Ultimi Barbarorum

Inside Men

November 9, 2009 · 4 Comments

Crikey. Looks like they’re going after Stevie Cohen now. For context, SAC Capital is the leading hedge fund of our time. They get to charge not 1 and 20, not 2 and 20, but 3 and FIFTY to their punters. And like La Gavroche, they get to decide who gets in; most of the funds are closed, with waiting lists up the wazoo. They’ve done this through nothing but creating consistent, (suspiciously?) persistent, 20% plus returns a year for god knows how long. SAC is the “smart money” you would follow if you knew where it was going; Baruch has known traders do that, no questions asked. And why? Because you just reason that they know something; they always do. How ominous that sounds now.

If SAC goes down like Galleon did it’s a much much bigger deal. I don’t mean the trading impact on the market, although there might be some — SAC is a rapid-fire trading house and will likely be positioned in mostly highly liquid securities. What I mean by a bigger deal is in an Ivan Boesky sort of way, a Drexel Burnham Lambert, a Defining Moment of Wall Street Greed sort of thing. A number of awful mini-series will be made about it. It may even turn out to be worse than that.

It’s clear too, the other half of the vast conspiracy (should it be proven to exist, of course) lies among technology stock executives, at least among those high enough up the chain to know the numbers. So far, at least, executives at IBM, Intel, 3Com, Atheros, and Polycom are supposed to involved. This is a highly representative list, across many tech subsectors and market caps. It’s not unreasonable to think staff at other companies are going to be indicted. Galleon’s original investors seem to have been tech executives who used to talk to Raj when he was a sell-side analyst, ie his sources, his informal “channel checkers”. Even if no brown envelopes changed hands initially, secretly advising a fund you have invested in p.a. on sensitive stuff doesn’t seem a stretch on the part of the executives, especially if it took place before RegFD. The relationships may have then become formalised, secrets in exchange for cash — is it unreasonable to imagine that the original conflict of interest sowed the seeds of the greater, and more obvious crime later on. If I was one of the Feds working the case I would view identifiying the early and later investors in Galleon as an avenue of enquiry rich, shall we say, in possibility.

Now it’s not just Galleon involved, but a horde of satellite hedgies with obscure names, and some of the managers who have started to cooperate with the authorities seem to have worked at SAC. “People familiar with the matter” (ie most likely the prosecutors themselves) have told the WSJ that SAC are the ones they’re gunning for. Given the size of the target, the prosecutor who can pull off this one is, on past form, a dead cert to be mayor of NYC, or at least state governor, and eventually will have the chance to become a cross-dressing presidential candidate.

If indictments are really going to be sent out, a number of half-formed thoughts spring to Baruch’s mind:

  1. this is grist to the mill of the “you can’t make money in the stock market crowd”, the Felix Salmons of this world* who would have us all invest in index funds and ETFs. This is terrible, not just for people like me who depend on belief that a small number of gifted investors are capable of consistent, though not necessarily persistent, returns. No, it also, reductio ad absurdiwhatever, will make the stockmarket less liable to make any distinctions between companies whether they be good ones or bad ones — the very life force of capitalism itself
  2. highly successful “fundamentalist” hedge funds may now have to spend as much time excusing suspiciously excellent performance, just as more unfortunate ones have had to traditionally spend time explaining away bad returns. In many cases this may be difficult, as the successful ones no doubt touted their “informational edge” as a way of getting the investors in in the first place.
  3. because of this I can’t decide whether this is good for us honest fundamental investors, or bad. At worst, the boundaries of what we consider ethically and legally acceptable may stray. What we could call the “brown envelope” investment strategies are clearly not kosher, but what about ones where legitmate “homework” brings about the same result? How exactly is a sell-side channel check, communicated to a limited number of paying clients, conceptually different? Insider trading as a concept does not have hard edges, and innocents may get caught up in the net, or much worse, be encouraged to stop doing any digging at all. Maybe investors will conclude that all the fundamental investment strategies are at risk, and eschew the class altogether in a “kill them all, god will know his own” sort of way. At best, however, the money invested in dodgy funds may find a home with more honest practitioners, and, much more to be hoped for, fund investors themselves may reset unrealistic expectations for consistency of returns. Larger drawdowns will become more acceptable, as will greater volatility in monthly and quarterly track records. In other words, expectations will become more in line with what the real world actually doles out.

