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..."