Wednesday, December 27, 2006

Some 2007 Prognostications

As a "Cassandra", I would be remiss if I didn't offer some more general predictions for the coming year 2007 - particularly the kind that hopefully will stimulate debate because they are contentious. Of course, as the legend goes, few will believe them irespective that many will come to pass....

1. US Housing "Crisis" will be shallower than pessimists believe.
This one is easy. So long as central banks accumulate reserves, allowing US deficits to persist and grow coincidental to stable interest rates, economic growth will NOT implode and nominal house prices will stabilize preventing the apocalypse - at least for the moment. This doesn't mean "Buy Homebuilder Stocks", but it does mean that if one was considering purchasing a home, one shouldn't fear that he bottom will drop out further. Rather nominal tides will rise to float most boats.

2. "Intermediate Frame Price Momentum" will continue to be a factor that strongly contributes to Stock Returns in Japan.
Contrary to popular belief, wisdom, and experience, what outperformed in the recent intermediate frame will continue to outperform. This will, be due to a combination of continued money flows by investors alreadyh invested in japan alongside continued earnings growth of enterprises that have been experiencing earnings growth. This unspide-down world (for Japan) will perplex reversion-oriented traders, and reward trend-followers, however,, hollow and shallow theior relative intellect may be.

3. Contrary to contrarian calls by KBC's Jonathon(!!) Allum Dec07 Topix ~15000 call (note: this was incorrectly referred to originally as Nikkei~15000 -ed.), the Nikkei will rally to 20,000 and the TOPIX will rally to 2,000 (not necessarily in that order).
BOTH Large cap and small cap will rally as Japanese asset prices continue to look both relatively and absolutely attractive on a world stage where the only action is inaction."God Bless Apathy!" said one long and leveraged English Hedge Fund Manager

4. PM Abe will visit Yasukuni
....but he will do so under the cover of darkness. Unfortunately papparazzi will not be denied and yet another Japanese Prime Minister will once again have to explain the inexplicable.

5. California's official sponsorship of Universal Healthcare will prompt national debate on the compelling wisdom of universal healthcare, and the even-greater wisdom of a single-payor
Shares of HMOs will tank as the market begins to conceive of a healthcare world less-intermediated. America will receive [unwelcomed by Conservatives] advice from France on systemic reform, and as in 2003, America will again harass and fun of the Frenc, despite the wisdom and correctness of their advice.

6. US dawdles Yet Again on Energy Policy - Oil avgs $75bbl in 2007
The side effect of continued US deficits underpinning global demand combined with stubbornly pig-headed lack of energy policy and no carbon taxes is energy prices stay firm, and rally. At least once during the year, a crisis will cause a spike in crude to within a millimeter of triple digits. Refining margins will NOT deteriorate, and Valero (ticker VLO) will return 50%. Nippon Oil will be a stand-out investment in Japan also appreciating 50%.

7. Wolfowitz is Impeached and Relieved of Command as President of the World Bank
"Mutiny on H-Street" it will be called. The only thing more stupid than placing John Bolton in a diplomatic position was ejecting Paul Wolfowitz from the Pentagon to the helm of the World Bank. Many are still pinching themselves (those that haven't resigned) perplexedly asking themselves "How did HE get here??!?" OK its too early to say "things are right as rain", but little by little in bite-sized moresels, the good guys are reclaiming control, to the eventual benefit of humankind.

8. "The Carry Trade" Makes it to the Cover of Time Magazine
No major move on the RmB. Pathetically small increases in the BoJ discount rate. No move in US fiscal or monetary policy. No GCC currency appreciation. Continued reserve accumulation of USDs by all the usual suspects. All will mean the carry trade lives. It will make the cover of time magazine because a hedge fund manager consortia in partnership with a private-equity consortia will propose to take the entire remaining S&P 500 private, using - yes, you guessed it - YEN financed funds from Japan. This will get Congress to hold hearings, at which Rep. Barney Frank will chide Lloyd Blankfein & John Mack for "shitting on their own dinner plates by facilitating and participating in the "Stealing of America's Assets".

How to Hide an Elephant - (Update)

If only my market-timing were so good! Just last week in the previous post in fact, Cassandra detailed the (oh so brief) history of reporting transparency in the Japanese equity market, leading up to an observation positing that "the elephants" (FMR, Cap Research, etc.) and the large-but-simply-paranoid have been employing "new" techniques to non-report their market pecadilloes.

Well this morning new regulations will take effect, according to Bloomberg, whereby authorities will be demanding that holders of greater than 5% positions are now required to file position updates twice a month. This apparently is in direct response to the rather un-cricket rule-bending discovered by authorities in their investigation of Takefumi Horie and the Livedoor affair. While any loophole-closing is better none (at least in Cassandra's view), this doesn't address the specific loop-hole of transactions that, in spirit confer ownership, such as swaps, OTC option-like structures that are employed for, and priced as if there were no other reason for the transaction than to to accumulate a position without triggering disclosure.

A big test will be at this year-end to see who, with the large position, is increasing their holdings (and as a result the stock price of said holdings) into the mutual fund bonus measurement period and the hedge fund calendar year-end. Anyone care to guess who'll win the ignominimous award of being the most blatant?!?!

Friday, December 22, 2006

How Do You Hide an Elephant

Being a fly on the wall means that sometimes one has to make conjectures, hypotheses, and suppositions in order to attempt to make sense of the world. For things are often not what they seem.

And, nowhere is this more germane than in the case of reporting large positions to stock exchange regulators around the world generally, and in Japan particularly. Japan seemingly has a love-hatre relationship with transparency. Reading who has bought what and when was a fascinating exercise. On one hand, ownership changes were only detailed twice a year, and even then, only the larger holders either through the YuHo or Toyo Keizaei. So it was long after the fact that one realized who had bought the slugs of stock that vaulted the price an issue by triple digit percent. Yet, at the same time, turnover identification was available on each stock at the end of each day. This was a dead give-away as to whether purchasers were foreign or domestic, sporadic or persistent. The strange mix of obfuscation and transparaency juxtaposed each other.

A few years ago, the authorities decided, for unexplained reasons, not to "fix" this, but to turn it own its head, by eliminating the revelation of who was responsible for what percentage of turnover in a security on a particular day, while instituting a requirement to report ownership positions in a security greater than 5% (and thereafter) within some timely interval that is apparently indecipherable when reviewing the very wide variety in reported actions and compliance. Now, one couldn't see the day-to-day colour (rumours were that it was Fidelity and foreign brokers who successfully lobbied for this at a time when transaction volumes were very low, an intimations of an increase in turnover following a decrease in transparency).

The position reporting game reveals information that can be beneficial or detrimental depending upon ones objectives and motives. For example, if you are trying to buy 10% of a company at the best prices, reporting after 5% is not in one's interests. On the other hand, if one intends to buy 10%, having bought 5% at lower prices, disclosing the position might attract copy-cat buying that is beneficial from the point of you of having "the market" do some of the subsequent heavy lifting that raises the price, making the initial 5% rather more profitable and validating the purchase decision. However, if one desires to acquire 10% before encouraging the copy-cats to pile in, then reporting requirements clearly creates adverse issues.

When reporting was first enacted in I believe 2003 (and foregive my imprecision as my memory is fraying), Japan was not popular with international investors. In fact, most were underweight from a GDP adn a market cap weighting for all manner of reasons. But for the few who were operating, it revealed valuable information about who was ramping what. It mathced the proverbial name to the face. For when Fidelity was buying a truckload-sized position, a potential short-seller would be wise to recall the words of Jim Croce: "You don't tug on Superman's cape, you don't spit into the wind, you don't pull the mask off that ol' Lone Ranger, and you don;t mess around with Jim!".

Some [foreign] organizations have taken the view that they'll report quarterly, some time after the end of the quarter. And it seems that despite the apprent flaunting of the letter of the regulations, no action has been taken in customary Japanese fashion. Others such as Steel Partners, have complied for obvious reasons that publicizing their now-greater-than-5%-position attracts other buyers hoping for a quick buck. But now, it appears even the "big boys" are fed up with the annoyances of reporting. For beginning last quarter or so, it seemed that rather than institutional investors accumulating positions and reporting them as they accumulated them, brokers were accujmulating them, and anecdotally, shortly thereafter, the broker would report a drop in the position and a "real investor" (Fidelity, Cap Research etc.) would assume ownership. Now, IF I am correct and they are using these methods to obfuscate ownership acumulation until they've achieved their desired quantities, they must in order to do this, be using some option or derivative structure that technically complies with the regulation, but is contrary to the spirit of the regulation. This is of course, the raison d'etre of much of the derivatives market, but nonetheless is disturbing for those that are cannily trying to unmask price manipulations of all variety for fun, public interest, and profit.

The technology exists of course to ascribe meaningful ownership changes - and thereby the potential misuse of material non-public information - with precision and regularity. Bearer shares exist no more, and info is there for public consumption. When will Japanese authorities codify and enforce such regulations with the efficiency we've come to know and admire from this nation? Hmmmm. One would have thought that the Horie affair would have provided sufficient mpetus for change. But shenanigans certainly continue amongst powerful domestic interests, and in such an event, one must wonder for the like of Softbank and others, what unsavoury deeds might be revealed or disrobed in the process.

Tuesday, December 19, 2006

Quote of the Day

In an interview with Bloomberg, Ara Hovnanian CEO President of the company bearing his name said:

"We really didn't see it [the housing slowdown] coming...."

He added (scratching his head):

"What's unusual [about the slowdown] this time, is that interest rates are low." "It's unprecendented!"

"Demand has slackened most in areas where prices had gone up the most" (strange, that!! -ed.)

-- Ara Hovnanian, President/CEO Hovnanian Enterprises

My comment: That would be fine if Mr Hovnanian was, say, perhaps a "Boulanger", an Elementary School Arts Teacher, or a Juggler in "Le Cirque du Soleil". But as the President & CEO of one of America's, (and the world's, I might add) largest residential homebuilders, his foresight is rather deficient....

