So do you want to hear about my brilliant idea then?

Posted on January 16, 2011 by | 6 Comments

Baruch was amused by the very earnest discussions he read on Abnormal Returns this weekend about hedge fund dudes sharing ideas. The WSJ had a long treatment on this which also quotes Baruch’s favourite quantademic Andrew Lo, who suggests that hedge fund managers sharing ideas may be creating systemic risk in the form of crowded trades and dangerous correlations.

On the same topic, The Rational Walk (again hat tip AR) has a detailed discussion of the possible motivations for investors sharing ideas. Quoting someone called Whitey Tilson, it posits a few viz:

1) It helps clarify our thinking to put our investment thesis in writing, especially on complex and controversial positions . . . .

2) When it is widely known that we have a position in a particular stock, we often hear from other investors who share valuable information or analyses.

3) Invariably, some people have the polar opposite view of a particular stock and, in sharing it with us, they can help us identify things we might have missed in our analysis. . .

4) When we share our ideas, it creates reciprocity and others share their best ideas with us.

How admirable, you might think. How open minded, open handed and collegiate. Bravo, that man.

Bullshit, thought Baruch.

First off, reading an article about how interesting it is that many investors can own the same security at the same time has the equivalent impact as reading an article tha says sometimes many women are interested in buying and wearing the same clothes at the same time. It is merely another revelation of the bleeding obvious, like the Economist last week which said that stocks which have gone up a lot sometimes go up more.

As for the crowded trades argument, well, crowding in illiquid, systemically important securities using leverage can be dangerous (think subprime CDOs), but I don’t think the Fed should lose sleep if 20 big hedge funds are all long VISA. When that tanked I don’t think anyone other than Visa and Mastercard noticed. It certainly didn’t rock my world.

Let’s not be naive. When it comes to the reasons for sharing ideas, there’s really only one, and OK, maybe a second, lesser but linked, reason why investors share their ideas with each other. The first and only real reason is what we call “reverse broking”, the sole purpose of which  is to make our stocks go up. The lesser reason is that most hedge fund dudes love to show off to their peers. There’s nothing more satisfying than going to one of those dinners, clarting on about your favourite stock and seeing it pop 3% the next day on no news and knowing it was a whole bunch of supposedly intelligent investors copying you because, you think, they think you’re just great.

That’s basically it; the ancilliary benefits to the investment process mentioned by Mr Tilson may be real, but they aren’t even the icing on the cake — they’re maybe the Hundreds and Thousands.

Frankly, these 2 are the only reasons Baruch ever shares his wisdom on particular positions with his peers, be they brokers or fellow strugglers. And you can be as sure as sure can be that when he does so he has bought his full position.* That’s why Baruch smiled at this, from The Rational Walk again:

. . . when Mr. Tilson published his analysis of BP in June, he took the risk that the response may have pushed up BP’s share price which could have prevented him from building up his position as the shares continued to drop in the subsequent weeks.

Right. For him to NOT have a full position at the time he published his analysis would make me, were I an investor in his fund, very angry. How irresponsible, I would think. I’m not paying him 2 and 20 to strew his pearls of wisdom amongst the Great Unwashed for free!

No, Baruch loves his colleagues and competitors, but as he has written in the past, investing at a professional level is a solitary pursuit. You don’t show your work to others unless you have a good reason to. And when people DO share their ideas with you, you’ve got to be pretty uncharitable in your thinking about that as well, because their motivations may not be pure. When Whitney Tilson publishes his ideas as to why NFLX is a great short — after he has lost just a ton of money on it –  can you be sure he’s not just trying to engineer a quick drop in the shares to exit his position with a small shred of honour? Let me hasten to add, I don’t think Whitney Tilson is a bad actor in this way, but trusting the altruism of participants in financial markets is not a well-accepted path to riches.

* this is one of the many reasons that Baruch doesn’t us this blog to pump his stocks. He has too much respect for you, his dear reader, to do that. Note also that if you see anything on this blog which could be construed as positive or negative commentary on a particular stock, it is in no way investment advice. Also you should assume Baruch is long or short to the gills.

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Baruch: big in Japan

Posted on December 17, 2010 by | 4 Comments

Imagine what Baruch found in his daily Abnormal Returns troll last thrusday, Bento! It seems 2 academic dudes, one Yuqing Xing and another Neal Detert at the Asian Development Bank Institute in Japan, took a look at the iPhone and the US-Chinese trade deficit, and realised that high tech products such as the iPhone, which are merely assembled in China, distorted the picture. Very little of the value of the iPhone comes from, or remains in China, yet the full value of the iPhone is counted as a Chinese export for the purposes of deficit calculation. The official numbers are wrong, therefore, and the “real” deficit is much lower.

