1-2 Knockout

Thoughts

Over the course of the past few months, I've been increasingly asked for my thoughts on several econo-political topics, including, but not limited to "the bailout(s)," industry-specific solutions, regulatory overhaul, and others.

Those of you who've read my work over the course of the past year may also be wondering where or how I weigh in on these issues, and/or why I've remained relatively silent on issues which one would expect I'd be quite vocal.

To be honest, the only quasi-explanation I have to offer is that I just don't know.

Unlike professional writers, analysts, and pundits who depend on their words for sustenance, I have the convenience of not saying anything if/when I don't have anything good/useful/interesting to say.  The events that have transpired over the past year or two (including those preceding events over decades past) have been a bit overwhelming, in terms of the time and knowledge required to not only stay abreast of, but more importantly to understand.  While I'm hardly disappointed to still remain otherwise employed (knock on wood), I simply haven't had time to wrap my head around much of this information, at least not to the point where I would risk what little (if any) reputation I've managed to nurture by spouting off some uninformed nonsense the likes of which I've previously accused others. 

Thus, while I haven't yet developed a comprehensive solution to our various ills, there is a slightly smaller issue into which I've put some time and effort.

Like many people, as I see the news scroll by on my monitor, I'm often overcome by feelings of anger and disappointment.  I'm particularly enraged (although unsurprised) with the constant interference of pandering politicians and poorly-informed punditry presenting opinion as fact or careful analysis.  That every Joe and Jane Schmo with a keyboard gets to voice their often similarly uninformed opinions reminds me of Steve Carrell's character in Anchorman when he declares "I DON'T KNOW WHAT WE'RE YELLING ABOUT...LOUD NOISES!"  The complex, interrelated issues at hand seem to be way beyond the knowledge, experience, and understanding of virtually everyone, and yet everyone still has an opinion, everyone knows who was at fault, who we need to blame, and how we'll magically "fix the economy," whatever that means.

Various media participants and outlets have done their part to contribute to the hype and hysteria, often inciting outrage and chaos, when there is often little-to-no reason for doing so, other than to sell papers/eyeballs.  To be sure, much of my ire has been focused on the media, specifically, the part that  covers (or attempts to, as it were) business, finance, and economic happenings.  Even to those of us who are actually trained, experienced, and possibly still work in such fields, there is much disagreement over what/how/why things happened as they did, and perhaps more importantly, how to "fix it."  Yet we've seen the same sort of behaviour from virtually every media outlet that I described in the above paragraph, speaking very loudly and authoritatively on topics of which they don't appear to have the slightest understanding.  Just pick up any daily Newspaper or click on over to Fox News or CNN to see some of the ridiculous crap being peddled by the "fair and balanced" media.  (Just to be sure, the previous sentence applies to both sides, and everyone in-between.)

Despite a keen awareness that most reporting these days is unfortunately nothing but filler between advertisements, I've found it difficult to contain my immense dissapointment with the way inherently complicated concepts have been grossly over-simplified, mis-interpreted, and mangled over-and-over in popular media, of both the new- and main-steam varieties.  To be sure, its altogether unsurprising to witness such a non-phenomenon when sensationalism and incendiary "reporting" are - or are perceived to be - the largest drivers of revenue for most media outlets.  Contrarily, when there is - or there is perceived to be - little/no incentive to present  balanced, well-argued/researched, and transparent information, it comes as no surprise that such things are few and far between. 

In fairness, there are several media outlets who have found a way (not necessarily a profitable one perhaps) to practise what I'd call "responsible reporting" when it comes to these matters, and I applaud them for their efforts.  These are the outlets I visit on a regular basis, and its little secret who they are.  However, such outlets unfortunately represent a disproportionate minority, and are thus not nearly as popular as their sensationalist, more irresponsible brethren.  

Of course this is hardly the biggest problem at stake, but it is perhaps one of the few that we have any ability to affect.  Especially in such turbulent times, we should be extremely cognizant of the material presented to the general public, and the light in which this information is presented. 

