Lemmings Demystified

Animal metaphors are abundant when it comes to describing archetypical investor behaviour. Few are as visually exciting at that portrayed by L. Lemmus (the Common Lemming). Conjure an image of hordes of investors falling over themselves to acquire shares in JDS Uniphase, Northern Telecom, or Global Crossing, (or for our Japanese friends Softbank, Trans-Cosmos, or Jafco) during the bubble only to realize that, like the notorious lemming, they have been led over the edge the cliff, and that their portfolio is now in financial free-fall enroute to oblivion.

Demagoguery whether political (such as neo-conservatism) or financial (like the Lemming imagery) is insidious because it is - at first glance - plausible, preying upon fear and ignorance to influence potential adherents. Both the current US administration and the lore of L. Lemmus are no exceptions. While I cannot with sound conscience defend Bush & Co., I am able to come to the defence of the Lemming and her otherwise soiled reputation.

The first thing that must be higlighted about the metaphor is that, insofar as it pertains to equity markets, there is apparently nothing wrong with either being a lemming, or acting like a lemming, because it seems that, in financial terms, the lemmings know where they are going and what they are doing. Almost all momentum research confirms that "being a lemming" doesn't impair your wealth. For if you bought last year's "winners" and sold short last year's "losers", you would (over time) have made a reasonably positive spread return at most intermediate-term forward holding period intervals. This is bog-standard MBA coursework in financial anomalies. This will come as a relief to those who've been trying - without success - to figure out the mysteries of how to play the stock market. What remains a mystery is "why" being a lemming produces financial something out of financial nothing. Some say the market underreacts. Some say it overreacts. Others say it underreacts then overreacts. Still others say people just behave badly. I personally sympathize with those that say that "markets have important things to tell us", though I also think markets are prone telling us those things to great excess especially when appropriately cajoled . This says the word Lemming - like the often derisory term "Liberal" - should be seen as a badge of honor and proudly defended rather than viewed as a piece of chewing-gum stuck to one's shoe.

Equally important in defending the reputation this small (and cute) member of the rodent family is to debunk the myth popularized nearly half a century ago that lemmings are stupid and unwittingly commit some form of mass-suicide. Thanks to recent research by University of Helsinki population biologists Olivier Gilg, Ilkka Hanski, and their colleague Benoit Sittler of the University of Freiburg, the mystery has now been been solved. Scientists have known that Lemmings don't actually commit mass-suicide, not in response to over-population, nor by following each other over cliffs, or by any means for that matter. This fiction was implanted in the popular consciousness by Walt Disney's 1958 film "White Wilderness", and was reportedly (though unconfirmedly) staged by the production crew who alledgedly chased them over a cliff wielding brooms. What IS real are the periodic cyclical population explosions of lemmings (sometimes increasing by 100-fold), and their subsequent rapid decline. But scientists never knew precisely WHY the populations dwindled after such massive expansions. Thanks to the careful observation of the nordic researchers, it has now been confirmed that the subsequent rapid dwindling are due to the quick responses of their main predators AND an increase in their rates of predation, the combination of which can reduce the lemming population by upwards of 2 to 3 percent per day! Though the original myth of mass-suicide was induced by hundreds of years of periodic sightings of numerous dead lemmings (typically around water) in Scandinavia, these apparently result from routine drownings during otherwise routine migrations, as they move through the swamps and lakes in the north. Lemmings, while good followers, are appparently poor swimmers.

Make no mistake: while I come to the defense of those who are unable or incapable of defending their interests (like the lemmings or the disenfranchised), and while I will point out the scientific evidence that "sort of", "kind of", justifies the actions of people who behave like lemmings, I am NOT a lemming, nor do I recommend any such mimetic behaviour. For while there may indeed be some abnormal economic returns to investing like a rodent, there are better ways to make a buck. I, for example, have been able to extract higher returns with far superior risk characteristics by selectively taking the other side of many of their trades. Just because there is no dishonor in being a lemming, doesn't mean one should blindly emulate them.

Electronic Herd Thunders Through Japan

In my previous Nov 11th post "Confidence Isn't Everything" I entertain alternative explanations for why Japan has historically been characterised as a "reversion market". While there are significant constraints peculiar to Japan, I proffered that it it also likely to be influenced by "behavioral" factors, most notably the lack of "overconfidence biases" amongst Japanese investors for cultural-specific reasons.

This is hindsight however, and while this may explain the historic reasons for Japan's unwillingness to participate in the global momentum party, trend persistence (serial correlation of individual stock returns) has emerged as a potent factor in Japan. Is this a so-called sea change, or simply a syle speed bump en route to more reversion and disappointment? This question may only be answered ex-post, but one thing is clear: the emergence of momentum has accompanied the tsunami of long-only and hedge funds buying and selling (though mostly buying)Japanese shares.

Senior Equity Strategist Goro Kumagai discussed the rising importance of the individual on-line investor in Japan over the past few years. Account numbers have been steadily rising to more than 1.8 million accounts across the major on-line brokers. This, according to Mizuho's Kumagai accounts for more than YEN 1 Trillion in funds (~USD $9 billion). With an average account size of YEN 3.5 million (USD $30,000), and a fortnightly turnover (24x per year), this equates to YEN 200 trillion in turnover - almost double the YEN 100 trillion of annual institutional turnover on the TSE. Clearly they are a force to be reckoned with (or at least ignored at one's peril).

Which brings me back to this post's question: is this emergent momentum "the kind found in the USA which, to the contarian feels like being impaled upon hot rusty poker, or does it resemble the "good old days" of tha late 80's and 90's where speculators bought and sold "whisper stocks", or fashioned daily themes in response the prognostications of Nui Onouoe's buddhist toad? This was a time when long margin positions were systematically gunned due to their predictably low pain threshold and loss aversion and short margin inversions resulted in dizzying and elongated melt-ups with astonishing predictability.

But what if this electronic herd are a "new breed"? What if they are not salarymen playing the financial ponies (poorly, I might add), but financial equivalents of Yoyogi-park Elvis' that are fast becoming as sophisticated, tenacious, and coordinated as the US IBD momentum crowd? What if they are, in short, diverging from their historical stereotypes, and becoming overconfident like their US kindred spirits.

A larger and decidely different electronic herd, replete with overconfidence and self-attribution, and myopic loss-aversion biases, in combination with an increasing concentration of size at both hedge funds and large long-only complexes, would have a profound and disturbing effect upon the behaviour or Japanese equity markets.

