Long or Short Capital

From a WSJ article on Madoff’s fraud:

Barney Frank, chairman of the House Financial Services Committee, which will have influence over how Congress writes financial market oversight this year, offered a more sympathetic posture toward SEC staff, saying he had spoken with enforcement officials in Boston and elsewhere. “There’s no suggestion that any of them were less than diligent; there were some structural flaws here, but in my experience, it would not be appropriate to blame any of them.”

Really? You mean receiving a letter saying “The World’s Largest Hedge Fund is a Fraud” about the fact that the world’s largest hedge fund actually WAS a fraud, and not being able to figure that out, that is not less than diligent???? The hardest part about due diligence remains actually doing it.

Recommendation: There is every suggestion that Barney Frank is less than diligent. And no, I don’t think it’s just some structural flaws.

Anyone who expects markets to restore a disturbed equilibrium instantaneously will be disappointed. People cannot discover the relevant changes, confirm and assess them, consider alternative arrangements of their affairs, and carry out those changes in an instant. The competent economist appreciates the necessity of patience in evaluating the market’s operation. Simply because the market does not appear to have reconfigured itself fully soon after a shock, we have no warrant to conclude that “the market doesn’t work anymore” or that “the market doesn’t work the way it used to.”
-Robert Higgs (ht: Econlog)

Past Quotes Entirely Relevant to Investing

Slightly over a year ago, we debated chicken little cries of Peak 2007 and, in retrospect, the world would have been better had we been 100% correct and 2007 was as limitless as we had hoped. Well we are back in the chrono-markets, with what we think is a true free lunch. Long 2009. It’s going to be a great year.

In 2008, investment banks ceased to exist, the real estate market was the worst ever, the stock market plunged more than it has since the world was depressed, The Hills continued, unemployment soared and every measure of economic health broke. So on a relative basis, 2009 looks like it is has a full year of easy comps thanks to the way in which God has cooked the books with some kitchen sink accounting.

Our current forecast for 2009:

1. The stock market’s annual performance will be better than a 35% decline
2. Consumer sentiment will improve
3. The first black President ever will be in office
4. The Hills, and all involved, will try to comically reenact the Jonestown massacre, but their white night will go tragically wrong when their illiteracy causes them to mistakenly add actual cyandide to their flavor aid rather than faux cyanide.
5. The US will keep kicking the rest of the world’s ass, especially China’s.

Recommendation: Long those who killed it in 2008 (down less than 35%) and plan to kill it in 2009 (down incrementally less than 35%).

Science is the quest to know, to evolve the communal intelligence of mankind. When we dislike the dark, we invent a light bulb to see. When we dislike too much light from light bulbs (or the sun), we develop sunglasses. When our sunglasses don’t make us look trendy enough, we invent ironic trucker hats. When trucker hats do not fully express the extent to which we are devoid of class and taste, we invent frufru dogs. And so on. That is science.

So it should come as no surprise how the energy crisis has played out. Need –> Invention. Southeast Asia needs a renewable fuel source? Power bikes with piganol. Mortgages are too scarce? Make mortgages out of corn. Corn too expensive in the US? Make ethanol out of pigs. Americans have an excess of calories stored on their bodies and gasoline prices are too high? Turn people into gasoline.

For a time, Beverly Hills doctor Craig Alan Bittner turned the fat he removed from patients into biodiesel that fueled his Ford SUV and his girlfriend’s Lincoln Navigator.

As with all amazing breakthroughs, there are some minor technical details that are still being hashed out for this revolutionary renewable energy technology:

Using fat to fuel cars might be environmentally friendly, but it’s definitely illegal in California to use human medical waste to power vehicles, and Bittner is being investigated by the state’s public health department.

Although it’s unclear when Bittner started and stopped making fat fuel or how he made it, his activities came to light after recent lawsuits filed by patients that allege he allowed his assistant and his girlfriend to perform surgeries without a medical license.

