The Accidental Consultant

Closing Up Shop

2006-05-30T08:03:00.000-07:00

The Accidental Consultant was an experimental blog to gauge the kind of reactions that I would generate to various sorts of postings. I operated anonymously in order to try out different things from flippant remarks about news stories, to attacking people for the silly things they say and do, to more detailed discussion of current topics and research.

This experiment has proved immensley valuable, thanks to all of your feedback.

As of today I will not be posting anymore. I have developed a model for a website/blog that I will use under my real name, and will go live with it in the fall.

In short, it will look something like Rutledge Capital's website (http://www.rutledgecapital.com/), with discussions about reasearch (both my own and others) on the left, and more timely posts (although not daily) on the right.

Thanks for all of your help.

-AC

Note to Bloomberg: Consistently Losing Money is not a strong track record

2006-05-19T13:02:00.000-07:00

In the story " Margolies to Shut Saranac Funds After Withdrawals" (http://snipurl.com/qoru) reporter Katherine Burton writes:

Saranac's closing shows that even fund managers with solid track records and access to billions in capital are under pressure to deliver profits. At the first sign of losses, some investors leave.

She later describes Saranac's performance as follows:

Saranac's four arbitrage funds fell an average of 8 percent in the first seven months of 2005 and ended the year down 5.5 percent. Margolies's five equity funds fell 11.5 percent on average in the first four months of the year. By Dec. 31, they were down 1 percent. The Standard & Poor's 500 Index returned 4.9 percent in 2005.

Saranac's performance lagged behind its peers. Convertible- arbitrage funds dropped an average of 2 percent in 2005 and stock funds climbed 10.6 percent, according to Chicago-based Hedge Fund Research Inc.

How exactly is that a solid track record if you consider that the firm only started in 2004?

I'm back.

2006-05-19T11:28:00.000-07:00

Should be in the office for the next two months. Sorry for the lack of updates. Still trying to fit this blog into my daily work schedule.

New managers perform better?

2006-05-13T19:32:00.000-07:00

A recent study suggests that new hedge fund managers perform
significantly better than existing ones. That may be true, but the
studies in question are not reliable. The simple explanation of this
data is that new hedge fund managers tend not to report their data
until they have a few years of good performance under their belt.
Thus, you never hear of the poorly performing new hedge funds, and
their performance data does not make the studies.

http://snipurl.com/qffq

Too Big to Delist

2006-05-10T08:16:00.000-07:00

From the Dealbreaker:

"If Fannie Mae was your company, it would be delisted by now. But, of
course, it's not your company. Earlier this year the NYSE exchange got
approval to be a little more, uhm, flexible when it came to delisting
Fannie Mae companies in certain circumstances. Previously, the NYSE
listing standards required the start of delisting procedures for
companies that failed to file an annual report within a year of the
report's due date. When Fannie Mae missed the filing deadline for its
2004 report, the NYSE changed the rules. And then the SEC approved
this change."

http://www.dealbreaker.com/

Travellin' Man

2006-05-05T15:12:00.000-07:00

Like my good friend Ryan (see below) I occasionally have to travel a
lot. I'll be out four days next week, so posting may be sporadic.

Such is the nature of the business (at least for me). Every quarter
there are two weeks or so where I do nothing but visit clients.

An old-time executive

2006-05-03T07:14:00.000-07:00

For those of you who yearn for the "good 'ole days", it should be
comforting to know that their are still CEO's who blatantly mislead
the public as a regular course of doing business. Overstock CEO's
Patrick Byrne just last week said there was no need to raise more
cash, but now he has sold stock at a below market rate to raise cash.
I still contend, as I did a few months ago, that while consultants
should not second guess their managers that one would be wise to see
if any of your managers hold Overstock and if so you should enquire as
to the reason.

http://snipurl.com/pz8s

ADP National Employment Report

2006-05-03T06:22:00.000-07:00

ADP Launched it's National Employment Report Today with Macroeconomic Advisers. Go to the link and familiarize yourself with the methodology. Over time, this report will prove to be more reliabile than the Friday BLS report, and of course it comes out two days earlier. http://snipurl.com/pz69

Financial Services for the Greater Good

2006-05-02T12:21:00.000-07:00

TIAA-CREF's Herb Allison is buying Phil Donahue's Westport, CT mansion
for $25 million dollars. http://snipurl.com/pxzp

Check out TIAA-CREF's statement "What We Believe" from their website:

Apparently, they provide long term financial solutions for the greater
good "of all of us". They do this by ".....staying true to our
lengthy non-profit heritage, which mandates that we put the long-term
best interests of our participants ahead of our own...".

Come on now. Someone who works for them can buy a $25 million dollar
house and that is staying true to their non-profit heritage?

For what it is worth, what TIAA-CREF does, according to a pitch I sat
in on recently, is they take the money into their non-profit
organization, and then sub out the work to for-profit arms that they
control... at least for the private equity funds that is what they do.

The Life of a Consultant

2006-05-01T15:32:00.000-07:00

UPDATE: I received a nice email from Mr. Harvey, in which he politely asked me to remove cleint information, etc. I have agreed to do so for two reasons: 1. While this has been fun for a few days, I don't want to actually hurt his career or anything. 2. His email was very nice and respectful. It is extraordinarily rare on the interent that someone in his position would have sent a polite email. Had he sent the nasty one that I expected, I would not be blanking out the various info that appears as XXXX's below.

FWIW, his calander is no longer public.

Want to know what the life of an institutional consultant is like?
Meet Ryan Harvey. Harvey is a consultant at RV Kuhns. Harvey also
is perhaps the first person on the Internet to gain notoriety for
leaving his Google Calender public. (Search for Ryan Harvey in your
google calendar public search tool. I found him by searching on
XXXX). Let's see what the life of a Consultant is really like:

Ryan is a pretty structured guy. He pays his mortgage on the first of
the month, takes out the trash at 7pm every Tuesday, and watches
Frontline Tuesday nights at 11pm.

I am not sure how much money he makes, but he lives rather modestly.
His property tax is due on the 15th, and it is only for $736.65.

Today he had an interview with XXXXXX (Mr. Harvey says that I am mistaken, he interviewed XXXXXX, not the other way around) . I hope it went well - as
it was all day long, I wonder if his boss knows.

The typical life of a consultant consists primarily of three things:

1. Client Interface
2. Interviewing Money Managers, and
3. Client Report Construction

Ryan does a lot of Client Interface. Tomorrow he is going to State of XXXXXXX
to visit PERA, which I presume is the Public Employees
Retirement Account, or something like that.

On Wednesday he is back in Portland for the XXXXXXX.

On Thursday he has a client meeting with XXXXXX, and also with
the XXXXX Employee's Retirement Board. They have an interesting
allocation according to the details of the appointment.

XXXXXXX - Large Cap Growth
XXXXXX - Small Cap Growth
XXXXXXX - Large Cap Value
XXXXXXX - Mid Cap Value

What, no small cap value? My guess is that Employee's Retirment Board has missed out
over the last few years without any small value. I'm sure however
that Ryan will be able to put a positive spin on this.

Hmm... on Friday he has the XXXXXX, and a client named
"XXXXX". Ryan sure is busy.

Ryan has a slow weekend. Most consultants do. We don't work weekends
like I-bankers do. All Ryan has scheduled for this weekend (as he
does every Sunday) is to listen to a radio show that I have never
heard of called "This American Life"

Anyway, I don't need to bore you with more of his client meetings, as
they are all on the web to see.

It looks like Ryan doesn't do much Report Construction. There are AC
(Which I assume means associate consultant) meetings all the time, and
Ryan sometimes interviews the AC's, so I guess he is above them. Ryan
wouldn't have much time to do the reports with all of his client
meetings. Personally, I like to do my own reporting as much as
possible because it gives me an overall better feel for the reports
when I deliver them.

Ryan does also visit with money managers. On the 9th he is meeting
with the XXXX Asset Allocation Guru, the Private Equity Guy and the
Transition Management Guy, and on the 10th he is meeting with XXXX
Investment management.

Anyway, if you want to know what the life of a consultant is like, I
suggest checking in ASAP, and thanks, Ryan, for letting the public see
and understand the life of a consultant.

Here are some screenshots (I have taken one out):

It's all over for Bolivia

2006-05-01T14:29:00.000-07:00

No more foreign capital. What is more worrying is the fact that after
a decade of the Reagan administration checking the advance of
communism in South and Central America, under W the communists are
gaining rapid ground. Look for Nicaragua to fall next. Obviously,
emerging markets returns should be hurt in the long run.

http://snipurl.com/pwm2

Another Hedge Fund Fraud

2006-05-01T08:27:00.000-07:00

A new hedge fund was in my office the other day pushing how strong
their corporate governance was. They claimed that over 40% of all
hedge funds fail to some form of fraud. I thought that number very
high (even though fraud is a real concern). They couldn't really back
up the number. If anyone has a good number, please email a source to
me so I can post it.

