Sunday, December 23, 2007

When Art meets Finance

Art intersects, sometimes collides with finance in different and often serendipitous ways. Titans of finance acquire and trade rare pieces like a child collects baseball cards or cats-eye marbles, perhaps because, in their lifetimes, there is little else upon which to spend such vast sums. There are those that choose to donate large sums in most un-anonymous ways to museums partially returning to the public what has often been accrued (or stolen), but not without trying to cheat the fate of time by extracting a named wing, or other honor. Others try to find the nexus where they can use money (often not their own) to stroke their vanity by narrowing the proximity between themselves and celebrity - often with disastrous results, economically speaking, at least i the realm of film finance. But we shouldn't ignore that there are undoubtedly many well-heeled donating and supporting the arts and artists anonymously with altruistic (or conscious-cleaning) intent. Bravo for them, and everyone please give them a moment of kharmic suport.

Then, there is the wholly serendipitous collision of art and finance. One example begins with Gary J. Aguirre, a name perhaps familiar to most as a former senior SEC official-turned-whistleblower, fired for the transgression of reporting wrongdoing, in regards to the SECs buckling to political pressure in its non-investigation of John, Mack, Art Samberg & Pequot over insider-trading allegations, detailed so well at Naked Shorts by financial sleuth and slayer of hubris, Greg Newton. The result made Martha Stewart and Sam Waksal - both of whom served time - appear, by contrast, as horrific victims of justice-gone-awry. On the other hand, it might just be that the American justice - in the Aguirre affair - was subverted in a most pathetic way. You should all re-read Mr Newton's well-written details on the affair, and form your own opinions.

Yes it's a mad world, a fact not lost upon Mr Aguirre directly, nor, evidently upon his son. For while neither Mr Mack nor Mr Samberg have been headlibne buyers at Sotheby's latest impressionist auction, nor were their collections ever called in to repay margin loans, there is an art connection: Gary Aguirre's son, is the contemplative musician, Gary Aguirre Jr. (performing under the name of Gary Jules). Mr Jules as you might know has a nice repertoire of original music, but is perhaps best known for his somber, haunting cover of the "Tears For Fears" hit, "Mad World" below, perhaps a lament or prophetic vision of the world in 2007.

For the year 2007 has been a most-strange one, in almost every way - socially, politically, economically, and financially. And while change may be afoot, there is something profoundly apt about the the sad poetry of this song, and Mr Jules interpretation.
All around me are familiar faces, worn out places, worn out faces
Bright and early for the daily races
Going nowhere, going nowhere
The tears are filling up their glasses
No expression, no expression
Hide my head I want to drown my sorrow
No tomorrow, no tomorrow

And I find it kind of funny
I find it kind of sad
The dreams in which I'm dying are the best I've ever had
I find it hard to tell you
I find it hard to take
When people run in circles it's a very very
Mad World
Mad World

Children waiting for the day they feel good
Happy Birthday, Happy Birthday
And they feel the way that every child should
Sit and listen
Sit and listen
Went to school and I was very nervous
No one knew me
No one knew me
Hello teacher tell me whats my lesson
Look right through me
Look right through me

And I find it kind of funny
I find it kind of sad
The dreams in which I'm dying are the best I've ever had
I find it hard to tell you
I find it hard to take
When people run in circles it's a very very
Mad World
Mad World
Enlarge your world
Mad World

Here's hoping that 2008 will yield more optimistic thoughts, and events for all.

Friday, December 21, 2007

2008 Year-End Financial Diary

Attention traders and portfolio managers of the world. For your convenience, I've aggregated the following information, so please make note of the following official Global Trading and Write-Down Announcement Calendar, which has been agreed by global banking authorities, in order to prevent unnecessary market volatility due to unexpected loss reporting or surprise asset write-down announcement congestion.

***** Holiday Calendar 2007 *****

Tue Dec 18th - Central Bank Day (ECB & BoE Spotlight)
Wed Dec 19th - Morgan Stanley Day (AM) Bear Stearns (PM)
Thu Dec 20th - Bond-Insurer Surprise Bonanza Day (AM)
Fri Dec 21st - Merrill Lynch Writeoff "Top-Up" Day
Mon Dec 24th - (Half Day) Small Lehman Writedown
Tue Dec 25th - Xmas - Orix Co Ltd (Japan) CDO Writedown Day
Wed Dec 26th - (UK Closed) US Bank Double Header - JPM and BAC SIV Rescues & ABS Writeoffs only)
Thu Dec 27th - Yet another Bear Stearns Day!!
Fri Dec 28th - GS "Little White Lie Day" (Small Class 3 Asset writedowns only)
Mon Dec 31st - Credit Suisse Day (Equity Trading & CDO Losses only)
Tue Jan 1st - (Markets Closed) Non-financial fireworks only
Wed Jan 2nd - US Agency Day Fannie, Freddie & Sallie Synchronized Writedowns
Thu Jan 3rd - UK Bank Day (Barclays, HSBC, HBOS increase of loss-provisions only)
Fri Jan 4th - Euro Insurer Day (Allianz, AXA, & Zurich Versich only)

Thursday, December 20, 2007

US Navy To Halt Hunting of Japanese Whaling Vessels for "Scientific Purposes" AP Reports

Dec 20th (Assoc Press)
In an about-face of earlier policy that allowed the hunting of up to 50 Japanese whaling vessels for "scientific study purposes", the US Navy announced today that US submarines would temporarily halt any further culls of Japanese whaling vessels pending a senior policy review. A US Navy spokesperson said the policy reversal had nothing to do with Japan's temporary halt to its deeply unpopular plans to "harvest" up to 50 humpback whales in Anarctic waters in contravention of previous international agreements. The US Navy reiterated its sovereign right to hunt Japanese whaling vessels that contravene international law, and human decency, on the grounds that such "research" is essential to the training and preparedness of America's navy, and thus the defense of America's way of life.

