Category Archives: Fellow Collegiant

There. You see?

Posted on April 22, 2010 by | 2 Comments

Much is being made of this video among the various Apple groupie blogs.

Readers will of course recall the fascinating one-two punch on the iPad delivered by myself, Baruch, and my dear colleague in blogging, Bento. His contention was the the real audience for the iPad will be older people. It is, he wrote, “a complex computer, simplified”, perfect for those intimidated by all the fiddly things you have to do to make them work:

It does one thing at a time. Your finger is the cursor. There is no need to tap things twice before stuff happens. You are allowed to turn it off with the power button.

No, Baruch contended, or rather, yes, but it is also or primarily a simplified computer for busy, empowered women: who as a group are perfectly capable of doing all those fiddly things but who don’t see why they should have to.

So one might think, “bravo Bento, you finally got one over on that loudmouth Baruch; look at Virginia, the 99 year old lady in the video using the iPad as her first computer. Proof of your thesis.”

Ha! Not so fast! Because of course Virginia is also a woman.

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Posted in Fellow Collegiant, Lens grinding

No Stock Recommendations here; move along

Posted on March 28, 2010 by | 5 Comments

Baruch recently found himself commenting on Wall Street Cheat Sheet, on a post by Damien Hoffman, who seems to really dislike Jim Cramer. The post was about some investigation of TheStreet.com by the SEC, which Damien thought highly amusing, perhaps because he also runs a competing subscription-based financial edutainment site. Now, Baruch doesn’t pay attention to Jim Cramer on TV, but in fact quite likes him in print. He reads his posts on theStreet.com, and respects his track record as a hedge fund manager and pioneer econo-blogger.  So Baruch felt a brief moment of annoyance about seeing someone he liked being unecessarily trashed, but soon his heart was filled with forgiveness and understanding again. We must not be too harsh; snark is Damien’s job, what he gets paid for. He is a financial blogger-journalist, and being cheeky about mainstream media figures is part of that David and Goliath thing blogging used to be all about.

Anyway, this post is only a bit about Jim Cramer and Damien Hoffman. The exchange got Baruch thinking about the differences between journalists/bloggers (or whatever you want to call them) and investors, and what it means to communicate about investments with the public. Baruch finds this terribly interesting, because of course as an amateur econo-blogger and a professional investor, he has a foot in both camps.

Some of Baruch’s best friends are, or have been, financial journalists and commentators, on blogs and print. Being a financial journalist is a good, interesting job, and very important to the proper functioning of a marketplace. Journalists can do things, find things out, and explain things the public and investors need to know in ways investment professionals can’t, at least without risking jail.

But in the end journalists are explainers, commentators. They are dependent on market participants to provide them with things to write about. They review what others do. They work with the huge advantage of hindsight. And when it comes to giving advice about what what should be done, most media commentators are no better than the rest of us. Probably worse; they don’t get as much practice at it.

The major problem that commentators have is that rewards are based on reputation. Praise from peers and increased readership is the only way they have of knowing how good at their jobs they are. This is dependent on how smart the writer sounds, rather than how good he or she is at giving actual foresight. It’s a difficult thing, having to appear smart all the time. A well publicised prediction gone wrong can be pretty devastating to a reputation and undo lots of less well-publicised predictions which went right. Many writers solve this problem by not making many predictions at all. This is why most analysis pieces in newspapers and mainstream blogs end up in prevarication and fence sitting. Most journalists these days are smart enough not to end their articles with the words “only time will tell” — but they may as well.

The need to constantly appear smart also incentivises some to find a shortcut. A good and quick way of appearing relatively smarter is to find some fellow commentator who has broken the cardinal rule of journalistic punditry and actually had a stab at predicting something in a clear, falsifiable way — and got it wrong. Pointing out someone’s errors is a good way to come up with copy when you can’t think of anything constructive to say.

