Tuesday, December 19, 2006

No Boyd LBO

When Harrah's, MGM and finally Station casinos got buyout offers Boyd Casinos (BYD) spiked 15% on speculation that it would be next. I thought it was unlikely and now, after rangebound trading for some time the MACD is crossing down and the stock has begun to fall. Moreover the CDS has tightened up - not a sign of a likely LBO.

Strategy: Short @ market, put an order to cover if it goes up to 47, or buy a call. Otherwise if it falls then cover after the drop, which should be at $42 or below.



Friday, December 15, 2006

CBS LBO Arb

There are rumors in the bond market that CBS may get bought out. The bonds are already showing this, but the equity hasn’t been affected yet, so it's time to act.


This is CBS’ Credit Default Swap (CDS) curve. It widened over 25% yesterday - which means the bond market perceives a 25% increase in chance of default. This can occur for several reasons, one of them being when a company is about to undergo a leveraged buyout as the buyback of equity is financed with high-yield, less creditworthy “junk” bonds. Given that there have been no other credit-related rumors I suspect it’s an LBO signal.

Now looking at the equity we see that it has been very strong in November and the trend is continuing. The lower graph shows that the MACD just crossed up over the signal. What this means is that there’s positive momentum on the equity that should continue. Nevertheless we haven’t seen a jump – perhaps because CBS investors are mostly cautious institutionals and want to wait to buy before there is a more confirmed rumor (or they may know something I don’t). In either case I‘d still buy at $32 as your risk/return is positively skewed – CBS won’t suddenly fall 20% like some penny stock as it is too big, but if there’s a buyout announced the equity should go up about 10-15%%. Just make sure to have a trailing stop of about 5% and you will be safe. Buy some out of money puts if you want insurance.

Monday, December 11, 2006

I called it! Shell Offers to Cede Control. Of Sakhalin-2 to Gazprom

I’ve been saying that this would happen for several months now. It should have been obvious from Gazprom's actions. Why else would they have been building pipelines without devloping new fields and reserves? Shell has finally buckled as its kneecaps have been bashed by the mighty hammer and its head cleanly cut off by the sickle of Kremlin/Gazprom/Putin/Mafia. Now Gazprom can take a gargantuan new nearly finished field and get all the capacity it needs to deliver to China, Europe and maybe even its own starving people. Nobody can stop the behemoth, not until 2008 when Putin steps down, anyways.

Shell Offers to Cede Control. Of Sakhalin-2 to Gazprom
By GUY CHAZAN and GREG WALTERSDecember 11, 2006 10:18 a.m.
Royal Dutch Shell PLC, succumbing to months of pressure from the Russian government, has proposed ceding control of the $20 billion Sakhalin-2 project to Russia's state-run gas monopoly, OAO Gazprom, an official close to the situation said.
The move shows Shell scrambling to rescue a project that has hit numerous roadblocks in recent months, including threats by Russian officials to withdraw a key permit over alleged environmental violations.
The pressure was seen as reflecting Russian anger at the cost overruns at the project, the biggest single foreign investment in Russia, and comes amid intensifying efforts by the Kremlin to dominate the country's oil and gas sector.
Gazprom said Shell Chief Executive Jeroen van der Veer met Gazprom CEO Alexei Miller and Russian Energy Minister Viktor Khristenko in Moscow last Friday to discuss Sakhalin-2, and that Shell had put forward new proposals on the project to Gazprom. Neither company would give details of the proposals. A spokeswoman for the Energy Minister declined to comment.
Mr. Khristenko will hold a press conference Tuesday in Moscow, the ministry said, during which he will answer questions about Sakhalin-2.
Gazprom and Shell reached an agreement in principle in 2005 that Gazprom would take a 25% stake in Sakhalin Energy, which is 55% controlled by Shell. Gazprom had since publicly denied it was seeking a larger stake in the company. Shortly after the Gazprom and Shell deal was reached last year, Sakhalin Energy announced its projected costs would nearly double for Sakhalin-2, prompting Gazprom to say it couldn't make a final commitment on entering Sakhalin-2 until the cost of the project was confirmed.
Sakhalin-2, said by Sakhalin Energy to be the world's largest integrated oil and gas project, is developing oil and natural gas reserves off the coast of Sakhalin Island in Russia's Pacific Coast north of Japan.Japanese partners Mitsui & Co. Ltd. and Mitsubishi Corp. own 25% and 20% of Sakhalin Energy, respectively.

Thursday, December 07, 2006

Kenny G Indebted

Citadel issues $500M of BBB-rated debt in the first-ever hedge fund offering.

Not to diss Ken Griffin, but… what the fuck Citadel? Well it's still a smarter move than the Fortress IPO - at least retail investors won't be buying Citadel debentures. Question for thought - could and should institutional investors in the fund buy debt as a hedge? Better yet - buy protection if we ever have hedge fund credit derivatives. I wouldn't mind doing some curve trades on those in the right climate.

Also, I love how no matter what the PMs think about the issue nobody bought in. Good call, too. Only 190bps over Treasuries for a hedge fund? Come on! At least the rating agencies were kind and gave it a BBB rating. Generous because Citadel's Kensigton fund has $9.5b AUM (that’s ~74% of all assets) is making heavy, and apparently rather volatile, energy bets (Amaranth, Blackrock anyone?). All in all their income this year was about 9.5% of AUM by my back-of-the-envelope calculations, which isn’t bad at all, but not spectacular either.