Feckless Lion or The Wizards of Arb

There's been no shortage of schaudenfraude that's surfaced from observers regarding Goldman Sach's Global Alpha hedge fund managed by Mssrs Carhart and Iwanowski. It's performance has indeed been more-than-dismal. And it continues to be challenged in the year's waning months, if the headlines are correct. It has admitted that it will suffer large redemptions and many commentators - yours truly included - took a few cheap satirical pot-shots at them and their GS overseers, though I can say in my defense that they were for fun and amusement rather than any inherent mean-spiritedness.

That said, GS Global Alpha appears set to live on, albeit in more scaled-down form. This begs a more serious and related question that some readers will know perhaps only too well, and that all concerned should consider if only philosophically. It was alluded to in their letter to investors that made the rounds, which is: "As happens to many traders and investors that experience large losses, have they, or will they, lose their ...ahem...balls??!?" Some who get clocked by Mr Market are, psychopathic, and return psychologically unscathed, often none-the-wiser. Others - the ones to be emulated - learn from their mistakes and adjust accordingly. But some never recover. They do community work. Go back to school. Visit an ashram, put their money into "Certificates of Deposit". Or when they do eventually return to markets, they do so without the willingness to sensibly tolerate loss or risk, commensurate with the expected returns of their investment style and pursuits.

I know not of the early trading history of Mssrs Carhart and Iwanowski, and/or what lessons they'd learned or troubles they'd encountered before 2007's unwelcome spanking. Some, such as AQR have been caned so badly before that even a low double-digit negative year entirely consistent with prevailing factor movements is barely a cause for concern except insofar as one must assuage general investor fear and rote questions. In my time, I've seen the gamut, and the saddest thing to witness is those whose egos are so visibly effected that their subsequent confidence and judgment becomes irreparably compromised. The vision of Tom Cruise, in "Top Gun" unable to "engage the enemy", and avoiding risk after he scorched his plane killing his co-pilot due to his own overly-aggressive error (and some jet-wash) vaults most poignantly to mind. Professional help is often required. In the world of high water marks, such fear of engagement is all too often, terminal.

In their Q3 letter, they said that in the future they'll be employing less leverage. For everything that happened in late July and August, the world is not THAT different or that much more risky for their strategies. There always is a right gearing and a wrong gearing for a strategy or a portfolio of strategies. The risk that volatility would rise again from unnaturally low levels was always there, whether folks chose to ignore it or not. On the surface, with a +40% in CY06, and Global Alpha's admittedly too-high prevailing leverage in 2007, their decision to ignore it appears self evident (in this commentators opinion). And so the question remains: Is this decision to de-leverage (going forward) a de-facto mea-culpa of massive pilot error or a reflection that the managers (personally) and their GS overlords (perhaps also reflected by their decision NOT to pony up further) no longer have the stomach for the strategy risk?? Food for thought.

Wednesday, December 19, 2007

A Split Too Far

Notorious serial splitter, the sanitized loan-sharking firm of Nissin Co. Ltd. (TSE code#8571) had a rather unusual problem on its hands - the unintended consequence of temporarily successful attempts to goose stock price performance by conducting large and frequent stock-splits described in these historical posts: The Joys of Serial Splitting; Nissin: Confetti Certs; Stock-Split Performance-Option Still Alive; 10 Divided by 1 Equals 3. Really!!. It eventually (rather unsurprisingly in Cassandra's opinion at least) resulted in a sub-YEN50 stock price. This was decidedly BAD for stock-price performance and core shareholder since many investors have floor-prices under which they are precluded from investing, and beyond which they must sell, as well as yielding a bid-offer spread in excess of 2%, further deterring investment appeal to punters.

But being passive is NOT something which the Sakioka's can readily be accused. In order to rectify the situation, management decided to radically change course, ordering a "reverse-split" that was imperative to preventing a wholesale slide to low-price ignominy. So on Aug 31, they conducted a 20-for-1 reverse split, undoing the wonders of the last three feats of serial splitting, in one, fell-swoop. Skullduggery apparently has its limits (and just consequences!). And it couldn't have happened to nicer guys! Cassandra's children certainly welcomed events since Dec 2005 (when short positions yielded little but angst, drawdown, and the prospect of a local education), but with shares now at 15 cents on the proverbial dollar prevailing then, school fees (and then some!) will once again manage to be paid. So I extend my hearty thanks to the Sakioka clan for their dedicated cooperation, and all those punters and professional investment management firms stupidly vying for performance options, who, in trying to get something for nothing, helped create parochial fortune out of others institutional abuse.