I say this because frankly, I'm not quite sure how to properly enunciate my fear that the various braintrusts  (legislatures, the SEC, FDIC, Board of Directors of most banks, the general populace, etc) will, in trying to "stabilize" the economy, actually send us further into the abyss.  If there were an ETF or other instrument to short the testicular fortitude of our Congressional and other "leaders" tasked with addressing our economic woes, I would be into that trade in serious size.  I have little-to-no faith in their ability to understand the issues in front of them, and even less faith that the group as a whole will make the tough choices conducive to long-term sustainability and economic health.  If what we've seen from both sides is any indication, we should expect more of the same short-term "solutions" which have generally failed to address any underlying issues, and quite likely prolonged the pain, and simply delayed confronting the real issues until a later date.

Showering the masses or individual companies with money (the exact faucet, pressure, and distribution pattern used is irrelevant here) may seem like the most politically expedient option, but as many others far more informed than I have argued, is actually counter-productive at a certain point.  Eventually, we have to pay the piper and reduce leverage across the board to sustainable levels.  (I'll leave it to 1-2 to discuss this in greater detail if he feels compelled to do so, since going down that path is a far-longer discussion than I'm interested in having here.)

So, perhaps if we can find a way to incentivize the media to be more careful about what information they present, and how it is presented, perhaps we can affect public opinion, and thereby affect the decisions made by the powers that be. 

I realize that this is far easier said than done, but to oversimplify, I believe that those of us who "know" have a civic duty to share that knowledge with those who do not, especially when it just so happens that doing so may very well be critical to ensuring our future employment. 

Some have argued that trying to improve the quality of business reporting is a fools errand, a futile effort.  One follower on Twitter pointed out that if one possesses a functional understanding (or even capacity to understand) the material, they one will most likely pursue a more-lucrative career in the field rather than reporting on it.  This may be true for many people for whom money is the primary motivator, however I know several people who forgo financial gain to report upon and analyze business and business news (for example, I don't do this for the money).  Some of these people even have undergraduate or even advanced degrees in the fields which they cover, as shocking as that might seem.  

The other solid criticism seems to be that news outlets and reporters wouldn't have much, if any incentive to comply with our requests.  Judging from traditional media's well-documented aversion to change, this is a legitimate criticism for which I don't have a fantastic response.  It would seem that any concerted effort to affect change would have to first gain sufficient visibility and popularity so as to make our stamp of approval an important sales/marketing tactic, or on the other hand, such that not having our support was perceived to be sufficiently detrimental to that outfit's credibility that they comply out of perceived necessity.  This is a bit of a catch-22, as 1-2 was quick to point out when we spoke about this a few days ago, but one that I don't think is insurmountable.

I envision a largely-volunteer Non-Profit, at the core of which is a proprietary, secure database of business professionals and academics willing to make themselves available to whatever degree they're comfortable with to reporters and journalists.  There are enough of us who make our thoughts, opinions, and analysis available for free already that I don't think this is asking too much.  Think of something along the lines of Linkedin, except with the added ability of anonymity for those who need to remain so for professional concerns.  These volunteers would be able to create a profile with whatever level of detail on their background, knowledge, experience, etc they feel comfortable providing.  Reporters and journalist members would then be able to search the database for those with knowledge/experience on the subject matter they're covering. 

Additionally, the website would allow volunteer members (like FT Alphaville's Long Room) to post corrections, criticisms, etc, on poor business/financial/economic reporting.  This could even be extended to a ranking of various media outlets.  In turn, this could be used to present awards each year for the best, most improved, etc ones, and also highlight repeat offenders so that the general public could be made aware which outlets they should avoid or take with a grain of salt.

Perhaps I'm delusional, perhaps I'm insane, but to me, this seems like a worthwhile cause.  There's virtually no overhead besides maintaining the website, plenty of business professionals with newfound time on their hands, and a general politico-economic state of affairs that makes today a more important time than ever to put our knowledge and experience to good use.

