Peak Oil!! Peak Inflation ?!? Peak Credit??

Does Peak Credit inevitably follow piqued credit? Well if you're my age, and you thought so and positioned accordingly, you'd have been bankrupted a very long time ago - possibly as early as the late 1980s. And if you were a glutton for punishment, you'd have been toasted again in 1994, another time in 1998, yet again in 2002, and rubbing one's nose in it, perhaps every year after that until midsummer two-thousand-and-seven. Dog days indeed for those bearish on the ability of the financial system to manufacture, distribute, and service debt, whether in real or nominal terms, or in relation to any measure of the economy or change in the growth thereof.

Yet as pessimistic on its sustainability (and wrong!!) as one would have been in the past, one should now be as optimistic one's assessment that this is The Big One, that we've smacked head-first into the boundary of the maximum amount of debt that can be assumed by households, corporates and governments in our economy and be reasonably sustained with the fruits of our labour, and investment. Actually, I would posit that we long-ago pierced any reasonably sustainable threshold, and only through sheer inertia and the fortuitiousness of pulling of rabbits-out-of-hats have we lasted this long. But it is the anchoring of popular belief in faith and absent solvency from days long passed combined with the extrapolation a series of non-extrapolatable macro income streams which could cause any sensible human being believe or have believed that the boundary lay somewhere in front of us and not far behind us.

Culpability is not singular. Stern-Stewart, investor short-termism and systemic mono-focus, along with greedy managers replete with agent/principal dilemmas must assume blame on the corporate side. Selfish American Voters repeatedly demanding representatives requite incongruous financial goals with cynically lame and unsustainable fiscal policies, along with a near complete detachment from reality in regards to present consumptive desires in relation to both incomes and longer-term savings requirements are just as at fault as the monetary wrecktitude resulting from an unwillingness to accept mild deflation and cyclical recessions where required for reasons that - to this day remain inexplicable given that Continental Europeans seemingly had little difficulty distinguishing a bubble or accepting that both taxes and economic brush-fires are not inherently bad in The Big Picture.

So IF what we are currently witnessing, commonly termed as The Credit Crunch, is in fact, an expression of what I will term Hubbert's financial equivalent - "Peak Credit" phenomena , and IF as I posit, we long ago untethered the financial wagon from the real economic train, what does this mean?

Many things, but first and foremost, that we are at a major and painful inflection that will impose a real Kunstleresque austerity upon Americans converging their desires with their means. In a word, this means "revulsion", a somewhat arcane and long-forgotten term for large-scale write-downs and/or economy-wide elimination of outstanding debt(s). For this reflects the implausibility of servicing, let alone paying off obligations, and the consequences to those whose capital and assets were/are/will be vaporized. It will, undoubtedly, be fought by authorities, with certain costs borne by the state and socialized upon unwitting voters. Japan wallowed in their own debt-shite for more than decade, and in the US it is (in present political climate of denial) even more natural that attempts to band-aid and stave off the inevitable reality will likewise be tried. In another time and another place, natural growth and demographics might have met inflation somewhere in the middle and the cycle would resume again without massive dislocation. But this time it is different. This time, the encumbrances are too large. This time, there is competition for markets, and their value propositions are surpassing Americas. This time the patient is too soft, obese, relatively uneducated, faux-faithful, weak, politically compromised, and cronily corrupt. This time, the business cycle is turning dramatically for the worse, wealth effects are only beginning to bite, oil has peaked with a generation of adjustment between any remotely plausibly cost-effective replacement. And competition is even heating up in the emerging world for the remaining high-margin business. This does not sound like an environment that will assist households or government to rebuild balance sheets and make good on obligations without great sacrifice from ordinary people and even greater sacrifices from the monied class. This sounds like an environment where creditors and debtors will be required to sit down and negotiate what can and might plausibly be paid, or converted into equity, or stretch maturity with lower rates - anything to keep it as an "asset" and a performing one.

"Peak Credit", like Peak Oil, thus forlornly reflects the necessity of increasing demand for credit from borrowers to sustain the unsustainable, at precisely the time when supply is constrained and shrinking, for suppliers are squarely confronting the reality that new sources are limited, and in any event, the demanders (even if supplied) have diminishing hope in the current environment of returning what was lent.

Some will think that these ruminations border on the insane. And I will admit that when I walk out of my office door to the local trendy coffee bar, there is scant evidence where I live that Peak Credit is anything but a financial phenomena - limited to the flippers in Vegas or the spec developers in Fla. or CA. But perhaps that's because the most insidious aspect of Peak Credit is its disruption to the chain of dependencies that bore its hallmark over the past two-and-one-half decades. So inexorable and complete has the rise of credit been in its permeation of every crevice of life that no one blinks when multi-trillion dollar GSE balance sheets are supported by but the thinnest veneer of equity - even AFTER large potentially (no, probably) impermanent increases in underlying asset values; when dogs receive pre-approved credit cards by mail; that its sheer ubiquity produces persistently negative rates of saving; when corporates use leverage in lieu of a margin of balance-sheet safety on the enterprises they are meant to steward in order to conform and placate the markets' twisted short-sighted ideal of optimal capital structure leaving them woefully exposed to cyclical fluctuations; where data-mined models themselves based on limited data replace good common sense; where leaders defer to unsustainable plebeian notions of what constitutes prudent fiscal policy producing errors in judgment that make the trench warfare of the first world war appear sane. If this is what God's country resembles, imagine the financial horror in hell...

"Peak Credit" will wreak as monumental changes upon American consumptive life as Peak Oil, and these cannot help but exert a massive deflationary pull - at least until such time as the parties agree to squarely face reality that confronts them, and in an interconnected world, everyone else.

Will The Hedge Fund Model Prove to Be Broken

Separating the shills from the bona fide proponents of hedge funds has never been easy. Nor has it been facile to distinguish the secretly-jealous critic from the legitimately, even altruistically concerned. In an interview with Bloomberg's Tom Keene, the articulate David Goldman, former Chief Strategist at Asteri Capital, posits in no unequivocal terms, that the "Hedge Fund Model" of investment will, over the coming-year, prove to be broken beyond repair.

What precisely does he mean? In a nutshell, he means that the majority of Hedge Fund performance will not be able to weather the volatility caused by the continuing de-leveraging and the catastrophic blow-up of so-called crowded trades that this will cause - something that is, and will continue to be exacerbated by the lack actual liquidity in many of the instruments and positions currently favored or stuck like chewing gum to bottoms of their respective portfolios.

The hedge fund model of stewarding money for one or two-and-twenty is, he suggests, predicated upon reasonably low volatility and above average returns. Yet like young unskilled schoolboys playing football (tank you Charles of IBEX Salads for the image), there are obvious trades and simply far-too-many participants chasing the same returns causing the trades to be intensely crowded. These over-exploited trades (in the short-term) are prone to massive bouts of short-covering necessitated by the very hedge fund model itself, for few funds, managers have the confidence (or the investors) that will forgive 20% to 30% monthly drawdowns for riding shorter-term aberrations in exchange for the eventually larger kill in having the right ultimately correct position. Strangely enough, no one's behaviour is illogical. It is just another example of a local optimization problem.

If this sounds to readers like the accident that initially availed itself in the Quant implosion of Aug 2007, then you are correct. And if this sounds like what is happening to unfortunate longs in the energy and commodity complexes, you are also right. Goldman believes that this will manifest itself in an near-unending decimation of funds pursuing the simplest model. He makes exception for the prescient funds, with the actual lock on capital (permanent exchange -traded vehicles or 3 to 5 year locks a-la- the Private Equity model) who also have the conviction, and strength of constitution to make high conviction bets and hold them despite the itinerant volatility of the positions and consequential vicissitudes of mark-to-market. Verbatim, he says:

"...with everyone forced to take the same trade, the volatility, intra-month, is so great, those investors committed to a month-to-month Sharpe-ratio low volatility strategy will be forced to redeem and you will get wild swings, illiquidity, and an inability to liquidate positions.

So I think we are going to have a serial catastrophe of hedge funds, particularly the kind of funds that thought that it was a great idea to buy loans at $0.90 on the dollar and won't be able to sell them at $0.80 later in the year.

Note that he is not bearish on opportunism, nor speculation. He thinks people like TPG did great trades buying assets "cheap" with something resembling matched, non-recourse funding. He simply thinks that doing the same thing (and there is no shortage of managers pursuing such spread returns in part or in whole) without the surety of similar investor commitment horizons on the equity capital side OR committed facilities on the finance side is a recipe for disaster, or at least an unwind cascade of ghoulish proprtions.

