Josh Stern

Hedge Fund Strategies: Global Macro vs. Market Neutral

The years 1998 (LTCM crisis) and 2008 (Lehman, etc. crisis) were different in character than other years from the standpoint of the anti-illiquidity harm done to small cap stocks.

Week in Review, Part I: Global Economics, International and U.S. Equity Markets Overview

I think there is a good point buried somewhere underneath Mr. Cara's embarrassing whine: if we look back in history, equities have, in the long term, been a positive sum game, and no doubt part of that is that the U.S. public and govt. have gotten sold on the idea that the equity markets make a positive contribution to the U.S. economic system by helping to allocate capital efficiently; but if the U.S. public and govt. becomes convinced that the signal to noise ratio of economic fundamentals to market movement is exceptionally low, they will stop supporting this enterprise and result will be both that the market is less of a positive sum game, that it has less liquidty, and that there is lower social status and fewer economic rewards for market participants. So it' reasonable to believe that there is a potential "tragedy of the commons" problem connected with the phenomena that almost everyone comes to believe that assessing fundamental valuations is irrelevant to trying to make money in the markets.

Bond Expert Monday Wrap: The Market Has an Epiphany

Yes, I agree. The part I don't understand is why day after day and year after the year, the financial media insists on finding a news flash reason for every hundred point move in the DIA or its S&P equivalent, no matter how implausible the best reason they can come up with is on any given occasion.

Socialism has failed. Capitalism is bankrupt. What comes next? "Whatever ideological logo we choose for it, it will mean a major shift away from the free market and towards public action."

The focus on the efficiency of different allocators of capital is important, but the idea that govt. is always worse than the private sector is wrongheaded. The current credit crisis and stock market decimation is due to the fact that people thought the financial sector in the U.S. was allocating captial efficiently when it was actually destroying unimaginably large sums of capital by making bad loans, trusting bad financial models, writing bad derivative contracts, and mis-compensating employees. On the other hand, very few right wing conservatives want to defend their country with privately contracted militias or build only toll roads, etc.

Most sensible people should understand that economic systems need to find a balance between fairness and efficiency, that govt. spending should try to be restricted to the areas where the govt. will be more efficient than the private sector, and to restrict government regulation to areas that are either too dangerous to leave unregulated or where communities of self-interested actors are likely to damage the systemic good with their selfish actions - e.g. "Tragedy of the commons" applies to lots of things ranging from environmental pollution to financial fraud. Vigorous public debate should focus on delineating the boundaries of where govt. is needed, while avoiding semi-religious positions like "all socialism is bad" and "govt. spending is always less efficient".






On Apr 10 12:40 PM Fueled By Randomness wrote:

> As Vitaly Katsenelson said, "Communism failed for a reason: Government
> is a horrible capital allocator." When politicians make decisions
> on capital allocation, they will do so based on political reasons,
> not economic ones. This guarantees that capital will be allocated
> inefficiently. The more the political system is involved in the
> economy, the more inefficient it becomes. Whatever system Hobsbawm
> thinks will come next, you can pretty much predict how well it will
> work using this simple rule.

Supress the urge to bottom fish: "Rallies led by financials... are suspect by definition."

The content of the Barron's article and SeekingAlpha's headline are mismatched. The article was a collection of tidbits, but the parts related to bottom fishing could be summarized to say "If you are going to bottom fish, do it systematically rather than by gut impulse."

Mark-to-Market: The Bogeyman of the 1930s Is Back

Most of the negative comments on this article don't accurately grasp the topic it addressing. To be blunt about it, the thesis is not that MTM caused the banks problems. The thesis is that the combination of MTM and lots of banks with problems causes D-E-P-R-E-S-S-I-O-N (or something close to it).

Of course the banks were stupid and their problems were not caused by MTM. But the question is about whether MTM is wise for banks given the possibility that it is causing the banking industry to take down the entire economy with it. Even if the crisis ends, it may be that MTM is not compatible with traditional bank leverage levels of 10-12X and if we want MTM we can only have banks with leverage of 2X, and therefore much higher borrowing costs. That's probably not the right decision for the economy of the future.

Is Barron's Right, Have We Entered a Golden Age of Activist Investing?

We badly need activist investing in the sense of this article, but we won't make adequate progress in that direction until the S.E.C. creates and enforces more investor friendly rules for corporate elections and B.O.D. behavior for public companies.

Will Lack of Accord on Stimulus Obscure Economic Lessons?

The cynicism in this article is not cynical enough! The so-called "two-party system" in U.S. politics is structurally broken because it encourages every policy action to be reflexively thought of and reacted to as part of a zero-sum game between two opponents. In this case, the Republicans correctly perceive that the current economic problems are severe enough that any stimulus action isn't likely to be judged as "successful" by voters within a near term time frame, so by staking a position against most all stimulus except for tax cuts, when things probably turn out to be bad (and probably would be bad no matter what Congress did) they will rally around the counterfactual claim that things would have been better if their proposals had been adopted, or at the very least, things "couldn't have been much worse" and less money would have been spent. In contrast, mainstream economists generally argue that things could get a lot worse unless a bunch of money is spent quickly.

