Friday, September 24, 2010

Please Don't Eat The Daisies

Like Doris Day, Carlson Capital's name is sprinkled with alliteration. And like her role referenced above, and the bucolic burbs of its setting, so Carlson Capital was caught and censured for disturbing otherwise calm waters, by violating Rule-105 - a polite reference to the rule prohibiting the practice of pounding secondaries before, and or into pricing, and covering (typically) via the offer . It goes without saying that (as was the case the GLG) it is obviously not permitted to pound the shares of an issuer (of equity, or equity-linked debt) PRIOR to the public announcement of the issue. Some would argue the former is OK because the practice is not without risk: shares hammered beyond management's pain threshold can always be pulled by the issuer leading to mother-of-a-squeeze, or or the perp of the low-risk arb could be denied stock by the syndicate forcing it to cover higher.

And politely, the SEC and its enforcers found Carlson culpable despite their protestations that the offending transactions (and presumably their covering counterpart) were initiated by separate portfolio managers, running independent portfolios. Admittedly, the WFC transgression (which was involved in a deal)  could have been bad luck. But just typing this justification made me smile. And then laugh. And thinking about it causes me to chuckle further. As an excuse, this falls into to pathetic "My Dog Ate My Homework", or "I Was Kidnapped and Violated By Aliens" categories of plausibility. Is there not another category of censure (and fine?) that says: "You broke the rules, and you were caught, but your attempt at a defense and subsequent justification is sooooo lame (and ridiculuous) that we will automatically multiply it by 10". If there isn't, there should be. Legally, this may not be defensible, or consistent, but the threat of such not-so-arbitrary enlargement might help put an end to Americans predilection for attempting to evade culpability for anything and everything - even when caught red-handed.

Indeed, their defense would have us believe that on the cited occasions one desk decides to drop big chunks of stock of the soon-to-be-issuing company, and then, completely independently there is another guy, whose strategy arrives at the decision to place orders from the secondary's underwriters for similar amounts of stock.  And this is in a reasonably small shop, with a central trading manager who is in the loop and presumably with advanced trading, middle-office and risk-management systems, Sure.

But it begs the question - is this an isolated incident (at CC and hedge funds generally), or is it exemplary of pervasive financial don't-ask--don't-tell, and that no omlette was ever made without breaking eggs? And if so, should we care? Actually, the question was rhetorical, and have no doubts that I think we should as these activities are zero sum, reflective of a real larceny probably from YOUR pension fund, and the reason it continues is because the spoils are concentrated, and losses widely diffused. So, 10x (or more), admission of guilt, even industry banishment might be a real and useful deterrent to such stealing.

Wednesday, September 15, 2010

Dog Days Revisited

And so venerable Ginza department store operator Matsuya (Code #8237) continues to revert (or, choose one: has reverted; will revert more; will overshoot) to some ltime-honoured level commensurate with some long-term market market-memory. It's present cap is just below YEN30 billion, which could just as easily be YEN20billion as it was during the millennial puke a decade ago, and little would change (except for the wealth of any levered specs still long of the stock). Though it must be said, this has been sympathetic with a malaise of similar magnitude amongst Japanese asset prices. Recently however, its decline somewhat oddly has taken on new vigour, particularly on market up-days. One might guess that  the remnants of its largest foreign holder are being puked to perhaps meet investor redemptions at the September quarter-end. So illiquid is the stock in comparison to the magnitude of their holding, even at their reduced levels, they need to start early and stomach (or rather subject their investors to) the resultant impact in order to meet obligations.

Long gone are the glorious thoughts of dismemberment, redevelopment, and pie-in-the-sky valuation estimates per tsubo. One wonders if they ever even met with management, and if so, how frosty and uncomfortable the timbre of such a tete-a-tete. Tumbleweeds like those from a Sergio Leone western, it would seem, will roll through Ginza before foreign carpetbaggers are rewarded for their efforts with a Mori Ark Hills-scale-project where specs are hoisted out of positions at large premia to their average acquisition prices.

At such times, it is worth contemplating the chastened hedge fund manager's options, having acquired illiquid positions earning incentive fees on the way up from self-impact, and now forced to liquidate into a near-vaccuum. He can act the fiduciary and attempt to obtain the best prevailing prices (which in any event are unlikely to be favorable to investors). He can say "fuck it" and just bang out positions without concern, justifying it with him (or herself) that since they are redeeming they deserve it, and anyway, he has acquired sufficient fuck-you money in the process to not care about being a fiduciary again. Or, and possibly this is the dark underbelly of interest conflicts, he could, knowing that the fund and business are "toast", really hammer the stock into the redemption date, and in some form, be it directly or indirectly, take the other side or collude with friends (with more capital) to take the lion's share of the other side at quite literally knock-down prices. The potential benefit is obvious since it is one of those moments when a manager has a true information asymmetry as he knows precisely "why" something is going down, and precisely "when" it will stop. This is not without risk, for  it may be the final ignominious descent to oblivion, Ginza jewel or not.

