and made-eth my cup. 

You made my lot secure.

16:6   Your prices are now rising [again] making pleasant our faces.

Yes, our offspring will have a good inheritance.

16:6.1   Beware the false prophet, paper gold, promising false profits.
16:6.2   Bow not before any other Gold but It, for they are but false and wicked idols
16:6.3   Trusteth in the Golden revelations of the Chronicles of Zerohedge and heedeth in thy Beck-ster and Fab-er, for they are the Righteous Ones and sayeth only the purest of truths.
16:6.4   Follow NOT the path of tribes of Paulson and Soros who, being weak in their hearts, smite-eth Gold, giving succor to the heathen.
16:7     Blessed be Chris Wood, who resembleth Jesus, and who hath given me wise counsel.

My heart instructs me to stay long during the right seasons.

16:8     I have set Gold always before other assets. Because It is is heavy in my right hand, and shall not be moved from It's Swiss vault without countersigned instructions.

16:9    Therefore my heart is glad, and my relative purchasing power rejoices.

My portfolio shall also dwelleth in safety so long as Bernanke ruleth.

16:10   For you, Gold, will not leaveth my portfolio in Zimbabwe, or Weimar

neither will you allow my portfolio to become holey due to political corruption, or crony capitalism.

16:11   You, Gold, will show me the path of wealth preservation during times of war, inflationary woe and political uncertainty.

In your lustrous presence, I feel the warmth and joy of your security.

So that my hand can exchangeth you for pleasures forevermore.

Amen

(with apologies to Private Eye)

Criminal, Victim or Just Stupid??

So Bruno Iksil will (apparently) not face charges. Hmmmm. I've had nothing to say on The Whale, mostly because the debacle (and its intricacies) have been covered rather well (particularly  by Matt Levine) leaving little to add on the subject. But no charges? Really?

Why does this shock me? Because it appears obvious that with the size of the position and the persistence of accumulation and targeted activity in the market, that the objective of Mr Iksil was to paint a false and misleading picture of the market by intentionally manipulating the market price (hence marks) of his position and by not letting prices trade askew, (if he could do anything about it). Anyone who has traded size in squeezable markets will immediately know what I am saying.

Snookered Hedge Funds are applying similar logic in their lawsuits against Porsche AG (though admittedly Porsche was operating in a market that was decidely more-limited in scale). But I wonder, had Mr Iksil been successful in engineering a squeeze, or waiting out for some market event that caused redemptions and deleveraging within oppositely-positioned funds, whether JPM would have been subject to similarly flavoured claims or lawsuits, irrespective of the theoretically unlimited market size in the offending instrument, constrained only by counterparty and credit limitations. 

As an equity girl, this is all the more egregious. We must file positions periodically in great detail, and whenever we move above a modest level. We are obliged to law to act methodically when dominate a market - either making a bid, or limiting our actions. The idea of owning 50% or 70% of a "market" and still being allowed to operate unassailed is mind-boggling to the ruler-followers or impossible tempting to the black-hats. As a price maker, one controls the price, and one can use every marginal trade to insure, if not a profit, then against a mark-down...until one cannot, as a result of being placed upon Uncle Jamie's knee and spanked.

So the idea that Bruno Iksil had anything other than criminal intent in painting and perpetuating a false and fictitious market is laughable, and preposterous. This leaves two possibilities. The first one is that he was ordered to do so and cut loose when it went horribly wrong. That JPM tried to cover up a large and ...ahem...rather embarassing loss is not in dispute. But it appears this resulted from concerns about how stupid they would look to have let it happen, rather than management collusion on trading objectives and strategy - so I'd attribute this a low-probability.  The second possibility is that Bruno Iksil is just the dumbest-of-fucking dumbasses ever to get a bankrolled seat at the table!! Rather than having criminal inten, he simply redefined the word STUPID in bold-faced upper-case. But Ecole Centrale is nothing like Nick Leeson's Middlesex Univ., and Mr Iksil didn't crawl out from under a back-office rock. This is an absurd thought. He is anything but stupid, and knew precisely what he was doing and trying to accomplish by continuing to increase the size of his position with the well-defined objective of protecting the mark-to-market valuation on his existing (large) book. Can this be called anything else?

I find it surprising that this behaviour is not the focus of attention. It is precisely this point which regulatory authorities should be focusing: the interference of market-determination of prices resulting from the creation  of a false and misleading market. All interested in liquid functioning democratic markets determining prices should take note.

Team Japan Drafts Message to Loeb

It should surprise no one that Sony Corporation, an icon for Japan's collective successes and failures over the past two decades, has rejected Dan Loeb's suggestions for helping the company's share price out of its funk. Anyone who thought otherwise (and is in the investment business) should - without haste - commence with a search for a new occupation. Or at the very least, a new regional specializiation. This is not to suggest that changes is not occuring in Japan. They are. Quietly if not steadily, though more often in fits and starts, and most frequently in response to calamity rather than the not unsensible proddings of a wily and reasonably successful gaijin operator (who is NOT Warren Lichtenstein).