Anyway, here is the latest fraud: http://snipurl.com/pw4l

Kremlin plans to halve size of Rosneft's London float as City doubts persist

2006-05-01T08:19:00.000-07:00

This is of course what happens to countries that don't uphold property
and other legal rights. The media never seems to pick up on this
angle when discussing things such and Venezuela's strong-arming the
oil companies that have contracts there. Down the road Venezuela will
not attract capital.

http://snipurl.com/pw43

Hedge Funds buying everything

2006-05-01T08:06:00.000-07:00

Two good stories as of late: Today we have an article about hedge
funds lining up to buy baseball teams: http://snipurl.com/pw2x

The Wall Street Journal also has a story about Hedge Funds getting
into the movie industry. The most interesting part of the article is
that Hollywood used to call outside investors "dumb money" yet
apparently, at least in this article, the hedge funds are not
considered dumb money. http://snipurl.com/pw37

All of this will end very badly. Perhaps what we see here is in fact
the triumph of market efficiency as opposed to hedge funds not having
anything else to invest in and getting involved in assets that they
are not experts in. Still, the reality is that even with hedge funds
moving towards two-year lockups, these investments are essentially
illiquid for greater than two years. All it will take is one
flame-out in these new areas and investors will run for the hills,
creating death spirals for most of the funds involved.

JP Morgan Blog

2006-05-01T07:32:00.000-07:00

The JP Morgan summer interns have started a blog. My guess is that
this won't end well for them.

http://jpmsummer2006.blogspot.com/

Unfunded Liabilities

2006-04-29T07:03:00.000-07:00

Bill Gross likes to pontificate. The problem with pontificators is
that after a while they like to be praised when they write things, and
thus often avoid the obvious truths is they will anger some people.
His latest writing is a good example of this: http://snipurl.com/pses

In a long Investment Outlook, Gross bemoans that the US as a whole
faces the cost structure problem that GM does, specifically as it
relates to unfunded health and retirement liabilities. He laments how
the country is currently dealing with this problem, and offers how he
would deal with it. However, nowhere does he mention the obvious
solution to unfunded liabilities: Fund Them!

The simple answer to Social Security is to replace the unfunded
defined benefit plan with a defined contribution plan.

This, however, would massive decrease the dependence of people on the
government, which is why the left doesn't like the approach.

Still, that does not mean that supposedly brilliant people should
ignore the obvious.

A new finance theory

2006-04-28T11:03:00.000-07:00

Roland Veit, president of Paragon Coffee Trading Co. in New York, has
developed a new theory on the relationship between spot and futures
prices. Once constrained to arbitrage pricing theory, Veit has broken
ground with the "it's too soon theory". Under the "it's too soon
theory" everybody might know that there is a looming shortage of a
commodity, and that prices will rise dramatically, yet prices might
not rise because "it's too soon."

Perhaps this theory is not quite ready for prime-time, but if perhaps
it could be combined with a behavioral analysis of why coffee traders
don't bother making profitable trades because "it's too soon" Veit
could be up for a Nobel Nomination.

http://snipurl.com/pskg

He's guilty....

2006-04-28T08:14:00.000-07:00

Not that I had any doubts before, but as a general rule of thumb any
time someone blames "short-sellers" for a stock price decline, they
are guilty of either lying, stealing, or fake accounting. A company
with nothing to hide has no problem with short sellers.

FYI: Ken Lay recently tried to blame his problems on short sellers:
http://snipurl.com/psc9

JP Morgan Settles IPO Suit

2006-04-21T11:43:00.000-07:00

I really don't understand all of this. JP Morgan and others give hot
IPO's to their best clients. I never thought that should have been a
big surprise. Then, they help drive up the price of the IPO
afterwards. So, a bunch of investors who didn't purchase the stock at
all sure because they didn't have the opportunity to get in on the
scam?

The ones who should sue are those who sold shares through JP Morgan.
JPM had an obligation to get them the best sales price, and they
didn't do it. It is long past the time that corporate America stick
it to the investment banks who have been raping them for years.

http://snipurl.com/piho

Why do investors do what they do?

2006-04-21T11:32:00.000-07:00

None of this should come as a surprise, but there is a great article
in the NY Times about Neuro-Economists and their studies of investor
behavior:

http://snipurl.com/pih8

Another week of slow blogging

2006-04-21T11:29:00.000-07:00

On the one hand, I am anonymous, so I don't have to worry about
hurting my reputation by not updating the blog. On the other hand, I
like updating the blog, so it is a bummer when I am overwhelmed at
work and at home.

Also, I am thinking of going by my own name, but only after I have
proven the concept that this can be a value-added blog, which will
only happen when I get the time to start posting more original
research and commenting more insightfully on the research of others.

MORGAN SUPER TRADERS WORRY HEDGE FUNDS

2006-04-13T13:44:00.000-07:00

And they should. (Yes, I know, I am not supposed to start a sentence
with "and"). So, Morgan Stanley is going to become a giant hedge
fund. There are lots of giant hedge funds out there. What advantage
does Morgan Stanley have that others don't? Access to the knowledge
of what their clients are doing and the order flow that comes with
their clients.

That is, the only advantage that Morgan Stanley offers to the
marketplace comes at the expense of their clients.

http://snipurl.com/p5kp

Man Group claims $2.3bn hedge fund record

2006-04-13T13:41:00.000-07:00

Hedge Fund scandals make good press. I wonder when the practice of
hedge fund groups paying kickback fees to consultants and RIA's is
going to explode?

http://snipurl.com/p5kj

"Man Group, the blue-chip hedge fund manager, has raised more than
$2.3 billion (£1.3bn) in client money in what it says is the largest
private client launch of a hedge fund product."

Commodities advice from AIG

2006-04-12T07:40:00.000-07:00

In an article in the Wall Street Journal today about the commodities bull market, there appears the following quote:

"Matthew Schwab, who advises institutional investors on commodities at the AIG Financial Products unit of American International Group Inc., argues that because index funds don't actually take delivery on their futures contracts, "they cannot impact the physical supply and demand balance."

Hopefully, Matthew Schwab has heard of the term "Cash and Carry" arbitrage, and that his quote was simply taken out of context. If not, I would not suggest going to AIG for commodities advice.

http://snipurl.com/p34r

A great deal, but not for shareholders

2006-04-12T06:55:00.000-07:00

I find this perplexing:

"Six Flags Inc. has agreed to pay Redskins owner Daniel M. Snyder $10.4 million to reimburse him for expenses he incurred in his bid to gain control of the company last fall, including a $5 million signing bonus for chief executive Mark Shapiro."

What? Why should shareholders possibly have to pay $10.4 million to reimburse a failed suitor? I suppose one could argue that companies wish to encourage suitors, but a far more likely scenario is that the Board and Officers of Six Flags simply want to use $10.4 million of shareholders money in order to preserve their standing in corporate America. It is this kind of "you scratch my back, and I'll scratch yours" that gets you later jobs as officers and directors. What's worse, however, it that is is just this kind of behavior that gives capitalism a bad name.

Hopefully Six Flags shareholders will reject the payment.

http://snipurl.com/p32j

From the: "I am not seeking business, but I decided to put out a press release anyway" department

2006-04-12T06:50:00.000-07:00

In the greatest private equity boom of all time, why not just be honest and announce that you are starting a private equity firm?

http://snipurl.com/p326

Former Merrill Lynch auto analyst John Casesa has joined forces with a former high-level executive from one of the nation's largest automotive retailers to establish an investment and advisory firm.

Casesa, who left Merrill in early February after 17 years as a Wall Street analyst, has teamed with A. Andrew Shapiro, a 13-year veteran of United Auto Group Inc., to form Casesa Shapiro Group. The private partnership will make investments, which will be actively managed, in targeted segments of the auto industry.

At a time when big-name auto industry companies are struggling, the New York-based group will focus its investments on new-vehicle dealerships, the aftermarket and other services. The group will also provide advisory services to corporate clients, it said in a press release.

Casesa said in an interview that the group doesn't have a timeframe for announcing its initial investments. The partners will use their own capital for those investments, but could seek private equity partners as the business grows.

Schering Risk-Arb...

2006-04-12T06:41:00.000-07:00

I am not a fan of the risk-arb guys. There is so much money in the space that I don't think that any significant Alpha is generated by them. In fact, I would suspect that well over half of their "alpha" could be easily replicated by a naive investment strategy. If I ever start my own Fund of Funds, I will not even include any Risk-Arb or Convertible-Arb managers in the fund. The costs of paying the managers, and doing the due diligence on the managers is greater than any value that they add.

