Tuesday, August 27, 2013

Financial Psalm No. 16

Financial Psalm No. 16


16:1   Preserve me, Gold, for in you do I take refuge.
16:2   My portfolio, you have saveth, and it sayeth: “You are my Saviour.
Apart from you, I have no good thing...not even Bitcoins
16:3   As for the Silver and Oil which is in the earth,
they are also excellent ones in whom is my delight.
16:4   Their sorrows shall be multiplied who diversifyeth into other assets.
Their offerings of bonds I will not accept,
nor hold such paper on my lists.
16:5    Gold, well-assayed, is my preference and made-eth my cup. 
You made my lot secure.
16:6   Your prices are now rising [again] making pleasant our faces.
Yes, our offspring will have a good inheritance.
16:6.1   Beware the false prophet, paper gold, promising false profits.
16:6.2   Bow not before any other Gold but It, for they are but false and wicked idols
16:6.3   Trusteth in the Golden revelations of the Chronicles of Zerohedge and heedeth in thy Beck-ster and Fab-er, for they are the Righteous Ones and sayeth only the purest of truths.
16:6.4   Follow NOT the path of tribes of Paulson and Soros who, being weak in their hearts, smite-eth Gold, giving succor to the heathen.
16:7     Blessed be Chris Wood, who resembleth Jesus, and who hath given me wise counsel.
My heart instructs me to stay long during the right seasons.
16:8     I have set Gold always before other assets. Because It is is heavy in my right hand, and shall not be moved from It's Swiss vault without countersigned instructions.
16:9    Therefore my heart is glad, and my relative purchasing power rejoices.
My portfolio shall also dwelleth in safety so long as Bernanke ruleth.
16:10   For you, Gold, will not leaveth my portfolio in Zimbabwe, or Weimar
neither will you allow my portfolio to become holey due to political corruption, or crony capitalism.
16:11   You, Gold, will show me the path of wealth preservation during times of war, inflationary woe and political uncertainty.
In your lustrous presence, I feel the warmth and joy of your security.
So that my hand can exchangeth you for pleasures forevermore.
Amen

(with apologies to Private Eye)

Friday, August 09, 2013

Criminal, Victim or Just Stupid??

So Bruno Iksil will (apparently) not face charges. Hmmmm. I've had nothing to say on The Whale, mostly because the debacle (and its intricacies) have been covered rather well (particularly  by Matt Levine) leaving little to add on the subject. But no charges? Really?

Why does this shock me? Because it appears obvious that with the size of the position and the persistence of accumulation and targeted activity in the market, that the objective of Mr Iksil was to paint a false and misleading picture of the market by intentionally manipulating the market price (hence marks) of his position and by not letting prices trade askew, (if he could do anything about it). Anyone who has traded size in squeezable markets will immediately know what I am saying.

Snookered Hedge Funds are applying similar logic in their lawsuits against Porsche AG (though admittedly Porsche was operating in a market that was decidely more-limited in scale). But I wonder, had Mr Iksil been successful in engineering a squeeze, or waiting out for some market event that caused redemptions and deleveraging within oppositely-positioned funds, whether JPM would have been subject to similarly flavoured claims or lawsuits, irrespective of the theoretically unlimited market size in the offending instrument, constrained only by counterparty and credit limitations. 

As an equity girl, this is all the more egregious. We must file positions periodically in great detail, and whenever we move above a modest level. We are obliged to law to act methodically when dominate a market - either making a bid, or limiting our actions. The idea of owning 50% or 70% of a "market" and still being allowed to operate unassailed is mind-boggling to the ruler-followers or impossible tempting to the black-hats. As a price maker, one controls the price, and one can use every marginal trade to insure, if not a profit, then against a mark-down...until one cannot, as a result of being placed upon Uncle Jamie's knee and spanked.