The two party system is the structural result of winner-take-all elections without provision for representation proportional to votes (as in the parliamentary system). So long as we keep that system in the U.S., our governance will be handicapped by limiting debate and political action to a choice between two opposed parties that strive primarily to best the other rather than to create the best policies.

In Praise of Suze Orman

Follow up point: anyone who is a sophisticate in these topics understands how much more financially effective it is for having a lifetime effect to teach financial competetence to 15-20 year olds rather than 40-60 year olds.

In Praise of Suze Orman

Suze Orman is fine for what she does, because she fills a need. But rather than having the "sophisticates" spend their time debating her, wouldn't it be more productive to get involved with one's local school board in order to try and get some basic financial literacy and wherewithal transmitted to the population at large via the public high school curriculum?

11 Reasons Why It's Time to Invest in China and 5 Ways to Play It

I agree with the thesis of the article and I've acted on it (my positions are in different stocks than the ones mentioned). However, my experience suggests that the greatest risk to investing in at least the smaller Chinese companies that one is attracted to because of their very low valuations is that the mgmt. and BOD (often controlled by the same principals) believe they are growth companies and will typically attempt to pursue overall growth rather than Ben Graham type shareholder value. In fairness, they are often just doing what they claimed they would do in their original IPO prospectus, but shareholders are inevitably disappointed when companies with trailing P/E under 4 and a lot of cash choose to use the cash to acquire another company with trailing P/E of 10 or worse, invest the cash in a new facility costing 20-50% of their then current market cap.

The Madoff Affair: Greed's Victory Over Common Sense

The comment above seems to espouse the theory that due diligence will typically detect fraud and that the primary failure of due diligence in this case was the failure to notice that Madoff was being audited by a small accounting firm without a national reputation. I don't agree with either of those points. Another famous fraud, Enron, was audited by Arthur Anderson which was at that time one of the top 5 accounting firms in the country. Where is the evidence that fraud is much more common when the parties use small audit firms or that parties using big audit firms are unlikely to commit fraud?

In the case of every fraud there are all sorts of things to be said with 20-20 hindsight, but I guarantee that no simple prescription for fraud avoidance is going to get the job done, and most will just hurt overall returns of a well diversified portfolio.



On Dec 16 07:04 PM trumanburbank wrote:

> Due diligence, and not even very concerted due diligence, apparenly
> kept many investors away from this toxic fund manager's clutches,
> so explain to us again why due diligence isn't the answer. The Mass
> Mutual-related hedge fund that was simply a feeder fund for Madoff
> just forwarded their entire $3.5 bil under managment to Madoff, charging
> their unsuspecting investors a 1% annual fee. I think that for $35
> mil in annual fee income they could've scraped off a few dollars
> to look over Madoff's audits, which were apparently done by an unheard-of
> firm with one CPA and a calculator. Those who took the time to examine
> the Madoff trading strategy found that it's virtually impossible
> for it to have generated the reported consistent returns. To perform
> this due diligence one only needed access to google -- you could
> do it on your cell phone in a half hour. Yes, fraud will always be
> an element of the business world, but there is an entire mini-industry
> within the world of finance that is designed to evauate risk, "internal
> controls" and operational integrity (and even a freshly-minted junior
> auditor would immediatly have recognized the near-total absence of
> proper internal controls at Madoff). The private side of this mini
> risk-management industry works (or should work) hand-in-glove with
> their public sector counterparts in the SEC and related agencies.
> These mechanisms will never prevent fraud, but if properly funded
> and used as designed they will catch fraud quickly and consistently,
> with an almost mathematical certainty. Just ask your CPA.
>
> (Disclosure: I'm not in the risk-management business, nor am I a
> CPA, but I do understand the fundamentals of internal controls, fraud
> prevention and forensic accounting.)
>
> It ain't rocket science, but fiduciaries, managers of OPM (Other
> People's Money) and those who handle the public purse are responsible
> for understanding these tools well enough to know how and when to
> employ them.)

The Madoff Affair: Greed's Victory Over Common Sense

A lot of detail about the Madoff case has yet to come out, but what I've heard doesn't lead me to believe that due diligence is the answer to the problem of fraud avoidance. The answer is diversification of who and what is being trusted with assets, paying particular attention to where and when the honesty of a given receiver of assets is reliably insured. Due diligence is not going to get people both access to the books and the ability to determine that the books are not cooked. Fraud will always be possible, so the correct approach has to involve spreading risk around possible sources of fraud.

Economists agree that the long-term solution for restoring economic growth lies in raising productivity, whose growth has slowed dramatically since 2002. A preview of the Private Equity Council's report on productivity examines what's behind the slowdown, and how to fix it.

Murdoch owned WSJ that routinely substitutes pure editorial for even a veneer of empirically grounded analysis - is it a cause or a symptom of declining productivity?

An Unexpected Bright Spot for TV Advertisers in China

XFML is a stock that fits squarely into the category of advertising in China. The company is not very shareholder friendly however and has fallen from over $10 to under 50 cents today. It will probably bounce at that price, but isn't a long term buy until mgmt. focuses on growing shareholder value as the measure of performance instead of focusing only on growing revenue.