Long or Short Capital

This headline teaser caught my eye this morning on WSJ.com:

“Russian Investor Backs Fortis

Fortis is tapping a Russian billionaire for a $630 million capital injection, a sign that banks are looking beyond Asian and Middle Eastern investors for help shoring up their shaky finances.”

1. It seems more apt to say that the Russian billionaire is the one doing the tapping, right before he injects $630 million in liquidity.
2. A Russian billionaire is really looking far beyond Asian and Middle Eastern investors. Totally different beast. Instead of being an extremely wealthy oligarch in a corrupt totalitarian state whose wealth is 100% dependent on commodities, the Russian billionaire is a wealthy oligarch in a corrupt tsarist state whose wealth is 100% dependent on commodities.
3. A Reuters report has attributes these comments to Fortis (Brussels: FORB) chairman Maurice Lippens on the overall transaction: “Fortis expects no more capital raising.” According to our proprietary translation algorithm, that statement indicates that investors should expect the raising of significant additional capital.

Recommendation: Read the linked Wikipedia article on the Russian investor, Suleyman Kerimov, it’s mindblowing. His nickname is “Russia’s Richest Civil Servant”, the source of his significant wealth cannot actually be determined and he has a yacht named “Ice.” Oh and he is also tapping the oligarchbait above (with his liquidity).

I don’t consider myself a home-run hitter. But when I’m seeing the ball and hitting it hard, it will go out of the park.
-Ken Griffey Jr.

Past Quotes Entirely Relevant to Investing

In light of the fact that Carl Icahn has recently begun blogging, we thought we should point our reader in the direction of the time Carl tried to take us private and started his own blog (formerly located at liquidiconcapital.com).

Recommendation: Historical perfomance may not guarantee future performance (or so some claim), but fake reality can be a useful guide to future reality.

The following is an actual User Submitted email, possibly a request that we generate such a report

Subject Line: Cutting edge Bio-Tech Opportunity: Potential to make a killing.

Industry: Baby Farming

Need help evaluating the PVGO of the industry.

I suspect the “plant” needs to be located pretty close to both India and China from a raw materials acquisition stand point. With live cargo the risk of dead-loss via ocean freight and air transport is too costly. Please include possible suitable locations for the facilities (Andaman & Nicobar Islands?). Also, please discuss the perceived need to capture advantages in avoiding costly American and European regulatory environments.

We have a great idea that will make you (and us) lots of money. I mean boatloads. You know that scene in the beginning of Ducktales, after they talk about how “Life is a Like a Duck Blur” when Scrooge McDuck is swimming in his vault of gold? That will be you, but that vault will contains gold coins and Russian models, liquid swimmable Russian models. Think about it. Awesome right? Ok well let me get to this way for you to make millions. But first, look at this picture.

Now my plan is simple. You and I, we, WE get together and we send out letters to everyone we know, asking them to give us $100 each but also instructing them to send the letter on to other people, who will send $100 to them and $50 to us, and so on. If we pool our resources and our contacts, I’m sure we can make a lot of money. What do you think? After you consider that, I have another can’t lose moneymaking idea that just involves you flying between Colombia and Miami carrying flour for my Colombian grandmother who loves to bake with fresh Colombian flour.

Recommendation: The time is ripe for investment banks to start putting in gratuitous pictures of scantily clad women into prospectuses. We smell opportunity to finally get deals like Classmates.com done.

Relationships as a whole would be improved if this was made clear that the relevant trade-off to not putting out or meeting your significant other’s needs is that the relationship has to be dissolved. Inertia and fear of change are powerful forces, so incentives should be contractually outlined to minimize their deleterious effects on your life. Most people dawdle or settle or both

To rectify these inefficiencies in the love market, we recommend contractually allowed cheating contingent upon putting out not happening enough. A requirement of some sort of formal notification and a cure period (30 days or so) would resolve fair warning obligations. Additionally, the contract would also provide (but not make mandatory the exercise of) the option for the counterparty to terminate the relationship upon the commencement of cheating. This ensures that there will be an adequate level of putting out or a faster resolution to the relationship — a veritable “win-win” situation for each side of the contract and also for society which would benefit from improved relationship velocity.