Monday, December 18, 2006

Cassandra's Xmas Presents to You

OK, Santa has come early. Of course some will say just "Buy Gold", but the smart investor is always trying to optimize, and do better. After all, bullion yields nothing, is risky, can be confiscated, and has few uses outside the speculative and decorative. Here is a Xmas investment (adn trading) shopping list that should, if nothing else allow the Goldbugs or just the worriers to BOTH invest and sleep better in the evenings.

1. Short High-Grade Copper vs. Long Gold
(Lots more HG1 about than GOLDS. Easier money for those with strong constitutions than phishing bank details from Nebraskans).

2. Long Cheap Japan Domestic Stocks vs Short Expensive US Consumer Discretionary stocks (currency unhedged).
The Easiest money may be gone, but this will continue to pay. Own the sub-book value soon-to-appreciate currency vs. the sector that once again will be ask investor owning it to bend-over (and get the yield pick-up while you wait to offset the high cost of shorting YEN)

3. Long CAD vs. Short GBP
Erosion of USD value vs. contractionary outcome will insure Canada doesn't roll over and so Bank of Canada will not be cutting rates anytime soon. In the race to see who cuts first, BoE will blink first cutting sterling rates before loonies.

4. Long YEN vs. Short Euro
Twenty-percent in 2007 on this one (Take 10% in Q1 if you get it, and put it back on again in July). If it don't happen, random Japanese tourists will be ritually sacrificed on the banks of the Seine.

5. Short USD Bonds
Rebalancing of CB reserves, means some of the distortions in the USD bond market will cease. And since no new taxes until 2008, and no new rate rises in 2007, US fiscal, trade and CA deficits will continue to provide ample reason to short bonds.

6. Short USD Quality Spreads
Short conumer-sensitive junk bonds where a continued retrenchment by consumer from higher energy prices bites and forces cutbacks.

7. Short Nucor vs. Long Newmont
There is an impending surplus of steel. Maybe not as fine as Nuecor's specialty, but nonetheless this trade will pay and pay and pay. Similar rationale to short the physical copper and long the physical bullion. Do it in options (short call vs. long call for the meek and timid).

8. Long Devon (DVN), Anadarko (APC), Apache (APA), Cimarex (CMX), Encana (ECA), Suncor (SU), Conoco-Philips (COP) Chevron (CVX) & Marathon MRO).
All are well south of heavily discounted NPV using low forward oil price estimates. The essential play is one of property rights in that US & Canadian resource property rights - in the absence of world-rogering depression - are most secure. Recent moves in Bolivia, Venezuela, Russia are harbingers of future actions that will see nation-states take greater control. These are wonderful "stores of value" with attractive current yields, trading is discounts, relatively secure. Should be part of any portfolio.

9. Stay Long: Global Sante-Fe (GSF), Diamond Offshore DO), Cleveland-Cliffs (CLF); Raynier (RYN)& PlumCreek (PCL), & Svenska Cell 'B' (SCAB SS), and Sherritt (S CN).
Assets. Assets. Assets. It takes three years to build deepwater rigs like these, and there aren't many out there. Attractive valuations, wonderfully abundant free cashflow, little encumbrances, should continue to make DO & GSF prized assets. Geography will continue to favor CLF over CVRD or BHP for NAm steel. Great balance sheet, and still cheap. RYN & PCL are Timberland LPs that are far south of book, nice current yield, and great assets - the kind the Chinese would love to buy. Bearts thought the Timberland boom passe, but recent transactions (admittedly by RYN) just paid $2200 acre in Texas, goosing implied values substantially.

10. Eastern European (& German) Real Estate.
OK so you feel bad that you didn't buy them when they were giving them away. Shame shame shame. But do not forget that Central Europe was the Center of the Civilized Chistian World for a very long time. Paris and London were hovels in comparison to Prague, Budapest, and Belgrade. Croatia, Serbia, Hungary, Berlin rural Greece, all afford excellent value for those with a long view. When the coming Europe vs. Asia trade wars come, Eastern Europe will continue to prosper as the lower-wage periphery of developed Europe. Europeans will (rightly) prefer to pay a bit more and buy from THEIR periphery where 80% is recycled back into Euro-area economies than from Asia. Farmland, coastal property, and urban locations still will afford attractive long-term appreciations on long-view with acceptable (but rising yields) in the interim.

And with anything left over, just go buy some Titanium, Uranium concentrate, or ultra-pure polysilicon and warehouse it safely.

Peace to all!

Friday, December 15, 2006

Groundhog Day

Markets have a way wearying even the most enthusiastic and energetic observers. There is a wonderful scene in the Bill Murray film, Groundhog Day where the cynical Murray re-lives the same day over and over as the weatherman who has traveled to the middle of nowehere to present a fluff piece on "Punxatawney Phil", the Pennsylvania rodent whose legendary shadow is renown for predicting whether winter will be short or long. And like Euro/Yen's relentless percolation against all reason and internationalo monetary responsibility, Murray, having delivered the same intro, on the same morning, with the same people, in the same town for the umpteenth time, has lost his will, become, bored, lethargic and even hostile at the absurdity and futility of living the same day over and over and over....

What will break the cycle of this Euro vs. Yen "Groundhog Day"? Asset prices all over continue to roar (excepting perhaps Russian joint-ventures coveted by Russian partners, central government, of friends of Mr Putin), Zimbabwean farmland or Venezuelan Pasture. And Japanese Japanese asset are no exception. Tankan was upbeat, Xmas Bonuses were the highest on record, and shares on the bourse have resumed their ascent. And while the ECB prudently expresses concern (even though most know that it is essentially "hot air"), MoF and BoJ officials continue to stoke concerns about deflation, of Nippon slipping back into recession, with not a public whisper about the Yen carry trade and its role in financing everything from US deficits, renovations to SW3 townhomes, to HF managers' record bids for trophy art.

Martin Wolf presciently foresaw this tenous divergent policy in early 2004 in describing the Fed's necessity to tolerate trade and fiscal deficits with complimentary loose policy as the price for keeping the balls in the air. He accurately predicted the roaring business environment, the growing imbalances, and mercantilist surplusses alongside the temporarily-benign purgatory. However he pointed out that it would, eventually, be threated by ballooning asset prices or growing trade-frictions and protectionism.

We've undoubtedly got the first. Liquidity is so abundant listed US companies are falling prey to LEVERAGED private market buyers at the rate of several per day. Real estate is gallopping again in overbought, overheated and unaffordable markets like UK, Australia and Spain despite tepid retail sales, stagnant employment and real wage growth. A spade must be called a spade, and this phenomenon is a pure monetary phenom. We have now proceeded deep into unprecedented territory, though we are protected from the most vbicious of beasts by Central Banks willingness to hold the dollars. But it is frightening to hear talk of independant Chinese agencies to "manage the assets", or wonder what might become of them should trade frictions rise as they are certainly bound to do.

(Sod's Law: Yen/Euro moves -1% as I finished typing this post)

Tuesday, December 12, 2006

Sorceror's Apprentice

OK nothing profound today, but I cannot get the image of Disney's fine depiction of Mickey & The Sorceror's Apprentice out of my head as I contemplate the state of Bretton Woods II.

See our Mickey, charged with cleaning up the world by his Maestro. Being a slacker at heart, he conjures assistance in the form of help from the Asian CBs (depicted here carting away excess dollar reserves), rather than directly tackling the task and undertaking the hard work of adjustment itself. I don't know quite how far one can go with this analogy, but I continue to be amused at the thought of some larger-than-life Volcker-like character re-appearing as "The Sorceror" himself to sternly reproach his apprentice both for his laziness and rather amateurish attempt to rectify the situation with the pathetic application of magic rather than diligence.

Friday, December 08, 2006

Paradoxical Incentives

And so Marshall Wace has raised $2billion from investors for a closed-end vehicle called "MW Tops" that will pursue "hedge fund strategies". I could be accused of professional jealousy - after all, who wouldn't want to win the lottery - but that is precisely what a $2bn closed-end fund is akin to for a manager with an elevated management fee + incentive fee structure.

With no disrespect to Mssrs. Marshall & Wace, who've performed admirably andd consistently over a long period such that their success is unlikely the product of the coin-flipping survivalism. And perhaps they've discovered the "Philosphers' Stone", and imbued it into a fund management method, or engaged sufficiently talented vassals such that performance could survive the principals' extended holidays, sabbaticals to ashrams in India, election campaigns for Parliament, etc. But along with ever-more restrictive gates in top-performing firms such as Citadel, locked in capital seems at odds with the shifting sands inherent to the Fund Management business. The fortunes of even the best firms waxes and wanes with the turnover of personnel, changes in corporate culture and hunger of the founder, principals or key persons, as well as the frequent inability of even the most successful people and firms to change with the times.

All that is fine and understood for someone seeking a firm offering to manage money on flexible terms for modest fees. But the relationship deteriorates assymetrically when one turns over money to a rockstar of finance with little to no recourse, oversight, transparency, covenants against excessive leverage (Citadel is already >10x levered) or risk-taking, or in the case of Citadel, any exit. One cannot simply "vote with their feet" and walk from a heavily gated fund structure. Nor is itan appealing proposition to dump one's closed-end shares into a market where the prevailing price is a hefty 15% to 20% discount to stated NAV, a level of discount frequently seen in the market for less-than-popular closed-end vehicles where one's star manager, investment strategy, or asset-class objective has sunk.

I understand all the arguments for "dedicated capital": preventing investors from doing the "wrong thing", insuring "dry powder" when market chaos (read: opportunity) presents itself, insuring business stability and thus enterprise quality, and so on. Yet there is nothing to protect an investor, from the equally deleterious and known demons of delegated agency investment managent such (for example: hubris, excessive risk-taking, massive errors in judgement, benign fiduciary negligence), save faith itself. And in danger of being a cynic, when I look at "faith" such as UK government's "faith" that competition will insure that public retail energy prices will rise and fal symmetrically, or the faith that companies have thoroughly tested the safety of chemicals inherent in their products, or the veracity of claims that Saddam must be brought down because he possesses weapons of mass destruction, I think one (and investors) would show wisdom in being skeptical that their interests will be equally served and protected, as those interests of the concentrated beneficiaries of such highly-gated or closed end structures. Caveat emptor!

