Stock Split Performance Option Squeeze Still Alive

In my November 2005 post "10 Divided by 1 = 3...Really", I discuss the anomaly whereby unscrupulous managers were using a technical loophole in TSE settlement procedures to generate enormous two-month performance options by effectively ramping shares that recently split, since such shares were not technically available for delivery for 10 weeks following record date.

Embarassed by the abuse and manipulation of shares in Japan, the delay was eliminated beginning in 2006, with "pay date" for the newly issued fungible stock now reduced to 6 days (settlement date + 3).

One would have thought that this would end the party except for the most ardent of die-hard cynics who enjoy surfing the edge of "demonstrably sub-optimal economic behaviour". Whilst only the TSE, Mothers, NASDAQ-Japan, and JASDAQ, through their time-and-sales data, and NSD and various clearing agents really know WHO the villains are here, it is worth highlighting this quarter-ends list of egregiously manipulated share splittees in an attempt to "name and shame" the ultimate perpetrators.

Code--Name---- SplitRatio--%Chg--Vol%ADV
-----------------------------------------------
2450 Ikyu..........3-for-1...15.8%....300%
8571 Nissin........2-for-1...16.7%....295%
8738 Himiwari.....3-for-1...14.4%....740%
3758 Aeria.........3-for-1....8.3%....100%
7873 Arrk..........2-for-1....7.6%....100%
9856 Keiyu.........2-for-1...10.9%....400%
3783 Nano Media..3-for-1...16.6%....210%
2383 Nihon Aim....5-for-1...12.4%....330%
8426 Nissin Srvc...2-for-1....9.7%....150%
2463 Senior Comm.3-for-1....7.2%....100%
9715 Trans Cosmo.2-for-1....9.3%....130%

Though most of these stocks traded multiples of the their average daily volume, one might have expected that they would trade with reduced volume since there are fewer shares available for delivery (until SD+3). One might also expect this to continue until the end of their marginal purchaser's respective valuation period, after which it's every man, hedgefund, or day-trader for themselves.

Nissin: Confetti Certs

Nissin Co. Ltd. (TSE Code# 8571) has broken still another record for intentional minimalization by adding a further 2-for-1 stock split to its already-prolific split history detailed in my October 2005 post entitled The Joys of Serial Splitting. As of The 28th of March, 100 shares of cuvee 1999 have financially been julienned into a whopping 35,942 bite-sized morsels. This well-suits the increasing army of day-traders in Japan who are seemingly desirous to increase their willy-size by throwing around larger and larger (if only in terms of number of shares) lines of stock.

Though Nissin has grown admirably faster than the Consumer Finance sector average, and may continue to do so in the future, it is worth pointing out it currently is sporting a split-adjusted multiple of 31x FY 2006 earnings, and 29x FY 2007 earnings which is MORE than twice the sector multiple. Reversion to the sector mean seems more or less inevitable once the obfuscation of the splits filters through and the day traders and long-margin holders puke - something that has not been lost upon Fidelity, Invesco, & Goldman Sachs, who were the three largest non-family member, transient shareholders until they dumped substantial amounts of stock during the end of Q4 2005 and beginning of Q1 2006, presumably sold to those who, with hindsight, will prove be the ones left holding the bag. Rough target price? YEN50 per mini-share, which will give it one of the lowest nominal price quotes on the TSE, an insanely large bid-offer spread (~2%), and perhaps get the Sakioka's thinking about hiring a gaggle of those famed Iranian women who spent 1979 and most of 1980 piecing together all the shredded US CIA intelligence from the ransacked Tehran embassy, to put all those diced-up share certificates back together again. In hindsight,the CIA is probably regretting not having used "The Master Blaster" shredder (the one, according to its manufacturer), that effectively "vaporizes" any and all offending materials committed to paper. I wonder if the Sakioka's will have similar regrets?

Japan Reminder: Most stocks Are Underperforming

Not that fund managers of Japanese stocks need to be reminded, but most stocks are under performing the Nikkei and Topix Benchmarks on a trailing 12mo basis. This trend has been in place for 13 months, but has dramatically accelerated in Q1 2006. So much so that less than 37% of reasonably liquid stocks listed on Tokyo, Osaka, Mothers, JASDAQ etc. have outperformed the first section benchmark. Own the "good ones" and and your golden, so to speak. Get the shit stuck to your shoe and, one might be looking for a job on the sell-side.

