Wednesday, August 13, 2014

Farming Sucks

Rarely, in business, does everything proceed perfectly and according to plan. Conjure an image of the farmer. Winter rains are copious before tailing off. One is able to prepare the earth at the moment of perfection, and sow the crop, fencepost to fencepost, to one's apparently great advantage. The incessant rains of the winter that caused near universal grumbling gives way to sunshine. Germination is nearly total and growth proceeds like a lineup of thoroughbreds out of the gate. Temperatures stay mild. Frequent, but restrained showers continue to nourish the young plants. Financed inputs are applied at the right times and in the right proportions. The farmers' crops reach towards the sky with a rare virility, and he looks upon them with justifiable pride. Even casual observers cannot help but notice the unusual health of the fields, multiplied across the town, country, region, and yes, neighbouring countries. Drought and heat-waves remain elusive. Sufficient rain mixed with sun continues. Yields will approach the pinnacle of what man and nature can conspire to create. Natural disasters will be universally averted this year. The imminent harvest will, in all its preceding perfection, give way to, not the popping of champagne corks but to an........unmitigated disaster!!!! For sale prices will have halved, while fixed costs are ummm... errrr.... fixed. The bounty from nature's smile and their diligent hard work will be challenged to avoid profound financial loss. Rarely, in business, can things go so wrong, when paradoxically, everything goes so right. Rarely is the world so upside-down that bad is good and good, bad. Welcome to the world of the commercial farmer. And it's a right shitty one...

Thursday, July 03, 2014

Top 10 List: What It Takes To Become an Activist Investor

Cassandra's Exhaustive List of Prerequisites for Becoming an Activist Investor
Oh, and don't forget the Starbucks loyalty card. Happy agitating!

Tuesday, July 01, 2014

Another One Bites The Dust (mid-2014 Edition)

Things, people, and/or ideas believed to have integrity, now seemingly compromised...(the second third  fourth updated and expanded version). The bear market in integrity continues unrelentingly…2014 edition.

Jimmy Savile (tnx Anon)
Rolf Harris (tnx Anon)
US Veterans Administration
The Red Cross
Justin Bieber
The London Gold Fix
Chris Christie

US Govt Agency Data Release
The UK National Health Service
Swiss Train Safety
Nick Clegg
IM Confidentiality 
BBC Management & Oversight
Risk Parity
Segregated Customer Accounts
Investment Consultants
Bloomberg Privacy
Dark Pools
London FX PM Closing Prices
Meredith Whitney

Reinhart & Rogoff
Jérôme Cahuzac
Japanese Yen
Jamie Dimon/JP Morgan
Banca Monte dei Paschi di Siena 
IKEA Meatballs

Wen Jiabao as "Humble Servant of The People
Lance Armstrong
Top Ten Lists
Austerity as an Economic Panacea
Harvard Students' Academic Honesty
BLS Statistics
Cyclical Recovery
Book Reviews
Strong Computer Passwords
'Organic' Food
Money Velocity
Undecided Voters
The Food Pyramid
Purity of '.999 Fine Gold Bars
Penn State Football
"Top of the Pops" 
Fareed Zakaria
The "risk-free" rate
LIBOR as a Benchmark
Public Sector Pensions
HFT as a Beneficial Provider of liquidity
Diversifying properties of Hedge Fund's
Einstein's Theory of Special Relativity 
Celtic Rangers
Macroeconomic Forecasts
John Paulson
FRB Open Market Operations
Standardized Educational Testing
Swiss National Bank
A Relaxing Cruise
WTI as Oil Benchmark 
Olympus Corp.
Payment Protection Insurance
HM Revenue & Customs
Sony Playstation Network
Social Mobility
Actuarial Return Assumptions for Pension Funds
Ryan Giggs
France   AAA
Boob Jobs
David Einhorn
Nuclear Power
Deepwater Drilling
Tiger Woods
Professional Cricket
Professional Cycling
High-Frequency Trading
Professional Baseball
Professional Tennis
Municipal Bond Underwriting
The Catholic Church 
Track & Field Athletics
NCAA Sports
US Congress
UK Parliament
Analyst Research
Credit Ratings
Newtonian Physics
The Stock Market
The Food Pyramid
Incentive Stock Options
Reinsurance Brokerage 
Lou Dobbs
The Mortgage-Backed Securities Market
Hedge Funds
Social Security
Government Balance Sheets
Tooth Fairy