This may seem a cynical interpretation of possible realities. But they are worth pondering for allocating investors - particularly if one considers the lack of hesitancy by managers to exploit the asymmetries of incentive payments based on mark-to-market returns on the way up. The question is: Is there anything an allocator can do to minimize them? For one, prior to an investment, an investor (allocator) where the manager has or may have large illiquid positions in public market securities, one should demand the manager make explicit representations about actions to be taken in such eventualities, and guarantee to warehouse (and provide upon request) time&sales transaction activity. One can demand (in the Info Memo or by legal representation) blanket prohibition by the manager, its affiliates, its employees and their families, upon dealing in any securities in which the Fund has, or may have an interest in. This seems obvious, but it is rarely codified as such. This is applicable to all liquidity-constrained strategies. Anchor investors can (and should) further demand clawbacks where fees are paid on mark-to-market, or at the very least, non-disbursing fee accruals that float up and down until exit, or some suitably long investment horizon, effectively removing the traders' option. It would be wonderful to simply trust your manager. But jail, or threat of serious legal action under circumstance of contravention may be sufficient inducement to insure one's fiduciary remains, in fact, one's fiduciary.

Friday, September 10, 2010

ETFs For a Brave New World

ETFs clearly can provide some advantages for obtaining otherwise-expensive-to-obtain exposures for thematically-oriented investors. More noteworthy perhaps is the way that such vehicles have captured the imagination of Promoters and Managers as a salvation for otherwise stagnant revenue growth. This has lead to a proliferation of ever-more-focused ETFs to cater to the evolving fancies of investors looking for errrr... umm... something, indeed anything different. I would like to add my two-cents worth here and now, so BlackRock, take note: Here are some candidates for your marketing machine to focus on for the next decade:

Rent-Seeking ETF - While the maxim "Death and Taxes" is known to all, few realize that the original phrase was "Death, Taxes and Corruption". Indeed Companies that purchase influence, contracts, and favorable legislation/regulation are worthy of investor attention (not because they are more dynamic, which they aren't) but because they have a definable edge - something many others cannot boast about. Of course, ETF marketers would need to sanitize the pursuit into something like "Government Partnership Focused ETF" or

Gilded-Age ETF - Anyone who does their own shopping cannot ignore the the increasing gulf between winners and losers. As the a large portion of the former middle class sinks lower, a smaller but not reasonably-sized segment is promoted higher. This phenomena has meaningful effects ETF marketers can exploit as those companies focused upon the top-layer and growing underclass relatively prosper as the expense of the middle market. This ETF might have Whole Foods (WFMI) and Coach (COH) alongside pawnshops, check-cashing firms, pay-day loan enterprises and dollar discount stores.

Sin-City ETF - Booze, Cigarettes, Recre-ceuticals, Trans-Fats-In-A-Bag-To-Go, Espionage and surveillance equipment, Gambling, Porn, all in a neat little exchange-traded bundle. Reasonably recession-proof. High-profitability. Growing (except tobacco). Need I say more...?

Follow-The-Insider ETF - Alpha is getting harder to achieve these days. Covert insider-trading is getting riskier (just ask Raj!). But we know from some of the recent academic research that there is information contained in selective but systematically definable insider purchases and sales that yields abnormal excess returns. This is an easy one to flog, and panders to the twin pillar retail beliefs that "the market is rigged" and "it is nearly impossible for Average Joe to beat the market.

New Age ETF - Even tree-huggers have money to invest and would benefit from a convenient vehicle. And their numbers along with greater public awareness of what is environmentally good an bad, healthy or unhealthy, kharmically or spiritually desirable will make this a winner. The allure of this ETF is that it has many degrees of freedom in which to invest - from alternative energy, to agriculture and food science, from any company with sustainable approach to yoga-mat and acupuncture needle manufacturers. Build it (and advertise it convincingly) and they will come...

Bugger-The-Shorts ETF - This ETF, which will concentrate highly-shorted and crowded short stocks, may appeal to several classes of investor. First there are those that philosophically dislike the short side of the market - whether for moral or philosophical reasons. But there are also those devilish mischievous investors who can smell easy prey, and get sadistic pleasure out of squeezing weak (or system-driven) shorts out of their positions for fun and/or profit. This could potentially be popular with hedge funds as a way of quickly reversing exposure when they've been plunging themselves and find their positions on the wrong side of vicious pops so characteristic of bear-market rallies.