Recommendation: Long fatties. We also reiterate our earlier position recommendation:

The play here is to start buying distressed poor American assets and forming farms, ranches or even islands dedicating to housing them and fattening them on low cost / calorie inputs like McDonald’s (NYSE: MCD) dollar menu and corn syrup IVs. Long poor Americans.

HT to Straight Cash Homie

Don’t you realize? The next time you see sky, it’ll be over another town. The next time you take a test, it’ll be in some other school. Our parents, they want the best of stuff for us. But right now, they got to do what’s right for them. Because it’s their time. Their time! Up there! Down here, it’s our time. It’s our time down here. That’s all over the second we ride up Troy’s bucket.
-Mikey from Goonies

Past Quotes Entirely Relevant to Investing

I’ve found the worst investor ever. I mean this has to be him right? His name is Jerome Fisher, the name may be slightly familiar as the founder of shoe-company Nine West. But he has done so much more than that. He lost a significant chunk of change in not one, but two of the biggest hedge fund scams in history, KL Group and Bernie Madoff Investment Securities.

He was an investor with the KL Group, a hedge fund run by Korean-American scam artists who defrauded investors of nearly $200 million. Maybe he should get a pass for this one as it was tough to imagine this being a fraud. I mean, according to the linked article, there were no telltale signs of anything but trustworthy, diligent investment management.

The aura of success and exclusivity around the firm was so strong that investors often begged to be let into its funds, some of which were said to have astounding annualized returns of 125 percent for several years.

…

And there was never a formal independent audit to verify whether the remarkable returns reported by the funds were real.

…

NOT that it was all that difficult for KL to persuade investors to jump into the funds with both feet. Its main fund reported strong returns of 70 percent in 2003 and 40 percent in 2004, according to statements given to investors. The lifestyle of the funds’ original three principals also supported the picture of a business doing well. The young men drove flashy cars: Maseratis, Porsche 911’s and Mercedes SL 500’s. (The firm’s personal masseuse drove a Jaguar X-Type that was provided by KL.) End-of-year holiday parties were held in Las Vegas, where Mr. Kim and Mr. Lee were high-rolling VIP’s at several casinos.

The crown jewel was KL’s luxurious offices in the new Esperante building in downtown West Palm Beach. The large sunlit offices were filled with gorgeous desks designed by Dakota Jackson and a conference table that had to be hoisted 17 floors through the building’s elevator shaft. Some walls were covered in a gray suede fabric, and in the corner of Mr. Kim’s office was a $6,000 massage chair. The trading floor had large flat-panel televisions scattered throughout.

It all was a great way to impress clients, who were ushered in to watch the main attraction: Mr. Kim. From his captain’s chair, he traded frenetically, surrounded by 20 computer screens.

I think we should give him a pass. Nothing in the quoted passage screams to me “I should be hesitant about entrusting my money with these people”. (Full Disclosure: LoS’s personal masseuse is provided a company car, it’s an Escalade Hybrid so it gets good gas mileage).

But we can’t give Fisher a pass for having $150 million dollars with Madoff. Sure lots of smart people were fooled by Madoff, lots of smart people invested with him, but how many of those smart people, who dumbly ignored all the warning signs and were proven to not actually be smart people, had had their fraud-sense heightened by recently having suffered a separate large hedge fund fraud? Wouldn’t that be a signal to review your investment portfolio to ensure that, for example, all your money is managed by people who have been audited by legitimate auditors? Or that your firm had adequate compliance procedures (or ANY compliance procedures)?

Recommendation: Fool you once, shame on you. Fool you twice, you suck at investing AND don’t deserve your money, and we’re just glad that the invisible hand is helping the world sort that out.

Addendum on KL Group: This is just too awesome to neglect sharing.

Tein said the trio lost about $20 million to $30 million of investors’ money through bad investments and then stole the rest, shipping the money overseas and gambling it away during frequent trips to Las Vegas.

Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.
– Charles Ponzi, on his scam over the people in Boston (Note, this was submitted by reader Charles T on November 10th, a month before Madoff came to light. I’m not saying he has a time machine, but there is a distinct possibility)

Past Quotes Entirely Relevant to Investing

Corporate Speak: “No one in the marketplace knew how swiftly the housing market would fall — not the Federal Reserve, not the Treasury,” said Ted Eliopoulos, head of Calpers’s real-estate portfolio, in an interview.
Translation: I have just invested tons of money at the absolute top and lost 103% of what I put into the deals due to using recourse debt. I am a moron. I could not have predicted the housing market would fall. No one could have…other than Ron Paul, John Paulson, Robert Shiller, and Long or Short Capital.

Corporate Speak: “Could our margins go up? They could absolutely go up.” -CEO of Take-Two Interactive (NASDAQ: TTWO) on 12/16/08 conf call.

Translation: Have you noticed that we have lost money for the last four, seasonally strong holiday quarters? Our margins are definitely not going up.

Corporate Speak: “Moreover, I think we’re trying to emphasize that these times are indeed very uncertain. Without trying to sugar coat the story, because it’s not our nature. We feel really good about the position we’re in.” -CEO of TTWO
Translation: We are sugar coating our story and it is, in fact, our nature.

Corporate Speak: “I am qualified to be Senator of New York.” -Caroline Kennedy
Translation: My qualifications for this position include a fancy last name, not holding a full-time job, not holding any political office, and writing books for children. I am definitely not qualified to be Senator of New York.

As a follow-on to my previous post, I wanted to give investors an idea of what quality due diligence looks like in a handy to read chart. This is exactly the kind of process that would ensure that investors are the victims of neither investment mismanagement nor fraud. Hat tip for the picture to a firm called Fairfield Greenwich Group.

The Affair de Madoff offers many lessons to potential investors, lessons that should have already been widely known and obvious, but apparently are not. As masters of the obvious, we have provided a handy check list to aid in doing diligence on whom you trust your money with.

1. If your investment manager has almost no volatility in his returns, either he is an annuity (and you are a moron) or he is lying (and you are a moron). An example of what to look for is if the monthly returns over 17 years looks like they were drawn with a compass (and likely were).
2. If your investment manager is not charging fees, and is “making it up on volume” (more or less), step back and think about that for a second. If you were in Brazil and a whore said she wanted to give you a free sex because she was making it up on volume, what she really means is that you will wake up down a kidney or two. No different with an investment manager.
3. If your investment manager goes to 100% cash for quarter and year end accounting purposes, red flags should be raised. Those specific red flags ought be “Is he doing this because it’s a Ponzi scheme and this allows him to better obscure his shenanigans?” and the answer to those flags should be “Yes.”
4. If the auditor of your investment manager is a firm you have never heard of, or operates in a 15′ by 18′ foot shack in upstate NY or NJ, or is the brother in law of the principal of your investment manager, it is worth questioning the validity of the audit. Especially if your investment manager is the largest hedge fund in the world.
5. If the compliance officer of the investment manager is the niece or brother of the principal, it is worth questioning the hardiness of the firm’s compliance policies. Here is a quick refresher. Things you want in a compliance officer — an independent agent assessing a company’s compliance. Things you don’t want in a compliance officer — a relative.
6. If you cannot understand the return statements your investment manager provides, and no one else can either, it is worth questioning whether the returns are legitimate. It is sort of like buying a novel from a bookstore. If you receive said book, and not only is it not written in English but, as far as you call tell, it is written in no language known to man, you should ask for your money back.
7. If your excuse for getting defrauded out of all your money by not observing any of these rules is that a lot of other smart people fell for the same thing, consider the fact that these other smart people are actually not that smart. If your excuse is that you knew something fishy was going on and hoped to benefit from it, you probably shouldn’t be allowed around money ever again.
8. Never, under any circumstance, trust the SEC. It is not a coincidence that the SEC was also the acronym for Charles Ponzi’s Securities Exchange Corporation.
9. Lastly, it’s important to actually, y’know, do diligence, so do it. It’s not called due diligence for nothing.