All well and good, and jolly interesting too. So much so that it was picked up by the WSJ, Paul Kedrosky, and of course, Tadas at AR.

Baruch certainly found the article interesting, as these were thoughts very similar to those he set down over one year ago in a blogpost here called What’s an export? Seriously. In it, after examining the supply chain of the iPhone* in some detail, he concluded that high tech products which are merely assembled in China distorted the picture. Very little of the value of the iPhone comes from, or remains in China, yet the full value of the iPhone is counted as a Chinese export for the purposes of deficit calculation. He wrote

Presumably to work out the real trade balance in terms of where trade flows, or where the wealth generated by iPhones goes, classifiying it as a {Chinese} export for the purposes of assessing a trade balance is misleading . . . Where there are totally integrated global supply chains, I suspect that the definitions of “import” and “export” begin to lose meaning.

Baruch was confused: why did economists and politicians harp on about the trade deficits like this when it  assessing the true value of the deficit was so obviously problematic? The post ended with a plea:

If there are any professional economists left reading UB, please help.

“Help” in this case, did not mean “purloin my idea and publish it in your own name for the glorification of your career without so much as citing poor old Baruch.”

What do you think Bento? Can I sue?

*happily, Xing and Detert also make a hash of the foodchain of the iPhone. Toshiba does NOT make the touchscreen and display module of the iPhone, though may be implicated in the NAND memory; touch module is left to an obscure-ish Taiwanese company called TPK, the screen could come from a whole passel of suppliers, but probably not Tosh; the apps processor is only “fabbed” by Samsung but is a design owned by Apple, Infineon does not make the “camera module”, though does make the baseband and some other stuff. Etc etc.

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Posted in Barbarians, Fellow Collegiant, Philosophising

Baruch the political football

Posted on December 3, 2010 by | 1 Comment

James Suroweicki is using Baruch’s (rather good) line, the “undead homicidal zombie market”  as grist to his anti-anti QE2 mill.

What’s most striking about the attacks on QE2 is how hysterical they are. People aren’t just suggesting that the Fed’s policy—which is quite modest relative to the size of the U.S. economy—might be ineffective or mildly inflationary. Instead, they’re accusing the Fed of “injecting high-grade monetary heroin” into the system, pursuing a policy that “eviscerates” the middle class, and potentially giving birth to an “undead homicidal zombie market.”

The main problem with this of course, is that this last bit never happened. No-one ever accused the Fed of potentially creating an undead homicidal zombie market.

What Baruch actually wrote (my emphasis) was:

“I’m not saying we’re in an undead homicidal zombie market,”

And there we could let it lie.

Although to be fair, I did add “though we may be” as quite frankly I was not very sure of anything at that particular moment. Communicating this lack of certainty was the point of the post, which was about feeling confused and worried. But nevertheless, in the offending line above, Baruch was trying to stop going too far down the path of a metaphorical flight of fancy about undead cats. To avoid, if you like, hysteria.

So James S. has it completely arsy-versy. Clearly he hadn’t actually read Baruch’s post, and by the way James, in the unlikely event you ever read this one, if you do choose to misquote me disapprovingly the least you could do would be to drop us a link, no? Probably you have an outdated editorial policy that prevents you from doing so, but still, this is the 21st century.

Calling one’s opponents “hysterical” is, moreover, quite a cheap rhetorical shot, a debating tactic much used by Straussian neo cons and WSJ op ed writers to close off a reasoned argument they are on the wrong side of. Different words that do the same job are “partisan”, and (Baruch’s favourite) “shrill”. If someone is hysterical it is much easier to ignore the points they make. Rather, the word implies, they just need a hard slap and a good shake. The word has the stench of politics about it.

That’s the wider context here, which I think we need to put James’ article into. QE2 has become politicised, and this is a mark of just how demented US political discourse has become. Domestic bond purchase programs elsewhere don’t generally create similar levels of controversy between parties; most politicians realise their central bankers are just following through with their mandates, as the Fed clearly is, without any regard for political advantage. Baruch thinks the blame for the politicisation lays squarely at the feet of congressional republicans. He also finds it highly amusing to find himself somehow lumped in with this lot, however indirectly, as he has yet to contemplate a more priceless, ill-intentioned, irresponsible and ignorant set of economic baboons.