Anyways – now we have a hedge fund IPO and a bond offering maybe we'll see funds shorting each other... it'll be hedgemonium!

Wednesday, November 22, 2006

Russia Coming to America

One of Ambramovich’s more legitimate enterprises, Evraz Group SA, purchased Oregon Steel Mills for $2.3B, making it the biggest acquisition of a US company by a Russian one. I predict and hope this is the start of a trend. Why is this great news? Two reasons:
First, if Russians own American companies then the US can do the same shit to them that Russia does to its foreign investors. That is, coming up with phony violations and injunctions until the foreigners succumb to any and all demands. Not that any US party has the balls to actually do that outright, but it’s nice to know the possibility is there, and if American interests are oppressed far enough who knows what can happen. Anything that can possibly put a check on Putin’s despotic regime is a good thing.
Second, in order to buy out a public company or (better yet) take majority stake in a public company the buyer has to bare a certain amount of information. There is nothing better then thus subjecting Russian companies into exposing themselves, even if they’re only showing a leg. If this trend picks up the bra and the thong will come off soon enough. It’s a lot harder to trick/bribe the SEC (and US auditors in the wake of Sarbox) than the Russian government, so some Russian entities may actually have to clean themselves up to look presentable and legal. This would likely involve shaving some of the dirtier activities have heretofore been hidden from the public eye.
So even if I didn’t see these transactions as great opportunities for cross-border special situations arbitrage I welcome them, and hope they increase exponentially.

Monday, November 20, 2006

Litvinenko can't escape the KGB

Well it wasn’t Gazprom per se, but Russia’s mighty sickle has struck again – poisoning former FSB (Federalnaya Sluzhba Bezopasnosti or Federal Security Service) operative Alexander Litvinenko currently living (or, rather, dying) in London. The current incarnation of the KGB dubbed SVR (Sluzhba Vneshney Razvedki or External Reconnaissance Agency) stated “We have nothing to do with what happened to Litvinenko. The Russian secret services have not in a long time carried out poisonings or any form of assassination.” Well, obviously we wouldn’t expect them to outright admit it – denying obvious treacheries with rice paper thin cover ups is what Putin’s administration is all about. I mean, according to them Khodorkovsky (former CEO of OAO Yukos) is having a wonderful time in his Siberian prison (nevermind that he got sent to solitary for a week after the guards found he had some “unauthorized lemons” in his possessions).
Litvinenko, a critic of Russia’s policies, got sick immediately after a lunch with two SVR members. They were supposed to discuss Litvinenko’s investigation into the murder of a fellow dissenter - Anna Politkovskaya. One of the men was “Andrei Lugovoy, a former KGB bodyguard and one-time head of security at a television station owned by the Russian billionaire, Boris Bezerovsky” [telegraph.co.uk], whom Litvinenko knew – but the second man, as yet unidentified, was someone Litvinenko had never seen before. Berezovsky visited Litvinenko twice and agrees with the dying ex-agent as to whose hands are awash in blood.
A toxicology analysis found the culprit to be thallium, a colorless and odorless chemical similar in composition to salt. The former agent’s “bone marrow has failed and friends say he has visibly aged 20 years and lost all his hair. His immune system has been severely depleted and he has suffered severe kidney damage.” [gulfnews.com] Doctors say he has only a 20% chance of survival.

Before and After:

Friday, November 17, 2006

Crapocalypse Now Redux

Check out this NYT article on G-Dub in Hanoi:

Mr. Bush spoke of driving by the lake where Senator John McCain’s plane crashed nearly 40 years ago, focusing less on Mr. McCain’s long imprisonment afterward than on the fact that “he was, literally, saved, in one way, by the people pulling him out.”
Thank you so fucking much for “saving” Senator McCain, and by saving I mean:

On October 26, 1967, McCain's A-4 Skyhawk was shot down by an anti-aircraft missile, landing in Truc Bach Lake. He broke both arms and a leg after ejecting from his plane. After he regained consciousness, a mob gathered around him and stripped him of his clothing. He was then tortured by Vietnamese soldiers, who bayonetted him in his left foot and groin. His shoulder was crushed by a rifle butt. He was then transported to the Hoa Lo Prison, also known as the Hanoi Hilton. Once McCain arrived at the Hanoi Hilton, he was placed in a cell and interrogated daily. When McCain refused to provide any information to his captors, he was beaten until he lost consciousness. Alexander, Paul (2002). John McCain: Man of the People
McCain, who unlike Bush, was an actual combat pilot and a damn good one at that, withstood torture upon torture in the name of his country, yet Bush is willing to dismiss all that by calling his captors saviors. I cannot even begin to tell you how disgusted I am by that.

The story continues, however:

For Mr. Bush, who had never set foot in Vietam before, this visit is something of a tightrope walk. America’s defeat here is increasingly being mentioned in comparison with how Iraq may turn out, and Mr. Bush was careful to stress that in Iraq, unlike Vietnam, defeat is not an option for the United States.