Even if Mr Loeb's suggestions were as tempting as Hello Kitty! to an adolescent girl or Zizzi Hikaru to a video-game-addicted freeter, it simply is not possible for Sony to be seen to accede. Sony remains a vanguard of Team Japan, with a deep and broad web of obligations. For right or wrong, obedience to Mr Loeb's demand disturbs the calm stability at the center of these relations and throughout the web of obligations, and would set a precedent that would not go down well with the broad constituencies that comprise the Team. Moreover they (unlike humbled Shinsei) don't have to (at present), for there few greater regrets in Japanese finance circles than the sacrificing of Shinsei. Bloodbath that Sony has been for shareholders, it's hemorrhaging is still no Sanyo. Moreover, it is horribly "bad form" (in Japan) for shareholders (let alone gaijin shareholders) to make public demands of management umm... errrr... "allies". The greatest sin  Olympus' Woodford made (in the eyes of colleagues, bankers, and Team Japan) was airing the the family's dirty knickers in public. When confronted publicly, the answer will ALWAYS be "Fuck-Off", irrespective of the question.  When the same is asked privately, the answer will also be "No". However, for those focused on outcomes, rather than the immediate triumph of submission, the private approach (at the very least) allows the possibility of preserving a semblance of honor. Time and utmost supplication allow an idea to be appropriated by the Team, or through the hierarchical chain, to the Team Leader, as custom and history demand it be done. With patience, if the idea truly has merit, and, if it survives the convulated cost/bĕnefit equation [strikingly different than our] that confronts Japanese public corporate management, the idea may re-emerge, as an internally generated concept, now wholly appropriated. Only then, can it be pursued, once internal consensus is built, once vetted externally by those who are directly and tangentially impacted, or connected. And never, never, never, with an observable direct link between external coercion and ultimate action.

I am neither defending nor excusing TeamJapan. It just is. It may not remain so, and perhaps Mr Loeb is out to hasten the change - something TCI and others have never been to do excepting the weakest of sacrificial lambs. However if you spend a couple of billion (dollars) on a punt, then I hope (for Loeb's investor's sake) he:  (1) traded the position "Einhorn-style" (or at least wrote options on the position) in the run-up reaction to the ruckous you created, or,  (2) Insure the duration of your capital, and hedges against "shit happening", are sufficient to patiently wait out the long journey for your "suggestion" to be assimilated and appropriated. Until then, TeamJapan's Geisha will convey TeamJapan's heartfelt reply...  

Greenlight.. Redlight?

Marrying reinsurance to speculative investment has held allure to many for more than two decades. Of course, everyone who has proceeded down this route has had a good reason, be it a tax roll-up, juiced-up returns, or outright tax avoidance. All have ended, if not in tears, then whimpering with their proverbial tails between their legs.

StocktonRe, founded by Princeton-based Commodities Corp, and subsequently  majority-owned by Japanese leasing giant ORIX, attempted to benefit from the roll-up marrying what was thought to be risk-less finite to a portfolio of CTAs. This was embarassingly-torpedoed by an underwriting accident so catastrophic, the venture was more-than-shuttered. Then, there was UPS affiliate OPL, which was the offshore benficiary of a higher-than-reasonble charge for insuring UPS packages, money that then would be invested and, benefit from the offshore roll-up until an exit strategy was conceived. Though they (rather luckily) won the IRS's challenge to the somewhat dubious logic unerpinning, their speculative investment portfolio fared rather more poorly, the combination of which forced the company into run-off. Louis Bacon, proprietor of Moore Capital liked the sound of an offshore tax dodge, providing locked-up capital to the mother-ship while benfitting from forecast underwriting profits and a more-than-pleasant Bermuda location and so decided to fund MaxRe, with son Zack as titular head. For six-years, MaxRe never missed an opportunity to miss an accident,  burning through several CEOs, and steppingb on BOTH underwriting AND investment mines. Eventually, having learned the hard way, that even the most alluring of finite is rarely risk-free (or even that attractive - even as a tax-dodge to satisfy scrutinizers that one is shouldering "real risk"), and, that in the world of Macro, "shit happens", shareholders tired of MXRE's travails and neutered, merged, and morphed it into an actual Reinsurance Underwriter with a traditionally- conservative investment portfolio.

Somewhat differently, Ken Griffin's Citadel tried their hand with a determined focus on underwriting profit, only to discover that as an insurance financier, shit outta' one's control also happens (like massive losses or willy-nilly redemptions by fickle investors) that might cause some errrr... ummm...  problems to a reinsurance underwriting operation (which it did). SAC Re, is also in the process of experiencing a mirror revelation of how deleterious "unexpected shit happening" (especially legal and regulatory problems) at the parent sugar-daddy, just might be.

