Wednesday, December 18, 2013

On the Connection between Syd Barrett & Some Financial Pundits

The 60s were wild, enthralling, and revolutionary but just as often simply weird and stupid. Take "Syd" Barrett, the founder, frontman, and indeed inspiration, for rock legends, Pink Floyd. He propelled something innovative, gained notoriety when doing weird stuff was viewed as virtuous. Yet, much of what he personally created has not, in all honesty, survived the test of time. It was, in the main, school-boy playtime under the influence of copious amounts of LSD (itself no crime at the time) that might have entertained himself and those similarly dosed (including record producers and music consumers at the time) but which with hindsight sounds as disassociated and unlistenable as Barrett was wigged out. Needless to remind anyone, Pink Floyd (ex-Barrett) went on to create dramatic lasting electro-psychedelic-rock - most (though not all) of which, far from bering gratuitously-self-indulgant, was sparse, contemplative, and has contrary to Barrett's Pink Floyd, has, until now, survived the test of time.

Yet "Syd" Barrett certainly had his moments of brilliance and lucidity such as the little ditty known as "Bob Dylan Blues" (youtube insert above left and a must-listen) which he wrote upon the rise of Dylan-mania in 1965. NINETEEN-SIXTY-FIVE!!! He (somewhat tongue-in-cheek) sized-up Dylan with such clarity, it is hard to believe that Barrett lost it so completely and totally just a few laters later.
Got the Bob Dylan blues
And the Bob Dylan shoes
And my clothes and my hair's in a mess
But you know I just couldn't care less

Gonna write me a song
'bout what's right and what's wrong
Got God and my girl and all that;
Quiet while I make like a cat

Cause I'm a poet,
doncha know it
And the wind -
you can blow it
Cause I'm Mr. Dylan the king
And I'm free as a bird on the wing

Roam from town to town,
get to get people down
But I don't care too much about that
Cause my gut and my wallet are fat

Make a whole lot of dough
but I deserve it though
I got soul and a good heart of gold
So I'll sing about war and the cold

Cause I'm a poet,
doncha know it
And the wind -
you can blow it
Cause I'm Mr. Dylan the king
And I'm free as a bird on the wing

Well I sings about dreams
and I rhymes it with seams
Cause it seems that my dream always means
That I can prophesy all kinds of things

Well the guy that digs me
Should try hard to see
That he buys all my discs in a hat.
And when I'm in town go see that.

Cause I'm a poet,
doncha know it
And the wind -
you can blow it
Cause I'm Mr. Dylan the king
And I'm free as a bird on the wing

So, Barrett was on the right track in the framing of big picture, despite what one might call abysmal execution - so abysmal he was unable to to see through his creation, and spent the latter two-thirds of his life somewhat tragically in more or less solitude, unable or unwilling to re-engage or re-associate. Talking about being early in calling a top. By contrast, the seemingly dis-ingenuine bull-market creation that was Bob Dylan went from strength to strength, continuing irrespective of his periodic setbacks (a motorcycle crash, and born-again religious episode) for what is now nearly half a century. "Syd" may have been "right" about young Robert Zimmerman from small-town Minnesota, but the victory was pyrrhic, and Dylan, despite the flaws and warts and vanity and disingenuousness highlighted by Barrett (as well as Baez and many others) continued to create great art. Perhaps Dylan confronted and overcame them. Perhaps such flaws are both integral and necessary to success. Perhaps Barrett's view itself though written with at least some admiration, was driven by incipient paranoia and jealousy. The why may not actually be of import.

When I think of today's perma-bears (and they ARE today's because yesterday's are long-since forgotten) - such as Faber, ZeroHedge, Shedlock, Keiser, etc. i.e. those that out of true belief, or demagogic chicanery, see black where there is white (or at the very least it could break either way); conjure an image of imminent doom in place of the more probable ploddingness of humanity; and feel it their duty (or way to scrape a living) to point out to others what they see as the primacy of "the dark side", in regards to every imaginable subject from the incipient threat of liberalism or progressivism, immigration, the past unraveling and impending re-unraveling of the financial system with visions of collapse evident in each and every headline, I cannot help but think of Syd Barrett. For one would be challenged to find perm-bears who have productively created anything positive - in thought, ideas, or public policy - or who, like Dylan, despite his obvious flaws,  has survived the test of time in anything other than the entertainment or financialnewsletterwriting business pandering to pessimists and preying upon those ignorantly or genetically predisposed to end-of-the-world-ism. It is a vile occupation that results in penury for its acolytes.

Undoubtedly, the market will fluctuate. In all likelihood - it will suffer a major setback at sometime  (or times) in the future, just as it has in the past, whether it be in response to war, recession, natural disaster, cumulative bad policy mistakes, bad luck, or just plain over-speculation. Perma-bears may even be right about the eventual collapse of society, the rapture, bitcoins, gold, and the decay of government and the financial system as we know it. But validation of such nebulous things is unlikely to arrive tomorrow, or next year, or on a time-scale and with a probability that is actionable - even if (and its a big if) they are eventually right. The negatively-biased lens (as with many other strongly-biased lens) is neither a way to invest, nor live one's life, though there is no shortage of blow-hard charlatans that will fill any space granted with their repetitive warnings of imminent doom to placate one's fears. Note that this is not an argument for blind momentum investing, nor a justification to eschew the healthy skepticism or risk-reward framework one should embrace in assessing any potential investment or strategy. Rather, it is a plea to identify and avoid inflexible thinkers whose conclusions are pre-determined. For like Syd Barrett, fifty years (and counting) is a long-time - nearly a lifetime - to wait for the rest of the world to come around (if ever they do) to one's point of view.

Monday, December 16, 2013

That Zero Hedge Xmas Party Menu (in Full)


Zero Hedge Xmas Party - 2013


Craft Brews
Harboe's 'Bear Beer' (12%!!)
Deschutes' 'The Abyss'
Stone's 'Sublimely Self-Righteous'
Surly's 'Furious'
North Coast's 'Old Rasputin'


Golden Tequila Shooters
Bloody Marys's
Rum 'Hurricanes'


Cheese Doodles
Spicy Burnt Almonds
Mixed Salted Nuts

* * * * * * *


(All you can eat Buffet)

Crab & Bitter Greens Dip
'Scalded' Short Ribs
"Crock-Pot" Turkey Meatballs
Smoked & Skewered Grouper

* * * * * * *


Deep-Fried Turkey w/Freedom Fries
Slow-Cooked Goose w/Sage & Cracked-Nut Stuffing Roadkill Potatoes
Wiener Schnitzel with Sour Cabbage & Short Grain Rice 
Ostrich Burgers w/Half-baked Mac-Cheese
Traditional Bulgarian Xmas "Sarmi" (for 'Tyler')

* * * * * * *


Silver-Dollar 'Crepes'
Austrian Strudel
Upside-Down Cake w/Burnt Butter Icing
Humble Pie

* * * * *


Shortbread Cookies
Ding Dongs

(upbeat festive music provided courtesy Leonard Cohen) 

Monday, December 09, 2013

What's in a Name?

Japanese have long been criticised for being overly conformist and insufficiently creative. This is  unfair, if not untrue demonstrated by the Nobel Literature Prize recently awarded to Murakami, and the increasing representation  of Japanese brands outside the realm of consumer electronics, and, I might add, Olympus Corporation's daringly-creative plan to sweep away $1.2bn of zaitech losses by burying them in the acquisition prices of several hokey takeovers.

Perhaps the most overlooked area of creativity in Japan however is the pith and humour employed in the naming of some of the their listed enterprises.  In America, Branding & Identity has long been approached seriously and (in my opinion) over-earnestly save the departure that brought us "Yahoo!" and "Google". So successful, in fact, was this attempt to fabricate a name that in one fell swoop conjures the image of the product, a sense of iconclastic fun, with fragments of some of the vertical's keyword or key aspects along with an almost certainly-contrived onamonapia (think Uber, Twitter,  Vimeo, etc.) that our brains are now filled with senseless near-names that all blend together in some Sand Hill Road pitchbook nightmare.

While the Japanese undoubtedly have their earnestly named companies, and have wrestled with the delicate identity issues (a fun read!!) that result from M&A, contrary to their boring and humourless stereotype, they also have a bevy of the most deliciously-named companies as outlandish and unusual as a dozen Elvis' in Yoyogi Park (at least to the western observer with a sense of the absurd).
Take code #6630, or "Ya Man" Co Ltd, peddlers of  ridiculous-looking "Weight-Shape Belts" whose function, even after close inspection, remains a mystery though it appears to have something to do with "toning". If their weight-shape belts hold no allure, then their Facerciser (avail in Pink White or Gold) might. While looks like a battery-operated roll-on deodorant vessel, it (allegedly)  "mechanically taps the face mimicking (sic) a professional aesthetician's (sic) hand massage" though it may secretly have other, more umm errr adventuresome uses. I am not sure if the "Ya-Man" moniker reflects the founders'  love of Reggae or the high-fives they give each other when some sucker buys their weight shape belts....