* of course, Felix Salmon has many other opinions, some of which are even correct.

→ 4 CommentsCategories: Barbarians · Lens grinding · What Would Spinoza Do?

iPorn exists! I take it all back

October 30, 2009 · 7 Comments

See full size image

(Asian Boobs)

As proprietor of a family site (in the sense that my mum sometimes reads the blog), Baruch is unwilling to show the images of one of the apparently best-selling apps on the iPhone, “ASIAN BOOBS“. Yes, it is Asian soft porn, charming oriental ladies in bras and knickers, in uncomfortable poses; it’s not pictures of vaguely silly people from China. Of course, this gives the lie to Baruch’s contention that there is no porn on the iPhone platform.

Baruch would like to claim this app only exists because someone at Apple reads Ultimi Barbarorum. No such luck.  Baruch’s scribblings on the banality of the iPhone’s walled garden might have forced the iPhone censor to respond in that inconsistent, atavistic manner of all pro “decency” censors through the ages, you would think, by allowing Asian Boobs onto the platform as a sop. But the app has apparently been a best seller for some time before Baruch wrote his post. Baruch fancies Apple have a group of blog flaks somewhere in Marketing whose job it is to influence commentary on prominent sites, or at least to report on Apple-related issues as reported in the blogosphere. The blog flak would take one look at Baruch’s traffic on some blog rating site or something and realise he didn’t have to bother.

(Don’t bother checking Asian Boobs out by the way; the app is rubbish. You don’t even get to see any nipples).

Meanwhile in another threat to Baruch’s Apple-as-victor thesis, as Dear Reader Cash Mundy points out in comments, the Android axis has been going great guns this week, with Android 2.0 launched, the announcement of a lovely Garmin-killing free navigation app from Google, and the launch of the new Motorola Droid (and a host of follow-on machines from other) to peans of praise from the techno-bloggers. Is this the point when the tide suddenly changed, the El Alamein of Apple’s global smartphone dominance?

Maybe. Who knows? I think Android is definitely likely to clean PALM’s clock, and possibly RIM’s too. But while it looks exciting and all, it also looks very fiddly. Do I want “widgets”? Whatever the hell they are. Do I want my phone constantly bleeping at me with the tweets of distant acquiantances I met once in a bar and don’t know how to tell to sod off, do I want Facebook offers of fricking virtual Bonsais and the latest appeal to stop dogs being used as shark bait force fed to me while I am in meetings or trying to play minesweeper? I suspect Android will be a mess; will all the apps work on all the different hardware configs of the thousand different manufacturers in the ecosystem? How will it work with the Verizon app store, the Vodafone store, the Google-hosted app store etc? Will it be as crap as Gmail (Baruch still has terrible problems using Gmail)? Will it actually have porn? And most importantly, will Google be able to pay it the consistent attention it deserves, outside of brief spurts of focus like we got this week? Prioritizing everything at the same time in one’s quest to organise the world’s information must be hard.

My current thinking is that Android manufacturers probably come to dominate the non-Apple part of the market, but probably don’t flatten the trajectory of iPhone adoption. Apple has many things it can do to step on the gas if it looks like someone is catching up: accelerate the end of operator exclusivity, create a portfolio of devices at different price points and/or, worst of all, decide to accept a lower gross margin, a merely impressive 50% rather than the quite astonishing 60% they are supposed to be getting, and cut price.

But let’s hope, as I said, that I’m wrong.

→ 7 CommentsCategories: Eurovision · Lens grinding · Stupid Cartesians

Where’s the iPorn?