So the idea that Bruno Iksil had anything other than criminal intent in painting and perpetuating a false and fictitious market is laughable, and preposterous. This leaves two possibilities. The first one is that he was ordered to do so and cut loose when it went horribly wrong. That JPM tried to cover up a large and ...ahem...rather embarassing loss is not in dispute. But it appears this resulted from concerns about how stupid they would look to have let it happen, rather than management collusion on trading objectives and strategy - so I'd attribute this a low-probability.  The second possibility is that Bruno Iksil is just the dumbest-of-fucking dumbasses ever to get a bankrolled seat at the table!! Rather than having criminal inten, he simply redefined the word STUPID in bold-faced upper-case. But Ecole Centrale is nothing like Nick Leeson's Middlesex Univ., and Mr Iksil didn't crawl out from under a back-office rock. This is an absurd thought. He is anything but stupid, and knew precisely what he was doing and trying to accomplish by continuing to increase the size of his position with the well-defined objective of protecting the mark-to-market valuation on his existing (large) book. Can this be called anything else?

I find it surprising that this behaviour is not the focus of attention. It is precisely this point which regulatory authorities should be focusing: the interference of market-determination of prices resulting from the creation  of a false and misleading market. All interested in liquid functioning democratic markets determining prices should take note.



Tuesday, August 06, 2013

Team Japan Drafts Message to Loeb

It should surprise no one that Sony Corporation, an icon for Japan's collective successes and failures over the past two decades, has rejected Dan Loeb's suggestions for helping the company's share price out of its funk. Anyone who thought otherwise (and is in the investment business) should - without haste - commence with a search for a new occupation. Or at the very least, a new regional specializiation. This is not to suggest that changes is not occuring in Japan. They are. Quietly if not steadily, though more often in fits and starts, and most frequently in response to calamity rather than the not unsensible proddings of a wily and reasonably successful gaijin operator (who is NOT Warren Lichtenstein).

Even if Mr Loeb's suggestions were as tempting as Hello Kitty! to an adolescent girl or Zizzi Hikaru to a video-game-addicted freeter, it simply is not possible for Sony to be seen to accede. Sony remains a vanguard of Team Japan, with a deep and broad web of obligations. For right or wrong, obedience to Mr Loeb's demand disturbs the calm stability at the center of these relations and throughout the web of obligations, and would set a precedent that would not go down well with the broad constituencies that comprise the Team. Moreover they (unlike humbled Shinsei) don't have to (at present), for there few greater regrets in Japanese finance circles than the sacrificing of Shinsei. Bloodbath that Sony has been for shareholders, it's hemorrhaging is still no Sanyo. Moreover, it is horribly "bad form" (in Japan) for shareholders (let alone gaijin shareholders) to make public demands of management umm... errrr... "allies". The greatest sin  Olympus' Woodford made (in the eyes of colleagues, bankers, and Team Japan) was airing the the family's dirty knickers in public. When confronted publicly, the answer will ALWAYS be "Fuck-Off", irrespective of the question.  When the same is asked privately, the answer will also be "No". However, for those focused on outcomes, rather than the immediate triumph of submission, the private approach (at the very least) allows the possibility of preserving a semblance of honor. Time and utmost supplication allow an idea to be appropriated by the Team, or through the hierarchical chain, to the Team Leader, as custom and history demand it be done. With patience, if the idea truly has merit, and, if it survives the convulated cost/b─Ľnefit equation [strikingly different than our] that confronts Japanese public corporate management, the idea may re-emerge, as an internally generated concept, now wholly appropriated. Only then, can it be pursued, once internal consensus is built, once vetted externally by those who are directly and tangentially impacted, or connected. And never, never, never, with an observable direct link between external coercion and ultimate action.

I am neither defending nor excusing TeamJapan. It just is. It may not remain so, and perhaps Mr Loeb is out to hasten the change - something TCI and others have never been to do excepting the weakest of sacrificial lambs. However if you spend a couple of billion (dollars) on a punt, then I hope (for Loeb's investor's sake) he:  (1) traded the position "Einhorn-style" (or at least wrote options on the position) in the run-up reaction to the ruckous you created, or,  (2) Insure the duration of your capital, and hedges against "shit happening", are sufficient to patiently wait out the long journey for your "suggestion" to be assimilated and appropriated. Until then, TeamJapan's Geisha will convey TeamJapan's heartfelt reply...  