But the worry is that if the republican baboons don’t like QE2, then it follows that those on the other side of the aisle will start to like it, not on the basis of a reasoned weighing up of pros and cons, rather because it gives them good talking points. The result will be the vaguely uncritical lumpen thinking we see in the New Yorker article, and at its worst, an item of pragmatic economic policy which should be debated on its merits will join the pantheon of topics of almost theological controversy in the US such as abortion, gun control, flag burning and gay marriage. Pretending that QE2 is a well established economic policy without risk of externalities is frankly as absurd as saying it is an unmitigated evil.

Felix, whose own position is not far from Baruch’s, does a much better job of tackling the article in this post. As he puts it, “the weird thing is that Surowiecki and I actually agree on most of the issues here.”

Indeed. As things stand right now, Baruch is very rapidly coming to terms with QE2: not particularly astonishingly, the thing might actually be working! There are green shoots everywhere he looks , from an apparent increase in volume at transaction processing companies, to semi makers guiding for much lower seasonality in the next quarter, to positive 2011 GDP revisions by the economists, to strategists telling me to buy cyclicals, etc etc. The price of gold even dropped a bit on thursday. He is pretty optimistic, certainly much more than he was last month, when his problem was that he could see the sufficient reasons for stocks to rise (QE2), but not the efficient ones (forward EPS estimates going up). That’s been solved, confusion lifted. Things are great!

Then again, that’s exactly what I’m supposed to feel, isn’t it? There’s nothing like turning up to a party with a hangover (swearing you’ll only stay for a bit), having that first drink and realising how much fun you’re going to have if you stick around. Thoughts of a potentially much worse hangover yet to come are far away.

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Posted in Barbarians, Fellow Collegiant, Lens grinding, Stupid Cartesians

Quantitative Queasing

Posted on November 16, 2010 by | 13 Comments

So we have been having Quantitative Easing already, and Baruch doesn’t  like it.  The stockmarket is up (or was), the data seems to be improving; QE has done its work and for all we know it will continue. But there is a special unhealthy quality to it all. It feels like a “wrong” rally, like the cat from Pet Sematary was clearly a wrong kind of cat.

The problem as I see it is this: QE lowers overall interest rates and makes all the stocks go up when they wouldn’t have normally. It raises their valuations, which you can also express by saying it makes for higher PEs. This makes people feel richer. They will go and buy more stuff like LCD TVs, making the companies who make the stuff they buy richer too. They will invest more, and buy more stuff from companies who make stuff not for people, but for other companies. Eventually all the companies grow into their higher stock valuations, and we are all fine.

The key word here however, is “eventually”. What happens in the bit between the 2 points:  after all the stocks have gone up, and before the fundamentals improve to justify their new valuations? Because I think that’s where we are if stocks have stopped going up, or where we will soon be.

Now, my tech stocks aren’t exactly expensive. Lots of them are to be had for PE multiples in the low teens, which really isn’t bad. But there has been no fundamental improvement in their businesses since the summer, as far as Baruch can tell, and yet their stocks have absolutely zoomed to levels I frankly have difficulties buying them at, at least on the charts. Baruch was astonished last week to see that the NASDAQ 100 was basically back to its pre-crisis high!! You get that? That index is telling you that things are as good as they were before the Great Unwind.

I can’t short them either, at least not on past form. That’s been a mug’s game; the subtext of QE is “kill all the shorts” — another way of making sure stocks go up. Returns on short books have been pretty brutal, and most long short guys in the past couple of months have learned to be mostly long, or if they have to stay balanced, then long stocks, short indices.

So, now what? If stocks are now disassociated from their fundamental realities, however short a time that disassociation is supposed to last, non-fundamental realities are going to rule, and I have no idea what that means. Will we get stasis, a crunch in volatility and volumes? Will we have vast nauseating unexplainable swings in stocks, huge moves in the VIX? Will we crash? Will we carry on straight up? Will we pause and rally? Who can say? We’re in a period where anything is possible, as I’ve said before, a world of unintended consequences coming down the pipe. Some may be good, and some may be bad.

This is why in his darker moments that Baruch thinks a very good analogy for where we are right now is Pet Sematary. The people who buried their cat (and later their son) in the Indian burial ground to bring it back to life got something which looked ostensibly like a cat, but was so only on the outside. On the inside their little puddy tat  was really an undead homicidal zombie cat, as became clear through its increasingly odd behaviour. Unintended consequences followed (mayhem, murder, horror, the Wendigo — all that Stephen King stuff).

The Bernank is like the guy who buried his cat, but in this case instead of a resuscitated cat he wanted his rally back, a healthy stock market and the wealth effect that would bring. I worry we have got something else.