So it was with some curiosity and considered amusement that I watched David Einhorn launch GreenlightRe - ostensibly for all the same reasons, seemingly undaunted by the chastening experiences of others. The lure of dedicated capital to the hedge fund to invest; offshore tax roll-ups, potential "double-alpha" via underwriting profit, double-dipping on fees, and an awesome bill-fishing venue in the Caymans. What could possibly go wrong?!?! For a while GLRE traded at a swanky premium to book - reflecting the desire of punters to gain access to Greenlight's Hedge Fund. Unsurprisingly, GLRE has seen finite deals spontaneously combust in their face. And Greenlight itself has not been immune to both controversy and accidents (i.e. insider trader, talking its book, HLF, it's sizable Gold pecadillo mirrored in GLRE). None of this should come as a surprise (or at least it wasn't to me). But what did shock me was the market's reaction to GLRE results earlier in the week. It essentially earned a miniscule underwriting profit and mediocre investment results on an investment  portfolio backing underwritten  risk comprised 90% of equities,  and some macro bets. The stock popped nearly 10% - perhaps in relief that their Gold "bet" didn't hammer them more, and that they didn't lose money on underwriting activities. Whatever. Oil and water just don't mix. With markets getting more volatile, Mr Einhorn's performance more erratic, coinciding with his increasing notoriety, and reinsurance markets soft and getting decidedly softer, one would be forgiven for wondering whether this is just another train-wreck (and we've seen three large ones in last month) waiting to happen... 

Some Out-of-The-Box Suggestions For a New FRB Chairman

I do not believe there has ever been such a fuss - coming from all sides - regarding the appointment of a new chairman of the FRB. Markets swooned when PV exited, but I cannot recall in all my observation and readings the attention lavished upon this appointment.

Much is stereotypical of the political divide. Without effort, one could conjure most of the rhetoric verbatim and attribute it accordinly.  Like most things macro these days, the nexus with politics is omnipresent, bringing shills of all persuasion to champion their view. 

Wishing to stay above the fray, and, at the same time hoping to contribute to the discussion in a constructive way,  I have some out-of-the-box suggestions that I believe are worthy of consideration for the next Chairman of the FRB.


 1. Leonard Nimoy. 
Objectivity. Logic. Fortitude. Strength. An ability to act.  Years of training as "Spock" are the ideal preparation for the next Chairman. Dispassionate obstinence based upon logic derived from Vulcan training and being the smartest guy in the room.. Mind-melding with the market. Need we ask for more?

2. Sully (a.k.a. Chesley Burnett Sullenberger, III)
Volatile times, uncertainty, a global economy at stall speed trying to navigate European storms Chinese typhoons,  could there possibly be anyone more qualified than than the guy who landed his crippled passenger  plane mid-Hudson, without a single injury. Even better, this guy has a name that sounds like a patrician central banker of old.  

3. Sir Alex Ferguson
Running the world's largest central bank is almost certainly child's play in comparison to managing a group of whinging overpaid primadona footballers, like Manchester United. The similarities are striking: one must deftly manage multiple constituencies, construct a longer-term strategy for winning, manage the press and PR of mistakes which the macroeconomy is bound to ecounter, and leave the world with a gaggle of timeless quotations one can wheel out in any situation.

4. "B-9 Environmental Control Robot" 
No one ever knew his name in "Lost in Space", and he has a problem gboing up or down steps, but with the proliferation of handicap access ramps in all federal buildings, he might be the solution, since the Fed's fiercest critics are perennially concerned about it blowing, or not recognizing bubbles, and this early AI prototype is unique equiped to spot "Danger!! Will Robinson.....Danger!! Will Robinson". No chance of the punch-bowl hanging around too long with B-9 in charge.

5.  A Large Advanced Computer
While B-9 is technically a computer, Fed critics like Stanford Prof John Taylor would undoubtedly likely to see a computer as Fed Chairman (so long as he was involved in coding the policy inputs). "HAL" (from 2001) springs to mind - easily capable of running an economy. Powever, logical, a sotto voce,  and independent-minded (maybe a tad too much so) qualify him for consideration. For those of us who believe there is too much earnestness in government, I would suggesty "Holly" (who was the ship's sarcastic, moody, computer in Red Dwarf). She is undoubtably capable, and with her moodiness will keep the market on its toes whilst keeping HF macro terrorists in their box. A final AI candidate  is "Rybka", the world's greatest chess computer. With a game as complex as the macroeconomy, and the largest players all fancying themselves as chess grandmasters, who better to manage the game than Rybka??!? Oh, and the biggest bonus: since Rybka is an accomplished cheater, it is well equipped to beat macro-terrorists at their own game.

6.  Paul Volcker
There is still a role for a highly-qualified 6ft 7inch brutally-honest cigar-chomping bad-ass in government. He makes all other financially-qualified candidates look like weenies.

7. Someone from GS
Conspiracy theorists will be rooting for Bill Dudley to complete the GS CB Grand Slam in order to confirm their belief that GS controls everything.