To combat the need for re-engaging branding consultants every time one changes business, #1408 has come up with the perfect solution by calling themselves "Something Holdings". This creatively-brilliant strategy insures that no matter business line they pursue, their company name will always be relevant (or at the very least not irrelevant).

Snobbishness of the patrician-sort conjured by venerable names like "First Boston", Morgan Grenfell, or Goldman Sachs" was not the objective of #8542, better know as Tomato Bank, a name that has not failed to sophmorically-amuse me for twenty-five years conjuring lurid visions of customers depositing tomatoes and withdrawing ketchup (or Catsup or Tomato Sauce for you Brits). Of course no one laughs at Apple Computer, but Tomato bank still seems a stretch even though a Chinese-owned FDIC-insured bank in California sports the same name.

Being creative is, however, hit or miss. Take #3845, rather frighteningly  called  i-Freek Co Ltd. not terribly sympathetic with its target audience of 3-to-6 years with web-based content. It sounds more like an on-line purveyor  of illicit paraphernalia and other nefarious stuff, but hey, maybe in Japanese it sounds a whole lot more warm and fuzzy than the name (and respresentative character to the right) imply.

At times "the miss" can be a veritable disaster or the corporate branding equivalent of an "own goal". Take relatively fast-growing fashion-retailer #2185,  which was formerly known as "Point Ltd", a rather innocuous but focused name that conveyed a stream-lined sense of purpose. But recently, they changed their name  to ummm ...errrr ..."Adastria" a worse-than-meaningless fabrication which  is a near-anagram for "DISASTER" - exactly the thing investors wish to avoid. Someone clearly didn't do their homework which is why all such rebranding exercises should be sent through the "let's take the team out, drink lots and ruminate about it" wringer. 

In case there are any doubts that the Japanese possess a sense of humour to balance their creativity one only need contemplate the brilliance of what was formerly #7553, known as "Sazaby", an obscure opportunistic hustler-of-firm who was Starbuck's original partner in Japan. How creative and opportunistic one might ask? Wanting panache and being desirious of instant-brand-name recognition, they thought the prefect name and image was the venerable Sotheby's, though this was already trademarked.... at least in English, and at least to the letter. Now, channel your best native Japanese, and imagine you wish to travel to London or NY to bid on some impressionist pieces (like  for example Van Gogh's 'Portrait of Dr Gachet'). Where would you instruct your assistant to make arrangements to? Sazaby's of course...

I have always found it difficult, however good the underlying business night be, to pull the trigger on the shares of accompany whose name could be construed as prophetic. I can imagine nightmarishly-replaying the scene where an investor gets sarcastic with me about #2674, asking how, pray-tell, I could imagine that "The Hard Off Corporation" had any possible allure outside its comedic value, irrespective of the quality bargains available in a shop selling used merchandise in a nation with a strong aversion to second-hand goods. So strong is this aversion, that there is a massive market in buying quality Kawai and Yamaha Pianos, and shipping these used beauties in bulk to all the major markets. Despite these attractions, there is something creepy about the name, so I continue to leave it alone.

#3165, Fuhrmeister Electronics is just plain bizarre. It is, quite literally, a made-up name, maybe even a joke-name like Naughtius Maximus or Biggus Dickus. The Japanese have a keen mutual respect for the Germans that  goes back a long way, forming the basis of many-a-strategic-alliance - particularly in auto-components where quality, engineering prowess, and order are important. And while "Fuhr" and "Fuhrer" are NOT the same thing in German, it is bold to go down THAT route to branding taking into account recent history.  Anyone with insight into this, please do tell.

Entrpreneurs are usually Do-Ers which sets them apart from armchair quarterbacks, and pub-dwelling know-it-alls. This is why investors might view #4287 with some trepidation. Perhaps if "Just Planning Co. Ltd" were an architectural firm, the name might be apt, but for a real estate developer, they could have done with something less descriptive of precisely the thing you want your developer to do with your investment capital: sit on their hands.

You would have to truly be one of the least curious human beings to not want to know precisely what  #4331, "Take & Give Needs Co. Ltd"actually did as a line of business. A pawn shop? A conveyor-belt sushi establishment? Private refuse collection? Personal valet service? Nope. It's a USD$275mm Wedding provider. Why did they name it so? One might romantically think it reflects the exchange of wedding vows but really it is because Take & Give reflects the Pump & Dump when it was run-up from YEN1000 to YEN20,000, before taking all investors' money enroute to YEN200/shr. It is currently in 'Giving" mode hovering at YEN2000 (from its pre-Abenomics level of YEN600.

Of all the things one might wish their business to be labelled, "quixotic" is probably not amongst them. Yet taking the proverbial bull by the horns (no pun intended) is precisely what #7532 did on choosing to call itself "Don Quijote". In true heroic fashion (again no pun intended) they overcome the burden of their name, and contrary to the prejudices it implies,  have grown rapidly,  and more or less continuously, rewarding investors who've backed 'the dreamer.'

Irony, too is present, in Japanese stock names and codes. While the meaning of symbols is different across cultures, I still find it odd to name your designer of infant clothes #7956, "Pigeon Corporation". Not that pigeons can't be cute - I am sure a good artist can conjure a cuddly likeness. But perhaps the somewhat obscure though humorous allusion between pigeons and babies was to the mess they both leave behind. Fortunately, the adjacent company #7955 is omnisciently and fortuitously-called "Cleanup Corporation". 

It is hard to say that changing #4631, the Dai Nippon Ink & Chemical Company's name to "DIC" was not without attendant risks. #2180 or "Sunny-Side Up" makes me smile whenever I see it which was likely their intention. But my favorite, as an english speaker, is the pure poetry of @2904 the seafood paste maker "Ichimasa Kamaboko".  I know in Japanese "kamaboko" sets the digestive juices in motion, but to me, it conjures images of a West-African beach, colourful Jimmy Hendrix style-daishiki's as the words Ichimasa Kamaboko roll off the tongue of Eddie Murphy fabulous parody (Merry New Year!) in what is likely every trader's favourite movie, Trading Places.

Friday, November 29, 2013

Fair-Weather Friends or Raining on Your Parade

Ask any thoughtful reinsurance underwriter about 2014 renewals and you will get (in their confidence or after their requisite 4th cocktail) a side-to-side shaking of the head….an iconic Japanese-like sucking-in of air through their teeth, marked with the appearance of archetypical and decidedly pessimistic worry lines on their forehead. You will hear grumbles about prices dropping like a Guinness&vindaloo in the wee hours of the AM, excess capital, new entrants, pension funds,  f*cking hedge funds, even before you hear them whinge "…you know our leverage - you can do the math on what THAT will do to returns….". It is, without a doubt, a buyer's market.

Yet, at the same time as the bias of earnings revisions for next year are mostly negative, with, in many cases FY14 below this year, you've got the reinsurance sector stocks on a veritable tear as if they had portfolios loaded with beta, despite most having highly-constrained risky asset or FX exposure on their investment side, with the exception of the ubiquitous credit hemorrhoid that flares up from time to time, and the odd moderate duration land mine.  And it seems like every large multi-strat hedge fund has started a reinsurance company or reinsurance strategy - whether for tax dodging  roll-up and deferral for diversification, and to secure additional "permanent" reasonably stable capital - on top of the numerous reinsurance companies themselves offering non-equity and alternative investors multiple new points of direct access - both through a fund structures or sidecars. Greenlight, DE Shaw, Third Point, AQR, Blackstone, are all having a go at their own show - reminiscent of the last big business opportunity which all the smart guys in the room stumbled over themselves to get a piece of - the CDO market. And we know how THAT one turned our for investors.

Even for a long-time bull upon reinsurance as I am, I must admit to being worried. There is no doubt that there  is  was a shortage of capital to reinsure peak risks (GOM Wind & CA Quake), partly as a result of co's desire to diversify underwriting portfolios, reduce volatility, as well as the biting of more stringent capital rules, and a increase in insurable values coincidental to the financial crisis. That was then. Now, all has been forgiven, as a dearth of yield, and money to deploy lures the punters back, along with increasing allocations by pension funds desperate for yield and continued evolution in collateralized markets easing access for, well, everyone wanting a few extra bp's. Cowboys, neophytes, quick-buck artists are ubiquitous alongside the bona-fide investors whose intention (the one pitched to trustees) is to ride out the complete cycle. And the result is, as David Byrne used to sing "…Same as it ever was", with falling prices and an as yet unwitnessed, but predictable outcome.