In the same way global warming has (according to everyone except the present US Administration and a lone Scandinavian skeptic who has since been discredited) has laid the conditions for larger and more vicious tropical storms, these changes whereby speculators, hedge funds and long-only fund complexes tend towards the same positions stylistically - call them behavioural aligments - would result in an increase in consensus within the market. This is not the same as efficiency, since it's only temporary. This would very likely lead to be bigger, and longer accumulations and distributions, a greater stretching of valuation boundaries, and a generally dichotomous approach towards the selection of securities: "There will only be good stocks and bad stocks". In this savage and binary world, its wonderful if you're a "good stock" with some or all of the characteristics the market is desirious of, and it's lucifer's barbecue if you present the market with an earnings torpedo or anything resembling a temporary setback after which your only friends will be Brandes or Silchester. Once in a while, however, the god-awful piece-o-crap stocks will revolt - whether for a month or a quarter - and vault in an amazing, colon-cleansing path, while the "great ones" will revulse" for no apparent reason". Well, almost no apparent reason since hindsight might suggest it was because too many people were in the same place, at the same time when someone per chance yelled "Fire!"

The choices that this style-tyranny creates (or dictates for the truly fatalistic) for thoughtful portfolio managers, allocators, and trustees are at once both stark and grim. The thoughtful portfolio manager is forced to become like Louis Navellier and "Do what works" (Shit! I wish I'd thought of that). Game or be gamed! It's a tough choice, but being prudent or sensible, results in returns that feel little different from taking a big long piss into a strong headwind. For the allocator, often an intermediary her self, there is little advantage to going against the flow. She is not penalized for failing conventionally, but is chastised (literally!) for making a bolder call, and getting it wrong. Take risk, just don't get it wrong! And for the trustee, few have the latitude, the intelligence, or the incentive to step out onto a non-conformist limb like David Swenson - irrespective of the correctness or the upside. All this is to say that while there is little question where one "ought" to be, there is great question as to whether one, one's investors, or the trustees of one's investors can stomach it. And it is precisely this conundrum that will make the opportunity that much more rewarding. Eventually.

For style consensus, and less-than-justified valuation dispersion - particularly the kinds that are non-economically driven ALWAYS end in tears. The challenge to the thoughtful contrarian and the opportunist in this brave new momentum world in Japan is to insure that one gives a wide berth to the new style consensus so that one is around to play the game when the style gods are less agreeable.

Learning to Get Shorty

Wanted: Trainee to learn the art of short-busting stocks with large short interest positions held by panicky, inexperienced, poorly informed or poorly capitalized short-sllers. Applicants should have a special interest in ramping highly accumulated or over-valued securities with established short interests. CFA, prior fundamental equity analysis not required, but experience in short-seller investor psychology, behavioral finance, making false and misleading statements, school bullying, thieving from widows and/or orphans or generally misogynistic behavior preferred.

I'll admit, you've never seen an "ad" like this. But according to last week's Wall Street Journal, these are people are real and exist in the flesh. The WSJ (& just for the record, let it be known that I strongly disapprove of their editorial policy) noted that a number of investors were rumored to readying themselves to play a game called "Get Shorty", a game in which they are said to buy more of the stocks that they, or others, have already bought in spades during the calendar year to-date. This past accumulation frequently accounts for such stocks stellar YTD returns in addition to often-elevated levels of short interest. The expectation is that additional rough and tumble ramping into the year-end will force the shorts to respond with the financial equivalent of the well-known bomb-shelter drill called "duck & cover". "Get Shorty" also provides the not unwelcome benefit of dramatically lifting the "end of year marks" on said favorite positions, thus allowing unscrupulous managers to pocket an otherwise less-than-deserved performance fee (or bonus) at their investors' collective expense.

Ruminating over the significance of what seems to be thought of as "harmless fun", I started thinking: How exactly DOES one learn to bust shorts? How has it evolved that some of the supposed best and best brightest financial minds of American capitalism have seemingly veered off down such a dark ignominimous road? And not only doesn't anyone appear to find anything wrong with it, they seem positively amused and admire it for it's ballsy ingenuity! Is this what Yankee cowboy capitalism has spawned - a world resembling some kind of financial Gomorrah ? Little more than a decade has passed since the corpse of the former Soviet Union's commmand economy imploded after failing miserably to attain anything like an efficient allocation of resources by willful neglecting an efficienct market. Might not our system, with its cariacature of market anarchy, suffer the same fate, arriving from the polar opposite direction?

I've never seen a course in predatory trading or short-busting in any MBA or PhD Econ guidebook. So where and how does one learn to play and orchrestrate such games with the market? It's important to distinguish this from ordinary healthy speculation, of the kind that's been around as long as the olive oil press has existed. Short-busting, on the other hand, is entirely different witht he distinct between "Murder-One" and "manslaughter" coming to mind. The former being conceived with bad intent, results from a concentration and abuse of market power. Not everyone can play, even if they want to. This is a game for the big, the elephantine, or the veritably gargantuan. Premeditation is also a helpful prerequisite, along with a bit of collusion (with other investors, brokers, and sometimes the company). For there are quarterly SEC filing requirements to skirt, and a host of other variables that will effect the economics of how much stock one might get, the higher one is willing to pay, not to mention the risk that the company itself might surprise you with a spot secondary or a jumbo-sized, low-premium mandatory, convertible issuance. Despite these risks, a truce generally exists between management and large shareholders since they NEED each other (in a Machiavellian way), even as their interests begin to diverge.

But what really makes it is possible, is the reality that markets are not perfect. A good "squeezer" knows, by trial and error, approximately how elastic the supply curve is for the free float for the stocks he's predating. Some have done this more systematically than others. Monroe Trout's primary strategy is supposed to have evolved out of cataloguing the impact of set order sizes upon an instruments' price at different times and under different conditions, and then measuring the subsequent effect. Sometimes, one triggers stops and it seems like Christmas-come-early. Other times, the market bids with you just because your bidding since the market is indeed reflexive. This sharply contrasts with the archetypical vision of markets which are that of a liquid and unbounded system. Reality more often resembles NOT infinite liquidity, but a finite and closed system. Here, only a fraction of shares are typically for sale in response to the recent change in price, so the squeezer who buys additional shares from liquidity providers (i.e. traders, specialists, market-makers, who don't own it but will facilitate the trade), and who is willing to buy more at higher and higher prices will, quite often, force the liquidity provider to buy the shares back from the purchaser at a higher price than that at which he sold them. The market may seem big and deep, (and it is for some of the largest stocks), but for the great majority of others, it's not much different than poker night with the boys. At this table, an oversized bankroll goes a long way towards creating unfair advantage in these games. And this would be harmless if only it WERE entertainment, and not the financial central nervous system of humanity, whose integrity is responsible for allocating scarce resources.