To some extent the Fed (like the BoJ before it) can put the brakes on the systemic point-in-time unwind cascades. It can cajole institutions to hold off, it can nationalize banks and make for a more organized liquidation of duff collateral and assets, i.e. whatever it takes to prevent the institutions at the system's core from selling position to make position - something that has little actual utility in fact. But the authorities have little control over hedge funds' investors, and hence the their resulting demands for liquidity.

I personally find such a continued evolution quite plausible. And it won't be undeserved. For other market participants have had ample time to prepare after witnessing the quant-related meltdown. I do wonder whether investors will, as a result, force the Darwinian HF survivors, to accept long-term incentives with clawbacks that manage to incorporate liquidity discounts and incentive payments based upon realizations - a sorely needed interest alignment tool. Maybe I've been a tad unfair to the PE guys by comparison...

Why UK House Prices Are Going Much Lower

Sometimes anecdotes are the most powerful evidence in turning the obvious, or the mere statistically-likely into the deterministic. Such was the case with a post entitled pfwooooor!!, my faithful recounting of an encounter with a dyed-in-the-wool wide-boy southwest London property speculator. Friends are no longer incredulous about my increasingly requited forecasts for both UK Property and Cable. Those friends who live abroad, and will eventually acquire something back in the UK are now waiting for an evolution in prices closer to the -30% (in asking prices) and -30% (in sterling) that I think will coincidentally benefit a would-be purchaser from a dollar-earners perspective.

Last night I was broadsided by another such anecdote. Some friends are selling their ordinary 1br Westminster mansion block flat purchased less than a decade ago for approx one-third of the current asking price (GBP 475000) which sounds decidedly more benign than the 350% price-appreciation this represents. "So what's the current yield?" I asked casually, (and slightly impolitely, feeling almost as if I was asking one's salary). "Pardon me?" was the reply. I tried again: "You know, the rental yield, the annual rent less costs, taxes and fees divided by the capital value...." A quizzical and slightly confused look crossed their face indicating that they'd NOT REALLY THOUGHT ABOUT IT, at length, or recently, anyways. "I - I - don't really know.....it's not leveraged". Now I knew a-priori this was NOT a lifestyle asset. It had been rented since purchase and was a financial spec property (and as good as it gets in hindsight from any perspective - particularly a USD one. But that was then, and this is now. Helping them out, I suggested "...so income was never a factor since it was so small compared to capital appreciation, right?" "Yes!! Yes!! That's it". Hmmm. I see. They did their sums, acknowledging that it wasn't much and virtually apologized for the paltry income. I translated it into a meaningful number (without looking shocked): "That's about two-and-one-half percent". They added that the "market was slow" and that their agent actually thought they'd need to drop their asking price GBP 25,000 or approx 5%.

Unequivocally, I offered them my advice: "Preserve your gains - Hit any bids". "Don't dally". "Forward sell your sterling". "Value convergence is in motion and will NOT be reversed. Neither incomes nor inflation are likely to rise any where near what is required to prevent price destruction. Finance will remain scarce. The heady days of housing asset price appreciation untethered from yield and sanity will be absent for some time to come...." Look out below!

BoJ Minutes

Nearly anyone who should be interested in Japanese monetary policy stopped reading the BoJ's minutes a long long time ago. For life is fleeting as best stated by Confucious' wisdom pearl: "Even the Emperor cannot take back one single day". That said, out of some erstwhile macabre fascination, I opened the minutes from their latest meeting, and would urge those who cannot find anything better to do while collecting UVs on their beach-of-choice, to have a gander - both for entertainment and personal edification.

The BoJ has been independent only since 1999, but after reviewing the minutes one would be forgiven for questioning whether this was in fact the case. The meeting begins with reasonably spartan Staff Summaries reviewing open market operations and recent developments in financial markets both domestically and internationally, highlighting developments in US, Euro zone, China and other EMs. They were sanguine about the domestic economy highlighting some price pressures (that put real rates into negative territory), but as always were quick to qualify this with expectations for moderation of the trend (else the staffer will be sent for a stint at the BoJ travel office, and be forced to make their own tea). Staffers were not referred to by name in the minutes.

Discussions of the Policy Board Members were then recounted. Members agreed (unanimously, of course) that 1) things would slow domestically, 2) despite positive growth, risks remained for the int'l economy; 3) credit markets remained strained; 4) US would remain weak due to negative feedback loop (perhaps the only perceptive comment in the entire minutes; 5) Euro area should continue to grow albeit at a slower pace; (huh??) 6) Global price pressures were demand led, from EMs (Hello Chindia!). "One member" (and we do not ever know who it is since they are always referred to anonymously lest they say something contentious that might threaten their ability to marry of a son or daughter to a 'good family') suggested that this would not abate until EM governments took appropriate policy measures (bravo! - but then it's always easier to criticize someone else...).

Fascinatingly, in making the suggestion that Euro area might slow, not a single member even mentioned that Euro-Yen rate, or that exchange rates might have something with anything anything nor was there any mention of trade surpluses, conveniently scrubbed to "export volumes" or "changes thereof". Inflation was a considerable topic of concern, discussing various causes, and likely outcomes, though despite such interest, concern was not so elevated as cause a single member to dissent, or seemingly suggest that real rates should be anything but negative. Carry trades and diminishing home bias of investors - either by global banks or the million+ FX day traders respectively were NOT mentioned anywhere.

Moving on to anonymously discuss the domestic economy, it was all benign and antisceptic talk that has no bearing on anything since no action would be taken, then back onto mild inflationary concern, and parroting Staffers view that moderation is near, along with other do-nothing justifications about Japanese exceptionalism with regards to growth-risks, and the adoption of a forward-looking, wait-and-see approach such that the unanimous result, once again, was to DO NOTHING, SAY NOTHING, CRITICIZE NOTHING

Then, in the final section, Don Corleone (The Ministry of Finance representative), whose been "observing" the meeting swaggers in to deliver his comments (and it IS a He), whereupon he listed four more polite suggestions as to why, Board Members, (presuumably under threat of being tarred, feathered and scarlet lettered), should refrain from taking any action, (else some unfortunate accident happen). These not-so-subtle suggestions were followed by Two-Yen from the Cabinet Office Representative also observing the meeting who (true to form) timidly suggested another four reasons for DOING NOTHING.

So in the end, unsurprisingly, the Board Members once again voted unanimously to DO NOTHING. While I am undoubtedly harsh, for this time, their hesitatancy might - for once - be justified, it should not go unoticed that an entire seven year business cycle of ZIRP and nearZIRP has passed with nary a peep from the BoJ. All which reminded me of the Galapagos Albatross, a large white bird with an unimaginably large wingspan, who returns to those islands for a month or so to breed, before resuming what is a year-long flight voyage at sea. These birds are so awkward and gangly that they actually need a running start to launch themselves off of a cliff to use the rising thermals in order to get airborne. But these Albatross, you see, are indecisive and apparently not very courageous. One can sit for hours and watch them milling about pensively and hesitantly before running to take-off, only and inevitably to chicken-out and abort when they approach the edge, after which they sullenly walk back to the beginning of their well-worn runway. They may do this a dozen times or more making the move, a record only outdone by that Albatross of central banks, the BoJ.

See ya !! - Wouldn't Want to Be Ya'

A black-box systematic long-short equity trader whose strategy has a momentum bias is sitting on a park bench reading his morning newspaper. His friend sees him and comes over to give his greetings, and, surprised to see that his friend is reading Investors Business Daily (for he, too, is a Systematic Black Box Trader with a momentum biased strategy) says: "Warren, I can't believe your reading that distorted-pack-lies CANSLIM rubbish!. What the hell's gotten into you?!?!"

Warren replied: "Nothing. I've just had it up to 'here' with the real world of momentum being so ugly...At least in the IBD world of momentum, traders are profitable, their stops usually work, one rarely gets whipsawed, and everyone wants to be one..."

Olympic Results: (in Full)

(Beijing - Aug 11)

Overnight Interest Rate Pentathalon

Gold ...... ....Turkey
Silver .........Iceland
Bronze....... Brazil

Final Standings (for qualifiers only)

Turkey.............16.25%
Iceland.............15.50%
Brazil...............13.00%
South Africa......12.00%
Egypt...............10.50%
India.................9.00%
Hungary.............8.50%
New Zealand.......8.00%
China...............7.50%
Australia...........7.25%
Norway.............5.75%
Korea (South).....5.25%
United King........5.00%
Sweden.............4.50%
Germany/France/
Belgium/Spain
etc.................4.25% (all tied)
Slovakia...........4.25%
Taiwan............3.62%
Czech Rep........3.50%
Hong Kong.......3.50%
Canada............3.00%
Switzerland......2.75%
United States....2.00% (Disqual - doping!!)
Japan..............0.50% (Disqual- false starts)

Current World Recordholder: Zimbabwe-(800.00%, 2008)

Dear Investor....