This, however, is interesting. In Germany, minority shareholders of more than 5% of a companies stock can seek an independent valuation in order for a takeover to go through. This, of course, is something that a small naive investor could not do on his own:

http://snipurl.com/p31n

Insider Trading

2006-04-12T06:37:00.000-07:00

Sorry for the lack of updates... End of Quarter... Cyclical business...etc. Anyway, you all have probably seen this, but this insider trading case is really quite interesting. I have always assumed that bankers, lawyers, and accountants still engage is small-time insider trading, but this case is really quite brazen:

http://snipurl.com/p31h

M&A deals outperforming

2006-04-04T07:46:00.000-07:00

What appears to be a flawed study suggests that recent M&A deals are outperforming the markets. From CBS Marketwatch

"In 2004, 7% of the transactions valued at $400 million or more resulted in companies that outperformed the stock market, such as the S&P 500 Index . The compares with merged companies underperforming the market by 3% in 1988 and 6% in 1998, findings by Towers Perrin and London's Cass Business School show.The study examined 218 global deals up to $1.5 billion. It analyzed company performance for a one-year period -- six months before and after the deal closing -- to determine the relative degree of financial success.

Towers Perrin and Cass said that the improved financial results are the result of management more closely aligned with shareholder interests, better selection of targets and an increased focus on integration. "

How about this better explanation: $1.5 billion is the realm of small cap stocks. The S&P 500 is an index of large cap stocks. Small cap stocks have dramatically outperformed large cap stocks for the past few years. How about comparing the results to the Russell 2000?

Does the SEC have it in for hedge funds?

2006-04-03T07:32:00.000-07:00

One can make a strong case for greater oversight of hedge funds. Short selling, however, is not one of them. There appears to be a mindset in the marketplace that a short-seller is somehow less honorable than someone who is primarily long-only. The stock market exists to be a free exchange of capital, one that in the long run functions best when asset values are accurately reflected. Asset values are accurately reflected when they can be tested by speculators who seek to make a profit.

This is all well understood when it comes to money managers who seek to buy undervalued stocks, yet somehow when someone seeks to short over-valued stocks, he is portrayed as a villain. Yes, there are short-sellers who aggressively try to drive the stocks down, but this is no better or worse than the endlesspumping of stocks by Wall Street.

http://snipurl.com/olx4

Foundation Accuses TH Lee Putnam Of Inflating Portfolio Value

2006-04-03T07:24:00.000-07:00

Here's a good story: A foundation suing over inflated values in a VC fund. Expect to see more of this. It is not just the Private Equity firms that have an interest in inflating values. The largest clients of the PE firms do as well. Inflated values give pension plan sponsors lots of wiggle room on plan funding. Also, the biggest endowments (such as the large Universities) who have plowed huge percentages into private equity have a lot at stake. The endowment managers have become heroes in the last few years generating high returns.

If you are a hotshot manager at Harvard or Stanford, and you have posted fantastic returns by being invested in illiquid assets (not marked to market) vs. liquid assets (marked to market) do you really want to make sure that your illiquid assets are being valued correctly? In my archives, you will see that I have already predicted that the large exodus of talent from the top universities is a result of "getting out at the top". This lawsuit is the first sign of what is to come.

I am always suspect of returns in illiquid markets, and I wouldn't be surprised at all that if these endowments haven't done nearly as well as they claim.

http://snipurl.com/olwq

Shocks Seen in New Math for Pensions

2006-03-31T07:11:00.000-08:00

A good test of efficient market theory here. Everyone knows that GM
and Ford have massive obligations to their retirees that are not
reflected on the balance sheet. Will forcing GM and Ford to report
the present value of the liabilities on the balance sheet cause stock
prices to fall? If the market is efficient, than the true value of GM
and F is already reflected in the price from footnote disclosures.

http://snipurl.com/ogto

"The new method proposed by the accounting board would require
companies to take certain pension values they now report deep in the
footnotes of their financial statements and move the information onto
their balance sheets — where all their assets and liabilities are
reflected. The pension values that now appear on corporate balance
sheets are almost universally derided as of little use in
understanding the status of a company's retirement plan.

Mr. Batavick of the accounting board said the new rule would also
require companies to measure their pension funds' values on the same
date they measure all their other corporate obligations. Companies now
have delays as long as three months between the time they calculate
their pension values and when they measure everything else. That can
yield misleading results as market fluctuations change the values. "

Another hedge fund fraud

2006-03-31T07:08:00.000-08:00

So, do you think that the returns of Cogent Capital Management show up
anywhere in hedge fund performance statistics?

http://snipurl.com/ogth

AN FRANCISCO (MarketWatch) -- The Securities and Exchange Commission
on Thursday charged securities broker and investment adviser Global
Crown Capital LLC with fraudulently hiding from investors the trading
losses of hedge fund Cogent Capital Management.

Why talk GM when we can talk Ford?

2006-03-29T07:49:00.000-08:00

A lot of bad GM news today:

More accounting problems, and they don't know if they can sell a
controlling stake in GMAC: http://snipurl.com/od0k

Plus, the unions are fighting hard on Delphi's wage proposals:
http://snipurl.com/od0s

While most people are discussing what this means for GM, I am more
concerned with what it means for Ford.

I own very few individual investments outside of my 401K and some
small bets on tradesports. One of my speculative investments, however
is Ford $10 Jan '08 calls.

Given this, I see virtually all GM news as good news. I used to have
some involvement in distressed debt investing. Typically, when one
company in an industry is going through trouble, it means bad news for
the other companies in the industry. If one firm goes into
bankruptcy, then it will be able to lower its costs and be more
competitive vs. other firms in the industry.

I think the GM and Ford situation is different. In essence, both GM
and Ford have to negotiate with the same workers. So, if GM is able
to work out its problems, then Ford should be able to get the same
deal. If GM is not able to work out its problems and it plunges into
bankruptcy, then Ford will be able to credibly threaten bankruptcy in
order to get a favorable deal with its workers.

Given Ford's cash flow per share, a Ford that is out of the woods
ought to be worth an easy $20/share.

The big threat is that GM muddles along until Jan '08. Thus, what I
am looking for is progress (either good or bad) on GM.

Patent trolls are on stage again. But this time they're at the Supreme Court -- and the court's decision could change the law.

2006-03-29T07:23:00.001-08:00

Let me make a few comments here on the issue of "patent trolls":

Patents are a very important part of our economic system. There is a problem, however, with the patent system. Too many patents are being granted that should never have been granted in the first place. The patent that was being used to shake down Ebay over its "buy it now" button is one such example. However, there is absolutely nothing wrong with enforcing patents held by people who never have any plan on using them. Capitalism thrives on specialization. The argument that a patent must be in use to be defensible is an argument that inventors must also be producers.

This is a very dangerous idea. Why should inventors have to be able to raise money and market their ideas? Or, why must they hold onto their illiquid assets (their patents). Why can't they simply sell their patents to a "patent troll" who has the ability to pay them now for their inventions?

What is going on here is nothing less than "big business" attempting to usurp the patent system so that the protections of the system apply only to them.

Yale Pulls Out of Fund It Helped Put on Map

2006-03-29T07:23:00.000-08:00

Yale put TCI on the map with a $200 million investment in 2003. TCI has done so well that that Yale's stake is now $500 million. The stated reason for Yale pulling out is that they are concerned that their $500 million stake has become too large a piece of their overall portfolio. This of course, is not the real reason. If a $200 million piece was acceptable to the endowment, then Yale would simply withdraw $300 million from TCI. Instead they are withdrawing the entire investment. Clearly Yale is concerned about the fund for some other reason.

http://snipurl.com/oczw

France’s Elite C.E.O. Club May Admit First Woman

2006-03-29T07:09:00.000-08:00

How can this be? I thought France was so much more "progressive" than the United States.

http://snipurl.com/oczc

D.E. Shaw trying to recover on a $10 million dollar loan to Don Johnson.

2006-03-24T13:36:00.000-08:00

Perhaps I can start up a fund and loan some money to Paul Hogan,
another actor who can't get over the fact that the 80's are long gone.

http://snipurl.com/o3u8

Goldman Sachs and RBC cost Tim Hortons 35%

2006-03-24T07:47:00.000-08:00

Tim Hortons (THI) priced last night at $23.16. Right now it is
trading at 30.40. Including fees, this means that Tim Hortons gave
away 35% of its value in order to be a public company. For some
reason, the media will report this as a success.

"Some day this war's gonna end" is a line from Apocalypse Now after
the famous "I love the smell of napalm in the morning" quote.

Some day the gigantic investment bank rip-off is going to end as well.

MIT names Alexander to invest endowment

2006-03-23T09:28:00.000-08:00

I try not to make too many of my own investment predictions on this
site, but I can't resist the prediction that this whole timber fad is
going to come crashing down. In fact, I have suspected it is in part
the reason why so many of the top endowment managers are bailing out
now. Commodities, as a whole, are money losers over the long run.
Timber (although it produces dividends) shouldn't be that big of an
exception.

