1-2 Knockout

Update

So for those wondering where we've been and what we've been up to for the past month or two, I just started writing for The Atlantic's website.  Not sure how that'll turn out, but I'm currently working on stuff for them, slowly, but surely. 

As for 1-2, well, I'll let him address that if/when he so chooses.

1-

Don't Let the Falling UST Prices Fool You

It could be a boon for the US Coffers--at least according to our favorite little regulatory body: FASB.

Just a thought:
Will the US Treasury begin booking the devaluation in US treasuries as a gain, ala Jamie Dimon's comments a few weeks ago about accounting standards (banks mark-to-market profits when their bonds fall due to buy-back costs declining)?  It would surely be the finest gov't accounting scandal YTD.

Maybe M2M isn't looking so bad afterall.

1-2

Disclosure: Massively short the US in multiple forms.

Why MFs Ride the Failboat -- A response to MarketSci

This morning Mike at MarketSci pondered why mutual fund managers just can't seem to get it right, yet he can (he has an audited track you can check):

"...why the mutual fund industry, with such a low hurdle to clear, doesn’t reach out to folks like me to apply some of our concepts to their more fundamental approach to investing; in other words, why they don’t think outside their little box.

Can anyone honestly tell me that a developer who has produced as much positive consistent alpha as we have couldn’t apply those concepts to a mutual fund and produce that magical and much sought after 1-2% annual outperformance? I think not."

My humble response (please excuse grammar and typographical errors):

Even though I am in what I would call “the brunch” phase of my career (early in the morning, but well awake long enough to clear the sleep from my eye), I have worked in just about every facet of asset management, and I am consistently befuddled by the poor performance of professional money managers. That said, I posit a few ponderables about WHY they are so bad:

1) Incentives/Risk Aversion: as you know, most money managers are really asset gatherers, skimming their fees off the top of AUM, not performance. Unfortunately this leads to an asymmetric risk aversion model of money management. Rightly or wrongly people benchmark their manager’s performance against a well known benchmark (simple framing heuristic). Since I am sure you are familiar with the risk-aversion “S” curve I won’t get into the details, but suffice it to say the visceral reaction an investor (client) has to underperformance is far more pointed than their reaction to outperforming the benchmark. Money flows more swiftly out of funds that underperform by, say, 200bps, than it flows in for 200bps of outperformance. Gathering assets takes time; losing them doesn’t. Since there is little payoff for marginal outperformance (zero profit participation), and a heavy penalty for marginal underperformance, PMs manage towards an alpha of zero (after fees): hug the benchmark and your career is safe. Furthermore, a single drawdown of any magnitude is likely to stain ones reputation for years, whereas (again) a single positive year is likely seen as “lucky” or flash in the pan. (This is nothing new, but it’s still true).

2) Regulations: while there are some (albeit a minuscule number) of actively managed funds that actually manage concentrated or unique strategies, the majority of funds are boxed in by diversification rules, bans against shorting, etc. As you know, the greater diversity assets you hold the closer you are going to perform “as the market” (for the few novices in the crowd just look at the Dow and SPX correlations…they are incredibly high even though the two indices have different methodologies, weightings, sector exposures, etc) in fact, if i recall correctly, after about thirty stocks you are at a .8-.9 correlation and beta to the market. Today it is (near) impossible to run a portfolio that DOESNT act like the funds respective “market”, simply because of the forced diversification.

It is also incredibly difficult to change ones investment/trading strategy in a fund that requires are the requisit fillings, risk analysis, and BoD approval. Therefore it’s tough to be agile and “try new things”.

3) Assets kill performance: on top perverse misalignment of incentives “asset gathering” promotes, the game of “getting big and collecting fees” is antithetical to efficient investing. A) As you grow in size your trading agility decreases as your ideal position sizes are corrupted by a major exogenistic (non investment) factor: moving the market. The elasticity of prices with respect to liquidity severely hinders a funds actual investment universe and forces PMs down their “best ideas curve”. B) Since there are “upper bounds” in how much you can invest in any one stock (by virtue of point “A”) you are forced to go down your investment prospects list to simply have somewhere to park excess cash. PMs aren’t paid for holding cash (it’s seen as the client’s role to measure their risk tolerance and balance accordingly), and the presence of cash reserves may (rightly or wrongly) signal that the PM is out of ideas (a negative signal).