Yes – clearly defeat was an obvious option in Vietnam from the start. That is exactly what the administration said throughout that conflict. Oh wait, no – we lost sixty thousand soldiers believing in our just and infallible cause to democratize and liberate a foreign nation, and then eventually realized this may not have been such a hot idea. Whoops. Can we at least say we’re fighting for Oil or something else worth dying for? The people need a real material cause.

I also like the statement that Stanley Kranow makes in the end:

The easy summation is that Vietnam began as a guerrilla war and escalated into an orthodox war — by the end we were fighting in big units. Iraq starts as a conventional war, and has degenerated into a guerrilla war. It has gone in an opposite direction. And it’s much more difficult to deal with.

We “won” the war in a matter of weeks. It was our incessant need to promote democracy and autonomy of the indigenous people rather than imposing strict martial law and a puppet dictator with an army of primarily local soldiers (and I hope by now the US has learned how to properly keep one restrained) that kept us there, suffering casualties as we try to gently pacify people who never wanted us there in the first place. Whichever party you affiliate with (although perhaps especially for us Libertarians) it's getting ever easier to lose faith in the government.

Wednesday, November 15, 2006

Who will Gazprom assasinate next?

After this cheeky bit of news:

“The head of a Russian fund that says it promotes the development of small oil
and gas producers was shot dead on Tuesday in southwest Moscow, the Reuters news agency reports. Zelimkhan Magomedov, 50, general director of the National Oil Institute Fund, was shot twice in the head.”
One simply has to wonder - who will be next? Will it be…

Arkady Ostorvsky for making the below comment in his article in the WSJ:
"Gazprom, the dominant gas supplier that frequently doubles as a Kremlin foreign policy arm, is not producing enough for an economy growing at more than 6 per cent a year. "

Vladimir Milov, head of the Institute for Energy Policy, for making the following comment to the media:
"Gazprom was given enormous privileges in exchange for providing the country with gas at regulated prices. If it wants to behave as a commercial company, it should not be a monopoly."

German Gref, minister for economic development and trade for implying Gazprom should be “independently regulated.”

Analysts at UBS Russia for questioning Gazprom’s strategy.

“Analysts say the problem is not the lack of gas - Russia has 16 per cent of the world's total reserves - but rather Gazprom's investment strategy. Over the past few years the company has spent vigorously on anything but developing its reserves. It has built a pipeline to Turkey, taken over an oil company, invested in UES and tried to gain a foothold in European distribution markets. All this was in the name of creating a national energy champion. But investment in Gazprom's core activity was inadequate.”
Why has Gazprom not been investing in developing fields? Because it’s going to take Sakhalin away from Shell (who has already done all the work).

The citizens of St. Petersburg as they re-experience the horrors of WWII when their city loses heat in the middle of winter.

The country of Turkmenistan for not supplying enough gas and quibbling with the Allmighty.

Chechnyan Warlords (or random Georgians who will be dressed up to look like Chechnyan warlords) who will then be blamed for the gas shortage as well as every other problem plaguing Russia at the moment.

Always seeking to profit from energy arbitrage, I am relocating some of my freelance monkey snipers (alluded to in the previous post) to Russia.

Monday, November 13, 2006

cliquer l'hypothèse efficace du marché

To continue in the vein of my previous post on EMH, here’s an excerpt from a book[1] I’m reading on volatility trading:
“Those sellers using local volatility models will certainly value a digital cliquet[2] at a lower price than sellers using stochastic volatility. Perversely then, those sellers using an inadequate model will almost certainly win the deal and end up short a portfolio of misvalued forward-starting digital options, or even worse - a dealer could have an appropriate valuation approach but be pushed internally by the salespeople to match (mistaken) competitors' lower prices."
Basically – when you’re trading really complex structured derivatives nobody knows what the real price is, because said price can only be derived by a model and the models are largely proprietary. It’s arbitrary arbitrage! Without set market prices there can be no market efficiency.
Oh, but these are OTC derivatives Fama would say. To which I will reply that 1. you, kind sir, have already implied that there should be no measurable difference in efficiency when liquidity is decreased and 2. said derivatives are based on a very liquid equity option that is itself a derivation of allegedly perfectly efficient securities like equities, bonds and even currencies. Moreover, the mere fact that you cannot price these instruments without making predictions (discrete or not) about their future value means that option markets cannot be played passively on assumption that they are efficient.
At this point Fama would rise from his armchair and, thrusting his cigar at me in a decidedly confrontational manner while swirling his brandy irately, exclaim: “So am I to understand then, that you have no faith at all? No belief in market efficiency? Then I put it to you, sir, that you are a heretic of the first degree!”
To this I shall reply, while serenely sipping my single malt, “No, my friend – I am a heretic of the second degree. A heretic derivative, if you will, which is to say a rebel against theory, fighting in the name of reality. Indeed, just as you don’t advocate strong-form efficiency I in no way support the weak-form hypothesis. Moreover, I believe that news is priced very quickly (though not instantaneously) and that many (though not all) markets are mean-reverting. Nevertheless, inefficiencies exist and increase proportionately with a decrease in liquidity and regulation or an increase in complexity. Both technical and fundamental analysis can yield superior returns in the hands of a gifted (and not just lucky) individual. Some of us aren’t monkeys throwing darts at a list of stocks as your friend Malkiel believes. Rather, we are monkeys with sniper rifles. And we’ve got efficient markets in our sights.”
I then tip my hat to the bewildered Fama and make my exit. As Fama takes a sip of his brandy he realizes that ashes from his cigar have inadvertently fallen into the snifter. The taste is almost as raw as the state of his prized theory.