Yes, the soft market has arrived, and if your job is to underwrite risk, then that is what you do, what you must do, and, like the ticking of a clock, what you will do. And almost all will do it irrespective of the pressure upon rates,  whether or not storms are getting more severe, because heaven forbid you return it, or lose market share or customers (or bonus!). Together this leads to more-than-a-creep in implied leverage as fence-swingers, the ignorant, or charlatans target rates of return with little regard to the risk required to attain it.  This is to the [immediate] benefit of everyone involved - brokers, underwriters, newly-minted fund managers, alternative risk-transfer professionals, the modeling community - everyone …. except the veritable principals…the owners of capital. The dutiful participate, and the more thoughtful whinge as they do so with a sense of forboding, but few to none leave the party, whatever their doubts. And as prices tumble, the loss required to put numbers in the red gets proportionally smaller. Sound familiar?

Reinsurers' stocks are were cheap.  They suffered setbacks, were way-south-of-book, and investors were slow to let go of their distrust - in fear of potential credit and duration risk in their investment portfolios resulting from potential euro contagion. But that was then. Now, with investors having already-piled-in, the stocks (club Bermuda in particular) - continue to set new highs while next FY earnings are at best, flat to fading. This is ironic from a behavioral point of view, for while investors are merciless with diminished expectations in every other sector, torpedoing the slightest revenue or earnings miss, or smallest negative change in forward expectation, there has remained an amazing tolerance when it comes to reinsurers that - to-date - has made them immune to pervasive scrutiny. It is a veritable love-fest and one might suggest, blinding them to the dark side of what they are placing upon the pedestal. Yes, some have yield. And others are contemplating buybacks and sport undemanding multiples on THIS PAST year's almost-banked earnings. But markets, as fickle, discounting machines are ignoring not just the diminishing forward expectations for the coming year, but it would seem, the increasing leverage it will take to reach these marks. Such a situation will make the arrival of the unforeseen or catastrophic that much more painful when IT does come (and make no mistake it eventually will). However, it seems at the moment, that only curmudgeons can conjure images of the perfect storm (no pun intended): large underwriting hits, combined with a market dislocation that widens credit spreads and heaps losses on duration. I'm not predicting such a perfect storm. No one can do that except the Supreme Deity herself. But what one can predict is that, now, today, such a hit will hurt investors more than it has in recent memory, and as a result, one should be questioning whether one (who is an investor - NOT the one blithely riding a traders' option) is still being sufficiently-compensated to bear the risk with the same aplomb as several years ago.

When formerly good trades become overly crowded and go bad,  the majority lose more money than they ever made. When the price is right, one is, over time, compensated for taking risks. In a very soft market, with a serious loss event(s) the damage can be, and often is, terminal. With so many new entrants and so much new capital combined with a rapidly-softening market, it is increasing-likely many will, unluckily, though not unsurprisingly, lose more than they ever made.

Wednesday, November 27, 2013

Bitcoin Haiku


Up Up and Away
The sun feels good up yon-der
"Relax!" said Hamlet


Pop some Bitcoin tags?
'Mother Mary & Joseph' !!!!
Napoleon's Waterloo

Left Of the Curtain

The Wizard told him
"Rub two Bitcoins together"
What is 'kurtosis'?


ya-da ya-da ya
Where's my USB?

Not the Monkey King

'That's a nice robe'
Exclaimed she to the vain king
Eat more bananas.

Giapetto's Nightmare

Pinocchio dreamed
When you wish upon a star
Jiminy Bitcoins!

(with apologies to Bashō; As usual, all contributions are most welcome)

Thursday, November 21, 2013

The English Moneyed-Class Are Just Plain Mean

Another small raise in the UK's minimum-tax threshold is insufficient medicine to be certain, and yet, still there are backbenchers whinging.

I was explaining to my eldest teenage daughter (who is studying IB Econ), why, in my opinion, I thought the UK Upper classes were rather mean-spirited - certainly more than their continental neighbors, case-in-point being the NHS's meagre funding relative to European healthcare systems. Ignoring historical precedents (from Enclosure onwards), my argument was that the roughly 9% of GDP that the UK spends upon healthcare (including "private" spend) reflects NOT some greater efficiency of the NHS, or some more-sensibly-organized structure, nor the superior health of the British population, but the conscious decision by the ruling class to Grinchingly restrict expenditure for the great unwashed, resulting in rationed dubious-quality services, over-stretched insfrastructure, insufficient systemic investment, and the absence of any portability of choice.  It is restricted to such a degree that the differences are palpably visible in the resulting population longevity figures and the elevated UK hospital mortality probabilities (adjusted for all systemic differences) that greatly exceed those within any peer nations, to the point that I am scared witless of getting sick in this country. By cintrast, I explained, the continent is clustered at healthcare GDP spends of 12-14%. All have universal basic coverage. All have - if not single-payor models - models mutuals or not-for-profits in which payor (or payors) essentially just carve-up similar cross-sections of entire risk-pool, resulting in uniform pricing, quality, and access. They share (unlike the NHS, and contrary to US wing-nut belief) reasonably free markets in service provision, do not ration services, and, in what was the keystone of my point, grant the less well-off essentially the same privilege as the better-off. In other words, they eat their own proverbial cooking. While this is paid for by working peoples' own social insurance contributions, there is, inevitably, a financing gap that must be filled by "those who can" paying for "those who can't" - something that the UK ruling class is apparently allergic to, but which the stoic nature of her working peoples accept with apparent  resignation, confirming both the mean-spiritedness of "those who have", and the passive nature of the great majority of Brits who - it must be pointed out - haven't revolted for 900 years, and with ubiquitious Beer and BSKYB, appear as unlikely as ever to take to the street en masse anytime soon.

The following day, my thesis was confirmed again by Nick Clegg's proposal to raise the threshold after which income tax is levied by GBP500 from  it's present GBP10,000 and the uncharitable grumbling from backbenchers.  Not that this gesture is in any way bad, for it is more generous than before, but it resembles throwing a few pennies in a busker's guitar case. My thesis is more confirmed by the presence of any income tax at all levied upon the lower quantile earners at anything remotely like the levels indicated, given the omnipresence of regressive council taxes, regressive VAT, regressive fuel taxes, regressive pecuniary taxes (road tax, TV license etc.) and little to no subsidy upon public transport and regressive implied taxes on electricity and gas via de facto privatisation surcharges masquerading as minimium ROIs - all which must be met through after-tax earnings. Libertarians (as well as high-earners and rentiers) will counter with arguments talking about "skin-in-the-game for everyone", or the top taxpayers already pay most of the tax, and so forth, as if the regressive contributions of the aforementioned were anything but painful skin-in-the-game contributions.  Moreover, National Insurance contributions are already levied directly, and fund, at least partially in proportion to what earns, some of the benefits that might be derived from the State, but what possible argument can there be to lay claim to the few farthings they earn in a world where GINIs are rising inexorably, reflecting an increase in an already skewed distribution of income?

With GDP and aggregate income rising, but the median real incomes stagnating and bottom quantiles falling, income taxes upon the lower quantiles increasingly look like attempts to squeeze proverbial blood from a stone  whilst the upper quantile continues to fatten itself with unprecedented speed and gluttony - BOTH at income AND wealth levels, the latter resulting from accelerating asset-price appreciation windfalls.   The result is exemplified in the Yellow Pages thick "How To Spend It" insert in the Financial Times, at the same time as High Streets across the nation shutter-up reflecting the maldistribution, and Lidl pinches financially-challenged customers from already-downmarket Wm Morrison's. Observers watch the top quantile's tumor-like growth in shares of both income and wealth, and unable or unwilling to respond to that critically threatening the circulation to the national body, as spending power continues to concentrate apace, and wealth eddies similarly thereby starving the economy of monetary circulation that historically resulted from more equal distributions of income. And yet, still, despite the aggregate numbers visible to all regarding the distribution of wealth, the top quantile mean-spiritedly decry higher levels of taxation, or windfall taxes upon their luck of being asset owners in a time of extreme asset-price appreciation.

There are those that will suggest it is the others' fault. They have been lazy. They could have worked harder. That their gains are through the harder-work, study and cunning blah blah blah. And while this may possibly ring true in any individual situation, it is almost certainly the inexorable forces of globalization at the aggregate level which are driving real wages lower at the same time as the cost of living is vaulting higher, just as there are huge elements of luck in the musical chairs of who - mostly by virtue of birth - at this moment so happens to be the larger marginal owner of assets. Certainly there are those that have "risked well" to borrow and buy assets (and who would have been subject to ruin and penury were things to have gone otherwise) just as there are, and will always be lazy shits and dole cheats. But I am talking aggregates, and generally, the problem remains: insufficient spending power  in the lower 50% (mostly through no fault of their own) and increasingly stingy owners of and beneficiaries from wealth at the top, unwilling to part with, or accept responsibility for, the health of the body as a whole. One might argue that the Lord of the Manor today, with dominion over the same estate, has far less obligation and far fewer responsibilities for the less fortunate than dominion over the same would have entailed in times past.  In modernity, it seems, we have truly institutionalized the privatization of the gains while socializing the costs, to such an extent that public discussion to pragmatically address the problem (and make no mistake, it is a problem for the Public Interest) is virtually impossible.