Activists Choice ETF - An ETF focusing on trumpted or reported positions disclosed by so-called activist investors are a so-called lay-up for ETF promoters. Primarily because activists themselves are such wonderful self-promoters, and quite adept at talking their own books. But also because they can tout "a hedge-fund strategy and performance without hedge fund fees" - always a winning slogan in the aggregation of retail funds.

Orlov's ETF - With an increasing number of doomsdayers crawling out from all crevices, under the svengali-like piping of Glenn Beck, subscribing to Dimitry Orlov-like visions of the future, perhaps an ETF focused on a belief in the coming unravelling would sell well. Manufacturers of home generators, self-sufficiency tools, small arms and ammo, micro-water-purification systems, drought-resistant seeds, land-mines and barbed-wire, as well as gold-miners, and private prison and security services all could have a place in this portfolio. The only draw back is the non-sequitir if investors peer too far into the future where property rights and the financial system dissolve into complete chaos...

The "US Healthcare System Is The Best" ETF - Americans have a peculiar love affair with their Health Care system, irrespective of how completely buggered it is in comparison to the rest of the civilized (and much of the recently civilizing) world for the insured (as well as the uninsured, and financiers of both). ETF promoters can exploit this inexplicably visceral love-affair by helping them put their money where their mouth is, and creating the market-traded basket that invests a portfolio of companies prospering from a continuation of US Healthcare haplessness.

Greying Demographics ETF - Another obvious marketing target with many degrees of investment freedom, that are increasingly visible to investors. Motorized buggies, time-shares, home-health monitoring, nutraceuticals, senior-assisted living, bingo and slot-machine manufacturers, all in a single portfolio.

The Two-Cent Nickel ETF - Americans can rarely resist a bargain. As America slides closer to Japanification, ETF marketers might take a page from the Japanese Investment Trust playbook which for years has sported The Hidden Asset Trust or similar fund focusing upon companies with net substantial real assets well below market values, particularly where such assets are not reflected on the books of the company at current market values. Some of these assets are land, subsidiaries, other securities that provide seductive teasers to bargain-hunting investors. Of course, they must be careful not to rely too heavily upon Japanese experience for performance comparisons.

Fund of Fund of Hedge Funds ETF - The Coup de Grace offering must be the Fund of Hedge Fund-of-Funds to give the punter access to the broadest participation of hedge funds, something the small-punter has arguably had difficulty in obtaining. And in an exchange traded vehicle where they can dump their exposure at the first sign of distress. The remarkable attribute of this ETF (from the industry's perspective) must be the multiple fee dollops that are removed from investors' investments on a monthly basis. This is truly the ETF Triple Dip straight from the in the Wall Street's finest creamery! But even better for the true skeptics, I know that you are thinking more like John Paulson, so if only someone (Hello GS!) can create for us a synthetic version of this that we can short, we too might find a good way to participate in the fee bonanza.

Of course, this is by no means an exhaustive list, as I am certain to have left some other crumbs on the table, so please feel free to submit your own additions.

Thursday, September 02, 2010

Ask A Stupid Question

I am sure that in readers' search for a quick buck and a sure thing they will appreciate the recent output from Cassandra's "quantitative" meat grinder which analysed the returns for the second trading week of September following a  > 6.2% fall in August, where the first day of Sept falls on Wednesday, AND the return on such a first trading day of the month is greater 1.6% (when coincidental to a Democratic administration and NFC Superbowl victor). Forecast strength is further enhanced if Paul the Octopus gives a polyps-up. Dear readers, this is almost a sure thing with 100% of priors exhibiting positive scond week returns, yielding an average weekly return of an outsized 3.7%. Better start loading up the truck. The only caveat is that there was only 1 prior (though when I ran it across ALL developed global markets, I found one other instance that yielded a 3% weekly return lending weight to the interpretation that this must be based on some strong seasonal anomaly.  More comprehensive results are available on this blog with a Premium Subscription*, and for a limited time with Gold and Platinum Membership's, you get a my personal phone number and two similar custom quant analyses per month!!) to provide sound basis for investing. 

If such numerical contortions impress you or excite you, or give you cause to open your wallet then I have some other large pieces of infrastructure I might wish to offer to you for sale.            

Recall that wonderful scene in "Something About Mary" where our hero, "Ted" played by Ben Stiller, picks up a psychotic hitchhiker enroute to tracking down Mary. The psychotic starts telling Ted  about his great business idea: "7-Minute Abs". With 10 minute abs being such a hit, he implores, why would anybody buy 10 minute abs if they could have 7-minute abs....right??!?" For my next quant-crobatic feat, I will analyze the last-hour returns for Thursdays, following Wednesdays (in September only) where the Wed. had a >1% opening gap, and finished the day up >2% where such a move returned the index level to within its trading range. Unfortunately for readers, you'll need a Premium Subscription to find the answer. As I used to say to my sister (when I was six): Ask a stupid question - get a stupid answer...