Think about it this way as well: The timber companies that have owned
these lands for 100 years are selling like crazy. Why should anyone
assume that Harvard, Yale, and Stanford know the value of the timber
lands better than the timber companies themselves do?

http://snipurl.com/o18z

This Speaks For Itself

2006-03-23T07:38:00.000-08:00

"America's Tax System strongly encourages American companies to invest
in foreign countries and not invest in America even if the funds could
generate a higher rate of return in the US".

So concludes the American Shareholders Association in a paper that
discusses the impact of the Invest in USA act which lowered
temporarily lowered the tax on repatriated profits.

http://snipurl.com/o132

FoF Performance Declining

2006-03-23T07:33:00.000-08:00

Research paper that concludes that even the most successful Funds of
Hedge Funds are seeing a dramatic decline in risk-adjusted
performance.

http://snipurl.com/o12s

Picture....

2006-03-21T18:58:00.000-08:00

Well the site that was hosting my picture took it down, so I think I can insert it into this post and then reference this post for my profile. We shall see...

If there is a portfolio that is superior to the efficient frontier, that means that your efficient frontier is not in fact the efficient frontier.

2006-03-17T05:46:00.000-08:00

I thought that was pretty obvious, but it's not to Ranji Nagaswami of AllianceBernstein, or Kathleen McBride, who interviewed her in investment advisor magazine.

Here's a good quote from Nagaswami on her belief that managers should have mandates to invest across all asset classes ( i.e. int'l and domestic growth and equity):

The whole job here is to identify a group of asset classes that have as low correlations as you can possibly get, so that when something is not working, something else always is. By pulling together these negatively correlating assets you actually improve the risk-return tradeoffs. You can get above the so-called efficient frontier. The efficient frontier itself gets most people pretty close to a good solution, but we think being a little bit more thoughtful by style, geography, and capitalization can get you above the efficient frontier. That's our goal, right?"

Uh, no, sorry. The whole point is to identify a group of asset classes that have low correlations with each other so that you can construct a portfolio that puts you on the efficient frontier. If you do a study, and you find that your have put together a portfolio that is greater than the efficient frontier, then you might want to reconsider how you are defining the efficient frontier.

This is kind of surprising, given that AllianceBernstein has very excellent international investment products (I in fact have some clients in some of them). Presumably she is not the one picking the stocks.

http://snipurl.com/np6d

Deceit at Barclays

2006-03-16T07:05:00.000-08:00

A good article today on how the different ETF's calculate their PE
ratios. Barclays calculates the PE ratios of its ETF's by excluding
companies that are not profitable.

The result is that they claim that their Russell 2000 ETF has a P/E
ratio of 19.1. If negative profits are included, however, the PE
ratios of the Russell 2000 is 41.

Now, we all know that the PE of an individual stock with negative
earnings has no meaning, but in a basket of stocks it has plenty of
meaning: The negative earnings simply detract from the positive
earnings of other stocks.

Think about it this way: Let's say you bought 100% of the equity of
every stock in the Russell 2K (The market, as a whole, has done that).
What would you say that your earnings were? Would you ignore your
losses? If so, how would you fund them?

What would you tell the IRS? Would you not report your losses to
offset your gains?

If you ask me, not including negative earnings in the Russell 2K ETF
is simply outright deceit, and Barclays should be ashamed.

http://snipurl.com/non3

Money Manager Links

2006-03-14T18:33:00.000-08:00

I have decided to post a link to a money manager on this website. I have had many conversations with money managers about my blog, (most of whom, of course, want me to reccomend them) and have decided that I will link to any money manager with anything interesting to say on a semi-regular basis if that money manager links to me.

My linking to the website or blog of a money manager is not in any way an endoresment of that manager, rather it is simply a recognition that they have something useful to add to the overall dicourse of the industry. I have added a link to the emerging firm CET Capital. CET just started its own blog, with a thread about the exploitability of persisent trends. Whenever I figure out how to do it, I will seperate money manager links from other links of interest.

The younger the firm, the better the performance?

2006-03-14T09:31:00.000-08:00

This claim has been made frequently, and has just been updated by
Northern Trust according to an article in Institutional Investor.

I can't find a link to the paper itself, if anyone can email it to me,
that would be great. While one can make a theoretical case for the
outperformance by emerging managers, I prefer hard data to theory. In
this case, I would like to see how the authors of the study corrected
for the fact that emerging managers often come and go without ever
having their performance numbers reported anywhere. That of course
would skew the performance numbers that do exist in the favor of
emerging managers, as only the good ones survive to ever report
numbers.

http://snipurl.com/nlcs

PCM, Knight-Ridder

2006-03-14T08:22:00.000-08:00

Private Capital Management, as I mentioned earlier, had the most
riding on the Knight-Ridder deal. A few comments on the outcome:

1. PCM is an interesting company with a great track record. That hey
have had a bad 12-18 months suggests that now would most likely be the
time to hire, rather than fire them.

2. Bruce Sherman is putting a positive spin on this, but it's not
working. Sherman is claiming an average cost of $60 per share. SEC
filing suggest it is more like 65. A certain number of PCM clients
have an average cost significantly higher than that.

3. PCM has a philosophy of "investing in what they know". For
example, they don't do energy, because it is driven almost entirely by
energy prices, and they don't claim any specific edge in being able to
forecast them. This is refreshingly honest. They do know newspapers.

4. PCM has a compelling case for the newspaper industry not being
"dead yet" that I recently sat through. While companies like
Knight-Ridder flounder, others like McClatchy and Lee Enterprises are
very successfully incorporating a new industry model of selling in
high growth areas, and incorporating local advertising into their
local websites.

5. They also have a case for the larger newspaper companies that I
don't buy. They consider the New York Times's subscription only site
a success, I think it is a flop. Yes, the NYT has signed up 200K
subscribers, but I think that is just the initial target group that
was expected to. The market for a small coterie of liberal op-ed
writers is small. It will get smaller. Whereas Paul Krugman and
Frank Rich were once widely read columnists, now that they are behind
the paid site nobody pays any attention to them any more.

6. PCM thinks that there is huge value in the NYT archives. I don't
think so. Information is widely available at low cost, and is getting
to be more so. The days of the NYT as the "paper of record" are
fading fast.

7. The Knight-Ridder deal shows one of the great perils of value
investing. Sherman saw great value in Knight-Ridder using the high
cash flow of the older big city newspapers to expand in the high
growth regional areas as McClatchy and Lee have done. Knight-Ridder
wanted no part in it. Value investing is tough when management
doesn't see the value.

http://snipurl.com/nl8f

Capital One giving consultants headaches

2006-03-14T08:04:00.000-08:00

The problem is that a lot of foundations and endowments have
"predatory lending" restrictions. Leaving aside the fact that there
is no clear definition of what predatory lending is, as Capital One
gobbles up traditional banks, consultants have to work through how it
affects the social investing restrictions.

http://snipurl.com/nl78

Hedge Fund Blowups aren't scaring investors.

2006-03-10T08:27:00.000-08:00

They should.

http://snipurl.com/neyv

Is Private Capital Management about to land or take off?

2006-03-09T07:17:00.000-08:00

Private Capital Management, with an excellent track record, has been
in the doldrums lately. Having totally missed the boat on energy,
they have been sucking wind on a massive bet on the newspaper
industry. Of traditional money managers, they probably have the most
riding on the outcome of a potential Knight Ridder transaction from a
credibility standpoint.

http://snipurl.com/nd9b

Are Papers About to Land or Take Off?

The fate of Knight Ridder newspapers, the nation's second-largest
newspaper chain, could be determined any day — and with it, the future
of what has come to be known as the mainstream media could become
clearer.

VC Funds getting in on the act

2006-03-09T06:56:00.000-08:00

A venture-capital firm misappropriated $9 million from investors,
including Philadelphia and Pennsylvania pension funds, the Securities
and Exchange Commission alleged yesterday in a federal lawsuit.

http://snipurl.com/nd8j

NYSE members get screwed by 25%, are jubilant

2006-03-09T06:55:00.000-08:00

Goldman Sachs gives away 25% of the value of the NYSE to it's
brokerage customers, and for some reason the NYSE members are happy
about it.

http://snipurl.com/nd8g

Shares of the New York Stock Exchange soared on their trading debut,
closing the day up 19 percent and capping a tumultuous year of
emotional negotiations and upending change for the 214-year-old
exchange.

From the department of useful research....

