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.
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!
Before and After:
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 PeopleMcCain, 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.
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.
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.
“The head of a Russian fund that says it promotes the development of small oilOne simply has to wonder - who will be next? Will it be…
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.”
“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).
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.
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.
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.
So before you go trying to fashion a noose out of spiral binding how about laughing at the Japanese over at www.engrish.com?
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
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.
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.
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
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.
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:
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
Of the Silver Seraph's wings
I walk on water
That turns to pinot noir
Said St. Peter
When I bought out Heaven
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.