ACME Systematic Leveraged Macro Momentum Fund LP
321 Overprice Street
Greenwich, CT
00573


Dear Investor,

This letter is to inform you that the wheels have come off of the proverbial wagon at ACME Systematic Leveraged Macro Momentum Fund LP, and that the same awesome thematic portfolio that made you feel (in the first half-year) as if you'd become very rich in comparison to those sucking wind on their leveraged MBS portfolios or Japanese Small-Cap Value Funds, has, quite literally, spontaneously combusted in our faces.

Our long-oil (PBR, SU, SWN), long coal (MEE, BTU), long fertilizer (POT, MOS), and long iron ore (CLF, RIO) positions have been crushed (no pun intended), and though we remain hopeful going forward as the story remains "in tact", our models have forced us to sell some in response to prevailing price action. Our offsetting shorts in selected financials (MS, BLK, GS, and LM) have not fared as we expected, while our core retail and consumer discretionary shorts in AZO & URBN, DECK have quite literally been lodged deeply and inexplicably in an unmentionable orifice.

If that were all we'd not be too sullen, all things considered, but unfortunately our short US dollar positions (vs. everything), our JPYNZD & CHFAUD carry trades have also not performed to forecasted expectations, and both our our long-only, and zero-exposure long vs. short commodity baskets have imploded with a rapidity that would even frighten Taleb to vows of silence. Oh, and if that weren't enough, our gold and silver longs, too, have gone south as if trying to re-embed themselves in the ground, whilst the short Russell-2000 ETFs we've been using as a hedge have been behaving all-too priapically. These losses of course are not as bad - relatively speaking - as some of our peers (who regretfully are no longer in business) and should of course be viewed in the proper context of our delft avoidance of long exposure in the worst of the RMBS and CMBS sectors, our eschewing of becoming a CDO issuer/manager, and our resolve to avoid anything denominated in Icelandic Kronor. Unfortunately we still have a large (leveraged) position in high-yielding cov-lite loans, US sub-prime credit-card-backed receivables for which we remain unable to obtain sensible bids at levels near to where our auditors and administrators agreed that we should pay our prior year's incentive fees. Only our long Japanese REIT portfolio and our unlisted fund of Spanish Olive Groves have held their ground, though regretfully we refrained from hedging the currency risk, and so these too, are now in the red and eroding rapidly.

We have no explanation, since our trades are systematically based upon doing what others are doing (only, hopefully, faster... though, in this instance, not fast enough). Nor do we offer you apologies. You [presumably] knew the risks, and felt the glory (if only for a while). We do lament the the now-sky-high high-water mark, and the absence of performance fees (this year).

Finally, saving the best for last, we will be suspending redemptions as per the Force Majeureclause 6(c)-2 of the Private Placement Information Memorandum of the Fund. We trust you'll agree that only something supernatural could have torpedoed such a finely constructed portfolio put together by the best and the brightest Wall St. has to offer.

Yours sincerely,

Hugh G. Fallis - Managing Partner
ACME Systematic Leveraged Macro Momentum Fund LP

FSA Report on False HBOS Rumours (in full)

Slow on the draw, I missed the Aug 1 release of FSA's Investigation into accusations that HBOS was torpedoed by hedge funds spreading malicious rumours. If you missed it too, FT-Alphaville has the detail here, but I'll save you the trouble and summarize it for you below.

10. Something went seriously wrong in the market that mid-March day in regards to HBOS share price moves.

9. Our research staff reconstructed the day's activity by looking at exchange time&sales, derivatives trades, emails, phone records, chat rooms, some internet porn (during our break) spoke with reporters, and consulted a psychic.

8. What we strikingly found out was that the stock price went down...a lot.

7. It was clearly the result of more sellers than buyers which made the HBOS price fall more than it would have if this hadn't been the case.

6. This was exacerbated by the fact the few people wanted to buy, and lots wanted to sell (or do nothing), following the manslaughter of Bear Stearns the week prior. In our view (as a non-regulator) this in entirely understandable.

5. Some of the selling was apparently caused by rumours of an unknown origin that were clearly malicious. If we ever catch them, we will hang them upside-down in the naughty-tree.

4. While in this instance, we didn't find any obviously guilty people as everyone had plausible excuses for their activity, nor did we find the so-called smoking gun, we did find a few computers that were culpable (the were Dell's apparently) as their algorithmic strategies sold when they saw others selling.

3. We DID confirm that when market participants are stressed and their nerves are frayed, rumours can have outsized impacts upon share prices.

2. Irrespective the outcome of this investigation, we will be watching you in the future. Watching is the operative word here, as it remains difficult to actually prove anything in such cases.

1. Most importantly, in order to deal with such situations in the future, we will be studying how to write better reports, and are resolved to improving our communication. This will give comfort to our constituency that they can safely remain here in London, and needn't move to Geneva.

The Value of Capital vs. The Value of Management

There is an interesting tug-o-war between the value of capital and the value of management evident in hedge funds, but even more strikingly highlighted perhaps in reinsurance. This is worthy of examination if only for the fact that they sit at opposite ends of the proverbial rope, producing (at present) an unimaginably large gulf between the two.

Anchoring one side, we have have the traditional reinsurance company. Once jokingly the last refuge for those ex-college football players that failed in the sleepy primary insurance market, these companies have come a long way from their disparaging caricature and Lloyds scandals - a time coinciding with capacity shortages from Hurricane Andrew that spawned a new class of dedicated entity with less-conflicted, more professional managements. They now sport reasonably disciplined underwriting and specialty lines that give them some diversification, with some even moving up the food chain to compete in the primary market. In this realm, the market for new-venture creation is reasonably efficient with an able management team able to raise capital from a variety of experienced private equity and dedicated insurance investors and garner between 5 & 10% of equity on long-term incentive plans in exchange for pedigreed stewardship of capital in a start-up. Capital thus maintains 90% to 95% of the upside (less operating costs), symmetrically bearing the same downside. As with most externally-funded enterprises, it is Capital that reaps most (90 - 95%) of the the reward in the growth [if any] of the enterprise. This "split" is seen as reasonably sufficient to align Management's and Capital's interests, without creating undue agent-principal dilemmas, or grandiose empire-building endeavors.

Anchoring the other side, we have a hedge-fund model applied to a dedicated reinsurance risk-taker, such as that which London-based MAN recently purchased a portion. Here, Capital (i.e. the Investor) pays "one-and-something" plus a deeded 20% performance fee on the (net) upside, though bears the full burden of the downside-risk, albeit without performance fees. Perhaps there is also a high-water mark, for which one would need to review the PPM in detail, the presence of which increases the attractiveness over the course of the profit and loss of a full cycle. Capital placed at risk here has ALL the downside of the underwritten "risk", but none of the upside of the business growth. Here management receives a full 20% of immediate economic spoils and 100% of the business-growth options that arise from the successful stewarding of Capital ostensibly through wise portfolio management, prudent risk-management, and avoiding adverse risk, and undoubtedly a barge-full-'o-luck.

The obvious question arises as to precisely "why" the Capital funding a purposeful reinsurance company formation is able to obtain seemingly so much more of the upside (at the expense of management) with seemingly the same downside, than Capital investing in a reinsurance hedge fund. If it were a matter of a small difference, it would be a dull topic of conversation, and you might be watching "House" re-runs instead of reading this. But being that the order of magnitude of difference is so large, it demands an answer.

The first question should be: are we comparing "like with like"? Th answer is essentially is yes. Both are providing risk-capital to effectively underwrite reinsurance risk. Both are more or less dependent upon external events for realization of profit. Both use essentially the same standard industry modeling techniques (eg RMS). And both profit more (less) in hard (soft) markets respectively. There may exist subtle differences in risk selection, leverage, and portfolio management, but these are less important determinants in the scheme of things. Florida windstorm or California quake are essentially homogenuous risks.

So what is different that might possibly be used as an excuse to justify keeping all the business upside or yielding ALL of it in its entirety it to one's agent? Liquidity, for one, differs - at least on the surface. The commitment of insurance VC is not an annual event, whereas Capital in a reinsurance hedge fund can be withdrawn within stipulated guidelines, typically less onerous than VC lock-ups. Of course if you buy a share of a listed reinsurance company in the secondary market, there are no restrictions. In fact, the reinsurance hedge-fund might be "less liquid", by comparison. To be fair, buying risk through the trading of shares entails high market impact for sizable risk, but this too is reasonably manageable if spread across a portfolio.