One might be thinking: "Why the f*%k should you care?" Well, call me an idiot, but when I see my neighbor being burgled, I telephone the police. When I see someone shoplifting, I notify the shop-assistant. When I see someone picking flowers from the public park, I chide them. It is the reflexive result of a good moral upbringing and strong civic pride. My late New-Deal Democrat-of-a-grandfather used to return his social security checks to the gov't because he was still working at age 78 and reckoned he "didn't need it just then". I fear it doesn't count for much in the ME! ME! ME! times of modern America, but I do think Scooter Libby could have used just a fraction of the integrity my grandfather had to 'fess up, and save us (the People of the USA) the millions spent by Mr Fitzgerald and his Grand Jury to investigate the retaliatory kneecapping of former ambassador Joe Wilson.

So what exactly is the harm of the frat bros hazing the shorts for fun and profit? First, it is - generally speaking - a divergent game that drives prices further from efficiency, which contrasts with many reputable short-sellers who simply provide liquidity or focus on uncovering fraud and divergent valuations. Interestingly, while Get Shorty alledgedly focuses upon stocks that have already been bought, and have already gone up, cheap stocks too tend to get cheaper during this period. Any look at the attribution of intermediate-term momentum returns across the calendar will confirm this. So this raises the question: is "Get Shorty" an independent short-squeezing game coupled with random underperformance of laggards, or is it a more integral part of a momentum-like, money-flow relative performance game? While clearly there are idiosyncratic exceptions, I would wager upon the latter. "Get Shorty" could be likened to a pathetic justification for an agent (i.e. an investment manager of a large investment pool) to throw more of someone else's money (the Principal, be it hedge fund investor, mutual fund investor, Pension Fund) at stocks with lower forward returns, in order to artificially (and temporarily) raise their prices, to insure the agent earns and crystallizes performance fees, collect incentive bonuses, or further their immediate performance rankings, and thereby enhance the value of the agent's investment management franchise. At best (where the players are skilled and manage to reverse the positions at a net profit), it is akin to an unauthorized "loan" from the principal investor to the agent, one which is quite adrift from the spirit implied in the princpal-agent relationship. At it's worst, for those who play the game clumsily (i.e. where net investment return is thrown away to the market), this is outright theft for parochial advantage, and is no different from the miscreants who profited from mutual fund timing.

But aren't they simply playing the game well, and winning? If Barry Bonds or Jose Canseco can make a $100 million, why shouldn't a ballsy clever financial games-player sitting in the hot seat at DOSH Partners be entitled to do the same? OK Maybe they are bad examples, because for starters, they were "juiced-up" and cheating. But the point remains: Why shouldn't the fittest survive in the market test of wits? Because, contrary to protestations from Bear Stearns in their "Kwiatoski Defense", financial markets are first and foremost NOT entertainment. They are mechanisms by which mostly educated and mostly skilled agents allocate the scarce resources of our world, making decisions that collectively provide the signals facilitating their movement from less productive undertakings to more productive endeavors. Theoretically, the efficiency by which they do this is essentially predicated upon the accuracy and efficiency of market price signals. This is why we SHOULD be concerned with whether or not stock options are expensed, or if management is smoothing profits through bogus accruals or dubious reinsurance contracts, or whether Telecoms companies are doing bandwidth swaps to paint false and misleading pictures of revenue thereby causing umpteen billions of dollars to chase illusory return in optical fiber and WDWM growth when they perhaps should have been investing in an LNG terminal, sour-crude refining capacity, or improvements to our healthcare or education systems. This is precisely why as a society, we SHOULD be concerned with whether our financial markets have integrity, or whether they are cynically viewed as enrichment schemes for those fortunate enough to be sitting in a catbird seat where, taking the traders' option, they can shoot the moon (and planet's aligning) and "win". But if price distortions are the result, the "victory is pyrrhic and impoverishes everyone in society. It is a vivid example of how the interests of the many, are minutely sacrificed for the larger gain of a few, that not only has no positive wealth gains for society, but results in probable wealth destruction from the resulting mis-allocation of resources. This holds unless one believes that the trickle-down effect from the Sheriff of Nottingham is a more potent economic motivator for the people of Nottingham and Sherwood forest than a world perceived as less corrupt, where more honest mannners of earning, exchanging, and investing one's wealth are transparent and just.

Whether or not one believes that Elliot Spitzer went too far in his prosecution of the market manipulation and bid-rigging in the insurance and reinsruance industries, one thing has been revealed with clarity: there were many otherwise decent soccer mom's and church-going dad's proceeding about their daily (corrupt) business practices, who came to see what they were doing (price-fixing, bid-rigging, kickbacks, extortion) as "normal", and even necessary. And everyone was worse off because of it, because everyone is effected by insurance markets to a greater or lesser degree. Squeezing shorts and other anti-social "financial market-as-a-game" equivalents, should be seen in the same light because everyone but the abuser of the privilege of their market power suffers. And for the record it must be noted that in a land where anti-trust still has traction even against the wealthiest man in the country, market size and power is a privilege with social responsibilities to many constituents, and NOT an alienable right irrespective of what some Ayn Randers, paranoid Republicans, or Supreme Court nominees might try and argue.

What can or should be done? First it must be understood that size and concentration of financial power - if abused - are the enemies of market efficiency, and thus the public interest. Markets may at times be peculiar and confound popular belief, but they are typically powerful positive forces and undeniably convey important information signals when they are large, deep, fair, and democratic. But I would be loathe to call a market "democratic" where large portfolio investors can buy monster amounts of stock unchecked, skirt regulations through numerous loopholes, collude with other participants in order to further abuse their size and power solely to garner parochial financial advantage.

The SEC can step up enforcement. Short-busting is illegal by the spirit of the law and regulations of the land. As a result they can demand more transparency of both short-sales and long purchases. They could also demand short-delay revelation of institutional investors' trades. And this could (should?!) include time and sales. No more hiding behind VWAPs. The tradeoff and responsibility for size must be complete and total transparency - on both the long and the short side (including all materially similar economic interests representing the same e.g. forward sales, swaps, OTCs bargains & options, futures, etc.). All of which should help make manipulation more difficult, which will undoubtedly make the market more efficient.

Unless in some strange kharmic sense, America somehow deserves to have resources allocated by trigger-men. Perhaps, rather than increasing the transparency, we need MORE short squeezes, more Enrons, more fraud, more dark unlit fiber. As a patriot, I reject this view and believe that money should be made from honest productive pursuits, rather than by stealing it. As a result, I believe financial regulation should endeavor to make it's policy and subsequent enforement on the very same basis to protect the vital integrity of our markets.

The Fcuk Factor

A few years ago, after a number of customers suffered what one might call grave financial contusions, BARRA capitulated and included their first non-fundamental factor in an otherwise fundamental factor model. This factor was called "Momentum" (note the capital 'M'). Never mind that it couldn't be explained. Or that consternation doesn't stop at it's puzzling properties. Though they weren't consulted for comment regarding this post, I do ocassionally wonder at precisely how much sleep the financial engineers at BARRA lost over the issue. That's because it (like the left-right political divide) causes visceral emotions best exemplified by reports of mild-mannered tweed-donning academics nearly coming to fisticuffs about it. It causes otherwise rational people to anthropomorphize or even deify it in stark terms of good or evil, and virtue vs. vice. I even have some good friends and colleagues who to this day get completely spastic over the fact that it exists at all, even though it seems like it shouldn't.

