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Akram is a Director at Suhail Capital.
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  • The Story of Agent Clean Slate

    ( As financial policy drifts further into the realm of fiction there is very little need to take policymakers seriously anymore. Meet Agent Clean Slate the future of financial policy.)


    Money Honey: So I hear you have a story for me.


    Agent Clean Slate: Yes, my name is Agent Clean Slate. I'm here from the not so distant future in a last ditch effort to save the global economy.


    Money Honey: Come on, you don't expect me to believe this nonsense. How did you get this meeting?


    Agent Clean Slate: Believe what you will, but I spent seven long years at TIBET preparing for this mission, if I fail then all hope is lost.


    MH: You are from Tibet?


    ACS: Yes, the agency for Time Interfering Based Economic Therapy, or TIBET for short. The abbreviation throws off the Chinese.


    MH: Agency? Chinese?


    ACS: Yes, we are ETC's, economic time cops. Project TIBET is part of the Clean Slate Initiative.


    MH: Clean Slate Initiative?


    ACS: See, where I come from, or more appropriately, when I come from; the earth's economy is a mess. 2/3 of the S&P 50 trades at a negative enterprise value. Central Banks are bust. Gold has been banned by the governments.


    MH: S&P 50?


    ACS: Yes, after a wave of consolidation and bankruptcies the index is whittled down to fifty firms.


    MH: And what about gold, why has it been banned?


    ACS: Governments believed that the loss of confidence in paper money was due to gold, and they figured this could be reversed by banning the metal altogether. Anyone caught holding gold is to be charged with high treason.


    MH: So, what do they do with the confiscated gold?


    ACS: All gold on the planet is stored in Iceland.


    MH: Iceland?


    ACS: Yes, iceland is the most advanced and stable economy on earth. Having abandoned markets and banking altogether and returned to their roots, the Icelandic people experience an economic rebirth. Breakthroughs in fishing and geothermal power allow iceland to become an economic powerhouse. They then volunteer to take over global financial regulations.


    MH: That makes no sense. You want me to believe Iceland is an economic power. What about Japan, the U.S., China…….


    ACS: There is no Japan.


    MH: No Japan……Was it a Tsunami or an Earthquake?


    ACS: Worse, it was AHDS.


    MH: AHDS, what's that?


    ACS: Advanced Hyper Deflation Syndrome. It's a nasty little bug.


    MH: Hyper Deflation destroyed Japan. That's a bit much. No economic problem can be that bad.


    ACS: My friend if you have seen a hundred year bond trading at 1bp you would understand what I was talking about. And if I fail in my mission I can assure you that you will live to see that day.


    MH: 100 year bond? What are you talking about?


    ACS: In 2012 the Governments of the World Institute the 100 year protocol to end the sovgn debt crisis. All sovereign debt is rolled over to 100 year maturities. It ends up being the worst financial policy decision in history.


    MH: Why?


    ACS: It completely destroys the time value of money. Money tomorrow becomes worth the same and in many instances more than money today. Finance collapses, and Governments follow. That is why Japan is now the home of the Apple community. A post apocalyptic UI driven society started by its predecessor the Apple corporation.


    MH: Apple owns Japan?


    ACS: No, Apple is Japan. Once the Yen collapsed Apple bought the island on the cheap and stopped selling its products to the rest of the world. If you want to use Apple products you have to move to the Apple island and convert to Jobsism. Basically, Apple concluded that they had reached the limits of the classical UI experience. To preserve Jobs' vision Apple needed control over all expects of daily life. Call it technological evolution. Their new slogan is "An Apple a Day for the Rest of your Days".


    MH: Wow, and what about Europe?



    ACS: After flirting with the idea of a fourth reich, Germany chooses an isolationist path. It is now the Wonka state. Plenty of goods come out of there, but nobody is ever allowed in. The rest of Europe is a mess.


    MH: And China?


    ACS: The Chinese are doing ok. Around 2020 we discovered that they were behind the housing bubble and the collapse of the US economy, and that Greenspan was a Chinese agent. But by that point the US military, after a decade of austerity inspired budget cuts, is in such a state of disrepair that there is nothing they can do about it. Outside of Germany and Iceland the rest of the world is at the mercy of China and their economic and military power. That's where I come in. The goal of CSI was to develop time travel technology so that we could travel back in time and fix the great economic policy mistakes of our ancestors. Hindsight replaces stimulus. The project is top secret and funded by the few remaining members of the S&P 50 and the investment bank Goldman Farmorgan.