Leverage and prudence may also differ. Katrina fatally blew-apart more than one catastrophe reinsurer - not because it was SOOO bad, but because management over-leveraged and under-diversified. In bridge and traders parlance it's called "shooting the moon". Most diversified, well run companies took hits and stomached the loss but it IS easier for the corporate entity to "reach" via leverage than the reinsurance investment manager who - without a proper balance sheet - well might face jail for a similar transgression. That is, of course, if he could a find a counterparty dullard enough to accept an under-capitalised promise for which there is no recourse...

Investment returns - premiums, excess capital, etc. provide another temptation for management not available to the reinsurance hedge fund. This could be good or bad, depending upon whether your investment pecadillo happens to be called "SCA" and Amaranth or its called "Paulson Global Opportunity Fund". On this front, many-a-reinsurance company has failed miserably in its pursuit of higher returns(hedge funds), non-core empire building (SCA), or social status hob-nobbing (Hollywood movie investment). Others however have soundly and soberly managed to earn higher returns than those available to just underwriting risk and placing it some collateralized trust structure. It is understandable for investors to desire to disentangle the two. However, IF one, for whatever reason, has investment alpha, the coorporate structure allows this to be better exploited resulting in higher returns overall to investors. However, the jury thus remains out on this front as to whose advantage this favours.

Cost structures are different. That is a major selling point of the hedge fund, vs. the largesse of corporate boards, Sarbox compliance, prima-dona underwriters, staff pensions costs, etc. But many costs are inherent in acquiring business to develop a more diversified risk book, and building an enterprise with depth, longevity, and redundancy that makes counterparty's feel safe, and allows more complex structures and risks to be assumed (presumably with better spreads) rather than merely marginally providing liquidity to a limited number of homogenous markets. Wining and dining, freebies, conferences, etc.fees, commissions, kickbacks all entice business, and senior people with relationships and expertise require meaningful compensation all which hits the bottom line. Moreover, these costs exist even in a disaster year where losses pile up due to the disaster or catastrophe-du-jour. One could argue that the Corporate's expense ratio is not dissimilar to "2&20" which might make one agnostic as to which structure one invests with. In reality, these "costs" are part-capex, and should build greater long-term value.  Yet, even IF the former were true, and one was indifferent, there is still the little chestnut about whether the business "optionality" should accrue to Management or Capital.

Transparency. Paradoxically, the HF structure provides MORE transparency than the corporate entity. Industry insiders say that a "clean reinsurer" is an oxymoron. There are only "less bad ones". Whether its the investment portfolio, or the current risk position, legacy risks, or malfeasance, one is never quite certain what's under hood. That said, there is no shortage of younger (both public and private cos. who are - relatively speaking - "clean", and there is nothing to prevent motivated capital from essentially setting up themselves (as Citadel, DE SHaw, and others have done), and cutting a deal with a capable management team.

While none of these reasons themselves are compelling, is there not something that explains it? For here where are today, with fine (not that I am qualified to pass this judgment) listed reinsurance companies trading at 5x forecast (and historical) earnings and up to 25% discounts to tangible book, solid management teams and well-operating infrastructures, existing relationships and books of business, and YET, MAN decides to buy into the other model, i.e. the hedge fund model, despite the seeming availability of BOTH the underwriting upside AND future enterprise appreciation upside, and do it at a reasonable discount too.

One possible answer might be - as queer and comical as it sounds - is that they simply have different investor bases. The corporates have smart, long-term, money who presumably value long-term growth and are willing to stomach illiquidity, volatility and discounts to book over the intermediate-term. The hedge fund model has investors that values one thing: "one-percent-per-month" in addition to the technicality that they often CAN ONLY INVEST IN HEDGE FUNDS, irrespective of how sub-optimal it may in comparison to investing in the same risk through a listed corporate. Yet another example of a local optimization problem. For the reinsurance HF investors are NOT irrational - just constrained, and a tad self-interested (yet another principal-agent dilemma). One can measureably sympathize with the investor who rolled the dice and bought a portfolio of listed reinsurers in 2007, which navigated the storm season and earthquake risk well, made ~18% returns on their equity except for the odd-ball who had monoline(s) exposure, YET their shareholders stomached negative mark-to-market returns (including dividends) despite the increases in book vals. But that was then, and this is now. When listed co's are trading at large prems to book, I can understand the aversion of opportunistic investors who just want the underwriting risk. But when they are cheap, very cheap, wisdom almost certainly favours the listed corporate, hands-down.

While the original question was "why would Capital not extract full potential rents from its existence, size and investment horizon?" perhaps I should lay that aside, and invert it into the more germane question which is: "IF the gulf is so wide, why would start or join a reinsurer when they could start a reinsurance hedge fund??!?!"

American ingenuity turning its attention to the credit crunch!

Just an Ordinary August Day

On a day when oil prices plummeted, P&G announced better-than-expected results from passing on higher prices to consumers, and the Fed did nothing, the relief rally that ensued did NOT witness Exxon-Mobil (the he largest company by market cap) turnover the most in value, nor P&G, nor Walmart, despite the S&P 500 Consumer Discretionary Index jumping the most, perhaps in the calculation life of the index. It wasn 't even the shorts falling over themselves to cover their shorts in Citicorp. Rather, it was Potash Corp of Saskatchewan, that Canadian province that makes Indiana look hilly, turning over almost twice the value of the next highest by value. Of course the talking heads will (after-the-fact) point to nebulous investor fears that fertilizer prices have peaked. But this isn't the real story. Potash - The Shares - are but a dog chewy-toy.

I believe the real story is - as I've written before inFeedback Trading's Hollow Victory, about the changing structure of the market: the evolution of momentum and feedback-trading strategies, the slaughtering of genuine liquidity providers, the morphing of former risk-trading capital into front-running order-sniffers, the Darwinian success (until mid-July) of momentum and trend-following strategies at the expense of value-oriented and contrarian pursuits and counter-trend programs. And as prophesized, the really interesting action begins when the Darwinian victors - having squeezed competitors to death - finding themselves atop the mountain - desire to exit. All the more so when, it happens in a pari-passu rush for the doors.

Maybe fertilizer have peaked. Maybe peak oil and increasing wealth in Asia will forever change the economics of energy-dependent agricultural inputs. Maybe as my friend Greg Newton at Naked Shorts suggests, the best cure for high prices is high prices. I actually haven't a clue. But I do know liquidation when I see it, and we ARE structural seeing a shake-out of the most egregious of the last 18-months of mimetically induced accumulations - irrespective of whatever the longer-term fundamental continuity of their underlying stories. Fat-tail indeed!!

When the Going Gets Tough, The Tough Get ... errr .... Handouts?

Mr Obama highlighted and lamented the fact that "We are addicted to foreign oil...."

The emphasis is mine, but it's strange to my sensibility. Is the API vetting his speeches? Are we not addicted to ALL oil - domestically produced as well? To energy writ-large? Are we actually addicted or are we simply callously clumsy and gluttonous in its use? Is it benign misuse or willful abuse?? Are we then addicted to its misuse? If we are addicted, should we go cold turkey, or use a patch? SO many questions. What did he mean?

But if we are addicted (and both President Bush and Sen Obama have used the same terminology) WTF is it with the pandering about releasing oil from the SPR, and gas-tax holidays (note to Mr Obama: this language could be misconstrued! -ed.) and the windfall Oil Co Tax-->$1000/head gift?? Either you're addicted or you're not, and if we ARE, it's rather irresponsible for our leaders to be suggesting that The State show up at the AA meeting with kegs-o-beer and a waitress from the tequila bar with bottles in her holster, limes, and a some shooters.

Are high prices the only thing that will change consumptive behaviour? If so, and The People have admitted they have a problem why don't The People (like every other civilized nation that understands the meaning of e-x-t-e-r-n-a-l-i-t-y)? agree to keep the prices HIGH to help themselves avoid imported oil temptation and let prevailing (post tax) price provide the adequate incentives to re-tool and invest in more homegrown (no pun intended) alternatives? And while you laugh at the thought of The People voluntarily taxing themselves at a HIGHER rate, consider that as recent as 2006, the Germans (and the right-wing conservative Christian Democrats to boot!!), in the world's model of social democracy, had little difficulty raising their [regressive] VAT by 3% to fund required/desired spending - a central plank in now-PM Angela Merkel's campaign if I recall correctly. And it was met, for the most part, with a stoicism that should shame virtually every American, considering that German property prices - even in 2006 where little changed from where they were nearly a decade-and-half prior. The difference in financial sobriety, and sense of social responsibility from the contrast in how the two societies react when things are tough, makes me wonder how America would react (in modernity) if things get really tough. Margaret Atwood may turn out to be prophetic...