8. Jim Bunning
Good pitcher. Abortion-of-a-Congressman. (Errr surely some mistake here including him....)

9. Bill Gross
This would be sweet payback. It always looks easier from the other side, eh Bill?

Clever Dicks

At the next opportunity, when you see a clever-looking high-frequency trader, coder, developer or other predatory HFT enabler in the local Wholefoods market foraging for his dinner after "work", shadow him  (and it will be a him for few of us girls have such unashamedly bad manners) to the fresh fruit & veg section. Observe him patiently, and wait.  When he appears to covet something, say a mango signed at @$1.50/piece, non-chalantly drift closer. When he reaches for his chosen piece of fruit, make your move, and seize the object of his affection before he can get his mitts on it, using  your sharp elbows if necessary to pry it from his hands. I can tell you in advance that this will not curry his favor. Nonetheless, open a dialogue and, without emotion (or an inkling of kindness or warmth) and without any indication as to your actual indifference to the item, ask whether he wanted that one. Accompanying a look of exasperation, he will likely say something like "Duh!" (a response testing the limits of his non-PERL, non-C++ interpersonal vocabulary). If so, empathize for a brief moment at how lovely indeed THAT mango is, and offer to sell it to him at $1.55 or whatever [higher] level you serendipitously desire. Should he hesitate, place it in your cart. Rinse. Repeat. If he turns his shopping chariot in the other direction to get away from a seeming nutcase like you, place the mango back on the display (preferably when he's not looking), but do not be deterred, and follow him. Do exactly the same again with whatever he chooses next, be it the acorn squash, and/or perhaps the very fine-looking white asparagus (the exact item is of course, of no importance so long as he seems interested in buying it). At around the third or fourth item, he will likely become rather distressed (as may the store manager). Stay calm and detached. For being a shy and somewhat introverted persona with a facility for math and a weakness for video games (and porn), he will likely have difficulty directly expressing his dislike of your behaviour and frustration with your  insouciance. Indeed you may have to spell out for him the root rhetorical question: "How does it feel, asshole?"

He may, by happenstance, be on the tail of HiFTers ability to communicate, and might muster up the courage to hypocritically ask you why you have done what you've done. An appropriate answer might be: "Because I can" (at least until the store manager calls the police or store regulations codify etiquette), with no need to expand to your fall-back explanation that you admire his choice of products...so much so that you wish to use this admiration and thus his intention to acquire them BEFORE he does, and that you see nothing philosophically, or morally wrong with that.  After all, you are both in the market (albeit a supermarket).

When you return to your own place of business (perhaps your Wine Shop), hopefully one that is rather isolated from competitors, you may - from time to time - have HiFTers who enter your place of business, who you might identify by their highly-corrected vision, overly-informal dress sense, laptop bag and baseball hat with their HFT firm's logo embroidered on the front. Greet them normally. They may head for the whites, and choose an over-oaked Chardonnay, a sad caricature of the white burgundy they are trying to imitate, and bring said bottle to the checkout behind which you reside. The price may be marked at say $30 (he buys on Parker's ratings because he doesn't know any better). Tell him, "I'm sorry the price has gone up and is now $40". I can tell you in advance (from experience) he will be none-too-enthused at this apparently swift change in the price, and, because it is the first occurrence and he's been caught unawares, will likely ask "why?", (rather than the more appropriate "WTF Dude!").  Serenely reply, in the most detached of tones, that in the nanoseconds before he reached for the bottle, you saw there was heightened interest in that vintage of that vineyard and in that same split-second, you used your privileged access to acquire the entire inventory of the same, but that you would be happy to part with a bottled (or two even) at the new quoted price. He may lift your offer, but will likely return to the shelves and pick out another bottle - one with greater inventory depth, perhaps, marked at $22/bt., and tentatively return to the checkout. Being charitable, and since you ARE in the business of selling wine and since you are not the Monty Python Cheese Shoppe (something outside the cultural reference of the avg HiFTer being twice its age), inform your customer that while the 750ml is now $30, he can partially fill his order by having a half-bottle of the same (the 375) @ $12. A second 375ml however, will set him back $18. Before he has the chance to inquire, just tell him you saw demand building and bought (most) of the inventory leaving a token amount for him, because, after all, you are there to sell wine. Feel free to point out that the nearest alternative is a 15-minute drive west.

Should we try, we might imagine, in Jimmy Stewart 'Ghosts of Xmas Past' style,  all manner of what life would be like were we to apply the principles of predatory HFT to seemingly mundane transactions. Booking.com attempts to stir the browser into action with apparent transparency into (real or feigned) supply and demand. Airlines routinely move quotes at signs of heightened interest on a route. Convention and rules develop to grease the life, add integrity and trust, in the interests of efficiency. Situations where people who have no natural interest, who forcibly intermediate to take advantage of privileged information access, flawed market structure, reveals warning signs of market failure. Until this is addressed, we can each, when the opportunity presents itself, demonstrate some instructive payback to the misfits who ignore or who are unable to understand the coarse, corrosive effects of their pursuits.

Syphilis Stages a Comeback

This article from Reuters dispels any doubts about whether Overstock founder Patrick Byrne is syphilitic. Raving looney rantings should best be left aside so as to not distract or confuse authorities attention. SAC defense counsel must be thanking their lucky stars to have legitimate allegations associated and diluted with babblings about the Dark Sith Lord...