Ironically, consumers of financial media are actually crying out for someone to tell them what to do, rather than the prevarication they are confronted with everywhere. So pundits who do state clear positions tend to get eyeballs pretty quick. This unsettles their peers, who are universally relieved when these outliers inevitably cock it up, and they can now write gleeful articles about how it was obvious their colleague didn’t really know what he was talking about in the first place. Realising this, even sites which purport to give readers actionable intelligence, such as Lex, don’t actually tell them what to do, which would be too risky. A conclusion is always hinted at, but never made as plain as ” we think you should sell”. Instead you get some coded priggishness, like the chairman of company X “should enjoy the view from the top while he can”. Which gives the Lex writer enough wiggle-room to appear clever whatever the outcome for shareholders. This is, after all, the point of his writing, which he would freely admit to you as well if you bought him a pint.

Compare financial journalists now to actual market participants. While every now and then hedge funds get in a feeding frenzy and will short your longs and go long your shorts if they think you are in distress, the rest of the time professional managers are remarkably civil about each other in print, in person, and in front of clients. They don’t have cat fights very often. Continue reading →

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Posted in Fellow Collegiant, Lens grinding, Stupid Cartesians, What Would Spinoza Do?

Econobloggers need their crisis back

Posted on March 7, 2010 by | 30 Comments

I think so, dear readers. With the advent of peace and plenty, as we move to the broad sunlit uplands of The Recovery, I fear some of the spice has gone out of the commentary on sites like this one, and its friends. Where people used to read econoblogs to actually understand a crisis that CNN and Fox News soundbites didn’t seem to encompass anymore, as the meltdown recedes into the past there’s now just a dull ennui.  And with that, the econoblogosphere is moving back to where it used to be, which is to cater to a niche, broader than most, but a niche nonetheless, with a circumscribed influence.

The high point of bloggy “power”, we shall probably find in retrospect, was when a number of bloggers were invited to the US Treasury department and fed some by all accounts delicious cookies, as well as being ferociously spun to by the Goldmans guys whose turn it was to be on sabbatical at the Treasury that when it came to financial reform and what had gone wrong in the banking sector they did in fact Get It, whatever It was.

Since then, of course, we have had Obama praise the bonuses to “savvy businessman” Lloyd Blankfein, who as we all know is doing god’s work;  mind-numbingly massive “trading” profits from all the big commercial, investment, commercial investment banks at the same time as accepting government and Fed largesse*; an even more hideous clusterfuck over finance reform than exists over healthcare reform in the US; and this despite none of the proposals under discussion seeming likely to properly change anything worthwhile, other than maybe the Volcker prop trading rule and this last seems fairly dead in the water.

What really rankles this blogger is that the Great Spinozist Republic is being subverted again. Regulatory capture is one thing, the total inability of a political system to make any steps to reform itself when what is wrong is staring at you in the face, is quite another. Political money and public ignorance has corrupted civic decency in the US to such an extent that doing the right thing for the Republic appears quite impossible.

All these things should make econo-bloggers all quiver with righteous anger, which we would communicate to our readers who would then rise up en masse against the legislators captured by Big Banking, and some form of actual reform might even take place.

But something along the chain has broken. Either we have lost interest or, more likely, the world has. To be sure, there are brave souls who carry on the fight. Felix does an admirable job of keeping us up to date with the nuts and bolts of finance reform. Taibbi provides the rhetoric (“vampire squids”, indeed). Calculated Risk and Naked Capitalism carry on doing their thing, as does Zero Hedge in its batshit sawn-off shotgun way. TED gives us the lowdown and I mean low, on what it really means to be a banker (though TED’s next post is just as likely to be about his favourite type of upholstery. Thanks for including us in the list of blogs you read, BTW). There are others, and Abnormal Returns continues to aggregate them. But the rest of us seem to have stopped caring so much. The minutiae of practical policy is much less amusing than making lots of money in financial markets that really, truly appear to be on the mend.

The wider global economy seems to be much better too. Sure, the US seems a bit screwed up still, and unemployment is high, but frankly that’s not where the action is at anymore. Baruch was astonished to read that Gartner is predicting 20% year on year growth in PC units globally. We can talk about overleveraged consumers until we’re blue in the face and we’ll still be wrong. That’s a crapload of PCs, and someone’s buying them. You don’t sell craploads of PCs like that unless there was something going fundamentally right in more places than where things are going fundamentally wrong.