[1] The Volatility Surface: A Practitioner's Guide (Gatheral, 2006)
[2] From AMEX Dictionary of Financial Terms: The French like the sound of “cliquet,” and seem prepared to apply the term to any remotely appropriate option structure. (1) Originally a periodic reset option with multiple payouts or a ratchet option (from vilbrequin à cliquet—ratchet brace). Also called Ratchet Option. See Multiperiod Strike Reset Option (MSRO), Stock Market Annual Reset Term (SMART) Note. See also Coupon-Indexed Note. (2) See Ladder Option or Note (diagram). Also called Lock-Step Option. See also Stock Upside Note Security (SUNS). (3) Less commonly, a rolling spread with strike price resets, usually at regular intervals. (4) An exploding or knockout option such as CAPS (from cliqueter—to knock)
Now that your are completely and utterly bewildered stare into this headlight young deer:

Ah, now it makes sense! It’s just a performance-linked digital option with resets! Duh.

Wednesday, November 01, 2006

Fama Keeps Preaching (but the choir ain't singing)

Fama, my old nemesis, is still preaching efficient markets. Check out the interview.
I especially love the interviewer’s interrogation regarding the 1987 crash, although I am disappointed she did not ask him about his own little fund, Dimensional, and its strategies. Namely how does Dimensional pick “risks that are worth taking and the risks that are not.”

Some parts I shall comment on:
(FEN - Financial Engineering News, EF - Eugene Fama, BSD - Arbitrageur's apropos pseudonym)

FEN: As an undergraduate at Tufts, you tried to beat the market.
EF: Yes. I was already working on stock market data. I tried to figure out ways to beat the market for Harry Ernst, who taught economics. I came up with mechanical kinds of strategies. He always made me have a hold-out sample to see if the strategy worked on new data – and it never did.
BSD: …and as a way of justifying your failure you dedicated the rest of the life to erroneously proving that you were playing a game one cannot win (although – of course – some consistently do).

FEN: If markets are efficient, a stock price reflects the intrinsic value of a company, but does that mean the price is always right?
EF: It means you can’t figure out whether it’s wrong. It’s not always right because there’s some uncertainty about what right is, but basically you just can’t beat it.
BSD: In another life you would have made a great spin doctor or lobbyist. You neither answered the question nor provided any evidence to the contrary of the point presented – you simply questioned the meaning of “right.”

FEN: What about [inefficiencies in] smaller, illiquid stocks?
EF: That’s what people claim – that smaller stocks are not priced as efficiently as bigger stocks, that emerging markets are not priced as efficiently as developed markets. But anyone who looks at it empirically can’t find any evidence to that effect.
BSD: Yeah, anyone but the investors who’ve been consistently raping those markets precisely on the basis of exploiting inefficiencies that result from a poorly regulated market.

FEN: I was just talking to a trader in Canada who’s at a fund that has beaten the broad Canadian market by investing mainly in financials for the last 20 years.
EF: Look across the spectrum of all funds – you’ll always find people in both tails. That can happen even if nobody has any special information. Some people are going to be lucky and some unlucky. The lucky ones get the attention, and then they think they’re smart.
BSD: So guys like Stevie Cohen who’ve been “lucky” for decades must have made some deal with the devil, because statistically such a streak of luck is near-impossible.

FEN: Have you moderated your views over the years that markets are efficient? Many academics and others say you have.
EF: Many people get confused. Many people don’t understand the difference between efficient markets and the risk-return story.
BSD: I think you don’t understand the difference, homey. Your original paper, understandably, does not account for the many ways to hedge risk that currently exist. The problem is that, like a caveman driving a car on square wheels you are unwilling to change.

FEN: There’s no need for active investors to go in search of information?
EF: There’s no need for active investors who don’t actually succeed in uncovering new information. People who act on bad information make prices worse.
BSD: Correct. So, since – according to you – most active managers act on bad information their very existence erodes efficiency.

FEN: Are traders following momentum strategies an example of people without information moving the market away from the most efficient price?
EF: I don’t know.
BSD: BS. You do know, you just can’t explain it with your theory. You said (in this very interview) that there is “evidence that there’s some short-term momentum in returns” – the very existence of observable and predictable momentum in liquid markets implies profit potential through an active strategy.

FEN:
You’ve been a skeptic of the idea that people’s irrational behavior and decisions affect market prices in predictable ways, and you’ve been a critic of behavioral finance more generally. Do you think behavioral finance poses a threat to the idea of efficient markets?
EF: It poses interesting questions and legitimate questions for research. I haven’t seen researchers in that area come up with much that indicates that prices are bad. They’ve produced a lot that indicates that individual investors don’t always act completely rationally. Those are two different things. At the micro-micro level, they have done some really interesting stuff. At the level of price-setting, it’s not so clear.
BSD: Assuming a significant number of price-setters who do not act rationally how can markets be efficient? You cannot say that there is no direct relationship between price efficiency and the rationality of market participants. Furthermore, there has been research applying behavioral finance to prices – you just aren’t bringing it up, perhaps because you can’t outright disprove it.