Monday, December 04, 2006

Mr Yen says: "Not Yet"

Despite the rollicking Euro vs. Yen movement, Dr Eisuke Sakakibara was quoted today by Bloomberg as saying that the chance of a year-end BoJ rate hike remains less than 50% (30% to 40% was his more precise prognostication). And, if so, it would hardly count a turning of the proverbial screw at a mere 0.25%. Modulating the use of Yen for all manner of ex-Japan, ex-Yen finance seems not to be an objective of the MoF, the BoJ, or, for that matter, anyone else in the world who matters.

It's ironic that everyone sees the Yen lower v. the dollar in 2007, lost of people are bearish on the dollar now, yet almost no one seems willing to say "Yes, it's now Go Long Yen!!". It this because everyone has become a is a momentum or feedback trader? Are there no more contrarians left in the world? Whatever the case, it is a situation that suits TeamJapan just fine.

Friday, December 01, 2006

Kwai Bridge & The Yen

This is NOT a Japanese hate blog. I truly like and admire the Japanese people and culture. Much of it anyway. And for years I have given super-human credit to the MITI & MoF (Ministry of Finance) for prescience, planning and organization. Yet I am having my doubts.

Yesterday I watched a PBS special on the horror and brutality employed by the Japanese in building of a Southeast Asian railway, most famously known for "The Bridge Over the River Kwai". And while historically, the allies may remember it for the unlawful use of prisoners in the construction process, nearly 100,000 Asians (mostly indiginous Malays) perished i their efforts as well. Of course this may not be a surprise given Manchuria was no secret. Nor was their pathetic behaviour in Korea, and, for that matter, anywhere else in Asia they happened to land and occupy undocumented. 60 years hence, Asians remain sensitive, and unforgetful about war-time atrocities, and for good reason: Japanese behaviour was atrocious!

Yet, many Japanese (both nationalists and otherwise) do not seem to "get" foreign sensitivity regarding visits to Yasakuni, lame textbook accounts about more or less objective history, or their seeming unwillingness to be culpabable to historical events, in the same way they eagerly seize culpablility to other Japanese, on behalf of things Japanese. This is puzzling to me, and really struck home when watching the interviews with the now-elderly Japanese engineers and soldiers who took part and oversaw the railways construction, and it's brutal consequences. They seemed to abnegate all responsibility. Yes, they admitted it was war, and things were done in the name of war. But to a man, they denied prisoners were forced into labour. They suggested prisoners' deaths were the result of "bad rice" or other such nonsense. Were these denials "real"? Sure they were concern4ed about war-crimes, and preesent-day "shame" of being brandished so. But did they actually believe this? Was it a defense mechanism of the human psyche constructed to excise and quarantine the unthinkable and the unimaginably horrible?

All which makes me think about the credit I have been attributing to the MITI & MOF and whether it is mis-placed. Just how cynical "is" the weak-yen policy? How much do policy-makers really believe that ZIRP is somehow benefitting local economic conditions, Capex, or credit take-up by the average Japanese household (who in any event are large net savers)?? Perhaps, they really believe it themselves! And, if so, what will it take to change their behaviour from parochially tribal (and damaging to the international monetary system), to one more global and responsible in nature?? If the financial system blows up, could Omi, Ota, Fukui, or Tanigaki (not to mention George Bush), be termed an "economic war criminals"?

Thursday, November 30, 2006

Euro-Yen at the Eleventh & a Half Hour

What are nation-states to do when markets imperfectly reflect the state of the world consistent with longer-term equilibrium? Witness the Japanese Yen vs. The Euro in the accompanying graph. What are we to make of it?

The market, according to pundits far and wide, ostensibly is focused on "interest rate differentials", and the forecasted rate of change thereof in the immediate period. Employing this line of reasoning, it would seem that the market is "acting rationally" eschewing Yen in favour of Euro's. In earlier days this might be wholly understandable since cycles might be distinctly out of phase. But globalization has changed this, increasing economic correlation and business cycle synchronization. Sure fiscal policies differ, and demographics might be divergent. But the logical question to ask is: Why might the European Central Bankers believe that 4% rate of interest is imminently appropriate, whilst the BoJapan's boffins (& MoFo's) believe 1% is too high?

Japanese asset prices are rising smartly - both property (commercial & residential)and shares. Corporate profits are surging. Capital investment increasing. Orders robust. Exports surging. Unemployment low. Government deficits large (>5%GDP). All the above are sure signs that things are pretty damn alright, irrespective of 0.5% core CPI still apparently deemed too low. Europe on the other hand, has less than 3% GDP fiscal deficits, much higher, but decreasing unemployment, surging asset markets, especially commercial and residential property (making some believe there is a bubble), growing private-sector debt, growing capex, roughly balanced trade accounts, and inflation that when incorporating asset prices, is growing and too high for policy makers to countenance.

So why with all this slack in employment, is inflation rearing up in Europe, but not Japan? Why are the Europeans more concerned about inflation or the Japanese with >5% fiscal gaps and near-ZIRP, not more puzzled by why with loose fiscal and loose monetary policy and rollicking asset markets, they are not generating more inflation at home? And if THAT combination of events is not generating goods-price inflation at home, would tighter monetary and fiscal policy really have a negative impact? And, if so, would this be bad for a nation that is is generating incredible dollops of income on overseas assets and FDI?

I think that what markets are not expressing, (rightfully since pissing in the wind is unpleasant in the best of times)) is that betting against the central bank and authorities of the world's second largest economy is a "mugs game". For the the world's central banks - at the moment - are working at different purposes. The US FRB is spinelessly schizo from dual irreconciliable mandates, erring on the side of soft money. The ECB is independently pursuing its mandate, it too erring on the side of soft money, though helped enormously by the saner fiscal policies, forward-thinking energy policy & taxes, and thankfully more balanced trade account, and manufacturing sectors. The BoJ, however, sits alone at the opposite pole to the ECB: politically compromised to TeamJapan, cynically selfish global citizen insofar as they maintain a ZIRP policy that matters not in the least to Japanese demand for credit, but which insures the YEN will be the global funding currency of choice to offset their surplusses and insure that TeamJapan losses not an iota of competitiveness to their Asian peers and would-be competitors. THAT is why the yen has deteriorated over the course of the past four years. THAT is why I loathe the BoJ's inaction, and the MoF's continued demaoguery regarding the impact of higher rates, for the only real impact of higher rates would be prevent the YEN from being the financing currency of choice for global carry, resulting in a higher Yen, resulting in lower corporate profits and potentially deflation of the benign adn unpernicious kind that results from productivity gains, plateuing demographics, and a geographical location adjacent to the largest deflationary force the world has ever seen.

China bears some blame here. For China, rather than be accumulating dollars, should be selling dollars and buying Yen, driving the Yen/Euro and Yen /dollar towards equilibruim amongst the crosses, and preparing for what the eventual acscent of the RMB (and the GCC currencies) relative to the entire OECD currency panpoly.

Wednesday, November 29, 2006

Bully Steals Candy From Baby

So American carpetbagger, Steel Partners, has managed to extract tribute from another Japanese management, in the form of Nissin Foods (TSE Code#2897) offer to purchase Myojo's (TSE Code#2900) shares from any and all comers at a heft premium to an already ramped-up market share price. Steel will undoubtedly tender. Nissin trumpeted the transaction benefits of a rather nebulous-sounding tie-up (surely meaning creation of a noodle cartel or price fixing oligopoly). But in their statement, they also unashamedly described their actions as protecting the many and varied Myojo constituents such as suppliers, customers, employees and management.

Not content to "cut & run" with the profits, nor satisfied with the greenmail gains, Steel reported today a 6% stake in Nissin itself, apparently as a result of the sub-optimal move of buying shares at a premium, but not taking the company over.

Greenmail IS effective in Japan. However, the Japanese will not continue to be extorted forever. What they (they being Japan Inc.) should do is let Steel actually succeed in one or so of their tenders since Steel has no strategic business rationale as cash acquirer, not to mention a probable shortfall in capital to actually finance the tender(s). It is a classic case of "be careful what you wish for". Let them, in the process of shaking down management, actually gorge themselves on a couple of chunky (but hard to digest) morsels (already ramped with expensive valuations) and see how they enjoy rolling up their sleeves as sole owner, or whether or not they have a trade buyer lined-up in the event of success. For the best way to deal with a bully is to call him out and embarass him (or her) in front of their peers for all to see their hollowness.

Could Japan stomach a few corporate sacrifices? Perhaps they should countenance such an offering to Steel, and then let labor and government ministries go wild and harass them thereafter as a not-so-subtle message to copycats to think carefully. For if they let Steel achieve even a modicum of success shaking down the system, there will be no shortage of imitators shaking up the share registers of listed companies something that would certainly NOT be in the interests of management, nor many other constituents, or even longer-term affiliated investors where shorter-term profit maximization is not at the top of the list of ownership objectives.

Wednesday, November 22, 2006

Is There Really a Goldilocks?

Some things to ruminate upon:

1. What's the outcome of a tug-o'-war between a falling dollar and Roubini-esque property-led slackening of US domestic demand, and the interaction of the two, upon the dollar price of oil.

2. Ponder whether US rates can survive in their current purgatory-like trading range once the markets smell dollar blood?

3. What is the probability of a genuine Goldilocks scenario including lower energy prices, muted inflation, natural correction in US & global imbalances without contractionary policy and outcome?

4. Could it be that Historical Cap Rates in US Commercial Real Estate and residential housing were, historically speaking, too low, and we are witnessing not a "bubble" nor "flight to hard assets" but simply a re-rating or semi-permanent state-change to higher (albeit sustainably so) valuations ??

5. Will anyone muster the courage to "call out" the BoJ & MoF for their not-so-benign-neglect in letting the Yen slide by >35% vs. the Euro since 2002?

Hey Joe! Me so pretty.