Let me know what you think. 

Good idea?  Bad Idea?  I'm a stupid schmuck?  Whatever, just let me know.  If this turns out to be a horriffic idea, then so be it, however if enough of you are with me then I stand ready to make this (or something like it) happen.  Lets see how it goes.

 

Notable and Quotable

"Profits, like sausages, are esteemed most by those who know least about what goes into them."

-Alvin Toffler

Gretchen Morgenson, Please Step Down From Your High Horse

Back in March, 2008, I sent an emal to Gretchen Morgenson regarding the Bear Stearns/JPM debacle, and her populist, Wall Street-hating coverage surrounding the situation.  For some strange reason though, I hoped, despite all indications to the contrary, Mrs. Morgenson would clean up her act, knowing that people who actually have some semblance of financial/economic knowledge read her nonsense work.

Alas, almost a year later, she's one-upped herself, this time with a new, more vengeful ignorance that by now I've regrettably come to expect from the paper that employs such Financially illiterate (arrogant, annoying, etc) types as herself and Floyd Norris.

Curiously, now Mrs. Morgenson fancys herself an expert not only in all things Wall Street, but all things involving compensation, incentives, and policy.  While I'm not particularly surprised or dissapointed at this point,  readers should understand the righteous indignation with which I'm tempted to rain down upon her with, and the restraint I'm showing by avoiding the use of expletives, ALL CAPS, various other means of expressing such feelings in text.  To clarify, explicitly, the following is not an attack on an individual (per se), but on the argument(s) which she presents, and will be sent to her in an email, again.

Gretchen,

Regarding your recent article, "Fair Game: Bailout Needs Some Strings Attached to Limit Pay", I'm not quite sure where to start?  At the beginning, perhaps:

“The panel’s analysis revealed that in the 10 largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66,” the report said. “This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.”

More taxpayer money down the drain, alas. And all the more reason to focus closely on executive pay restrictions at any bank that receives TARP funding.

Lets ignore, for a second, the fact that claims of "value" are for all practical purposes useless, given that no one can actually value the instruments in question, but frankly, I mean, holy non-sequitur Batman!   If I'm following your "logic" here, because the Treasury overpaid for assets to which no one can accurately value, you conclude that we should limit the pay of the bank Executives that convinced them to do so, despite the fact that their job is to do precisely that, to get the highest possible price for assets?  Seriously?  Give me a break.

I think you'll agree that most of the ladies and gentlemen who sit at or near the tops of these firms are already financially well-to-do, no?  Your plan is, to summarize, that we give the people who have the knowledge, ambition, and wherewithal (if anyone can be said to posses such things), a disincentive to fix the mess they may very well be responsible for creating?  This, sense does not make. 

Given the enormity of the task at hand - restoring the stability of the Global Financial System - perhaps we should be primarily focused not on punishing those deemed "responsible", but on creating an incentive structure to make sure those to which this task is left are those best equipped, and most likely to succeed. 

I realize, however, because this concept makes sense, it has no place in your column, especially since it does so without fueling the indignation of the ignorant pitch fork & torch anti-capitalism crowd. 

Much to my chagrin, It gets worse (much):

Although our long-running financial despond has produced few real positives, surely this is one: Investors are finally seeing just how regally executives live on their shareholders’ dimes. Maybe now they will do something about it.

Yes, Gretchen, making it, per your own admission, the Shareholders' problem, not the Government's.  

During good times, banks either hide or try to justify such perks as fleets of corporate jets and Las Vegas junkets. But as companies run to taxpayers for their bailout billions, they are now being forced to forgo the Gulfstreams, the tee times at Pebble Beach and those sumptuous spa treatments.

No, Gretchen, these perks are not restricted purely to the Executives and Employees of Financial firms.  As a matter of fact, firms (yours included, I'd imagine) rely on such perks in their every-day course of business.  Are you suggesting that, at a time when Banks are already up the proverbial creek in terms of retaining, nay, generating new business, that we further restrict their ability to do so?  Do you ever engage your brain before you put pen to paper (or fingers to keyboard, as it were)? 