I’m not saying we’re in an undead homicidal zombie market, though we may be. But here’s an example of what the Pet Sematary market is capable of in terms of unintended consequences: QE inflates all asset prices, including commodities. This pressures the Chinese consumer, who we are relying on to pull us all out of this mess, who can suddenly not afford his new LCD TV because his Moo Shu pork is costing 20% more than it used to. Changes in commodity prices have a much greater impact on his consumption than Joe Schmoe in Idaho, with his low cost high fructose corn syrup and processed trans fat diet. The BoC has to raise rates to offset the inflation this is causing, hurting Chinese growth even more, and global GDP growth drops 50bp. Bravo the Bernank. With your Quantitative Easing you just killed off the only good thing in this market which was working naturally without outside interference.

OK, Baruch may be exaggerating, but a big part of today’s selloff is driven by fears of commodity prices in China and a collapsing Shanghai stockmarket. It’ll probably turn out to be nothing, a damp squib. But if it doesn’t, you heard it here first. I feel sure there is a wider point here to make about the bad things that happen when you mess with the signalling mechanism of the stockmarket. After all, the stockmarket does not exist solely to make us richer, does it? But that’s probably for another post.

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Posted in Barbarians, Lens grinding, Philosophising, Stupid Cartesians

Get me some of that subprime action!

Posted on October 19, 2010 by | 2 Comments

One part of Baruch’s latest post concerned what after today may now properly be called “Mortgage Crisis II — The Evil Spawn”. I’m not referring to the foreclosure issue, that’s totally separate. I mean the bit where the banks knew that they were selling on dodgy mortgages — where they had done the due diligence and forgot to tell anyone they were selling them crap. We got the first case today. Pimco, the NY Fed, and others are suing BofA, and want them to take back $47bn of dodgy mortages they sold on. At par! It’s called a “Putback”, apparently.

Anyway, as you may remember from the post, Baruch made a joke! He wrote, concerning, as it may come to be known, Putbackgate (actually, Felixgate would be much better):

Certainly you would think a civil case would be worth a shot, and if proven, I can only imagine the settlements. I hope they remember to ask to have the checks made out in Yuan.

Baruch also wrote, and then deleted “I got to get me some of that sub prime paper” — on the ground that it wasn’t that funny. Honestly, I really did.

Incredibly, doing precisely that is the new real life trade on Wall Street! This crappy old mortgage paper trading at 40c on the dollar has suddenly found a new lease of life. Once you own 25% of a securitised issue you can, apparently, get to look at the books and find out just what it was the securitising banks didn’t tell you. You can get your own Clayton to look at the loans. And if you find a discrepancy, you hit the jackpot! Double your money. I dont think these loans are going to stay at 40c for long.

Pimco, according to the WSJ, had 63% of its main bond fund in government paper in July this year. Now it’s just 33%. They’ve been buying, among other things, mortgages, now 28% of the fund. Clever Baruch, with his little joke. But much cleverer is Pimco, methinks, for taking its sense of humour seriously, and thinking of a way of making money from it.

 

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Posted in Lens grinding, Stupid Cartesians

Through the looking glass again

Posted on October 17, 2010 by | 5 Comments

I’ve been catching up on my reading and dear Bento, if anyone tells you they have a clear view on what is going to happen to the econo-world from here, walk away briskly. As Ed Hyman of ISI* puts it, with the now imminent onset of QE2 we are in “scary times”, a world of “unintended consequences”.

The only intellectually honest position to take at this point, it seems, is to admit we haven’t a clue. Personally I, Baruch, am getting really confused. My default setting is that we will muddle through and everything will be OK. But the cone of potential outcomes that surround that base case is now as loose and flappy as a wizard’s sleeve.

Note also that even the “muddling through” scenario doesn’t presume any particular level of the S&P at the end of the next 12 months. Plus or minus 30% and in Baruch’s view we’d still be all right.

Where to start? Well, here’s a list of the factors that I think are going to make us move, in the form of a dialog in Baruch’s head. None or all of them could dominate. Maybe some are already priced in. Some of them I hope are  made up and will go away. There’s nothing particularly original here I admit, but I want, at this juncture, to sum up where we may be. Baruch’s future self might find it interesting. Here goes:

1) we are getting QE2! It will save us from Japanese-style deflation. Yayy!

2) Yes, but this is not necessarily a good thing. QE2 is the first move, the invasion of Poland if you like, in the coming currency war against everyone who is good at exporting, especially the Chinese. In the ensuing cycle of “bugger thy neighbour”, we will descend into massive disruption of trade and runaway inflation. Oh no!