In the short few short years since they've added Momentum to their model(s), the world has come a long long way. Microprocessor clock speeds are now measured in gigahertz. The price per megabyte of memory has long since put a lid on EMC's share price. Telecommunication costs are less than the price of a colourful gumball. Much financial data is now virtually free (though quality remains dubious), and "data-mining" has supplanted "strip-mining" as a concern amongst thoughtful graduate students. Even momentum, once thought of as inexplicable, has, with the help of graduate student slave-labour, neural nets and non-linear models, now been found to alias more plausible sounding things such as sector return, forms of growth (or is inverse), and various nuances of relevant first derivative-like variables.

Yet, even with all this power imbued in the cooked sand of the microchip, in combination with all the quantitative model-building prowess of the best and the brightest, some securities continue to defy our abilities to systematically explain why they are up (and won't go down), or why others are down (and won't go up). And so to insure that my PhD. hasn't been an utter waste of time, effort, paper, and federal & university endowment grant money, as well as to altruistically further the knowledge of academic finance, I would like to propose that BARRA introduce what would be their second non-econometric factor: "the Fcuk Factor". Once introduced, I am confident that this factor will systematically explain the previously inexplicable returns on tails of the cross-section that have been baffling rational investors and financial sleuths for years.

With momentum, BARRA set about to measure and fit an observed (technical?) factor into their otherwise fundamental framework of systematic risk descriptors. They could have just as easily used "Relative Strength" or MACD, but that is a hornets nest for another day. The Fcuk Factor WOULD have a-reasonable r-squared to Momentum. But not all stocks that load highly on momentum will have a high loading on the Fcuk Factor. But since their factors are not orthogonal, this is of little consequence anyway. For some momentum stocks should have momentum. They DESERVE it at the time of measurement by virtue of their attributes, irrespective of whether they will live up to them in the future. FOr THAT moment, they have earned the right to bask in whatever expectational glory is they call theirs. But the Fcuk Factor would describe otherwise inexplicable or difficult-to-explain returns on the tails that - to date - BARRA calls "residual", since they are not explained by the model. As such the returns of securities with let's call it "undeserved momentum" are believed to be idiosyncratic and therefore specific to that stock. But I would propose to you that "the Fcuk Factor" will SYSTEMATICALLY help to explain large anomalous recent (~12mo) returns amongst otherwise historically uncorrelated and econometrically unrelated securities. The individual pieces are already out there in the body of public domain research - visible for all to see. BARRA need only take their stockpot and mix the composite soup of final derivation based upon the inputs, including, but not limited to: short interest ratio, short interest as percentage of float, degree of separation of short interest from market price action, probability-adjusted tradeable float, concentration of institutional ownership, change in institutional ownership; clustering of institutional ownership by investor type; # of inappropriate funds in fund family holding the security; the # of phone calls between the Company CFO and leading analyst; divergence from most forecasted absolute & relative equilibrium prices on the majority of rational models; scale and persistence of window-dressing activity; anomalous microstructure activity (end of day marks & other non-random footprints); "tip-sheet" popularity; # of positive mentions by "Cramer" in last 3 months; membership in IBD 100; Large change in IBD's Proprietary ranking, aggregate option open interest, and anomalous expiry activity.

The most important contribution of accurate measurement of the Fcuk Factor will be a dramatic increase in the efficiency of markets as well as its numerous applications to the investment management indsutry in general - especially the largest of long-only managers (Fidelity, Cap Research, etc.) and incentivized & well capitalized equity hedge funds. It will, for example, allow the largest marginal buyers to justify why many of their largest relative "active" positions in their portfolios are in some of the most implausibly overvalued crap & shite in the universe. I can already picture a large Boston firm's compliance officer's conversation: "Well you see Mr Spitzer, we were short the Fcuk Factor according to BARRA, so we purchased a million shares at the close of the quarter to insure our portfolios were balanced...". Uh huh. And it will be a bonanza for hedge funds who no longer will have to fish for justifications for ramping shares: "Dear Investors, Q3 returns were robust as we were correctly and aggressively bullish on the Fcuk Factor....". But the real boon will be to short-sellers, who can dramatically improve their returns by recognizing in advance as to which stocks to short and when (the answer to the latter, for those with elevated "Fcuk Scores", categorically being NEVER!). And with fewer shorts "getting in the way" of the largest investors having their way with their fav stocks, market efficiency will be much improved since the equilibrium price for such a security will be reached far quicker than might be the case without the fitting and estimation of a Fcuk factor into BARRA.

So I urge you BARRA, implore you BARRA to get to work beginning yesterday and sort it out. Measure it. Tweak it. Smooth it. Include it. And in so doing save hapless shorts from further one-way tickets to hell.

Stretching It Thin

There is a tenuous but symbiotic relationship between a bold and persistent securities analyst and the bold, persistent speculators and investors who heed his advice. And at it's most bizarre, it resembles a James Dean-like games of "chicken" where two cars proceed in head-on directions to each other, with the loser being the one who veers off first. The difference in the game of chicken between the analyst and sympathetic investors is that the winner is typically the one who bails out first.

In the Shangri-La world of the "perfect market" such dilemmas rarely arise. The analyst there, is unbiased, prescient, and if it weren't for the salary that he was drawing, one might even venture that he was altruistic. And in that magic kingdom, the investor has access to infinite liquiidty at a price, and has nothing more to do than to placce his bet, and wait for the spin of the wheel which will decide whether he is a living legend or a schmuck. He is pitting his wits against the invisible hand of the multitude of faceless investors, all with their fingers on the trigger ready to make a rational investment decision on the turn of a price.

[Camera Fade from the paradise of Shangri-La, to the Labrea Tar Pits, replete with flames, bubbling and oozing black slime]. Now back in the real world, companies pay analysts based upon commission revenue generated and possibly upon banking and advisory fees earned. And investors certainly can't access sufficient liquidity at a price. In fact, the price moves when Fidelity or Cap Research even LOOKS at a stock. In the Labrean tarpits, contrary to economic theory (particularly in Japan), much stock has no elasticity of supply. Whether the shares are held for strategic purposees, in trust, for control purposes, or whether capital gains may simply be "too large" to realize, supply is far more insensitive to price than modeled or poipularly believed. Then there are the umteen trillions of dollars to invest, which in combination with the aforementioned, are ever-tempted "to cheat" by using one's investors money to move the price of a security a great distance from its starting point in the generally desired direction.