If Your Stock Goes Down, It MUST Be Short-Sellers

IF one is the chief a monoline, bank or other financial holding company with large dubious asset-backed positions, it is understandable that during the denial phase of coming to terms with one's fate, that one would like to blame the nefarious Short Sellers. We'll ignore the asymmetry of absent blame on the way up for momentum traders, and concentrated hedge and mutual fund accumulations.

But today's short-seller whinge-ing award comes from the most unlikely of sources in the most unlikely of sectors: Australia's richest man, none other than John "Twiggy" Forrest, chairman and founder of emerging iron-ore behemoth, Fortescue Metals Pty. (ticker FMG AU Equity for Bloombergers).

According to today's Sydney Morning Herald,

Iron ore miner Fortescue Metals Group Ltd, headed by Mr Forrest, has being targeted by hedge funds resulting in a more than one third fall in the company's value over the past six weeks.

The activity has also cut Mr Forrest's paper fortune in Fortescue since hedge funds began targeting the stock when it was trading at a high of $13.15 a share on June 25.

"Those people who make a living out of short selling stocks ... are bordering on criminality," Mr Forrest told delegates on Monday at the Diggers and Dealers conference in Kalgoorlie, Western Australia.

No matter that FMG (seen in chart above) vaulted more than 115% from A$6 to A$13 in the current YTD, punctuated by an unusually firm End-of-Quarter-2 close, nor that it had increased more than 900% since Jan 1, 2007.

The SMH continued:

"Those stock market players who have no interest in the company, who spread or propagate rumours that they haven't been bothered to check ... and then sell into the back of those rumours, I don't think they're doing anyone any good," Mr Forrest said.

"And of course, when we hear that we've got cracks in the bottom of our ore cars, or even a ship has sunk at the berth.

"We know those things are being put out to scare the mums and dads into selling their shares and of course the people who've shorted their shares then go and buy those shares off."

Mr Forrest also attacked investment banks who defended the practice.

"The investment banks who defend short selling are defending real personal interest," he said.

Mr Forrest, of course, is not in any way defending his personal real interest with his accusations. After all his mark-to-market wealth of Fortescue shares alone only declined a mere A$4 billion to A$8 billion. And while Mr Forrest's faux-concern for little Bruces & Sheilas across oz is heart-warming, by way of full disclosure, most of FMG stock is locked up between himself, Steinberg's Leucadia, Falcone's Harbinger, whom together control @63%. Perhaps, one of the other big-three is hedging out the enormous gains of the prior 18 months, particularly as bottom falls out from under US economic activity in general, and the commodity complex in particular.

In any case, I am not defending short sellers. Nor making any statement about whether FMG's share price is too high or too low. But I remain intrigued by the ease and rapidity that longs unsheath their asymmetrical insinuations that anything which goes down - even something that has appreciated as outrageously as Fortescue - even something with some serious logistical issues which remain to resolved - must have a nefarious connection...and is not the result of ordinary profit-taking, trend-followers reversing positions, or principled value investors using it to hedge the market risk of other, now-less-exuberantly valued miners, in currencies less susceptible to carry-unwind risk.

I wonder if Mr Forrest is buying more down here from The Short Sellers, particularly if such a fall is as unwarranted as he suggests? Last official filings, however, showed him selling a cool A$40million of stock during the prior quarter...

Revisiting Increases in the Bankruptcy Filing Rate

For those who missed it last week, University of Illinois law prof Robert Lawless at Credit Slips posted a nice colourful update to YoY changes in US (personal - I presume) Bankruptcy Filings, state-by-state, along with a table rank-ordering the data. As one might expect, a year into crunchy credit coincidental to @$125 oil, vaulting coal prices, and 50% rises in many softs, the credit-sensitive states are ignominiously on top, with energy and ag states at the bottom. Using my own powers of visual agglomeration, there appears (make what you will of it) to be a decided red-state/blue-state schism to the changes.

Compare (or contrast) this to Business Bankruptcies posted and discussed in the Big Picture a few days ago. While there is some reasonable overlap, Lawless' pictograph is more indicative of housing distress, and his discussion perhaps more reflective of the actual flashpoints across the country.

What Do the Germans Think of Obama?

(cross-posted at Naked Capitalism)

Following a whirlwind global tour, US media coverage would have one believe that Mr Obama had wowed Europe's most important nation. However, a close look by Der Spielgel at German reactions to Obama suggests they are rather cautious and less then-than-enthusiastic across the German political spectrum, though for far different reasons than American skeptics. Why? 'Continuation of The War on Terror' rhetoric and its implied obligations along with an expectation of increased commitments to Afghanistan are seemingly their prime concerns. Read the entire article in Der Spiegel's Obama Summary
(hat tip to Ben Carliner)

Alternative Stores of Value for the New Millennium

(Cross-posted at Yves Smith's Naked Capitalism)

Considering our location high on the ridgeline above the steep slopes of deflation on one side and the inflationary abyss n the other, and despite our slip (in the last two weeks) seemingly towards deflation, I thought it apt to offer up some non-traditional stores of value given the teetering banking system, near vertical ascent of commodities, and the still highly departed real estate indices as multiples of median incomes, all which cause consternation when it comes to preserving capital (at least for the contrarian). Of course, everyone is encouraged to share their own.

Anyone who's ever happened upon any episode of Antiques Roadshow is familiar with the increasing value of things vintage. Factory Farming and GMO crops that require pesticide and ever-more expensive nitrates could result in nice premiums to the colourful but gnarly-looking heirloom varieties (pictured left). And in the worst case, should things not work out as planned, they would make for delicious eating!

Garden sculpture too provides a fascinating utilitarian place to keep your money both safe and close by - especially if its a veritable work of the late Alexander Calder. Indeed, too big to steal, it simply sits, making itself wondrously beautiful to all who gaze upon it, and best of all, appreciates - even on weekends! Fortunately, such behemoths don't fit on Ken Griffin's roof terrace, so their values remain tame by comparison to smaller, more portable impressionist wall-hangings.

The Dutch have always been sober-minded despite their paradoxical tolerance of cannabis, evidenced here by their practical love-affair with the Windmill. Considering how long these beauties have been around, they must have ultra-long depreciation schedules that would warm the heart of even the most parsimonious purchasers.

War, depressions, floods have not deterred the thronging masses of football fans and the popular spirit of athletic competition. The problem is that professional sports has been gripped by a "Location Location Location"-like mantra that has lead well-heeled psychic-income-seeking egos to pay top-dollar (and pound!) for trophies that will likely hemorrhage cash when the going gets errr ummmm tough - at least until the proverbial screws are turned in earnest. Second-tier sports clubs (like Millwall for example, or even Hamilton Academical) share the same consumer non-durable demand characteristics for a fraction of the price of, say, Chelsky. And Millwall has the added benefit of providing Vinnie Jones-like muscle for less-than-salubrious "other pursuits" if things do, in fact, get even tougher-than-expected.

Little could be more basic than transport. So if oil has "peaked" and cold nuclear fusion, and the BTF Flux-Capacitor remain far-off pipe-dreams, what could be better than owning your own existing commuter rail service?!? Japan remains one of the few places where private rail service demonstrably works AND throws off reasonable cash-flow which after almost two decades of ratings compression are almost attractive. No NIMBY complaints as the lines are laid and more or less paid for. OK so Nagoya Rail's (pictured here) dated commuter cars need capex for sprucing up, but the earnings yields are reasonsably attractive (compared to JGBs) and there is reputed to be large under-valued land holdings still on the books if ever asset prices in Japan do revive.

One of the greatest stores of value, amusingly, has been paper. Not newsprint, or the ordinary kind, but the type bearing the likeness of the legendary Honus Wagner. The T207 has continued appreciate at quasi-exponential rates, long after my cousin paid for his Harvard education with the unlikely (at the time) and short-sighted (in retrospect) sale for a sum of five-digits. Compared to current values, he might as well have given it away...

Diamond-encrusted skulls, while not MY my metaphorical cup of tea, apparently are de rigeur in certain circles. I certainly am not qualified to pass judgment on this particular one's artistic merit. Nor do I wish (here) to sully those whose opinion of such a piece tends towards the favorable. So despite my inherent aesthetic and financial skepticism, I bring to your attention that it remains possible that - as with Faberge eggs - such curios might in fact turn out to be sound (and portable!) long term stores of value.

