A Bridge To Far (for Snookered HFs)

Germans may have been resoundingly defeated in two world wars, but they can claim some vicarious pleasure from Porsche's unilateral victory in their legal fight with Allied Hedge Funds over Porsche's perfect corner of VW shares, the irony of which I discussed on separate occasion here, and here. The decision is final, and while there are no formal surrender documents, the Germans must be feeling rather satisfied.

When the HFs sued Porsche, you have to wonder what the HFs were thinking. Presumably, one would have thought they assessed the probabilities of success - something they do for a living.  And as any good decision-makers do, they must have taken the advice of expert legal counsel, taking into account that top lawyers, as Madoff and Lehman creditors can attest, in a complicated case, aren't cheap.

Yet, something is not right. Did they really think that a German commercial judge was going to give nefarious offshore hedge funds - primarily American-run and British-run - a couple of billion dollars from one of the poster-children of German industrial success? I'm no lawyer, but I know a thing or two about assessing probabilities, and this one always looked like long odds from every angle. Heavens knows what the aggregate legal bills of the case and two appeals came to, but likely sufficient to alleviate poverty in more than few under-developed countries for a reasonable period of time. One might wonder about how impartial an advising counsel can be as he mentally tabulates the hours involved in the case and its appeals.

This reminded me of Baron Thyssen-Bornemisza's bid, at the behest of his former-Miss-Spain (and fifth wife!!) "Tita", to dissolve The Baron's airtight Bermuda-domiciled family trusts that favored his children from previous marriages, at the expense of hers, resulting rather remarkably in what is now known as the most expensive court case in history. Now the skinny was this case never had a chance of success, trust law being inviolable. Yet Tita was sold the dream of success, and bought it whatever the cost. Armies of lawyers were dispatched to the case,  and more than a few visiting lawyers rented some of the expensive houses on the island,  flying to Bermuda so frequently, they were reputedly on a first-name basis with the cabin crew. The case had a predictable outcome, with everyone looking bad, but only the lawyers with anything tangible to show for their actions.

In the case of the plaintiff hedge funds suing Porsche, it is unlikely that the management companies paid the costs, more probably being expensed to the Funds' investors. If this were in fact the case, we have managers with mostly upside (potential performance fees receivable), egged on by litigators who cannot believe their luck at the cash-cow, working a case whose bill is footed, with only investors having the unfavorable pay-off pattern.

But monetary reasons are the less-than likely motive: after all, what are a few pennies to Croesus?? Rather, the relentless pursuit of legal action is likely a way for egoists to avoid culpability, to avoid admitting they were wrong, to preserve a proverbial "the clean sheet".  Not that there is anything shameful in getting royally squeezed out of a position. Supreme beings just don't like to admit it too loudly in public…for then, investors may start to believe they are mere mortals, easily taken out by a couple of amateurs, and where will 2&20 be then?

Hypocritic Oath

So David Einhorn is upset that someone was spoiling his game in MU before he'd fully loaded-up and had the chance to "leak" the information himself, or talk his book on the numerous bully-pulpits on offer. He is sufficiently upset to sue. Which he can do. Mostly because he is well-lawyered and can afford it.

I cannot say I feel sorry for him because I reckon talking one's book in the trading game is different than a long-term investor expounding on the long-term growth prospects of the apple of their affection. For those who do not know the difference, the former all-too-often uses the timing, publicity of disclosure and subsequent price reaction to shift their position to those who cannot distinguish between a trade and an investment. So while those enamored with, say someone like Mr Einhorn and his investment prowess, are buying - they are being sold the stock precisely by those touting its virtues. That doesn't mean I approve of violations of confidentiality. I do not. It is illegal, and talking your book is legal, even if you're doing the opposite which is merely devious and of a dubious ethical standard. But if, in the process, such leaking shines light (errrr Greenlight?) upon the practice of pump and dump, however slick, and/or professionally packaged, then I am tempted to focus upon its silver lining.

NYT's Dealbook today took note of the aggressive legal action. It said:

Mr. Einhorn contended in the petition that “the only persons who lawfully possessed information regarding Greenlight’s position in Micron were persons with a contractual, fiduciary or other duty to maintain the confidentiality of Greenlight’s position: Greenlight’s employees, counsel, prime and executing brokers and other agents.”

The irony and hypocrisy of this wasn't lost on me, again not because I do not agree with it, but because Mr Einhorn only a short time ago was censured for illegally dumping his 14% Punch Taverns position on a hair-trigger the just moments after he discovered (possibly even while he was discovering) material non-public information about forthcoming corporate finance activity, in breach of UK FCA code, (and probably every relevant line in CFA's code of conduct).

My point is clear: You cannot eat your cake, and then have it too (which, BTW I am told is the correct version of this proverb, not "Have your cake and eat it too"). If Mr Einhorn wants to play in, and profit from, the grey areas, be they regulatory or ethical, then he really shouldn't be hounding bloggers (or joining the plaintiffs suing Porsche over their snookering of VW shorts). To his credit, Mr Einhorn has an innocent-looking, impish grin that undoubtedly makes his grandmother very happy. But there is nothing nice or decent in his hypocritical actions.

Un-Diddled Markets

List of Markets Not Tampered With By Bankers, Traders, Dominant Corporates & Hedge Funds.


Girl Scout Cookies
Fresh Fish (thanks Joe W.)
Cut Flowers
Rice Noodles
HIBOR
Gold Fix
Foreign Exchange
Oil
Natural Gas
Payment Protection Insurance
Art
HY/IG Derivative Markets
Aluminium
Equity Markets
New Issues
LIBOR
EURIBOR
Collateralized Debt Obligations
Wholesale Electricity
Cheese
FTSE Derivative Expirations
Split Capital Trusts
Lead
Copper

I Was Sooooooo Wrong

It takes some honesty and fortitude to confront one's mistakes. Everyone makes them, though not everyone admits to them, perma-bears (like ZH & MISH) being, being amongst the worst offenders. Many Hedgies, most likely for reasons of ego and hubris, also have great difficulty accepting culpability for their errors, evidenced by their letters, blaming everything and everyone but themselves and wayward theses. Hugh Hendry, at least, maintains the intellectual flexibility to thoughtfully, and articulately throw in the towel, whereas the most effective do not invest themselves so fully into their investment theses that they cannot cut-and-run without inflicting egotistical self-harm. Because I operate in the land of the diversified portfolio, excising errant positions has never been traumatic, nor do I self-flagellate with cutters-regret. So long as my distribution is skewed-right, and the tail not overly kurtotic, I am sanguine.