    MH: Goldman Farmorgan?


    ACS: Yes, Morgan Stanley, Jp Morgan, Wells Fargo, and Goldman are merged into one bank.


    MH: Wow.

    ACS:So, Goldman Farmorgan provided a bridge loan for the project with GooGamaZon ventures putting up most of the equity.


    We code named it TIBET to confuse the Chinese who we knew would do anything in their power to stop this project from succeeding. And we located the primary research facility underneath the abandoned World Cup mega complex in Qatar because that's the last place we figured anyone would look for anything.


    MH:What is your mandate?


    ACS: To develop the ability to successfully send someone back in time to stop the collapse of Lehman


    MH: So Lehman was a mistake?


    ACS: Not exactly, the stimulus that followed Lehman was the mistake. Lehman was just the excuse. By stopping it we aim to temporarily slow the chinese down and buy ourselves time to fix the real problems.


    MH: Why not just go back and replace Greenspan?


    ACS: It's not that easy. Time travel is complicated. We are using an Einstein-Scholes bridge to enter and exit through funding holes in the time based capital structure. We never know when we will arrive, and we lack the power to remove principal actors. We can simply seek to influence, but as Greenspan is an agent for the Chinese that wont work.


    MH: So how does it work then?


    ACS: Well, the Googamazon search engine locates funding gaps in the time structure and then send agents in to fill those gaps.


    MH: How do you fill the gaps?


    ACS: With Gold from iceland of course. It still has financial value in your time. We structure a swap between two parallel universes, and presto the bad debt is gone.


    MH: But how do you hedge your parallel exposure?


    ACS: We don't. If we do our job right our universe will cease to exist, thus we are inherently delta neutral.


    MH: Is that all?


    ACS: No there is one more thing.


    MH: What's that?


    ACS: We fix the bankers.


    MH: What do you mean you fix the bankers?


    ACS:Well, every TIBET agent must deal with your investment bankers. Why do you think we wear these suits?


    MH: Yes, you are kind of like those guys from the film MIB.


    ACS: We are MIB's. Men in Brioni, and there is a good reason for that. We need bankers to trust us before we give them them their BONUS back.


    MH: What? You are going to give them a bonus?


    ACS: Yes, a bonus. A banker's onus.


    MH: A banker's onus?


    ACS: It's a sense of responsibility. We give them their b-onus by taking away their bonus.


    MH: Ok, i'm confused.


    ACS: Well,every agent has neuralizer which can be used to wipe memories. Much like the movie MIB except that we use our neuralizer to simply readjust the memory of investment bankers. We don't wipe, we plant powerful suggestions.


    MH: And how does that work?


    ACS: We make them believe they don't deserve their bonus.


    MH: So what?


    ACS: It's actually a very powerful tool. Once a banker believes he or she never deserved their bonus they become overwhelmed with guilt. They then feel that they have a debt to society that they must repay.


    MH:How can you be so sure?


    ACS: Easy, I was the first person this was tested on.


    MH: You are a banker?


    ACS: I was an investment banker. That is why I am here today.


    MH: What do you mean?


    ACS: I told you I was here to stop Lehman.


    MH: Yes.


    ACS: And i told you that when it comes to principal actors in time we can only seek to influence and that we cannot remove them.


    MH: Correct.


    ACS: Well then, how do you think i am going to stop Lehman?


    MH: Convince the government to bail them out I guess.


    ACS: There is no way for me to change the events of that weekend. There are too many actors involved and too many opposing forces at work.


    MH: Then, you need to go back in time and convince Dick Fuld to sell Lehman before it is too late. But how are you going to convince Dick Fuld of anything?


    ACS: (Smiles) Thanks for your time.


    MH: That's it?


    ACS: Oh, I almost forgot, one more thing.


    MH: What?


    (Agent Clean Slate flashes MH with his neuralizer)


    ACS: You will remember nothing about the conversation we just had other than the fact that you really enjoyed talking to me.


    MH: Wow i really enjoyed this conversation….Mr……..


    ACS: Fuld…..but you can call me Dick.


    MH: Dick Fuld? You know that's the same name as the former Ceo of Lehman. And you kind of look like him….that must be a tough combo.


    ACS: Yeah, i know. I get it all the time. They tell me if i was just 25 years younger i'd be a dead ringer for him.