But a better economy just makes people fat and happy, and fat and happy people aren’t likely to be roused by righteous anger. Fat and happy people are not likely to want to change much. Fat and happy people are much more likely to assume the light at the end of the tunnel gives out onto a large outdoor buffet than the next oncoming crisis. Hell, fat and happy people are more likely to do the stuff to bring on the next crisis, to binge, to borrow more, stoke the next bubble wherever that may be and feel pretty smart doing so, just like we did in 2006 and 2007. Reformed Broker Josh captures the new Zeitgeist rather well just today when he lists the things people no longer appear to be interested in e.g. financial reform, unemployment, etc and says

most market participants have instead turned their focus to finding secular growth stories, deep-value high yielders to replace the lack of money market interest and other such assorted baskets to put their eggs in.

Fine with me.  I could use a break from the “news” myself.

I can’t say much better. Josh is saying what lots of us think.

Baruch isn’t really the person to do anything about this himself. He isn’t Spartacus. It was no co-incidence he was not invited to hob-nob at the Treasury; David at Aleph Blog was kind enough to suggest he and some others should be next time, but Baruch would probably have just eaten more of the cookies than was fair and got bored and played Homerun Battle 3D on his new iPhone until it ran out of power, annoying everyone. Baruch is one of those who likes to analyse what Is and try and make money out of it. He is not very interested in, or good at, what Should Be, though is slightly envious of those who have strong opinions in this direction. Less “designing better futures“, more buying the right ones. Even if Baruch had a prediliction to think about policy he doesn’t have time to think about more than what he writes about already; he has a day job, and a very intense one, which soaks up what mental energy he can muster these days.

But buying better futures are not what the best blogs in this space are about (and not what Nick Gogerty’s blog is either). Posts about the latest chart formation in the S&P500 are not memorable. They help no-one. Blogs about how best to trade can be interesting, but remain narrow and mercenary. So in the end are posts about how many iPads Apple will sell, the stock-in-trade of UB recently. Myself and Bento are just not that qualified to do much else and don’t have the time to post as often as we want. But there are other bloggers who are and who can. At its best, the econo-blogosphere can be the last haven of truly independent, non-captured, and crucially, informed, commentary able to affect policy and opinion makers positively. It used to do just that. It may not help in the end but let someone at least try.

Get your game back on, people. Get some fire in the belly again. A crisis is a terrible thing to waste, and it looks like we are on the verge of wasting ours.

* the irony is of course, is that the millions in banker wodge financing the lobbyists is at least partly the hot money doled out by the Fed to banks in that extraordinary money machine called ” quantitative easing”: Fed buys up at full whack the treasuries it issues to banks at a discount, financed by cheap rates set by the Fed itself. Said banks, busting out with Fed-invented cash, or more properly, “trading profits”, refuse to lend it to small businesses like they’re supposed to in the textbooks and support the economy. No, they plow it into awarding themselves big bonuses and, most pricelessly, pay lobbyists to pay off politicians to subvert both good sense and a public opinion which is as viscerally opposed to big banking as it is ignorant and pliant, and make sure the status quo ante crisum is restored. An edifying spectacle.

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Posted in Blogroll, Fellow Collegiant, Lens grinding, Philosophising, What Would Spinoza Do?

Google: Scientist

Posted on January 13, 2010 by | 9 Comments

Baruch,

Symbolism is never lost on the Chinese, who are the masters of signaling, and thus there was some great poignancy to Google’s A new approach to China being posted to the blogspot.com domain, which is blocked in its entirety by China’s censorious government. This proved quite a sassy way to illustrate a point, before even starting on the merits of the case. Those outside China didn’t even notice. Everyone inside China, including the officials, had to turn on their VPN to read it.

Now that the deed is done so publicly, I don’t imagine either side will back down, and nobody expects Google.cn’s redacted search service to last much longer, with perhaps a further punitive ban on google.com for the sheer audacity of this insubordination. But already today the blogosphere erupted in competing narratives explaining Google’s autodefenestration from Chinese search, and not all were wholly credulous of Google’s stated motives.

Among the cynics, the arguments ran thus:

- Google is misrepresenting its decision: It was a face-saving, kudos-generating way to exit a failing business (though without explaining why profitably capturing 31% of the search market in China should prompt shutting down).