Tuesday, December 18, 2007

Letter To Mr Cho, RE: Whaling

Mr Fujio Cho, Chairman
Toyota Motor Corporation
1 Toyota-cho
Aichi 471-8571

RE: Whaling & Japanese Corporate Responsibility

Dear Mr Cho,

We all have relatives that we're embarrassed to admit are related to us, either directly or indirectly. I've got my Uncle Bernie. Former President Carter had "Billy". Ronald Reagan had "Nancy". The Russians had Yeltsin. The Bush family has "W". And you've got those lunatic scientists and whalers, who conjure up one idiotic excuse after the next in order justify the height of senseless and barbaric slaughtering of the magnificent creatures we call "Whales" (Sit down Pour yourself a whiskey and see the spectacular video here).

I can understand your desire to distance yourself from the likes of Mr Kunio Arai, Head of the Japanese Whaling Association and his cohorts, who do nothing but embarrass civilized Japanese people by conjuring images of the occupation of Manchuria, comfort women, and other historical wrongs that we'd all like to forget, with his rhetoric and absurdities justifying the unjustifiable. But humanity now dictates that you, as Chairman of Japan's most powerful and successful global enterprise, and Vice-Chairman of the Keidanren, the most powerful business association in Japan, take a strong and vocal stand AGAINST the shameful actions of the very small minority clinging to the vestiges of a history now-gone, who promote and justify the slaughter of these magnificent sea-mammals. No less than one-thousand ("1000"), do they plan to kill on their recently announced series of expeditions to the world's southern oceans, including 50 Humpbacks, the gentle and most-intelligent species starring movies above.

To help Toyota understand just how intensely I personally feel about this, I will, from this moment, refuse to purchase (rent, hire or lease) any motor vehicle or product produced by your fine enterprise, until the whaling by the small minority of trouble-makers in your country has ceased in its entirety. Moreover, I will encourage ALL of my family, friends, business associates and readers to do the same. And just so you don't feel that it's personal, or that Toyota is being single-out amongst Japanese enterprise, I will be sending similar letters to Mr Fujio Mitarai, Chairman of the Keidanren, and Chairman and CEO of Canon Corporation, and all other major Japanese enterprises whose products and services I will NOT be using until the Business Leaders of Japan take the initiative to force an end to what concerned individuals and national governments around the world have been unable to accomplish.

Sadly, I would prefer to buy a Toyota Prius this Spring when I upgrade my vehicle. And I know my son would prefer a Nintendo Gameboy for Christmas, and my wife, a Canon IXUS 750. But such is our resolve, and so strong do we feel, that I will NOT allow this to happen, for sometimes, meaningful change requires sacrifice in order to save the things that we cherish.

Time to stop the impending slaughter is running out. I look forward to your reply on the above, and to hearing Toyota's action plan for stopping this, and any and all future slaughter of whales by Japanese "scientists" and "fishermen" alike, and wish you much luck in your efforts to effect swift and meaningful abolition of such practices.

Yours respectfully,

A Cassandra

P.S. - I believe that Japanese Corporations underestimate the intensity of interest of this issue, and the potential economic effects upon your enterprises, as you will see when activism surface sat every primary, secondary school and university around America and Europe, in what may be the first truly Grassroots Global Boycott.

P.S.S - I would even buy a GM, Ford or heaven forbid a Proton rather than reward a society that slaughters whales.

Monday, December 17, 2007

The World in 2008 - A Sneak Preview

As I’ve been traveling and preparing this post for a while, the world in the interim has rather frighteningly been validating my carefully prepared though probably not-so-contentious prognostications for 2008, albeit too early. I do wish I had some more provocative and non-consensus forecasts, for as a seer with a contrarian streak, I am distinctly uncomfortable extrapolating current trends forward. Yet I believe that many of these below have secular staying power.

UK Housing - Especially High-End London - Gets Decimated.
Apologists and those who are long to their eyeballs in overpriced bricks & mortar might say there is no bubble in London real estate. All I have to say in reply is that as I drove past Lambeth Palace last night, past the big round-a-bout on the door of St Thomas' Hospital, I noticed that there is a large hole in the ground that will be "luxury" apartments. Yes, right smack in the middle of a one of London's largest and busiest (not to mention smokiest) round-a-bouts. Perhaps there are sufficient numbers of Bangalore or Bombay noveau riche who've seen their friends make money in London real estate and who will buy on spec without a clue about location. But surely, for the price, it might be nice to open the window, at least once-in-a-while.

Warren Lichtenstein's Steel Partners Japan Experiences Redemptions & His Investors are "Shocked" to Learn That Mark-to-Last is 30-to-40% (maybe more) above Liquidatable NAV.
The problem with buying stock at higher and higher prices particularly where the higher and higher prices are the direct result of one's own market purchases, is that if one stops, entropy will ensue, and this will be counter to price movements in the recent past. Even worse is that when said shares are illiquid, and the position sizes unimaginable large in relation to turnover or market appetite, and the market figures out that one is actually SELLING, they will be most unmerciless and veritably pound the bids down until one wishes they were a mere US domestic activist, rather a globally-active one. And….ooooohh this will be so unpretty. Think train wreck. Blood, gore, horror, Ringu, things you wouldn't want your children to see, let alone experience. Or imagine another paradoxical scenario: above abusively tagged activist investor investing unwelcomely in Japanese companies meets activist investor in Fund wondering how it will all end and how to escape whole, in turn actively activizing upon the activist. "Distribution in-kind" will be something more investors will realize is a distinct possibility in 2008.