Monday, October 30, 2006

Hedge Fund Poetry

Not sure if anyone gets/likes these, but here's another one:

Luring pension plans
With a clever snare
Of high yield

Eroding counterparties' assets
Like acid rain on unsuspecting
Salted flesh

Before you yell "villain"
Remember the law of
Zero Sum.

Thursday, October 26, 2006

The Hedgie

Ok, so here is the much delayed scoop on my new job. It’s not that I haven’t had the time (I worked a blissful 55 hours last week), it’s just that I’ve been too busy enjoying my newfound free time.
There has been much inquiry into what it is exactly that I do every day. That is – what is my routine? The honest answer is that there isn’t a typical day. This is a phrase one hears very often, and a lot of bankers will say that because it sounds much better than “depends on who decided to rape me today” but the fact is in banking you’re working in either Excel or Powerpoint/Word making models and pitchbooks. The type of model and underlying company stops mattering after you’ve done them all twenty times over till 3AM. The key difference between working at the quant hedgie and investment banking is that whereas in the latter I could painfully see myself becoming ever more robotic and melancholy here I’m becoming smarter and every day. At this rate my brain will soon be sharper than a coke addict’s razor blade.
At the hedge fund my only routine is morning P&L when I mark-to-market our positions (which can take 30 minutes or 3 hours depending on how many new trades I have to account for, and whether or not our broker messed up) and execute new trades as dictated by my Portfolio Managers and our black box model. The P&L models themselves are about as complex as anything you’ll see at a bank – VLOOKUPs and VBA macros galore.
After that I may spend the rest of the day on a project that one of the PMs asked me to do (I’m rarely told what to do here, since everyone is extremely polite). The projects vary across all aspects of running a fund: so far I’ve been asked to write an optimization function for one of our models, research a way to trade global term structure volatility and come up with various investment hypotheses. The best part is that I never feel like a grunt here – all of my work is genuinely interesting to do and receives immediate feedback.
When I don’t have a project however, which is about half the time, I am free to learn about whatever I want. It’s free time to get smart on sexy topics in quant finance and think of ways to turn them into profit for the fund. Getting paid [extremely well] to learn about the things I am so passionate about is a great feeling, I believe it’s called joy – but I’ve forgotten after working in IB for 4 months.
I’m done with my day whenever I feel like it’s time to go, which tends to fall between 6 and 7. Since we don’t trade intraday the whole atmosphere is extremely relaxed – hourlong lunches away from the desk and leaving early to go out on Friday is not only accepted but outright encouraged. In short, I haven’t been this happy with a job since I worked for a fashion house where part of my duties involved interviewing models and attending open-bar fashion shows.

Tuesday, October 24, 2006

Go Big or Go Home



The two weeks of my vacation have been amazingly relaxing (I was at any given point either sleeping or drinking). In a world of compromises, sometimes excess is mandatory to break the routine.
Having thus rested up I started my new job, which is even better than I imagined. More on that in my next post. Meanwhile, I have some Brazilian swaps to execute.

Wednesday, October 04, 2006

Bye Bye Banking!

If I haven't made any posts in a while it is because I have been drunk with joy. And alcohol. Last Friday the 29th I resigned from my role as Investment Banking Analyst to pursue my dream of controlling the world's financial markets (the key to success is having modest, easily-achievable, goals). Here's how the Arbitrageur got a new job (and put some substance behind his name):

About a month ago I applied for a Portfolio Analyst role through craigslist to work for a "new quantitative hedge fund platform, a strategic growth initiative funded and seeded by []. This is a small company centered around quantitative fixed income strategies with an entrepreneurial work environment that is well suited for focused, energetic, self-motivated and flexible top investment talent." Although the job required 2-3 years of buy-side experience, in my desperation to get out of my shoddy sinking dinghy of a bank I applied anyways, hoping that my mix of derivatives and programming knowledge and the intellectual tenacity of an Oxford educated pit bull would carry me through.

A couple days later I got an email from the president of the fund, asking me to come in for an interview. Thus began a quest that would consist of 7 hours worth of interviews, masked as so many doctor's appointments that my MDs must have thought I have become either terminally ill, a hypochondriac, or both. The questions asked of me by the president and his elite team of quant Ph.Ds (I'm the only person employed by the fund without one) ranged from derivative modeling to programming to econometrics and math. Quite frankly, I'm surprised that I made it out alive. My black belt in bullshit isn't exactly applicable to questions such as "write an SQL program that calculates the aggregate return and risk of a portfolio." I guess you never know how far you can stretch yourself until put into the "seat of heat", and that's exactly why I can't wait to start my new job. My mind will be honed to have the all the speed and litheness of a gymnast on a racehorse.

Before I begin climbing the steep and shaky ladder to the top, however, I am taking two weeks off to shed my banker skin and come to work ready to be reborn. Expect a recap when I return from my world tour of debauchery. Till then, I remain your arrogant Aribtrageur.

