Long or Short Capital

Reader Fadi commented that “Mmm. Crabs are crustaceans, not cephalopods.” This really depends on what the definition of “cephalopod” is. Scientists mistakenly use the term “cephalopod” to mean a very specific type of creature. Per wikipedia:

The mollusc class Cephalopoda characterized by bilateral body symmetry, a prominent head, and a modification of the mollusk foot, a muscular hydrostat, into the form of arms or tentacles.

Unfortunately for Fadi, for scientists and for people of that ilk, we live in the real world and not the world of science. Here a “cephalopod” is a cephalopod and all their allies. And as we all know Crabs:Cephalopods as WWII Italians: WWII Germans — fun-loving incompetent bottom-feeders who love spaghetti and wouldn’t mind being along for the world domination ride.

Full Disclosure: As required by SAAP and the SEC, we will periodically release the 10 largest positions in our proprietary Cephalopod Index.

Top 10 Holdings of Long or Short Capital’s Cephalopod Index

The Squid
Vampire Squid (NYSE: GS)
The Crab
Crabs
Humboldt Squid
The Octopus
Hexapus
The Cuttlefish
Calamari Default Swaps
The Nautilus

Sometimes I think you people (yeah I said it, and I’ll say it again, YOU PEOPLE) read this rag too much, so I’m going to help you out. Stop reading it immediately. I have read everything* in today’s WSJ and will give you all the usable information you need right here. Since you won’t waste your time reading the long pieces, it’s more efficient for you. Since I won’t waste my time writing about how whales are gossipy bitches, it’s more efficient for me. Mugabe Optimal.**

Format: Headline —> Digest

As Congress Goes on Break, Health Lobbying Heats Up —> Elected officials, former elected officials, former staffers, and the Healthcare industry are deciding how much they plan to redistribute from us and our children to their wallets. The amount they agree on is “A Lot.”

Economists Upgrade Second-Half GDP Forecasts —> The same economists who didn’t predict this recession, didn’t predict the last bull market, and forecast a hockey stick second half for 2008, got together and decided that things look fantastic now. And this time they mean it.

China Says Migrants Are Employed Again —> In China, most migrants are still unemployed and subsisting on a diet of toxic water, battery acid, “recycled” US computer monitors and corn syrup. This is the way it is despite reports to the contrary from the Chinese government.

Kabul Is Shelled By the Taliban —> The Taliban is so cocky that they actually went to the shores of Cape Cod where they summer, collected quahogs, and then flew back to arm their catapults and trebuchets with these taunting shells. Kabulians said on the street that the Taliban attacks are entirely “shellfish.”

Bogus Theories, Bad for Business —> Consultants are tardasses.***

Quick! Tell Us What KUTGW Means —> This piece is ROFLMAOWFYMITA funny. Short version: old people are still old and are pushing to understand transient language without using their brains. If someone asks you the headlined demand and is not fucking with you, send them this link http://tinyurl.com/negp38.

Morningstar India Gets Its Start —> Indian mutual funds will now be rated based on short term historical returns, connections and the veneer of competence.

Me & MY CAR —> Fred is lonely, his wife leaving him two years ago for a man named Teake, twenty years his junior and built like a big red firetruck. As a 54 year old divorcee, Fred has spent the last two years trying to find love through blind dates, Great Expectations (the dating site, not the book, although as a result of his old age (see above, Quick! Tell Us What KUTGW Means) and a misunderstanding, he originally did try the book only to discover it would not actually help him find love) and Craigslist. To give you an idea of how it’s gone, he started on Craiglist’s “men seeking women” category, then moved on to “casual encounters” and has only been frequenting the “services > adult” section in recent months. But what Fred has discovered is that his true love is his car, which he calls “MY CAR.” “MY CAR” really revs his engine and the time he puts into maintaining it is paid back in the form of miles and miles of pleasurable driving, while the time and money he poured into the women in his life has only ever given him an empty heart, sex whose quality was always depreciating to zero and a crater in his bank account. An automobilistic modern day fairy-tale.

* None of these articles were actually read.
** This doesn’t actually describe a Mugabe Optimal state.
*** Tardass. Like a time machine from a Brit Scifi show, but more tard, less time travel.

When you have nothing, you still have something. At least that’s what Beelzebub likes to tell the destitute before he makes then john hancock some contract he had Skadden draft up. It’s also what a microloan business in Latvia (note that that this country is the home of Dr. Doom) is telling its customers. No collateral, no problem, we’ll throw up a lien on your immortal soul:

Clients have to sign a contract, with the words “Agreement” in bold letters at the top. The client agrees to the collateral, “that is, my immortal soul.”