Considering this suggestion, if put into practice, would necessitate further layoffs and bankruptcies amongst the very firms that depend on corporate travel and entertainment spending,  which we do not need any more of, I highly doubt it.

Could shame, that long-lost American character trait, be making a comeback? Not likely. So it’s important to make Washington’s plan to rein in executive pay airtight. Loud rebukes against executive excess are amusing, but a $500,000 cap on salary means only that the executives will be paid some other way. And requiring companies to recover compensation only if an executive is found to have lied on financial statements? Good luck with that.

Well, the voice of reason speaks, kind of.  This is really the best part though, where you, Gretchen, presume to teach us all how you think we'll get out of this mess, thank god!

Here’s an alternative approach. How about requiring that any severance pay over $1 million be subject to an excise tax of 20 percent? This is the amount levied on golden parachutes, and it could easily be applied to severance at companies tapping the TARP.

Ahhh, the inevitably arbitrary, yet impressively chosen "million dollar" threshold, what better way to rile the masses?  Far be it from me to point out that this approach simply amounts to a redistribution of money to The State, which I should remind you has such a great track record when it comes to deciding how best to allocate capital, but let's not let things like "logic" or "history" get in the way of your arguments here.

Furthermore, why not extract a 20 percent tax on all perquisites exceeding $50,000 that are given exclusively to top executives each year? These include such delectables as cars and drivers, country club memberships and personal use of corporate aircraft. If the government won’t bar perks outright, then executives should have to give something back for the freebies.

Gretchen, by what calculus did you arrive at these numbers?  Even if you're speaking only of use of jets, drivers, and the like for personal use, $50,000 is still an arbitrarily low number, when a country club membership alone can cost $100,000+/year for a mid-to-fairly high-level club around a major metropolitan area.  A driver, often included in compensation packages since an Executive's role is sometimes a 24/7 job, can cost substantially more than $50,000.  

And while we are on the subject of excise taxes, the government should ban the deplorable corporate practice known as the gross-up, in which shareholders pay to cover an executive’s tax bills. Rank-and-file employees at these companies, who have been hit hard by the crisis, don’t get these deals. Why should anyone?

Gretchen, I'm sorry, you are either a shameless pandering hack playing to the already-angry masses to sell Papers, or an ill/un-informed idiot. 

 If shareholders don't want the executives of their portfolio firms receiving gross-ups as part of their compensation, then can - get this - not hold, or sell their shares in that firm or firms.  Incredibly, they can also attend what we call a "shareholder meeting," among a variety of other ways they can air their grievances.  Feel free to return to the realm of reality at any point, we'll be waiting for you.

IT is also important for the government to provide as many incentives as possible to get taxpayers’ money paid back quickly. So any executive pay restrictions might also state that if TARP funds are returned within a certain period — say, 18 months — the penalties can be avoided or refunded.

Oh, because this proposition won't incentivize Executives to do anything silly, like maximize short-term results to the detriment of long-term sustainability, no, we'd never expect anyone to do something so preposterous!  Of course, this says virtually nothing of the fact that as long as Banks keep paying interest (preferred dividends) on TARP funds, repaying loans later, rather than sooner, may actually work out better for shareholders, as over a more distant time horizon, many asset values will likely increase closer (albeit likely not to) par.  This is a gross oversimplification for which I apologize, but you should be comfortable with such shortcuts, so bear with me.

That which does not kill you makes you stronger, as the saying goes. If out of this near-death economic experience, shareholders emerge stronger and tougher on directors about me-first executives, more to the good.

Yes, you've hit the nail on the head, finally!  Shareholders, not the Government, need to demand more accountability and results, more performance for the pay, so-to-speak.  I do not disagree with the basic premise that when Government (or, as you're careful to say, "Taxpayer") funds are used, certain restrictions may be a good idea to ensure that said funds are not abused.  However, not a single suggestion if your article comes close to making any sense whatsoever.   If adopted, your proposals would, as I've already pointed out, likely accomplish the complete opposite results for which we should be desperately hoping.