What I have to say won't take long:

Japanese stocks, excluding the whimisically thematic, the detritus, and the overly-glamorous, are remarkably cheap in comparison other assets. Factor in the embedded in-the-money currency appreciation option (for non-Yen-based investors since the BoJ will eventually relent), the oligopolistic, or in many cases, near-monpolistic nature of many of their edxport specializations, the low multiples to the hard (and increasingly scarce) underlying assets, as well as in relation to forecast earnings potential, free cash flow generated as well as relative to enterprise value, not to mention relative to replacement value, tossing in the meaingfully large dollops of accounting conservatism (i.e. significant R&D & Advertising that depresses current earnings in favour of future earnings), the benefits of industrial policies and corporate relief that result from national socialization of pensions & healthcare, and one has a compelling case for the shares of such enterprises hedging much monetary devaluation, whilst offering diminished risk should things not really pan out as currently expected.

Skeptics (and those who are, if not short, not long) will chime that there is no "catalyst", but this is untrue. The catalyst is rising asset prices, global relative valuation, continued global economic growth, and no pullback in China until after the 2008 Olympics. Yes, there remains issues for the really meek: transparency & accounting integrity, liquidty, stock supply overhangs in the hands of government, reduced shareholder rights and the cultural heeding of multiple constituencies that have profit-diminishing attributes during slack times, and the effect of dollar devaluation upon competitiveness.

All that and current index-price softness notwithstanding, relative to many other assets, they remain attractive, and if nothing else, will soon (and again) attract buyers - portfolio investors, pension funds, domestics, and petro-dollar earners - that will provide, at the very least, a quick turn with attractive risk v. reward to the bold, though probably larger and more sustained gains over the ensuing 12 months.

Monday, November 20, 2006

Optimism or Cynicism ?!?!


Is the fascination for commercial real estate, infrastructure and other hard assets a cold and calculating appraisal of the prevailing political economy that yields a high-probability scneario for more of the same: low interest rates, continued fiscal expansion, yet more current account, trade deficits & industrial hollowing giving way to further asset-price inflation WITHOUT limited imported-goods-price inflation or an interest-rate or currency accident??

Or is the continued run-up in asset prices simply the so-called savings glut and its attendant late-cycle cascades, in combination with what are currently low real interest rates combined with FX & interest-rate stasis, that is causing the herd (even the smart herd) to perhaps myopically "use it or lose it"??

My own money is [wrongly, to date I must admit] on the latter. Though other historically prescient investors have shyed away from the party (LA's Colony Capital Leucadia's Steinberg, Baupost's Klarman, etc.), today, the ranks are joined by Sam Zell (Equity Office Props), and more recently, David Geffen (who dumped a significant chunk of his art collection). While betting against either Blackstone or Carlyle hasn't, in aggregate, been extraordinarily rewarding, with the frenzy and prices-paid along with assumed leverage accelerating, one would be forgiven for wondering whether this stampede into large-scale leveraged asset acquisition is a bold statement of unbridled optimism or an ultimate statement "to be short paper & long assets" because the end of the BWII regime is nigh. Comments please!

Saturday, November 11, 2006

Saturday's Thoughts

"The optimist proclaims we live in the best of all possible worlds; and the pessimist fears this is true."
- James Branch Cabell in 'The Siilver Stallion', 1926

"The liberals can understand everything but people who don't understand them."
- Lenny Bruce

"Conservative, (n.): a statesman who is enamoured of existing evils, as distinguished from the Liberal who wishes to replace them with others.
- Ambrose Bierce

" the only ennduring testament to man's confidence in man."
- James Blish

"The cure for admiring the House of Lords" is to go look at it"
- Walter Bagehot

"It is easier to fight for one's principles than live up to them"
- Alfred Adler (1939)

"Democracy is the art of saying "Nice Doggie" until you find a rock"
- Will Roger

Wednesday, November 08, 2006

Republican Congress Poetry Corner

(with apologies to EJ Thribb aged 11-1/2)

So Farewell
Then 109th

Your Mandate
has been
and Foleyed.

Gay Marriage
and Right-
To-Life Bans
Thankfully Unrequited
like Unexploded
Cluster Bombs.

"Everyday Low
was your

Parochial Greed
Total Utter Disregard
For The Public Interest
is Your Legacy

What will you do
Cleaning latrines
is far
too skilled.

'Tis a Shame
My Taxes
Will Pay

Tuesday, November 07, 2006

Sadistic Narcissistic Rally

The Bloomberg News headline reads: "US STOCKS ADVANCE ON PROSPECTS OF POST-ELECTION GRIDLOCK", which strikes me as rather, well, disgusting. For, so the logic goes, with gridlock comes more of the the same. Essentially, more large budget deficits, no new taxes, no new energy taxes, no energy policy, no universal healthcare, more military spending, no pharmaceutical regulation, no attempt to rectify international imbalances, and certainly no policy initiatives to attempt to deal with any of the structural risks to international monetary system. It does mean, more inflation, continued negative real interest rates, all of which [for the immediate moment] is the perfect environment for stocks, not to mention all other assets, hard or soft. Under the Gridlock scenario, optimists can look forward to the housing slump being rather shallow for house prices in nominal terms will not fall very much, even if turnover drops. And as inflation accelerates (though interest rates lag with the Fed squarely behind the curve), housing inventories will be consumed as they begin to look attractive once again.

All which conjures images of sleazy "Cock fights", the Gladiators in the Forum of Rome, "bare-knuckle-boxing" or Smash-up Derby" where inexplicable sadism is rife and the seeming focal point of spectators' (or in our case Stock Traders & Investors') maccabre pleasure. Keep an eye out for Emperor Nero, for his is surely lurking nearby.

The Forest and "Cheap" Trees

I will tell you a personal secret: I become rather anxious when asset prices rise far and fast. This is partly because I hold the opinion that coordinated asset price rises are somewhat self-extinguishing in an environment of already leveraged households, already appreciated assets and rather largely indebted governments. But it is also because I hold some non-hard asset financial assets (because of what I believe to be the elevated probability of the above), and so become relatively poorer with each additional upwards vault. And as behavioural finance researchers have shown, it is indeed one's relative performance that produces anxiety.

And as I look around today, I see all asset prices doing moonshots: Global shares of virtually all sectors; Credit spreads at cyclically narrow levels; real estate of all manner in most countries at post-war peaks in terms of affordability multiples, while cap rates for commercial real estate the world over are near all-time lows. So dire is the cap rate conundrum, and perhaps so certain that the rates won't go up and that the only way to earn an incremental nickel is to lever up that Morgan Stanley recently launched the largest aggressively-leveraged real estate Fund ever seen by mankind. Art from van Gogh, Klimt to Jackson Pollock is valued in the triple-digits of millions, while even some mickingly absurdly modernist art is changing hands in the millions. Undeveloped land is raging. Media content such as recording and film libraries too are garnering impressive valuations, as is agricultural land and orchards. Infrastructure is booming (also with copious amounts of leverage). Antiques, too, are on a rampage, as anyone who's watched Antiques Roadshow can attest. Stamps, coins, curio collections of dubious pedigree, vintage cars, sports memorobilia all gallopping. Commodities of all sorts from precious & metals to softs and foodstuff are up up up.

But my realm is Japan, in general, and Japanese public equities in particular. And here, too, I will share another secret with you: despite raging asset prices the world over in every asset class, in virtually every region (except perhaps North Korea, Zimbabwe & Moldova), slightly more than 30% of listed Japanese public companies are trading south of stated "Book Value" as reported at the end of the latest fiscal year. This is approximately 1225 enterprises out of perhaps approximately 3800, not including those with negative book values. By way of comparison, the US market is, as of last night, sporting nearly 250 listed companies out of nearly 6,800 (using a $50mm market cap cut-off to avoid Chap-11 reorgs). This is a miniscule 3.7% of US listed companies trading sub-book.

Now there remains some caveats: some of these companies are really shitty, detroying shareholder value as prodigious rates. Others are merely illiquid - so illiquid that it might an entire year to acquire but a few percent of the shares outstanding. Another calss are some cases really small that many a hedge fund manager could buy them with their credit card! (ok this is an exaggeration). Yet others have small floats and /or concentrated ownership that they are little more than listed holding companies, and being a shareholder in a Japanese enterprise is trying enough, even before having to countenance being a minority shareholder in a Japanese Company.

To be fair, American companies all suffer from many of the same shortfalls. And perhaps, because the "best and brightest" and the "smartest guys in the room" are engaged in finance rather than engineering, the market is more picked-over, so the probability that a company that is trading sub-book is, in fact, defective is much higher than in Japan, where it is likely to be suffering from inattention, insufficient affection, and general benign neglect.

Nevertheless, 1225 (33%!!) is a large number, so this patch of forest must contain, if nothing else, a lot of assets. And since assets are such the rage these days, the question arises as to how long such potential bargains will remain, especially with money supplies the world over run amok, real rates near zero or negative on any kind of realistic inflation measure NOT calculated by the US BLS?

So perhaps next week, I will introduce a new investment fund called "Assets-'r-Us", and we will blindly buy the entire 100-acre wood, dregs and all, under the mantra: "I don't know, and I don't care, but if it's an asset, lift the offer....". Of course, these assets perhaps should be cheap, and the anomaly could very well be that all other assets are poised to collapse under the weight of their own prices and, the tighter monetary polciy that is imminent, and the contractionary effect of the inevitably deterministic rise in US energy adn income taxes.

Friday, November 03, 2006

Momentum Perfection

As we approach the end of the 2006, I will take the opportunity to exclaim how uncharacteristic certain factor returns of the Japanese equity market have actually been. As a result of the world upside-down, cynics would be forgiven for being optimistic about cats relationship with dogs, or Palestinian hopes for a fair peace settlement with Israel, but nonethless, in Japan, the market where the momentum phenomena, so puzzling to efficient-market theorists and so prevalent elsewhere, which has been absent for the better part of two decades, has manifested itself in picture-perfect fashion over the trailing 12-month, much to the ire or reversion-oriented investors.