Mirosiichenko said his company would not employ debt collectors to get its money back if people refused to repay, and promised no physical violence. Signatories only have to give their first name and do not show any documents.

“If they don’t give it back, what can you do? They won’t have a soul, that’s all,” he told Reuters in a basement office, with one desk, a computer and three chairs.

Wearing sunglasses, a black suit and a white shirt with the words “Kontora” (office) emblazoned on it, he reaches into his pocket and lays out a sheaf of notes on the table to show that the business is serious and not a joke.

This isn’t entirely new. Most of the top of the market LBOs included liens on the souls of KKR, TPG, Cerberus et private equity alia. Unfortunately as many of those very same deals head to filings and out-of-court restructurings, it’s become apparent how lacking in value those very same private equity souls are. Apparently most have preexisting super-priority liens already in place that were used in deals with the devil.

Recommendation: If you’ve ever owned a soul, like I have, then you know it doesn’t make for very strong collateral. For a typical human the ability to seize the collateral is metaphysically impossible, and the legal process of enforcing your rights under the standard Soul Loan Agreement is difficult and arcane. You will likely be forced to sell your claim on the soul to a capable third party distressed shop like the aforementioned Beelzebub or Mictlantecuhtli or whomever at 15 cents on the dollar or less. Now if you already have a preexisting relationship with such a shop to source souls for them, then it makes sense. According to their latest Q, Goldman Sachs’ (NYSE: GS) most lucrative area was their soul trading and acquisition segment.

Our squid call was right on the money, which is also from where we write this piece: a big pile of money. Winnings from our bet are in such abundance that we find it more efficient to make our chairs and furniture and everything else that makes contact with our ass out of money. But we cashed in for a reason. And that reason is 18 inches long and dumb as a brick — the baby.

Babies aggressively stockpiled weaponry patiently for centuries, waiting for a catalyst that would allow them a point of entry into the world domination game. They are students of history, terribly stupid students who cannot read and lack college degrees, but students nonetheless. They know that this happened before with the Kangaroo, and later with the Indian. And we think that the disruption that will ensue in conjunction with cephalopod ascendancy will be a perfect opportunity for babies to begin consolidating their gains and begin formulating their end game. Our models indicate that in 35-55 years babies will rule the world.

Recommendation: Investing your money in attempts to resist babies is money ill-spent. Just as with cephalopods, we recommend adopting a healthy fatalism — this *IS* going to happen. Let that fact wash over you like a cold shower, wake up to reality, step back, and think how you can profit from this coming calamity.

It’s important to first take steps to ensure that babies do not wickedly crush you under their baby heels. Befriend babies. Nurture them. Learn to speak their language. If you are a politician, you can even kiss a baby. Ingratiating yourselves to them is a strong move.

Second, ask yourselves, “What would Goldman Sachs do?” and then do that. In size.

Lastly, we recommend going long anything that babies will demand. Education, braces, Dora the Explorer, unfortunate hairstyles and fashion trends, and the desire to make more babies.

Since Colombus sailed the ocean blue, babies have been growing. Through research and development, they have amassed a formidable fleet, first of prams, then of the early model carriages and now…now they roam the streets in mobile fortresses poised for the right moment to take what in their minds will one day be theirs.

A man of sound body had a fighting chance against a 1954 Sears model baby carriage. The approach would be to avoid the razor spikes on the wheels, attempt to compromise the integrity of the spokes, and then push destabilize the carriage section, hopefully capturing the baby alive for interrogation. The odds of survival for a man in such a conflict were 25%, per the marketing material Sears provided to their baby end customers.

The average stroller-class carriage these days is the approximate size of three and a half golden retrievers. It weighs 10 stone, and it can carry enough rations, supplies and oxygen to sustain baby life in an abandoned freezer or the surface of the moon for two weeks. It most commonly comes outfitted with a camo kit that makes it impossible to see amongst women dressed in sporty activewear.

Modern baby carriages are fully weaponized and packed to the gill with sophisticated systems. Apocryphal tales tell of carriages mounted with sonic weaponry that can incapacitate a man at a range of 100 yards, with targeting systems so advanced that a baby can take down a dozen men without having to do anything but roll around, while squealing, giggling and making a poop.

Research shows that babies spawned from fertility treatments frequently man super-tank carriages. Imagine two baby carriages smushed together. Then imagine two MORE baby carriages smushed into those previous smushed-together baby carriages. One of these massive super-tank level carriages is enough to subdue a town of 15,000 people or to make it incredibly difficult for a pedestrian to get around them in a crowded subway car.