Errr ummm Professional Wrestling is starting to look good by comparison - at least it makes no pretensions to be anything other than it is. What's left?

Tuesday, June 24, 2014

Manna From Heaven

They call the JPX-Nikkei Index 400 smart beta. Ummmm, errrrr, yeah, sure, they can call it whatever they want, and perhaps, if they say it loud enough, and repeat it enough, some will adopt it as gospel. And God bless them - particularly the blithely gullible trustees. And my kids' trust fund blesses them - the latter benefitting large from (being as kind as kind can be) their rote sub-optimality. 

The JPX-Nikkei Index 400's  construction applies a straight-forward three-and-a-half stage process:  screen, score, score again, select by rank. Initial screening (from the TSE's website) looks like this and weeds out what, to some, is the detritus;

① Screening by Eligibility Criteria
Issues are excluded from selection if they fall under any of the following criteria. 
- Listed for under 3 years (excluding technical listings)
- Liabilities in excess of assets during any of the past 3 fiscal years
- Operating deficit in all of the past 3 fiscal years
- Overall deficit in all of the past 3 fiscal years
- Designation as Security to be Delisted, etc.
② Screening by Market Liquidity Indicator
The top 1000 issues will be selected from those eligible, excluding the above, in consideration of the following 2 items.
- Trading value during the most recent 3 years
- Market capitalization on the base date for selection

The first scoring covets OP, ROE and size, with bigger preferred to not-so-big.  The TSE calls this quantitative (noting the lower case "q" and italics, which are mine). It is a bit like an American vehicle MOT:  making sure it has four wheels (with tyres), the headlights that point straight, an engine that turns over when the fuel is ignited; the brakes stop the vehicle when in motion, and plumes of blue smoke are not being emitted from the exhaust. It is, yes, a car, in the least contentious sense.

The 1,000 issues selected in (1) will be scored according to the ranking of the following 3 items. (1st: 1000 points – 1000th: 1 point). Then, overall score is determined by aggregating those ranking scores with the following weights. (There are handling rules for the overall scoring with negative ROE and operating profit.) 
- 3-year average ROE: 40%
- 3-year cumulative operating profit: 40%
- Market capitalization on the base date for selection: 20%

The second scoring is qualitative, based on the admirable, but by no means universal, attributes of transparency, accounting standards, and oversight. For those that cannot distinguish what the second scoring is based upon as written,  it is "qualitative" with lower-case "q", italics and a tiny font size to highlight that this can only tweak the results by a maximum of 2%, a bit like smoking "lite cigarettes".

Following the scoring in (2), issues will be further scored based on the following 3 items. This score is complementarily added to the quantitative scores explained above (2)*.
- Appointment of Independent Outside Directors (at least 2)
- Adoption or Scheduled Adoption of IFRS (pure IFRS)
- Disclosure of English Earnings Information via TDnet (Company Announcements Distribution Service in English)
* The score is determined so that at most around 10 constituents are different from those chosen with only quantitative score above (2).

Then, it is a simple matter of letting the proverbial chips fall, or rather, rank wherever  they may, combined with an "all-change" every now-and-again.