While Waterworld set Kevin Costner's career back a few notches, it did (years after, at least) provide some things to ruminate about (outside of what Zimbabwe might resemble were it ruled by a crazed Dennis Hopper instead of lunatic Robert Mugabe. But in a world of increasingly sought-after petrol and high energy costs, what could be more useful, apt, and elegantly graceful than a beautiful wooden sloop using nothing but the power of the wind for locomotion. As a boat owner, I do not dispute that the happiest days in boat owner's life are the day one buys it, and the day one sells it. Yet, I cannot help but dream that in such an environment a modest, but beautiful sailing vessel will become MORE cherished (and valued!!!) with time. Oh, and true to form, no kevlar - cloth sails only please!

Stands of timber are at once both majestic and economically useful. I've got some. Swenson's got some. Brad Pitt and Angelina Jolie just got some 500-odd ha with their Chateau in southern France. I still like RYN and PCL for their combination of still-cheap implied valuation, potential inflation hedge, and the fact that I salivate at the thought of how many large and small-denomination currency notes can be printed with the paper from a single hectare...

Everyone should have a trusty vintage Alembic in their garage, barn, or cellar, though few in fact do, which makes having one all the more attractive. Since long before Shakespeare's day (epoch and associated alchemist pictured with 16th century still adjacently) the Alembic has provided merriment and valuable liquid goods of exchange for many an entrepreneur and moonshiner. The raw inputs are as plentiful as the multitudes of flavourful and potent outputs. Nice copper Alembics, in addition to their economic usefulness, and yields of hi-proof nectar, also have valuable collectible potential as well as (in a pinch) being a good source of scrap, making for an SOV-triple play!

A Grove of Olive Trees is romantic. It is also beautiful. It's pure economic yield, while less-than-lotterific (unless depicted by van Gogh as the one here), hasn't prevented the earth on which they stand from appreciating, albeit in fits and starts, and certainly not without hiccups that often last as long as an entire generation. Of course, I am not qualified (as a northerner) to wax too lyrically about their bounty and positive externalities, something I will leave for Charles Butler's investment manifesto, in this most wise and overlooked of posts.

Farewell then Bennigans...

Farewell then
Bennigans -
Bringer of
faux-Irish
to American
Suburbia,

Amazingly,
you wrung
huge margins
from the cheese-slathered skin
of
the humble
potato.

You were
the first
of your kind
to arrive,
and now,
the first
to depart.

Your green-roofed
carcasses
will litter
dead retail
centers for
years to
come.

Oh yeah, and
my first flame
was once
a server
for you...
and even way back then,
thought (rather articulately)
that "you
sucked!".

(With usual apologies to EJ Thribb and Private Eye)

It's the Silly Season (in DC)

Last night, I had the misfortune of hearing an interview with Senators' Dodd & Shelby discussing their bipartisan housing bill (which passed committee 17-2, or so). This was just after listening to Speaker Pelosi rant about the dire need to release oil from the SPR in order to send prices lower. Little makes me more despondent than watching the knaves pandering.

First let me address Dodd's inanities, which were delivered in a tone of voice that was positively pleading, usually reserved for a mother with a malnourished child. "THE SKY IS FALLING ALL AROUND US AND NOT JUST IN THE US BUT WORLDWIDE!!! THE CASE-SCHILLER INDEX IS LIKELY TO FALL ANOTHER 30%", he told PBS's reporter, " AND WE SIMPLY CANNOT ALLOW THIS TO HAPPEN..." Ahem, pardon me, Mr Dodd, but ummm where the hell were you when when housing prices were vaulting upwards and the Fed was doing its best mimic of Japan's ZIRP? You were dissing Issing, and all others who suggested that skyrocketing asset prices demanded attention. Where were you when financial institution balance sheets and credit growth were ballooning?? Which fellow Senators were you whipping into shape when tax cuts were the rage, unrequited as they were by fiscal restraint??!? Perhaps if you'd not let housing prices appreciate so, and encourage your banking friends to willy-nilly finance the HELOCs and equity-withdrawal refi's in order to mindlessly consumer beyond their means, we wouldn't be here now. Hypocrite!

Gollywag #2 was listening to Madame Pelosi waffle on about the benefits of slamming the market with oil from the SPR. Mrs Pelosi may be a fine leader, and consensus-builder, and she may have a good heart, in sort of the same way that Gore Vidal is a wonderful writer and perhaps the top literary critic. But neither he, nor she should trespass into the realm of economics. For while such a notion of spending our savings would be consistent with American public and private economic policy over the past two decades - particularly the last one, it is, I must say daft in the extreme, particularly when the primary reason cited was: "Because the American people have already paid for it...". Ma'am, if I might point out, that logic is the same logic that would have us spend all our savings, because we've already saved. It is utter nonsense. The SPR, like one's savings, have been built for a rainy day. Not a drizzle. Not a light shower. But a full-on honking severe turbo-tempest. Next time, we who would dearly like to see the republicans dethroned would kindly ask that you please think before speak.

The SPR issue really gets my goat. For LOWER oil prices (without an attendant energy policy) only encourages MORE of the wastefulness that has gotten into this dilemma in the first instance. I would be amenable to a temporary draw on the SPR in exchange for say large energy taxes, renewable incentives, mandatory conservation initiatives (beginning with government itself), etc. But it is terribly painful to listen to all manner of demagogue (whether its about the SPR, drilling the ANR or offshore, or imploring the Saudi's to pump more) prattle on about supply, when - as Amory Lovins of the Rocky Moutnain Institute rights points out, by far the highest returns on energy investment are NOT on the supply side, but on the demand side in the form of conservation and extracting higher efficiencies.

Mechel: Steal or Steel?

Poor Igor Zyuzin. What could he possibly have done to earn the wrath of Prime Minister Putin? Stealing? Price Fixing? Insufficient baksheesh? Slept with his girlfriend? Doesn't really matter. The stock has been shattered, and along with it, the confidence that Mechel is "safe" and squarely within Putin's circle of friends (Oh how the god of mixed metaphors will crucify me for that!).

Hope you weren't long...

Shock - Horror!! - Trading Firm Manipulated Prices!

An SEC press release detailed with shock, horror (and awe) the luciferian machinations and manipulations of Optiver BV in the US energy markets. OK, admittedly my language is overblown, and no one is, or should be surprised by such revelations. At least anyone whose seen the smartest guys in the room, or witness the torpedoing of Amaranth.

But perhaps the most amusing thing about such a firm (compared in the same breath with Susquenhanna, and DE Shaw) who ironically vocally boasts about recruiting A-1 mathematicians from the best schools who also are "the smartest guys in the room", is that (according to the SEC) these geniuses left a slime trail of e-mails detailing their bold exploits in vivid colourful splendidiferous language, thus violating a cardinal rule of market-based "crime": vaporizing your own plausible deniability. For there are lots of reasons why participants do seemingly sub-optimal and uneconomic types of trades, including ignorance and stupidity. But when you hang yourself by bragging about it in emails, one's length of rope with the authorities demonstrably shortens.

Clearly business and engineering schools in America (and apparently elsewhere) are failing their students by NOT properly educating them in the subtleties of contrapreneurship. It seemingly happens over and over again - across the spectrum of firms, spanning industries. The groundrules are simple: Cover your tracks. Always have a Plan B. Retain multiple outlets to describe the appropriate plausible deniability. Certainly do not brag about it to friends or associates. Know when to fold, when to walk away, and when to run. Don't count your money, when your sitting at the table. And Never, NEVER refer to any such activities in any written electronic communication except in the most obscure of coded language indecipherable to prosecuting authorities.

Bad Chapter 11 Poetry

So Farewell
Then
SemGroup,
LP.

Latest
(and largest)
non-consumer
casualty
of energy
price
vol.

You were
stealthily
in the Midstream
before being
ummm
errr
"victimized"?!?!

Dr Hyperbole
tells us:
"Hedging should
reduce
risk"
No?

Shucks! (*)
you must've
missed the
fine print detailing
the perils of
"variation margin".

(*) - red state vernacular for "FUBAR"
With apologies to Private Eye & EJ Thribb (aged 8-1/2)

Effingly Absurd Efforts

If I'd told you that Jeff Skilling or John Rigas were raising capital for a new investment fund or business venture, laughter would be the more polite of your reactions, though effing derision might be appropos. Of course, one is free to give it the old college try as the now overly-effervesced Sowood, Peloton and Amaranth PMs have. But legal imbroglios are different, and so it is with raised eyebrows that I bring your attention to former MAC associate Takashi Kosaka's effingly bold Singapore-domiciled activist-value fund managed by eponymous Effissimio Capital Management.