Lancing The Boil

Steve Cohen almost certainly didn't set out to be the biggest nor the most successful insider-trader in the history of the world. No one does, or could do, that with the requisite premeditation. Life has too many twists and turns, and in such a business, there is no direct line from 'A' to 'B'. Yet, here he finds himself. The most successful. But still defiant.

I don't know him. He may be a good guy. His first wife (and those he's fired) probably think not. His second (and those upon whom he's lavished generously with money, more likely harbour a different opinion. I am, in fact, not interested in this aspect. But I do wonder at the genesis from ordinary talented trader to systematic abuser of inside info who, despite every indication to the contrary, defends a reality divorced from the one most informed observers share. Maybe he must because he has no alternative. Maybe, he believes his own version of reality. He doesn't appear to be a monster in any sense. But there is, nonethless, a nagging obliviousness that is screaming for precedence if not scrutiny.

When I  (from my distance as a detached practitioner) ponder his actions - based upon email, IM, recounted and transcripted conversations - regarding his decision-making process on the blighted trades cited by authorities, I cannot help but think of the bid-rigging scandal perpetrated by Marsh Mac, and detailed in State of NY vs. Marsh Mclennan. Read it. Here, ordinary people - the ones you see at PTAs and on the sidelines of the soccer pitch - break more or less every single rule and law violate every ethical tenet related to business conduct and markets in pursuit of ripping off the end client by systematically managing the pricing quotes to insure an uncompetitive, higher margin environment for all. It apparently went on for so long and became so ingrained, it became the standard operating procedure for the broker to set the price (rather put it out to competitive market tender), get an above-market quote the firm who will be awarded the business, and a way-above market "b-quote" from the designated loser who - in turn - would be the deserving recipient of the next piece of business at similarly inflated margins if they played the game cooperatively. It seems from the complaint, and those in the market, that after a while, no one saw anything wrong with it. It was, in those lines of business, just how it was done. The perps were ordinary, family men and women, however depraved was their sense of obligation, fairness, or fiduciary duty to their clients. They surely didn't set out that way. They likely stumbled upon  it, and it worked. Their clients not noticing. Their fees higher. Their underwriting counterparties fatter and more profitable, and so in their debt. And it was easy to the point where everyone involved knew what a b-quote was, and their obligation when asked for one.

"The edge" or other pseudonym SAC had for insider trading, eerily resembles 'b' quotes. It was SOP, so much so, SAC, like Marsh, became brazen - ruminating amongst themselves in IMs about who's got the better inside information edge. And (before Level Global, Raj, and the spotlight was shined) this discussion (on recorded media) was NOT with respect to feigning attention to the legality or appropriateness of use, but solely on the establishment of which was more potent and therefore reliably useful in pursuit of the edge. It had, by then, become SOP. Apparently without fear of retribution by authorities. People, it would seem, including Cohen, constructed the intricate scaffolding to enable, support, cultivate and legitimize what in ethical terms is very very wrong and bent - cultivated to the point that in THEIR minds their transgression was diminutive, victimles, that perhaps they were entitled due to their tenacity andf cleverness. Who knows the precise narrative one makes to oneself...

America has a strange relationship with culpability. They rarely do it. Legal advice seems always to suggest to deny it. Claim innocence. Blame others. At Marsh Mac, only the infantry was sacrificed. No Generals went down. And Wall St. throughout the crisis (excepting Raj) is little different. We see the same with Fab Fabrice. But with SAC, there is an apparent determination to make a more meaningful statement. Make no mistake, this is not about market efficiency, but about the appearance of fairness. And the biggest sin of SAC, like Marsh Mac, was to go so far down the perditious route, there is no recourse for authorities but to use every means within its grasp to lance the ethical boil, so fat, ripe, and overgrown...   

SEC Launches Torpedo at SS Cohen

It seems obvious from the SEC's complaint that SAC was in need of a compliance oversight department to insure that its compliance dept was insuring that PM's were in compliance with SAC's Code of Ethics. Oh, yeah, that was Cohen's job. So perhaps what SAC needed a CEO-overseer to make sure that the CEO was overseeing the compliance department in order to insure that SACs PMs (or the CEO!) was complying with its Code of Ethics (not to mention applicable law).

One also might speculate on SAC's understanding IM and service-provider archiving of IM messages. Since the ground rules on accepted communications between suppliers of edge and SAC consumers of edge was crystal clear to suppliers, one might wonder whether SAC believed IMs were somehow disposable and "not like email", somehow vanishing into cyberspace upon exit. This seems (to me) rather amateurish in comparison to the sophistication and lengths employed to cultivate an edge systematically throughout the business over time.

Confidence Crisis

I am in a reflective mood, navigating, what one might call say, a crisis of confidence. What is the root of this self-doubt? I am, you see, squarely in my middle years, and as I look out at the vast pool of talent that makes up the market, I am coming to the conclusion that, like the writer who realizes he will never write a great novel, that I am just not very smart by comparison. Nor clever. And this is humbling.