Why is this happening? Larger banks, larger real estate, insurance, blue chips, larger-cap earnings companies revising up in combination with a heady momentum tail of a smaller set of "favorites" that have seen their returns catapault to doubles and triples of the average stock have combined to make it a challenge to pick the right one. Longer-term momentum has been the surefire way of keeping pace without having to do the backbreaking (and rewarding) fundamental research. Yesterday's returns, however, have historically posed challenges for tomorrow's portfolios (at least as far as Japan goes), and following the truly stellar momentum returns in 2005, one shouldn't be surprised to find more soothingly familiar times (read: relief) emerging sometime later in the spring, after the flood of new money has been allocated subsequent to the end of March book-closing.

Disinfecting Guilt

Bear Stearns finally settled with the SEC regarding allegations of impropriety in respect of their alledged facilitation of "mutual fund trading" by certain of their preferred hedge fund clients. The fine was seemingly large, but no one will do "hard time", for which they must be thanking their stars that the SEC won the juridictional battle with Manhattan-based US Attorney, Eliot Spitzer. More interesting perhaps, was that as part of the USD$250,000,000.00 settlement, Bear Stearns followed the pattern so cynically typical in the Securities Industry whereby they "neither admitted nor denied guilt". But surely it is really a "black and white" question: did Bear Stearns (i.e. their management and employees) knowingly facilitate the illegal (yes, criminal) activity of their customers in the perpetrating of fraud against longer-term holders of mutual funds in which their customers' traded?

Sometimes practices become commonplace such that people no longer question how or why they evolved. But how has "being able to pay-up, but not 'fess up" to criminal activity become so accepted? Why should securities companies be absolved of having to admit guilt when the rest of our American society is theoretically held accountable in our lives and work? Have we really benefitted from civil (and ocassionally criminal) case settlements that allow a defendant to duck and cover with such an unswervingly ambiguous and privileged treatment of guilt? Is not the payment of USD$250,000,000 dollars a rather ostentatious statement of where on the side of right or wrong one sits? Has our society become so monetized and divorced from principle that even the disposition of criminal charges can be wiped clean by money?

Perhaps I will try this tactic the next time I am stopped by the State Police for speeding since it has many obvious advantages such as NOT accumulating points on my driving record and NOT having to report such infractions to my automobile insurer who might raise my insurance premiums accordingly. "Yes officer, I understand you believe I was speeding. I'll gladly pay the fine to avoid the besmirchment of my name, but let it the record read that I neither admit nor deny guilt...." With such moral permissiveness in respect of guilt, it is no wonder there is such a contagion of cuplability afflicting of people like Lay, Skilling, Scrushy, Rove, and yes, I. Lewis "Scooter" Libby cynically exclaiming: "Who....me?!?!"

Speeding Ticket For GLG

I feel compelled to weigh-in on the resolution of the GLG market manipulation charges. As has been known since March 2nd, both GLG and Mr Jabre received speeding tickets (GBP 750,000 fines) from the FSA for alledged trading on material non-public information. As a result of the settlement (provided neither GLG nor Mr Jabre appeal), no further investigation will be conducted nor will there be any public hearings in the affair.

As one might gather from my previous posts, I am rather disappointed by the outcome since the fine (comparable to a speeding ticket in the hedge fund world) de facto sanctions cheating and the cheaters who cheated, and will do nothing to discourage unfair play, or less-than-salubrious secondary market antics.

The FSA, the public, and market integrity are the biggest losers in the decision. FSA chief, Hector Sants came out guns-a-blazing about policing and investigating market abuse and manipulation, but somewhere between then and now, someone apparently stole his manhood and has placed it in a little box, someplace where he was apparently unable to find it. UK regulators now appear more pathetically whipped in relation to their American counterparts, The SEC than Mr Blair's government underneath the jackboot of the Bush administration prior to the Gulf war. Yes, it seems to me that they have squandered their chance to prove that market surveillance in the UK is REAL, that the FSA has teeth (something the SEC, for all the brouhaha surrounding manager registration, has yet to locate with respect to market manipulation), and that the penalties for cheating are embarassing, severe and immutable.

But perhaps the real winner is Goldman Sachs who, as a result of the settlement, will not have to endure on-the-record public inquiries into it's investment banking, underwriting and sales practices, nor elaborate upon how it leverages its network of friends, former employees and good customers to everyone's mutual advantage.