October 25, 2009 · 10 Comments

Baruch is slowly coming to terms with the ghastly truth. Apple is closing down everyone else in the smartphone market, and it seems that nothing can stop it.

For over 10 years the mainly European giants of wireless, the operators, equipment and handsets makers, touted the bright sunlit uplands of our 3G mobile internet future their products would lead us to. Well, they didn’t. Total fail. Handset makers never got their act together, never worked out how to make it easy to use the interwebs. Meanness, fear and general hopelessness meant operators never spent the capex; making fat margins, no-one wanted to rock the boat. Equipment makers were slow to release the fastest network upgrades. Everyone was culpable in their inaction, and until about 2 years ago it looked like we were never going to get anything like what we had been promised in the powerpoint presentations.

But now we are there; look around you at all the people browsing the web on touch screens, using mobile apps, downloading music and watching video. It took an outsider, the least Spinozist company in the world, and an (overpriced) PC maker to boot to make it happen. We have to face facts: the mobile internet has been created, and is now owned and controlled by, Apple, and we owe them a debt of gratitude. Those who know Baruch will realise how nauseating it is for him to write that.

Now read on to find out why all this is in fact a Bad Thing:

Keep reading →

→ 10 CommentsCategories: Lens grinding · Stupid Cartesians · What Would Spinoza Do?

What’s an export? Seriously.

October 4, 2009 · 2 Comments

Baruch the amateur economist has been mulling this question for a while now, and still doesn’t know. Baruch was reading this World Bank blogpost (via Paul Kedrosky)* discussing how much we can rely on China to pull us out of our current funk, which we’ve just been reminded us we are sort of still in.

It makes the reassuring point that China has been the global economic growth engine for some time already, accounting for 20% of global GDP growth over the past decade, twice the contribution of the US. So presumably stagnation in the US, zero growth, would be fine for global growth, ceteris paribus everywhere else, so long as Chinese growth was to increase proportionately, and it’s supposed to. This of course is great news. Except then the blogpost then starts to cavil because the blogpost is actually called “China Can’t Do it Alone”, and then it starts a discussion on how Chinese imports aren’t actually going up very much at all:

Assuming China’s bilateral trade surpluses decline in equal measure, increasing Chinese net imports would add less than 0.1% of GDP to US final demand this year. This simply pales in comparison with the discretionary fiscal stimulus measures . . . implemented in the US (and other advanced economies).

The only way China can pull the US out of the slump is by importing more, it would seem, and it isn’t doing it. So in other words when these stimuli expire, and they will, we’ll all be stuffed again and China won’t help us at all. The authors conclude,

China is too often seen as a one-stop shop for the crisis recovery. A replacement for the US consumer? Check. A source of low-cost borrowing to stimulate your OECD economy? Check. A source of investment funds for emerging, commodity-rich economies? Check. . . Alas, if it sounds too good to be true, it probably is

As a conclusion this does sound possible. But the path the WB bloggers take to get there, viz China isn’t importing more relative to exports, doesn’t make any sense when it comes to looking at the technology sector. I think in tech at least, that discussion is pretty irrelevant.

It’s hard to talk about a trade balance between China and the US in tech hardware, when almost all the hardware, and many of the components that go into the finished good, are “made” in China itself. There isn’t any balance. It’s all “export” then. Hardware and assembly outsourcing was probably one of the key drivers of the trade imbalance between China and the developed world this decade. 

But of course it isn’t proper “exporting”, is it? It’s outsourcing. In fact I really don’t know what to call it. Let’s look at the not-so-humble iPhone. Keep reading →

→ 2 CommentsCategories: Blogroll · Lens grinding

Silly bears, just watch me walking on all the squares

September 20, 2009 · 7 Comments

There’s nothing to blog. Rising markets do that; we’re all fat and happy. I’ve tried to think of something interesting to say and failed. But I’ve noticed that even trivial thoughts, expressed in an unusual way, can seem much more relevant and interesting than they really are. So I’ve tried to encapsulate my more trivial thoughts in Haiku form* and see if that helps maker them look or sound more profound. Here goes:

Bears hyperventi-

late. Bulls are gloating.