The consensus within the UK's sibling social democracies across northern europe - while not solving the problem - shames Britain by their willingness to look the issues in the proverbial eye, and make attempts to address the problems. Certainly, angst remains across the developed nations, for the stresses upon society resulting from globalization are universal, often resulting in a resurgent right-wing of angry white dudes - who were accustomed to relatively comfortable living wages, and at the very least, some stability, but who have been, or are currently now being sorely squeezed, and it is unsettling. The "angry white dudes" have likely always been present within populations. The risk (for everyone) is that if the problems are not addressed with consensus, demagogic solutions arise that risk inflicting deeper fractures upon the polity with graver economic consequences.  The UK ruling class has chosen to respond to this threat by empty words, hypocrisy, and few pennies to the busker. But more profoundly innovative policy needs to be contemplated on pragmatic and non-partisan levels in order to prevent present and further mal-distribution from killing the patient. Such mortality could occur via several avenues (via continued macroeconomic muddling) that eventually goes ka-boom, via further political shifts to the extreme right, or on the tail of the distribution of outcomes, by ugliness from the increasingly-numerous on the margins. Nine-hundred years, after all, is a very, very, long time to go without some form of revolution...

Wednesday, November 13, 2013

Full Marks For Showing Up

"Contempt", so researchers have found, is one of the strongest predictors of divorce from amongst the palette of potential factors. It is precisely such "contempt" that describes how UK Utilities feel about, and are treating, customers, and taxpayers, and indeed, the taxpaying-customer. Since I let my feelings about privatized natural monopolies be known several weeks ago in the post Freedom To Choose (to be Buggered), politicians (both right and left) and journalists have joined the fracas putting the Utilities on the defensive (but hardly inflicting anything more than a paper-cut upon the beasts). 

Listening to SSE's spokesman on the BBC this morning was demonstrative of why "contempt" may not be sufficiently powerful. He was immediately taken to task for trumpeting to Shareholders, SSE's success at extracting better than average returns and better than average dividend growth from a regulated entity, and whether or not there was something wrong with this taking into all the shenanigans that SSE (and the other Big 6) conjure and perpetuate in their rape and torture of  consumer. Some hemming and hawing ensued, leading ultimately to the following justification: SSE needs to provide investors with better than average returns and better than average dividend growth in order to entice and reward investors for the billions of pounds of investment that SSE needs to undertake to deliver the services to their customers - a justification he ended with an extremely self-satisfied remark about how the "lights go on every time their customers flick the switch". Now it must be said that using the delivery of the service for which you have a near-monopoly as a benchmark is like asking for full-marks by turning up in school, ignoring theft and abuse of consumers. The true contempt is that SSE hasn't asked equity investors to fund capital investment, and their ability to raise debt on a vast base of hard assets is hardly related to their ROE. Capital investment is funded by cash flow extracted from customers in addition to the cost of the commodity provided and its delivery. And where regulation is light, transparency dubious, this is always conflictual. Knowledgeable consumers should want this capex depreciated over the longest possible time period to minimize the present value extracted from their pockets whereas Utilities will desire to front-end the depreciation so to minimize the amount of capital (and risk) from their pockets and hasten the transfer of wealth from customers to Shareholders & Management. It is truly that simple. Despite being capital intensive, with a captive customer base, and the stability associated with providing a utility-service, such enterprises don't actually require much "capital" (equity), for it is possible to finance required capex at much lower rates than the rate of return guaranteed to utility shareholders. 

So to suggest that the reason SSE is extracting excess profits and paying generously to shareholders is to fund future capex for the benefit of their customers is plain horseshit. IF returns were to be reduced due to tighter regulation, the capex will nonetheless occur (mandated if need be) and be funded by customers (possible at depreciation schedules more attractive to their interests and bills). And IF this were to occur then the disappointed shareholders may sell their shares (or not) to reflect this new reality. The secondary market in equity doesn't or shouldn't effect capex decisions where capex is funded by revenues - NOT the equity capital markets.

The BBC inquisitor called him out for "setting the bar" for success so low at "one's light's going and staying on", as well as the absurdity and disingenuousness of petty theft via confusing tariff structure and so forth, but sadly didn't take him to task for the larger contemptful lie that it is somehow not zero sum and that customers are somehow better off when SSE is paying large bonuses to management and large dividends to shareholders.

I cannot help but think with such piggy unenlightened management this is - eventually - going to snap-back and end badly for shareholders - worse than it otherwise might be. Wafer-thin mint...Sir?

Tuesday, November 12, 2013

Happy Anniversary Japanese Bull Market

Happy Anniversary Japanese Bull Market! It's been a wonderful year! Happy Anniversary market anticipation of Japanese reflation! The market almost believes [for now] that you might succeed without destroying the entire edifice! Happy Anniversary to the official end of the "Yen is a Safe Haven" meme! Ignoring Kyle Bass, this was an absurd hiding place - even by the measure of absurd hiding places. Happy anniversary to the discovery by investors that Japanese assets were cheap beyond compare! Unfortunately, most of you didn't accumulate them when they were cheap, only to find that they were rather difficult to accumulate when many others wish to do the same. Happy Anniversary to the re-weighting of Japanese equities in Global portfolios! Hope you've been hedging the FX exposure! Happy Anniversary to Japanese HF TTM returns! They have made veritable heroes out of people previously almost-embarassed to say they had anything remotely to do with Japanese equities.  And a very very special  Happy Two-Year Anniversary wish commemorating the Olympus Corporation Surrender. Their capitulation and subsequent revelations of twenty-years and nearly $2bn of "pass-the-parcel" deceptions to hide spec trading losses, culminating in the most stupid and comedic plan to finally dispose of the hidden red ink, will be remembered as the crowning achievement of Zaitech. (See here for my long-form account that few have had the patience to read - Free beer for engaging comments!) 

Since it is more informative for Cassandras to peer in to the future, than dwell upon the past,  what next? I would be well-surprised to see index levels lower, or the yen higher, into calendar year end. In fact, if there were a comparative measure of bang-for-proverbial-buck in allocating more to existing to positions to capture the rather obvious year-end spoils dangling dangerously low, Japanese equity, expressed in all its forms, would rank rather high indeed and present some of the most compelling opportunities for monkey business.  

Sunday, November 10, 2013

"Ten-Four There Good Buddy...We Got Ourselves a Convoy..."

The Seventies were bizarre. I knew it at the time, and with the benefit of hindsight have been proved right by the passage of the years. Captain & Tennille juxtaposed to Johnny Rotten yet still spawning the like of CW McCall's Convoy. OMG.

Fortunately MOST things change (at least in America). And some things change elsewhere too - even Japan. But amusingly, in Japan, plus ça change, plus c'est la même chose, evidenced most recently by the Food Mislabeling Scandal better known as "Whatever They Tell You It IS, It Certainly AIN'T" Scandal.

Japan has a long history of nationalistic paranoia about its food and all manner of charlatans willing to capitalize upon the population's predilections. This is perhaps to be expected by cynics and skeptics alike. The UK food industry remarkably plays up domestic provenance as well and the people perhaps less remarkably lap it up (despite being Ground Zero for MadCow/CJD). In Japan however, where reverence is greater in most culinary areas, provenance is of paramount importance. 

So the shock at the initial admissions by the Hankyu group that what their establishments had been  serving up, was NOT what was billed, was indeed great, particularly in one of last places on earth where honesty survives, honor is important and shame remains an important deterrent to anti-social behavior. And the Hankyu hotel brands are not downmarket (think Ritz-Carlton!!), but elevated and venerated. They played it initially as clerical error, outdated menus blah blah, but in fact it was willful  deceit and fraud on a rather large and systematic scale. And in Japan, practices and policies like these are (like SAC for example) rarely rogue, but are likely promulgated by or from The Top. No surprises here.

For me, who has worked for a Japanese company and been involved in Japanese markets for more than twenty years, what would have been a surprise is if Hankyu was alone in its deceptions or that government ministries themselves weren't complicit. And though the latter is awaiting revelation, rather amusingly, as if one was Plane-Spotting, or watching the daily rhythm of the day unfold in clock-work fashion, everyone else soon followed Hankyu Group with similar if not identical revelations. Okura, Matsuzakaya, Isetan, Mitsukoshi, Daimaru, Takashimaya, Sogo, Seibu, Kintetsu and Odakyu groups. Whew. Apart from Jiro Ono and his sons, indeed one might wonder  if anyplace anywhere in Japan has been honest in labeling veritably what comprises their offerings.  This is the Convoy system. This is  the Japan I know and maintain my love/hate relationship with. And evidenced by the affair, little to nothing has  changed.

