Thursday, March 28, 2013

Path to the Ignoble Investment Hall of Fame

And so yet another long/short equity fund launches. Good luck, and I wish you success with your investments and the growth of your company. Ummm, just one question. Your press release states you will "target an annual return of between 15 and  25%", presumably buying shares you think will go up and selling shares you think will, in a perfect world, go down, or, at worst, go up less. I just want to know: How the frick do you "target" long/short returns on a calendar-year basis in the equity market!!?!?? And you are not alone in purporting to whip up this secret return sauce ex-ante. Surely you mean that you are "expecting" returns of 15 to 25% and hopefully, this expectation will be based upon historical experience over a sufficiently long and diverse period, as well as a dumb strategy composite that at the very least might provide a benchmark. Not that investors should expect there to be any correlation between YOUR expected returns and your actual returns. Indeed, if one had $5 (not the inflation in the metaphor) for every basis point drift on every managers' expected versus actual, one would be rather well-off. But if one really does target return, one would surmise that there are conditions under which you would have no positions, or others in which your returns would be much much bigger, and that you could, would or should target returns of 100%. Or mightn't you just keep an eighth to a  quarter of the position so you could continue to "target 15 to 25%"??!? Or maybe, should volatility become comatose, and expected returns get squeezed quite low, you might employ mondo-mondo leverage in order to achieve your target, kinda like Merriweather and LTCM did in 1998 (and Merriweather did yet again with JWM). THIS, I suspect, is the problem with targeting return. It could - and often does - lead you right into the Absurdist Wonderland of Nonsene for those silly enough to religiously pursue such a course.

I reckon the truth, in long/short equity where one is following a strategy which is not the equity equivalent of the Grand Unified Theory , is that one cannot target jack-shit. The market giveth what it does, when it wants to, and it will laugh - often derisively - until you and the majority of others  cry proverbial "Uncle!". And if its in the mood, it will carry out those that follow the taken and position accordingly thereafter, before yielding. Allocate accordingly, attenuate your leverage depending upon your orientation to the ever-present tail risk, take what the market gives you, but for heaven's sake, don't target return, and just get rid of it (along with the meaningless attempt-to-impress summation of the Management Team's aggregate years of experience) from any and all published material else your potential investors think of YOU in the same sentence as the Investment Ignoble Hall -of-Famer, John Merriweather.

Monday, March 18, 2013


Often, when one sees something incredibly absurd - one struggles to find a logical explanation. "The Dartford Crossing" is one such infuriatingly-stupid example that should make both economists and motorists weep.

To being with, the UK, has few toll roads. Road license fees and petrol taxes ostensibly are meant to fund the upkeep and maintenance of highways.  Outside of the M6, and a handful of bridges/tunnels, there are no additional usage fees outside the taxes/fee mentioned. This is both good and bad. No tolls certainly speeds traffic. But it also provides a hidden subsidy lowering transport costs, suffers from the tragedy of the commons where every stray beer-can and plastic shopping finds its way to roadside, and there is little incentive to maintain roads which are potholed and it seem chronically underfunded and poorly-maintained. There are also fairness issues associated with this. The French, by contrast,  have gone the private route for their major arteries, which delivers a large network of amazingly smooth, quiet, clean, safe roads, with excellent technological investment and adoption to further speed the flow, albeit at eye-wateringly expensive prices of something like EUR10 per hundred km.  One need only take the A6 out of Paris from the Porte d-Orleans in order to experience the difference between the public and private management. And though there are the occasional "bouchon"  (cork=traffic jam), price DOES keep people (and HGVs) off the motorways, and there is choice with the N-roads or "Route National" adjacent to most motorways that remain free, though subject to congestion, and vagaries of local traffic. Switzerland takes a somewhat middle ground, adopting a peculiarly Swiss-style solution: the Vignette. This is a CHF45 annual decal one must affix to their windscreen if they wish to use the (generally clean, safe and well-kept) motorways. Excepting those crossing the border into Switzerland via a motorway who are forced to buy one by commercially-minded border guards, it relies on the honor system, with harsh penalties for rule-breakers. The result is a hybrid pay-by-use with the efficiency gains that result from eliminating toll booths and collection bottlenecks. Their alternatives are typically more limited by the geography of Switzerland, and in any event HGVs (trucks) are often forced to traverse the nation via the rail network, or take a large and long detour through France or Austria.  