Apologies for that last breath-consuming near run-on-of-a-sentence, but perfection is perfection, and just as aesthetes are compelled to laud good design, so I must give credit where credit is due. As recently as this month, the godfather of market efficiency, Dr Eugene Fama was commenting in Financial Engineering news:

FENews: Your view is that the anomalies researchers have discovered – such as calendar patterns, the January effect and other relatively predictable relationships – are not anomalies that people can consistently profit from, right?

EFama: A lot of them disappear on closer examination. They’re not like M&Ms – they do melt in your hands. They are statistical fallacies. The one that gives me problems is momentum. The phenomenon shouldn’t be there.

FENews: Has the presence of momentum in asset prices increased in recent years, as a function of retail investors?

EFama: Nobody can explain it. It was a little weaker in the 1930s and 1940s than it was after that. It never existed in Japan.

So to see the returns to stereotypical naive "momentum" in Japan, as evidenced by Jegadeesh & Titman's ("J&T") seminal 1993 paper "Return to Buying Winners & Selling Losers" line up "just-so", is really nifty. In the 12 months-to-date, the decile returns in Japan in sympathy with J&T methods:

Momentum 1-month = - 8.9%
Momentum 3-month = + 7.7%
Momentum 6-month = +12.8%
Momentum 12-month = + 9.2%
Momentum 36-month = -18.4%

As you can see (as most US quantitative managers understand), short-term reversion is prevalent intermediate reversion is the rule, long term reversion remains the trump. And note that more complex and sophisticated momentum strategies (sorry, but those are proprietary) have yielded commensurately better returns (as one would expect) while the same holds for the more sophisticated flavours of reversion in the short & long frames (again these are closely held).

Now one can ask "why?", as I have done here on a number of ocassions. And my answer would be (not necessarily in any particular order of explanatory power):
(1) Convergence of investment methods of styles;
(2) return of foreign investors to Japan where they now dominate;
(3) investor concentration enhances the sheer ability of the largest marginal buyer (e.g. Fidelity, SPARX, Cap Research) to purchase sufficient percetage of stock from free-floating market to elevate and maintain a prices on the tails. Periodic liquidation of such position invokes the flip-side;
(4) Increase in "feedback-trading" (pro-trend & passive strategies) as a percentage of overall trading strategies.

Will this evolution to picture-perfection momentum become a permanent feature of Japan's bourse? The answer I think is a qualified "yes", so long as foreign investors remain present, dominant, and active, and such investment methods continue to be the by-product of the way the Global Fund Management Game is implemented & played.

Wednesday, October 18, 2006

BoJ v. DIC: Who's Got the Hot Hand?

Mizuho Securities reported in their latest 4th quarter strategy summary that Japanese public entities (The BoJ, the DIC, and the BPSC) held roughly YEN 7 trillion (nearly USD$65 billion) of listed stock.

Interestingly, the DIC (Deposit Insurance Corp) held on a cost basis YEN1,795 Billions primarily "acquired" from the less-than-illustrious though once-mightly NCB & LTCB, the former who was one of the largest writers of Put Options on the Nikkei 225 at the Pinnacle of the Bubble. Likewise, the BOJ bought YEN 1,974 billions of stock at cost from it's accumulated interventions and market pecadilloes. The DIC, as of Sept book closing was showing a market value of YEN 1,780 billions - for a loss of YEN 15 billions which is rather surprising given the breadth and depth of the bull market over the past four years. The BoJ, by contrast, shows a market value of their acquired holdings (basis the same Sept book closing) of YEN 3,565 billions - netting them a cool YEN 1,591 billions (USD$18 billion) of profit for the People of Japan, who with a >6% of GDP fiscal are in need of additional revenues, whatever their source.

All which leads one to ask the burning question: what is their secret? Who is their hot-hand? To be fair, the BoJ acquired most of their stock at the pitiful depths of bear despair in 2002 whereas the DIC acquired theirs in the mini, but narrow bull of FY 2000. Moreover, it is likely that both LTCB and NCB - both lacking long historical Keiretsu's - ending up with little less than poodle-shit in their portfolio, something the DIC must eat as lender (and apparently buyer) of last resort. Yet it is worth fathoming just HOW BAD their stock selection must have been to effectively make no mark-to-market money whatsoever during the past 4-year bull market which has been of a breadth and scale not seen since the 1980's - more than two and a half decades now-passed.

Charlie's War & Yen Market Shenanigans

I just finished reading "Charlie Wilson's War" about the enigmatic Texas Congressman's championing and funding of the Afghan Mujahaddin's fight vs. The Soviets in Afghanistan during the 1980s. Some even go so far as to extend to Congressman Wilson the honor and credit of single-handedly being responsible for the destruction of the Soviet Empire. Eye-popping stuff, indeed. But much of the sordid details are not entirely unexpected for the slightly cynical. Grand conspiracy? No. But nonetheless, what one learns is that whatever was rumoured to have happened, or whatever deeds the CIA was alledged to have been undertaken, or whatever horse-trading one might insinuate to have been responsible for the legislation, money and events that followed was not only true, but more colourful and entertaining than anything a conspiracy theororist might have imagined in their wildest fanatsies.

Which brings me to the subject of the Japanese Yen and deflation. Here your faithful seer and prognosticator, "Cassandra", has been brutalized by the neo-mercantilist apologists for Japanese & Chinese fiscal, monetary and international economic policies that have - at leastly partly - perpetuated and exacerbated global imbalances. First hog-tied by a mysterious, arrogant and dismissive Asian economist (perhaps one who himself works for the Chinese government or such) followed by a pummelling from an official at a Japanese lobbying organizations active in advocating Japanese Policy to foreign governments, all for having the audacity to suggest that Japanese deflation has been whipped and is (and has been for a little while) a problem no longer, and that we find ourselves in our current predicament of "sticky", non-correcting exchange-rates, not as the result of happenstance, serendipity or for that matter, benign neglect, but as a result of conscious policy action in both China and Japan.

Seething dismissive derision was the resulting response. "Deflation is evil and causes AIDs, not to mention Nuclear Proliferation!", he chimed. "No one can live with it!". "Everyone will suffocate". And therefore, "No economist can understand what your suggesting!". His partner took over: "Conspiracy theorist!" "Prove it", he taunted, as he went on to explain that rather than being a conspiracy of the type our Cassandra suggested, it was actually the result of a different domestic policy conspiracy of the type he favored, one in whihc the Japanese Yen was simply innocent road-kill on highway of pacifying the farmers. All I suggested was that there were plenty of good reasons to believe that many prices in Japan should have fallen, and for that matter, still be falling. And that combatting this fall with ZIRP-tastic monetary policy was not only difficult, and unwise, but terribly uncivic-minded as far as the international monetary system goes. About as useful as putting out a candle with a high-pressure fire hose.

All which brings me back to the CIA. And Oliver North (remember him?), Charlie Wilson and Gust Avrakotos, the hero (of sorts) of the aforementioned Afghan story. You see, they did do all these things. Despite Jimmy Carter and the new moral foreign policy. The CIA did (and does) have fat balding paedophile-looking guys thinking about devious ways to blow-up our enemies, running proxy wars and destabilizing regimes just as the KGB was behind the Bulgarian assasination of their lliterary dissident in London with the funnny poison-tipped umbrella. And there were ideological wackos in the Pentagon thinking of ways to subvert Congress' will to NOT fund the Contra, by, yes, of all crazy schemes, supplying arms to anti-American Iranian mullahs (to fight Saddam who we were also supplying) in exchange for the Iranians giving money to the Contras. Silly as it sounds, people thought it was, at the time, sound and so it happened. Calmly and calculatingly, and stupidly.

In modernity, where "war" between advanced industrialized countries, and increasingly all nations, is often fought economically, financially, and in the realm of trade, it should come as little surprise that successful nations are doing everything possible to gain parochial advantage for their people and their corporations, through every means possible, including intervention in, and the resulting manipulation of, international money markets. And Japan is the King in this respect. After all, "PKO" (Price-Keeping Operations) only has meaning in Japan - something which saw government authorities indirectly and directly hoover-up many trillions of YEN of stock from all comers. Think Eisuke "Mr Yen" Sakikibara, who massacred dollar shorts and engineered an appreciation from the excruciating depreciation torture engineered by Secretary Rubin. So today, think of the double-talk of Tanigaki, lambasting the BoJ on every occasion for even hinting rates might rise. Or BoJ officials, even today, frantically denying stories they might be even gathering data on the potential size of the carry trade. "No! No! Absolutely Not!!!" "We have no idea, no such intention, and we do not care....."

Yeah, Right!

Friday, October 06, 2006

Change of Heart: Bring It On, Dude

I've changed my mind. In an epiphany (of sorts) overnight, I have dramatically shifted my mindset from one of "outrage" and "blame" regarding neo-mercantilists' self-serving treatment of the international monetary system to a "take charge"attitude of "Bring it on Dude - The More The Better". Let the Japanese and Chinese play their petty mercantilist games, but we too can play and win. They may have won this battle whereby they escaped with a sizable amount of America's manufacturing base, but looking forward with some skill, scheming, and Muhammad Ali rope-a-dope tactics, American can yet win the war.