Macro is different. The calls are fewer. Gestation time to trade maturity is longer. False breakouts and devasting swoons create further potholes. One can be very right and still get completely hosed in one's expression (and timing) of the trade (just look at Corzine if you have any doubts!!). Needless to say, one should ideally approach one's positions with the same sense of detached objectivity described above. Many, however, find this challenging whether it is due to personal political bias that clouds reasoning, or the resulting delusion caused by the 24-7 talking of one's book, whatever the evolution in ummm … errrr… let's called 'objective reality'.

Rest assured, I make no claim to be better. My worst prediction - the one that haunts most, confronting me each and every day - was not a trade per-se (though there are no shortage of bad ones). Rather, it was a political-economic scenario that not only hasn't panned out, but evolved (and, continues to do so) in completely the opposite direction. This was my forecast for what I call "Peak Inequality", along with all the deterministic knock-on effects such a scenario would have upon everything from luxury goods, and trophy real estate and high-end everything-else. For a short time in 2008, I smugly felt vindicated witnessing halts in construction of premier projects, bankruptcy of uber-luxury developments and the failure of high-end props to catch a bid. As things stabilized and bounced, and embedded counter-cyclical stabilizers blew gargantuan holes in Govt fiscal income statements throughout the world, I believed that 1) markets would [wrongly in hindsight] press for austerity 2) consumption was too fragile to raise taxes generally or cut govt spending; 3)the highest inequality and lowest marginal top-decile rates in generations would be the obvious target; 4)this would occur across the DMs, and draw the line-in-the-sand for inequality; 5)For IF the authorities were to bail out and make beneficiaries of asset-owners (levered ones in particular) in a pull-out-all-the-stops attempt to reflate, I reasoned the moons would be aligned for the State to recapture a meaningful amount of this (via tax) as a quid-pro-quo for not letting the soon-to-be angry hordes do "a Romanov"; 6) This would go some way towards capping and sustainably financing a yawning fiscal gap while maintaining general consumption and employment with a more constructive balance than otherwise might occur were reflation to float top-decile boats with scant participation by the median.

It would be understatement to say I was wrong, so far was I off the proverbial mark. On the surface, Like ZHers and MISH, I committed the cardinal sin of letting my political ideals get in the way of assessing the true probabilities. I had thought that under the circumstance, political expediency and policy pragmatism would extract 'sacrifice' from, or or co-opt, the top decile beneficiaries, given the backlash against the financial sector and the levered, that would in other times prove tortuous or impossible. Saving the system, at public risk and expense, with all its attendant property rights, is, after all, useful to the beach-masters, and the old adage of 50% of a goldmine being preferable to 100% of nothing must (so I thought) ring truer during such moments.

I'd thought it would be obvious to largest asset owners, and the top-decile earners, that they had escaped by the skin of the proverbial teeth, and expected they would have been grateful (excepting Hank Greenburg), and that these people would have not reneged on their promises to the Supreme Being made as the plane was falling from the sky. Instead, they offered-up "austerity" rather than contributing, as the Koreans did in 1998, a bit of the family sailver. Mark Blyth @Brown said: "Democracy is 'asset protection for the rich'….Don't skimp on the payments!". But the incessant rise in inequality is, a sure sign, they've been skimping on the payments. This has had profound implications: delaying and muting recovery, swelling deficits unnecessarily, undermining fiscal confidence, and exacerbating political divisions and preventing pragmatic action where and when required.

While some has resulted from unabashed or calculated "smas-n-grab", globalization has laid the substrate for great windfalls for some while undermining real median incomes. This is not meant pejoratively, or suggest anything should be done to throttle the trend or pace of globalization, but rather as a statement of fact. But the strength of the current should be noted by those who argue against the ill effects of inequality on the basis of libertarian personal fortitude. Formerly domestic pursuits (entertainment) now have global audiences. Software, healthcare, and yes, asset management) often have fixed development costs and mind-boggling scalar effects producing unimaginable wealth while median wages are throttled by competitive global labour markets and technology that increasingly allows outsourcing to ever-lower cost venues. These dynamics have incredible inertia, and are lifting vast numbers out of poverty elsewhere, and are difficult to decry. But somewhere, in this process, democratic insurance payments have been missed, and responsibilities by the beneficiaries, ignored, resulting in a listing economic boat, a mis-firing distributionalengine, a drought of sorts, an entirely unnecessary and man-made creation as a result of the rules of the game as drafted.

If one use the Lord of the Manor, as an analogy, he would have had the property rights over his domain, but in exchange, would assumed responsibilities and obligations both up and down the food chain. He would support (albeit with a lower-case 's') those below during bad times, and would have fiscal obligations to the that above (not meaning god for the avoidance of doubt), and if required, raise men for armed conflict. Failing on either account might very well threaten the property rights granted, or worse, his life. They were not inalienable, despite his position. Today, the same metaphorical "Lord", has all the rights, and they are inalienable, but none of the responsibilities outside a modicum of fiscal contribution to the State which can, with effective counsel, be minimized to great extent. His properties are, excepting rights of Eminent Domain, fully enclosed in the medieval sense. The Modern State, over time, has assumed many of the responsibilities, with the provision of a social safety net, and a tax rate that can be raise or lowered according to the requirements of public finance. That is, until recently, it seems, with the War on the State, a war on what remains a social work-in-progress that is "government", one which at its extreme in the USA is seemingly stuck in a Mondale-esque deer-in-the-headlights inability to adjust (or even reform) the rates (and structure) of tax to meet the obligations and responsibilities of the State to her people. The Grover Norquists, if nothing else, have succeeded in framing the popular political-economic debate such that it is believed [in that parallel universe that exists in parts of the nation] that austerity is divinely good, that hyperinflation is around the corner, that the state should barely exist, and shouldn't have a strong sense of the public interest. And we can witness the result: no new taxes, less progressively on existing taxes, starved public investment, unnecessarily higher unemployment and lower wages, hardship, and an incessant rise in inequality that most economists believe is inimical to growth and a well-balanced economy. Few desire sharing their income - whether rich or poor. And few would choose to shoulder responsibilities, if they could be avoided. But we, and the economy upon which we depend, and/or thrive, all share fates and fortunes that are inexorably tied, that if not demand, then certainly benefit from civic responsibilities (mostly economic in modernity) that are not transmutably-minimalist, but should remain flexible so as to respond more pragmatically.

Yea, I got it wrong, which I wish wasn't the case. But I do not regret my lost investment opportunities. Rather I fret about the future threat property rights, of lawlessness, of the lost economic potential, of the diminished social mobility, and of the resulting coarseness and divisiveness that stems from all these negative pressures.

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….  

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.  