So far so good. At this stage, not only isn't there a conflict of interest between the analyst and the investor, but there is a genuine alignment of interests. This is the symbiotic part where an investor, having acquired a position in a company, benefits from favorable analyst reports and comments, and the analyst benefits from the investor's subsequent market impact of more more shares at higher prices, thereby enhancing the analysts reputation for timeliness and prescience. At this point it is important to say that both the analyst and the investor are better off if "the story" is not completely fabricated, and has a modicum of plausibility, be it a rising earnings or revenue trend, new product(s), the spectre of product price increases or increasing market share, hidden value, etc., something than can be pointed which engenders hope and expectation. Failure to heed this important point typically results in both critical inverstor and analyst casualties. So long as the analyst doesn't transgress this point, his toolkit is virtually unlimited. He can claim a stock is cheap to its growth, cheap to itself, cheap to its history, cheap to similar securities, that it possesses unique growth qualities, better management, increasing sympathy to shareholders interests. And as things get whackier, he can even make comparisons to the most ludicrous of peers in an attempt to justify a rising price in the future. For this is what is required for the financial equivalent of Pax Romana, a prerequisite to keeping those commission dollars rolling in.

This may go on for many months. The analyst reiterates his "buy" recommendation, and raises his price target)s). The investor buys more. And more. By this point, the investor has accumulated a rather large position and has "taken out" most of the real marginal price-sensitive sellers as he's bought (it's definitely a "he", as "she"'s rarely do this) more stock at higher prices. The "story" is still in tact as the earnings trend is rising, the new product is still expected to come on line some time next year or the year after. Hope spring eternal. But the "rating" as our friends at the FT's Lex likes to call it, has doubled or tripled. What might have been cheap at 12x FY2 earnings is now 25 or 30x. Admittedly the ranks of the shorts are not what they once were. Famous US short-seller David Rocker admits to having learned lessons "the hard way" to "never short on price".

Yet there is a nascent but growing conflict here between the analyst and the investor. Just as it is likely that the sun will rise in the east tomorrow, so to is it likely that the higher the "rating" (or valuation premium) a security achieves, the lower the expected economic return. This is not pessimism, bearishness, liberalism or communism,(as certain Libertarian trend-followers would have you believe) but rather simple and objective mathematics - the physics of finance, so to speak. This is the this point tensions emerge., for what is good for one is bad for the other. Their optimal strategy is to maintain the status the quo. But the rewards for breaking ranks are high and the penalties for NOT breaking ranks are also severe. The analyst can issue another "buy" recommendation, but at 30x or more FY2 estimated earnings, what will justify this? Now the analyst must begin worrying about HIS reputation, and his I.I. or Starmine ranking. For the investor he too is trapped. As the largest marginal buyer, he might have tripled the rating. Now other buyers are few (maybe a few shorts, some momentum junkies, and some index or benchmark buyers). But nowhere near the demand required to move the position currently on his shelves. Should he try? One thing is certain: he has a better chance of moving SOME if he does it when the momentum guys are buying AND when the analyst is reiterating his support. When these reverse, the only net will be the price at which he (the investor) desires to throw good money after bad.

And how does this game of "chicken" typically end, the curious might ask? The Pax Romana ended with barbarian hordes systematically pillaging the "civilized" empire culminating in the sacking of Rome. Janus was similarly savaged by the market in 2002 during their puking of THEIR technology positions. Henry Blodget was fired, as were many of his contemporaries who fabricated similarly outrageous stories and comparisons to justify seemingly conflictual committments. My suspicion is that in the absence of motivating factors to the contrary, both analyst and investor will "veer away" from the head-on collision because it is in their interests to do so. However, vocal reiterations of past recommendations will become less intense and less frequent, while purchases at even higher prices by the investor will also cease outside of important month-end and quarter-end portfolio valuation dates. They have become, in effect, inseparable, in their prisoners' dilemma, and will, whatever, happens sink or swim together because they have little other choice....

Confidence Isn't Everything

Dr. John Brush of Columbine Capital, a mathematician by training, has dedicated mostl of his long career in financial research to the study of price momentum. Though he publishes for parochial gain rather altruistic enlightenment, this doesn't devalue his work. In his topical Twenty-Year Retrospective on Momentum made public in 2003, he stated categorically that contrary to his findings in other developed markets, Japanese (along with Scandinavian) markets exhibit strong properties of intermediate-term REVERSION, and NOT Momentum. This means the higher the historical relative return has been, the LOWER the forward relative return has been over the most fertile of intermediate-term momentum horizons (which is 12-months). To put it even more succintly: For the portfolio manager in Japan, buying what's "gone up" vs. selling what's "gone down" has been, over the last 30 years, one of the quickest routes to unemployment, not to mention penury.

This is most curious, since virtually all esteemed academic research indicates the opposite has been true in the rest of the world. Which is why hackneyed (but apparently true, on average) "old saws" exist like "Cut your losers & let your winners ride", or "Don't catch the falling knife". While they clearly have logic flaws if you examine their premises in greater detail, they are, like most demagoguery, based upon kernels of truth. So is Japan "different", and if so why? While it is true that collectively, the Japanese people believe themselves unique in many ways (their rice is supposed to be "purer", their beef is less contaminated, western medicines don't work as well as upon them, their snow is suublimely different so that European skis don't work as well in the mountains near Nagano, etc.), I would suggest they (the Japanese) have no monopoly on this belief since most cultures like to perpetuate myths about THEIR Tribe's superiority. But why on earth would or should Japanese financial markets be seemingly governed by different natural laws than our own markets?

For years I've meditated upon precisely this question, to the detriment of my golf swing and my love-life. To be sure, many plausible-sounding explanations have come and gone. Some have even survived the test of time (particularly those that cannot be easily measured). Here is my current (and most plausible) version: Since in the "longer run" stock price generally follows earnings, it's reasonably determinstic that continued price persistence of a security requires above-average growth in earnings (or long-run below-average earnings in most other stocks, though this route to relative momentum would, in fact, be bounded). Such positive earnings growth requires growth in sales and/or profit margins (though alone, the latter, too, would theoretically be bounded). So if reversion was to be considered the rule, rather than the exception in Japan, then growth must be bounded OR/AND the market's prices must be wrong (or a little of each). And they must be wrong enough such that when buying the portfolio formed upon prior high returns whilst selling the portfolio formed upon low measured prior returns, one not only doesn't make any money in the next period, but one loses it in buckets. This would tend to be indicative that too much return or discounting must have occured in the prior interval in the one or the other or both of the respective high and low return portfolios. In Japan, one has been rewarded for catching the proberbial knife, and penalized for being greedy and riding your winners.