Please, I implore you, issue a public defense of my criticisms, of your work.  Nothing would make me happier than to see some actual supporting evidence or logic to back-up your claims and suggestions, that is, to prove my criticism unwarranted; I am not excited about my seemingly ever-declining faith in traditional media outlets and traditional Journalists like as yourself.  Seriously, please, I beg of you, restore my confidence once more!

Regards,

Anal_yst

Fail of the Week: Grassley/Levin Hedge Fund Regulation Act

The latest bullshit populist bill to come out of the brain trust that is the U.S. Senate, per the WSJ, is aimed at those dastardly Private Equity and Hedge Fund robber-barons, o noesssss!

That this issue is once again on the table is hardly surprising in and of itself, but - and I didn't think this possible - somehow, the proposal is actually more ridiculous than it was the first time we heard about it, ya' know, back in the good ol' days when Steve Schwarzman was still ballin' out, and Trader Monthly was actually still in business.

Anyhoo, the gist of the Hedge Fund Transparency Bill, introduced last week by Chuck Grassley (R - Iowa) and Carl Levin (D - Michigan), essentially comes down to forcing Hedge Funds, Private Equity, Venture Capital, and similar funds with > $50mm AUM to disclose to the SEC, at minimum:

1. The names of the companies and natural individuals who are the beneficial owners of the hedge fund and an explanation of the ownership structure.
2. the names of any financial institutions with which the hedge fund is affiliated.
3. the minimum investment commitment required from an investor.
4. the total number of investors in the fund; the name of the fund's primary accountant and broker.
5. and the current value of the fund's assets and assets under management.

The rationale here is that hedge funds have gotten so big, and so entangled that they pose a serious systemic threat to the U.S. and Global financial system.  One would be hard pressed to refute this basic allegation, although methinks its hardly enough to rationalize raining down with righteous regulatory indignation on the bulk of the alternative asset management industry.  Unsurprisingly, we see our old friend, the classic Bloomberg-esque "Hedge funds for dummies" introduction, below which they cite several other factors (non sequiturs, mostly) supporting their call, among them:

• Endowments and Pensions, the same ones that poor Joe & Jane 6-pack depend upon for their economic well being, have increasingly invested in HF's, leaving these poor innocent folks dangerously exposed to losses..  No mention of the fact that this concern could be tempered by oh, I don't know, actual oversight of the Pensions/Endowments by their boards, managers, and existing regulators, of course.
• A rambling description of how, as far as I can tell, the failure of Bear Stearns HGSCELF lead to Merrill being sold to BoA and every other bank on The Street being forced to take TARP money.
• The claim that, as SEC Commissioner Luis Aguillar stated in a speech on January 9, 2009, the SEC "currently lacks tools in the hedge fund arena to provide effective oversight and supervision," somehow, someway, this Bill will render the SEC effective, despite effectively zero evidence to support that conclusion.
• Somehow, an operation with $50mm AUM is deemed to be included in the single entity "Hedge Funds," and thus necessarily part of the axis of financial evil.  This makes sense, clearly.

The best part of this whole clusterfuck might be that necessarily, these guys must be delusional/dense/retarded to think that the Securities & Exchange Commission, which failed so epically over the course of the past several yours, is up to the lofty task of doubling (or worse) their responsibilities and workload. Clearly, the same group that totally missed the boat on Madoff, despite being spoon-fed 10 years worth of virtually every detail of the scam is up to the task.

For sure, all criticism should end here, QED, but just for shits & giggles, we move on...

Given the requirements spelled out in the numerical list above, the only thing this Bill actually achieves is to guarantee employment of the lawyers, bankers, and accountants whose job it is to devise ways to obfuscate relationships between owners, clients, affiliates, and investors.  Someone should remind these two asshats to be careful what they wish for, since given the populist leanings of those in power, they very well might just get exactly what they're wishing for.