Buy-to-Let Turns into "Bought-and-Forget" as Foreclosures Increase.
Leveraged finance for-the-masses in the guise of "buy-to-let" schemes will also comes unraveled as both amateur, and over-leveraged professional specs discover the meaning of "capital loss" upon their optimistic one-way cash-flow and capital-gains projections from an entry-point of low yields, post-high price-appreciation. Net result? Negative equity, foreclosures and financially-humbling discovery by property investors that property markets are in fact cyclical and that there is rarely a free-lunch, particularly from a position of poor value. The slowdown in construction will cause hordes of East Europeans to return to the continent for better opps, further easing demand pressures, particularly in the southeast.

Biggest & Nastiest Atlantic Hurricane EVER Hits Major Florida Connurbation. Reinsurers & Hedge Funds Get Decimated.
Some high-end construction is built to a code that can withstand even a big one. But much of Florida is still shitty two-by-four, gingerbread, penny-wise, pound-foolish construction, and the Category-5 storm will cause extensive damage, tearing roofs off many-a-shitbox, while flattening uncountable others. More meaningful for financial markets will the huge hit to reinsurers, a hit which in hindsight will be seen as a double-whammy, with whammy#1 being the actuarily-soft-rates realized as a result of hedge-funds naively deploying capital to an inherently mark-to-model strategy that spins 1.25% a month until the binary outcome event vaporizes allocated capital, and whammy#2 being inflating reconstruction costs that will prove to outpace those modeled. An additional whammy#3 might occur when said insurers are forced to liquidate holdings into weak markets to make whole on the the risk underwritten.

London Commercial Real Estate Comes-a-Cropper.
Many of the self-confessed brightest in London in London finance circles have started to believe their own bullshit, and in so doing, have failed to see how much of the London Boom (in residential but especially commercial real estate) are a function of global credit and liquidity expansions that are, in short, non-extrapolatable. But the economy is investing in a reality that somehow assumes further liquidity and credit expansions of similar magnitudes in excess of the growth in the real economy, despite the near-deterministic imminence of recession (in UK & USA) , and a throttling of consumption and the bubble of The American Way of Life more generally, something it must be said, that cannot be good for overinvestment in general and commercial real estate prices. For the web of dependencies extends far-beyond flats on the Chelsky-Prospekt or a Dacha in Wiltshire to goods and service providers throughout the south of England from impossibly luxurious kitchens that will be used laughably infrequently, to the web of service-providers buzzing around the hive when things are good.

Disinvestment Bests Investment By Wide Margin
The advice to invest is more often than not, a god one. This is certainly true over time. But there are times – such as the present – where disinvestment bests investment. It usually occurs AFTER large asset price run-ups, when inflation is accelerating, but before full-on recession, or recognition of stagflation. Pick your overvalued asset class of choice and short it (or buy puts which remain, in many markets, reasonably priced alternatives. Caveat: watch your counterparty risk this time around.

North v. South Currency Debate Takes Center Stage.
The dollar's topped out against EUR and Cable. But all three (as well as yen & CHF) remain undervalued to GCC and Asian Mercantile units. Oh what to do...what to do?? This crisis is not one of the USD, but of BWII, and will make it to the cover of the Economist magazine before my mid-summer holiday in 2008.

US Election Campaign Moves Ordinary People to Tears.
I doubt I will be the only one cringing and throwing things at the TV as the primary season heats up, and we must endure all the inanities and ass-lick that American political "news" coverage has to offer. Where is Jeremy Paxman when you need him? But alas, the American political debate will painfully tame at the best of times, even though current conditions demand the precise opposite - not in terms mud-slinging, racial-slurs, or other underhanded smear-tactics and issue-distraction popularized by the Republicans - but rather good old fashioned debating based upon - as much as possible - the facts as best determined by independent observers. Why not put the candidates into a situation resembling “X-Factor”, where the panel is a group of globally chosen critics, writers, academics, (and perhaps even an economist!) whose purpose would be to "buzzer them" (i.e. call them out) when they deviate off-topic, waffle irredeemably, or speak infactually. They could - and even should have - their policy advisors there so we can see who and how slimey they are since we will be living with them for the next four years. Would America have voted for Bush had they had the chance to evaluate Karl Rove, Richard Perle, Paul Wolfowitz or Andrew Card a-priori?? I think not.

