Long or Short Capital

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

Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.
-Nassim Taleb (ht: Market Moves)

Past Quotes Entirely Relevant to Investing

It’s frequently said that you can’t get something for nothing. This is true. But what is the price of something? Difficult to know. This has been a market that lacked liquidity and price discovery.

Luckily, the Something Store has started making a market in somethings. You can buy as many as you like for $10 per something. I suspect they are capturing a large producer surplus here — somethings may well be worth less than $10 — but I nonetheless admire their willingness to make a market in something.

Recommendation: We’re still working on how to make a market in anything which seems to be a dangerous proposition. Something can be more valuable than anything, but in a discretionary context, anything is likely to be a lot more valuable than something. Nothing can actually be more valuable than anything or something. And then you bring everything into the equation and it’s worth either zero, infinity or negative infinity, and there is clearly a lot of science that needs to be done.

Olden times knew how to mark someone who literally fucked up. A big scarlet letter to shame them permanently. Olden times understood that it was appropriate to properly prioritize penalization over rehabilitation. They got that. Now, when people mess up in most walks of life, you basically have to apologize to them for it.

“I’m so sorry you went to Cornell and that you couldn’t get into Harvard, where I went. When I was at Harvard, I felt so guilty knowing that I had gotten into Harvard and all these other nice people hadn’t gotten into Harvard and were forced to attend lesser schools like Cornell or Dartmouth or Brown, schools that weren’t Havard, where I went for undergrad and then later for my MBA. God, that is so horrible, I hope you are able to find someone willing to hire you.”

But it doesn’t have to be like this. It’s time to roll out The Khaki Letter. The Khaki Letter is a mark of shame that should be applied to anyone who fucks up in finance, or other industries that can make a claim to being appropriate.

Embarass yourself professionally by sending out an email about how Chung is King that gets you fired? Khaki Letter
Shoddy analysis that gets your clients screwed? Khaki Letter
Pop one too many collars? Khaki Letter
Work for Moody’s? A Veritable Yacht Club of Khaki Letters

Recommendation: Long Shame.

CIFG’s slogan on their website is CIFG: The New Generation in Triple-A Financial Guaranty.

Well, about that, uhh I don’t know how to say this but I think you need a new slogan. CIFG was downgraded to Ba2:

Moody’s lowered its financial-strength ratings on CIFG Guaranty, CIFG Europe and CIFG Assurance North America to Ba2 from A1, a 7-notch downgrade, and said the future direction of the ratings is uncertain.

The credit rater said “absent material developments, the firm will fail minimum regulatory capital requirements in New York and Bermuda due to expected significant increases in modeled loss reserves on” asset-backed CDOs. Falling short on capital requirements “would put the firm in a precarious position, especially in light of the solvency provisions embedded in its” credit-default-swap exposures.”

Moody’s said as downgrades of residential mortgage-backed securities have continued this year, “Moody’s believes CIFG will experience sizable increases in reserves, and could breach regulatory capital requirements in the near future.” The company has already failed to meet some regulatory-filing deadlines in the U.S. and Bermuda, including first-quarter results for CIFG Assurance North America and the 2007 annual report for CIFG Guaranty.

Recommendation: CIFG the New Generation in Fallen Angel Financial Guaranty is quite catchy. But more accurate would be, CIFG Our Guaranty Is As Valuable As the Paper’s It’s Written On, Which Paper Is Rated By an Independent Third Party Which Says Our Paper Is Not Very Valuable Even Though It Used To Be.

This report is gratis, Yahoo! (NASDAQ: YHOO).

1. Find ways to make money. Sounds simple but like checkers, it takes an instant to learn and about an hour to master when you have a portfolio of the most trafficked sites on the internet and dominate Japan more than low-interest rates or even xenophobia.
2. Rename the company OO-OO. Throwing a double-OO is probably YHOO’s best shot to take down the Goog (NASDAQ: GOOG). If you can find a way to get a triple-OO done, do it, but we’ll believe that’s possible when we see it.
3. Traditionalists would say that Yahoo should stop CEO Jerry Yang from spending so much time playing poker. But, to improve value for Yahoo shareholders, we would encourage Jerry Yang to play much much more poker and much much less CEO. At least he is good at poker.
4. Create a meta Fantasy Game on top of your Fantasy Sports Games. It should be a traditional roto league where you draft fantasy sports participants based on categories such as “Time of Firm Wasted”, “Dollar Value of Firm Wasted”, “Minutes Boring Other People Talking About Your League” and WHIP. The consensus no.1 pick would be Yahoo username “poneilyanks4eva.”
5. Rehire Terry Semel. Just checking to see you if you were paying attention. Seriously, you’d be better off hiring the corpse from Weekend at Bernie’s. Unfortunately, he is currently busy trying to lead an activist campaign against Yahoo’s incumbent management team.
6. Add one or two executives with some experience managing an internet company to the Board of Directors. Although it’s great to have marketing executives, VCs, and Bill Clinton’s best buddy on the Board, it doesn’t help your clueless founder/CEO or your President — who used to be CFO and before that, a Wall St newspaper analyst — to run an internet company.
7. Lie to China. Spread horrible rumors about Google, like that searching through Google.cn makes it so that for its users, every year is the Year of the Goat, which we all know is awful. Also start a marketing campaign based around how “Lucky” Yahoo makes its users, and throw a lot of 8’s in there. They eat that stuff up. Remember, there are a billion of them, so even if you get 5% of that market, it’s going to be about 50 million people.
8. Let the company be bought by Microsoft (NASDAQ: MSFT) at a 50% premium to YHOO’s closing price before MSFT’s February bid.

Freedom in capitalist society always remains about the same as it was in ancient Greek republics: Freedom for slave owners.
-Vladimir Lenin

Past Quotes Entirely Relevant to Investing