- Google is making a mistake: No business in their right mind would purposely anger the masters of such a lucrative market, so this has to be a stupid tactical mistake. (The stated presumption here is that Google cannot be ethical, or it would not have entered China in the first place, so this fiasco must be a very bad business decision merely masquerading as a moral decision.)

Among the partisans:

- Google was pressured into it by Hillary Clinton, thinks Rao Jin, the founder of the China’s patriotic Anti-CNN forum. (I suspect a failure of the imagination on the part of Rao — clearly, he is projecting onto the US how things are done in China.)

And tomorrow, expect the official mouthpieces’ take, which I predict will involve far more references to the peddling of pornography than to the free market of ideas.

I, Bento, take Google’s explanation at face value, however. And I intend to restate the narrative in terms that will be familiar to long-time readers of Ultimi Barbarorum: All along, Google’s approach to China has been that of the scientist: There was a testable hypothesis, an experiment, and a conclusion based on that experiment. And today, we saw the publication of the results — the hypothesis proved false.

Specifically, the hypothesis, as formulated by Google during 2005: The internet in China will become freer in the coming years, and Google’s presence in China will help strengthen this process. Many believed and hoped this might be the case — the Olympics were approaching, China was opening up, officials exuded reasonableness.

The experiment, initiated in January 2006: Enter the Chinese search market, try to improve the system from within by collaborating with the regime, and see if China’s internet gains freedoms over time.

The evidence: Over the past few years, a progressively stricter program of shutting down those Chinese sites that do not comply with demands for censorship and surveillance. The progressive blocking of all popular foreign sites that allow uncensored anonymous communication, including several Google properties: Twitter, Facebook, YouTube, Blogger, WordPress, IMDB, Google Docs, URL-shortening services… And, what Google cites as the final straw, recent industrial-strength malware attacks aimed at Gmail-using Chinese dissidents.

The conclusion: Google’s collaboration was not making things better; things were getting worse. They admit they were wrong! There may have been a financial return on its China investment, but the civic return proved disappointing.

Faced with this realization, Google could have done nothing. But that way lies death by a thousand cuts as web property after web property gets axed. How soon before Gmail gets blocked? Google Maps? Earth? Picasa? Google Reader? Instead, Google cleanly terminated the experiment: There will be no more collaboration with the regime. Now China must throw them out if it wants to save face domestically — albeit at the price of losing face internationally.

As Spinozists, this is a proud day for us. Google has posted that placard declaring China’s government Ultimi Barbarorum in a public place. Gone for them is the queasiness of having to placate a regime that believes calling for free elections deserves 11 years in jail for subverting party state power. I’m betting it’s a relief.

A postscript: I was surprised that several Shanghai-based European VCs and businessmen I follow on Twitter were among the cynics, berating Google for not conforming to Chinese/Asian business practices based on saving face, consensus and relationship-building, instead reverting to an “American” ultimatum. But these views come from individuals who have already made their peace with China’s political system, and whose business models and reputation do not depend on the unfettered flow of information. Perhaps some of them are unwittingly using the occasion to signal their own reliability as partners in China: “Look at us — we’d never consider doing what Google just did.” Google may have burned its financial bridges, but they are burning their moral bridges, making them the Stupid Cartesians of this sorry episode, Baruch.

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Posted in Barbarians, Fellow Collegiant, Stupid Cartesians, What Would Spinoza Do?

Phase Transitions and the Googlephone

Posted on December 20, 2009 by | 8 Comments

Baruch keeps thinking about Apple and what it’s done to mobile phones. Call him obsessed if you will, but it is also his job to think about it, and there’s good money to be made if you get it right. You may recall his last post on the subject, that Apple has become wholly dominant in the mobile internet and smartphone space. What’s struck him recently is how few of the intelligent analysts and counterparties he talks to actually agree with him on what seems even to generalists utterly obvious. Lots of them still think it’s a good idea to push other smartphone stocks, like PALM or RIMM, which if Baruch is right is a very efficient way to lose money, inferior only to piling it up in big mound and setting light to it.