An About-Face Regarding ZH Conspiracy Theories

ZeroHedge

Enigma House

1 Underabigrockov Square
Sofia
Bulgaria
 


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

Cassandra




On the Connection between Syd Barrett & Some Financial Pundits

The 60s were wild, enthralling, and revolutionary but just as often simply weird and stupid. Take "Syd" Barrett, the founder, frontman, and indeed inspiration, for rock legends, Pink Floyd. He propelled something innovative, gained notoriety when doing weird stuff was viewed as virtuous. Yet, much of what he personally created has not, in all honesty, survived the test of time. It was, in the main, school-boy playtime under the influence of copious amounts of LSD (itself no crime at the time) that might have entertained himself and those similarly dosed (including record producers and music consumers at the time) but which with hindsight sounds as disassociated and unlistenable as Barrett was wigged out. Needless to remind anyone, Pink Floyd (ex-Barrett) went on to create dramatic lasting electro-psychedelic-rock - most (though not all) of which, far from bering gratuitously-self-indulgant, was sparse, contemplative, and has contrary to Barrett's Pink Floyd, has, until now, survived the test of time.

Yet "Syd" Barrett certainly had his moments of brilliance and lucidity such as the little ditty known as "Bob Dylan Blues" (youtube insert above left and a must-listen) which he wrote upon the rise of Dylan-mania in 1965. NINETEEN-SIXTY-FIVE!!! He (somewhat tongue-in-cheek) sized-up Dylan with such clarity, it is hard to believe that Barrett lost it so completely and totally just a few laters later.

Got the Bob Dylan blues
And the Bob Dylan shoes
And my clothes and my hair's in a mess
But you know I just couldn't care less

Gonna write me a song
'bout what's right and what's wrong
Got God and my girl and all that;
Quiet while I make like a cat

Cause I'm a poet,
doncha know it
And the wind -
you can blow it
Cause I'm Mr. Dylan the king
And I'm free as a bird on the wing

Roam from town to town,
get to get people down
But I don't care too much about that
Cause my gut and my wallet are fat

Make a whole lot of dough
but I deserve it though
I got soul and a good heart of gold
So I'll sing about war and the cold

Cause I'm a poet,
doncha know it
And the wind -
you can blow it
Cause I'm Mr. Dylan the king
And I'm free as a bird on the wing

Well I sings about dreams
and I rhymes it with seams
Cause it seems that my dream always means
That I can prophesy all kinds of things

Well the guy that digs me
Should try hard to see
That he buys all my discs in a hat.
And when I'm in town go see that.

Cause I'm a poet,
doncha know it
And the wind -
you can blow it
Cause I'm Mr. Dylan the king
And I'm free as a bird on the wing

So, Barrett was on the right track in the framing of big picture, despite what one might call abysmal execution - so abysmal he was unable to to see through his creation, and spent the latter two-thirds of his life somewhat tragically in more or less solitude, unable or unwilling to re-engage or re-associate. Talking about being early in calling a top. By contrast, the seemingly dis-ingenuine bull-market creation that was Bob Dylan went from strength to strength, continuing irrespective of his periodic setbacks (a motorcycle crash, and born-again religious episode) for what is now nearly half a century. "Syd" may have been "right" about young Robert Zimmerman from small-town Minnesota, but the victory was pyrrhic, and Dylan, despite the flaws and warts and vanity and disingenuousness highlighted by Barrett (as well as Baez and many others) continued to create great art. Perhaps Dylan confronted and overcame them. Perhaps such flaws are both integral and necessary to success. Perhaps Barrett's view itself though written with at least some admiration, was driven by incipient paranoia and jealousy. The why may not actually be of import.

When I think of today's perma-bears (and they ARE today's because yesterday's are long-since forgotten) - such as Faber, ZeroHedge, Shedlock, Keiser, etc. i.e. those that out of true belief, or demagogic chicanery, see black where there is white (or at the very least it could break either way); conjure an image of imminent doom in place of the more probable ploddingness of humanity; and feel it their duty (or way to scrape a living) to point out to others what they see as the primacy of "the dark side", in regards to every imaginable subject from the incipient threat of liberalism or progressivism, immigration, the past unraveling and impending re-unraveling of the financial system with visions of collapse evident in each and every headline, I cannot help but think of Syd Barrett. For one would be challenged to find perm-bears who have productively created anything positive - in thought, ideas, or public policy - or who, like Dylan, despite his obvious flaws,  has survived the test of time in anything other than the entertainment or financialnewsletterwriting business pandering to pessimists and preying upon those ignorantly or genetically predisposed to end-of-the-world-ism. It is a vile occupation that results in penury for its acolytes.

Undoubtedly, the market will fluctuate. In all likelihood - it will suffer a major setback at sometime  (or times) in the future, just as it has in the past, whether it be in response to war, recession, natural disaster, cumulative bad policy mistakes, bad luck, or just plain over-speculation. Perma-bears may even be right about the eventual collapse of society, the rapture, bitcoins, gold, and the decay of government and the financial system as we know it. But validation of such nebulous things is unlikely to arrive tomorrow, or next year, or on a time-scale and with a probability that is actionable - even if (and its a big if) they are eventually right. The negatively-biased lens (as with many other strongly-biased lens) is neither a way to invest, nor live one's life, though there is no shortage of blow-hard charlatans that will fill any space granted with their repetitive warnings of imminent doom to placate one's fears. Note that this is not an argument for blind momentum investing, nor a justification to eschew the healthy skepticism or risk-reward framework one should embrace in assessing any potential investment or strategy. Rather, it is a plea to identify and avoid inflexible thinkers whose conclusions are pre-determined. For like Syd Barrett, fifty years (and counting) is a long-time - nearly a lifetime - to wait for the rest of the world to come around (if ever they do) to one's point of view.

That Zero Hedge Xmas Party Menu (in Full)

MENU

Zero Hedge Xmas Party - 2013

DRINKS & SNACKS

Craft Brews

Harboe's 'Bear Beer' (12%!!)

Deschutes' 'The Abyss'

Stone's 'Sublimely Self-Righteous'

Surly's 'Furious'

North Coast's 'Old Rasputin'

Cocktails/Spirits

Dark-'n'-Stormy's

Golden Tequila Shooters

Bloody Marys's
Rum 'Hurricanes'

Snacks

Cheese Doodles

Spicy Burnt Almonds
Mixed Salted Nuts

* * * * * * *

 FIRST COURSE

(All you can eat Buffet)

Crab & Bitter Greens Dip

'Scalded' Short Ribs

"Crock-Pot" Turkey Meatballs

Smoked & Skewered Grouper

* * * * * * *

MAIN COURSE

Deep-Fried Turkey w/Freedom Fries

or

Slow-Cooked Goose w/Sage & Cracked-Nut Stuffing Roadkill Potatoes

or 

Wiener Schnitzel with Sour Cabbage & Short Grain Rice 

or 

Ostrich Burgers w/Half-baked Mac-Cheese

or 

Traditional Bulgarian Xmas "Sarmi" (for 'Tyler')

* * * * * * *

DESSERT

Silver-Dollar 'Crepes'

Austrian Strudel

Upside-Down Cake w/Burnt Butter Icing

Humble Pie

* * * * *

PETITS-FOURS

Shortbread Cookies
Ding Dongs

(upbeat festive music provided courtesy Leonard Cohen) 

What's in a Name?