2006-03-08T18:08:00.000-08:00

Qwest may acquire, be acquired or stand alone in consolidation

http://snipurl.com/ncj8

The "Sage" uses a bad analogy

2006-03-07T19:19:00.000-08:00

The latest Chairman's letter from Warren Buffet, the self-described
value investor who makes money investing in growth stocks, is out. I
would have commented earlier, but was in New York the last few days.
As there has been much discussion on the letter already, I will stick
to the portion relating to consultants. It is as follows:

<i>Indeed, owners must earn less than their businesses earn because of
"frictional" costs. And that's my point: These costs are now being
incurred in amounts that will cause shareholders to earn far less than
they historically have. To understand how this toll has ballooned,
imagine for a moment that all American corporations are, and always
will be, owned by a single family. We'll call them the Gotrocks. After
paying taxes on dividends, this family – generation after generation –
becomes richer by the aggregate amount earned by its companies. Today
that amount is about $700 billion annually. Naturally, the family
spends some of these dollars. But the portion it saves steadily
compounds for its benefit. In the Gotrocks household everyone grows
wealthier at the same pace, and all is harmonious.

But let's now assume that a few fast-talking Helpers approach the
family and persuade each of its members to try to outsmart his
relatives by buying certain of their holdings and selling them certain
others. The Helpers – for a fee, of course – obligingly agree to
handle these transactions. The Gotrocks still own
all of corporate America; the trades just rearrange who owns what. So
the family's annual gain in wealth diminishes, equaling the earnings
of American business minus commissions paid. The more that family
members trade, the smaller their share of the pie and the larger the
slice received by the Helpers. This fact
is not lost upon these broker-Helpers: Activity is their friend and,
in a wide variety of ways, they urge it on. </i>

I have spoken repeatedly of investing in the stock market as a
winner's game, but picking individual stocks as a zero sum game. This
is Buffet's point. It does the Gotrocks family no good to be actively
trading because they are only making the family as a whole poorer.

There are, however, two problems with this theory:

1. We are not all family. I am more than happy to take money from
some guy I don't know in New Jersey because I bought a stock that he
shouldn't have sold.
2. Theoretically, the market can never reach the "desired" point
where everyone is a passive investor. If everyone was a passive
investor, then prices would not be rational, as there would be no one
setting prices.

So, there will always be active stock trading going on, and it is
reasonable to assume that anyone who thinks that he/she has an edge
should attempt to profit from it.

Don't Buy Hambrecht & Quist IPO's.

2006-03-03T08:57:00.000-08:00

They are actually priced correctly. While the mainstream investment
banks routinely cost thier banking clients tens, if not hundreds of
millions of dollars mispricing IPO's for the benefit of their
brokerage clients, H&Q actually brings companies public at a fair
market value. Of course, H&Q should be praised for this, but why buy
a correctly priced IPO when the "prestigious" banking firms will
transfer money from the pockets of their banking clients in to yours?

http://snipurl.com/n54z

Yale CIO Disses Harvard

2006-03-01T09:01:00.000-08:00

Swenson blasts Harvard for the huge payouts to the investment
officers. All that being said, I still have doubts as to whether or not
Yale's performance is really as good as is claimed. It's very easy to
hold up the values of the real assets that Yale has invested in. It
will be interesting to see how those valuations will look if they ever
decide to sell.

http://snipurl.com/n2f2

Day Traders... A Bunch of Losers

2006-02-28T11:30:00.000-08:00

So, the day traders are having a hard time of it lately with Google
down and all. This just confirms my suspiscions that day traders
never were any good, and never really were "traders" in any sense of
the term. They had a great time in the late '90's as well, only to be
hit hard in 00 and 01. Of course, if they were truly traders that
added any value by squeezing profits out of inefficienceis, then they
wouldn't care which way the market or Google would go.

Day traders don't like to carry positions overnight. So, by
definition, they are buying in the morning and selling later in the
day. When they are involved in stocks that are going up, they claim
to be successful day traders. When Google starts going down, they
have no idea what to do.

Hedge fund's money is AWOL: Report

2006-02-28T07:12:00.000-08:00

I'll bet the performance of this fund isn't included in the CSFB/Tremont Index.

http://snipurl.com/n0xa

"NEW YORK (CNNMoney.com) - Only about $150,000 of the allegedly $150
million in assets of an Atlanta-based hedge fund has been found by
investigators probing allegations of fraud there, according to a
published report."

Hedge Fund Returns Vastly Overstated

2006-02-28T06:30:00.000-08:00

"THE spectacular investment returns of the hedge fund industry were
thrown into doubt yesterday as Barclays Capital said that the figures
were being exaggerated by as much as 6 percentage points a year.

The flattering picture of the industry had emerged as a result of
imperfections in the way many hedge fund indices were compiled, it
said. The investment bank put the typical level of overstatement at 1
to 6 percentage points per year, depending on the index. "

http://snipurl.com/n0vd

Biovail legal complaint

2006-02-27T08:21:00.000-08:00

You can read the Biovail legal complaint at the link below. I think
that the charge that hedge funds were writing their own negative
research reports, and having them republished by hatchet job "research
funds", while true, is no big deal. As anyone knows, the markets are
full of those who "pump" stocks endlessly. Simply because
short-sellers want stocks to go down doesn't make what they do any
more or less "bad" then the guys who issue starry-eyed research
reports that promote tech companies with no earnings.

The fascinating part about the legal complaint, however, is the
allegations against Stevie Cohen. The legal complaint alleges that
Cohen uses is market clout to demand that brokers and banks provide
his companies with inside information that he can trade on. If true,
it is a massive scandal - not just for Cohen, but for Wall Street as a
whole.

http://snipurl.com/mzl3

Suez, Gaz de France Announce Merger to Repel Enel (The end of the Euro)?

2006-02-27T08:02:00.000-08:00

It is hard enough to try to run a single currency when the common
currency has to deal with multiple nations setting their own fiscal
policies. Now, we have the individual countries doing everything in
their power to halt the free flow of capital across their borders.
Just in the past few months, we see an absolute explosion in countries
attempting to protect their inefficient but "prized" companies. The
protectionism is wrapped in Patriotism, but really it is about
protecting the cash cows that subsidize the European elite.

France is different than the United States. In France, the life of an
elite snob - a high end government worker - is a prestigious one. It
is also one that somehow manages to be quite lucrative. It is
lucrative because the high end government officials help themselves to
the coffers of the prestige national companies. All that is
threatened by foreign takeovers of the prestige companies.

When the Euro was set up, the elites in France and Germany thought
that they would be able to dominate the region. Instead, their old an
inefficient structures are uncompetitive - and Poland and the Czech
Republic are still just now gearing up to wipe France and Germany
clean of their manufacturing bases.

France has been desperately hanging on to the idea that it has some
sort of relevance in world affairs for 50 years now. I don't expect
them to just give up on their control of their prestige companies
without a fight. I will get some flack for this prediction, but I
believe that ultimately the Euro is doomed.

http://snipurl.com/mzk6

Spain getting in on the protectionist game

2006-02-27T07:43:00.000-08:00

Spain, previously the great beneficiary of the EMU, now is getting in
on the protectionist game.

http://snipurl.com/mzj9

"....but the bid battle took a further twist when the Spanish
Government passed a decree enabling an energy regulator to prevent
foreign takeovers of Spanish energy companies. This annoyed European
Union officials, who rebuked Madrid for breaking European laws."

Resistance To US Buyout Activity Abroad Growing

2006-02-23T10:51:00.000-08:00

Bad news for US Private Equity funds. Flooded with cash, these funds
are having to look for larger and larger targets, and to look overseas
more than ever. The larger the target, the more likely a country will
try to put the kibosh on an American takeover.

http://snipurl.com/mvfm

Resistance to buyouts by U.S. and European-based private equity firms
is increasing in some countries, such as Germany, Japan, and Korea,
driven by fears that buyout houses are profiteers who are weakening
local control over companies and reducing employment, warned David
Rubenstein, founder and managing director of Washington-based global
firm The Carlyle Group.

Claiming Stock Manipulation, Biovail Sues Hedge Fund

2006-02-23T10:50:00.000-08:00

Maybe something illegal was done here.. and maybe not. My guess is
not. The suggestion that a "hatchet job" report from an unknown
research analyst can drive an otherwise correctly priced stock down
50% is absurd. My main point, however, is why it is seemingly ok for
research analysts and others to drive stocks up, but now down.

http://snipurl.com/mvfj

The Biovail Corporation, a Canadian pharmaceutical company, has sued
SAC Capital Management, one of the most powerful hedge funds on Wall
Street, accusing it of colluding with independent research providers
to issue misleading reports to drive down the price of Biovail's
stock.

Hedge Fund Customer Risks

2006-02-22T14:15:00.000-08:00

Prompted by an article "Schroders pays 60 million (pounds - I don't
know how to make the pound symbol) for NewFinance Hedge Fund,"
(http://snipurl.com/mudd) I had the following thought: Do firms that
own multiple hedge funds analyze the customer bases of their various
firms to see to what degree their customer lists overlap? It would be
interesting if these firms, thinking that between their multiple hedge
funds have 2,000 customers, really only have 1/2 that amount. Perhaps
if their is a downturn in the industry they will find their assets
shrink faster than they expect.