Here is my plan: America should subsidize and encourage Disney, Dreamworks, etc. to dump as much Bambi, SpongeBob and "Friends" as well as Video games (e.g. Grand Theft Auto) upon China & Japan. Encourage their piracy for THEIR domestic markets - since the more distribution the better. The lamer, more hynotic and saccharine the plot, the more we should encourage its consumption. Next, we should subsidize and encourage the export of our world-class Processed Food. Oreos. potato chips, Nacho-flavored Bacon Bagels, Chocolate Chicken Nuggets, TV Dinners, BigGulp Sodas, Campbell Soup, Philly Cheese Steak Pizzas, and loads and loads of ice-cream. With fertility rates already low in Japan & China, and their darling little spolied children already over-indulged getting fat and lazy, hanging about in Yoyogi Park dressing like Elvis and slacking with computers & pop culture, we are already half there. Then we need to send them skateboards and snowboards. And perhaps AC/DC or The Scoropions, Kurt Cobain or something else rad to accompany it. Gen-X-J & Gen-X-C!! Brilliant, huh? Oh a couple of more things. We need to train lawyers for them. Lots and lots of lawyers. If we can get their lawyer-to-population ratio up to where we are in the USA, we can really throw a proverbial spanner in their works. And we should try to teach them the benefits of LObbying within government giving them the whole spiel on aggregation of interests and how it breeds efficiency. Maybe they'll bite. Finally, we must encourage the promulgation of CNBC China, and stealthily encourage E-Trade & all manner of on-line brokers to expand & grow in Asia. We could even send Maria Bartiromo over there and make trading "free". The combination of hypnotic pseudo-financial news and essentially "free" on-line gambling coupled together would be absolutely toxic and would grind work and efficiency to a slow halt since we know that both cultures are already inveterate gamblers. Together, these things, in the absence of government policy, will drive convergence on the Asian side.

But that's only half my plan, not to mention half the battle. Causing convergence on the eastern edge of the Pacific will be tricky, and for this we must use reverse psychology and counter-intuitive methods. The USA must encourage the Asians to continue to accumulate dollar reserves and make our dollar even stronger. We will at once both raise rates, and taxes upon the rich to ease our fiscal deficit. This will cause the dollar to soar and will be like putting one's balls into a vise and squeezing. The dead will awake from the excruciating cries of pain, but this time something different will emerge. Not the historical moaning and whinging about cheating and unfair competition, but a John Wayne-like gritty determination to figure out ways to compete and win. Whereas in the past companies simply up and left, moving to China, this time they'll stay and fight. Like in Iwo Jima. Or the beaches of Normandy. This time, like the Japanese and the Germans, capital will take a haircut on returns and invest in training, new and more efficient plant & equipment, while management takes across-the-board paycuts, especially at the executive levels. Labour too will work longer, harder, more efficiently discarding all remnant lines work demarcation that are vestiges of the UAW and labour struggles of the past. And most importantly, management, labour and capital will work together to figure a way to best their neo-mercantilist competition. The Federal government will also pitch-in. They'll unburden companies of their current and legacy pension and healthcare obligations, finally placing US companies on equal competitive footing with their European and Japanese counterparts, and taking a huge burden off of the day-to-day worries of labour, finally letting everyone focus on how to improve and get better, cut the fat, make production processes leaner and more intelligent, with less waste. They can also perfect the Japanese art of "our rice is different" and "your meat smells funny", or the Chinese skill in protecting "key" or nascent industries from competition, by resurrecting any number of non-tariff barriers, security checks and port-controls for Asian cargos to make sure there are no Zerba Mussels or Japanese Beetles aboard. Americans have historically been up to meeting a challenge. But the narcotic effect of affluence, unrequited indebtedness (and, yes, Taco Bell) have numbed our ability to respond to a such an important challenge. In fact they've even numbed our ability to know we're being called out!.

America can regain her competitive feistiness, but it will take pain. Not pain for the sake of masochistic pleasure, but pain for the sake of regaining our senses. How can one know pleasure if one doesn't feel pain? How can we overcome our parochial selfishness if we are not forced by circumstance to work together?? Ok besides meditation, is there a route? And in an increasingly hedonisitc world, this lack of ability to sense and react accordingly will be our undoing unless she can regain a sense team spirit, rejuvenate her ability to manufacture, innovate, and compete effectively, and collectively rise to the occasion.

Wednesday, October 04, 2006

Pirating, Buccaneering & Steeling

The news that Tom Hudson's Pirate Capital, and his aptly-named "Jolly Rogering Fund" were taking some heat last week was no surprise (to me). Hudson's operation runs what is professed to be an "activist" fund. This effectively entails buying a wodge of an albeit "cheap" or otherwise unloved stock, ramping the price as much as one can once one has bought the line. Then publicly professing one's [affection, admiration, recognition of value] for the [company, business, sector] while simultaneously (and again publicly) expressing one's disaffection with [management, CEO, share price performance, business strategy]. For those with lots of their own money, secure credit lines, a keen eye for value, and a reasonably deep reservoir of patience, this can be rewarding as Nelson Peltz recently demonstrated with Heinz. But the equation is entirely different IF one is an agent, employs fickle forms of leverage, is subject to frequent SEC reporting, and is at the whims of market liquidity and redemption cycles that differ from one's possible duration. This caveat is NOT for the manager for he is popping the Veuve Cliquot and flying private so long as investor just show up in his fund. He it must be said has the trader's option. For his capital "partner" on the other hand, it is an entirely different equation.

In the extreme, an activist's attention results in a quick sale of the company at a premium allowing one to exit the entire position, in cash, at a nice profit as was the case for Pirate & ski resort operator, Intrawest. However, this is the exception rather than the rule. More frequently, one buys a position, ramps it a bit, grabs a positive mark-to-market, leverages that to raise more assets and if he is smart and lucky, accrue and collect fees from an irreversible quarterly high-water mark. That is sweet, at least for a swashbuckling investment manager. What follows is: (a) he's "spent his ammo" or "shot his load" so to speak (b) passed the filing threshold (c) used his PR splash to exhort to the world his intentions (d) is now left with an unconscionably large and unmarketable position in a stock of dubious longer-term merits.

Often, the targets are flawed, which is why they are "cheap". They are in declining segments, facing stiff low-cost competition, or perhaps have not invested as they might have. Stale longs and short-sellers notice that the stock has gone up. It's elevated price now often deters value investors, as well as potential trade or private equity buyers. Basically, one has put lipstick on a pig, but it remains a pig by any other name. The financial privateer must now:(a) pray for a stock-specific or market tailwind to keep prices elevated, (b) collude with other pirates, (c) buy more of the same stock - prefarably at the end of the week, month and quarter to avoid losses and redemption cascade that will inevitably follow if he fails in "a", "b" &/or "c".

Now if our Corsair is fortunate, he will score a few extra-base hits, or home runs AND the market breeze will carry and reward one's accumulated positions. The virtuous circle of returns->new investors->new capital->buying more of the same->returns->new capital and so-on continues so the manager, now Master-of-The-Universe can speak authoritatively at conferences about the tremendous market opportunities there is, the virtually unlimited capacity of his vision (and his Fund), the unbounded opportunities that will open up in China as well as the social good he is doing for the world not to mention the untouchables in Calcutta. After all, Hedge Funds CARE, you know.

But as anyone who has been around can tell you, "shit happens". LTCM, 1987, Gulf Wars, fraud, panics, scares, regulatory changes, recessions, depressions, devaluations, hemorrhoids, your entire research staff walking out, you name it. Then like a frigate under attack, one is subject to the unvirtuous circle. Because something happened, one's positions come under pressure causing poor performance. Investors redeem causing one to necessarily sell positions, causing their prices to fall, causing one to lose more money, causing more redemptions. Somewhere in between all this, depending on the shit that has happened, the market, too, begins to gun for the positions of the once Master-of-the-Universe. The positions then return to the realm of "cheap getting cheaper" and once again might enter the sights of the private equity or deep value guys who invariably have more capital, more "principal" and less "agency", more patience, and less hubris.

Publicity-shy Warren Lichtenstein (and friends) were the group that seized the day in Japan. Though Yoshiaki Murakami's MAC may have made more headlines as a former MOF-man gone renegade, it was Steel that actually made the buckets of money - at least on a mark-to-market basis, and collected the fees in cold hard cash. There are three types of activist in Japan. First there is the "cooperative" ones that take a big line in a cheap company and truly desire to hold it for investment purposes. Silchester, Wilbur Ross's Taiyo Fund fall into this category. They let everyone one the object of their eye is "cheap", but they don't shake down management, though they do buy more at higher prices when "opportune". The second type is SFP or Symphony Financial Partners. They buy really shitty businesses and crappy companies at ostensibly knock-down prices. The companies may have some redeeming quality such as a crown jewel of undervaluied real estate, or sub-book valuation, or excess cash they could return to shareholders if management were so inclined. There performance is entirely self-generated and this is effectively a market impact trade or ponzi for the really cynical. They cannot exit without destroying 50% of the market value, which is often the same amount of market appreciation they created when they bought their shares at higher and higher prices. If held, this trade is effectively a race to the death of when the company will burn, or mis-use, or write-down the value of their cash, investments or assets.

Steel Partners is the third type, that combines the first two. They adopted a portfolio approach and bought stakes in all the net-cash companies that were low hanging fruit. They bought more shares at higher and higher prices to generate mark-to-market profits that created the aforementioned "virtuous circle". Then they made public bids for a few companies to demonstrate that they were serious. Of course they had no intention of consummating the deal, and almost certainly had no interest in running a Japanese company. The bids accomplished a few things. They forced some change that might be construed as "good" from a passive shareholders point of view, but ultimately bad for an investor in Steel who was now an oversized holder of an unmarketable position in a once-cheap, but now pedestrianly valued security. Sure Steel has a large mark-to-market gain (which Steel collected incentive fees upon already). Sure the dividend is high, but with six-months trade of an average day's volume, one would have to take a massive haircut to liquidate. Moreover, at present valuations, many of the companies hold little appeal to private equity or trade buyers.

So what does the future hold for activism in Japan? Eventually, there will be more successful hostile deals, like the Hankyu-Hanshin merger. But they will be made by private equity firms or trade buyers who desire to actually strip out the cash and assets, run, merge and/or subsequently flip the company back out to the unsuspecting public market with negative book value. They will encounter resistence along the way from all the constituents, including the authorities who desire to keep the "wah" of the house in tact. But before then, perhaps during a capital dislocation event that is as yet to emerge, it is my forecast that Steel Partners and the other parasitic activist flippers who don;t really want to get their hands dirty, will be the victim of the most unbecoming unvirtuous circle, like the one we see unfolding today at Pirate's not-so-jolly Fund.