And so as I look upon the ongoing travails of the Mizuho Group senior management - self-perceived as  the blue-blood of  Japanese banking -  wrestling with what are [presently] singular revelations of their banking ties with the underworld and services provided to Yakuza groups, and I must smile that knowing smile...the one that was well-aware that Nui Onoue and her Magical Buddhist Toad has many powerful clients (not just the directly implicated IBJ execs)...the one that is quite sure that in Japanese corporate affairs, there is rarely a single roach...and that there must be much hand-wringing, document scrubbing and shredding, hush-money paying, and praying at the other banks, along with the groaning and straining of whatever machine keeps eyes narrowly focused upon The Few who've been found out. But my guess: other shoes will drop.... 

Tuesday, November 05, 2013

Never Feel Sorry For A Man With his Own Plane

I am, by nature, empathetic. I look at the distress that the government's rather relentless case against SAC and Steve Cohen has brought to him, his business, and his family and feel it must be hard. And for what? Totally victimless crime(s) if you ask me (if 'crimes' is the even the right word)! And, to be fair, they are victimless crimes that he has firmly and continually denied and was just as shocked as Federal Prosecutors to discover the sheer extent to which not only was SAC the first call BEFORE the first call but to the lengths his trusted minions went to shake down sources for material non-public information of every flavour and variety and circumvent the extensive compliance procedures that he personally directed be put in place! Shocking indeed...and disappointing.

I can understand the extreme disappointment and shattering of dreams that being arm-twisted into admitting guilt by a frickin' bureaucrat who likely makes less than Cohen pays Bubbles The Clown to twist balloons into funny animals at his kids' birthday party. This admission wrested from Him under unending duress, will mean that posterity will NOT utter his name with the same veneration as one might say "Bernard Baruch". Nor will his photo adorn the gilded walls of the trading Hall Of Fame with the likes of George Soros, or Michael Steinhardt, but will instead be caricatured with Martha "I hate Ina Garten" Stewart and Raj "I Paid Kenny Rogers $4mm to Play The Gambler Over and Over and Over" Rajaratnam. You can take away a man's money, and he'll survive, but take away a man's honour and bragging rights and you end up like Dick Fuld - NEVER being able to find a bona-fide golfing partner. Fortunately, unlike Fuld who's sob story is forcing him to sell assets, Mr Cohen will always be able to pay Guy Fieri to play a few rounds, but its not the same. The legacy is now shot. One wonders however, how low he'll go and whether he may upon hitting bottom seek Lance Armstrong-like redemption in an Oprah confessional?

And while the loss of 3 & 50 which will undoubtably hobble attempts to catch Icahn, Dalio or Simons in the dash for whatever they are all dashing for, it must be worth both the money, humiliation, and shattered dreams just to stop the relentless pitting of former friends and colleagues against each other as if gladiators before a raucous Roman crowd. No humans should be faced with the prospect of having to choose between self-incromination and resulting prison or sending a friend to prison for a victimless infraction of an ostensibly technical rule...don't you think? And there is stigma. Which university will now accept his donation for the "Steve Cohen Endowed Lectureship in Financial Ethics"? In Japan such stigma even damages the marriage prospects of one's children, though we are more liberal in America. Nonetheless, it is unlikely his wealth will now be able to buy him an Ambassadorship, Senate seat, Mayoralty, or Governorship, and may have to settle for buying a professional sports team to lighten himself of some of his remaining billions.

But before you shed too many tears, you should take the advice of Charles Morse (masterfully played by Anthony Hopkins for which he won a special Academy Award), the protaganist in David Mamet's film, aptly named "The Edge" . The aging billionaire Morse is being taunted by young photographer Robert Green (played by Alec Baldwin), emboldened for the latter is (unbeknownst to Morse) having an affair with the old billionaire's young wife (Elle MacPherson). They are flying to a remote place in Alaska for a photo shoot. Green (showing faux sympathy) asks Morse 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 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..."

Tuesday, October 29, 2013

Winning The Battle But Losing The War?

Fables and parables are likely as old as language itself. Aesop's Tortoise and The Hare is more iconic of patience & method than anything yet written, springing to mind yet again just the other day as I'm cycling atop the north downs.  I am mid-ride, and ascend up the steeps overlooking the Darent Valley on my way through Warlingham , then across east to leafy lanes of Knockholt on my way to descending into sleepy Otford Village. Despite the beauty of this area, I rarely ride north of M25. The lanes are tighter, the driver's more impatient, he troads less well-kept (if such a thing were possible). I am in gawking mode -  taking in the scenery of roads not-yet-traveled. I begin my descent and pass a super-high security area as I am coming down the hill enroute to Otford. High-tech cameras… double-fences….fencecd-in cameras and cameras trained on the fences. I follow a truck down a side road towards an entrance gate at the base of the hill, also with double gates, infra-red cameras. I could slip in drafting behind the 18-wheeler, but think it wiser to stand my ground. I think: WTFF is THAT in leafy old Kent?!?! 

When I get home, I check out my maps, and it turns out that the installation is the old Fort Halstead (I'd never heard of it) but all locals have  Apparently, the Brits built it at the turn of the last century as part of a ring of strategically-located fortifications in order to protect London from what one might only guess to be a land invasion (from ummm  errrrr I don't know…the Germans?) which were meant to be manned by Dad's Army.  After the first world war, it was home to sercret weapons research and other things no one likes to talk about . Anyway, the German's failed to breach blighty's shores (for which they [the Germans] are undoubtedly thankful, preferring Spain and Greece in any Event) never testing the Volunteer Force (likely a good thing for the occasionals). After WWII,  Fort Halstead housed top secret military research (think of Ian Fleming's likeable "Q"). Though in its hey-day, it was thought to be center of UK Nuclear Weapons Research,  with time, (and the 1970s) (and the fact that half this island eats baked beans for breakfast), it became quite clear the UK couldn't really afford such luxury. So with an empty billfold, in one of the last sales of state assets,  the UK Government privatised it (calling the outfit QinetIQ, eliciting thoughts of  "The Smartest Guys In The Room) after which management and directors paid themselves larger salaries and big bonuses before remembering that they've only got one big (and very skint) customer, who occupies a rather over-crowded island in the very North Atlantic and no longer has an empire. QinetIQ, in a move to cut costs so that they could continue to pay generous salaries and bonuses to management and directors, decided that they didn't really need the Fort Halstead installation (with their skint customer now in need of fewer , if any, Nukes) and, sitting as is does upon some 300 or so acres of the most expensive real estate outside of London, they decided they would close it (NB: It was the largest employer in the Sevenoaks area with > 1200 people!!) and cash in on the soaring land values. The sale process was set in motion and irony of ironies, who buys this former fortification designed to protect the people and government of London, thereby capturing the proverbial flag? Yes, you guessed it….The Germans!  (Deutsche Bank's Anglo-sounding property development group Armstrong Kent LLP for a whopping "undisclosed sum" of millions).  One would be forgiven for wondering if The Brits only won the battle but really lost the war...?

Thursday, October 24, 2013


I read yesterday morning in the Japan Times that the JP Morgan settlement is thought to be a blueprint of future settlements. Some recompense to the Treasury, some putative damages to act a deterrent for the future, but a decided lack of culpability in the veritable errrr ummm culprits.

Why, pray tell, is it believed correct by a majority of lawmakers in America that "Gun's Don't Kill People - People Kill People",  yet, the same lawmakers fail to apply similar conviction (no pun intended) to the thought that "Banks Don't Commit Financial Crime - People Commit Financial Crime"?  It is quite obvious that in the truest sense, a bank cannot (yet) commit a crime, and until such time as HAL or Holly take over the reins and execution of bank trading and management, there are individuals, and responsible managers, and their Managers (upper-case "M") who, should be culpable. Yet, in 2013 America, if one pays enough, it seems the perps and perp-enablers and perp-encouragers and perp-incentivizers can walk free.

The question as to "why" there exists a paradox of culpability is a rhetorical question. The answer is  rather obvious: the legislature and its lawmakers have been captured, which leads to laws and standards of convenience, rather than consistent logic. In the game of political rock-paper-scissors, money trumps philosophical consistency each and every day.

While I am admittedly both curmudgeonly and, at times cantankerous, and I am known to be periodically nostalgic, none of these are behind my belief that partnerships-of-old, as compared to publicly-listed joint-stock companies, throttled behaviour in ways that were palpably superior, precisely because there was a semblance of culpability - at the very least to one's partners. And if you weren't a partner, you can be certain that the culpable partner would insure potential tumors under his remit were excised, as such a cancer would impact both his partnership and therefore his children's patrimony. I am of course, using this as an example, and I am not suggesting banks return to a partnership model. But it is important to question precisely what message is being sent by the decided lack of personal culpability, directly, by line managers, and their senior managers. Yes, their Senior Managers. In most areas of the law (it has been pointed out to me on more than one compliance-related occasion)  ignorance is no excuse.