Mutual Funds Adopt Hedge Fund Practices

2006-02-22T11:53:00.000-08:00

This should be a good thing overall. I don't think that the long term performance of these funds will be all that great. The good thing however is that daily pricing and the transparency of mutual funds will allow researchers to better gauge the risk-adjusted performance of hedge fund strategies.

http://snipurl.com/mu7t

Pressured by weak stock-market returns and greater competition for investors' money, a growing number of mutual funds are making use of investment strategies typically found in riskier hedge funds.

Liquidity Theory Points to a Bull Market

2006-02-19T13:38:00.000-08:00

Interesting Article. Suggests that with incomes rising and companies
buying back their shares, that the market should be bullish for the
year. Methodology claims success at predicting last 12 of 13 years.

http://snipurl.com/mqfd

50 year mortgages are almost here.

2006-02-17T17:42:00.000-08:00

The naysayers think this is a bad thing, and that it just shows how stupid consumers are, but I think it is great. Locking in a 6.5% borrowing rate for 50 years? You could take the savings and plow it into the Vanguard Total Stock Market index fund, and come out waaaay ahead. Especially once you factor in the mortgage interest deduction.

http://snipurl.com/moq6

NEW YORK - The
Treasury Department's resumption of 30-year bond sales could have an interesting impact on the home mortgage market, with lenders offering more 40-year loans and maybe even 50-year mortgages for the first time to help some consumers qualify for loans.

Merrill to advise companies threatend by activist shareholders

2006-02-16T07:43:00.000-08:00

In case you ever wondered if brokers are on the side of the shareholder, it is now official. The answer is no.

http://snipurl.com/mmpi

A Fair Value Fraud

2006-02-16T07:09:00.000-08:00

The esteemed Jack Ciesielski, who spent the entire 1990's screaming at the top of his lungs about poor accounting practices before finally triumphing in the end, has noted on his blog the scam described below. Of course, there are fair value issues in hedge funds with illiquid securities, but apparently this guy was changing the values on liquid convertibles that had timely quotes on Bloomberg. The auditors at PWC noticed this, and did nothing.

Here is the link:

http://snipurl.com/mmnx

A few days ago, on February 9, the SEC instituted administrative proceedings against a PricewaterhouseCoopers audit partner for letting the manager of three hedge funds overstate the fair value of convertible bonds in the portfolios.

The hedge funds (Lipper Convertibles, L.P., Lipper Convertibles Series II, L.P. and Lipper Fixed Income Fund, L.P.) were managed by one Edward J. Strafaci. From at least 1998 to January 2002, Strafaci provided intentionally overinflated values for convertible bonds and convertible preferred stock held by the three funds. There's no question about this issue: Strafaci 'fessed up, pleaded guilty, and is now serving a 72-month prison sentence and must pay $89 million in restitution.

Hedge Fund Poetry

2006-02-16T06:10:00.000-08:00

Today's WSJ has an article on Hedge Fund Poetry (http://snipurl.com/mmlv):

But the silence was unbroken,
and the stillness gave no token;
And the only word there spoken
was the whispered word, "Bernanke?

I presume this is supposed to be cute, and designed to highlight the quirky nature of the supposedly genius hedge fund manager. Personally, I find it sort of silly. I suppose if you have a few billion under management you can afford to take risks in your quarterly letters. For you start-up managers, however, let me suggest that you stick to your facts, themes, and performance.

Securities Firms to Give Up Windfalls

2006-02-15T09:48:00.000-08:00

I'm not sure what the justification is for this, other than the
government wanting to get its hands on the money based on some silly
notion that it is ok for someone to lose money on a mistake, but it is
not ok for someone else to make money off of that mistake - unless of
course it is the government making the money.

http://snipurl.com/mkzx

TOKYO (AP) - Fifty securities firms, including UBS and Lehman
Brothers, will give up over 20 billion yen (US$170 million) in profits
gained from a trading error, donating the gains to a fund for
strengthening Japan's stock trading system, company officials said.

The firms profited from a botched order by Mizuho Securities Co. on
Dec. 8, in which a trader mistakenly tried to sell 610,000 shares in
recruiting firm J-Com Co. at 1 yen (less than 1 U.S. cent) apiece
instead of 1 share at 610,000 yen (US$5,190; euro4,390)

Merrill to Swap Fund Management Unit for 49.8% BlackRock Stake

2006-02-15T08:40:00.000-08:00

Let's hope that Blackrock positively effects the Merrill Lynch
operations, and not vice-versa. Personally, I think that all of this
might be a mistake on Blackrock's part. Just as the association with
Dean Witter didn't help the old Morgan Stanley all that much, I wonder
if Blackrock's reputation will fade when it starts having a bunch of
pushy salespeople running around pushing "Blackrock" products with
high fees and poor performance on people.

http://snipurl.com/mkzl

Feb. 15 (Bloomberg) -- Merrill Lynch & Co. agreed to exchange its
asset management unit for a 49.8 percent stake in BlackRock Inc., the
third-largest U.S. manager of bond funds in a transaction worth about
$4.65 billion.

Morgan Stanley does a good job for their client.

2006-02-15T06:52:00.000-08:00

Morgan Stanley just went up a notch in my book. That puts them at notch #1.

http://snipurl.com/ml05

NEW YORK (MarketWatch) -- Morgans Hotel Group, a trendy chain of
boutique-travel destinations founded by Ian Schrager of Studio 54
fame, saw its shares trade close to their offering price in their
stock-market debut Tuesday.

MHGC19.85, -0.04, -0.2% ) opened at $19.65 a share, below the $20 a
share price. The stock closed up at $19.68.
The New York-based hotel chain raised $360 million by offering 18
million shares at the midpoint of its $18 to $20 price range, with
lead underwriter Morgan Stanley.

Department of Neurology

2006-02-14T09:19:00.000-08:00

Here are two brain wave articles that I thought y'all might find interesting:

Mind Rewind: Brains Run in Reverse (http://snipurl.com/mjko)

Summary: When faced with a new learning task, our brains replay
events in reverse, much like a video on rewind, a new study suggests.

The 2nd, and more interesting is:

WHO REALLY WON THE SUPER BOWL?
The Story of an Instant-Science Experiment
(http://edge.org/3rd_culture/iacoboni06/iacoboni06_index.html)

Summary: This very first attempt at doing 'instant-science' is a
collaborative effort between Marco Iacoboni's group — a leading group
in functional neuroimaging — and FKF Applied Research, a marketing
firm. The main idea behind this project is that there is often a
disconnect between what people say about what they like — and the
real, underlying deeper motives that make us want and like some things
and some people, but not others. With fMRI, it is possible to look at
unfiltered brain responses, to measure how the ads shown today elicit
emotions, induce empathy, and inspire liking and wanting.

(This article claims, among other things, that women claim they don't
like commercials that use sexy ladies in them, but really they
identify and empathize with them).

And yes, y'all is in fact proper english, or at least it should be.
Let's say, for example, that you are talking to a group of people, say
a class. One guy raises his hand and asks if he can take a bathroom
break. If you respond by saying "Why don't you take a 15 minute
break" nobody will know if you are talking to that guy individually or
to the class as a whole. If on the other hand, you say "Why don't
y'all take a 15 minute break", then everyone will know that you are
addressing the entire class.

Full bore attack on the hedge fund industry

2006-02-14T09:17:00.000-08:00

Abstract:

" In this paper we use the hedge fund return replication technique
recently introduced by Kat and Palaro (2005) to evaluate the
net-of-fee performance of 1917 individual hedge funds. Comparing fund
returns with the returns on dynamic futures trading strategies with
the same risk and dependence characteristics, we find that no more
than 17.7% of the hedge funds in our sample beat the benchmark. In
other words, the majority of hedge funds have not provided their
investors with returns, which they could not have generated themselves
by mechanically trading S&P 500, T-bond and Eurodollar futures. Over
time, we observe a substantial deterioration in overall hedge fund
performance. In addition, we find a tendency for the performance of
successful funds to deteriorate over time, which supports the
hypothesis that increasing assets under management endanger future
performance."

http://snipurl.com/mjuf

Seven Sins of Fund Managment

2006-02-13T15:22:00.000-08:00

Dresdner has put out a great paper called the Seven Sins of Fund
Management. It is 102 pages long. In short, the Seven Sins are:

1. Placing forecasting at the hear of the investment process.
Dresdner says that nobody can forecast, yet everybody puts their
forecasts at the heart of their analyses.

2. Obsessing over information. Too much information leads only to
more self-confidence, as opposed to increased accuracy.