Huge Scandal Hits at Least One Major Hedge Fund Over Class-2 & Class-3 Security Valuations.
Frodo is of course a fiction of Mr Tolkien’s imagination, but the mesmerizing, indeed devouring lure of the ring's metaphorical power, is real and has rarely if ever been resisted in modernity - not in junk bonds, US S&Ls, Japanese stocks, real estate, mortgage securitisation, tech stocks, I&C equities, nor in almost any situation in which someone could take advantage of a market or systemic loophole for parochial gain. Imagine the temptation now-faced by large hedge funds -some with investment bank-like percentages of their portfolio considered class-2 or class-3 from a liquidity and pricing perspective. Everyone is [temporarily] served by optimism, for increases in NAVs - whether real or imagined - result in huge bonanzas for everyone including the layers of agents and intermediaries in between as well as all service providers from accountants, lawyers, primer brokers to traders etc. When the shit slams into the proverbial fan, NO ONE is incented to be brave and mark to prevailing or anything resembling reality. Private equity and VC will be hit worst, as will most layers of associated debt. If you're an investor in a large hedge fund, a letter like this will be coming to a mailbox near you soon
Dear Investor,
Pursuant to section 5, paragraph 7, clause c3.21, of the by-laws of the Fund, you are the now the proud owner of $15,720,112.36 of face value in Mezzanine Up-step Coupon "Klassics" (hereafter "MUCKs") obligations of American Municipal Bond Assurance and Stadium Revenue Bond Guaranty Corp. that were formerly of the Undersigned's Sidecar in the issuer. Note that there is no liquid market in the instruments and that our current estimate of market value is 37% less than that upon which we coincidentally accrued and collected incentive fees on at the previous valuation date, just three-months prior. This, was due to no fault of our own, but rather a highly unusual and statistically rare confluence of events, so if you have any problems, please call our attorney's who will be pleased to explain your recourse, and why you are screwed. Should this fail to clarify the issue of our responsibility, please contact our D&O underwriters, who also will be glad to explain why you're indeed, (in the legal vernacular) S.O.L.

Good luck with their sale, and just so you know, if you're in a pinch, we are 17-1/8 bid for the bonds, which we understand is a long long way from the current market, but are certain you'll understand our attempt to squeeze earnings from wherever we can during these are difficult times given the increase in the cost of kerosene and rising private jet charter rates.
Yours Truly,
(Mr) I.M. Effing-Smarte (Managing Member)
URSOL Partners

P.S. - I have taken the liberty of withdrawing the incentive fees that I've earned in order to diversify my portfolio across other strategies and is now safely in Trust in Liechtenstein. My children will thank you one day

Gordon Broon Unable to Right Labour's Ship.
Much like the externalities of a leveraged buyout, a government that invests NOT, sells what is in the public interest to private interests for short-term parochial gain that results from spineless leaders unable to parse the policy choices for the people and define long-term vision, will ultimately suffer from the cumulative effects of their actions (and it won’t be pretty) having in short, borrowed from the future to pay for the present. Mr Broon will bear the brunt of Labour’s smoke-and-mirror financing that until now has passed for "eating-your cake and having it too". Soaring costs for using historically public goods, or services, now private with gluttonously high returns on equity, on the premise of weak-founded grounds of private enterprise bettering the public in goods and service provision just make people angry. They can of course QonnecQt the dots. The all-in value proposition engendered by these bargains is horrendously poor, which, coupled with two wars, scandals, mis-steps, and arrogance, will lead to someone being made culpable, and that someone will be the dour PM of Scotland. (note that this is coming from one historically sympathetic to the left)

Despite Magazine Cover Contra-Indicators, Food Price Inflation Continues Apace.
Increasing global population, rising incomes in BRICs and other emerging economies, changing dietary habits in developing world, coupled with natural disaster, diversion of food crops to bio-fuel, palm oil, etc. peaking of yields due to limits of intensity, drought and desertification all spell a continuation of demand-led robustness to ag & food prices. DOTW take note...

Condaleeza Rice Resigns

Yet one more nearly-a-voice of reason gone. The reason will ostensibly be to pursue other interests (which won;t be Carlyle Group), but insiders and blogs will be reporting the real reason as a Cheney racial or gender insult that broke the proverbial camel's back. Rice seeks affiliation with a contender and her nam is thrown about as a potential VP nomination.

Mortgage Credit Continues To Be More Difficult to Obtain, Despite Lower Prices
One of the financial world's great paradoxes is that when money is cheap and credit is easy, there's little to buy, and when there is loads to buy, credit is difficult to find and its price is high. The sensible observer can see the problem with this, which is why there is merit in a central bank making determinations upon asset prices, precisely to prevent the market from doing what it does best which is doing whatever it does until its irrevocably stupid-silly, leading to the disturbing non-singularity of having to loosen credit and reduce the price of it, to correct the fact that you loosened credit and reduced it. This time however, creditors and central banks may find themselves in the uncomfortable position of something that, in the West, has only been seen in textbooks during our lifetimes: "pushing on a string".

Shorting IPOs Returns To Become A Vogue Strategy.
One knows one is getting on in one’s years when one pines: "Ahhh those were the days".... But those really were THE days when a healthily skeptical market [correctly until 1997] doubted the conjuring of the vast quantities of paper wealth that are presumed to materialize as a company moves from ownership by the so-called smart-money as a private-market to the suckers in the public markets. Global liquidity growth, the resulting money illusion, and passive benchmarked strategies, have made shorting IPOs dangerous and even unprofitable in recent years. But Sir John Templeton made fortunes doing just this during less pervasively-one-way markets. These days are set return, and with them, some tried-and-true, but recently cast-away strategies, of which this is one.

Google Screws Up and Shutters Its Ill-Conceived Wikipedia Competitor
Is this the tell-tale that indicates GOOG is too big, powerful, and arrogant?? One can only imagine what the Rupert Murdoch entry in Wikipedia would look like where Fox & NewsCorp are larger advertisers. It will resemble GOOGs spineless approach to censorship in China. Wikipedia is not without its flaws, but its pretty awesome and I for one hope GOOG gets visibly and embarrassingly toasted on this.