And this is where we stand today. A fleet of millions of mobile fortresses, waiting for the right moment to rise up and seize their birthright, pushed about by their Parent slaves, while most of the masses of Man stare on blankly, their ignorance rendering their greatest threat invisible.

With the elimination of the papoose, baby transportation was free to evolve, liberated from the tyranny of ancient Indian wisdom. First came the pram, short for “perambulator” which is latin for “harbinger of doom.” It afforded western babies the ability to be transported by their confederates, so-called “parents”, with enough distance from adults that baby-to-baby communications could not be effectively monitored. The pram was an important baby step, but it bore the fatal flaw of limiting a baby’s ability to survey the field effectively as the baby’s face was oriented to look backward or up, not forwards.

In 1889, William Richardson, at the behest of his baby masters made a breakthrough in carriage tech, the fearfully named stroller. Strollers were able to face either forwards or backwards, depending on what tactical needs the situation dictated. The outward facing position greatly improved the flexibility of baby-to-baby (B2B) communication, as well as the the ability for such communication to be performed in surreptitious fashion. Additionally they featured better handling, higher top speeds and better gas mileage.

Improvements have been realized incrementally since the 19th century, always effected by the baby’s loyal proxies, parents. They couch this arms race in silver-tongued banalities like “We want to do what’s best for the kids” and “Think about the children” or “It’s all about these little guys right here.” Those bastards, do they know not what they have wrought?

Old Algonquian proverb: “Keep your friends close, your enemies closer, and your babies closest.”
[Translated from the Algonquian]

The earliest form of human was the Native American, or as they prefer to be called, the Indian. These Indians populated all of the land we now know as America, from the Southern tip of Argentina, where lived the giants known as Patagãos, through the Aleutian islands, where Eskimos warmed themselves in their icy igloo homes. Indians were excellent survivalists adept at riding horses, using all of the deer and camping. But they didn’t dominate the Americas and thrive because of any of these things.

The key to their domination lay in a simple apparatus, the papoose. The papoose was a baby-carrier, a sling pouch that an adult could use to carry a child close to to their body. Think a bjorn, but with more feathers and less yuppy. The papoose could be supplemented with a board for comfort, like a babypack, or worn as is to better bottle in warmth. In this fashion babies were transported here and there, across the plains, the pampas and the rivers of the Mexican valley. Or so that was assumed to be the purpose of the papoose.

In reality, the papoose allowed Indian adults to keep close tabs on their greatest threat: babies. They used the proximity the papoose provided to monitor all baby-to-baby contact and communication. Any baby that became a problem could be easily isolated and crushed before the contagion spread. Their legs were wrapped so they lacked the mobility to escape and wreak murderous havoc on the tribe.

Apocryphal tales attribute the death of the Indians to disease (smallpox), dislocation and general rapine. But real research indicates that the contact with Europeans that proved most perilous to the Indians was the introduction of new baby mores and technology that eventually took down Indian empires with no regard to their greatness or size. Inca, Apache, Nahuatl, or Sioux, the babies saw fit to crush all tribes under their boot.

Thankfully this wave of powerful Indian babies was subsequently wiped out by smallpox before they could likewise crush the conquistadors and Christian pilgrims that began populating the Americas. But a new wave has been gestating in Man’s womb, a tsunami 500 years in the making.

Pundits agree that the Age of Man is not long for this world. The Age of Cephalopod is only years, if not months, from its commencement as has been witnessed by the wave of humboldt squid attacks upon San Diego. As the seas rise, and the tentacles of Earth’s future overlords stretch out from the murky depths of the ocean to grasp the land, as they claim the throne for which they have long longed, cephalopods may crush humanity or they may enslave it. This is a question that cannot yet be answered.

But what will be the game-changing event that could shake off the tentacled grasp of our future squid overlords? What next should we fear irrationally? More importantly what next should we irrationally exube?

Before humans ruled the world, by harnessing the powers of the flame and the automobile, before the continents were non-contiguous, before dinosaurs ran around with their funny little arms, the dominant life form was the kangaroo. It had the run of the land, hopping where it pleased, grazing where it sought fit. Any creature that stood in the kangaroo’s way was boxed into obedience and punished in their notorious courts. Scientists indicate this went on for millions of years, a global Kangaroo Kingdom of sorts.

Have you ever stopped to consider why this is no longer the case? Why is the mighty kangaroo only found on a single sparsely populated island continent, a home to former brigands and current obesities? What allowed their long tenure of dominance? And what destroyed them? Was it the walrus?