Um, Not Your Best Timing, Mr. Wynn

As Long or Short Capital detailed back in May, 2008, Wynn Resports issued $4.4mm shares for proceeds of $660mm of stock at $154, and subsequently bought 2.4mm shares back a mere QUARTER later with the stock trading at ~$95.  Despite dropping to the mid-to-low $50's in the interim, I think its safe to say this move was still a shrewd gaming of your own dumbass investors. 

(As an aside, in the commentary to said LoSC article, I pointed out how shorting Giant Interactive  at ~$16 was a good trade.  Long story short, I'm a wuss, didn't pull the trigger, and now the stock trades around $6.  Shit!)

Moving on. 

Earlier, I finally saw the commercial for Steve Wynn's new hotel/casino in Las Vegas, the completely non-egotistically-named "Encore" on CNBC.  Naturally, this has been in the planning/construction phase for years, but uh, from the guy who shorted his own company's stock, you'd think that maybe, just maybe he'd have had the foresight to see that the Resort/Casino industry was in for a few years of serious pain, no?

Alas, maybe Sir Wynn (not to be confused with this Win) knows something we do not. 

Presented without further comment for your viewing pleasure (ed: Give the tanning/botox/creepy old man schtick a break, Steve):

Question:

Which group is more full of shit?

1. National Association of Realtors 

With the market correction nearing an end, home prices are expected to rise again...Real Estate remains the best investment available. (NAR, 2006)

Oh, wait, you mean home prices actually FELL in 2007? AND the Case-Shiller Index fell by almost 10% in 2007 and ~22% since 1/2007?

D'oh!  (for even more fun, try this set of mindboggling mathematical impossibilities from NAR's most recent "Economic Report")

or

2. National Retail Federation

The National Retail Federation today released its forecast for the upcoming 2008 holiday season, projecting that sales will rise 2.2 percent this year to $470.4 billion. (NRF, 9/2008)

Whoops, turns out total sales actually FELL 2.3% from 2007 #'s.  Typo, perhaps?

I know, you're all completely and utterly shocked (SHOCKED!) that these trade groups blatantly lie over-and-over again, yet are still quoted and even looked to for unbiased information by consumers and media outlets.  I remember one morning a few months ago watching CNBC when they announced the NRF's holiday sales predictions and, despite being maybe 1/2 awake, having a nice little chuckle to myself, as I was reminded of one of my favorite quotes:

No man has ever gone broke underestimating the intelligence of the American people.

--P.T. Barnum (attr.)

Just for shits & giggles, can any of you lawyer types out there figure out a way to sue the National Association of Realtors for their role ("now is the best time to buy!", "prices always go up!", etc, ad nauseum) in the real estate collapse? 

The Cause of, and Solution to All of Life's Problems

I have found the cause of the credit bubble. 

And it is Johnnie Walker.

Know this, Sirs and Madams, it pains me to even type these words, as I have been (and continue to be) quite the fan of the succulent syrup since my college days. 

Know also, that I do not mean to imply (or do I?) that everyone on Wall Street has been drunk for the past 5 (+/-) years, although I'm sure some may inevitably claim such was the case. 

Moving on.

Please, gents and ladies, if you haven't already seen it on TV yet, take a gander at this Johnnie Walker ad,  (link fixed, thanks RT!) entitled "Keep Striding"

For those of you not paying attention to the text appearing over the powerful imagery, let me spell it out for you:

Keep Rising
Keep Building
Keep Climbing
Keep Exploring
Keep Uniting
Keep Innovating

Enjoy Johnnie Walker responsibly or (Ed: some such nonsense)

Sound familiar?

Cheers, and happy weekend!