When I started out in the business, despite my knowledge of delta-hedging portfolios of options, I wasn't smart enough to dream-up of "portfolio insurance", nor implement or encourage its deployment in any way. Truth be told, I am often intimidated by Maths PhDs, self-conscious over my incapacity for visualizing anything but the most basic of quadratic functions (I hit "the conceptual wall" in Linear Algebra).  And I admit was jealous that I was unable comprehend the beautiful genius of mathematical formula's and risk-analysis validating highly-leveraged (and crowded) carry trades, on for example, the Japanese Yen in 1998. And heaven knows I didn't have the prescience (or wisdom) to ride the most rip-roaring and snorting of bull markets in internet and technology stocks, unlike so many other much-smarter-than-me investors.

It is apparent to me now that I wasn't clever enough to understand the intricate business models or the unmitigated allure supporting the "merchant energy" craze, so I was never  accused of being one of the smartest girls in the room, despite the untold billions flushed-away by Mirant, Dynegy, Calpine and Enron.  I am so slow that CDOs didn't even register with me until they were near their sell-by date, and never in a million years could I have been so wickedly sharp as to invent the idea of putting a wrapper on them to miraculously transmute a still-steaming pile of dung into scentless triple-A.

 In the markets and strategies that I invest  (quant equity long vs. short)  I almost certainly am one of the dimmer bulbs, blind to the opportunities that applying 10x (or yet higher!!)  leverage to crowded trades might afford my P&L, as it might have in the summer of 2007. Despite beginning my professional days in the bullion business, my feeble grey-matter could never have conceived of turning a gold-and-oil-heavy commodities basket cum "index" into a permanent portfolio allocation for pension funds across the USA - a genius ALMOST as brilliant as that which dreamed up the idea of encouraging housewives to buy a box of baking soda, take it home,  to immediately flush it down the toilet!

Lacking the requisite creativity, I missed the chance to design something really useful for humanity, like Payament Protection Insurance. I am still in awe of the risk-management intellect behind tail-risk insurance funds. The savvy required to make these attractive when implieds were already highly elevated (historically) and the market had already more-than-a-halved is humbling. I often wonder how I've managed to compete at all!  Then, if I wasn't feeling stupid enough, I just need to take one look at luminaries like Galleon, Diamondback, or SAC. Top ivy-league schools, minted MBAs. IB training programs. Couple of years at Och-Ziff or Perry. These guys are so smart, and have had such good returns they just seem to know what is going to happen before it happens! And to think that for all these years, I'd never dreamed of the games one might play with LIBOR!

But far-and-away, the smartest guys, the ones whose certitude, sound logical reasoning, and mathematical notation are (to me)  both most impressive and humbling to listen to are the guys (and they ARE guys for only guys can be this brilliant) touting risk-parity strategies. The engineers who've  championed them sound soooo clever, and have so many academic letters following their name, one would just have to be a dolt NOT to want to adopt it for your pension plan. Really, who could quibble with the formulaic logic that miraculously gifts you a levered long bond position when it's yield is as close to the ZLB as, ummm errrr, it's EVER been??

It should be comforting to investors everywhere that so many of our best educated minds and brightest talents have chosen to serve investors' interests with such forward-thinking creative imagination. The investment world thus appears meritocratic. In this hierarchy, simpleton's seem to get what they deserve. Looking back to history, to President Carter's "Crisis of Confidence" in 1979, his implied solution was imbued in "redemption" in the biblical sense. I cannot help but wonder whether investors today will discover the same solution with regards to risk-parity and its associated gamma-negativity.

Let's Play, Financial "Would You Rather...?"

 With loadsa' people getting hammered, it might not be a bad time to take a break with your collegaues, grab a Skinny Grande Latte and play: "Financial Would You Rather...?" 

Would you rather have Bill Ackman as your largest shareholder or Carl Icahn as your business partner?

Would you rather be caught insider trading by the SEC or accused of goosing LIBOR by the FSA?

Would you rather be a GoldBug or a YenBull?

Would you rather be an American with an undeclared Swiss bank account at UBS in Zurich or a German stashing undeclared income at HSBC in Geneva?

Would you rather be short puts of LULU stock into an earnings announcement or be long of USD/YEN into an Abe press conference?

Would you rather receive a tip-off of a takeover via an e-mail message or a  your office landline?

Would you rather be George Osborne or Jeffrey Osborne?

Would you rather be cellmates with Raj Rajaratnum or Bernie Madoff?

Would you rather be short of a stock with extremely high, and decreasing short interest, or long of stock with extremely high and increasing short interest?

Would you rather run an Alpha Capture strategy or be the call before the first call on analyst recommendation changes at your cousin's IB?

Would you rather systematically trade upon the advice of Bob Janjuah or be forced to listen to an endless Q&A Loop with Abbey Joseph Cohen?

Would you rather be long a truckload of leveraged US Govt 30yr zeros or short a truckload of long-dated OTM puts on JGB 10yr bonds ? 

Would you rather be investigated by Preet Bharara or pimped out to Eliot Spitzer?

Would you rather pump&dump pennystocks from a boiler-room with a bunch of Russians led by a guy named "Ivan" or shakedown the clinical researchers from your expert network for inside information?

Would you rather take investment advice from Martin Armstrong or Mish Shedlock?