So "Pay Away" your sins, while a palliative to the Treasury, is no cure. Only the bona-fide prospect of sharing a cell with a father-raper, near-total asset seizures vs. to most individuals what now appears to be eventual repayment of an interest-free loan (if caught) and a possibly blot on one's employment record (which BTW others less pure-minded may see as a virtue). In practice, this must mean more than  selling out a few of your subordinates to take the rap, and make it go away. Like cancer, if you don't get it all, it will return, metastasize, and kill the host. And to be clear: WE are the host.            

Wednesday, October 16, 2013

Join Today! The "Trade of The Month Club"

In 1928, Harry Scherman a JWT coptwriter founded the Book-of-the-Month Club to help the aspiring masses populate their scant libraries with leather-bound tomes their friends and guests might impressedly fondle. Over time, the idea spawned many copycats from "Wine-of-the-Month" Club, to the more absurd "Fruit-of-the-Month" Club. The year nineteen hundred and twenty-eight was, I might point out, rather near to the denoument of the roaring bull, and so padding out a library for show, rather than one's edification, was certainly apt.

But here we are in the year two-thousand and thirteen - one that finds investors, in a word, apathetic, and adding a few more, decidedly lacking in conviction. Investment is determined by the negative of asset-class avoidance ("I hate bonds"), reaction to market action ("Silver isn't working") rather than by inspired imagination (excepting the promise of Tesla Motors or the Strontium/Cesium eating algae of Japan Best Rescue Co. (TSE Code 2453).  Even the most dire of Euro-skeptics (excepting Mish and The Telegraph's Ambrose Five-Names) those who only months before were hyperventilating in their predictions that the Greeks would shortly be wiping their bottoms with light-blue EU Flags - have lost their conviction in Europe's and the Euro's imminent demise, and returned to their local Brasserie  for a plate of Jarret à l'os. 

So uninspired are investors, both Macro and Micro, Chernham & Burnham Publishing will, effective immediately, attempt to solve this crisis-of-no-obvious-crisis, by forming, and opening for membership a "Trade-of-the-Month" Club, along lines inspired by Mr Scherman back in 1928.  Each and every month, on its first day, The Trade-of-the-Month Club will provide you (and it must be pointed out all other club Members) with a single, inspired, carefully-bound idea that Members can sink their money into, and concertedly both move, and benefit from others moving, the price of the chosen investment. This will provide relief from market boredom, narrow ranges, and unpredictable whip-saws. Accompanying each volume will be a simultaneous month-long dissemination of sponsored research, press-reports, "briefing notes" for stringers and content providers to construct their own articles as well as selected Experts made available to talk on the "Trade of The Month" in multi-media interviews of all formats.  Recent 2013 Trades-of-The-Month (available to our Beta members) have included: "Jan 2103 Short Yen/Long Nikkei", June 2013 - Long the USD,  May 2013 - Short AUD, Aug 2013 -Short US Bonds, rounding out a stunningly attractive set of trades for our Members trading pleasure.

Finally, I want to highlight that like all good research with commercial objectives - whether Independent, Private, Sell-Side, Newsletter - the Trade of The Month Club will offer tiers of membership: "Basic", "Preferred", and "SAC".   I am quite certain that this needs no further discussion and that everyone - and I mean EVERYONE - knows what's going here.

So sign up today! And begin receiving your "Trade of The Month commencing immediately!

COMING SOON!: The "Trade of The Month" Club will shortly introduce its special Monthly Activist Section. This will be tailored specifically to the interests of Activist members highlighting a different target every month. In addition to focusing Members' attention upon a single well-researched thesis, it will also include provocative boiler-plate letters composed to company chairmen and their board members that members can customize accordingly, and a special Xmas Focus Edition to help members with a year-end busting performance boost. Join today!

Freedom To Choose ( be buggered)

Her Majesty's Post Office, The Royal Mail, has been privatized. As such, it is an opportune moment to evalute past experience, in order to ruminate upon whether, in totality, as proponents might suggest, this is a "good thing".

There is no small contingent repeating the mantra "Privatization Is Good" with a religious fervency that would make Lubbovitchers envious.  Their arguments - free markets, competition, consumer choice, efficiency - are, by now, well-known to all. But I often wonder whether any such proponents have taken a (UK) train in the past decade, paid a gas bill, tried to swap electricity providers, have ever been employed by a privatized regulated quasi-monopoly, or for that matter, ever required the installation of a private telephone line.

I will state my thesis clearly and directly: upon reflection, I reckon that the overwhelming majority of the much-trumpeted economic benefits have been appropriated by Management and Shareholders of privatized entities, leaving the other constituents - captive customers, and long-serving employees and, most importantly, the taxpayer - decidedly worse-off than what was the case with former monopolies, or what is the case in comparison to state-sponsored monopolies across peer nations in Western Europe. While it is likely that there are many studies sponsored by the beneficiaries demonstrating unmitigated success, in addition to numerical analyses from the losers, concluding overwhelming failure, what IS undisputed is that the "Privatization is Good" arguments have gained primacy amongst the polity to such an extent that it feels heretical to re-open discussions to the contrary.

Let's detail and review the textbook arguments promised in favor. Lower prices. Better service. Greater simplicity. Increased investment in infrastructure. More consumer choice. From my observations on an absolute and relative basis, I anecdotally conclude the following: Lower prices (than otherwise would have prevailed)? No. Better service? Not really, unless one enjoys being tortured by rat-hole mazes of automated telephone menu systems. Greater Simplicity? No, it is likely that to NOT be buggered by the plethora of sucker "deals" and teaser offers, one needs a more advanced degree than the engineers providing the service.  Greater Investment in Infrastructure? I will concede 'perhaps in airports'.  These are neither indictments against markets nor a trebuchet aimed at the notion of competition. The dismal experience to-date may be the result of insufficient regulation or regulatory failure, corporate lobbying & rent-seeking, or simply ineptitude or short-sightedness on the part of The State in the sale of assets or management of the long-term concession process, which is undeniably complex, and subject to asymmetrical expertise when facing off against better-funded and better remunerated private interests (at least in nations where the most able opt for private rather than public administrative careers). Or it may simply be that exchanging public for private ownership of natural monopolies are just not fit for the purpose of exemplifying Libertarian-inspired policy benefits. 

Consider, now, what is self-evident: Capex is likely lower (and now conflictual needing to, as best as possible, be stipulated by contract), and where adequate is typically funded directly by the consumer through higher charges. Yet, the consumer/taxpayer, who regressively pays for the capex and infrastructure receives no long-term benefits such as lower charges once depreciation rolls off, nor carried interest in the resulting long-lifed assets whose (monopoly) values have tended to rise at greater than the rate of inflation. Consumer costs are by definition higher since they must now directly repay the up-front dowry investors forked over in exchange for a guaranteed rate of return. Here, again, incentives are conflictual as prices are rapid to rise and sticky to fall. Moreover, non-volatile non-commodity things like transport or water/sewage NEVER fluctuate down (on an average basis).

Risks also appear skewed asymmetrically-favoring shareholders at the expense of the Taxpayer and Consumers.  The risk is fully-borne by the consumer. Price increases typically have a guaranteed floor with a minimum (again in the case of trains) guaranteed escalation of "CPI + 1" formula with options for more upside should regulators be strong-armed or feel charitable, or wages be strong-armed or fortuitously move lower in real-terms. And in fact, wages and benefits for most employees have been doing just this: falling in real terms, irrespective that the contractual  basis for perpetual increases on the revenue-side of the equation is CPI. This is unimaginably good luck since CPI is unreflective of their costs - rising residential property prices, rents, food and - in a perverse feedback loop - the higher rail and utility charges themselves. Over time, this runaway feedback-loop has left (for example) UK fares ridiculously out on the tail of comparative European costs. 

"Consumer choice" is one of the favourite arguments of proponents, yet also one of the lamest - particularly when applied to the typical privatized monopoly. Supporters may conjure images of the dour Leonid Brezhnev, a cigar-chomping Fidel or an army-fatigue clad Bulgarian women in Ceaușescu-like Halls of The People hissing and spitting in customer's faces. But I believe this is a canard, and that there is, to put it frankly, little public utility in competing utilities - from a customer choice point of view. Competing oligopolies can hardly be considered to provide truly competitive choice. Can anyone honestly say that privatization has improved customer service? I see no end to understaffed gas, telecom, or electric  works snarling critical byways, workers unchaffed, sipping tea. One can wonder whether public monoplies might have provided even greater benefits had they the luxury of the productivity gains resulting from IT revolution just as one may wonder whether the Average Russian, as opposed to the 135 oligarchs controlling 40% of Russia's wealth, would have been better off had The Party remained in power, or a newly democratic state had maintained monopoly control of assets at least through the main part of The Commodity Supercycle.   If legacy monopolies were empowered to invest half the resources that newly-privatized entities spend concocting deceptive half-baked fare structures or confusing tariff-schemes with weird-ass terms in which the consumer always loses, "customer choice"would be a proverbial red herring. Gas would be delivered; waste-water cleansed and it would be done simply and sufficiently above cost to fund capex for the next generation. It truly isn't difficult. And in any event, customers do NOT want choice - they want what they want, which is good value for money - rather than a jolly-rogering from one's service provider. 