4) Client representatives/Buyside advisors: these geniuses love to take complex situations and boil them down to nothing more than a series of comps from traditional style-box analysis. If you can’t be bucketed into a well defined style pension/insurance/RIA advisers won’t even look at you. God forbid they have to take the time to understand products and explain a complex subject to their clients. Rather they prefer to simply have a matrix by which they can punch in return streams and holdings then say “XYZ is best, look at their Sharpe!” When I launched one of those fabled HF Replication products the toughest hurdle to clear was figuring out how to “box” the fund–not the mechanics, not the methodology, they only asked “what box would this go in?”

5)Finally, to sum everything up, MF companies are big, slow moving organizations. On top of the regulatory hurdles most funds are seen not as alpha generators, but as product shelf fillers. A “good” mutual fund shop has a product for every “box” and they need to keep their presence in each category regardless of performance or rationality. If a PM on, say, a large cap value fund underperforms heavily then the PM is simply replaced because every platform needs a LCV fund. To the contrary, should you outperform your market, but exhibit any kind of style drift, you can just as easily be canned because people will complain “they dont know what they’re buying”. And god help you if you come up with a new investing metric to base your analysis on—you’ll have to prove it works to your handy dandy risk department for well over 6 months, but which time it’s probably arbed out anyways.

At the end of the day it’s the structure of the system that has set portfolio managers up to fail–all in the name of “protecting” retail investors. The only places you see demonstrable alpha is in the HF community because they can trade nimbly, react quickly, generally aren’t big enough to move markets, and have an aligned incentive structure. Is it perfect? No! But you are never going to eliminate all principal-agent problems, which is what this REALLY comes down to. HFs are just allowed to act as better agents.

Krugman: Sixteen Years (of Intellectual Dishonesty)

Sometime around 5am this morning (sleep is for the weak) I read a week-old post from our favorite economist liberal acolyte, Nobel Laureate Paul Krugman.  Beginning his career as a caterpillar economist (churning out paper after paper by candlelight from the drafty Princetonian economics basement) he apparently cocooned sometime ago and morphed into a beautiful butterfly (aesthetically pleasing, but lacking substance or utility) for the NYT and democratic party.

His post was an exercise in Japanese efficiency, and Cinema Code era innuendo.

Its title: Sixteen Years.

Its lone content:

"A Tale of two presidents."

The sinister elegance of his post is just how little Mr. Krugman says.  By intentionally structuring his "argument" (Clinton > Bush => Liberals > Conservatives) without actually forming a logical line of reasoning or corroborating commentary he is able to "appeal to popularity", since he knows his readership, and then compel the reader to draw Krugman's known conclusion, which was probably presupposed by said readers.  

Now, before I get any further, you, dear readers, must realize that this I am not about to argue the merits of one party's policies versus another, or the merit of our previous two presidents.  As always we welcome and enjoy your comments, but if you want to argue about the efficacy of economic policies, POTUS' effect on the economy, etc wait for another post.

This is about intellectual dishonesty.   

"There are lies, damn lies, and statistics." -- Mark Twain (Attributed)

"Torture the statistics long enough and they'll confess to anything." --Widely Attributed

Mr. Krugman surely tortured these statistics, but like a first year associate in AG Cuomo's office, it didn't take long for the data to cave. And we all know, because John McCain reiterated ad nauseum during the elections, "Coerced confessionals are of limited value."   While this kind of "analysis" may be acceptable in the nether regions of New Jersey (and the newly mortgaged NYT basement) I am pretty sure most high school math teachers would fail a student this intellectually dishonest.

To wit, his chart:

• truncated the data stream as to eliminate any context of historical levels, volatility, highs, lows, etc.--without context data are meaningless;
• used an abridged timeseries when the full series tells the opposite story (democrats have a negative average growth in employment, republicans have a positive);
• doesn't adjust for economic policy lag;
• implies that the president alone (or in majority) controls the factors of production, employment, and output without exogenistic factors.

Utilizing the exact same data set he used I came up with the following...and this tortured soul confessed to a different crime entirely:

   

NB: 1) Party in Control is defined in the spirit of Krugman's post and reflects the party of the sitting POTUS.
       2) As mentioned in the chart, all years are offset (t+2) to account for economic lag/momentum.

	Republicans	Democrats
Months	384	349
Average Growth (PIC)	2.32%	-0.38%
Avg. Growth (month)	0.07%	-0.01%

If you look in the expanded data series you can see a few things

• His narrative of "good pres / bad pres" and thus the ideological extension doesn't hold water.  Republicans presided over a positive average growth rate of 2.32% per PIC period, while the democrats presided over negative changes in employment participation.
• The range has extremes at 55 (low) and 64 (high), and has a standard deviation of 2.9% for a series that extended sixty years it's pretty tough to give any credibility that any move less than 1SD are de minimus, no matter how much you scale the data (heck, even i had to adjust the Y axis to get this chart look readable);
• Lastly, even if you accept that a 1-2% (see what I did there) change is a "big move" you are still left with the rather obvious exogenistic variables (everything that isn't "president in power"), like Congress, Fed policy, Global economic growth, etc.