Why people can think this way was a mystery to Baruch, until he made the realisation that the phase transition in the handset market is not yet evident to them; they still think the handset market resides in Mediocristan, as opposed to the Extremistan regime it has most likely become. They haven’t been reading their Taleb. Continue reading →

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Posted in Fellow Collegiant, Lens grinding

More on the trading tax

Posted on December 11, 2009 by | 18 Comments

Fellow collegiants Jay and the incomparable Cassandra carp in the comments of the previous post about, well, many things, but mainly about Baruch’s distrust of a trading tax. Their key points in favour of the tax are, I think:

  1. the financial sector is too big and needs to be shrunk and simplified, which is also Krugman’s key idea. A trading tax would be a step in the right direction
  2. there is a way to distinguish, mostly to do with timeframe, between “speculation” and “investment”. Generally two legs, sorry, speculation is Bad, leveraged speculation in highly liquid markets even worse and responsible for lots of the financial crisis. However, ”informed and active” investment is Good; a trading tax would restrain one and leave the other unrestrained.

 If I’ve misunderstood something or left something out, let me know.

Firstly, I am very interested as to how we can possibly know how big the financial sector should be. Jay and Cassandra might answer “I don’t know exactly, but I just know it’s too big”. They might argue we expect too much of them; the sizing of any particularly important industry should be above anyone’s pay grade, let alone the responsibility of a couple of commenters on an obscure 3rd rate econo-blog.

Yes, well but that’s the point. We’ve largely done away with the type of industrial planning that pulled western economies out of the devastation of WW2, the period of MITI in Italy, the Marshall Plan, the last time we had an economic regime where people actually decided how big certain industrial sectors should be. That type of dirigisme worked in conditions of relative simplicity, where there were fewer moving parts to an economy, trade was restricted to controllable flows between large trading blocs, and exchange rates were stable. For most of the postwar period the financial sector of most economies was small, and mainly boring. In the UK, for example,  it was the preserve of a class of people drawn from the chinless children of an addled aristocracy. They really did wear bowler hats. Their tasks were simple enough for them to perform even after polishing off a litre of claret every lunchtime and leaving the office at 4pm.

I would argue the explosion in financial innovation and the size of the financial sector coincided with the increase in the overall complexity of the global economy from the early1980s on. Bretton Woods had broken down; there were extreme fluctuations in interest rates and costs of capital; the rise of Japan and other emerging markets were destabilising settled industries in Europe and the US; new technologies were creating new working practices and business models.  I am not saying a supersized financial system was the cause of this increase in dynamism and complexity. But what if it was a response?

Looking at where we are since 2000, we have a global economy which has made a step change again in complexity and dynamism.  Things have globalised to the extent that concepts of imports and exports have lost their meaning. Our economic system is optimised, primed to work at an extremely high level of just-in-time delivery. New business models pop into existence overnight, and destroy old ones — they demand and create capital and wealth at an unprecedented rate. And it’s largely great for everyone; most of us are richer. Literally billions of people have seen their living standards improve this decade. It’s been an exciting time to be alive.

This is an unpopular thought, but here goes: what if the current financial system is actually rightsized for our economy? Sized specifically to provide  the greater degree of economic dynamism we have come to expect, and on a much more massive geographic scale? Might there not be a price to pay in shrinking it?

Now let’s try look at the second debating point of my commenters and distinguish between “speculation” and “investment.” I still don’t understand the difference. But I don’t think anyone does; I am not sure there is a qualitative difference. Cassandra introduces the concept of (allocative) “efficiency” in the sense (correct me if I am wrong) that the hardworking “investor” with his longer-term timeframe performs a useful societal function in allocating capital to where it is needed. Short term specs, on this reading, do not.

I think this is wrong; speculative traders probably have as much or more allocative efficiency as the investment-minded ones. They have more money, for one thing, but more importantly even the highest frequency High Frequency Trader is actually tracking the portfolio decisions made by actual investors. Even Raj, at the height of his powers, was effectively allocating capital to companies which were showing better earnings. He just had the earnings release a bit before everyone else. Most short term specs, whether technical, quant or flow-driven, are really piggy-backing on investors; they basically buy the same stocks and amplify their decisions. Qualitatively, as I say, there’s no real difference, except they are either lazier or smarter than fundamentalists like me. Probably both; I bet they get home before 7pm. Is there a difference in holding period? Generally yes. But today I entered and exited a position in a tech stock in the space of 40 minutes. In fact it was a mistake. But I don’t feel bad about it. Do you think I should?