Thursday, August 01, 2013

Greenlight.. Redlight?

Marrying reinsurance to speculative investment has held allure to many for more than two decades. Of course, everyone who has proceeded down this route has had a good reason, be it a tax roll-up, juiced-up returns, or outright tax avoidance. All have ended, if not in tears, then whimpering with their proverbial tails between their legs.

StocktonRe, founded by Princeton-based Commodities Corp, and subsequently  majority-owned by Japanese leasing giant ORIX, attempted to benefit from the roll-up marrying what was thought to be risk-less finite to a portfolio of CTAs. This was embarassingly-torpedoed by an underwriting accident so catastrophic, the venture was more-than-shuttered. Then, there was UPS affiliate OPL, which was the offshore benficiary of a higher-than-reasonble charge for insuring UPS packages, money that then would be invested and, benefit from the offshore roll-up until an exit strategy was conceived. Though they (rather luckily) won the IRS's challenge to the somewhat dubious logic unerpinning, their speculative investment portfolio fared rather more poorly, the combination of which forced the company into run-off. Louis Bacon, proprietor of Moore Capital liked the sound of an offshore tax dodge, providing locked-up capital to the mother-ship while benfitting from forecast underwriting profits and a more-than-pleasant Bermuda location and so decided to fund MaxRe, with son Zack as titular head. For six-years, MaxRe never missed an opportunity to miss an accident,  burning through several CEOs, and steppingb on BOTH underwriting AND investment mines. Eventually, having learned the hard way, that even the most alluring of finite is rarely risk-free (or even that attractive - even as a tax-dodge to satisfy scrutinizers that one is shouldering "real risk"), and, that in the world of Macro, "shit happens", shareholders tired of MXRE's travails and neutered, merged, and morphed it into an actual Reinsurance Underwriter with a traditionally- conservative investment portfolio.

Somewhat differently, Ken Griffin's Citadel tried their hand with a determined focus on underwriting profit, only to discover that as an insurance financier, shit outta' one's control also happens (like massive losses or willy-nilly redemptions by fickle investors) that might cause some errrr... ummm...  problems to a reinsurance underwriting operation (which it did). SAC Re, is also in the process of experiencing a mirror revelation of how deleterious "unexpected shit happening" (especially legal and regulatory problems) at the parent sugar-daddy, just might be.

So it was with some curiosity and considered amusement that I watched David Einhorn launch GreenlightRe - ostensibly for all the same reasons, seemingly undaunted by the chastening experiences of others. The lure of dedicated capital to the hedge fund to invest; offshore tax roll-ups, potential "double-alpha" via underwriting profit, double-dipping on fees, and an awesome bill-fishing venue in the Caymans. What could possibly go wrong?!?! For a while GLRE traded at a swanky premium to book - reflecting the desire of punters to gain access to Greenlight's Hedge Fund. Unsurprisingly, GLRE has seen finite deals spontaneously combust in their face. And Greenlight itself has not been immune to both controversy and accidents (i.e. insider trader, talking its book, HLF, it's sizable Gold pecadillo mirrored in GLRE). None of this should come as a surprise (or at least it wasn't to me). But what did shock me was the market's reaction to GLRE results earlier in the week. It essentially earned a miniscule underwriting profit and mediocre investment results on an investment  portfolio backing underwritten  risk comprised 90% of equities,  and some macro bets. The stock popped nearly 10% - perhaps in relief that their Gold "bet" didn't hammer them more, and that they didn't lose money on underwriting activities. Whatever. Oil and water just don't mix. With markets getting more volatile, Mr Einhorn's performance more erratic, coinciding with his increasing notoriety, and reinsurance markets soft and getting decidedly softer, one would be forgiven for wondering whether this is just another train-wreck (and we've seen three large ones in last month) waiting to happen...