Friday, September 22, 2006

Trebecca Trifecta

From today's WSJ:
Citigroup is moving ambitiously on a number of fronts. Aside from changing the leadership at Tribeca, the bank is in negotiations to buy at least a stake in Amaranth Advisors LLC, the hedge fund that has lost about $6 billion since the beginning of the month, mostly on bad natural-gas bets. The talks could fall apart, but if Citigroup takes a stake in Amaranth, it would mark the bank's latest effort to expand its alternative-investment business, which includes hedge funds, private equity and real estate.

So should bulges get into hedge funds? Yes and no. As the Journal article points out, they certainly have the high net worth and institutional customer base locked down. On the other hand, they have too much bureaucracy and overhead to be nimble. Furthermore, the truly great managers know that they can get their own client base and open up shop without restrictions. Thus, banks can wind up serving as breeding grounds for mid-level PMs to polish their skills before taking the client base over to their own funds.

What may be a better idea is to have a more involved joint back office (JBO) arrangement where the bank supplies the infrastructure, clients, and some amount of proprietary capital, and in return takes a bigger cut of the profits and imposes certain return/alpha hurdles that the fund must meet in order to continue the relationship. So long as the hurdles are met the bank stays completely hands-off and lets the fund run its strategy as it sees fit. If performance is not in line with expectations, however, it may either step in or terminate the relationship – assuring that there’s a floor to its losses. The bank may further hedge its risk by entering into JBO agreements with funds that are negatively correlated in their strategies and/or sectors.

In any case, just my thoughts – would love to hear some comments on the feasibility and profitability of such an arrangement.

Thursday, September 21, 2006

Banker Break: Engrish.com


We bankers are often in a desolate mood, so I have found several good pick-me-ups to lighten the mood. I will start introducing these whenever I feel like I should post something, but can't think of any actual content.

So before you go trying to fashion a noose out of spiral binding how about laughing at the Japanese over at www.engrish.com?

Friday, September 15, 2006

Neuroeconmics 101

Back when I was in college I had the privilege to work on some really exciting projects in the nascent field of Neuroeconomincs. Since then a lot of people have inquired as to what exactly neuroeconomics is. I used to delight in explaining my research, but now it only makes me sad as I reminisce of the truly stimulating work I did before being forced back into reality by the dreary buzz of my blackberry.

Thankfully an anonymous friend of this blog has provided me with a link to an excellent, though somewhat lengthy article in the New Yorker on the field: The History and Science of Neuroeconomics

Turnover Ain't Tasty

The dubious MD from the last post has resigned today. He went from our shitty middle-market bank to a marginally less shitty bank. Other departures in the past 2 weeks: The Head of Banking, 2 Analysts and 2 Associates. Don't you love bonus season? (I'm not talking to you, Mr. Bulge Bracket Bitch, go point your gold-tipped cane elsewhere. This is Middle Market Mafia turf, and what we lack in deal volume we more than make up for in angst.)
Needless to say I am now the only analyst in the SF office, so I hope more senior guys leave. Then I will have no work, as it stands, it's 2AM and my model still looks more like Hillary Duff than Hillary Swank.
In other words:
Fat, Clumsy and Stoopid-Lookin:

...instead of Slim, Sexy and Classy:

















(and might I add that that's quite the OAS, Ms. Swank. You could boost my alpha any day.)

Wednesday, September 13, 2006

How Not To Close A Deal

The following is a truncated interpretation of the conference call with the CFO of a prospective bidder for a sell-side deal that led to the engagement being terminated:

Big Bidder: Hi there. We think your counteroffer is a joke. We have $70M in revenues and you have [dramatic pause] three. Basically, our valuation is right and yours is wrong. We’re throwing you a bone, so be a good little poodle and lap it up. Our original offer is final.
Our MD: Well actually our valuations are very close. We just need a little bit more to make the client happy.
BB: I’m sorry, did I stutter?
MD: Well, we’ve been very flexible and can bend backwards a little more – but if we are going to stick our head up our own ass you have to at least bend down to touch your toes.
BB: [long pause]
MD: Hello, are you there?
BB: Yeah… Umm, sorry – I just thought that I made myself quite clear.
MD: [beats off a dead horse for another 3 minutes]
BB: You know, we do have other targets that are cheaper and more exciting. Tell that to your client
MD: I’m not going to say that. That’s too negative. I’ll tell them something positive instead.
BB: (another pause)
MD: That’s cool. Just don’t say anything if you agree.
BB: No, I’ll say something. The deal is off. [Trump Style] You’re fired.

Monday, September 11, 2006

How every analyst feels after being asked to flip a 100-page CIM by tomorrow morning...

The Client Is Never Right

I spent hours this Sunday toiling over my beautiful model, unsure as to why it wasn’t balancing. I checked all the numbers, examined every formula and audited every assumption – yet still it was off. Moreover, the difference was but a measly $291,000. That won’t even buy you a half-decent yacht anymore. Why is my extremely valuable time being spent trying to find such a trivial amount, I pondered. After all, I could be lounging out by the pool in the refreshingly nippy 65 degree weather, hoping that the chilly gusts of wind will have the desired effect on the bust of the nubile young fox stretched out across from me.