Incomplete, Incoherent Rambling on (the Role of) Quantitative Investing

Long story short I was reading about the ever=fascinating and slightly irritating Ray Kurzweil earlier, and per Wikipedia, apparently he began a venture in 2006 to use Artificial Intelligence to drive quantitative investment programmes, dubbed FatKat (Financial Accelerating Transactions from Kurzweil Adaptive Technologies).

What got to me though, was this:

 "...he predicted in his 1999 book, The Age of Spiritual Machines, that computers will one day prove superior to the best human financial minds at making profitable investment decisions."

Ray has a history (and a slight ego to boot) of making predictions for technological change, many of which have turned out to be both prescient and accurate.  One cannot help but wonder how colored his judgment may be from his successful past experiences applying technical and scientific thought advances to other fields such as education and healthcare though. 

Finance, and more specifically profitable investing, presents a variety of challenges which have brought down virtually every systematic strategy over any significant period of time, going back as far as such things have been recorded.  Until the past year or two one had to go back an entire decade (whoa!) to the spectacular chronology of When Genius Failed , but over the past 24, or really 12 months we've seen the 'new breed' of quant geniuses getting crushed as badly, if not worse, than their non-quant brethren.

I think if Kurzweil, himself, cared to contribute to this rambling, his argument would hinge on the fact that the failure of quantitative investment schemes (or lack of relative success) of late is due to the human element, not necessarily the technological, although the two are inevitably and inextricably linked whether they like it or not.

The most historically spectacular investing failures, regardless of the system (or lack thereof) employed by their practitioners, have shared many a characteristic, among them ego, hubris, pride, arrogance, and intractability rank at or near the most frequent and serious offenders.  My inclination, one I believe is supported repeatedly by history, is that there is not one single investing strategy which (out)performs in any and all circumstances.  I realize this is not necessarily the claim of many quant funds, however, in the grand scheme of things, it seems to be the ultimate aspiration, or at least nerdy wet dream of many.  

The quants' search for the ultimate algorithm, for the AI that's always one step ahead of mere mortals may very well be an impossible task, or even a fool's errand.  That there is a very public, multi-party game being conducted, where each party believes that, utilizing essentially the same set of tools as the other parties, they will outsmart them, seems inherently ridiculous to me.  Of course, this can also be said for the larger investing game as well, although the number and variety of approaches (not to mention the "quality" of many participants) opens up the odds some, although the point is hardly lost on me.  Much in that same vein, what we've seen is that rather unsurprisingly, the proliferation of quantitative investing has created an even more profound feedback loop in various markets than already existed just with the more 'traditional' methods and participants. 

The logical action for the prudent quant is then to adjust the models to better account for the actions of others with similar strategies.  Throw in another factor here, tweak a little stochastic calculus there, no big deal.  Of course, if everyone (or a significant # of participants controlling a significant amount of money) makes these changes, then you run into the unsurprising eventuality where everyone is essentially second-guessing each other, and thereby second-guessing themselves, much in the same basic fashion even the most novice retail brokerage account holder approaches the investing game.

What then, is the purpose, besides to tout one's technical or mathematical acumen, if the results do not stand up to scrutiny, if it can't weather the storm better than say, going to cash.  Contrary to many a financial professional, being down less than your (bullshit) "benchmark" in a severely down market as we're currently in does not strike me as worthy of celebration.  When, in a severely down market, you've outperformed cash, well Sir, now we're talking!  Crack out the good shit, we're having ourselves a party tonight!

Now, back on track (one resembling the Nurburgring, perhaps).

As many an investor has acknowledged, in this game, being right, and being profitable aren't necessarily one-in-the-same.  While admittedly comparing apples to an orange grove, over the past year or two many technically advanced quant funds, with access to a virtually unlimited supply of data and analytical power, suffered serious losses.  During this same period, myself and several acquaintances, with significantly less resources (to say the least!), have achieved positive returns, all-the-time wondering how it was possible that everyone else could get it so wrong.  By "it", of course, I mean the basic conceptual bets.  For example, as I'd mentioned over the course of the past 9-12 months, the short Retail trade seemed completely obvious if one was willing to look at the body of evidence available.  When I shorted Lululemon (LULU) at around $36 (after recommending it months earlier as a short before I started @ 1-2 Knockout when it was trading over $60), the analyst estimates were based on entirely unreasonable growth rates, given what I saw was the inevitable shitstorm we were heading into, the same shitstorm in which we currently find ourselves.  I can't speak for every quant model of course, but of late it seems to me that many such funds failed to see the forest for the trees.  That is, the data was there, but when one is looking for very complicated relationships, perhaps its not too surprising that some very simple connections went relatively unnoticed.