Cassie thinks it was the leveraged specs who blew us up in the crisis. No way. It was the leveraged investors. Those guys buying subprime weren’t in it for the quick buck; they were going to hold them for as long as they could borrow overnight at 5% and earn 7% on the bonds, ie as long as the then-current interest rate regime was going to last. Holding periods were measured in years. In the end were barely able to trade the stuff. That was the problem. As Jay puts it, “in less liquid markets, shareholders act more like owners” — they acted like owners, all right, and look where it got them, and us.

Look, a smallish trading tax may not make all that much of a difference, really. Financial markets will survive, and a tax will likely end up making a good few investment bankers richer than they would have been, when they come up with a way of avoiding it. There’s actually a trading tax in place in the UK already. It’s called Stamp Duty. I don’t know how much it is because I have never paid it on any of my UK trades, we use something called CFDs to avoid it. Everyone does this except low volume retail investors: Stamp Duty has thus merely become another way the little guy gets screwed. I am not sure this was the intention of its inventors.

But if you think discouraging speculation in liquid equity or forex markets is going to somehow prevent another crisis, think again. The root causes of our difficulties lay in a combination of too much easy money feeding a boom in illiquid debt securities, held for investment. A trading tax would do, and would have done, nothing to prevent any of those conditions from prevailing again.

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Posted in Fellow Collegiant, Lens grinding, What Would Spinoza Do?

$1.3 million lost in blatant but failed attempt at insider trading?

Posted on November 16, 2009 by | 8 Comments

The blogosphere made the catch! The Interweb protects the rest of us from evil doers! The world is ablaze with the news that prior to the 3Com buyout announced by HP last week, there was an unusual amount of volume in the $5 november call in 3Com. We’re all pretty sensitised to insider trading at the moment, and so this looks as clear cut and beautiful a case of  evil-doers caught with their hands in the till as we are likely to see in our time on earth. As Tyler Durden puts it:

This is so blatant it is sufficiently stupid that even the SEC will presumably catch the perpetrator. Here’s to hoping the trader ends up being Galleon’s Raj Raj buying options from his E-Trade account while on bail. Of course, we fully expect any prosecution case against the perpetrator to fall apart at the seams courtesy of a completely inept legal team at the SEC and the Justice Department.

Oh really? Before the Zero Hedge folks get the pitchforks out, let’s stop and think a bit. Let us be splitters, and not lumpers, and we might see that would be quite reasonable for the SEC and DoJ not to prosecute anyone at all. Using the principle of Occam’s Razor, they may well tend to conclude that no insider trading took place. At least not in the options, the underlying or common may be a different matter.

Let’s get technical here. In the case of the unusual volume in the 3Com options, you should know that incredibly unusual volumes in options is not terribly unusual, if you follow me. It is in fact the case that the volume of a particular option resides, as Taleb would have it, in Extremistan. It is subject to many many days of low and limited trading, and very few days of extremely high volume, orders of magnitude above the norm, where most of the total volume traded in the life of the option takes place.  This occurs most notably in the final month of the option’s life. This is so because people are more likely to buy a particular option when its intrinsic value (the portion of the option price described by the difference of the strike and underlying prices and its volatility) is highest in proportion to its time value and its total value. This is when you get the most “bang for your buck”, as Baruch puts it — roughly 2 weeks before expiry, the option is in its prime, near its most efficient for hedging and speculative purposes.

That’s what people use options for, mostly. Hedging, and speculating. Options are excellent as a way of profiting moderately, or reducing losses, in conditions of risk and uncertainty. As a way of playing a dead cert, however, options are pretty crap. Had someone concrete knowledge of the 3Com deal, it would be far more efficient to buy the stock. The most important of the “Greeks”, as options dudes call the panoply of statistics surrounding options, is “delta”, the rate of change in the value of the option relative to the value of the shares (it’s a function of volatility, time to expiry, a whole lot of stuff, don’t trouble your head), and this is always less than one. 3Com options buyers made far less money on the takeover by buying options than they would if they had bought the stock.