Yet another vastly inflated argument is the 'Benefits of Competition' justification. One needn't be a Trotsky-ite to see the paradoxical oxymoronic absurdity of "monopoly competition"- particularly with respect to a natural monopoly. It is all well-and-good to suggest that a bus, car, bicycle, or private helicopter serve as reasonable substitutes for a suburban commute from the Green Belt keeping operators honest, but this is just horse-shit. While the Southern or  Southeastern train service may be 35 minutes to a London from my mainline station, a bus (or several pairs of buses) is not (and has never been) a viable substitute and would, in actual, fact take several hours, as might a car journey at the same time in the AM, or PM, forgetting the negative externalities and near-impossibility of parking. As a keen cyclist, I would happily contemplate cycling the 25 miles were it not perpetually life-threatening (even Tour de France-winner Brad Wiggins was knocked off his saddle in the UK) and were the roads properly maintained. I would hitch a ride on Lord Asa Three-Names' chopper were it on offer and make my own way across town, (though sadly I've yet to be invited).  And while my garden is of sufficient size to house an Aggreko generator should my Electricity provider fall out of my favour, the resulting vibrations and humming might sour neighborly relations just a tad, and while I am fortunate to also have space for a diesel storage depo, I do have my doubts whether the requisite permits would be forthcoming. Let's stop the weaseling: it is a bullshit of an excuse. There is a simple blended cost of production (raw material plus large depreciating capital costs), delivery across a network (also with  maintenance, & high and depreciating capex) plus the SG&A of billing & admin (and perhaps the cost of placing one's name on a Premiership jersey. Tweedle Dee's price cannot be more than basis points from Tweedle Dum (nor his logo more inspiring). If it is then (1) Tweedle Dee is stealing from us all, or (2) Tweedle Dum is completely inept and has wasted valuable resources that could have been used to contribute to ongoing system-wide capex. Oh and of course there is not an improbable chance that: (3) Tweedle Dee and Tweedle Dum collude on pricing and both steal from us all.  

Ah, one might interject, The Taxpayers are surely better off. After all, they received generous proceeds from the sales, didn't they?  Apart from a lower borrowing requirement and some freebies, I don't see where the Taxpayer is better off. Privatisation was always about fiscal diddling and the last round by New Labour were no different as I 
called out here and here (should anyone think me partisan) and were little different to American's taking out HELOCs on overvalued homes to take a cruise, or make other non-investment-related expenditure that shredded any hope of retaining equity on their home.  More importantly, for fiscal rectitudists, they prevented UK politicians from having the type of adult conversation with their child-like Constituents about sustainable spending (which BTW includes the very same public servants' pensions!!). The point is, the state needn't ever bear the brunt of capital investment (directly on-balance-sheet) since a state-controlled natural monopoly can borrow and invest in its own name, even without an explicit government guarantee. This is strictly off-balance sheet. A typical natural monopoly's assets are vast, and rarely are it's claims-paying ability in question (with a few exceptions e.g. USPS) where ostrich-like union intransigence fails to acknowledge the arrival of the twenty-first century upon jobs, service and working practices. One could argue that it in certain situations, such a monopoly borrowing in its own name is preferred by investors since it's assets (a Gas distribution network, rollingstock, a power grid) are typically less encumbered than a Govt's G.O. promises - DB, SNCF being a case in point. Who wouldn't lend to Deutschebahn or SBB? Moreover, it needn't be Leviathan, or a Michael Palin-inspired "Brazil" bureaucracy.  DB (as well as others on the continent) is organized as a private corporation, run on corporate lines, where the shareholders have broader, wider objectives (like "let's not make it a priority to think of devious ways to fuck our customers) and more importantly, being in a position to exercise the requisite control to make it so. Taxpayers get short-shrift in other ways. Since newly privatized firms notoriously drive down real wages and benefits, there is a greater burden on the social services and government expenditure - both directly and indirectly. And there are the negative externalities that come with outsourcing and greater employment instability - either through the increased rate of contract workers, or outsourced contract workers. Were waste and largesse pursued in the name of the customer to reduce prices, or with a view to investing the gains in new plant, equipment, better services etc. this could be a powerful argument. Instead these gains are pocketed primarily by management and shareholders - a net transfer from workers, captive customers and taxpayers to management and shareholders, aptly characterized by Billie Holiday in her signature tune: "Nice work if you can get it....", or if you're allowed to get it.

Not only are taxpayers NOT better off, they likely are worse off. They are being abused by clever financial engineering (like the type the Li Ka-Shing used to control Thames water) which after years of minting coin and contributing to the HMRC miraculously no longer makes any trading profit on-shore and therefore pays no income tax as a result of inflated interest payments to foreign debt-holders (who are, Yes!, Li Ka-Shing). By selling up, the taxpayer has ceded a most valuable inflation option on precisely the type of inflation we are witnessing and are likely to continue to witness:  Stagflating Resource Stuff coupled with falling real wages resulting from dual pressures of globalization and persistent output gaps. For IF real median wages are falling (and they are), why don't the customers share the benefit?  Why should management and shareholders receive this windfall? Surely this wasn't the spirit of privatization. The option is asymmetric: a guaranteed rate of return on the downside and asymmetric embedded options everywhere else. Investors (and management) are long a free-call on stagflation, and inflation, and long a put on deflation via return guarantees on the downside. The Taxpayer, through privatization, managed to go short perpetual, free straddles!! Both Employees and customers are short the same inflation put. The State (and hence Taxpayers) got a right shite deal because they swapped an asset - i.e. hugely valuable infrastructure and monopoly privilege whose Tobin Q-ratio (as HS2 and Cross-rail show) is many many many times higher that that implied by the typical sale price - for cash which was effectively a one off reduction in taxes/revenue.  

Holding one of the winning tickets are management & directors, who receive far-higher salaries for doing the same thing they were doing before, with the added bonus of golden parachutes and additional benefits previously "not cricket" with being the manager of an enterprise in "the public interest". Before one judges harshly, this might be warranted given the reduced job-security and icnreased stress now associated with a private enterprise. Ummm but wait: wasn't the same argument used to throttle employee wages, and outsource their (better-paying) jobs? There is no less fierce or heated competition for management's jobs as there are for labour's, yet the outcomes are decidedly different, and neither is in the public's interest.  Combined with Shareholders spoils,  the gains are now wholly-privatised, with the attendant risks - including unemployment, and tax-predation, fully-socialized. Cost rises and capex are borne ultimately by the consumer without recompense;  employees are left with even less stability, fewer benefits and falling real wages; while at the same time salaries and benefits for management outpace inflation. Add to that the injustice of free embedded options awarded to management and particularly shareholders, to the insult of consumers having to endure collusion amongst so-called competitors, more complex and deceptive pricing and attendant stickiness in prices that borders on cheating & dishonesty, and it's hard to get very enthusiastic about the whole exercise.

At least, for the economy as a whole, whatever the drawbacks of Bulgarian-inspired customer service, 1980's 'GUM'-style choice in Public Utilities, the patronage, sloth, over-staffing, higher-than necessary employee wages and benefits - whether imagined or real - likely made positiver contributions to the stability to macroeconomic 'Consumption', contributed to reducing both the level and the cyclicality of 'Government' expenditure, reduced the stress and uncertainty amongst workers generally thus contributing to marginally higher consumer spending, and investment since the velocity and marginal propensity to consume the additional pound are more elevated when distributed throughout the median income household and below.  

So the next time your ideologically-driven MP tries to convince you of the benefits of privatizing your natural monopoly, remember that, adapting Frank Zappa's apt words, there is a big difference between kneeling down before the altar of privatization and bending over. 

Monday, October 14, 2013

Kim DotCom Takes on Hedge Funds

Kim Dotcom takes on Hedge Funds! OK, so the headline is a tad sensationalist, but one might be forgiven for thinking that the idea of swapping research on hedge funds opens some moral (and indeed some potential copyright) issues. PirateBay always denied it was jolly-rogering the record companies and artists, just as one wouldn't expect to see Albourne's watermarked reports, or Cambridge Research's proprietary research offered verbatim on HF Investors' potential Pirate Bay. That said, the concept sure looks like Napster has arrived at the doorsteps of hedge fund research.