Ryanair announces huge losses when jet-fuel prices [that they've hedged] temporarily plummet. Services Cut. Some People Cheer.
The problem when a curmudgeonly soul like myself finds a beautiful, isolated and unspoiled corner of paradise, is that one would like it to remain a secret. The quickest way to ruin such a place – may of which remain tucked away in the french countryside is to let Ryanair fly there. Soon thereafter, the local “Bar-Jeu” becomes “Le Chanterelle” boucheries, and epiceries smarten up sufficiently that the word “gouging” comes to mind, and the high street will have untold numbers of estate agents frothing and swarming and speaking zee eenglish such that one might as well be back in England. Fuel hedging has lifted Ryaniar in the past, but I cannot help wonder whether they might find themselves in a little Metallgesellschaft-moment when crude swoons lower once the economic flesh-rot manifests itself more overtly. Those enjoying the periodic absence of the union jack and its holiday-swarming masses, will not be too upset at the prospects of fewer and dearer flights to some of the still-unspoiled parts of the world.

Japanese Stocks Finally Outperform MSCI World-Ex Japan - Both in USD & Local Terms.
This one is easy. It has to happen at some point. Why not in 2008? The lesser of evils indeed!!

Wednesday, December 12, 2007

No One Expects The....

....Spanish Inquisition. Yes Macro-Man has been rhetorically asking why the Fed did as the Fed did, conjuring Grinch-like allusions. Now, when speaking of Xmas, the Grinch and FInancial Markets in one breath, the comparative bar is set rather high with The Saturday Night Massacre being the meanest of feats to all the Who's down in Whoville. Everyone knows the Fed is between a rock and rock, being buggered and slagged whatever it does. Yet, despite my own oft-cynical view of US FOMC, their inherent biases and asymmmetries, and the "Catdog"-like objectives with which they are charged, they remain economists, highly-educated economists and, of course, human beings. As such they are not only fallible, but subject to vascillation, distraction, whim, happenstance, and arm-twisting by this or that.

That may or may not be part of the explanation, but if I were a central bank, I would be doing everything in my power to wrong-foot, trip-up, up-end, hurl cattle from trebuchets perched in their castle, and fart in the general direction of BOTH leveraged specs AND spineless and fiscally-blaspheming elected representatives. SO what would such an FOMC resemble? No, not the Grinch, but a softer slightly-more cuddly version of Python's Cardinal Jiminez&Friends whose watchword was "Fear & Surprise". For... "No one expects the Spanish Inquisition....". That'll make 'em think twice about leveraging the farm to short Yen in favor of Icelandic Kronor...

Tuesday, December 11, 2007

Are You Still Playing With C's 2007 Xmas Presents?

There are few better remedy's for selective memory disease than periodically reviewing one's prior prognostications.It is a particularly useful exercise prior to passing along further ones to interested readers. Though far less structured than MacroMan's highly disciplined and near-real-time accounts, I did offer some Xmas presents just before the holidays, last year, that I hope readers enjoyed, and, inshallah, profited from. But its instructive in any event, to have a look:

1. Long CAD$ vs. Short Sterling. I was pleased to have flagged the under-appreciated Loonie, still reeling at the time of the writing from the shakeout in Nov06. The cross has returned a raw 10% YTD though one must shave off a few percent for the negative carry. The prescient, however might have been able to grab more than 15% before carrying costs if one had lightened up in early Nov. In hindsight of course, the USD v. CAD was the ticket.

2. Short US Consumer Long Japanese Consumer. The best way to express this was perhaps to go long the Topix Retail index (TPRETALA Index) and short the S&P Retail index (SPRETC Index). Early on, this was decidely unwise, drawing down a reasonably amount, as Japanese consumption waned and the US consumer continued its zombie-walk, financed by kind Asian mercantile vendors. With US housing meltdown Q3 and Q4, coupled with near-$100bbl oil, the US consumer appeared to be about to be KO'ed, causing investors to drill the SPRETC back down, leaving the spread down nearly 4% for the year. Sentiments were correct on the short side, though with Japanese housewives punting in Icelandic Kronor rather than buying fashionable clothing and handbags, Japanese retail was punished even more severely.

3. Short Copper, Long Gold. Short Copper v. Long softs was the alternative, but the copper/gold spread was deemed the lower risk trade. It paid 10% immediate, before hovering flat for most of the year, before doing what I believed it stagflationarily should with copper reflecting weak US housing and gold reflecting weak USD and continued global inflationary realities. There is more in this trade, longer-term for the patient, though one has a reasonable probability of re-establishing at better levels than those prevailing currently.

4. Long YEN vs. Short Euro. Ummmm did I really recommend this? Although one had two chances to unwind without pain (Feb & Jul), and once in Feb with a couple of points profit courtesy of the carry-unwind fat-tail, this would have cost -6% before carry, so more than -9% given no tactical action. Mea culpa. MM did the right thing: bought yen vol (straddles) AFTER a large negative move. Bully for you!!

5. Short USD Bonds. It was a tug-o-war between slackening demand due to weaker dollar and inflation fears, vs. recessionary fears and flight-to-quality (or rather away from shite). The position paid +6.4% in the first half, before, if one held the position, it proceeded to lodge itself deeper adn deeper inside one's rear lower orifice ending down more than -3.5%.