So despite my amusement at such an offering, and thankfulness for those allocating passively to it, I am neither derisive nor pejorative in its essential mechanics, and though some might, I do not call it "dumb". It just does what it does. On the other hand, one would be forgiven for thinking proponents a tad hyperbolic in terming it "Smart". It isn't.  Beta? Yes. "Smart"? Errrr, no.  For how can something of value, that is being exchanged amongst consenting adults many of whom are meant to be fiduciaries, be "smart" when it is completely, and totally untethered from any sense of value? It is likely worse than navigating by dead reckoning, and probably inferior to the piñata method of security selection. Make no mistake, at times, it might be attractive. But, given that investors already covet consistent and high profitability in relation to their equity, with good governance, and that companies qualify only AFTER  they have had it for a good spell, it is not unlikely to forecast that it might, more often than not, yield negative alpha. So what would YOU call "smart" beta, with negative alpha? I call it "winning the battle but losing the war".

For many, however, this IS, manna from heaven. For exchanges and index licensors it means incremental revenue where none existed before. For journos it means grist for the mill. For trustees, it is a simplistic (albeit highly sup-optimal) answer to a complex investment problem. For Japan Inc. it provides convoy cover for suspicious behavior change -  yet-to-be-fully-embraced. For me, it will create a fantastic variety of relative investment opportunity whether from inflows, outflows, or re-balancing, that will keep giving and giving and giving. Hallelujah! Yes, it is manna from heaven for everyone except those investors whose money is passively and naively be thrown at something mis-labeled as "smart", though which is anything but. Blessed be index-makers...

Monday, May 26, 2014

Euro-Election Post-Mortem...

UKIP supporters, along with those of the European right are angry. And nostalgic. Nostalgic for ....ummm .....errrr..... Johnny Halliday? Johnny Rotten ? Sir Lawrence Olivier? Georges Pompidou? Chaban-Delmas? Harold Wilson? Ted Heath? Free parking? No traffic jams? A Ford Cortina or a Renault 4? Ten-pounds-a-week rent? Fifty-P a pint? Greasy chips fried in oil t'aint been changed for weeks? Baked Beans 'n'toast for breakfast? Twiggy? Cliff Richard? A white guy (not a Russian) winning at boxing or sprinting? One-piece swimming costumes? Free university? A job-fer-life? Iconic red pay-phones booths smelling of urine? Phones with an umbilical cord? Single-race marriages? The Cold War? Clean beaches? High-streets free from foreign food? Holidays in Blackpool? Turnips and root veg? Chicory drinks? Maybe. B ut I think that they are nostalgic for rising or stable real wages; a settled feeling that accompanies slower technological change; a stable job that pays a good stable real wage, with an indexed pension, and that is not undermined by someone more educated or qualified or enthusiastic, willing to work harder, for less especially if they are foreign; Oh and lower taxes. All of which are under siege. Regretfully, for sensible public policy, this has little to do with Europe, or immigrants, or the decline of religion and general moral standards. But that won't stop the angry cocks from THIS.

Tuesday, May 20, 2014

More Jitney's Needed?

There is considerable debate in the state of New Jersey about whether Newark or Camden is the Garden State's armpit. True connoisseurs of sweat, however, would add another - the one that gave us The Diving Horse: Atlantic City. All three have long-passed their glory days.  AC, remains a hollow shell of its mid-20th century optimistic seaside-self, despite many billions of collective investment by private casino operators and public authorities.  Camden more closely resembles war-torn Mogadishu or the bombed-out Syrian frontline of Homs than it does prosperous archetypical suburbs like Darien, CT or Merion, PA.  Newark, alone, may rise once again, like a Phoenix, recalling Philip Roth's adolescent days, if only a result of its proximity to New York.  Yet, Atlantic City, for all its flaws, retains a pragmatic solution to public transport from which many public transport authorities can learn. It is called The Jitney, and is simply an uber-practical shrunken bus.