Instead, there I was: buried under a pile of marked up financials, my only sources of sustenance being Cheddar Cheez-its and a bottle of Knob Creek. Bleakness all around me, save for the pale glow radiating from the monitor. If an artist is to be qualified by how much he suffered for his work then I was fuckin’ Michelangelo. The afternoon turned to night and the bottle of Knob, much like me, turned into an empty vessel, devoid of all utility. I threw the bottle into the trash and myself into bed.

This morning, feeling equal parts refreshed and hungover, I once again attacked the model with the resolve of a snared pitbull. After several more hours of futility I finally found the root of all evil. It was hidden, quite literally, in one of the 50 columns in one of the 25 worksheets in the client’s Excel financials. Turns out that when putting together their quarterly balance sheet the client decided, for no apparent reason, to omit one of the line items and thought it wasn’t worth footnoting. Now I understand why they have metal detectors in most office buildings. Then again, it doesn't seem like these guys have much of a brain to blow out anyways.

In the next issue: How to turn a $1M cow with negative cash flows into a $70M sexy beast.

Tuesday, September 05, 2006

I Write CIMs Not Tragedies

Most fresh analysts shudder at the thought of being staffed on their first Confidential Information Memorandum, or CIM. A 40-80 page document that will be shown to all the potential investors/buyers of a firm, it has to look perfect and sell that little piece of shit for at least twice its “true” value (of course all truth is arbitrary in banking). Not to worry, however, the CIM is one of the easiest things you’ll ever do – but do it right and everyone will think you’ve toiled endless days and nights. Creating the illusion of long hours and hard work is the most important skill of a good analyst.

Rarely will you actually have to write anything in banking. Most documents (like sales memos and engagement letters) are fully templated and so shrouded in legalese that only a legal weasel could comprehend them anyways. At first glance CIMs appear different, however. They’re meant to sell the company and must therefore be understood by any potential buyer who, we are to assume, has no legal or finance experience. Does this mean you must actually write up a coherent thesis on why this company is such a great buy? Hell no! You weren’t hired as an analyst to think. Fine, you say, but how do I fill up all these pages then?

Elementary, my dear Watson. Unlike your reputable academic alma mater the bank is amoral and encourages plagiarism. First, ask the company for all of their marketing, financial and business documents. Next, assuming the company is private, find the offering memorandum of a comparable public company on EDGAR and steal their industry overview and risk sections. Now you have all the building blocks to create your Tower of Babel.

You must copy and paste and arrange all the different pieces of different documents into your CIM’s sections, which your VP/Associate should have already defined. Remember to make it look pretty and throw in lots of pictures. Investors, like fish, have short attention spans and need shiny lures to be hooked. If you’ve ever had the “privilege” of meeting with a client for a pitch you already know that 70-80% of the book you’ve spent all of last night making is never even discussed. The CIM is no different. Investors will only read the executive summary, which is a concise copy-and-pasted version of the full CIM, look at the pictures and flip the financials. That’s enough for them to decide if they want to proceed further, and as you must know by now you only need to do the minimum work necessary to get the investor hard about your client.

That’s all there is to it. Your value-add is essentially reformatting and partially rewriting a bunch of garbage and making it look like a legitimate business operation. One final note, remember to look busy during the day and have Outlook automatically send the email with the CIM attached at 4:00am. Virtual facetime is a wonderful thing.

Wednesday, August 30, 2006

TRLG Update: Strong Buy

Jeff Lubell States the Obvious and Buckley outlines growth strategy.

This article is fairly on-point. A couple points I disagree with, however:
1. UARM is doing better because it is a brand that most traders know and nobody has doubts about people buying sweat-wicking sportswear, whereas they always do about any premium fashion. I don't think going public through a reverse merger, as the Routers article stated, has an impact on TRLG's current valuation, especially since it became NASDAQ listed over a year ago. They need to face the facts - right now the market doesn't get you, it hasn't got you since you've been public so go and get bought with a strict agreement allowing you to continue operations with the same management team, get a nice capital infusion from the buyer and exit with a true IPO in a couple years if you feel the time is right.

2. Surfwear - This market is cornered right now, and there are actually plenty of high-end $60 -100 boardshorts out there. TRLG shouldn't expand that far, rather they should become the new, more premium, Deisel.

All that being said - these guys are going to have more good news. Hold them tight, and buy at anything below 20.

You know you’re a middle market ibanker when…

…you go to the bathroom to sleep
…you steal utensils and condiments from fast food joints
…you ask your bulge bracket buddies for their excel models and training manuals
…you pretend that working one-on-one with mediocre MDs makes up for having billion-dollar deals
…you have to resort to cigarettes because cocaine is too expensive
…you only tip a buck for lap dances, and get your money’s worth
…you have no league tables in your books, because no amount of spin could make this shack look good
…the only girls impressed by your job are of the holla-back sort

Friday, August 25, 2006

Rejected Follow-on

Observe the white gloved line
Too clean to cut
The undervalued vagabond
Even as he begs to bleed

Thursday, August 24, 2006

StockTips: TRLG

Those who know me also know about how fervent of a True Religion supporter I've been. The company has been good to me, with over 85% in realied returns. Here is why TRLG is especially sexy: the market doesn't get it. Look at all the street articles - most question why people would buy a pair of $200+ jeans. Fortunately, I've had enough experience in fashion to know that you can't put a price on sexy, and TRLG, like Justin Timberlake, is bringing SexyBack. True Religion is premium denim's golden calf and isn't going away anytime soon based on that alone.