Monday, October 02, 2006

Denial is a Team Sport

Here we see a sign outside the Finance Ministry in Tokyo. It alerts everyone to the August Ministry's location and it roughly translates into English something much like: "Do not show us the truth inside these wall because we do not wish to see it; do not speak the truth inside these walls, for we do not wish to hear it; and do not wait for truth to come from our lips, for we have no intention whatsoever of uttering it - not at least to smelly Americans or pig-dog Chinese". That is a paraphrase of course.

Such a sign is not surprising for with the the Euro again reaching new highs versus the Japanese Yen (see adjacent graph), even as the Eurozone slides in to deficit v. Japan & China both and the Japanese continue to rack up prodiguous surpluses against everyone except OPEC, we see Japanese consumer prices & property prices rising smartly, unemployment falling, and, most recently, releasing a most optmistic and promising Tankan survey, it is worth contemplating how deeply cynical such parochial selfishness and team denial actually are within Japanese policy.

Japan-o-philes and Nippon's other apologists will point to now-laughable threats of continued deflation (certainly if viewed relatively for Japan shares the same global economic risk as other OECD nations), or the need to keep rates low just in case deflation rears its ugly head again. But by now, these are so obviously just tired, lame, recycled excuses for TeamJapan to avoid doing its part in making any concessions in the desperately-needed global move towards rectifying global imbalances.

In the meantime, they seem intent (and rather pleased with themselves, I must say) to beggar jobs from Europe at an increasing pace, and the United States at a decreasing pace, and do their utmost to insure that the Chinese do NOT get the upper hand by somehow outlasting Japanese efforts to prevent the YEN from abandoning it's tether to the USD before the RMB. And so they will continue with ZIRP, a bloated fiscal policy with 6 or 7% of GDP deficits, and insure YEN is the finance currency of choice for everything from USD denominated bonds, any higher-yielding soverign & junk, a new kitchen or beach-home for the Hedgies of Greenwich, as well as a new flash fab in Milipitas, CA.

Friday, September 29, 2006

Groundhog Day

Each morning I rise and shine thinking, hoping, and wishing that the world be better place than the one I left behind the night before. Gosh knows I try to be a better in what ways I can. But why oh why do nation states in general (and to get to the point for this is an economics-related blog of sorts) and the various finance ministries & central banks in particular have such difficulty making it "a better place" and doing the right things for world as a whole?

I am not here to bash "free trade", the benefits of trade, or the imperative of each minister or chief banker to regard the interests of the polity from whence he came above the interests of the world in general. But each day, we seem to diverge further from, rather than converge towards, any medium-term sustainable global equilibrium. And each morning as I scan the headlines and review the figures in detail, I am both both saddened and worried anew. Yes cliched as it is, like Bill Murray in "Groundhog Day".

Just once might I get up and hear: "The head of the BoJ admitted that Japanese interest rates are too low (and have been for too long) and thus effective immediately will be normalizing rates. "He said further that such normalisation will occur "at once", and there will be quote "No pussy-footing around". When questioned about the impact of the move upon the stability of financial markets, he said: "Speculators who have borrowed YEN at near zero to finance investment activities in other parts of the world when economic activity and inflation are so obviously very buoyant must be smoking crack or be severely mentally challenged if they didn't factor in the risk of eventual normalisation of YEN rates into their speculative equations. From Japan's point of view, they deserve whatever financial fate befalls them, not to mention that the Darwinian shakeout will make the world financial markets more efficient in the future.

Or how about: "PBoC Chief Zhou today announced the full scale float of the RMB, effective immediately. In teh same breath, he warned speculators that Chinese Banks have lots of bad debt, Chinese rates while low, are not expected to rise anytime soon, and that inflation is actually much higher than officially admitted, but that the float of the RMB will help the market enforce some much needed discipline..."

And then of course, we would all like to hear: "US lawmakers, feeling the deficit is really rather too large, said today they believe the USA needs to raise Federal revenues, and thus taxes, at least until revenue and expenditure correlate more closely. Speaking for the unanimous bi-partisan coalition, Sen Chaffee said they'll be effecting it by raising marginal inome tax rates by 10% on the dollar in the highest brackets as well as implementing a windfall resource tax, and a hefty nationwide Carbon Tax to both raise revenue and promote efficiency).

One day of course, I would be profoundly gladdened to hear "The entire Bush administration has resigned effective immediately". "New elections will be called for next week..."

Or, in keeping with the main topic of this board, Japanese equities, I would see a better world if: "Masayoshi Son, alledged charismatic and enigmatic founder of the Softbank internet empire was led away by officials from the Tokyo Prosecutors office Financial Crimes Squad as they investigate wrong-doings within the Softbank group of companies. Reporters were told Mr Son admitted to the various counts of fraud and was deeply deeply apologetic to those who as a result of his notoriety and schemes came to believe that wealth could be created in ways other than through the alignment of great prescience and good hard honest work, and of course time...".

I can dream, can't I?

Wednesday, September 27, 2006

Abe & Omi

I know this is irrelevant in comparison to the weighty subjects often tackled here but has anyone noticed how cute the names of new Japanese Primo and MoFo Chief (Abe & Omi) sound when ennunciated together?

In both German & Dutch the sweet nicknames for Grandama & Grandpa are "Oma" & "Opa". Along the south Indian coast, the same is Ajja & Ajji. Father & Mother in Hebrew are of "Abba" & "Ema". "Abe" and "Omi" just has such a cute and ring to it, that one might mistake them for a an absent-minded elderly couple puttering about their business meaning no one any harm. And heavens knows that that such an image might be important in the battle to defend what are indefensible interest rate and weak yen policies. one could imagine that every little bit will help...

Tuesday, September 26, 2006

Amaranth: Was It The Market?

That Amaranth had a losing position is [now] a USD $6billion undeniable fact. But the nagging question that I have about this trade-gone-bad is: (a) did the position itself sink Amaranth", (b) did the market sink Amaranth or (c) did some more nefarious interplay of causes sink Amaranth?

The common perception is that it was (a) "the position", which means the size of its bet, and the severe wrongness of the bet was responsible. This ascribes the disaster essentially to bad luck and poor risk-management and oversight. An elephant skating on thin ice, so to speak, that broke. To the young (after all, he IS rather green) Mr Hunter's defense, he didn't expect such a large move in such a compressed period. And he had been blessed with remarkable luck and prescience before so he (and his boss) might be foregiven for a lapse whereby they extrapolated Mr Hunter's (and by extension Amaranth's) luck into skill.

But I have been around the block a few times, and things are rarely what they seem. I am not ruling it out, but "the market" is rarely as big an anonymous as lore and certainly financial hacks purport. "The market" is, after all, the sum of participants, and though the mythology of capitalism would be furthered by widepsread belief that prices are set in pure competition by thousands of small anonymous ineffectual hedgers and speculators, reality very often differs. For the inconvenient truth (to borrow Mr Gore's pleasant turn of phrase) IS that some players are huge and alone can set or at least [temporarily] have great impact upon the marginal price. And all-too-often, large investors DO collude thus acting in concert. Yes it's prohibited, but when has that ever stopped anyone from trying to squeeze a profit? And it is none-too-easy for authorities to prove it in fact. And there are other feedback mechanisms such CTA trend-following strategies that have the same de facto collusive effect, even if the particpants never speak.

Where I am going with this? Metalgesellschaft's oil plunge, Sumitomo-Hamanaka's "little" copper problem, as well as Codelco's Juan-Pablo Davila's copper cock-up were all examples where feedback mechanisms whether overtly revealed, parsed from price-action, or driven by plausible rumour, innuendo, or margin calls, are rather different from the over-sized wrong-footed bet where the market random goes against. In all these, and potentially Amaranth's case, the market is hunting. They smell blood, and may not know why or what is precisely causing the move but as it moves, "they" (the market-as-hunter-killer) increase positions and press, thereby shaking the proverbial tree to see what falls. In Amaranth's case, there was information available to the market as it was common knowledge to the Energy cognoscenti that they'd bought MotherRock's book. And LTCM's [rightly} resident paranoic Lawrence Hillenbrand will tell you that unles you're Exxon that is the beginning of the end...

To my suspicious mind, this is getting warmer to the truth. And it somewhat shifts the "blame" from "stupidly unlucky" to "unluckily stupid", since getting caught out as such reveals hubris, overconfidence, and a feeling that one is smarter than "the market". All cardinal market sins and Bad! Bad! Bad!

But there is third possibility that is understandably NOT discussed in the mainstream media, but surprisingly is not discussed in the trade press either. And this is the possibility that their clumsy and quasi-public long Natty position was the subject of predatory trading by those with material non-public information about the Fund and it's positions. You see, Securities firms and Mega-Banks are required to have what are called Chinese walls, ostensibly to reflect the scale and impermeability of the Great Wall of China. But this is a rather poor analogy. "Shoji Partition" might be better. Or perhaps, "A Blood-brain barrier", or even "Placenta-like Separations". These are more accurate because information can and does flow to "those who require it" in the firm, i.e. risk-management personnel, Executive Committee members, CEO, CEO staff. Irrespective of what these firms might advertise, whe information flows, nothing is secure - certainly not as secure as one with an oversized-Natty position and already high-leverage would require to feel safe and secure (at least where I sit).

Roger Lowenstein's account, When Genius Failed reconstructed the scenario pretty well. Essentially, if you're very leveraged, once someone sees your positions, you're a target. Hillenbrand was seemingly the only one who really understood this risk. He made sure they used multiple Prime Brokers, swapped positions between leverage providers to insure no one saw the full extent of their leverage or their positions. If one cannot be certain as to whether one has an offsetting position at another shop, the risk-reward equation for "gunning" is greatly reduced. After LTCM started to take a hit, and needed either new capital or bigger lines, anyone who might supply the credit that was needed also needed to see "the position". All the Positions. He fought it, but there was recourse, and that was the precise point at which Hillenbrand knew they were dead.