Japanese have long been criticised for being overly conformist and insufficiently creative. This is  unfair, if not untrue demonstrated by the Nobel Literature Prize recently awarded to Murakami, and the increasing representation  of Japanese brands outside the realm of consumer electronics, and, I might add, Olympus Corporation's daringly-creative plan to sweep away $1.2bn of zaitech losses by burying them in the acquisition prices of several hokey takeovers.

Perhaps the most overlooked area of creativity in Japan however is the pith and humour employed in the naming of some of the their listed enterprises.  In America, Branding & Identity has long been approached seriously and (in my opinion) over-earnestly save the departure that brought us "Yahoo!" and "Google". So successful, in fact, was this attempt to fabricate a name that in one fell swoop conjures the image of the product, a sense of iconclastic fun, with fragments of some of the vertical's keyword or key aspects along with an almost certainly-contrived onamonapia (think Uber, Twitter,  Vimeo, etc.) that our brains are now filled with senseless near-names that all blend together in some Sand Hill Road pitchbook nightmare.

While the Japanese undoubtedly have their earnestly named companies, and have wrestled with the delicate identity issues (a fun read!!) that result from M&A, contrary to their boring and humourless stereotype, they also have a bevy of the most deliciously-named companies as outlandish and unusual as a dozen Elvis' in Yoyogi Park (at least to the western observer with a sense of the absurd).
 
Take code #6630, or "Ya Man" Co Ltd, peddlers of  ridiculous-looking "Weight-Shape Belts" whose function, even after close inspection, remains a mystery though it appears to have something to do with "toning". If their weight-shape belts hold no allure, then their Facerciser (avail in Pink White or Gold) might. While looks like a battery-operated roll-on deodorant vessel, it (allegedly)  "mechanically taps the face mimicking (sic) a professional aesthetician's (sic) hand massage" though it may secretly have other, more umm errr adventuresome uses. I am not sure if the "Ya-Man" moniker reflects the founders'  love of Reggae or the high-fives they give each other when some sucker buys their weight shape belts....

To combat the need for re-engaging branding consultants every time one changes business, #1408 has come up with the perfect solution by calling themselves "Something Holdings". This creatively-brilliant strategy insures that no matter business line they pursue, their company name will always be relevant (or at the very least not irrelevant).

Snobbishness of the patrician-sort conjured by venerable names like "First Boston", Morgan Grenfell, or Goldman Sachs" was not the objective of #8542, better know as Tomato Bank, a name that has not failed to sophmorically-amuse me for twenty-five years conjuring lurid visions of customers depositing tomatoes and withdrawing ketchup (or Catsup or Tomato Sauce for you Brits). Of course no one laughs at Apple Computer, but Tomato bank still seems a stretch even though a Chinese-owned FDIC-insured bank in California sports the same name.

Being creative is, however, hit or miss. Take #3845, rather frighteningly  called  i-Freek Co Ltd. not terribly sympathetic with its target audience of 3-to-6 years with web-based content. It sounds more like an on-line purveyor  of illicit paraphernalia and other nefarious stuff, but hey, maybe in Japanese it sounds a whole lot more warm and fuzzy than the name (and respresentative character to the right) imply.


At times "the miss" can be a veritable disaster or the corporate branding equivalent of an "own goal". Take relatively fast-growing fashion-retailer #2185,  which was formerly known as "Point Ltd", a rather innocuous but focused name that conveyed a stream-lined sense of purpose. But recently, they changed their name  to ummm ...errrr ..."Adastria" a worse-than-meaningless fabrication which  is a near-anagram for "DISASTER" - exactly the thing investors wish to avoid. Someone clearly didn't do their homework which is why all such rebranding exercises should be sent through the "let's take the team out, drink lots and ruminate about it" wringer. 

In case there are any doubts that the Japanese possess a sense of humour to balance their creativity one only need contemplate the brilliance of what was formerly #7553, known as "Sazaby", an obscure opportunistic hustler-of-firm who was Starbuck's original partner in Japan. How creative and opportunistic one might ask? Wanting panache and being desirious of instant-brand-name recognition, they thought the prefect name and image was the venerable Sotheby's, though this was already trademarked.... at least in English, and at least to the letter. Now, channel your best native Japanese, and imagine you wish to travel to London or NY to bid on some impressionist pieces (like  for example Van Gogh's 'Portrait of Dr Gachet'). Where would you instruct your assistant to make arrangements to? Sazaby's of course...

I have always found it difficult, however good the underlying business night be, to pull the trigger on the shares of accompany whose name could be construed as prophetic. I can imagine nightmarishly-replaying the scene where an investor gets sarcastic with me about #2674, asking how, pray-tell, I could imagine that "The Hard Off Corporation" had any possible allure outside its comedic value, irrespective of the quality bargains available in a shop selling used merchandise in a nation with a strong aversion to second-hand goods. So strong is this aversion, that there is a massive market in buying quality Kawai and Yamaha Pianos, and shipping these used beauties in bulk to all the major markets. Despite these attractions, there is something creepy about the name, so I continue to leave it alone.

#3165, Fuhrmeister Electronics is just plain bizarre. It is, quite literally, a made-up name, maybe even a joke-name like Naughtius Maximus or Biggus Dickus. The Japanese have a keen mutual respect for the Germans that  goes back a long way, forming the basis of many-a-strategic-alliance - particularly in auto-components where quality, engineering prowess, and order are important. And while "Fuhr" and "Fuhrer" are NOT the same thing in German, it is bold to go down THAT route to branding taking into account recent history.  Anyone with insight into this, please do tell.

Entrpreneurs are usually Do-Ers which sets them apart from armchair quarterbacks, and pub-dwelling know-it-alls. This is why investors might view #4287 with some trepidation. Perhaps if "Just Planning Co. Ltd" were an architectural firm, the name might be apt, but for a real estate developer, they could have done with something less descriptive of precisely the thing you want your developer to do with your investment capital: sit on their hands.