Still critics chirp - but aren't premium jeans just a fad? Aren't all denim firms doomed to the fate of Jordache? Certainly kids will be rocking jeans for all time, but say that all of a sudden distressed denim goes the way of the dodo. Is TRLG doomed? Not at all.

Enter the firm's new President: Mike Buckley, the man who took Diesel and transformed it from a mediocre denim designer into a full-service "lifestyle brand" with stores all over the world. He's doing the exact same thing to True Religion with the introduction of a more diversified product range and retail stores in all the trendiest spots, with more to come. The brand now has ever increasing exposure and market share.

This isn’t being reflected in the stock price, however, so TRLG has finally publicly announced that they are looking for a buyer, and when the almighty Goldman is willing to represent them you better believe the deal will go through with a good premium.

So what should you do to take advantage of TRLG? Here are two simple strategies:

  1. Buy and hold – enter anywhere below 19 and you will see positive returns. The firm won’t sell for anything below 24, and my guess is closer to 28 – the only question is when and to whom. Obviously a strategic buyer will bring the premium up even higher. Otherwise, a financial buyer is a likely candidate. I pitched the idea to Mr. Kravis in January, and I sincerely hope he takes it to heart (and if he does I hope there’s a commission for me in the form of a job offer from KKR). Bear Stearns’ merchant banking group owns Seven Jeans and a few other smaller apparel firms, so there could certainly be consolidation if they were to add TRLG into the mix.
  2. Long + SAR – notice that the stock tends to go up, then back down. This is because of all the shorts on TRLG that always bite whenever it goes past 20. Use this to your advantage. Enter gradually from 18 down then ride it up to 20. Now stop and reverse into a short and ride the stock back down to about 17 before covering and going to long. TRLG tends to float between 16 and 21, so don’t get too greedy and you will see excellent returns. This is the strategy I’ve been using and it has worked wonderfully. You just need confidence in you strategy and patience.
Update: TRLG just announced they appointment of Zihaad Wells as the new Design Director. This guy created Levi's Red and Vintage brands. He is perfect for TRLG in terms of aesthetic direction: clean and sexy with a hint of flair and tasteful accents. Note that this happened just as the stock was about to start heading down. My guess is that the shorts will be weary, but not too much. In any case since banking means I can't day-trade I am backing out of my short before market open tomorrow and will re-purchase the stock when I see it has leveled/reversed.

Wednesday, August 23, 2006

Poetry in Money

One of my all-time-favorite idiot savants (a literature professor at my alma mater) once said, mockingly, that there is “no money in poetry, no poetry in money.” I contested then, and will prove through my writings in this blog, that the latter point especially is false. My style tends to be fairly laconic so don’t expect (or fear) having to sift through Evgeni Onegin. For future reference I’ll label all of my poetry of money posts as pomo.

Sacked Religious

Under the shadow
Of the Silver Seraph's wings
I walk on water
That turns to pinot noir

Jesus was overrated
Said St. Peter
When I bought out Heaven

Monday, August 21, 2006

Poker Playing Computers & Free Energy

AI that plays Poker
Now I understand why this poses a great challenge from the sense that it's modeling a game of imperfect information, but what I really want to see is portable, concealable, AI I can take to Vegas. Maybe they could have a camera and HUD embedded in sunglasses that transmit wirelessly to a CPU box that's hidden under a shirt/blazer. Baby needs a new pair of Ferragamos!

Free Energy
An Irish company claims to have made free, clean energy. No, it doesn't run on Guiness - it supposedly uses magnets. Simple stuff, right? Except how do you fit a magnet strong enough to power a cell phone into a cell phone? What about for a car? And how would having extrmely strong magnets affect other (metal) cars on the freeway? The company has issued a public challenge in the Economist for any scientist to test their product/theory, but I'm not going to be short crude anytime soon.

Arbitrageur says Quack. (the first post)

After a somewhat extended sabbatical from keeping any sort of "blog" (back when I still kept one the term wasn't even common) I have decided to make a quiet, yet triumphant return. This is the first time that I’m using a full-service as opposed DIY content delivery mechanism, but Google has lured me with their promises of being able to post anywhere at any time while still allowing me to create my own layout and designs. Semantics aside, let’s elaborate on the content.

This is going to be a cross between the diary of a banker (it’s 5AM and I’m trying to slit my wrists with pitchbook paper), the ramblings of a wannabe BSD (hedge Tatneft with a written Lukoil collar), and the general banter of a formerly artistic 22 year old in a city full of clean vehicles and dirty hippies (I hate both).

I may have a few guest contributors and will spice up the text with audiovisuals every now and then. One thing I can promise with complete confidence: this blog will be way more exciting than anything else an analyst sees on his computer (unless he’s figured out a way to circumvent the firewall to look at porn).