He's bought some effingly big stakes (see above) in the "time-honoured" (JCH code for shitty and shrinking) Gakken CO Ltd.#9470, also-ran Nissan-assembler Nissan Shatai #7222, "hidden-asset" landlord Tachihi Enterprise #8821 (and their intermediate parent, New Tachikawa #5996, Mitsui M&S Plant Engineer, MESCO, #1737, and PC distributer Daiwabo #9912. It is my contention that in time, they will become portfolio effigies - tributes to an investment strategy with lottery-like odds.

Why? CAll me conventional, but in contrast to other activists who often at least make an attempt to target reasonably "good" assets and companies whose share-prices have been under-performing, Mr Kosaka's effingly bold accumulations have the following in common: the enterprises are uniformly shitty and largely shrinking; they are all, excepting Gakken, wholly-owned or controlled subsidiaries of other listed companies, and all the positions are wholly and completely unmarketable in the context of the market. Transgressing any one of the foregoing might be forgiven for a three-cent nickel, but violating all three together should be a cause of grave concern to investors in the effingly absurd hedge fund. And all this is before pointing out the frightening lack of diversification to which investors are exposed for the luxury of one-and-twenty.

A very astute friend and former manager of a large global hedge fund looked at me puzzle-ingly when once, long ago, I pointed to the "cheap" assets in Japan such as those precisely owned by Effissimo. For he had cut his teeth as a well-connected opportunist in the French market and learned that such things are mostly cheap for a reason (tax, control, financial flexibility afforded the parent) and that there is little gain to be had from being a minority holder no matter how cheap. "IF it is cheap, AND otherwise 'controlled', you must own 50.1% or nothing at all..." And this is in France where at least minority investors are afforded some protection against the common Japan practice of "The Take-Under", where consolidated subsidiaries are subsumed at often-unfavourable prices back into the parent.

This was of course in the days before the agent-principal hedge fund conflicts made their pursuit an efficacious and attractive undertaking - at least for the IM. While I have been less-than effusive of Steel Partners investment manager enrichment schemes masquerading as a hedge fund (which interestingly has NOT been seen recently adding a to a single position in any MoF filings leading one to believe that my prognostications about an eventual death-spiral may be in the process of being requited), Steel's approach appears positively scientific by comparison to Effissimo's efforts (though I'll hold my tongue on their relative honourability).

But what is it in the pursuit of large illiquid holdings that seemingly prevents the ability to resist the temptation to manipulate stock prices into meaningful valuation periods? Do they think no one will notice? Perhaps like MAC (and the late Leona Helmsley), rules are for "little people"? As an observer, I admit that I must be careful not to fall prey to the behavioural flaw of seeing non-existent patterns in the erstwhile random meanderings of stock-prices. But the coincidence of quarterly ramps (as depicted in New Tachikawa Aircraft - seen adjacently) would stretch the imagination of even the strongest apologists for the primacy of an unfettered market determining price. For the former cohort of a felon, Singapore may be (from Mr Kosaka's perspective) the domicile of choice for all the right reasons...

CNN vs. Chris Wood

What gives? CLSA's Chris Wood is banging the table on the attractiveness of Japan's equity market, yet, in a little-noticed innovation, CNN's scrolling financial banners (at least the ones piped through the cable news channel's Italian offering) has scrubbed the Nikkei index from its news scroll in favor of Singapore's Straits Times, and the HK's Hang Seng, as the Asian bellwether(s). Perhaps it is an oversight, or maybe the Nikkei is now well-and-truly irrelevant. Or perhaps CNN, like the covers of the Economist and Time magazine, are meaningful contra-indicators. I just thought it was interesting, and potentially telling, as a news-and-data junkie, that I was unable to keep abreast of the daily (mostly downward) fluctuations from a purported leading news provider.

(Note to self: Must get a USB global 3-G device...)

Earth to Gramm: W.T.F.Were You Thinking??!??!

In the solitude of the high Alta Badia amidst the Malga's (working summer farms), the world's happiest cows gorge themselves upon verdant clover, wildflowers and grasses, clinking bells carried by the wind from seemingly all directions. From here, where the fossils in the Dolomite rock are Pleistocene, it is hard to imagine that the international monetary system is in severe and irreparable decline. The farmers cut and dry the grass for winter while the rest of the family including a now-short-and-stooped grandmother rake it on the steep slopes unreachable by conventional tractor. Marmots still squeal in the fog of morning, hawks hover high and time - excepting the encroachment of modern tourist construction built by the more enterprising of the Ladinisch - seemingly stands still.

Modernity intrudes nonetheless. Some of the enterprising have assumed large debts to construct - at a most dubious point in the cycle of both economic growth and changes wreaked by global warming - resorts that will inevitably be owned by the banks before the cycle is done. Restricted as comms were, a CNN-branchlet seemingly intended for Africa evidenced by ads for Nigerian banks and Ghanian port-services accompanied Berlusconi #1, 2 & 3 on the limited cable. It was the odious CNN that delivered to me the somewhat hilarious figure cut by Phil Gramm calling Americans a bunch of economic whiners, further suggesting that America's economic ills are both imagined by the Polity in general and a figment of the democrats' political strategists in particular. Now while it may be true that Americans are whiners - whether about taxes, gas prices, or one's liberalness, that is as far as Mr Gramm's worldview intersects with objective reality. Lore has it that everything is bigger in Texas - the cars, hats, steaks, the ego's, and if Mr Gramm and America's President are anything to go by, so to is the sheer ludicrousness of her politicians. $150bbl-oil has it would seem, has untethered any prior connection that such figures had with reality in the rest of the non-oil producing, home-owning, food-eating nation, a nation itself divorced from reality by the bubble of its own existence, as aptly summarized by Dr Roubini in his latest missive.

The problem with monumental political falsehood is that, like slander, it nonetheless tends to stick, remaining in the conscious mind long after it's been garroted by the facts. So let us contemplate for a moment the objectively sorry state of America's economy, and the likelihood of a yet-sorrier state in the imminent future. She [the USA] has seen steeply falling real wages for most workers for the last decade, impossibly large and persistent current-account and trade deficits on top of fiscal gaps that (all-in including SS) stretch the probable and exist only as a result of cynical piss-taking by foreign CBs mercantilist policies; persistently negative household savings rates that would make Edith Cresson's Grasshoppers blush; an energy-appetite woefully incongruous with the soaring energy prices, and future supply considerations, and energy-inefficient housing and transport infrastructure; an absurd healthcare infrastructure that consumes more per unit of GDP that any other nation YET leaves more than 20% of the population uninsured and uncovered, and fails to measure-up to peers spending half-as-much when it comes to basic measures of achievement such as infant mortality, and longevity; a financial system (including brokers, mono-line insurers, GSEs, and regional banks) that is in tatters due to excessive short-termism, greed, and flawed monetary policy; unprecedented income inequality that continues to widen through all-manner of rent-seeking and flawed political process, a currency that is in near free-fall through not-so-benign neglect, and an unwillingness to impose austerity upon a people whose lifestyles are at odds with their ability to afford what they've been told and sold is their god-given right; homes prices that are also in free-fall, municipal and state-finances that are in shambles, infrastructure (particularly transport, education and electricity) that is decaying rapidly, on top of unprecedented real and nominal levels of household indebtedness - especially credit-card debt, and international diplomatic initiatives strait-jacketed by the nation's debt held by our potential military foes and both real and imagined economic rivals. This is in addition to the Rappaport short-termism and economic cronyism encouraged by asymmetrical risk/reward of executive compensation that rivals the very best the Russian kleptocrats can muster, leaving the nation's enterprises as perilously fertile as the midwestern soils ravaged by intensive monoculture.

So, while it is all well-and-good for Mr Gramm to conjure political invective accusing the opposition of false manufacture, the fact is that none of these major-league problems are imagined, most were encouraged by, and accelerated their emergence since the turn of the millennium under republican watch without any acknowledgment to mission-control in Houston that we've even got a problem. Whiners? Maybe. But rest assured this has nothing to do with with the issues we face. Hopefully, this will be a year that the liars will be called-out, and perhaps that people recognize their own culpability in the travails that the nation now must confront.