Their time will come.

 ***

Who expected

A V shaped recovery?

Well this is it.

 ***

Bears should rethink.

Invent’ry restock

Is yet to start.

***

Cockroach always eats.

Not bull nor bear

He is the ball.

And a random Apple haiku to end with:

iPhones taking over.

No-one else at all

gets a look in.

So there you go. In case you were about to leave a comment, if only to bemoan the fact that Baruch seems to have “jumped the shark”, note I am as yet in two minds about whether I am going to accept comments that are not in Haiku form themselves.

* before the usual array of Haiku pedants write in to complain that I am not using the right number of syllables (17), it should be noted that English is a much more economical language to write Haiku in. 17 syllables is more or less the equivalent of a novel in comparison with the amount of information the same number of syllables can transmit in Japanese (apparently), and the economy of content is a large part of the form’s attractions in my mind. So I chose a 4-5-4 schema for better or worse; I just think it more faithful.

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Krugman expects you not to expect anything

September 5, 2009 · 15 Comments

Baruch has to join the paean of praise for (all via Abnormal) Paul Krugman’s NYT piece, How Did Economists Get it So Wrong. He’s going to object to bits of it in a second, but first let’s puff it up. It’s fantastic, a great summing up of the state of the art of the dismal science (sic) that is macro-economics, includes a proper skewering of some hapless midwesterners, and a set of prescription for the future that Baruch can only applaud; writing of where macro-economists need to go now, Krugman concludes:

First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

As a broad strategic outline, or a description of the destination we need to get to, it’s great.

But, but, but. Here comes the quibble: 2 problems need to be overcome on the way, and this might make the project a little/even more difficult than most of us think it is. Economics may remain a dismal pseudoscience for a long while to come. Keep reading →

→ 15 CommentsCategories: Fellow Collegiant · Philosophising · What Would Spinoza Do?

Defending the Squid

August 24, 2009 · 13 Comments

The Blogotariat is up in arms on the subject of Goldmans latest evilness-itude. Goldman Sachs, apparently, blatantly favours clients that pay them more money. Baruch is shocked. And so we should all be. The tone of the original article on the subject in the WSJ is strongly disapproving; here the tagline:

Critics say Goldman Sachs gives key trading tips only to its own traders and favored clients, hurting others who aren’t given the opportunity to profit from the information.

Apparently, GS analysts go into “huddles” with their salesguys, come up with short term stock ideas that may or may not totally chime with their formal ratings on the stocks. They may, in the case of Janus as cited in the article, sort of front-run ratings changes when the analyst says something like, “I like it more now” or “it may go up into numbers” or something. This stuff gets sent out in calls to high rolling punters like the big hedgies. According to a lot of bloggers (none of whom I note actually run any money, unlike Baruch) and those holier than thou twerps, the CFA brigade, this is a Bad Thing.

One can perform a reductio ad absurdiam on the more disapproving of the reactions: clearly Goldman Squid should be sending out every twinge every analyst feels on every stock under coverage all the time to everyone who pays GS any amount of money at all as well as those who don’t. This would mean everyone would be able to make lots of money all the time, in a completely fair and transparent way. Wouldn’t it.

Of course not. Actually, what GS is doing here really makes very little difference at all. Keep reading →

→ 13 CommentsCategories: Lens grinding · Stupid Cartesians

Kaupthinking

August 21, 2009 · 2 Comments

Mildly tragic promotional video from Kaupthing Bank, back when Iceland was in the process of leveraging itself into, well, whatever it is now. Forget Lehmans and Bear Stearns, Kaupthing was the real poster child for the debt bubble of the mid Noughties. On Acid.