LTCM accused many of the people of trading against them once they saw their positions, Goldman Sachs being singled out, in particular. But AIG, Citigroup, Berkshire, all had seen the enitre book. But everyone had lines with LTCM, so even for those who didn't see the whole book, and even they didn't know whether there was a hedge on the other side, they knew what THEIR risk was, or rather what as a lender to LTCM, they would soon be owning as principal in the event LTCM missed their call, or violated the fine print. As a creditor, a firm knew precisely what to sell and its childish to think they didn't take measures to protect themselves directly by "hedging" their risk (i.e. selling some or all of the position out directly in anticipation) or that opportunists managing the various trading desks didn't understand "the wink & the nod" that this client was now "shark bait", or that the sales manager on the bond desk couldn't resist helping another large client who would still be a client AFTER the mess was mopped up, make a little money.

But there was another incident a couple of years ago called "Eifuku" (amusingly pronounced "I F*ck You"), in which a Japanese hedge fund priming with Goldman Sachs took on entirely too-much leverage, and ploughed it into rather stupid concentrated positions. And in the span of a few short days, "the market" moved against them, and lo and behold, Goldman "owned" the position. The proprietor screamed "foul play", and sent a letter to his investors that all his positions mysteriously moved against him at the same time, causing margin call after consecutive margin call until POP!! Rumours circulated later that they had been "gunned" by Goldman. And Admittedly, this is suspect since it would make very bad business sense to risk a franchise for a little trading profit. But the world is small. And there ARE other plausible, though unproven, possibilities. For example, the head of a large London hedge fund might have worked at Goldman, and still had private friends there, and might have even been a big client of theirs. Perhaps Mr "Eifuku" had an oversized ego and inflated opinion of himself, was a Cowboy, and a potential liability to the white-shoes. Coveted position information thus passed could have seen such a client and fund trade against the position. Given the leverage, it would only take a couple days to torpedo it. Goldman would then "own the inventory" and would presumably sell the offsetting position to the client hedge fund locking in a lovely profit, and solving the problem of a loose cannon. Not to mention that the now-enriched client, with boosted returns, would gather more assets, thus completing a virtuous circle. "Boat drinks!!" Of course all the foregoing is pure and unsubstantiated conjecture, and by way of disclosure, is meant to entertain a plausible alternative explanation for very real events.

Which brings us to what really happened to Amaranth. We know they had a big energy position that was compromised from the get-go because others bid for it, so they knew marfin calls were being made. We know that they had reasonably high leverage across the fund (and I don't care what anyone says or what comparisons they make to LTCM, it WAS high). We know Citadel is very active in the energy markets and has boatloads of capital, and probably "saw" the MotherRock position. Having missed it, and seen the market tail south, did THEY "gun" it? Did their Prime Brokers "see" the position and decide it was scarily big and thus sell some Natty to hedge their credit risk, thus creating larger margin calls? Did the IB prop desks (through their Prime's) "get wind" of the position, see the margin calls, and give it a friendly "push"? Did the CTA Trend followers acclerate the trend through their "informationless" feedback loop? Maybe all? Maybe none. But be assured that there is an objective reality out there and the NYMEX Natty "time and sales" audit trail that flows back to the ultimate traders will reveal a story. How nefarious that story ultimately is will have to wait for a determined investigative pit-bull. I wonder to what extent "plausible deniability" is being manufactured as you read this?

Monday, September 25, 2006

Never Feel Sorry For A Man With His Own Plane

One of the top headlines in Bloomberg news this morning was the revelation in an Austrian Magazine that an Austrian speculator had been forced to sell amongst other things a van Gogh in order to repay the Austrian Bank whose money he was reputed to have lost in the markets. The article closed by saying that the centerpiece was, (of all places), now adorning the walls of Steve Wynn's Las Vegas palace, and that it's former owner was too distraught to cast eyes upon it ever again.

In addition to the irony that the famous canvas finds itself yet again, in a gambling establishment, it must be pointed out that that it is but another in a long list of speculators and famous works sold under duress. Alan Bond, Ryoei Saito who's story is detailed by Cassandra here, along with many others whose involuntary art dispositions and subsequent legal humiliation were far worse than what's at stake here.

Perhaps the point of the Bloomberg article was to mock the feelings the van Gogh's former owner, though with Mr Bloomberg himself being a collector, such an accusation might be out of line. Or perhaps the implied sympathies were genuine. After all, the wealthy do have feelings too. But the implicit plea for sorrow made me think of that film with Anthony Hopkins, Alec Baldwin, (and Bart The Bear, for whihc he won a special Academy Award) called "The Edge", in which Hopkins plays a fabulously wealthy older man with a stunning young wife who as it happens is having an affair with his confidante, the young Mr Baldwin. They are all away in somewhere in Alaska for Hopkins character's birthday celebration where they (sans wife) take a little sea plane voyage to do some fly fishing or such.

Baldwin's character, emboldened 'cause he's sleeping with his rich old Friend's beautiful young wife starts taunting Hopkins asking 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 for 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...". Which seems rather fitting in the circumstances in case one was in danger of shedding too many sympathetic tears.

Thursday, September 21, 2006

Get Rich Funds vs. Stay Rich Funds

Are you a "Get Rich Fund" or a "Stay Rich Fund"?!??, I recall him asking. "You're a "Stay Rich Fund", which is all very nice and I am sure you're a nice girl, but, I only invest in "Get Rich Funds. Perhaps, you should talk to Izzy...since he's sweet on "Stay Rich Funds...." . Yup, that was a "potential investor meeting" following the LTCM debacle in late 1998. It followed a meeting in which the short, cigar-chomping Jewish allocator screamed "Dammit, Leverage is POISON!!". That of course followed the guy who said: "...only 20% pa and Sharpe of 2x?!?? You'll be lucky to raise a two dimes...I saw three guys this morning doing 35% with Sharpe's of 12..."

Such were the dark days in 1998 following LTCM's mere hiccup in comparison to the heaving technicolour yawn of the Amaranth Fund's demise. What will be the fallout for the street, hedge funds and hedgefund investors?

At $9bn, everyone who could, seemingly did have a piece of Nick Mouanis' Amaranth. Every Fund of Fund, family office, and large pension fund will have got stung. Many, will make public pronouncements, because they have to, though others -particularly in Switzerland - will be either more discreet or too embarassed to admit association. And surely the Japanese were there. Maybe that's why Mouanis let it happen: in response to the pathetically selfish neo-mercantilism of Japanese monetary policy? OK, probably not. And surely some of the Petro-dollars got "recycled" from Russian & Middle-Eastern owners to CTA's and the investment banks shorting Natty (who must have been the big winners), in their pursuit of putting the wounded holder of "The Ill-Fated Long Position", out of their margin-call misery.

LTCM was a capital dislocation event. It widened spreads of all variety across all credit-sensitive markets. And they stayed divergent or distended for a reasonably long period because LTCM was pari-passu with every prop-desk and Wall Street firm inventory position (and they had eaten their fill and weren't taking any more). The heightened perceived risk caused capital to pull in its horns, making it difficult for anyone to raise equity let alone think about dramatically increasing leveraged exposure to risk. Eventually it dissipated as the Fed ill-fatedly open the spigots in fear for the Y2K bug-a-boo. And the pain of investor losses faded.

But make no mistakes: the demise of Amaranth IS a capital dislocation event. Fortunately for the markets, their leveraged exposure was concentrated in Energy, and zero-sum. And though its zero sum, this is a dramatic destruction of equity, is not entirely offset since the short-Natty "winners" are not necessarily levered Spec Funds, per se. But more imtportantly, like in 1998 there will be ripples, and these ripples will cause risk-reduction, meaning position reduction in anticipation of year-end redemptions. Risk-spreads will widen, even though this was not a credit event. Christmas in Greenwich will not be as gluttonous as it might otherwise have been.

For the real economy, global imbalances (and the median US stock), Amaranth and its fallout is probably good news (for the moment). That there was excess speculation by all manner of Macro, Strategi, and Trend-Following investor in energy (and other commodities) as well as their stocks is obvious. Kicking the shit out of Natty validates the reality that there is plenty of supply (for the moment). Copper & Nickel are probably next. Maybe the whole real-asset complex. The net result will improve sentiment across the board by taking the heat off rising goods & service prices, the Fed, and especially the US's massive trade and current a/c deficits. PCE will take that much longer to roll over, and Nouriel Roubini's bold recession call, may prove to a quarter or two too-premature.

In the meantime, for hedge fund principals, and marketers alike, it is worth rehearsing your investor explanation for why you are no longer (and never really have been) a go-go "Get Rich Fund", but in fact are (and always have been) a conservative "Stay Rich Fund", irrespective of your momentum-humping pursuits, and envelope-pushing leverage. Just hope and pray that they do not demand to "look under the hood"...

[Bad] Hedge Fund Poetry Corner

So, Farewell
Then Amaranth
Fund L.P.

The Myth
of Your Floral
Permanence -
Now Shattered.

Seekers of
"the Secrets
Between Price
& Value", You
Might've Been.

But, Torpedoed
by "Natty"
Shooting The Moon!"
Will Be
Your Epithet

Some Will Call
You "Vermin",
"Fraud" May Roll
From The Lips
of Others.

But Markets
Will Remember You
Simply As:
"Cannon Fodder".

(with apologies to EJ Thribb)

Monday, September 18, 2006

That Joint IMF Statement (in full).

All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys. All work and no play makes Hank, Sadakazu & Zhou dull boys.

& Zhou

.syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA .syob llud uohz & uzakadaS, knaH yalp on dna krow llA

A L L W O R K A N D N O P L A Y M A K E S H A N K , S A D A K A Z U A N D Z H O U D U L L B O Y S . A L L W O R K A N D N O P L A Y M A K E S H A N K , S A D A K A Z U A N D Z H O U D U L L B O Y S. A L L W O R K A N D N O P L A Y M A K E S H A N K , S A D A K A Z U A N D Z H O U D U L L B O Y S. A L L W O R K A N D N O P L A Y M A K E S H A N K , S A D A K A Z U A N D Z H O U D U L L B O Y S

All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.
All work and no play makes Hank, Sadakazu & Zhou dull boys.

Errrr. That's it, now if you would please be on your way and go sell the Yen again!