3. Meeting company managements is a waste of time, that only serves
to confirm one's previous opinions.

4. Everyone thinks they can get in at the bottom and out at the top,
which in fact is very difficult to do.

5. Investors try to perform on very short time horizons, and the
average holding for a NYSE stock has fallen to only 11 months.
(However, I think one can blame the clients and the consultants for
this more than the fund managers. It is the clients and the
consultants that press for the short term performance. The managers
just respond accordingly.)

6. Managers get too sucked in to "stories" as opposed to facts.

7. Many investment decisions are the result of group interaction,
which amplifies rather than alleviates decision making processes.
(For what it is worth, however, this study concluded that mutual funds
run by groups perform substantially better than mutual funds run by
individuals: (http://snipurl.com/mj1g)

The Dresdner paper can be found here: http://snipurl.com/mj1i

Leveraging shareholder value

2006-02-13T07:13:00.000-08:00

Breakingviews has a good commentary on public companies trying to
emulate the LBO managers through leveraged recaps:

"Economic value is not created by replacing equity with debt,
according to modern finance theory. However, that lesson of the
Modigliani-Miller theorem overlooks the tax deductibility of interest
payments. Factor this in and it can pay to leverage a company to the
hilt. Private equity firms have earned big bucks from doing just that.
Public companies, however, have generally been reluctant to follow
their lead. The recently proposed leveraged recapitalisation of
Affiliated Computer Services, a $7.8bn tech company, suggests that
private equity no longer has a monopoly on this game. "
http://snipurl.com/mih7

Here's the thing: Public companies can never use leverage as
efficiently as Private Equity firms can. Modigliani and Miller
suggested that capital structure doesn't matter in the perfect world.
There are of course a number of violations to the perfect world. Two
of them are taxes and bankruptcy costs. Taxes give an advantage to
debt over equity financing. On the downside, bankruptcy costs rise as
debt level increases. Theoretically, one would want to finance with
debt until the theoretical benefit of incremental debt is equal to the
incremental expected bankruptcy costs. This number is different for
every firm, as the probability of bankruptcy is different for every
firm.

In any ever, the problem that public companies have is that their
bankruptcy costs are typically higher than for private firms because
they have both more owners and often more creditors as well, so a
public company is always going to be more restricted in the debt
levels it can choose.

European VC Investments Drop 5% In 2005, Yet Deal Size Soars

2006-02-13T06:40:00.000-08:00

European venture capital investments fell 5% in 2005 as investors -
buoyed by strong public markets and high-value acquisitions -continued
to invest larger amounts in a shrinking number of start-ups.

Venture firms invested EUR3.6 billion in European companies in 2005,
down from EUR3.79 billion invested the previous year.

The number of companies funded, however, dropped 16% compared with
2004 figures: 1,020 start-ups raised venture money in 2005, down from
1,214 the previous year, according to a report by Ernst & Young and
industry tracker VentureOne, a unit of Dow Jones Newswires, publisher
of this newsletter.

http://snipurl.com/mifp

Merrill to take Blackrock Stake

2006-02-13T06:24:00.000-08:00

It looks like Merrill is going to take a large stake in Blackrock, yet
stay below 50% and not exert as much control as Morgan Stanley wanted
to in their Blackrock proposals. This is a good thing. Blackrock is
a first rate institution, and I would hate to see a bunch of brokers
who make their living putting investors into massive front-end load
funds get their hands on a quality investment institution such as
Blackrock

http://snipurl.com/mif2

The Decline in Household Savings

2006-02-13T06:20:00.000-08:00

This will upset the gloom and doomers, but the reported decline in
household savings is in fact just the result of the large capital
gains that people have been experiencing, which are not counted in the
savings statistics.

http://snipurl.com/mif0

Morton's Bankers only cost them 12%

2006-02-10T06:26:00.000-08:00

Morton's Restaurant Group rises in trading debut, to 17.90 from the
IPO price of 17. That 5% gain, on top of the IPO fees that were
probably 7% means that Morton's IPO cost them 12%. This is much
better than the combined 22% that it cost Ruth's Chris to go public.

http://snipurl.com/mexz

Congressional Lobbying Reform

2006-02-09T06:53:00.000-08:00

Imagine if Congress were to pass a law that focused on cracking down
solely on the consumers of illegal drugs, while ignoring the sellers
of illegal drugs, based on the theory that the poor sellers just can't
help themselves, and therefore shouldn't be blamed for the drug trade.
Silly, right? Yet that is EXACTLY what congress is doing with
regards to lobbying and campaign finance reform. There are only 525
sellers of political influence, they are all public figures. It
should be relatively easy to keep them from selling influence. Yet,
Congress instead thinks that is should regulate all of the 300 million
consumers of poltical influence on the theory, I suppose, that they
just can't help themselves when offered campaign donations in exchange
for that political influence.

Luxembourg to harm its capital markets

2006-02-07T10:16:00.000-08:00

In a bid to help Arcelor rebuff Mittal, Luxembourg is going to change
its laws so that any company can institute a poison pill without
shareholder approval. Poison Pills seriously damage shareholder
wealth, and Luxembourg's rash actions will harm it's capital markets.

http://snipurl.com/mbeg

Private Equity Wants To Stay That Way

2006-02-06T07:55:00.000-08:00

What will likely happen here is that the private equity world will start to split between those who will accept public funds and those who won't. There is too much public money out there for the industry to turn it all away, however I would suspect that the premiere PE firms will have the ability to not accept public funds without hurting their ability to raise money. Full disclosure of valuation methods will, however, ultimately harm the industry. Full disclosure will make it more apparent that PE is more volatile than the industry lets on. Right now, the industry gets to pretend that it is not all that volatile. Of course, that is just a fiction of the fact that they just don't bother/ can't value their assets very frequently. Any light shed on valuation methods will ultimately hurt the volatility figures that consultants and plan sponsors punch into their asset allocation software.

http://tinyurl.com/anuzm

Private equity funds are some of the most secretive investors around. They rarely publicize returns, and they fiercely guard the specifics of the companies they own. That confidentiality has come under attack in recent years by media outlets and political groups that want public investment funds to disclose their private equity and venture capital holdings. Public funds have largely resisted, arguing for less disclosure rather than more.

Until now. The Ohio Bureau of Workers' Compensation, a state-run fund with $15.7 billion in assets, is pushing to lift the curtain almost completely.

NEA On Way To Closing 12th Fund With Record $2.5B

2006-02-06T07:18:00.000-08:00

While I can see an advantage to having a large private equity fund (the ability to do large deals), I fail to see the advantage of a $2.5 billion venture capital fund. In essence, in order to actually invest all the money, they are either going to have to have a huge staff, or relax their standards. I would avoid this one.

http://tinyurl.com/7bbax

New Enterprise Associates is well on its way to wrapping up what would be the largest U.S. venture fund ever raised at $2.5 billion, surpassing the record $2.3 billion fund it closed in the boom year of 2000.

Toshiba to Pay $5.4 Billion for Westinghouse Electric

2006-02-06T07:07:00.000-08:00

http://tinyurl.com/bv59f

I'll try to keep politics out of this blog for the most part, but Toshiba is the company that sold our propeller milling machines to the Soviets at the height of the cold war. This allowed the soviets to catch up on submarine "quietness" which they had previously been way behind on. I am by no means an anti-free trader, or someone who uses national security as an excuse to be anti-free trade, but really, shouldn't the governments of the US and in this case the UK pay attention to who they are selling leading western technology companies to?

Inflation's bite on returns

2006-02-06T06:39:00.000-08:00

A good article in the WSJ today that points out that, of course, in
real dollars stock market returns have not been anything like what
they seem. Does anyone have a link to the data behind the "real
returns" mentioned in the article? I will track them on this site
going forward if I can find them.

Here is the WSJ article: http://tinyurl.com/bqpva

Overtime at the NYSE

2006-02-03T08:31:00.000-08:00

Extended trading hours for the NYSE has reared its ugly head again, and it is something that should be opposed by all who are concerned about a level playing field for all investors in the stock market. Today's Wall Street Journal has interviews of a number of different market participants and how their take on it: http://snipurl.com/m75x.

What is clear is the following: The NYSE is not losing out on any major trading volume or listings due to its hours not being longer. What this is about, rather, is an attempt to raise the costs of smaller market participants compared to the larger Wall Street Firms. John Thain, don't forget, comes from Goldman Sachs, a firm that stands to benefit materially if NYSE hours are extended.

The larger wall street firms have one and only one agenda, and that is to gather assets and transaction volume for themselves. With Goldman's extensive trading and asset management platforms, to extend hours requires minimal marginal costs. For a money manager with perhaps say, up to $5 billion in assets under management, that is not the case. Their costs will rise materially relative to their revenues to add more traders or compensate their employees better due to the increase hours.

Individual investors will also be hurt, as extended trading hours will make it even more difficult for them to maintain a working knowledge of the markets as they tend to their other work and family responsibilities.