But again, one might ask "why"? In reply, the arguments for bounded growth are seductive and numerous if not compelling. First there is GEOGRAPHY: Japan is an island and not a terribly large one. For those who received only passing grades in their georgraphy studies, it's located smack in between the Korean peninsula and China - both of whose peoples speak different if not mostly unintelligible languages and both of whom, more importantly, thoroughly detest the Japanese. This is not fertile growth territory for the convenience store chain wishing to to expand across the Sea of Japan. Second is DEMOGRAPHICS: Fertility rates in Japan are extremely low (and still dropping), and the population is aging rapidly. This is good for adult-use diapers, but less good for the unit sales of manga, toothpaste, or home furnishings. And they are a thrifty people, by necessity and nature. They are, by many accounts, also quite xenophobic too and outside of what they need for their immediate labour requirements (lapdancers, leather-workers, bargirls, TEOFL teachers, etc.), there is basically no immigration nor refugee uptake. Third, there is CULTURE: Japanese people speak errr ... umm ... Japanese. No one else in the world speaks (nor desires to speak) Japanese. This is both insulating and limiting. Microsoft did not arise in Japan possibly because Bill Gates was American, but more probably because the marriage of the Japanese language and the computer is a wholly unnatural act, sort of like asking a Snowy Egret to mate with a Belon oyster. Their culture also elevates the collective at the expense of the individual, and historically has fostered large oligopolistic behemoths at the center, with small depedent suppliers on the periphery. Together, this has been stultifying to entrepreneurship, limiting emergent growth to a handful of inconoclasts. Finally there is HISTORY: Japan's overseas "pecadilloes" (note: this is the polite term) during the first half of the twentieth century made them rather unpopular (note: also the polite term) with their immediate neighbors as well as with the rest of Asia (not to mention the people of Hawaii). Despite ideological differences, even Ho Chi Minh was more than happy to look to Uncle Sam for help to rid them of the Japanese occupiers. So deep and intense has this hatred been that the Chinese, from time-to-time, still feel it cathartic to do the old "smash-'n-'grabs" at anything visibly Japanese resting upon Chinese soil. Yet Japan HAS grown dramatically. The Japanese ARE world-class engineers, manufacturers, and scientists with an eye to detail and an unusual and mostly pleasant aesthetic, not to mention a strong work ethic. These ingredients have combined to form the basis for some of the World's largest and most fabulously successful firms that are champions in their industries. They have grown to an immense size, but done so relatively quickly. But this size, once obtained, itself constrains the size of future growth rates. And then there are the rest of the firms which have historically been constrained the limitations listed above. Finally, the biggest ones were also defined by, but limited by the consensual nature of Japanese society, and the brand of capitalism that was forged in post-war Japan which was one where shareholders are but one of many constituents (but which also include management, employees, suppliers, community, and cusomters). This has limited earnings growth at the expense of what western academics might term "empire building" - something that benefitted shareholders less than it conferred benefits upon the other constituents, including Japan Inc. collectively.

Clearly the price has been wrong (since, ex-post, they HAVE been excessive in the prior period) on sufficient numbers of securities or else reversion would NOT be pervasive. If, on the other hand, price had erred on the side of cautiousness in the prior formation period, then it would follow that price would continue in the same direction in the next interval. In this situation, if one was looking backward after holding the high and low portfolios for 12-months (with full knowledge of future returns) one would likely describe the Share Price as having "underreacted" to their prospects in the prior frame.

But "WHY" was the price wrong? Were investors historically just always over-reacting whatever they did - extrapolating trends forward that were not recurring and undertaking myopic loss aversion whenever a speed bump or earnings miss was encountered? I had always thought that the Prices were wrong in hindsight because the constraints upon growth (detailed above) led to two direct effects. First, the lack of growth meant that whenever the price of a share appreciated in the absence of growth, it was unlikely to be justified. The second was that the paucity of real and persistent growth opportunities across listed companies made such enterprises so scarce that their prices inevitably were bid up to levels above and beyond the associated levels of growth. So much so, that their future relative share-price performance were victims of their success, such that it was well-nigh impossible to keep up with expectations. And so the puzzle, having been explained, was kept in its box and trotted out ocassionally to VIPs when asked to explain why things were the way they were.

Then Kahneman & Tversky won the Nobel prize and behavioural finance exploded. Some alternative explanations appeared, and quite compelling ones at that. Academic researchers still do not agree on what precisely causes momentum. Some deny it exists altogether and claim it is a yet to-be-discovered risk factor. Others claim it is aliasing other things (future earnings & growth or changes thereof) and that while not explicable by CAPM, it IS rational. And there is some proof that this is true at least in part. Still others say that while it exists, it's loopy, looney, irrational and is firmly rooted in behavioural causes such as self-attribution bias or myopic loss aversion. These accounts say, that while it exists in the USA, it may plausibly be explained by "overconfidence" and "self-attribution biases". Tamura (2003) turned this on its head and suggested that "Reversion" is the rule in Japan because, citing behavioural psychologists Kitayama, Takagi & Matsumoto (1995), Japanese people seem to be guilty of little self-attribution bias. This is highlighted in the paper by the fact that when they succeed in something, the Japanese will ascribe it to external factors (e.g. "the simplicity of the task" or "luck"), rather than their own ability. Moreover, when they fail at something, they tend to blame it on personal factors such as the lack of ability, poor training or insufficent effort. So rather than being over-confident (which Daniel Hirschleifer & Subrahmanyam posited maybe be prerequisite for self-attribution bias and thus explaining the continuation effect), the Japanese are more critical, self-effacing, self-deprecating.

What is interesting is that Japan is now in the throes of a rip-snorting momentum craze. It is fast becoming a momentum market, resembling the other large western markets of the world. And the emergence of this momentum has coincided with a rise in the percentage of foreign ownership of the Japanese market, but more significantly, from the even larger increase in the percentage of turnover accounted for by "foreign" investors in general, and hedge fund investors in particular. Perhpas one could discount this as the inevitable trend towards "globalization". But while there is an element of truth in this, it is not the whole story since there remains stark cultural contrasts between Japanese investors and the foreign capital now calling the TSE its playground. The traditonal "bounds to growth" arguments remain plausible in some respects, but they too may be ebbing with time as a new generation whose hatred of things Nippon fades in intensity, and global fund managers blur the national distinctions and domicile of manager and funds managed.

For my view, I continue to pay quiet respect to the Momentum Gods, whose power carries with it the ability to cause large mark-to-market losses, and thus undesired margin calls, not to mention the transmission of material non-public information. But I remain suspicious of the longevity of these Idol's power, particularly where less-than substantiated by evolving objective fundamental changes, and where induced by the parochial greed and cynical disregard for fidcuiary resposnibility by agent fund managers with assymetrical incentives or motivations.

Responsibility 101

RESPONSIBLE. (rI"spQnsIb(@)l) American Heritage: Adj. Liable to be required to give account, as of one's actions or of the discharge of a duty or trust. Involving personal accountability or ability to act without guidance or superior authority; a responsible position.