Now, back to Dartford. The day I am sitting for half-an-hour in a tailback caused by toll-collection, I read an article extolling transport pricing's positive externalities.   In it, Krugman is thankful for a VoxEU piece quantifying the benefits of investment in public transport, and road pricing in causing people to switch to public transport. All well and good. Dartford's tolls were kept ostensibly as a means to use pricing to discourage use, as much as they were kept to generate revenue for a threadbare Treasury. But Dartford is the ONLY passage to the east of London (that is not a boat), and it is the most critical and vital link in the ring-road around London, and the only way for HGVs to get to and from the Channel Tunnel. There are no rail links or alternative routes. In effect, the supply curve is completely inelastic, and so too, are the demand curves. The only result from toll collection is the cause of massive negative externalities in the form of endless traffic jams, pollution, inefficient lost output and waiting time, and increased consumption of fossil fuel. There is are no redeeming qualities to the imposition of tolls (the infrastructure has been paid for and then some) other than pecuniary short-term gain to the Treasury at the expense of massive negative externalities. It makes you want to rip your hair out. Worse still given the inelastic demand and supply curves, they charge during the busiest times yet waive the charge when its empty, when, the public interest would be served by the opposite: making it free and zooming everyone through when its busy and charging when it's empty, and the negative externalities are greatly diminished.

Am I missing something? Analysis by more competent economists would be appreciated....

Friday, March 15, 2013


In a world where formerly hated assets are on fire, gold miners remain hanging from the investment equivalent of the naughty-tree. Despite the hate mail that routinely stuffs my inbox from the people offended by my occasional mocking views of gold itself, I would highlight that my views on the shiny yellow metal have never been "personal", but are on par with the same healthy skeptical treatment I give to any asset class or investment that has been touted, bought, annointed with deity-like powers, spawning an entire industry of proponents whose opinions, by nature of their conflicted interest, are more than worthless to the would-be investor. As for the relative investment thesis, Mr Buffett did a fine job of articulating the advantage of attractively-price assets with cash-flow (and growth potential) versus inert but highly conductive lumps of metal dug out of the ground only to be re-buried.    

All of that said, the miners are cheap by any backward, forward or relative measure. Their businesses are enviable - despite rising costs, poor management and shooting themselves in the foot - insofar as costs remain low by comparison with what they sell their product for. And they are hated. Lowly-leveraged. And under-owned. All this while their natural admirers (who I have known to mock) are hoarding last-year's coins, bars and ingots. The investment non-sequitir, of course, is that the so-called great rotation into stuff, is ignoring this gold mining stuff. Now I understand the overcapacity in iron ore, and other non-ferrous things, on top of concern about the condition of their largest consumer. Yet, the market cannot have it both ways: bidding up stuff for debasement fear on hand, and avoiding it for the opposite fear on the other. Puzzling. Yet, if it be stagflation that emerges as our nemesis, it would seem to me that the spreads between certain heavy industrial cash-flow yielding assets on one-hand, and gold mining concerns on the other, would - in the medium term - be unsustainable. For you don't have to love gold to like gold miners: just not HATE (note the upper case emphasis) it. 

Thursday, March 07, 2013

Take The Zero-Hedge Test

Being permanently bearish on equities definitely pays. 

Just ask Zero-Hedge. Unfortunately, for wool-dyed pessimists and the other overly-skeptical black sheep of the thundering herd, it pays apocalyptic newsletter writers' paychecks, and Zero-Hedge/Tyler Durden's Manhattan bar tabs rather than those who permanently position against market priapism. And it's worse than zero-sum because those who are optimistically-challenged often pay for the bad advice - whether directly in subscriptions, inflated margins on retail bullion products, or indirectly via page-views and click-throughs AND then they get hosed by the market.