Problem Scenario Example: Bob loves to get it on. Bobette, Bob’s right hand, gets tired after only a few rounds and sometimes “she” just doesn’t “feel like it.” Normally, Bob and Bobette would stay together in a sexless and loveless relationship for months on end, until one or the other was “fed up.” This could take months, possibly even years if kids were to enter the picture. With a well drafted love contract, Bob could put Bobette on notice and the cure period would begin, allowing for Bobette to fulfill Bob’s needs. Were that not to take place in the given 30 days, Bob would be free to start seeing Bobetta, Bob’s left hand (Bob describes “her” as “like hooking up with someone else”), and/or Bobette would have the legal right to immediately terminate the relationship.

Recommendation: Long love contracts. There is nothing that a properly designed contract cannot improve, or at least make less worse. Not even love.

I descend from a lineage that can be traced back to the Roman Empire, a time when men were men, women were women, and, sometimes, boys were women too. My forefather kept a meticulous journal on valuation of everything ancient Roman, knowing that such a journal would be a helpful guide the economic choices that his descendants would face over the next several millennia. In my family, it has been a masculine tradition to keep similar logs of economic thought and financial analysis. I will from time to time share with you relevant passages from these Legacy records.

From my forefather, Cornelius Scipio Flipio (translated from the original latin):

On Valuing The Plebs

You, plebs, I have need to ascribe upon you a value. This is the way I would do such a thing as that.

First Question: How are your teeth?
Second Question: Can you pull a plow?
Third: Salary

Add a 10% premium to your salary for good teeth; add a 15% premium for plow ability. Lastly, it is required that I then do a DCF on that number. That is your number. That is what I would pay for you. You are an asset, and I do not even have concern about your humanity, but I only have concern about what I would pay for you. That is the way in which I see you.

Zimbabwenomics is mainly a field of economic study, but that doesn’t meant its guiding principles can’t be pragmatically applied to create solutions for any problem (note: if there is no problem, Zimbabwenomics can utilized in creating one). Robert Mugabe was facing a difficult re-election as president of Zimbabwe in the elections earlier this year, one that had seen tension, vitriol and internecine tribal conflict on a scale almost matching that of the US Democratic Primaries. But Mugabe understood a fundamental concept that his opposition and international haters failed to grasp, namely the inherent advantageous position that a Zimbabwenomic analysis of his candidacy revealed.

Under normal political analysis, there are two result paths from an election, only one of which is victory:

1. Win the election
2. Lose the election

From a Zimbabwenomic perspective, there are also two result paths from an election, the difference being that BOTH lead to victory:

1. Win the election
2. Lose the election, but actually win the election, because your opponent pulls out

Recommendation: Readers familiar with Zimbabwenomics knew from the outset of the elections that Mugabe retaining his position was a fait d’accompli. Long the Pullout Method of Dictatorship Retention.

What each man does will shape his trial and fortune.
For Jupiter is king to all alike;
the fates will find their way.
-The Aeneid

Past Quotes Entirely Relevant to Investing

Baidu (NASDAQ: BIDU) trades at 122x on a trailing PE basis. LTM earning per share are $2.88 and the stock trades at $329. Think about it. There are 1 billion people in China, I know, yes I know. Also I am familiar with the well know equation that Google + China = 122x. But let’s be serious here. 122x!

They can have all the market share, be in the best most profitable industry in the history of mankind and have all the people in their market they want, but if they aren’t actually making much money off of it despite trying for several years now, doesn’t that tell people something? Maybe, a small clue?

But reason isn’t enough in analyzing investments. Consider that the stock trades at a conservative 6x expected 2020 earnings. You need to make these kind of adjustments in your analysis if you ever want to be able to participate in a herd.