When I was 12, I was charged by my chemistry teacher with responsibility for fetching the chemicals required for our collective experiments from the secure storage room down the hall. One day soon after, in the privacy of the storage room, having absorbed just enough chemistry to dangerous, I tested a theory of mine: if I mixed 1 part HCl (hydrchloric Acid) with 1 part NaH (sodium hydroxide), the Sodium should bond with the Chlorine to become NaCl, and the two hydrogens would bond with the leftover oxygen giving me....table salt and water. I took out a large beaker, measured out the sodium hydroxide tabs, then carefully dispensed the highly potent hydrochloric acid, then slowly poured the it on the tablets. WOW! First it bubbled and crackled. Then came some smoke followed by violent shaking of thte beaker, and then a denoument of a small explosion that sent the beaker into shards propelling bits of the mixture all over, including me! Dumfounded, but undaunted, I cleaned it up as best I could and returned to class. The teacher immediately inquired what had taken me so long. I began to mumble something or other when he asked what the large gaping and rapidly expanding holes on my clothes were. I was B-U-S-T-E-D as busted could be. As I was caught red-handed, it was pointless to do anything other than explain what I'd done, admit that with hindsight it was stupid, and apologize for the transgression and especially the breach of trust. Unlike Clinton, I was stripped of my responsibilities, served with several detention notices and a wad of demerits, and my mother was called mostly to replace my clothes which had by now dissolved rather alarmingly into what looked like rags that happened to be stitched together by a very amateurish seamstress. With my clothes and my career as a nobel-prize winning chemist in tatters, I set my sights on a more intellectually modest target: finance.

Pictured to the left are the senior managers of Japanese truck-maker Mitsibishi Fuso. They are seen here deeply and profusely apologizing to the family of a victim who was killed in a 2002 accident that resulted from one of their vehicles inadvertently dropping a driveshaft (due to systematic manufacturing defects) thus severing the brakelines of the vehicle and causing the crash. Honor and responsibility are important and deeply ingrained in Japanese culture, though they may be reserved for Japanese since thhey seem to have such difficulty acknowledging their own history across Asia.

But like me, they too were caught red-handed. And reassuringly as one should do when one is confronted with the uncomfortable reality that one's actions (whether individually or collectively) are wrong, harmful, or deceitful, one 'fesses-up. And takes responsibility. And apologizes. Like so many Japanese before him or her. Like the Truth & Reconciliation Commission demanded of the army and secret service in South Africa. After which people can then, hopefully, put it behind and look forward. If Enron had happened in Japan, the Chiefs of Arthur Anderson would have taken full responsibility for their part, apologized, resigned (prior to trial and probable incarceration). In the proces, they would hope to remove the stain from their many untainted colleagues, and in the process help restore the reputation of the organization by effectively self-excising the cancer from the organization and thereby saving the livelihoods of the loyal ones who'd served honorably and faithfully.

By contrast, pictured to the left is one Lewis "Scooter" Libby, formerly one of the most powerful lawyers in America (as Managing Partner of Dechert's DC office), formerly the Chief of Staff for President Cheney, who is by now both a household name and face. Mr Libby is seen here apologizing to ... errrrr ... ummmmm NO one and accepting repsonsibiity for errr ... ummmm ... NO thing. Nada. Zero. Zippo. Rien de tous. But this is America, and Mr Libby is entitled to, and will have his moment in court with special prosecutor Fitzgerald before receiving his Presidential pardon. (Ironically Mr. Libbby represented the case for pardoning Marc Rich to then President Clinton! -Ed.)

But my somewhat rhetorical question of the day to you is: Can we really "blame" him for not owning up? My answer is: "probably not". Not because he isn't slime (since he IS slime for violating our trust and lying to our representatives of justice). Not because he doesn't deserve justice (he does! and I am ever-so-hopeful that justice for knee-capping Joe Wilson while on MY payroll and on MY time, involves at least some quality-time in a cell with horny child-raper, Du-Wayne, in C-block). But we can't "blame" him, because he is merely a sad product and cariacature of the less-than-honorable side of American culture. This is not a partisan issue. Clinton wouldn't own up to getting his pipe smoked by his intern ("I did NOT have sex with that woman..."). Bernie Ebbers, Jeff Skilling, Richard Scrushy, Jack Grubman, Tom DeLay, OJ Simpson, Ted Kennedy (whatever happened Mary Jo K.??) and yes, even our President who couldn't muster up the courage to admit he snorted coke in the White House when GHWB was in charge. Or 'fess-up that he ducked out of most National Guard duty time and was wrong and ill-conceived about Iraq and WMD. But I repeat, this is not partisan, this is cultural. Can you just imagine for one moment just how blue the sky would look, or how fresh and crisp the air would seem, if you woke up one morning and heard that Scooter had resigned of his own free-will, and that he admitted that it was wrong - not to mention dishonorable - to rub faeces all over Joe Wilson and disrobe his spouse, and that it was not in the best interests of democracy or the country, and then, waiving all legal rights that he might be entitled to, "in the interest of truth and reconciliation", hear him declare that he was indeed guilty of lying and of obstructing justice, and that he and "the as yet to named, but who everyone knows who they are others" sat long and hard on many mornings, throwing back brandies with their coffee while thinking of devilish ways to impugn Ambassador-Joe. The thing is that, in order to save his own sorry ass, and the asses of the other sorry asses, he has willingly, knowlingly and intentionally shamed the whole nation and our government expelling one huge symbolic fart in our general direction.

Here, pictured to the left is Koji Kitano, head of JCO Co. Ltd., the manager of a government Nuclear facility that was the scene of Japan's worst nuclear accident. With the deepest of bows (nose, knees & feet to the floor), he expresses "mea culpa" extending the deepeest of apologies to the families of the victims. Despite the protestations of conservatives and triumphalists, there are clearly some things that we can learn from "foreigners".

10 Divided By 1 = 3. Really!!

Everyone should know that stock splits shouldn'’t affect the aggregate value of the firm. Observant readers will note the conditional tense of the prior sentence. Yet, for some investors in Japan, it appears that 1 divided-by 10 often equals 2, or 5, or something in between. At least temporarily. If you think this is ludicrous, persevere with the following anecdote.