My intent is not to highlight my genius (nor to even claim such a thing exists; hint - it doesn't), but to simply point out the fact that perhaps the most highly-correlated factor or driver of investment success is not the sophistication of the system, but the ability of the manager (whether man or machine) to stay curious, and informed, and to keep an open, and humble mind. 

Are quantitative strategies useless?  Of course not, don't be ridiculous! They are yet another tool in the prudent investor's toolbox, which, when used "wisely" can yield spectacular results.  However, just like with any other powerful tool, an over-dependence upon, or misuse of quantitative analysis can be, as we've seen, catastrophic.

Excuse the rambling, its 2am 3am for Christ's sake! 

Thoughts?  Discuss amongst yourselves in the comments.

(Detroit's) Back in (the) Black (or not...)

So I spent a little time over the past day or two going through the recently released Automaker Bailout Bill, which apparently is to be called, the ‘‘Auto Industry Financing and Restructuring Act," or "AIFRA", as the cool kids call it.  Lacking a password to unlock the original, and being way to unambitious to crack it, unfortunately I wasn't able to upload my annotated version, so lets go through this thing the hard way:

Section 2.a: Findings

 The Congress finds the following:
(1) A combination of factors, including errors in the business model of domestic automobile manufacturers...

What, what is this?  A tacit admission that they dug their own grave?  REALLY?  Can someone else verify this is, indeed, the FIRST finding?  Right there, up-front, fo serious?

What Do You Value?

The "American Dream" upon which Obama routinely waxes-bullshit (McCain is just bad on this front, in fairness) is not - contrary to what he and many of his supporters think - that everyone has the god-given right to be financially well-off.

Before the Obama freaks inevitably jump down my throat, let me state this as clearly as possible.  

Warning:

This is a non-partisan post.  I do not support Obama or McCain.  Let me repeat:  I am completely Party and Candidate-neutral in this election.   This is an examination of concepts central to this election, and the philosophies behind them.  This post is not intended to be, and in no-way represents an endorsement or criticism of any Candidate beyond the issues discussed.  In the next few weeks, we'll likely be posting new material lambasting both McCain and Obama, so please don't be so quick to judge.   

Now that we've gotten that out of the way (although I expect the attempt will inevitably be in vain), the WSJ describes the differences between Obama and McCain's "value-based" tax plan:

Sen. Obama replied that it's a matter of values. His plan values work, not just wealth, he said. And after largely dodging Joe the Plumber, Sen. Obama referred to him on Saturday as one of the working people who would receive a tax cut under his plan.

"It's time to give a tax cut to the teachers and janitors who work in our schools; to the cops and firefighters who keep us safe; to the waitress working double shifts, the nurses in the ER," he said. "And yes, the plumbers, fighting for the American dream."

I want to focus on one clause in that statement for a moment, "His plan values work, not just wealth." Let that sink in for a second.  Obama tacitly acknowledges that work is valuable.  However, based off the subsequent paragraph, above, he fails to make the connection that not all work has the same value, which in capitalistic society is commonly measured by the price paid for that work.  (ed: A deeper discussion of the price paid for work being an accurate measure of the value society attributes said work is beyond the scope of this discussion, for another time though for sure, 1-2 care to give it a shot?) My job, for example, is not nearly as valuable or more accurately, not priced as highly as that of a surgeon, an all-star trader, a talented architect, etc, all of whom likely make several times what I do (just take my word for it).