The first step to improving behaviour toxic to one's own self interest is admit one has a problem. As an aid to help those who have difficulty in distinguishing "a bearish trade" from "the lead boots of anger and pessimism", I've devised a little something I call the Zero-Hedge Test to determine more precisely whether readers objective realities are sufficiently  paranoid, pessimistic, anti-social and rantingly angry to warrant more serious help.

Instructions: Circle the letter that best describes the adjacent image:

a.  a glass of water
b. glass of water, half-empty
c. glass of water, half-full
d. glass of  errrr ummm , Grey Goose vodka? (NB: ed. choice)
e. The US Government must have stolen half of a glass of water.

a. First black elected (and first to be re-elected) President of the USA
b. Barack Hussein Obama
c. A Former Senator from Illinois
d. tall guy who used to like to sneak a cigarette now & then
e. Jezebel, dark Sith Lord Vader Emperor & Chief of the Plunge Protection Team. Odious non-American african muslim responsible for taking away our world-beating healthcare, encouraging the immigrants and foreigners who took our our jobs, and formulating a secret plan to put two-dads in every home .

a.  Something that still buys a 12oz can of Coca-Cola
b.  A greenback, worth a dollar, which, on average, an American is paid each 4 minutes of work
c.  A US Federal Reserve Banknote almost universally accepted in exchange for goods and services the world over
d.  A cocaine hoovering apparatus c1978
e.  Worthless fiat toiletpaper, so useless that bric-a-brac, watches, baseball cards or bitcoin should be more preferred than this P.o.S. that forms part of the elders of Zion grand plan to steal your labour savings before eating your babies.

a. six would-be wedding bands
b. 1oz novelty of pure gold smelted by JM
c. Au = element #79 on Periodic Table
d. Reward for a 9.59 sec 100m
e. The solution to all our financial problems...changer of men from liberal faggot zionist atheist swine into god-fearing hardworking people of fortitude and rectitude...curer of cancer, balancer of budgets....purifier of all our precious bodily fluids and divinely-given laws....come, my preciousssss...

a. ummm Europe?
b. Site of the war which was believed to be the war to end all wars (excepting the worse one that immediately followed)
c. Continent with mix of culture, cuisine, history, engineering, and civilized living standards 
d. A place for Brits to go on holiday
e. Socialist commie cesspit of looney bureaucrats, unworkable financial alliances, gulag-healthcare systems, leading the world in obstinate unions, lazy workers, regulatory morass and geographical epi-center of the soon-to-be-arriving disintegration of civilized life on earth.

a. a bull market
b. an uptrend
c. a squiggly line 
d. reflection of long-term (nominal) growth 
e. an accident waiting to happen caused by insane, stupid, or insanely stupid people, or conspirators doing insane and stupid things that will end very very badly with the dystopian destruction of the civilized economy as we know it and reversion to an economic life of warlords and barter using nuggets of gold and silver as portrayed in that film with Kevin Costner, "The Postman"....

a.  beginning of a 5-year bull market
b.  beginning of an uptrend
c.  a squiggly-line 
d.  technical reversal of severely oversold position
e.  an obvious orchestrated short-squeeze caused by the elders of zion and their 0.1% lackeys controlling the Soros-Rubin-Banker-Fed-Axis pulling the levers at the Fed Plunge Protection Team for the sake of enriching their cabal whilst duping and hiding the truth of how the rich steal money from hardworking ordinary Americans

a.   a pooled investment in Gold
b.   a low-cost alternative to buying, holding, storing & insuring physical commodities
c.   an easy liquid way to bet on the price of gold
d.   useful asset allocation tool for diversification
e.  a conspiracy to defraud honest hard-working speculative investors who've put their hard-earned savings into physical bullion held at secure vaults outside the USA, who have been cheated by the depressing influence these instrument have on the physical gold price by diluting the buying power which would otherwise raise the price of Gold benefitting all the other paranoid gold-bugs and survivalists who've already bought physical bullion in the form of coins at significant premiums or for delivery in a secure vault outside the USA.