In the more sober past, the Japanese stock markets (my area of minor expertise by legacy more than conscious choice) had quite severe listing requirements. This form of financial puritanism obliged companies desirous of a listing to sport reasonably proven operating histories, and minimum revenue criteria as well as consecutive years of positive earnings (and not pro-forma ones I might add!). Then came "the bubble", which brought with it the exchange-equivalent of the leisure suit (NASDAQ-Japan, Mothers market etc.) who set about aggressively trying to encourage new listings and generate turnover presumably for profit, and perhaps as a welcome diversion from "Pachilsot" or the ponies. The ticket to capturing punters' fascination was to focus on smaller growth companies (that typically had sparse if not dubious operating histories), to support the visions of riches that would - fingers crossed - result from the stellar growth expected to materialize at any moment. To protect “the little guy” (or housewife as the case maybe, since “she” is often the punter of the family), authorities required such companies to list with extremely high nominal share prices (~YEN 500,000 or more), presumably in order in order to deter speculative buying by people who couldn'’t afford speculative losses.

As time progressed and operating histories emerged, the companies would be allowed to split their shares reflecting the seasoned trading and a maturity of the company’'s shares. The result was that most such enterprises were brought to market sporting Lilliputian floats and it must be said, limited appeal, outside of the most die-hard opportunistic operators who understood the possibilities inherent in a listed company with a small float, and small cap in combination with a large wallet. It should be noted herre that few sober mainstream British portfolio investors were present at this party. I would like to think this is because of their keen appreciation for the time value of money, though I must admit that it might be because few can say "No!" to the drink.

To understand where this is going, one must briefly detour to a related anomaly in the land of the rising sun: book entry form of ownership. This is relatively new in Japan, a place where tradition fights long and hard to the death. Before the JASDEC electronic clearing system, a dedicated army of chainsmoking men on bicycles would ferry around share certificates between the exchange and brokerage firm back-offices. Such a quaint arrangement insured the continued useful (and harmonious) employment situation of these delivery men. It also was one of the reasons that stockholders experienced long delays in obtaining newly issued shares following corporate actions. Though antiquated, the system worked sufficiently well until a big scandal in the early 1990s caused a crisis of confidence when one such courier absconded with a cycle basket full of shares of the venerable sock-maker, Fukusuke Co. Ltd. (TSE Code #3584) which ultimately found their way into circulation relieving an enormous short squeeze that had taken their shares from less than YEN1000 to more than YEN5000 in a very short time .

These seemingly unrelated concepts (splits, an incomplete synopsis of listing requirements & some fascinating settlement details) are highly relevant because they have resulted in the serendipitous happenstance of what is typically a 10-week purgatory between the ex-dividend (or ex-split date) and when the dividends or new "when-issued" split shares are, in fact, dispatched by the company and received by the shareholder (or custodian). In a normal fractional split (e.g."1 for 10"), this is of little consequence since only 9.1% of shares are "off of the market", waiting to be delivered. But some Buccaneers quickly figured out that there was some serious swashbuckling to be done when the split ratios were more meaningful. In the more extreme example (e.g. a 10-for-1 fracture of a stock priced at Y1,000,000), this meant that only 10% of an already-small float was in the vault and available for delivery in the ten or so weeks following the ex-date. This of course meant that anyone could ramp the shares when they'd gone "ex-split" with little worry of encountering short sales (or long sales for that matter) since virtually no one was in physical possession of the existing stock, and the WI-certs were NOT fungible to make delivery against the existing line of stock.

To the whimsical, the criminal, the devious trader or portfolio manager with a reasonable pre-split position, this could create a highly efficient "portfolio performance option" that requires little additional money to move an ex-split stock price 100%, 200%, or even 300%++.!! This, seemingly did not escape the notice of Fidelity (see 4714 JP Equity GPC W in 2004) who, one might speculate, might have inadvertently exploited the situation to their [temporary] performance advantage. As with most fads, the result has been that almost every brokerage firm now publishes a "“Stock Split Watch List"” that tries to forecast the most likely split candidates. And confounding efficient market theorists (but not practitioners of Game Theory), the strategy performance of buying the basket of likely candidates from split announcement date to ex-date has been - in one simple word - excessive.

So what should one do? First, if you are an allocator, and you allocate investments to Japan, you should ask your hedge fund manager (or your Japanese institutional investment manager) if they "play" these games (since they are doing so at your expense). Secondly, if you enjoy watching them squirm, you might want to to ask them to put into writing, whether or not they have ever played such games in the games in the past.

As for myself, as a traditionalist who boasts a strong financial sobriety and honourable sense of making profits, I can only sit and watch in awe and wonderment at the fiduciary folly, while patiently waiting for a more ideal time and place to lay out a bit of a short...

Stock Entropy

Thinking about how the diminished presence of certain American investors from TSE during American holidays results in reversion (if only briefly), it seemed to me that finance needs an enhanced vocabulary to more accurately describe such phenomena as they relate to stocks. My contributions to the financial lexicon are below:

ENTROPOLOGY - The scientific study and explanation of the origin and behaviour of stock prices that move in ways that are likely to be contrary to what they would in the absence of those certain participants actions, and analysis of the participants actions and motivations.

PRICE ENTROPY - The tendency for the prevailing price of a stock to do what it would otherwise do in the absence of a minority of traders/investors actions that causes it do what it does.

ENTROPOLIBRIUM - The likely price at which a stock will comfortably rest at in the absence of the accumulation or disposal of the largest marginal participant.

SOCIAL ENTROPOLOGY - The study of investor group activity and upon PRICE ENTROPY and a security's ENTROPOLIBRIUM.

CULTURAL ENTROPOLOGY - The particular study and analysis of how ENTROPOLIBRIUM varies across market and cultures to behavioural biases, investor preferences and the relative proportions of momentum traders and value investors.

ENTROPOMORPHISM - The attribution of a stocks deviation from ENTROPOLIBRIUM to a single human investor or small group of investors acting in concert rather than to the anonymous perfection of the archetypical inanimate & democratic market.

ENTROPOMETRY - The study, by precise scientific and statistical measurement, of all things entropological.

VOLATROPOTILITY - A measurement of the variability of deviations from Price Entropy.

(Further entries welcome)

Sisyphusian Endeavors

Always on the lookout for the sublimely unusual, I bring to your attention yet another weird and wonderful phenomenon that is crying out for an explanation: Why are USA holidays more strongly "reversion days" in the cross-section of Japanese Stock Market equity returns than the average day?

Perhaps my feeble understanding of physics will help, particularly the Second Law of Thermodynamics which in simple terms posits: Energy spontaneously tends to flow only from being concentrated in one place to becoming diffused or dispersed and spread out. How does this relate to Japan Stocks, one might ask? Quite simply, large yankee investors/traders/purchasers of Japanese equities seem to have a penchant for focusing their buying & selling attentions and thus moving prices in the opposite direction of the level at which they might - other things being the same - come to a rest. FOllowing in America's democratic tradition, this seems to apply more or less equally for the leaders as the laggards.

One might suppose that the lure of "Beer & Dogs" with friends and family is (at least occasionally and even for VIP traders and portfolio managers) stronger than the fun and games derived from tape-watching the TSE or selling and buying more of the same to excess. Excess as least if thought of in terms of entropy.