By extending trading hours, the NYSE will also be further harming California investors, who already must start their trading days at early hours.

The only beneficiaries of extended trading hours will be the larger wall street firms at the expense of everyone else, and we should all do what we can to make our voices heard.

Hedge Funds May Depress Company Values on Bankruptcy Exit

2006-02-03T08:18:00.000-08:00

The Daily Bankruptcy Review (subscription only)has run a series of articles on how the larger role of hedge funds in the bankruptcy process might affect the next down-turn in the credit cycle. http://snipurl.com/m75m

Yesterday's issue suggests the following:

A study by Fitch shows that over time, companies that enter bankruptcy with a greater percentage of bank debt relative to other forms of debt tend to exit bankruptcy in a stronger position than those that have a lower ratio of bank debt to other forms of debt. Fitch postulates that this is because banks, with more at stake when there is a lot of bank debt involved, put more of their expertise into helping a company through the bankruptcy process.

Now, with hedge funds comprising 30% of the syndicated leveraged loan market, and hedge funds often having competing interests in the bankruptcy process through their holdings of many different securities as well as credit default swaps, the supposition is that on average companies should start exiting bankruptcy at lower recovery rates.

Another poor IPO performance

2006-02-03T07:26:00.000-08:00

A poor performance on the part of the investment bankers, that is.
What is surprising is that Weisel led its own underwriting team. Just
what exactly are investment banks paid for if they so such a poor job
of pricing IPO's?

http://snipurl.com/m72c

NEW YORK (MarketWatch) - Thomas Weisel Partners Group Inc. rose as
much as 33% Thursday, and if it holds those gains, the San
Francisco-based boutique firm would post the best first day gain for
investment banking IPOs in the last two years.

TWPG19.59, -0.31, -1.6%) initial public offering began trading at $19
a share, well above its $15 price, and then rose to a finish of $19.78
on volume of 3.19 million shares on the Nasdaq.

Thomas Weisel raised $90 million by offering 6 million shares at the
top of the estimated $13-$15 range with an underwriter team it led,
along with Keefe Bruyette & Woods and Fox-Pitt Kelton.

Blackberry

2006-02-02T07:37:00.000-08:00

I know this has nothing to do with consulting per se, but a lot of us
use Blackberry's, particularly since we tend to travel a lot in our
industry. I have three comments:

1. RIM violated NTP's patent. That is clear. While it is true that
there is a lot of silly patents being granted these days, this does
not appear to be one of them. Had RIM gone to NTP years ago, before
Blackberry's became widespread, they likely would have had to pay
little to use the patent. However, there seems to be an arrogance in
corporate America that perhaps patents don't need to be worried about,
because the patent holders don't have the ability to protect their
inventions.

2. It is outrageous that while all of our Blackberry's might be shut
down, there is an expectation that the government shouldn't have to
suffer the same as the rest of us. What is so special about the
government?

3. I also have a Treo. They are pieces of garbage. They turn on and
off by themselves all the time, and it is very difficult to do
anything with one hand... like walking through the airport, etc.

DOJ sharpens objections in Blackberry case

http://snipurl.com/m5sq

FEB. 1 7:58 P.M. ET The Justice Department sharpened its objections
Wednesday to a threatened shutdown of the BlackBerry e-mail system,
saying it would be difficult to close it without affecting government
users.

NTP Inc., an Arlington, Va.-based company, has convinced a federal
jury that its patents have been infringed by Research In Motion Ltd.,
the Canadian operator of the BlackBerry network, and is seeking a
court ruling to turn off the network.

800 Fund Advisors Register

2006-02-02T06:45:00.000-08:00

On the one hand, I don't think this will have too much effect on the
actual incidences of fraud. Those who are determined to defraud
others will be able to do so despite the new regulations. On the
other hand, this is probably a good thing for the industry as a whole.
The number one reservation that individual clients of mine have about
investing in hedge funds is the fear of fraud by unregulated entities.
At the margin, SEC registration should bring more investors into
hedge funds.

http://snipurl.com/m5r1

The Securities and Exchange Commission said that almost 800 hedge-fund
advisers met yesterday's deadline to register with the agency under a
new rule that subjects the industry to stricter regulation and random
inspections.

Fears that $850bn of deals will lift prices

2006-02-02T06:41:00.000-08:00

PRIVATE equity funds are expected to raise enough capital to fund up
to $850 billion (£476 billion) of deals this year, further fuelling
concerns that the industry could overheat.

http://snipurl.com/m5rb

Higher debt 'harms returns' on £100m deals

2006-02-02T06:40:00.000-08:00

http://snipurl.com/m5r8

The gist of the story is that while LBO funds try to use as much debt
as possible to enhance returns, research suggests that the more debt
involved with an LBO the lower returns tend to be. The researchers
theorize that the extra buying power that incremental debt provides
results in less restraint on purcahse prices, resulting in LBO funds
paying too much.

Blackrock Talks Break Down

2006-02-02T06:38:00.000-08:00

I'm happy about this. I am a big fan of Blackrock and don't want to
see them merge with a lesser organization (from an institutional asset
management perspective).

http://snipurl.com/m5qu

Shares of BlackRock Inc. tumbled more than 7% on Wednesday after
financial news network CNBC said that talks with Morgan Stanley about
a potential takeover by the investment firm broke down.

BlackRock's stock fell as much as 7.4%, to $123, during early trading
and was off 3.5% intraday.

More Private Equity News

2006-01-31T08:29:00.000-08:00

A profitable I-bank operation closing down to focus solely on LBO's?

January 31, 2006 -- Veronis Suhler Stevenson, one of the first media-focused investment banking boutiques, is winding down its advisory business to focus exclusively on leveraged buyouts, The Post has learned.

The New York investment firm, which was started in 1981 by Psychology Today founder John Veronis and former CBS Inc. president John Suhler, is planning to exit the investment-banking business in the next six months after wrapping up a handful of assignments, sources close to the firm said.

http://www.nypost.com/business/62590.htm

A Pretty Good Sign For South Africa

2006-01-31T08:21:00.000-08:00

I have always had a very dim view of the investment prospects for South Africa, given the marxist background of the ANC, but this news story is promising. Can you even imagine American liberals supporting such a move? It suggests that somebody in the ANC has the right idea: economic growth is the key.

"SOUTH AFRICA is to scrap the bulk of its black empowerment programme in an attempt to boost foreign investment.

After 11 years of failure, it is understood that the Government is ready to abandon some of the conditions that govern the commercial relationship between foreign business, South African business and black workers and shareholders."

http://snipurl.com/m3hu

New Product - K4

2006-01-30T15:02:00.000-08:00

I had the privelege of being allowed to demo the manager search and
selection software K4 by Klein Decisions. (www.kleindecisions.com)

In short, the basic problem with manager search tools is that it is
easy to miss a good manager because the search criteria used are hard
limits. For example: Let's say I am looking for a Large Cap Growth
manager who has 10 years of data, a downside ratio that is better than
the Russell 1000, Assets under management of greater than 1 billion,
and 10 years index-relative outperformance of 25%.

It is quite easy to put criteria like that into M-Search or PSN and to
spit out a list of managers.

However, there are two problems with this approach:

1st, the hard limits on the search criteria result in potentially good
managers being left out of your search. For example, a manager with
10 years of great performance, but only 990 million under management
won't clear the screen.

2nd, if you put in search terms that are too strict, then you won't
get any managers in the results, and you will have to mess around with
search strings until you get an apporpriate number of managers to
study further.

Now, using the regular search features of M-Search and PSN, one can
get around these problems, but only by in essence running multiple
searches to make sure that you have looked at the search from every
possible angle.

K4 eliminates these problems. Using the Mobius database, K4 asks you
for screening criteria, but then promopts you to answer a number of
questions about your priorites. For example, it will prompt the user
to answer a series of trade-off questions of how certain levels of
performance compare to the importance of assets under management, etc.

The result is a list of managers ranked in order of your preferences.
Thus, in this system, a manager who is fantastic in all of your
priorities, yet just barely misses on one of your criteria, will still
appear in your results if through the series of priority questions you
indicated a "softness" on your screening criteria.

K4 also promises to smooth the workflow of your search process. It
allows you to indicate levels of risk tolerance for the client, which
thus produces search results that through a normal search tool such as
M-Search would require a series of search parameters. K4 also has a
series of reports that allow for an easy presentation to the client of
how a search was conducted (a feature that is lacking in traditional
manager database search tools), and also allows for internal review of
a search by a senior executive.

I am not sure if I will subscribe, as the way that I conduct manager
searches is a bit untraditional, but K4 would seem to make sense for a
number of consulting operations that I am familiar with.

For what it is worth, I have no financial or other interest in K4, or
any business relationship with Klein Decisions.