You would have to truly be one of the least curious human beings to not want to know precisely what  #4331, "Take & Give Needs Co. Ltd"actually did as a line of business. A pawn shop? A conveyor-belt sushi establishment? Private refuse collection? Personal valet service? Nope. It's a USD$275mm Wedding provider. Why did they name it so? One might romantically think it reflects the exchange of wedding vows but really it is because Take & Give reflects the Pump & Dump when it was run-up from YEN1000 to YEN20,000, before taking all investors' money enroute to YEN200/shr. It is currently in 'Giving" mode hovering at YEN2000 (from its pre-Abenomics level of YEN600.

Of all the things one might wish their business to be labelled, "quixotic" is probably not amongst them. Yet taking the proverbial bull by the horns (no pun intended) is precisely what #7532 did on choosing to call itself "Don Quijote". In true heroic fashion (again no pun intended) they overcome the burden of their name, and contrary to the prejudices it implies,  have grown rapidly,  and more or less continuously, rewarding investors who've backed 'the dreamer.'

Irony, too is present, in Japanese stock names and codes. While the meaning of symbols is different across cultures, I still find it odd to name your designer of infant clothes #7956, "Pigeon Corporation". Not that pigeons can't be cute - I am sure a good artist can conjure a cuddly likeness. But perhaps the somewhat obscure though humorous allusion between pigeons and babies was to the mess they both leave behind. Fortunately, the adjacent company #7955 is omnisciently and fortuitously-called "Cleanup Corporation". 

It is hard to say that changing #4631, the Dai Nippon Ink & Chemical Company's name to "DIC" was not without attendant risks. #2180 or "Sunny-Side Up" makes me smile whenever I see it which was likely their intention. But my favorite, as an english speaker, is the pure poetry of @2904 the seafood paste maker "Ichimasa Kamaboko".  I know in Japanese "kamaboko" sets the digestive juices in motion, but to me, it conjures images of a West-African beach, colourful Jimmy Hendrix style-daishiki's as the words Ichimasa Kamaboko roll off the tongue of Eddie Murphy fabulous parody (Merry New Year!) in what is likely every trader's favourite movie, Trading Places.

Fair-Weather Friends or Raining on Your Parade

Ask any thoughtful reinsurance underwriter about 2014 renewals and you will get (in their confidence or after their requisite 4th cocktail) a side-to-side shaking of the head….an iconic Japanese-like sucking-in of air through their teeth, marked with the appearance of archetypical and decidedly pessimistic worry lines on their forehead. You will hear grumbles about prices dropping like a Guinness&vindaloo in the wee hours of the AM, excess capital, new entrants, pension funds,  f*cking hedge funds, even before you hear them whinge "…you know our leverage - you can do the math on what THAT will do to returns….". It is, without a doubt, a buyer's market.

Yet, at the same time as the bias of earnings revisions for next year are mostly negative, with, in many cases FY14 below this year, you've got the reinsurance sector stocks on a veritable tear as if they had portfolios loaded with beta, despite most having highly-constrained risky asset or FX exposure on their investment side, with the exception of the ubiquitous credit hemorrhoid that flares up from time to time, and the odd moderate duration land mine.  And it seems like every large multi-strat hedge fund has started a reinsurance company or reinsurance strategy - whether for tax dodging  roll-up and deferral for diversification, and to secure additional "permanent" reasonably stable capital - on top of the numerous reinsurance companies themselves offering non-equity and alternative investors multiple new points of direct access - both through a fund structures or sidecars. Greenlight, DE Shaw, Third Point, AQR, Blackstone, are all having a go at their own show - reminiscent of the last big business opportunity which all the smart guys in the room stumbled over themselves to get a piece of - the CDO market. And we know how THAT one turned our for investors.

Even for a long-time bull upon reinsurance as I am, I must admit to being worried. There is no doubt that there  is  was a shortage of capital to reinsure peak risks (GOM Wind & CA Quake), partly as a result of co's desire to diversify underwriting portfolios, reduce volatility, as well as the biting of more stringent capital rules, and a increase in insurable values coincidental to the financial crisis. That was then. Now, all has been forgiven, as a dearth of yield, and money to deploy lures the punters back, along with increasing allocations by pension funds desperate for yield and continued evolution in collateralized markets easing access for, well, everyone wanting a few extra bp's. Cowboys, neophytes, quick-buck artists are ubiquitous alongside the bona-fide investors whose intention (the one pitched to trustees) is to ride out the complete cycle. And the result is, as David Byrne used to sing "…Same as it ever was", with falling prices and an as yet unwitnessed, but predictable outcome.

Yes, the soft market has arrived, and if your job is to underwrite risk, then that is what you do, what you must do, and, like the ticking of a clock, what you will do. And almost all will do it irrespective of the pressure upon rates,  whether or not storms are getting more severe, because heaven forbid you return it, or lose market share or customers (or bonus!). Together this leads to more-than-a-creep in implied leverage as fence-swingers, the ignorant, or charlatans target rates of return with little regard to the risk required to attain it.  This is to the [immediate] benefit of everyone involved - brokers, underwriters, newly-minted fund managers, alternative risk-transfer professionals, the modeling community - everyone …. except the veritable principals…the owners of capital. The dutiful participate, and the more thoughtful whinge as they do so with a sense of forboding, but few to none leave the party, whatever their doubts. And as prices tumble, the loss required to put numbers in the red gets proportionally smaller. Sound familiar?

Reinsurers' stocks are were cheap.  They suffered setbacks, were way-south-of-book, and investors were slow to let go of their distrust - in fear of potential credit and duration risk in their investment portfolios resulting from potential euro contagion. But that was then. Now, with investors having already-piled-in, the stocks (club Bermuda in particular) - continue to set new highs while next FY earnings are at best, flat to fading. This is ironic from a behavioral point of view, for while investors are merciless with diminished expectations in every other sector, torpedoing the slightest revenue or earnings miss, or smallest negative change in forward expectation, there has remained an amazing tolerance when it comes to reinsurers that - to-date - has made them immune to pervasive scrutiny. It is a veritable love-fest and one might suggest, blinding them to the dark side of what they are placing upon the pedestal. Yes, some have yield. And others are contemplating buybacks and sport undemanding multiples on THIS PAST year's almost-banked earnings. But markets, as fickle, discounting machines are ignoring not just the diminishing forward expectations for the coming year, but it would seem, the increasing leverage it will take to reach these marks. Such a situation will make the arrival of the unforeseen or catastrophic that much more painful when IT does come (and make no mistake it eventually will). However, it seems at the moment, that only curmudgeons can conjure images of the perfect storm (no pun intended): large underwriting hits, combined with a market dislocation that widens credit spreads and heaps losses on duration. I'm not predicting such a perfect storm. No one can do that except the Supreme Deity herself. But what one can predict is that, now, today, such a hit will hurt investors more than it has in recent memory, and as a result, one should be questioning whether one (who is an investor - NOT the one blithely riding a traders' option) is still being sufficiently-compensated to bear the risk with the same aplomb as several years ago.