    MH: Yep. (MH's phone rings) Just give me a sec Dick I need to take this. (MH steps away to take the call)


    Agent Clean Slate: Ok.


    (MH returns)


    ACS: Sorry, Dick that was……. that's strange where did he go?


    (Agent Clean Slate has vanished)


    To Be Continued

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Sep 20 3:49 PM | Link | Comment!
  • "Netflix; Ignore the Girl in the Red Dress"
    “The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it.�- Matrix, 1999
    I really am a glutton for punishment. I did everything I could to avoid Netflix in this earning season. I think there might be some 25 companies reporting this week that I know extremely well and could find some way to trade, but for some strange yet compelling reason I feel it’s time for me to revisit this trade and potentially hit it hard. The last time I traded Netflix it was 140$.  It closed on Friday at $182.  Did anything happen over that time period that warranted another 50% rise in the stock? Great earnings, a major industry shift in their favor, a brilliant acquisition? NOPE, none of that for good old Netflix. The stock rose on what is commonly referred to as good old fashioned momentum. Up, up, and away became popular, and Netflix, a short favorite, was a good place to be to make fast money.
    So, why do I think now is the time to call an end to this momo party?
    The way I see it there are five reasons to be short Netflix this earnings announcement.
    1)      Material Industry Landscape shifting news in the past couple of weeks that doesn’t bode well for Netflix
 consolidates Lovefilms- Amazon, a minority equity holder, in the ‘Netflix of Europe’, had always been rumored potential acquirer. So, this is not exactly surprising news to most of the people following this space, but it is now official. This means that Netflix will need to contend with an entrenched and very deep pocketed Amazon if it decides to venture into Europe, and I only expect this combination to get better as Amazon leverages its asset to enhance the  Lovefilms user experience. Expansion to Europe was often listed as the next big catalyst for the stock by most momo traders. This deal becoming Official/Headline stuff just hammered that thesis.
    FCC signs off on Comcast-NBCU Merger- This has been an ongoing and closely watched regulatory situation as the FCC’s conditions to this merger have potential far reaching industry implications. The review process took one year and involved extensive lobbying on both ends. What came out of it was surprise surprise good news for Comcast-NBCU. The ‘conditions’ were for most of us a lot softer than expected, particularly in the on-line video space, were they left a lot of room for Comcast to slow, or depending on how you view things, kill the OVD disruption. (I will say I never really viewed online video streaming as a true disruptive tech because in my eyes the technology infrastructure in the form of vod has been there….it’s really been more of UI phenomena and media conglomerate lack of strategic direction pricing/loophole exploiter than the genuine disruptor it was to rental chains) Comcast is now sitting on a large equity stake in a competing OVD service (Hulu) and controls a huge content empire. The cord cutting hype that was behind Netflix shares in 2010 is now being replaced by a much harsher reality. The companies best possible outcome now remains what I thought it was before,  a very fragmented distribution/content market. The Comcast deal allows  more investors to recognize that the Netflix story of getting content for next to nothing and access to distribution infrastructure for next to nothing was in fact TOO GOOD TO BE TRUE. It’s like exploiting a loophole or a glitch in the matrix, it works right up until the point that it doesn’t. What determines that is largely beyond your control. If OVD’s have to deal with likes of Comcast and Time Warner going forward, the cord free universe dream fades away. Dream stocks without a dream attached often lead to disastrous returns.
    FCC Net Neutrality- At this juncture I’d say the rules are a Net Neutral for Netflix, though ultimately I am leaning in the direction that they are bad news as the cost of internet streaming relative to traditional bundled consumption is likely to go up which ultimately is an issue for disruptor/switch based model and as we get more details on managed service rules. At the end of the day, OVD’s will have to accept the fact that the only way to get completely around the potential discrimination issues is to build or acquire their own networks.  Anyway, as far as nflx shares go,  this was another regulatory issue that doesn’t exactly favor their long-term model that was resolved over the past few weeks.
    2)      If the first week of Earnings are an indication, Netflix type stocks are not exactly the place you want to be this earnings season
    Netflix shares are up 257% over 12 months. The stock is currently the best performer in the SP500 over a 1yr period. Those are not under the radar numbers, and going into earnings this could be a serious advantage for short-sellers. Citigroup, Goldman Sachs, and F5 networks were all high expectation stocks that got hammered last week. The latter two on what were respectable reports. A similar but less extreme pattern of stock behavior was observed in the energy, fertilizer, or mineral names that reported last week. Good news was just not good enough for most of these stocks. And remember we are talking about names with fundamental stories that are INTACT and ROCK SOLID. Nobody is questioning the fact that F5 is dominating one of the hottest segments in the networking space or that energy, food, and metals are good places to be. So, if these stocks can get cracked, you need to respect the tape. And what I saw in the tape last week was value/underperforming names drawing interest/ rotation.(ms/ge) If I am shorting a momo, I like to see signs of this type of action in the broader market. The fact that this momo has its own issues is icing on the cake.