Information does apparently have some serious value to potential investors wiring nine-figure sums to HF's accounts. One might indeed wonder whether there will be an even more highly-prized back-room on the exchange (think of the most private and exclusive of Baccarat tables at a Casino) where whistle-blower secrets on HFM's dirty-deeds could be exchanged for even larger sums? In this way, a mid-level operations clerk, or contract programmer at an HF, PB or administrator can vault to a big-time Wikileaks-enabled pay-day.If exchanging such info for money,  would they be protected by whistleblower laws? Though the intent is to disrupt the cozy rarefied world of the upper echelons of manager research, the potential effects may be much wider (and more dangerous to those managers surfing the edge or dabbling in the Dark Arts. Like Cosmo suggested in the Cult-hacker movie Sneakers, "No More secrets, Marty...."

Friday, October 11, 2013

Nialling Down Before the Altar

Precisely what is it about a posh polished British accent and Oxbridge authoritativeness that causes Americans to become weak-kneed, flustered and forget all sense (critical and otherwise) as Og, Wally & Vermin do in the presence The Supreme Being??!? A smart dark suit, a smug and condescending  manner of superiority coupled with a self-attributed sense of intellectual omniscience about ummm errrrr everything, a dramatic flair accompanying words that flow smooth as hot oil with nary a stutter, hesitation, repitition or stumbling utterance - not unlike Ralph Richardson (above left) or convincing  director/thespian-turned-Smith-Barney-pitchman, John Houseman, or one might even suggest the historian (say that again, historian - not the economist) Niall Ferguson, that arrest the bullshit detectors and scream integrity - deserve-ed or not. The former, are, of course serious actors and entertainers of the first order, thereby having excuse and justification to play the part. The latter...well...appears to just enjoy the adulation, and yankee aversion to head-to-head verbal combat - the kind that amongst more critical experts might very well reduce his smugly and superiorly-rendered "facts" to the realm of mere conjecture and opinion proffered by an historian somewhat astray from his recognized comfort zone at best, to 'bat-shit' at worst. In simpler days past, with more humility, one such as Mr Ferguson might have been termed and perhaps even been respected as a 'polymath'. In the ever-increasing complexity of modernity, however, I fear that, when pontificating from up high on the subject of economics, he is, like Mssrs. Richardson and Houseman, just a convincing entertainer, and policy circles - particularly in America - would be judicious to treat him as such.

Tuesday, October 08, 2013

Things You Don't See Everyday #117

GOOG finance has a rather interesting business description summary of the fishin' prods co' company formerly as Daiwa Seiko (TSE Code #7990), but now known as Globeride to reflect its repositioning towards things two-wheeled (something I personally approve). For it is not every day - at least not in the USofA where companies compete with other to devise new ways to avoid providing their employees with healthcare or sufficient hours to qualify for benefits - where one sees an overt statement by a company of its responsibilities to its workers.

GLOBERIDE, Inc. is a Japan-based company. The Company, along with its subsidiaries and associated companies, is mainly engaged in the manufacture and sale of sports-related products. The Company is also engaged in the provision of welfare for the Company staff. As of March 31, 2012, the Company had 23 subsidiaries. On August 31, 2011, the Company completed the dissolving of its wholly owned subsidiary's subsidiary engaged in wholesales of fishing gear.

Monday, October 07, 2013

The Trend is Your Friend....(until it's not)

So Farewell then
FX Concepts
An early entrant
in the trend
to follow trends.

Your fund had
some good years,
and some not,
though overall:

You went from
Nil, to $14bn,
And back.
Ashes to ashes...

Your catch-phrase
The Trend
Is Your Friend...

...but not when
The Trend is in

(with apologies to PrivateEye & EJ Thribb, aged 23-1/2)

Friday, September 27, 2013

Solutions To Life's Problems

Teleportation. Telekinesis. Telepathy. Transmutation. A discovery to reliably reproduce any or all of the preceding would, I dareseay, cause one's stock to do a ....errrr.... ummm..... moonshot. In fact, one that would look remarkably similar to the adjacent chart. Sadly, these abilities remain consigned to the entertaining realm of Perry Rhodan (my ages-ago adolescent reading addiction).

But something has produced the rocket-fuel to propel the stock represented in the adjacent chart into a celestial orbit - something that should cause a certain amount of interest and intrigue amongst the more curious of investors, be they momentum or reversion-oriented, as well as those merely with a sense of humor.

The company is a Tokyo-listed outfit, #2453, better known as JAPAN BEST RESCUE SYSTEM LTD.  It's moniker itself begs further investigation. "Do they manufacture emergency rope ladders?", one might ask. "Fire-extinguishers"? "Utility helicopters"? No, nothing so utilitarianly-concrete. Deferring to the oracle of Bloomberg, however, I begin to imagine why investors might be so hot & heavy for its shares. According to their business description:
 "Japan Best Rescue System Co., Ltd. provides solution services for troubles in daily life"
Vague and cryptic, but brilliant. On this basis one might jump to a rapid conclusion: the increasing difficulties in the lives of the average person must translate directly into more customers and more business. Yes! That must be it. Why indeed didn't I think of it??  They must be the "Go To" guys for EVERYTHING. Eldest daughter wants to marry a Korean? Hassled by Yakuza? Black-listed from your fav hostess bar? Need a 10am tee-time this Sat at Ashinoko C.C.? Youngest son never comes out of his room because he is playing video games all day long? Heavy rain but you forgot your umbrella? Boss is continually overbearing? Japan Best Rescue System has the answer... Awesome.

 But wait! I missed the fine print. This is NOT it at all. Here, (again) according to Bloomberg: 
Its services include repair for locks, glass, and plumbing systems. The Company offers a membership to customers and provides services through a network of franchisees and co-operate shops.  
Google elucidates further on it's business as:
The Call Center segment offers key replacement services, automobile-related services and other life-related emergency services. The Membership segment offers motorcycle stolen compensation services and other daily problem solving services. The Corporation Collaboration segment offers representative call center and customer support services. The Member Store segment develops and manages stores and cooperation stores. The Small-amount and Short-term Insurance segment offers underwriting services for small-amount and short-term insurances. The Automobile Leasing segment leases automobiles. The Others segment offers support services for self-developed home security products. On February 27, 2013, it acquired a 46.2% stake of a Japan-based company. As a result, it hold a 58.6% stake in the Japan-based company up from 12.4% stake. 
Oh, ummm, yeah. It seems the founder broker down on his scooter late one night and everyone was closed, so he was stuck. As he result, he saw opportunity in his misfortune (and others' laziness) and set about to capitalize upon it. All well and good, but if it cannot teleport freight, and don't have a cure for cancer, Best Rescue must be VERY good then at providing its services or its customers must be both absolutely desperate and solvent to warrant a nearly nine-fold increase in their shares. I, myself, am unable to judge. Whatever the case, it sure looks like there was a sea-change back in April.  

Fortunately, there is a source of information: a highly reputable Sponsored By The Company Research Report. To save you the time, here are the highlights: results at all their businesses kinda suck except for the the handyman callout subscription service which is growing nicely, more than compensating for all the other crap which Net/Net in May, led to an upward revision to sales and net for end of this FY. Nothing earth-shattering. In mid-July they also announced they bot a minor stake of shares in 2482 Yume no Machi Souzou Iinkai which runs a home delivery service for sundries. I guess the business adjacenies make a nice fit: the plumber dispatched to fix your leak can bring you a pizza too. And  in Aug, they also announced a stock-split - nuclear power for small-float, un-owned  listed co.s in Japan. 

Further plumbing the depths (no pun  intended) of this paid-for-research-gem, I finally strike the gold I am looking for. They are entering the environmental clean-up business.  In February it seems, this company bought a 3rd party allocation of shares giving them majority control of a nacsent enterprise that - get this - manufactures algae that topically absorb radioactive strontium & cesium. I think the idea is that you spray their green sludge on the effected area (say the Fukushima access road), then lease their street-scrubber-vaccuum-cleaner-thingie that sucks up the sludgy (now contaminated) water which is subsequently dried out in pans leaving a green strontium-cesium residue that that can be more easily, and we are told, safely, disposed of. It is, I must admit, pretty awesomely clever.  And timely. It is, an easy "1032" on the barometric scale of Thematic investing.  And so we have the answer to why a US$30mm market cap company is now a US$280mm - an investment return that venture capitalists are undoubtedly kicking themselves for missing.

I do not pretend to know how big the strontium & cesium clean-up market is globally. I hope, for the sake of my children it is, and remains, small - not that I wish Best Rescue ill-will in their investments. I do of course have my doubts that the venture supports Best Rescue's present market cap and eye-watering annual returns.  That is neither here nor there in regards of this post. What matters (to me) is that while their core business appears squarely focused upon handy-man dispatch contracts, I am disappointed, for I am waiting to invest in THE REAL THING - the company that, genie-like, as Bloomberg relates: provides solution services for troubles in daily life....