When formerly good trades become overly crowded and go bad,  the majority lose more money than they ever made. When the price is right, one is, over time, compensated for taking risks. In a very soft market, with a serious loss event(s) the damage can be, and often is, terminal. With so many new entrants and so much new capital combined with a rapidly-softening market, it is increasing-likely many will, unluckily, though not unsurprisingly, lose more than they ever made.

Bitcoin Haiku

Icarwho?

Up Up and Away
The sun feels good up yon-der
"Relax!" said Hamlet


Macklemore&More&More

Pop some Bitcoin tags?
'Mother Mary & Joseph' !!!!
Napoleon's Waterloo


Left Of the Curtain

The Wizard told him
"Rub two Bitcoins together"
What is 'kurtosis'?


Security

ya-da ya-da ya
crytpocharlatanery
Where's my USB?


Not the Monkey King

'That's a nice robe'
Exclaimed she to the vain king
Eat more bananas.


Giapetto's Nightmare

Pinocchio dreamed
When you wish upon a star
Jiminy Bitcoins!


(with apologies to Bashō; As usual, all contributions are most welcome)

The English Moneyed-Class Are Just Plain Mean

Another small raise in the UK's minimum-tax threshold is insufficient medicine to be certain, and yet, still there are backbenchers whinging.

I was explaining to my eldest teenage daughter (who is studying IB Econ), why, in my opinion, I thought the UK Upper classes were rather mean-spirited - certainly more than their continental neighbors, case-in-point being the NHS's meagre funding relative to European healthcare systems. Ignoring historical precedents (from Enclosure onwards), my argument was that the roughly 9% of GDP that the UK spends upon healthcare (including "private" spend) reflects NOT some greater efficiency of the NHS, or some more-sensibly-organized structure, nor the superior health of the British population, but the conscious decision by the ruling class to Grinchingly restrict expenditure for the great unwashed, resulting in rationed dubious-quality services, over-stretched insfrastructure, insufficient systemic investment, and the absence of any portability of choice.  It is restricted to such a degree that the differences are palpably visible in the resulting population longevity figures and the elevated UK hospital mortality probabilities (adjusted for all systemic differences) that greatly exceed those within any peer nations, to the point that I am scared witless of getting sick in this country. By cintrast, I explained, the continent is clustered at healthcare GDP spends of 12-14%. All have universal basic coverage. All have - if not single-payor models - models mutuals or not-for-profits in which payor (or payors) essentially just carve-up similar cross-sections of entire risk-pool, resulting in uniform pricing, quality, and access. They share (unlike the NHS, and contrary to US wing-nut belief) reasonably free markets in service provision, do not ration services, and, in what was the keystone of my point, grant the less well-off essentially the same privilege as the better-off. In other words, they eat their own proverbial cooking. While this is paid for by working peoples' own social insurance contributions, there is, inevitably, a financing gap that must be filled by "those who can" paying for "those who can't" - something that the UK ruling class is apparently allergic to, but which the stoic nature of her working peoples accept with apparent  resignation, confirming both the mean-spiritedness of "those who have", and the passive nature of the great majority of Brits who - it must be pointed out - haven't revolted for 900 years, and with ubiquitious Beer and BSKYB, appear as unlikely as ever to take to the street en masse anytime soon.

The following day, my thesis was confirmed again by Nick Clegg's proposal to raise the threshold after which income tax is levied by GBP500 from  it's present GBP10,000 and the uncharitable grumbling from backbenchers.  Not that this gesture is in any way bad, for it is more generous than before, but it resembles throwing a few pennies in a busker's guitar case. My thesis is more confirmed by the presence of any income tax at all levied upon the lower quantile earners at anything remotely like the levels indicated, given the omnipresence of regressive council taxes, regressive VAT, regressive fuel taxes, regressive pecuniary taxes (road tax, TV license etc.) and little to no subsidy upon public transport and regressive implied taxes on electricity and gas via de facto privatisation surcharges masquerading as minimium ROIs - all which must be met through after-tax earnings. Libertarians (as well as high-earners and rentiers) will counter with arguments talking about "skin-in-the-game for everyone", or the top taxpayers already pay most of the tax, and so forth, as if the regressive contributions of the aforementioned were anything but painful skin-in-the-game contributions.  Moreover, National Insurance contributions are already levied directly, and fund, at least partially in proportion to what earns, some of the benefits that might be derived from the State, but what possible argument can there be to lay claim to the few farthings they earn in a world where GINIs are rising inexorably, reflecting an increase in an already skewed distribution of income?

With GDP and aggregate income rising, but the median real incomes stagnating and bottom quantiles falling, income taxes upon the lower quantiles increasingly look like attempts to squeeze proverbial blood from a stone  whilst the upper quantile continues to fatten itself with unprecedented speed and gluttony - BOTH at income AND wealth levels, the latter resulting from accelerating asset-price appreciation windfalls.   The result is exemplified in the Yellow Pages thick "How To Spend It" insert in the Financial Times, at the same time as High Streets across the nation shutter-up reflecting the maldistribution, and Lidl pinches financially-challenged customers from already-downmarket Wm Morrison's. Observers watch the top quantile's tumor-like growth in shares of both income and wealth, and unable or unwilling to respond to that critically threatening the circulation to the national body, as spending power continues to concentrate apace, and wealth eddies similarly thereby starving the economy of monetary circulation that historically resulted from more equal distributions of income. And yet, still, despite the aggregate numbers visible to all regarding the distribution of wealth, the top quantile mean-spiritedly decry higher levels of taxation, or windfall taxes upon their luck of being asset owners in a time of extreme asset-price appreciation.

There are those that will suggest it is the others' fault. They have been lazy. They could have worked harder. That their gains are through the harder-work, study and cunning blah blah blah. And while this may possibly ring true in any individual situation, it is almost certainly the inexorable forces of globalization at the aggregate level which are driving real wages lower at the same time as the cost of living is vaulting higher, just as there are huge elements of luck in the musical chairs of who - mostly by virtue of birth - at this moment so happens to be the larger marginal owner of assets. Certainly there are those that have "risked well" to borrow and buy assets (and who would have been subject to ruin and penury were things to have gone otherwise) just as there are, and will always be lazy shits and dole cheats. But I am talking aggregates, and generally, the problem remains: insufficient spending power  in the lower 50% (mostly through no fault of their own) and increasingly stingy owners of and beneficiaries from wealth at the top, unwilling to part with, or accept responsibility for, the health of the body as a whole. One might argue that the Lord of the Manor today, with dominion over the same estate, has far less obligation and far fewer responsibilities for the less fortunate than dominion over the same would have entailed in times past.  In modernity, it seems, we have truly institutionalized the privatization of the gains while socializing the costs, to such an extent that public discussion to pragmatically address the problem (and make no mistake, it is a problem for the Public Interest) is virtually impossible.