Assume the 4,000 Novs and the same in Dec calls that day came from a single buyer. S/he bought an economic interest in 800,000 COMS underlying. Purchased at 65c and 85c, both calls popped post the announcement to $2.50. Hooray, a profit of $1.4m. But trading the underlying, buying at $5.611 would have given $1.52m profit. The other thing favouring the underlying as the vessel for insider speculation was that it was so much more liquid than the options. Buying 800,000 COMS would have been a drop in the lake of the volume that day, which saw 22m shares change hands. It would also have been much, much less conspicuous, and we wouldn’t even have a story. These were pretty stupid inside traders, indeed, who not just left money on the table by playing the options, but drew extra attention to themselves by doing so.

Though of course, if you want to insist on the inside trading thesis, you can always posit insiders with limited funds who couldn’t afford 800k underlying shares. So the DoJ in its inquiries should be able to exclude institutional investors. Or at least competent ones. But come on; is it the simplest explanation? Or is it actually a stretch?

Perhaps it was insider trading, but we have to posit incompetent and poor insiders for the thesis to work, and while possible this seems less likely than other explanations. A less complex interpretation for the COMS trade is that shorts, not long insiders betting on a takeover, got spooked and decided to hedge. Over 10m shares of COMS were shorted at the end of October, a proportion which might have remained stable into the takeover. Rumours fly about all the time, and 3Com has been known to be a takeover target since like forever. A 20% to 50% gap move in a big short can seriously spoil your day, if not your year, and a call position is an excellent way to hedge, to take the sting out, to make an existential 50% loss into, say, a merely unpleasant 10% one. When COMS has cancelled a roadshow, you’re seeing weirdly high volumes and a breakout, it’s actually pretty prudent for a short to hedge a bit with calls against a takeover.  

This sort of trade, moreover, happens all the time. Just this Friday, PALM November $12.50 option volume went through the roof; never mind a measly 4,000 contracts, they traded 21,000 on the day. The occasion was the the ridiculous suggestion, no doubt assiduously spread by inscrupulous holders eager to get out with some honour, that Nokia would be taking them over that weekend. The volume can probably be explained by the fact that PALM is probably the most shorted tech stock around at the moment, and more likely than not it was this lot, not numpty spanners who actually believed this crap, who bought most of the calls to cover their arses just in case. It would have been evidence of insider trading, of course, had there been an actual takeover at the end of it, and no doubt we would all be tut-tutting about the state of the markets today and how it’s all stacked against the little guy.

As it is, there wasn’t. At least there hasn’t been yet. And the owners of the options, who bought at 65c (they last traded at 23c) have until friday for the takeover to happen, after which the options will expire worthless with PALM at its current price. That will be $1.3m down the tubes. If that was money for speculation, it would have been painful for all but the biggest fund. If it was merely shorts paying up for insurance against getting their faces ripped off it would be more than bearable. You tend not, after all, really want your hedge to be making you money.

“To speculate,” the prophet said, “is human. But to hedge is divine.” The game is not just stacked against the little guy, it’s stacked against everyone, which is why some cheat. At least the little guy probably has a day job. It’s not wrong to be aware of what is probably widespread insider trading in stockmarkets today. But it’s probably very important to aim for the real evil-doers, the ones who pay executives to “get the quarter”, who know exactly what the company is going to print to the decimal point, and who have covered the tracks of their entry in a way specifically designed not to be noticed. We should get these guys, they suck, and Baruch can only applaud the FBI for the way they have handled the Galleon case. But we do need to stop and think before we throw premature accusations that may get innocent hedgers into hot water and don’t help anyone to make the game fairer.

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Posted in Fellow Collegiant, Lens grinding, What Would Spinoza Do?

Krugman expects you not to expect anything

Posted on September 5, 2009 by | 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. Continue reading →

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Posted in Fellow Collegiant, Philosophising, What Would Spinoza Do?

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

Posted on August 16, 2009 by | 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. Continue reading →

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Posted in Fellow Collegiant, Lens grinding, Stupid Cartesians

The Worm in the Apple

Posted on August 10, 2009 by | 8 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.

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Posted in Barbarians, Fellow Collegiant, Philosophising, Stupid Cartesians