a  provider of goods for the shelves of Walmart
b. ambitious nation that has (for the moment) successfully lifted hundreds of milllions of her citizens out of poverty
c. future demographic bomb resulting from 1-child policy
d. one of the oldest civilizations who made fine silks when most europeans were donning animal skins
e. yellow peril mercantilist currency manipulator who took our jobs (please watch -C.) who are taking the places of children of hard-working americans at our top universities and the trading rooms on Wall Street, and who are taking over ownership of our country

a. a man with a beard
b. Nobel-prive winning economist
c. Princeton Prof & contentious NYT columnist
d. Consistent proponent of the view that it is better to try to grow rather than austerity our way out of economic depression.
e. A liberal faggot anti-christ he-Devil, devoted to Keynes and insulting to the spirit of the greatest economist of all time: Ludvig von Mises causing vilifiers to wonder why the USA Govt can increase its credit card bill, when if they do it (individually), they just get mean letters from Capital One or the card-services department at their bank; just wants to take the money of hardworking Americans and give it to entitlement-cheats who make babies to collect welfare and food stamps so they can buy drugs and Fritos (in that order). 

a. impractical fashion trend
b. An accessory when listening to late-night radio
c. a joke from ser. 6, ep. 6 of Big Bang Theory
d. art project c.1977 gone very wrong
e. an important tool in preventing aliens and the American government from influencing your thoughts and controlling your brain which is one of the best kept secrets along with the PPT, George Soros' role as the leader of the conspiracy by the Elders of Zion to take over the world financial system and rule the world and keep the hard-working man dumb and stupid and rig the system against  hard-working Americans.

How to Score:
a=1pt; b=1pt; c=1pt; d=1pt; e=5pts

Interpreting the results:
 0  - 11 -  Surely a grad from an effeminate liberal east-coast university
12 - 22 -  Got some financial redneck potential in you
23 - 33 -  Wishing you had a Kazcynski-cabin of your own? 
34 - 44 -  Likely owner of guns, ammo, & survivalist subscriber
45 - 55 -  Honorary Fight Club Member; NB: The NSA is watching you...  


Monday, March 04, 2013

Golden Nuggets

Some people suggest that while it's difficult to precisely pinpoint a bubble, they know it when they see it. In housing, one saw all manner of weird predatory and non-sensical financial telltales be they smelly securitizations, 100% interest-only mortgages, low-down payments on properties whose alleged market"value" had vaulted many times over in the recent preceding years, liar loans etc. One saw it in the buyout market with nearly unlimited sums available for the most dubious of deals (e.g. TXU) with little protection (cov-lite) for the lender in the event business goes pear-shaped. Now, the bubble detector surely is pointing in the direction of the FX Bucket Shop and On-line Brokerage market.

To say that a good idea attracts imitators is to reveal (in the words of former RJR CEO F. Ross Johnson) a blinding glimpse of the obvious. And so from the first spread-betters like IG Index, arbing the UK tax code, we now have hundreds of imitators, each offering global market access, tight spreads, sexy-GUIs (shame on you for thinking that's in any way perverted!), and up to 1000-to-1 leverage (now THAT'S perverted!).

However, it is not the imitators but the wackiness and direction that things are moving. Take for example "Banc de Binary", who annoyingly has been monopolizing the banner ad space across my browser (thanks Google!). They call themselves (in the spirit of uber-bullshit) "Private Option Bankers", but it's merely an on-line bucket-shop specializing in rainman-like options. There is no mention of THEIR internalization, risk-management or hedging or their capital ANYWHERE, though, from their glossies, there appears to be lots of croupiers , ooops I mean "experts" ready to help you place your bets errr ummm I mean trades. Call me old school, but in my book it is almost always better to be a seller of insurance than a buyer, and better to be the house than the punter excepting when one is exposed to mandated or life-threatening unhedgable risks that one can ONLY mitigate via insurance. Our friendly "PRivate Option Bankers" however,  have managed to combine BOTH aspects into one business. It is, of course, highly predatory, and I will wager this "banc" will NOT be a household name in 10 years next to Ameritrade or Schwab.