The consensus within the UK's sibling social democracies across northern europe - while not solving the problem - shames Britain by their willingness to look the issues in the proverbial eye, and make attempts to address the problems. Certainly, angst remains across the developed nations, for the stresses upon society resulting from globalization are universal, often resulting in a resurgent right-wing of angry white dudes - who were accustomed to relatively comfortable living wages, and at the very least, some stability, but who have been, or are currently now being sorely squeezed, and it is unsettling. The "angry white dudes" have likely always been present within populations. The risk (for everyone) is that if the problems are not addressed with consensus, demagogic solutions arise that risk inflicting deeper fractures upon the polity with graver economic consequences.  The UK ruling class has chosen to respond to this threat by empty words, hypocrisy, and few pennies to the busker. But more profoundly innovative policy needs to be contemplated on pragmatic and non-partisan levels in order to prevent present and further mal-distribution from killing the patient. Such mortality could occur via several avenues (via continued macroeconomic muddling) that eventually goes ka-boom, via further political shifts to the extreme right, or on the tail of the distribution of outcomes, by ugliness from the increasingly-numerous on the margins. Nine-hundred years, after all, is a very, very, long time to go without some form of revolution...

Full Marks For Showing Up

"Contempt", so researchers have found, is one of the strongest predictors of divorce from amongst the palette of potential factors. It is precisely such "contempt" that describes how UK Utilities feel about, and are treating, customers, and taxpayers, and indeed, the taxpaying-customer. Since I let my feelings about privatized natural monopolies be known several weeks ago in the post Freedom To Choose (to be Buggered), politicians (both right and left) and journalists have joined the fracas putting the Utilities on the defensive (but hardly inflicting anything more than a paper-cut upon the beasts). 

Listening to SSE's spokesman on the BBC this morning was demonstrative of why "contempt" may not be sufficiently powerful. He was immediately taken to task for trumpeting to Shareholders, SSE's success at extracting better than average returns and better than average dividend growth from a regulated entity, and whether or not there was something wrong with this taking into all the shenanigans that SSE (and the other Big 6) conjure and perpetuate in their rape and torture of  consumer. Some hemming and hawing ensued, leading ultimately to the following justification: SSE needs to provide investors with better than average returns and better than average dividend growth in order to entice and reward investors for the billions of pounds of investment that SSE needs to undertake to deliver the services to their customers - a justification he ended with an extremely self-satisfied remark about how the "lights go on every time their customers flick the switch". Now it must be said that using the delivery of the service for which you have a near-monopoly as a benchmark is like asking for full-marks by turning up in school, ignoring theft and abuse of consumers. The true contempt is that SSE hasn't asked equity investors to fund capital investment, and their ability to raise debt on a vast base of hard assets is hardly related to their ROE. Capital investment is funded by cash flow extracted from customers in addition to the cost of the commodity provided and its delivery. And where regulation is light, transparency dubious, this is always conflictual. Knowledgeable consumers should want this capex depreciated over the longest possible time period to minimize the present value extracted from their pockets whereas Utilities will desire to front-end the depreciation so to minimize the amount of capital (and risk) from their pockets and hasten the transfer of wealth from customers to Shareholders & Management. It is truly that simple. Despite being capital intensive, with a captive customer base, and the stability associated with providing a utility-service, such enterprises don't actually require much "capital" (equity), for it is possible to finance required capex at much lower rates than the rate of return guaranteed to utility shareholders. 

So to suggest that the reason SSE is extracting excess profits and paying generously to shareholders is to fund future capex for the benefit of their customers is plain horseshit. IF returns were to be reduced due to tighter regulation, the capex will nonetheless occur (mandated if need be) and be funded by customers (possible at depreciation schedules more attractive to their interests and bills). And IF this were to occur then the disappointed shareholders may sell their shares (or not) to reflect this new reality. The secondary market in equity doesn't or shouldn't effect capex decisions where capex is funded by revenues - NOT the equity capital markets.

The BBC inquisitor called him out for "setting the bar" for success so low at "one's light's going and staying on", as well as the absurdity and disingenuousness of petty theft via confusing tariff structure and so forth, but sadly didn't take him to task for the larger contemptful lie that it is somehow not zero sum and that customers are somehow better off when SSE is paying large bonuses to management and large dividends to shareholders.

I cannot help but think with such piggy unenlightened management this is - eventually - going to snap-back and end badly for shareholders - worse than it otherwise might be. Wafer-thin mint...Sir?

Happy Anniversary Japanese Bull Market

Happy Anniversary Japanese Bull Market! It's been a wonderful year! Happy Anniversary market anticipation of Japanese reflation! The market almost believes [for now] that you might succeed without destroying the entire edifice! Happy Anniversary to the official end of the "Yen is a Safe Haven" meme! Ignoring Kyle Bass, this was an absurd hiding place - even by the measure of absurd hiding places. Happy anniversary to the discovery by investors that Japanese assets were cheap beyond compare! Unfortunately, most of you didn't accumulate them when they were cheap, only to find that they were rather difficult to accumulate when many others wish to do the same. Happy Anniversary to the re-weighting of Japanese equities in Global portfolios! Hope you've been hedging the FX exposure! Happy Anniversary to Japanese HF TTM returns! They have made veritable heroes out of people previously almost-embarassed to say they had anything remotely to do with Japanese equities.  And a very very special  Happy Two-Year Anniversary wish commemorating the Olympus Corporation Surrender. Their capitulation and subsequent revelations of twenty-years and nearly $2bn of "pass-the-parcel" deceptions to hide spec trading losses, culminating in the most stupid and comedic plan to finally dispose of the hidden red ink, will be remembered as the crowning achievement of Zaitech. (See here for my long-form account that few have had the patience to read - Free beer for engaging comments!) 

Since it is more informative for Cassandras to peer in to the future, than dwell upon the past,  what next? I would be well-surprised to see index levels lower, or the yen higher, into calendar year end. In fact, if there were a comparative measure of bang-for-proverbial-buck in allocating more to existing to positions to capture the rather obvious year-end spoils dangling dangerously low, Japanese equity, expressed in all its forms, would rank rather high indeed and present some of the most compelling opportunities for monkey business.  