6. Short USD Quality spreads. I would like to think this would have included negative sub-prime bets like Paulson's, but I wasn't so close to these markets to have been able to structure the trade. I was simply thinking of general ABS, and lower quality junk, CMO tranches and LBO-debt as spreads were to narrow across the spectrum. I'd look to you to suggest how this might have fared over the course of 2007.

7. Long Newmont (NEM) Short Nucor (NUE). Not only was there an opp for the underlying commodity spread, but the equity was equally attractive. NEM continued to get hammered in Q1 & Q2 - mostly for idiosyncratic reasons, so the spread went as much as 25% against before zipping to a +25% YTD gain by mid Nov. Alas, with deflation fears fading as result of an ADD-like market, it now sits at +6.5%.

8. Long Cheap Oil Co's. The price returns speak for themselves: Devon (DVN)+31%, Anadarko (APC)+43%, Apache (APA)+52%, Cimarex (XEC)+9%, Encana (ECA) +42%, Suncor (SU) +30%, Conoco-Philips (COP) 15% , Chevron (CVX)+ 26% & Marathon MRO) +28%. Dividends are just bonus. They were so-called lay-ups then, and remain cheap.

9. Long Misc Asset Plays Through Equity: Global Sante-Fe (GSF)+45%, Diamond Offshore DO)+60%, Cleveland-Cliffs (CLF)+113%; Raynier (RYN)+17% & PlumCreek (PCL)+26%, & Svenska Cell 'B' (SCAB SS) +2%price + 12% ccy + 3.5% divs = 17.5% tot return, and Sherritt (S CN)+17% all-in in USDs.

10. East-European & German Real Estate (Proxies = NRE LN Equity (+2%) UBSERBA LX Equity (-16.8%), SGL LN Equity (-20%)
RCEA NA Equity (+2%). Not enthralling, though thse are Euro-denom returns so there was some respite for the dollar-based investor.

The thing about Christmas presents, is that the novelty often wears of fast. However, in the case of the above, the metal spreads, oil, & misc asset plays, despite their stellar returns (something infinitely hard for a reversion investor), remain the most interesting bets as authorities attempt to surf an increasingly probable stagflationary path through deflation and wholesale inflation. Softs continue to be attractive, as does farmland, orchards, rail transport, and, in fact anything where supply is constrained or that has a more than modest chance of indexing or passing along price increases to end users or consumers.

Thursday, December 06, 2007

Matsuya (8237) - Good Luck ! ( You'll Need It....)

Symphony Financial Partners 'SFP Value Realization Fund, is a buyer of what, to a growth or GARP-investor is micro-cap and nano-cap detritus. It does so in large, concentrated and, once-acquired, unmarketable sizes. This comes with the attendant benefit of creating what (I have termed as) "market-impact options" where once a position is acquired, the manager can typically use their persistent and concentrated buying-power that results from unused leverage, self-generated market-to-market profits, topped-up with cash from additional subscriptions to their Fund, to goose the prevailing stock-prices of companies in which The Fund already has large positions. Fortunately (mostly for SFP management) investors have been none-too-inquisitive about such practices, so long as they've been able to report P's rather than L's when crunch-time (at quarter-end) arrives.

Their biggest (reported) commitment to-date has been the lamest and least-profitable of remaining department stores, Matsuya Co. Ltd. (TSE Code# 8237), which seemingly has absorbed perhaps a fifth to a quarter of the fund's gross long assets. The rationale for said position is a belief (which I have no reason to doubt) that their flagship Ginza store is worth far more as a veritable hole-in-the-ground, than it is as a time-honored Tokyo shopping and dining destination. Optimistic rumor has it that the block-long site-alone is worth upwards of USD$1.5billion, set against a current market cap of $1.1 bn.

Now I will admit to being a sucker for such "hidden asset stories", particularly in under-covered small and mid-cap names. And I am not alone for there is a (or used to be) an entire slew of funds focused on the so-called hidden asset game in Japan. So much for efficient markets, I guess. But given that some of these funds have been in existence for a decade and half, with fees far outstripping any investment return, it might be wise to ask the question: Is it a reasonable expectation for a carpetbagging gaijin portfolio investor to be successful in pressuring a time-honored Japanaese company to restructure or otherwise disassemble itself for the short-term parochial profit of foreign cage-rattlers?

Many - mostly those accruing management fees from their investors on Saturdays & Sundays - take an optimistic view as one might expect them to. They see positive change, management that is more sympathetic to "creating shareholder value" (the vernacular for asset stripping), despite the sh*t-kicking that activists have received on TOC (8841), Bulldog (2804), J-Power (9513), Fuji TV (4676), amongst other forays.

What IS true, once one dispenses with the hyperbole, is that some good companies continue to evolve into even better companies, but I, personally, harbour large doubts as to the overlap between these enterprises, and the low-hanging rotten no-growth fruit targeted by Steele, SFP, and other seekers of embedded-value-on-the-cheap.

I do not pretend to know the inner workings of Matsuya. So obscure is it - despite its billion$$+ mcap - no one has written a research report on it in a decade. But it appears to be a time-honored way of life for the minority family owners and its extended constituencies, rather than a business that appears to be voluntarily willing to commit ritual suicide and so shutter itself in favour of yet another, large-scale glass & steel real-estate development by Mori Trust or similar. The time-honored web of corporate and personal obligation extends deep and far, but this is not visible to those who see it as US$1.5bn parcel of land.