Would you rather have your broker-dealer run by Dick Fuld or your FCM run by Jon Corzine?

Would you rather be short Commodity-currency gamma or long EM beta?

Would you rather invest in a new bond arb fund led by John Merriwether, or a commodity fund launched by Brian Hunter?

Would you rather be a Pension Beneficary of the State of Illinois, or the City of Philadelphia?

Would you rather a listen to market commentary by Dennis Gartman or self-help tapes from NN Taleb

Would you rather lose 33% of your clients money being incredibly and obviously stupid or 45% of your clients' money being unquestionably careless?

Would you rather play another round of this stupid game or get back to watching your hemorrhaging P&L? 

(All comments and your own Financial Would You Rather Questions welcome...)

Deutsche Bank: A Bogus Slight or Just Slightly Bogus??

Reuter's reported FDIC Vice-Chairman Hoenig's hyperbole regarding Deutsche Bank's seemingly poor capital position. This caused ZeroHedge, the Bête Noire of detached objectivity, to lavishly hyperventilate on the same without considered thought - with both  sufficiently retweeted to insure some nervous-nellies will be shorting DB stock or buying DB CDS protection, without delay.

I am no apologist for banks, least not for German Banks, who've rarely missed an opportunity to miss join a crisis. That said, I do reckon that these presumed obscene numbers and ratios are an artifact of their securities financing business (including liquid markets delta-one and all manner of back-to-back swaps as it is for MS, UBS, and CA). All such undertakings cause a balance-sheet gross up of assets, but take no account of margin or collateral that is the equivalent of (if not superior to) bank equity in regards to financed assets.

Consider, for example, if a DB customer deposits $100 at DB, and borrows a further $600 from DB to buy a total of $700 of bonds. DB's core equity is unchanged, but both the assets and liabilities on their balance sheet have increased. But the $100 of equity the client has deposited/pledged/posted is, to the bank, the equivalent (and I'd argue superior to)  $100 of core equity because under the terms of the loan, it is "first loss", where the bank maintains strict covenants over the type of collateral, minimum required margin in the acct, rights to liquidate under certain conditions, and so forth. So before the bank loses a penny, the margin must completely evaporate. In practice, demands for additional margin/collateral are issued as soon as agreed thresholds are perforated. Failure to perform triggers a liquidation of positions by the bank, NOT to the detriment of the bank, but to their customer who bears the equity-like risk of the positions. Moreover, it's contiunously marked-to-market, in contrast to a traditional bank loan that is typically unsecured and unmargined initially, slow-moving to reprice, not subject to variation margin, and difficult to call-in or on-sell.

But for all such securities companies who finance positions similarly, this equity/collateral of the client, this equity-like buffer upon which they lend against the entirety customers' position, doesn’t show up on THEIR balance sheet as equity, but rather as a liability, offset by the investment assets held on their clients behalf. No matter that, under the example above, the capital ratio is > than 15% with all the covenant cards proverbially-stacked in their favour. So, a 2% tier-1 to assets ratio is a rather meaningless measure of risk, loss or actual capital sufficiency in relation to it's positions. One would need to know the bank's tier-one equity PLUS customer equity and/or liquid-market collateral held in order to make a sensible apples-to-apples comparison before declaring them a hazard. 

Furthermore, financed positions like prime brokerage (as well as repo, delta-one) are typically liquid market instruments. No illiquids. No binary instruments like CatBonds. Sensibly large haircuts and low leverage for concentrated volatile positions (e..g. a Biotech portfolio), outsized position in relation to its historical liquidity, higher, but by no means stupid finance for liquid, well-hedged diversified stuff. Over two decades (speaking as a customer) they have all (DB, MS, GS, UBS, CA) extremely good risk management and control - much better in fact than the oversight of their own prop traders.  And they are positively draconian in comparison to the terms of an ordinary commercial bank loan.  

Vice-Chairman Hoenig is not the first to scare people with non-apple-to-apple comparisons that dramatically misunderstand the nature of these relatively prudent and well-risk-managed financing businesses (oh god, I know this sounds like an ass-lick straight from "Pseuds Corner" but its true!). Which is not to say they are without risk, but that this risk is not accurately reflected (i.e. severely overstated) in the too-often cited bogus ratios. There are lots of legitimate reasons to take aim at the banks in general, and Deutsche Bank in particular be it LIBOR manipulation, tax fraud, hiding losses, etc., but using a mis-specified capital-to-assets ratio, unfit for purpose, is disingenuine and not one of them - especially if one's purpose is to understand their actual capital position and consequential risk, free from hyperbole.

Deux Chevaux?

I'd long held, from a quick superficial point of view, that France Telecom was cheap. I thought so at 17. And at 14. Even more so at 10. And again at 8. I haven't had a position but have carried the thought nonetheless, and watched with some attention. The reason I've not taken a position is mostly because of my dislike of cratering revenues and earnings forecasts. While the stock has been ahead of the fundamental declines, opportunities have been fleeting, an little has changed to the fundamental scenario, though the stock is, again, in front of fundamentals.  Sumzero now thinks it is cheap too. 7x forecast. Outsized yield. Decelerating deceleration in revenues. Goliath status in local markets. Etc.