Recommendation: Sometimes the herd goes right off the cliff. But sometimes the herd kills the bad cowboy when the good cowboy lets the herd lose to distract or incapacitate the bad cowboy. Other times the herd stops and eats grass and enjoys a beautiful sunny day in the plains, soaking in life without a care in the world. Long all that.

Sometimes it seems that population experts must spend their entire lives discussing birth rates. “Country X has so many people it is falling apart and they need to all be sterilized. Country Y has so few children that everyone needs to be forced to procreate. This country blah blah blah.”

Now I see that the experts are concerned that “Japan [is] Steadily Becoming a Land Of Few Children.” The theory is that just because the Japanese have basically substituted Pokemon toys for children in their culture and shun immigrants as a culture, they will eventually run into problems when they’re all old farts and don’t have any young ones to care for them.

Isn’t this really a case of cutting the wheat from the chaff? The Japanese have realized that babies are just not that smart, not that educated, not that good at work and cost a lot to maintain. Society suffers all of that just in the hope that these babies will one day take care of the society, an idea of dubious merit given the qualities of your average baby. Why not do away with the baby overclass altogether? This is what the Japanese are planning.

While the idea sounds attractive on the surface, the potential problems of who takes cares of an elderly society remains. Japan has addressed the care giving shortfall by “subsidizing the development of robots as caregivers for the old”. So smart. No one, not even a stupid baby wants to deal with smelly old people and their problems. Japan has also solved the deep-rooted needs of society to feel like parents by means of digital pets (basically the same thing as a baby) and assorted synthetic maternal love simulators. The Japanese have leapfrogged us once again in the area of efficiency.

Recommendation: Long Japanese society. Short procreation. Long Pokemon and care-giving robots.

Those who know how to win are much more numerous than those who know how to make proper use of their victories.
-Polybius

Past Quotes Entirely Relevant to Investing

When loan assets go down, you typically have to mark-to-market which leads to unseemly things like Important Banks having to announce write-downs. This is patently unfair and not just because Important Banks should not be subject to rules that apply to others or to reality. If they have to write down loan assets, they should be able to write down (where down is up for them) loan liabilities on a mark-to-market basis. Now, thanks to Statement 159 and the FASB, they finally can.

Here’s how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the “presumed savings that you have on your liabilities,” Bove said.

“In the real world you didn’t save a dime,” he said. “You still owe the $100 million. It’s another one of these accounting rules that basically takes you further and further away from reality.”

Rule in this context is really a perjorative. The preferred nomenclature is accounting innovation. Recent financial innovations include The Off-Off Balance Sheet, Earnings Before Everything and Citi’s Reality Distortion Field. The crucial part of this innovation is that banks have the discretion to determine what liabilities should be marked-to-market and which ones should just be ignored.

“As in all things, except the iPod, oh and Google too, more choice and control is always better. For example, say you were a farmer and you had a bunch of hens. Wouldn’t you want to empower the wolf to have discretionary control, e.g. choice, on how to account for the number of hens left? Of course, you would, it’s just common sense. This would smooth uneconomic hen earnings volatility, which is good for everyone. And that’s why we lobbied the FASB so hard on this matter,” said an anonymous and probably made-up senior Important Banker.

Isn’t this just a continuation of most Important Banks’ core business, namely shell gaming money away from other people?

So far, most banks’ writedowns are “unrealized,” meaning they’ve been unwilling or unable to liquidate distressed assets. If prices reversed, the banks would record mark-to-market profits.

The same is true for the liabilities. Companies can’t “realize” the mark-to-market gains on their debt unless they buy it back at the discounted price. They’re unlikely to do so, because the deterioration in creditworthiness means they’d have to replace the debt with higher-cost borrowings, Willens said.

“No one’s going out in the market and actually retiring this debt,” Willens said. “It’s a shell game.”

Like I said, it’s a shell game, the staple business of Important Banks. Why say it like it’s a bad thing?

Recommendation: Given no forseeable disruption in the supply of shells, Long Important Banks.

Stretching his hand up to reach the stars, too often man forgets the flowers at his feet.
-Jeremy Bentham

Past Quotes Entirely Relevant to Investing