"Ten-Four There Good Buddy...We Got Ourselves a Convoy..."

The Seventies were bizarre. I knew it at the time, and with the benefit of hindsight have been proved right by the passage of the years. Captain & Tennille juxtaposed to Johnny Rotten yet still spawning the like of CW McCall's Convoy. OMG.

Fortunately MOST things change (at least in America). And some things change elsewhere too - even Japan. But amusingly, in Japan, plus ça change, plus c'est la même chose, evidenced most recently by the Food Mislabeling Scandal better known as "Whatever They Tell You It IS, It Certainly AIN'T" Scandal.

Japan has a long history of nationalistic paranoia about its food and all manner of charlatans willing to capitalize upon the population's predilections. This is perhaps to be expected by cynics and skeptics alike. The UK food industry remarkably plays up domestic provenance as well and the people perhaps less remarkably lap it up (despite being Ground Zero for MadCow/CJD). In Japan however, where reverence is greater in most culinary areas, provenance is of paramount importance. 

So the shock at the initial admissions by the Hankyu group that what their establishments had been  serving up, was NOT what was billed, was indeed great, particularly in one of last places on earth where honesty survives, honor is important and shame remains an important deterrent to anti-social behavior. And the Hankyu hotel brands are not downmarket (think Ritz-Carlton!!), but elevated and venerated. They played it initially as clerical error, outdated menus blah blah, but in fact it was willful  deceit and fraud on a rather large and systematic scale. And in Japan, practices and policies like these are (like SAC for example) rarely rogue, but are likely promulgated by or from The Top. No surprises here.

For me, who has worked for a Japanese company and been involved in Japanese markets for more than twenty years, what would have been a surprise is if Hankyu was alone in its deceptions or that government ministries themselves weren't complicit. And though the latter is awaiting revelation, rather amusingly, as if one was Plane-Spotting, or watching the daily rhythm of the day unfold in clock-work fashion, everyone else soon followed Hankyu Group with similar if not identical revelations. Okura, Matsuzakaya, Isetan, Mitsukoshi, Daimaru, Takashimaya, Sogo, Seibu, Kintetsu and Odakyu groups. Whew. Apart from Jiro Ono and his sons, indeed one might wonder  if anyplace anywhere in Japan has been honest in labeling veritably what comprises their offerings.  This is the Convoy system. This is  the Japan I know and maintain my love/hate relationship with. And evidenced by the affair, little to nothing has  changed.

And so as I look upon the ongoing travails of the Mizuho Group senior management - self-perceived as  the blue-blood of  Japanese banking -  wrestling with what are [presently] singular revelations of their banking ties with the underworld and services provided to Yakuza groups, and I must smile that knowing smile...the one that was well-aware that Nui Onoue and her Magical Buddhist Toad has many powerful clients (not just the directly implicated IBJ execs)...the one that is quite sure that in Japanese corporate affairs, there is rarely a single roach...and that there must be much hand-wringing, document scrubbing and shredding, hush-money paying, and praying at the other banks, along with the groaning and straining of whatever machine keeps eyes narrowly focused upon The Few who've been found out. But my guess: other shoes will drop.... 

Never Feel Sorry For A Man With his Own Plane

I am, by nature, empathetic. I look at the distress that the government's rather relentless case against SAC and Steve Cohen has brought to him, his business, and his family and feel it must be hard. And for what? Totally victimless crime(s) if you ask me (if 'crimes' is the even the right word)! And, to be fair, they are victimless crimes that he has firmly and continually denied and was just as shocked as Federal Prosecutors to discover the sheer extent to which not only was SAC the first call BEFORE the first call but to the lengths his trusted minions went to shake down sources for material non-public information of every flavour and variety and circumvent the extensive compliance procedures that he personally directed be put in place! Shocking indeed...and disappointing.

I can understand the extreme disappointment and shattering of dreams that being arm-twisted into admitting guilt by a frickin' bureaucrat who likely makes less than Cohen pays Bubbles The Clown to twist balloons into funny animals at his kids' birthday party. This admission wrested from Him under unending duress, will mean that posterity will NOT utter his name with the same veneration as one might say "Bernard Baruch". Nor will his photo adorn the gilded walls of the trading Hall Of Fame with the likes of George Soros, or Michael Steinhardt, but will instead be caricatured with Martha "I hate Ina Garten" Stewart and Raj "I Paid Kenny Rogers $4mm to Play The Gambler Over and Over and Over" Rajaratnam. You can take away a man's money, and he'll survive, but take away a man's honour and bragging rights and you end up like Dick Fuld - NEVER being able to find a bona-fide golfing partner. Fortunately, unlike Fuld who's sob story is forcing him to sell assets, Mr Cohen will always be able to pay Guy Fieri to play a few rounds, but its not the same. The legacy is now shot. One wonders however, how low he'll go and whether he may upon hitting bottom seek Lance Armstrong-like redemption in an Oprah confessional?

And while the loss of 3 & 50 which will undoubtably hobble attempts to catch Icahn, Dalio or Simons in the dash for whatever they are all dashing for, it must be worth both the money, humiliation, and shattered dreams just to stop the relentless pitting of former friends and colleagues against each other as if gladiators before a raucous Roman crowd. No humans should be faced with the prospect of having to choose between self-incromination and resulting prison or sending a friend to prison for a victimless infraction of an ostensibly technical rule...don't you think? And there is stigma. Which university will now accept his donation for the "Steve Cohen Endowed Lectureship in Financial Ethics"? In Japan such stigma even damages the marriage prospects of one's children, though we are more liberal in America. Nonetheless, it is unlikely his wealth will now be able to buy him an Ambassadorship, Senate seat, Mayoralty, or Governorship, and may have to settle for buying a professional sports team to lighten himself of some of his remaining billions.

But before you shed too many tears, you should take the advice of Charles Morse (masterfully played by Anthony Hopkins for which he won a special Academy Award), the protaganist in David Mamet's film, aptly named "The Edge" . The aging billionaire Morse is being taunted by young photographer Robert Green (played by Alec Baldwin), emboldened for the latter is (unbeknownst to Morse) having an affair with the old billionaire's young wife (Elle MacPherson). They are flying to a remote place in Alaska for a photo shoot. Green (showing faux sympathy) asks Morse how difficult and challenging it must be "to be rich". "You never who your friends are", "You never know if someone is sincere or just wants something from you....". "Yeah it must be rough...". Hopkins is silent. Expressionless. He hears what Baldwin is saying, clearly contemplating it carefully as they cross beautiful virgin Alaska wilderness. Then, in with the utmost of non-chalance, Hopkins responds:"Yes, well you should NEVER feel sorry for a man who owns his own Jet Plane..."