But before you back up your deux cheveaux (or park it front-wise since it's a rear-engine relic), it would be wise to consider this. I've been a good customer of Chez Orange for several years. Three analog landlines (inbound, fax, alarm circuit), Unlimited Broadband & Livebox TV, Video-on-demand, along with a digital telephone line (used for outbound), as well as two mobiles numbers with unlimited data, a few hours of talk time, and a heavily discounted foreign forfait. The monthly hit for this was roughly Euro160 plus whatever variable calls to daytime mobiles, foreign mobiles, or restricted regulated countries. My American friends tell me this is a serious bargain. My UK experience, and competitive observations suggested this was the wrong price.

So I ambled down to my local Orange kiosk where, despite the much-discussed low morale of engineers deskilled into clerical roles, I found a friendly salesman willing to tolerate my pidgin-French. I also had my trusty, enthusiastic, and more important, bilingual 10 year-old son. I told the Orange representative: "I think I'm paying too much. Let's negotiate". So we went back and forth. Discussed the various options, plans, and bundles. It turns out, France Telecom is keen to decommission the analog lines. If you can afford them, they ARE more reliable, and useful for fax and alarms, but the incentive to cut them is now simply too great. Mobile competitive pressures are finally being felt too. The result: massive, and I mean MASSIVE reductions.

After much discussion, we agreed: kill the analog lines. Move the permanent analog number to the digital line. Port the alarm to the digital line. Continue with unlimited broadband, Livebox WiFi and VoD, and with this package comes move 1 mobile to the bundle, and add the second mobile to the bundle for Euro 10. Total cost for year one: Euro 56/mo., stepping up to Euro61 when an applied discount rolls off. Wow! From Euro160/mo to Euro 55/mo!! OK, Small cuts to mobile minutes and an unobtrusive throttle on broadband for the mobile phones, and the small inconvenience of no fax line (must scan and e-mail), but these were inconsequential in the scheme of things.

Now, I realize that I am not the typical customer. But the revenue drop is eye-popping, and beyond my wildest imagination. And while one shouldn't extrapolate this throughout their businesses, the impact of similar blended revenue deflation is large and palpable and I am unlikely to be amongst the last customers to make such realizations and take action. France Telecom's debt, by contrast, is relatively fixed. And, for the first time in regards to FTE, firsthand, I witnessed how right the market had been fundamentally,and how little conviction I have that this is "in the price".

The stock IS likely ahead of revenue/earnings declines. And it may bounce. But continued revenue and earnings contraction and disappointments coupled with continued likely paring of the dividend means choppy trading and snuffed rallies before ratings will be view more positively.  That's my FTE anecdote of the day FWIW...

Valued Advice

Memorandum

To:         Bea Wethervane, Senior Consultant, Coxbridge Associates

From:     Hugh G. Shortphall, Florida University & College Teachers Pension Fund (FUCT)

Date:      31st May, 2013

Subject:  Hedge Fund Allocations

_____________________________________________________________

I've appreciated your valuable advice to our plan over the years. As you know, the path to changes in orthodox investment policy in a plan such as ours is often long and arduous, particularly when trustees and oversight committees are involved. Witness our struggle to add mortgage derivatives, or expand our equity allocations with a dedicated BRIC component which we finally received approval for, and implemented in 2007. Our campaign to add a GSCI Commodity Index component, as per your recommendation, was not easier, though with your help, we finally gained approval for and deployed it in mid-2008.  Your 2009 advice to implement a dedicated equity tail-risk program - one that we finally allocated to in Sep 2011 - was a big-step forward towards insuring our Board, Trustees (and plan members) could worry less about funding levels in the event of a market crash. 

Over the past few years, you've been tireless supporters of substantially increasing our hedge fund allocations, and, as you know, last year, we recently ramped up these allocations (taking funds from our long equity exposure).  I want to say, we trust your advice implicitly in this regard. However, we on the investment committee have been taking a lot of heat lately on this last decision - both at the tactical and the strategic levels. Not a day goes by without our Board and Trustees reading about overly-generous fee structures, poor manager and strategy performance, and asymmetrical division of the resulting aggregate investment return. As the chief internal supporter, I would be grateful if you could "do the rounds" with the Board and Trustees in order to reconfirm the thesis for this last decision in detail - something that would take the heat off me, and to the greatest extent possible, help you when Coxbridge's consulting contract comes up for renewal. In particular, they keep asking me "where are the scheme members' yachts (or Gulfstream IV's)", quoting figures that over the past decade, in aggregate, managers have pocketed $700 billion in gains whilst fund investors have gained a mere $12 billion net of fees. These concerns need to be addressed, and fears assuaged.

On a more positive note, I am pleased to say that as of the beginning of this year, we've finally completed the implementation of your advice to take replace more of our long-only equity with an allocation to several risk-parity managers. Indeed, as of January, levered bonds and reduced equity appear set to make a meaningful contribution to meeting the Plan's actuarial targets.