No doubt some of you will rail that I am reading my own story into his blurb, and that may be true, but if you look at the comments on his post he succeeded in drawing out the reactions he wanted without even making an argument.  Go ahead, read them, you can leave 1-2 for a second.

What was so irking about his post wasn't his conclusion (I couldn't have cared less), but rather the way he played with cheap synecdoche, ambiguity, and blatant intellectual dishonesty.

One thing I know for sure is that compliance would have my head were they to find a chart this blatantly cherry-picked in a deck. 

You're better than this, Krugman.

Vonage v. America

Would all the states Vonage loves please step forward...

Not so fast, Arkansas.

-Screenshot from Vonage's latest ad on ESPN.

I Pity The Fool Who Lays Over in Dallas: The Strangest Dinner Invite Ever

We've all been there: a missed connection, an airport hotel, and all without a decent single malt scotch to wash away the fact your selling equities in Dallas...so you turn to late-night basic cable.

Presented without further comment, Mr. T's Flavor wave.

Related: Ric Flair Finance

Two Words: FIX IT

Does it depress anyone else that congress stole their script for today's hearing from SNL?

(2:20/4:19 mark)

The End is Nigh': Estrogen Edition

Tyler Durden: We're a generation of men raised by women. I'm wondering if another woman is really the answer we need.

or

And so I went in secret off to Delphi.
Apollo sent me back without an answer,
so I didn't learn what I had come to find.
But when he spoke he uttered monstrous things, strange terrors and horrific miseries—
it was my fate to defile my mother's bed,
to bring forth to men a human family that people could not bear to look upon,
to murder the father who engendered me.

In case no one noticed, the end may be near.  Number six on my checklist (below Republicans Lose South and above Krugman Wins Nobel) is "Major Financial Publication Run by Women". 

Difficult as it is to admit, the domination of venerable Financial Tabloid, Dealbreaker.com (is that an oxymoron?) by estrogen in the forms of Bess Levin, Equity Private, and Muffie Benson-Perella has forced me to concede that the end may in fact be near. 

For years the Wall St. archetype has been that of a chauvinistic, sex-driven, middle-age male making up for his lack of high school social rank (ARS we're looking at you).  He held numerous secret affairs, with helpless women, whose only shot was to sleep their way to the top.  Women were ghosts on Wall St.  Afterthoughts. 

Not any longer.  Now, just as mother used to with Cinnamon Toast Crunch on Saturdays they spoon feed us our news, gossip, and channel our intellectual curiosities where they see fit. 

Once upon a time one could rebel against the Oedipisian complexes festering in the male Wall Streeter's heart, for once we left our nests we were free to be men--at least until some slog convinced us we needed their protection yet again. 

Now there is no respite, no escape, no "happy little cave"  for us to hide in.

We, fellow Wall St. males are now a thing of the past, obsolete, and merely an appendage of the female new world order. 

The end is near friends, the end is near.

PS - You ladies can bathe me in your liquidity any time.

Everybody Calm Down: RICK's OK (still blames shorts)

Forget JNJ and P&G, Rick's Cabaret is neuvo-defensive .

From Briefing.com (please don't sue):

Merriman notes that over the past month, RICK shares have declined by about 25% as they believe investors have feared the potentially negative consequences of a weak economy on the co's strip club operations. However, after completing some channel checks in recent days, they do not believe the co's strip club business trends have suffered during the current qtr. In fact, given the co's market position in many of its regions, they actually believe RICK could benefit from this economic environment. The firm also notes that according to the SEC website, RICK shares have been on the "fail-to-deliver" list indicating potential "naked short-selling" abuse. If this has been contributing to the drop in RICK shares recently, the firm would believe the situation should correct itself as the co continues to report solid qtrly results. Firm says that one other concern impacting public valuations recently is whether or not a co needs capital to sustain its operations. They say that the short answer for RICK is no.

Really, a bailout, on Friday??

Dick Fuld's net worth has gone from a reported $480m to <$10m over the past six months...

I'm betting SNL was pretty spot on with his reaction to Friday's bailout.

Download snl_dick_fuld.wmv.asx