It is currently held by a cross-section of TeamJapan, that for all intent owns it for legacy reasons, but is still NOT likely to sell Matsuya Co. Ltd. to the foreign devils, else the same thing kharmically boomerangs upon them in the future. And even if someone pays full-market value for the site, there are the legacy pension costs, outstanding short-term and long-term debts to settle, inventories to write down, and redundancy costs for full-shuttering, thereby decrementing net proceeds to common shareholders by a large dollup. But SFP must surely have taken this into consideration. Right? Their investors should hope so.

In the meantime, aside from the paltry shares being repurchased by the company itself, SFP is the only buyer, and their stake - painfully acquired at ever-higher prices - is unimaginably large relative to what might be realizable in the market were something errr ummm unforeseen to happen, such as, for example, their largest investor were to redeem their interest in SFP Value Realization Fund in order to allocate, for example, to the Enhanced-Leverage Super-Senior Mortgage Salvation and Redemption Turnaround Fund (Euro-Class). Any estimate is, of course, a whimsical exercise, but my guess is that they would be very lucky to realize an average sale price of YEN1000/shr (or 50yen on the 100) in the market were they to become a distressed seller, under current market conditions.

I could of course, be wrong. SFP might have a trade-buyer in hand, one keen to acquire the site, and ready to "pay-up" for any and all shares, at a "fair price" far-above my estimate. But, investors would be wise to pay attention to the interim risk here, which is that there appears to be a large fat-tailed accident waiting to happen, as the race between the patience of SFPs investors, and the success or failure of their very large punt comes to an end. Personally, I would wager that SFP's investors lose patience before Matsuya's management gives up the proverbial ghost. Anyone with the bull-side of this story, please do divulge the particulars...

Il Palio

Like the Running of the Bulls in Pamplona, one of the great spectacles posterity has yielded modernity (that continues in time-honored, though slightly more commercial fashion) is the Palio of Siena. Exciting, potentially rewarding, but nonetheless defying what you and I might consider good common sense, participants attempt to cheat death and oblivion for fame and fortune.

Irrespective of whether Goldman's Hatzius was talking his firm's book to manufacture profit in some Macchiavelli-inspired impact trade, the bounce in the complex of "Liquidity Sensitives" has been mean indeed, predicated almost universally upon the emerging consensus that the fed will shower the another 50bps of ease upon the leveraged and forlorn of the street coupled with a belief that US real estate woes are over, given two high-profile hopefully market-clearing deals by opportunistic hedged funds. Indeed, there have been bargains around as the retail, REIT, and financial sectors have been slaughtered. And despite my sympathy with Dr Roubini's concern for potential systemic meltdown scenarios, such possibilities remain on the margins, albeit more probable than 12 months ago. But volumes appear lighter on the bounces than those that might signal secular trend continuation, and this suggests to me that for the liquidity-sensitives, this remains a bear-bounce, albeit a white-knuckled one for highly-liquidated longs and highly-shorted shorts alike (at least in the US market).

It is such frenzied covering and reversal-swings that cause me to think of the Palio, for it is as once, both exciting and dangerous for participants and spectators alike. Just don't fall off, (or be in the path of a participant that loses equilibrium).

With specs and shorts fighting for offers in the same oversold names, I can't help but wonder what might ensue IF, once-given their 50bps, the market doesn't react in textbook fashion, instead resuming its more primary path of discounting the darker deflationary swings of the pendulum associated with a median consumer that has, in a word, been cluster-FUBAR'ed.

Wednesday, December 05, 2007

From Russia With [40%] Love...

I suppose every currency comes with it's nations' idiosyncratic baggage. The Euro comes with the Italians, the Spanish, and Gallic intransigence, the Yen comes with Japan's need for consensus that makes any bold, or preemptive decision well-nigh impossible, while the Dollar brings with it America's national predilection for economic hope over financial preparation, or heaven-forbid, sacrifice. The Ruble, too, brings with it things distinctly Russian - amongst other things, a weakness and fascination with that parodied above.

Orange County Kool-Aid

Bloomberg reported today that Orange County Treasurer's office is once again in the news admitting that perhaps more than twenty percent of assets are in SIVs facing imminent downgrades. Certainly most will remember the spectacular implosion of Robert Citron's derivative bets, structured and advised by none other than, yes, Merrill Lynch, in a vain and most-unwise attempt to reach for yield.

But this recent revelation is gallingly ironic, (not to mention rather hypocritical) for on June 1st 2007, I shared what I thought (unknowingly) at the time was Most Ironic Quote Of The Day when, County Treasurer Christopher Street chided those caught with Old-Maid-like toxic CDO tranches by saying:
...It's grossly inappropriate to take this level of risk. Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig....
Ouch! As Freddy Mercury was known to sing: Another One Bites the Dust!. If your are interested in managing the albeit soon-to-be-smaller cash assets of a large US County in a pleasant though earthquake-ridden locale, please send your current CV with a cover-letter explaining how you plan to avoid the next cash-management fad-du-jour to:
Orange County Board of Supervisors
Hall of Administration
333 W. Santa Ana Blvd.
Santa Ana, CA 92701
ATTN - Treasurer Vacancy