California is the home of honey and milk, but soon to be the home of fiscal crisis. Oh but it’s so beautiful there, and progressive, and they are forward thinkers, and green too, and don’t forget multicultural and don’t forget they hate the gays! Who doesn’t love California! All things to all people. Well, it’s a good thing you people love it because the rest of the country is going to have to bail it out.

Fact: There are a million crazy reasons why California’s budget is high, including pension spiking and paying firefighters 4x the avg income of a resident. If firefighters are some of the highest paid people in your county or state, with salaries well into low-six figures, great benefits and true pensions that allow you to retire at 50 and receive salaries (in perpetuity) above what they made in the 4 yrs they actually worked…well, then your your state had better be on fire or beset by fire-breathing dragons like in Reign of Fire because that’s the only way to justify that level of compensation.

Fact: Calpers is apparently not good at investing money. Especially in Real Estate. Maybe I am being too harsh, but losing 103% of equity is sub-Madoff. When you factor in the advantageous tax-loopholes of being defrauded rather than your investments crappily managed, Calpers’ RE performance is worse than Madoff.

Fact: The state is run by a man whose most favorites words are “I’ll be back”, which, not coincidentally, is what people say most often when they deliberately plan to skip out on a bill, and never be back.

A fiscal crisis looms in California and the most likely broadly palatable fix is some sort of bailout of CA by all the non-CA states. To that, I say we should learn to change our palette and develop an acquired taste for more extreme solutions.

Solution: My solution is simple. Johnny Debacle’s Debacle Plan for California. America should make California an off-balance sheet liability. And by off-balance sheet, I mean we should sever California from the continent. You love your state? You can have it. CA seems to have a thing for earthquakes, so that is the most direct solution but I am open to any Debacle that can cut California off from the continental US.

Crust penetrating alien space lasers? Beam away, Xenu.
Subterranean magmatic discharges? Here you guys come.
Poseidon’s rage creating a water torrent that snakes around CA’s land borders? I’m sure they did something to piss you off, like calling you Neptune.

The United States should help put back California where it belongs. Floating alone in the ocean.

Jenny. I believe God made me for a purpose. But he also made me fast. And when I run, I feel His pleasure.
-Eric Liddell in Chariots of Fire

Past Quotes Entirely Relevant to Investing

NBC has taken a page from the Hills and gone fully post-modern. Their plan for the network over the last several years is now fully formed — Expand the Today show, expand the Tonight show, so eventually there is nothing else, no other reality, nothing to actually talk about on Today or Tonight except Today or Tonight. In stock brokering, we call that focusing on your “core competency”. NBC knows that virtually nothing else it puts on the air is worthwhile so why not cut the wheat from the chaff, and focus on selling as much chaff as possible in one’s most valuable time slots.

When time travel is developed, they will add to their lineup new concept the Tomorrow Show, in which time travelers will enter the future (specifically the next day) to give you celebrity interviews, heart-warming human interest stories, and Jay-Walking Through Time. The Tomorrow Show will be followed by the The Yesterday Show, in which, a time traveling host or robot will go back to the day before and give you celebrity interviews, heart-warming human interest stories and authentic cooking tips from the past (yesterday). It’s likely that the Yesterday will also create an infinity loop or potentially destroy time itself, but don’t worry about that, you probably won’t even perceive either if it happens.

Recommendation: We recommend shorting the Sheinhardt Wig Company.

[W]e do know something – at least abstractly – about the future. We know that other great crises will come. Whether they will be occasioned by foreign wars, economic collapse, or rampant terrorism, no one can predict with assurances. Yet in one form of another, great crises will surely come again… When they do, governments almost certainly will gain new powers over economic and social affairs… For those who cherish individual liberty and a free society, the prospect is deeply disheartening.
-Robert Higgs, Crisis and Leviathan

Past Quotes Entirely Relevant to Investing