Baruch has many thoughts about this video. One concerns the regrettable prevalence of infantile thinking in business discourse: “You can. If you Think You Can.” Well, no. Half the time, you probably shouldn’t.

The other idea Baruch has is how smart we think we are (“Thinking Beyond”) at times of great success, when oftentimes all we are doing is cruising for a massively spectacular bruising. Kaupthing was living a charmed life surfing on a wave of debt (“We thought we could grow our balance sheet. And we did. By 500% in 3 years”), confusing audacity and financial nous with reckless growth and easy credit. I met a couple of Kaupthing dudes a  few times. What struck me most was their sense of achievement; they were really proud of being involved in something special. The thought it could end so badly, and basically result in the ruin their country, could never have crossed their minds.

Baruch is having a fine run at the moment, as are the markets. This makes him stop and worry: is he Kaupthinking? Are we Kaupthinking now? I don’t think so; one guesses Kaupthinking properly comes at the end of periods of persistent prosperity, not after periods of existential crisis. That said, the only time we can be sure we are not Kaupthinking is when we are not actually doing very well. This should be a source of comfort, one supposes.

“Kaupthinking is beyond normal thinking”. It should be, but is it really?

HT Lara Hanna Einarsdottir, queen of the Icelandic blogosphere, apparently. And my mate Konrad.

→ 2 CommentsCategories: Eurovision

Cisco earnings wildly overstated: management milks shareholders for fun and profit

August 16, 2009 · 7 Comments

The nexus between US share options and share buybacks is one where great evil lurks, dear readers. I’ve banged on about it before and got very little reaction, but even after all that Baruch got very cross indeed this week, when he finally took the time to get round to looking at Cisco’s fiscal 4th quarter results (belatedly it is true). Wankers! he yelled when he had a look at the guidance on share count.

Basically, Cisco bought $600m worth of its own stock in the quarter. This is a lot of money, obviously, about 30% of the net profit for Q4. The average number of shares out didn’t decline from Q3, which is odd, but potentially explainable if Cisco bought back all those shares towars the end of the Q. Except they also guided to a  flat share count next Q. What the fucking hell did they do with that $600m then? Answer: the management used that money, shareholders money, to enrich themselves and their colleagues and hoped we wouldn’t notice. By and large, we haven’t.

Prof Lazonick of UMass sort of has, in a recent article for Business Week (HT Abnormal), but at the same time he misses the true perniciousness of share buybacks.  He thinks they are merely a waste of money, which could be used for something more wholesome than merely enriching shareholders.  The Prof points out that in the past few years IBM bought back lots of shares as it replaced good old American workers with Indians (apparently that is a Bad Thing because Americans are Better People). Drug companies buy back shares wastefully, yet argue that they are strapped for cash enough that it would be a Bad Thing to regulate drug prices. Now-bankrupt or government-supported companies like GM and the banks wasted loads of money that could have staved off ruin by buying shares. From the perspective of class warfare then, which is where Prof Lazonick seems to be coming from, share buybacks are a weapon for use by fat cat capitalists to screw the workers and should therefore be banned. If only they did enrich shareholders.

While we can disagree on the class warfare thing, however, he and Baruch are each others’ running dog; both our conclusions are the same, which is that Something Should be Done about shitty buybacks. And Prof L. gets close to the heart of the matter when he says:

It is the executives themselves who frequently benefit from price boosts generated by repurchases—by selling their personal shares after exercising stock options

Close, but not quite the banana, however. Keep reading →

→ 7 CommentsCategories: Fellow Collegiant · Lens grinding · Stupid Cartesians

The Worm in the Apple

August 10, 2009 · 7 Comments

 The blogosphere is buzzing with reaction to Jason Calacanis’s epic post on Apple’s uncompetitive practices. Basically, as concerns iPod, iTunes, switching off apps it doesn’t like or who it thinks are a competitive threat, Calcanis thinks that Apple is acting like a monopolist and should probably be investigated by the DoJ. His most telling points come in the comparison between the current behaviour of Apple and the ex-great monopolist Microsoft:

On iTunes:

Think for a moment about what your reaction would be if Microsoft made the Zune the only MP3 player compatible with Windows. There would be 4chan riots, denial of service attacks and Digg’s front page would be plastered with pundit editorials claiming Bill Gates and Steve Ballmer were Borg.