Predation raises the good question of who or what is their market. It's likely the same as another big-spender with their annoying Flash ads occupying yet more of my banner ad-space (cycling with the binary bank) on my browser - one called Inter-Trader.Com What exacty is is Have a look. Is it just another on-line bucket-shop? Is it about investing? Is it about trading? Is it about gambling? Is it a about partying? It seems to be all of these things! Just read the "About" section:

InterTrader Limited is part of the family. was formed from the merger of bwin Interactive Entertainment AG and PartyGaming Plc in April 2011 to create the world’s largest listed online gaming company.

For further information go to

So, there you have it: the prescient and growing on-line financial buccaneer encompasses investment, trading, gambling, entertainment, gaming and partying online all rolled into one - though not necessarily in that order. To reorder them in terms of likely target customer profile it might be: Gambling, gaming, entertainment, trading, partying, and that's it. Sadly, FWIW, we don't see the word Investment too much in their website.

Some years ago (before most of you were born), the technical buzzword within the financial industry was "convergence". This primarily meant the narrowing of differences between between traditional banking and securities markets. What they (BOTH Banks and securities firms) completely missed was the other convergence: that between trading and entertainment/gambling.  Perhaps, if Schwab, e-Trade or ScottTrade had been more imaginative, adding modern casino-like sound effects (F16 turbothrusters when you place a trade;  ka-ching! when an open trade ticks in your favor or a rhinoceros fart when it moves against) along with more dramatic visual GUIs, they potentially could have have squashed the usurpers in their tracks. Perhaps they were too busy hanging out in the comfort zones. But the real convergence, still, is yet to come, as frankly I am waiting for elephants -  like Steve Wynn or Sheldon Adelson - those with the most comprehensive knowledge of how to inebriate, hypnotize, and seduce the punters while stealing their wallet, to expand into the online spread-betting business before I open my account.

All this begs the question: how will banks and securities firms respond to customers' seeming demands for entertainment and hedonism while investing? There is nothing worse than than the slow and painful torture of watching one's customers drift away without effective response. Bear Stearns (and others) have tried hiring entertainers  (at least that's what they called former Fed Governor Wayne Angell when he was their lead currency strategist).  I leave that one open for you to provide the requisite "strategic advice"...

Friday, March 01, 2013

What is a Banker?

Dealbreaker's Matt Levine and the FT's Lex nailed it on the EUs directives regarding Banker Bonuses.  They are well-stupid and there will prove no shortage of clever arbitrages to circumvent them  - an area that, as Matt points out, Banks are particularly adept.

What has been ignored in the discussion is the common misperception and difficulty in defining what, in fact, a Banker IS. Images abound: The community banker of Jimmy Stewart; handlebar-mustached JP Morgan;  comic-strip City Gent "Alex"; Bird & Fortune parodies;  Michael Douglas or Russell Crowe's maverick trader, even before approaching the wide-boy trader stereotypes. Yet, do any of these reflect the vilified targets of Brussels?

Is M&A banking"? Is securities-research banking? Is securities broking banking? Were Nick Leeson or Jerome Kerviel "bankers"? Is the clerk at my local HSBC Premier desk a "banker"? What the army of  computer programmers who code the transactions or payment systems, and the web-interfaces of retail banks or the securities custody officer? Or the swaps desk or the writers of CDS? Are they "bankers"? Is stock-loan and repo "banking"? Was the London whale, Bruno Iksil, a banker?  An FX spot or options market-maker?  The traditional mythical view of the deposit-taking coiffed vested & suited gentleman lending directly hardly reflects the realities of modern-day banks, bankers, or banking.

If it is difficult to define who or what is a banker, given the complexity, then a slippery-slope problem arises. Doubts also surface about whether measures are intended to reduce systemic risk and public exposure to it, or whether the issue is really half-baked populist demagoguery conveniently aimed at the high compensation of the exposed and despised target of the moment (no, not Lance Armstrong). One would be right to ask, Why bankers? Why not actors?  Or CEOs. Or Athletes and rock-stars? Or rentiers, lawyers doctors.....

Yes, it is likely that "Bankers" are overpaid by any measure. And they are partially culpable for economic and financial carnage from 2008 onwards. Culpability, however, runs wide and deep, and law-makers and vilifiers both would do well to examine their own role and responsibility in the crisis and its outcomes before shifting the blame wholesale.