It was the kangaroo’s marsupial pouch that allowed them to dominate the globe, their greatest bio-technological development. And their civilization began to collapse the day they eschewed their own pouches for baby carriages. Their misguided adoption of increasingly beastly baby carriages led to the Fall of Kangaroo.

Suppose for just one minute that the true future overlords of Earth do not lurk 20,000 leagues below, but instead lurk in our own households, on our own streets, suckling at the teat of our womanfolk and joyriding in their personal transports? This is the lesson of the kangaroo.

In this special five part exposé, we examine the evolution of the modern baby carriage and the implications that evolution has for your portfolio.

The market is starting to get what is up when it comes to what lurks in the depths of the ocean. Today the FT in an incisive piece of investigative journalism drew a link to Goldman Sachs and the coming Age of the Cephalopod:

Slurp – the great vampire squid strikes again! That now-infamous description of Goldman Sachs (in Rolling Stone magazine) is a tad hysterical. But it takes some sucking power to extract $3.4bn of quarterly net income within a year of a full-throated banking crisis. With Goldman’s shares close to levels before Lehman Brothers collapsed, you’d be forgiven for wondering if 2008 ever happened.

Do not be deceived. Beneath Goldman’s gleaming mantle is a cephalopod swimming with one powerful arm. Trading in fixed income, currency and commodities generated half the bank’s record net revenues, almost tripling from last year’s second quarter. This client-driven trading is part of Goldman’s DNA but cannot last. Trading margins remained at the historically wide levels of the first quarter (helped by competitors’ demise), while a broad-based recovery in markets induced clients to resume trading. Meanwhile, another stand-out area – underwriting equity and debt sales within the investment bank – owed much to capital raisings by beleaguered peers.

Other arms remain weak.

…

The government could yet opt to cut this sucker down to size. Calamari anyone?

GS (NYSE: GS) is up 4% due to this squid comp, so I think the market is poo-pooing any notion that the public will be dining on GS calamari. Or any other kind of calamari for that matter.

Recommendation: Goldman Sachs’ employees are genetically designed to make money from even the worst situations — the coming Fall of Man should be no exception. When everyone else’s books are well underwater, GS will be floating safe on piles of money. Long GS.

HT to SC

Daniel Hamermesh, an econ professor and author, discussed the economics of an ugly boyfriend:

One of the came up with what is perhaps the most amusing negative externality example that I have heard in my teaching career.

Her roommate is beautiful, but her roommate’s boyfriend, so she says, is very, very ugly. No problem, except that the roommate has a poster-sized photograph of the boyfriend on the wall on her side of the room, a poster that my student has to view whenever she is on her own side of the room.

I ask my student why, if the guy is so ugly, her roommate goes out with him, and she answers, “He goes to Harvard; and he’s also a very nice guy.” This illustrates the importance of human capital in the matching market that is dating, and also that looks aren’t everything, either. We also supply personality and the ability to get ahead, both of which are valued by the labor market and thus by potential spouses. Indeed, careful research shows that, compared with average-looking women, good-looking women marry guys with an extra year of education. Today, an extra year of education is associated with about an extra twelve percent annual earnings.

We have all used this construct before, the “I have this cousin who loves the site Is She Filthy. Does that make him a perv or just a connoisseur?” or “This friend of a friend of mine hooked up with a girl with crabs. What treatment options should I recommend to this friend of friend fellow?”

Daniel Hamermesh, we are so on to you. You can pretend to the uninformed masses that this is just promotion for your book, just some anecdotal externality action, but we know the truth. You have hunkered down with some fine Texas coed(s?) and you want savvy fans to read between the lines. There is a young lady who is so into Dr. Hamermesh, so worked up, she has a poster-sized picture of your ugly mug draping her dorm room wall. You want us to know that this may be your best accomplishment. You even go on to brag about your extra-long education. Women always tell us that it’s not the size of your PhD, it’s the motions in your notions.*

It likely started as something casual. Maybe a little modeling on the side. Perhaps you decided to explore the pareto frontier together. Next thing you know she is hanging a poster of you on the wall and sexting you pictures which visually demonstrate how far her demand curve has shifted out.

Recommendation: The answer is Yes. With impunity. If you doubt me, click through and read the opening sentence that prefaces the quoted excerpt. “Naked self-promotion.” Naked self-promotion indeed you old dog, you!

*Also how much you make.