On Apple’s draconian apps policy for iPhone:

Imagine for a moment if every application on Windows Mobile or Windows XP had to be approved by Microsoft–how would you react? Exactly.

On banning other browsers on the iPhone

Apple was more than willing to pile on after Microsoft’s disasterous inclusion of Internet Explorer with Windows. In fact, what Apple is doing is 100x worse than what Microsoft did. You see, Microsoft simply included their browser in Windows, still allowing other browsers to be installed. In Apple’s case, they are not only bundling their browser with the iPhone, but they are BLOCKING other browsers from being installed.

The standard Apple response to all this is that the restrictions Apple places on its products are necessary to ensure the quality of the user experience, that Apple deserves to be paid for the innovations it has brought to the marketplace and the consumer freedom it has enabled to use things like the mobile internet, to make online music easy and fun to use etc. But these remain the classic arguments of all monopolists, and are identical to the ones Microsoft used back in the days it was being investigated.

Baruch has often thought of what would have happened had Apple actually won the market share wars of the early 1990s; its instincts are much more controlling than Microsoft’s. Would we really have had an open-source internet? Would we really have had all the innovation spawned by cheap and ubiquitous computing?

Needless to say, this is not being well received by the hordes of Apple aficionados, the self-confessed fanboys. Baruch is constantly amazed at the level of brand loyalty Apple has managed to instil in its punters. I certainly don’t feel the same way about my crappy old Toshiba (although I would be cross with anyone who disparaged my Subaru).

Count me firmly in the Calcanis camp on this. As every reader knows, I make no secret of my dislike of the company, for very much the same reasons Calcanis does. Reader Verec, in the comments attached to the last post, accuses me of “anti AAPL bias.” But “bias” is a loaded word. Is a well thought out position against something, a consistently held position, bias? For those utterly convinced of the righteousness of the other, the pro, side, it may appear so. And that is probably why it is generally very hard to have a proper conversation about Apple on the interblogs.

At the risk of throwing lighter fluid on the flames, I blogged this on Apple, almost 2 years ago:

. . . I do so very strongly dislike Apple as a company. They sell high quality hardware it is true, but so overpriced; you pay a premium to be unable to use 90% of the world’s software without running some other complex program to do so. I hate the cutsie-coo operating system and the self satisfied “pop” when you close a window. I find the advertising unbelievably irritating, with its “Think Different” slogan, which when you think about it is a pean to its lack of market share; if they had managed to sell more Macs than PCs would they be telling us to “Carry on Thinking the Same” to make us buy more Macs? More than that, I pity the ponytailed, smug, pseudo-individualist, and above all gullible Apple fanboys, who all believe they are part of some greater social movement representing god knows what but who are in fact the victims of some corporate succubus which cares not a jot for them except how much more they can milk them. And the fanboy’s anger at the Wintel axis ignores the fact that the only thing which kept the company afloat during the dark times was Microsoft’s charity; that and the need to pretend that Windows was not in fact a monopoly.

No, Apple is the antithesis of what a Spinozist technology company should look like: closed, not open systems; overly pleased with itself and arrogant; and its advertising and brand values appeal to the grossest of the Passions: envy, pride, confusion and fear. In their defence, the flip side of their arrogance is a certain appealing audacity. The company from time to time (but not as often as we think) creates attractive and innovative products. But net net they have to go in the Stupid Cartesian bucket.

It’s nice to finally have company. And now we have that out of our system, let’s hope that ’s the last blogpost about Apple here for a while.

→ 7 CommentsCategories: Barbarians · Fellow Collegiant · Philosophising · Stupid Cartesians