Fiddling While Rome Burns

First, apologies and explanations for my absence: it was the Italians fault. Their hotels, you see, have a bizarre sense of what the internet represents, treating it like the way hotels-of-old treated telephone access: with unimaginably large mark-ups, byzantine security firewalls that restrict access, in distinct opposition to informations burning desire to be liberated. Not that my drivel represents a security threat, but apparently the Italians are more abusive than the NSA in this regard, with the most prevalent eavesdropping and surveillance of all NATO members. Of course, one might question whether Mr Berlusconi's intention is National Security or personal security, though I reckon its closer to the latter.

Second, though my market sensibilities feel guilty about vacationing while proverbial Rome burns, I have no regrets, having spent a decidedly magical couple of weeks at altitude in the Sudtirol with family, pursuing vigorous hikes and climbs with all the requisite libations. And it felt doubly-liberating since this was the first time in nearly nine years that I am truly free - unburdened with a so-called risk-position (more on this later). Up there, away from Bloomberg, newswires, cell-phones, email & dingleberries, the world appears just fine. Farmers make hay, with cows eating the excess grass; Dutch people still tow their camper vans anywhere and everywhere, and Belgians have yet to learn to drive in the mountains. Expresso's (always short - and never burned) are consumed frequently and with aplomb, while aperatifs and digestives flow freely. Change still comes slowly there. But if one looks with but mild astuteness, there are plenty of signs of the post-millennial, post-dollar-hegemony which I will share with you in a later post.

Third, sorry about not requiting replies to my observations on Bob Dylan’s latest tour. My brother (a far more informed critic than I) sympathized with my thoughts and pointed to “Live at Budokan” as 'the beginning of the end', with his brontosaurus-like mastication of “Maggie’s Farm”, to which I agreed. To the commenter who was looking for exemplary evidence of his manglings, I sadly cannot do justice as I fear I do not have the musical lexicon, but his destruction-through-bizarre parsings of nearly every line, in every tune, reminded me of the difference in meaning that a transposition of a single comma makes to the hypothetical phrase “…she was french, kissed by sun…” versus "...she was french-kissed by the sun....". The meaning is, of course, altered irreparably. That is a mere comma or pause. In musical vocalizations, there are multitudes of opportunities to inflect, emphasize, intone, change the pace of the cadence, whether overtly or subtly, that imbue (or not!) a song and lyric with meaning and hence poignancy. Not all changes of course impact the meaning or poignancy, but at it happened, most of Mr Dylan's THAT night, did, and did so for the worse. That is just my opinion. All the same, thanks to all to who've wrote and commented. Quiet alpine nights were perfect for conjuring and distilling musings - despite my technical inability to launch them into the world. They will hopefully re-emerge during the coming week.

Poignant No More

There are things in modernity that have outlived their useful purpose. Some (like the Gas Guzzlers, Mao Suits, the incandescent light bulb) by circumstance, some (the top-loading washer, the typewriter) by the emergence of better design and technology, whilst others (President Bush, the shadow banking system, stock-brokers, or mortgage brokers) become more-than-redundant due to senescence or worse yet, by willful neglect. A few (say the NYSE) of course will whither from superciliously clinging to the vestiges of past usefulness or glory beyond its sell-by date. And so it was with Bob Dylan, for almost the entirety of his two-hour gig at the Palais des Sportes in Grenoble, that I was unable to shake such thoughts from my head.

It was a combination of happenstance and serendipity that brought me there, to l’Isere in eastern France on that June day, so-aligning our paths, that I felt cornily compelled to pursue this ummm errr destiny to its conclusion. A ticket came easily, despite the apparent scarcity but hours before, as did on-street parking free from the hassles of K&C permits, zealous traffic wardens or other suspect and thoughtless municipal revenue scams. Beer and freshly-made sandwiches (on baguettes) were provided cheaply and with both quality and smiles unlike the Aramark-abuse heaped upon the customer at North American events where everyone is cynically entitled to their pound-o-flesh and where the words “public interest” are oxymoronic at best. As the lights dimmed, my hopes were uncharacteristically high, as touring bikers and hippies were joined by parents in their 50s and 60s accompanied their grown children (and grandchildren!), and for once, I didn’t feel old and out of place as one of my age inevitably does at such gatherings.

Yet as the concert began, I was bugged almost immediately. No, I was not put-off by his band, for he was indeed accompanied by fine and accomplished musicians. Nor was I disappointed that he wasn’t playing guitar, but keyboard of one variety or another. And anyone who’s seen him over the years wouldn’t expect him to croon sweetly, so I wasn’t disappointed by the evolution of his characteristic rasp into a definitive growl. Even expectations about repertoire were non-existent, so the mix of new and old sat perfectly well. What saddened me however, was the apparent contempt his displayed towards his “art”, and so - by extension - his audience with what to this seasoned listener’s ears were nihilistic and mocking interpretative phrasing of lyrics that mangled once-poignant creations. It is galling enough to witness the mercantilist piss-takers and their consumptive co-conspirators destroy (what’s left) of the Bretton Woods system, for flawed as it, it remains the only one we’ve got, and therefore highly poignant for any saver, at least until replaced by something better. But to do see an artist debase and grafitti his own works (that I myself love) is almost more than I could bear.

You see, I have no problems with change, and even admire it for its own sake. Change (in art, at least) is good - even when things are going well for there is virtue in taking one out of one’s comfort zone, or applying one’s talents to new medium. Miles (as I’ve written here before) explained why he stopped playing ballads as:

“…because I liked playing ballads too much….”

And I have no doubts that it would be bloody f*cking boring reproducing the same arrangement of the same song day-in-and-out year-after-year. But there is “good” change and bad change. Constructive change and destructive change. Change that works, and change that doesn’t. 1970s fashion was indeed a change from what preceded it, but its worth remains debatable. But Thursday night’s concert in Grenoble, the change was in my opinion decidedly for the worse. Take a classic such “Tangled Up in Blue” from Blood on the Tracks, or 60s classics “Hard Rain”, ”Blowing in The Wind”. These were poignant works, with meaning imbued by phrasings and their consequential emotion – particularly when read/spoke/sung by the songwriter-lyricist-poet. But to edgier backing rhythms of his band, he was parsing the phrases in the most bizarre fashion – growling them rapidly in ways that decimated the poignancy, emotion, an sensitivity of the original works, leaving me thinking….WTF???! It was, no pun intended, disconcerting, in much the same way as commodity allocations as an asset class are a classical demonstration of a composition fallacy. And like such fallacies of composition cynically mock the system of which they are a product, so too did it seem that Mr Dylan was mocking his fans, taking the piss at those tossing $100 bills his way for the dubious pleasure of two hours of entertainment approaching abuse.

Now Dylan has a long history of disappointing fans, admirers, and just about most people not immediately close. Some - even those personally dissed by Robert Dylan a.k.a. Zimmerman like Joan Baez - explain it away as something which is essential to the artist in him. Apparently, he is less of a creator of art, than a channeler of inspiration that allows him to tap into something almost-divine and verbalize archetypical feelings. This is in contrast to say, Leonard Cohen, who treats composition and songwriting like a 9-to-5 job, and says its bloody hard work. Fine, I can accept that. And they ARE his songs, so he is free to do whatever he wants to with them. Perhaps Ms Baez is correct, and since he hasn’t sweated for these works, he has no attachment to them. And if he has no attachment, perhaps they have no meaning to him, allowing him to shit and piss upon their carcasses. In this view, poignancy is conjured only in the eye of the beholder, and Mr Dylan has made his view clear. Just as the PBoC, BoJ, SNB, and Federal Reserve have made clear theirs.

It is a sign of the times. We are in new and uncharted territory in modernity – composed of one part selfishness, one part-nihilism. So have a drink. Borrow some money. Don’t pay it back. Steal from your neighbor. Pick the public flowers in the park. Fuck everyone. Nothing really matters anyway…right?!?!

The Times They Are A-Changing c1963

Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone.
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'.
For the loser now
Will be later to win
For the times they are a-changin'.

Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'.
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.

Come mothers and fathers
Throughout the land
And don't criticize
What you can't understand
Your sons and your daughters
Are beyond your command
Your old road is
Rapidly agin'.
Please get out of the new one
If you can't lend your hand
For the times they are a-changin'.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin'.
And the first one now
Will later be last
For the times they are a-changin'.
Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone.
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin' who
That it's namin'.
For the loser now
Will be later to win
For the times they are a-changin'.

Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'.
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'.

Come mothers and fathers
Throughout the land
And don't criticize
What you can't understand
Your sons and your daughters
Are beyond your command
Your old road is
Rapidly agin'.
Please get out of the new one
If you can't lend your hand
For the times they are a-changin'.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin'.
And the first one now
Will later be last
For the times they are a-changin'.