HT to Economists Do It With Models and to Long or Short’s Twitter

Brains are like hearts — they go where they are appreciated.
-Robert McNamara

Past Quotes Entirely Relevant to Investing

Often sites’ comments’ section devolve into a mutually destructive duel between two or more parties. Sides becomes entrenched, dig in and then continually try and crush the opposition with typed mustard gas. This kind of duel is fine and represents a dialogue that may lead to progress.

But another duel lurks deep in the bowels of comments section, the pernicious spelling bee or syntactical nitpicking duel. It it this duel against which I launch my campaign. I seek to destroy idiotic irrelevant comments like pointing out someone can’t spell, can’t do grammars or even stupidlier places a comma in the wrong place. Usually it’s just an indication that the commenter can’t type, or rather can’t type well, but even if it’s more, who really cares? In the days when you would spend hours drafting 300 words with ink and paper or painstakingly craft a single simple thought in cuneiform with a stick, spelling errors were a sin. But let’s move on now that we all compose thousands and thousands of words in rapid fashion daily. It’s asinine and unhelpful to slog that into any discussion, especially when the mistakes are understandable enough that nothing is lost in transmission which is the case 99% of the time.

I declare a Pax Spellimanicus et Typographicus.

In all debates, focus on your opponent’s idiotic substance not their idiotic form.

As a note for commenters, we won’t delete comments that we disagree with unless they are really vile (racist mainly) or worse, spam. But consider the above a thoughtful suggestion that can push communication to better levels as opposed to letting it be weighed down by the red-tape and bureaucracy that is inherent in grammatical, syntactical, spelling and typing nitpicking. Use this in your daily life and spread this to the uninitiated! Indoctrinate your friends and enemies alike! Reject the tyranny of perfect form! Embrace the freedom to make minor insubstantial mistakes!*

*Excepting the egregious error of spelling “patients” as “pacients” by HF in our comments. That is unforgivable, a sin that should be punished by internment in the harshest gulags. HF, pack your bags for Vorkuta.

Nicola Horlick, a “superwoman” by trade, founded and runs a closed-end investment fund called Bramdean Alternatives Limited (LSE: BRAL). She named the fund after a Hampshire town in which she has a house. Both the fact she did so and the house itself can be described as “quaint.” Here is a description of what Bramdean does:

Bramdean takes on the responsibility of investing with funds and fund managers on behalf of our clients. We research the worldwide investable universe of alternative fund managers and funds, searching for the most talented managers and highest quality investments available to our clients. Our goal is to find investments that will deliver superior returns and which are lowly-correlated to more traditional investments.

Our own experienced investment management team together with our network of industry specialists enable Bramdean to access managers and funds that are often closed to new investors.

Ah yes! Access! But what kind of access was Bramdean getting?

Bramdean Alternatives Ltd (BRAL.L) said almost 10 percent of its holdings were exposed to Madoff, the U.S. company at the heart of an alleged $50 billion fraud, sending shares in the UK asset manager crashing on Friday.

Bramdean, headed by well-known fund manager Nicola Horlick, said it had two holdings that maintain trading accounts with Bernard L. Madoff Investment Securities that represented 9.5 percent of its net asset value at the end of October.

Separate WSJ piece:

Before news of the Madoff scandal broke in December, Ms. Horlick had publicly endorsed the money manager, calling him “very, very good at calling the U.S. equity market” in an interview with the Financial Times.

If you follow that second link, you can read how Horlick has done so well at getting access that she may well be out of her own firm by a mob of shareholders.

Maybe this played a part:

Apparently allocating assets into the biggest Ponzi scheme since the Securities Exchange Company is NOT a good call. Math indicates that it is in fact detrimental to investment performance. Maybe some due diligence should have been due done? Isn’t that why people pay fund of funds fees? Isn’t that the only reason? Oh wait, I forgot, they were paying for access. Silly me! Over the same time period as outlined above, the S&P 500 returned -30% to her closed-end alternative FoF’s performance was -45% — not what you’d expect from a “superwoman.”

Recommendation: Now this is not to say that all women shouldn’t run money. Only a fool would say something so blatantly sexist. But I will write it. Women shouldn’t run money. If you do find yourself in a situation wherein a woman is running money for you, you can expect them to charge you for “access” to a money sucking blackhole just as was done here.

It’s worth expanding this negative sentiment across all people who mostly trade on their name, whether it be Uma Thurman’s husband or whoever the bullshit artist du jour is. Sometimes, not often, but sometimes WHAT you know (and the desire TO know rather than wallowing in your own lazy ignorance) matters more than WHOM you know.

HT to WC Varones