    3)      Analyst sentiment on the name now favors the shorts
    I don’t usually rely on sell-side analysts for anything more than a temperature check when I am putting on a trade, but I will have to say I have been impressed by the number of analysts who have stuck to their guns and continued to highlight the disconnect between the business model challenges and stock price. The recent industry wide developments have led more than a few analysts to get cautious on NFLX shares which is in sharp contrast to the tape I was shorting into last year. I counted 8 analysts with price targets that are 10%+ below the current share price when I think there were only 2 names in this category last august. This tells me that no matter what nflx reports, the bearish analysts are likely to be growing even more confident in their case and will continue to spin news flow in favor of their longer term bear case on the shares despite the near term business model momentum. Basically, every nflx announcement will now be viewed through an Amazon in Europe and Comcast in US competitive prism along with the typical content cost margins issues. If you’ve been buying based on headlines and the fact that you felt momentum was on your side, this is a cause for major concern.
    4)      This is the perfect time for some shareholder unfriendly Corporate Action
    Netflix’s cash situation has been going in the wrong direction for the past four quarters. With recent developments in the space, one does wonder what Reed Hastings is thinking. He should be shoring up his balance sheet here and raising some cash for the likely expensive content/network access road ahead. It’s the smart thing to do. I think a secondary to the tune of $500-$750mm for general corporate purposes including acquisitions, content licensing deals, etc should not be ruled out. In fact, I’d be pushing for this if I was advising them.
     5) First look at a business model in transition
    This earnings will be the first time mgmt really has to offer guidance for the transitioning model. Up until now nflx mgmt has had the luxury of cheap content driving streaming while they continued to run their core mail in model. Now, things get a bit more complicated. Nflx is going to be paying big bucks for content in 2011 and at the same time still supporting the mail in dvd model infrastructure. This usually doesn't bode well for margins and might have something to do with the recent dvd que elimination. Mgmt isnt one to do anything to mess with their sub base, so this move really stood out to me as a sign hastings and co want to accelerate the shift to pure digital. Basically, if you are going to spend 500-1bil a year on content you might as well ditch make sure you are completely ditching the mail in model. Mgmt obviously has some accounting room to operate as far as amortizing these costs, but i think it is fair to say it is going to be hard not to give the street a clear picture of what the 2011 nflx will look like tooday, and that their is potential for a very negative surprise as mgmt has chosen to kick this can down the road over the past few quarters. Well, that is no longer an option. 2011 is here, you still have mail in, you will be paying a lot more for steaming content, and one of your biggest sources of content output is up for negotiation. This is what i am looking at and not the q4 numbers. I think everyone on the street will concede q4 will beat expectations on subs and top line.
    Conclusion- Putting these five factors together I have decided to put my hand back in the nflx fire. I also would point out that stock price action, at least from the perspective of a trader who has seen similar behavior in momentum names in the past, favors the bears. The shares are a good 24% above where they were going into the last report, and less than 12% off its all time closing high. I would characterize the trading pattern as almost just waiting for an excuse to fall. By that I mean I expect the market not to assign much weight to the financial metrics that will be reported after the close on Wednesday. This would be consistent with past nflx share price behavior as you could convincingly argue their last two earnings reports were disappointing and yet they were disregarded by the market in favor of  ‘story’ based buying. Well, with the ‘story’ element now a much harder sell overall, and especially at this price point, you do have to wonder what type of earnings report nflx needs to prevent a share decline/crash.
    Anyway, I would caution anyone that decides to get involved that this is a risky trade, and that my recent history(I was on the other side of the trade in dvd rental days…but that now seems like ages ago) with nflx has been abysmal. The first time I shorted the shares they were 45% below where they are today, though I will say that my instincts told me the price action in the weeks after the july report said to cover and join the herd on their stampede; I have consistently been surprised by the willingness of investors to pile into the ‘story’ without any regard for what one would think are almost plain vanilla gargantuan business model challenges ahead.