Nothing is more galling to a taxpayer than senseless avoidable waste. Cynical fraud can at least be seen in the context of benefits delivered. Some mean-spirited Libertarians see it everywhere. I am more generous, but nonetheless loathe stupidity, rigidity and tolerance for things abysmally-sub-optimal. Where I reside, in the leafy hilly part of Kent County, everyday I see huge, aged, empty buses plying their routes with growling Spitfire-sounding diesel's that would annoy Harley riders, struggling to climb steep grades as they make their way through the lanes and up hills of my area, belching smoke, wasting petrol, blocking or slowing traffic both on major arteries and B-roads, menacing cyclists with their overtaking. And outside of the rush hour/school runs, they are empty -  or appear virtually so given the ratio of passengers to available seats.  Ghost buses. And each and every time I see this, apart from my selfish desire for less polluted air, silence, and budgetary optimization, I feel as if a crime were being committed. And I wonder: where is the Jitney? One would have thought that, if one formed opinions on the basis of hyperbole, the private sector would have ingeniously invented and tailored market solutions that would quickly eliminate (or reduce) the horrifying waste described for all of these are private concessions (Arriva, MetroBus etc.) with, one would presume, the appropriate profit motives.  

France is not without its macroeconomic and social problems. However, when it comes to public sector policy solutions and their execution, be they infrastructure, public works, or healthcare, one should take notice, not because I say so, but because they tend to pursue non-ideological pragmatic solutions to policy conundrums that would baffle ideologues from both the right and left.  In contrast, to the smoke-belching rust-buckets on spartan routes subsidized by my UK County plying their neglected, pot-holed roads, my municipality in France, delivers multiple bus solutions that pragmatically balance efficiency, cost, with public needs in pursuit of the public interest. During busy hours, and in high-demand areas,  the public authority deploys modern quiet, bendy-buses while on smaller routes, they dispatch drivers with modern Jitney equivalents that navigate country lanes without endangering on-coming traffic (and cyclists thankyouverymuch!!) and that can climb hills without draining the public fuel depot and purse. While the agency combines the resources of 13 towns surrounding our main city, the public authority also cooperates and coordinates with the regional transport authority to run convenient routes that cross jurisdictions without, as the case in my UK village, having to change buses just because of splintered geography and fractured concessions. That is even before mentioning cost which is low by any standards, but benefits everyone:   passengers, business, non-passengers (less traffic and congestion on the road) and everyone else by lowering pollution.

Brits are a curious lot. Stoic. Patient. And, in the main, suspicious of collective activity as Orwell highlighted six decades prior, save for self-organizing their curiously peculiar pass-times such as birdwatching, needlepoint or plane-spotting societies. This suspicion of The Group Movement, he pointed out, insured that facism could never gain a foothold over these islands. For the mere sight of goose-steppers on the High Street with their earnestly-shined boots and silly rigid march would elicit derisive mocking laughter - a far greater deterrent than any form of counter-organization. The dark side of this combination of national traits is that the majority of people, and the public's interest  suffer at the hands of more intensely-motivated and greedy parochial interests. Private monopolists abuse inelastic demand curves with an inert and collusive political class and the result: USD$40 a train ticket into London for the scant 24 mile return journey ($50 if you wish to park your car), roads that are hopelessly pot-holed and in dis-repair despite some of the highest road taxes and fuel-surcharges in Europe; bus-service so poor and mis-fitted for purpose it makes you cry. And the people stoically, patiently, say nothing, and do nothing, as the carpet-baggers using the svengali-like mantra  of "free-market is best" empty the purses of the people extinguishing any hope of creating pragmatic efficient solutions to public policy issues. Like deploying efficient Jitney-like buses. Or maintaining authority and rectitude over monopolistic concessions sold or granted in the public's interest, rather than the Public Interest being treated like little fuck-boys of opportunists-run-amok.  And still, the monopolists continue to push, and take, and gorge, not realizing the risk they run for themselves and their investors. Even the Brits have their breaking point and make no mistake, stoic as they are, even though it's been more than eight centuries, they WILL "go postal".

How they managed to run an empire is baffling. In all likelihood, it would have baffled Cyrus and Darius too. Now, the home territories are neglected. Now, there is too little enlightenment. Too little wisdom. Too little pragmatism. And not enough Jitneys...