3) But don’t worry. The Chinese are going to make structural reforms in their upcoming 5 Year Plan which will massively boost consumption over the next few years. The Yuan will rise anyway, no matter what the result of the horrible currency shenanigans, and their ensuing import boom will be the engine dragging the world out of debt-deflation! Yayy!

4) Hang on. I’ve just had some bad news. The financial system is insolvent again. All the mortgages securitised in the past X years stopped being asset backed, as they umm. . . lost the paperwork. The holders can’t foreclose, and the people who have been foreclosed on may have had their houses taken away illegally. Many may have to get their houses back. So stuff that the banks still own has to be written down again. Hell, even the people who can pay their mortgages have a big incentive not to any more. We’re totally fucked.

5) Don’t worry! All that crap’s been written off already or backed by the Feds! Isn’t it? They can’t be as stupid to have it still on their books, right? While we may have jeopardised a couple of banks, the Foreclosure Crisis may also have solved the US consumer debt problem! All the mortgages will be cancelled!! As long as a few banks can survive we still got QE2, massive Chinese consumption growth AND a reset to US private indebtedness. Those crazy Americans can now re-re-mortgage their houses and buy another round of LCD TVs for their McMansions, and reinstate the semi-annual holidays in Disney World! We can’t lose!!

6) Not so fast, cheeky monkey. The US banking system may be meta-fucked. Turns out the banks who securitised mortgages may have defrauded their customers and broken the law, because they secretly did in fact do some due diligence, and knew all the mortgages were rubbish. There is no better person to tell you about this than our old mate Felix; who says bloggers can’t do journalism? Good news: bankers may not be the total idiots we thought they were. Bad news: they were fraudulently criminal instead, and apparently may have to pay cash at par for all the stuff they all wrote down already, plus a bunch of extra fines.  Even if the SEC throws up its hands and the DoJ doesn’t want to prosecute, I imagine foreign prosecutors won’t be so shy if there’s a case to be heard. Certainly you would think a civil case would be worth a shot, and if proven, I can only imagine the settlements. I hope they remember to ask to have the checks made out in Yuan.

7) You poor sap. You ridiculous perma-bear. Bernanke has our backs! You don’t think he doesn’t know this stuff already? You were wondering why he was so keen to rush into QE2 despite the positive turn in the leading indicators, and pump us all up before the mid-terms. You got it now? We’re going to get the mother of all easings, bigger than the trillion dollars everyone’s expecting, something open-ended, maybe.

Anyway, that’s as far as I got. Any better ideas out there? Anything I missed? Is any of it wrong? Can you help poor old Baruch make sense of it all?

* ISI is the only macro strategist my team actually pays for, everyone else seems to offer their opinions for free

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Posted in Fellow Collegiant, Lens grinding, Philosophising, Stupid Cartesians

Don’t tell anyone, but I am not sure I like my new iPad

Posted on September 28, 2010 by | 16 Comments

It’s very embarrassing, but I think my iPad annoys me. Baruch feels that he should be raving about his iPad. It’s the biggest thing to hit consumer tech since, well since the iPhone 3G took off. When the history of early 21st century tech is written, it might even be  a more important product than the iPhone. And here am I, on record, complaining about it. I’m going to be that guy from IBM who said in I think 1945 that there would only ever be like, 5 computers.

So, why don’t I like my iPad?

1) Flash — ahh-aaaaahh! I miss Flash on my iPad like I don’t on my iPhone. I (mostly) understand The Great Jobbso’s reasons for treating Flash like a vampire looks at garlic, but I have somehow failed to make my 4-year old understand them as well. All he knows is that he is unable to play his favourite Flash-based Teletubbies game on the CBBC website. It doesn’t work, and he wants Daddy to fix it. Obviously Daddy can’t. He gets cross. So the poor little tyke’s had to go back to the PC for his Teletubbies.

Daddy had a similar experience with the Daily Show. Watching the Daily Show online is, for Baruch, almost the whole point of having The Internet. And it’s flash based. And its not just John Stewart, it’s like half the commercial video on the internet, from retail sites, to (I am told) porn, to hotel websites. Baruch hates those little lego blocks in the middle of the space where his video should be. His heart sinks when he sees them. He wonders what he’s missing.

I don’t have the same level of expectation with my iPhone. After so many false dawns in the mobile internet, I secretly think I am not supposed to surf the web on my phone, so anything I can do on it in that direction I still find mildly incredible. I don’t typically use it for streaming video. And I didn’t buy an iPad as a replacement for my iPhone.

Anyway, lack of Flash is a major problem on the iPad that I didn’t think about when I bought it. Here are more: Continue reading →

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