    I will note that I expect the stock to shift into consistent weakness mode after this report. So a low risk way to play this trade would be simply to sell calls if you can or to just wait for earnings and then short. Basically, you hope it doesn’t crash immediately, and you hop on for a longer term correction once you confirm that the shares are incapable of rallying. Normally, if I was approaching a story like this as an outsider who was not familiar with the name that is how I would play it, but in this case I will say I have just a bit more confidence that the nonsense of the past six months will be corrected.
    Ignore the girl in the red dress, she is a distraction. It’s time to unplug. At least that’s how I am playing this.
    Jan 26 11:16 AM | Link | Comment!
  • “Measured by Numbers”
    These tests were conducted over a six month period using a double-blind
    format of eight over-lapping demographic groups.  Every region of the
    country was sampled, the focus testing showed a solid base in the 9 to
    11-year old bracket--with a possible carry-over into the 12-year olds. 
    When you consider that Nobots and Transformers pull over 37 percent
    market share, and that we are targeting the same area, I think that we
    should see one quarter of that and that is one fifth of the total
    revenue from all of last year.  Any questions?  Yes?  Yes?
    I don't get it.
    “Big” 1988
    “Measured by Numbers”
    Just the other day I was sitting in on a meeting with some analysts from Malaysia. The economist quickly started rattling of gdp numbers for 2009 and 2010. First, to be clear, I know very little about the Malaysian economy other than that produce a lot of palm oil, and that the pricing of palm oil impacts their decisions to purchase potash. These numbers could have just as easily represented the Gdp of a fictitious country that produced nothing but widgets. To put the numbers in perspective the analyst threw out some numbers on China Gdp growth and then some numbers on Gdp growth rates in developed economies. The message was clear: We are not growing as fast as China which all investors love, but we are growing a lot faster than most countries you probably know. Now, in defense of the Malaysian analysts, they actually put together a good presentation; it’s just that I am starting to feel like I’ve reached a point of number saturation.
    I remember I was at a job interview with ML in late 2007 and the person interviewing me handed me a recent Merrill annual report. As I perused the report, I couldn’t help but notice the highlighted ROE numbers over the last five years. Merrill’s return on equity over the past five years was double what it had been since inception, and Merrill was clearly quite proud of these numbers as they’d chosen to highlight them. I found it quite ironic that I was interviewing with a firm that was at that very moment trying to raise capital from foreign investors while touting numbers that looked too good to be true.
    This is of course should come as no surprise to most people. The numbers nowadays don’t just tell a story; they are the story.
    Bernie Madoff figured this game out a long time ago. If you can put together some nice consistent numbers you’ll have a line out the door of people looking to put money with you, and only a handful of people asking questions. So, why not make them up? Bernie did. For 18 years he returned 10.5% a year with a standard deviation of less than 2.5%. He produced better returns than the market, and he did it with a fraction of the volatility.  
    Bernie wasn’t the only one. Guys like Marc Drier and Allen Stamford also figured out that a world that measures by numbers is easy to deceive. 
    When I first arrived in Dubai I would often question the brokers at real estate stands in the mall that would be throwing around projected returns and expected yields like they were investment advisors. Like Josh Baskin, “I didn’t get it.” I didn’t have much more to add, and I was eager to learn what I was missing, but I rarely if ever got any answers. The numbers, as I was often told, spoke for themselves.
    The recent move in global markets reminds me of my 2008 conversations with Dubai real estate agents . The fact that everything has risen justifies the fact that everything has risen. Just the other day I was watching Laszlo Birinyi on Cnbc speak about the bull market. Laszlo has very lofty expectations for markets, but like my real estate broker friends in Dubai, very little to offer in terms of explanations. For example, when discussing U.S. real estate Laszlo said something to this effect: Is there is a real estate problem? I don’t know. I hear all these people talking about it. But then I look at nvr stock and its up 100%. So, whose right? The market is always looking ahead. It’s telling you things are going to be much better.
    But not everyone is taking the Laszlo approach. Some people know that there is something inherently wrong with what’s going on in markets just as many Madoff investors knew he was cheating in some way shape or form, but they are still willing to invest. Why? Because they think it’s easy money, and that they can get out before things turn sour.
    There is another famous saying about numbers.
    The numbers don’t lie.
    If we’ve learned anything over the past two years, that statement just isn’t true.

    Disclosure: no positions
    Oct 24 8:10 AM | Link | Comment!
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