Issues & Opinions

From the WSJ story of this evening:

BOSTON—A little-known Republican shook up the balance of power in Washington by winning a U.S. Senate seat in Massachusetts, a result that imperils President Barack Obama’s top legislative priorities and augurs trouble for his party in this year’s elections.

Cast beneath the front page story, these three bullets, pointing to stories I’m not linking here:

• Independent Voters Abandon Democrats
• Americans Weary of Government Intervention
• Democrats Set Plan to Pass Health Bill

It could just be me, but one of those items doesn’t belong with the others, and in fact represents the root problem for which I hope Senator Brown’s election is the first solution step.

The Democrats, in sole control of the levers of government, are committing slow-motion suicide, and don’t seem to care. I hope, for the sake of the country, the sake of our political system, and frankly, the sake of the Democrats, that they don’t make the ignorant mistake of trying to whistle past this particular graveyard.

Oh, and Martha/Marcia (Go Patches! Do that dynasty proud!) Coakley? Perhaps the worst, most tin-eared, foot-in-mouth candidate ever.

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From Douglas McIntyre:

Stable home prices may be overrated. Every month that there is an artificial barrier that prevents real estate prices from falling faster is a month that the market does not reach rock bottom, and rock bottom prices are what eventually bring buyers into the market. Real estate prices are being destroyed by the current “hundred year storm” in the industry and buyers will find the bargains irresistable, even if mortgages rates are not at a historic low. The government can draw out that process unnecessarily instead of standing aside as it takes it natural course.

The taxpayer will write a check to Fannie Mae and Freddie Mac in the name of keeping real estate prices from falling. That taxpayer might buy a house with his check, but the government is keeping home prices too high.

Everyone (well, some people anyway, the ones who were paying attention, not including those who were playing the game) worried about the clearly-building bubble in the real estate market. Poof! Turns out it was real.

And now, those who should have taken action (Greenspan’s folksy alleged wisdom notwithstanding) are blowing as hard as they can, attempting to reflate the bubble. Marvelous.

In 2004, Stephen Roach was quoted: (Economist)

…the chief economist at Morgan Stanley, has long argued that the Fed is a “serial bubble blower”. Its cheap money is stimulating another round of irrational exuberance. America’s property market certainly looks pricey: the ratio of house prices to incomes is currently at a record high, and about a fifth above its 30-year average.

He was right then, and it’s still true today. Clearly, they’re at it again.

To avoid gloom and doom? Too late – that already occurred, and should have been left, in late 2008, to burn itself out by whatever means necessary. Stretching the pain of the adjustments over the next 30 years is not preferable to allowing the markets to have regained equilibrium on their own.

To assure affordable housing for everyone? As any economist, observer of recent history, or both should be able to point out, the fact that everyone with a pulse was allowed to purchase a home, even when many would clearly have been better served to rent or live with their parents, did nothing but goose the price of real estate to the point where it not only became unaffordable to all those this magical low price was supposed to help, it ALSO cratered the financial system.

Great work, Fed/Treasury (but I repeat myself). Give yourselves a pat on the back. And then get the hell out of the market. You’re killing us.

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From the AP via James Taranto (“Close Enough for Government Work“):

—– Quote —–
“President Barack Obama’s economic recovery program saved 935 jobs at the Southwest Georgia Community Action Council, an impressive success story for the stimulus plan,” the Associated Press reports.

Hey, great news! Just one little problem: “Only 508 people work there.” The story continues:

The Georgia nonprofit’s inflated job count is among persisting errors in the government’s latest effort to measure the effect of the $787 billion stimulus plan despite White House promises last week that the new data would undergo an “extensive review” to root out errors discovered in an earlier report.

About two-thirds of the 14,506 jobs claimed to be saved under one federal office, the Administration for Children and Families at Health and Human Services, actually weren’t saved at all, according to a review of the latest data by The Associated Press. Instead, that figure includes more than 9,300 existing employees in hundreds of local agencies who received pay raises and benefits and whose jobs weren’t saved.

You read that right: Civil servants got pay raises, and the Obama administration claims credit for “saving” their jobs:

Officials defended the practice of counting raises as saved jobs.
“If I give you a raise, it is going to save a portion of your job,” HHS spokesman Luis Rosero said.

Aren’t you excited to think that these people may soon be in charge of your health care?

—– End Quote —–

One of several possibilities seems obvious here:
1. These guys are idiots
2. These guys think we’re idiots
3. Both

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Where to start?

The short-selling ban that is in place from yesterday through October 2 (or later) is an abomination. Not only is it bad policy in an absolute sense, it’s made worse by the cynical hypocrisy of those who begged for it to be put into place.

It’s one thing for an amiable boob like Patrick Byrne to whine about short-sellers and how they’re killing his company. I’m willing to give Byrne some small measure of benefit of the doubt, since finance isn’t his claim to fame. But when the chairmen of the Federal Reserve and the SEC, along with the former CEO of Goldman Sachs, now Treasury Secretary, start whining out of the same hymn book, they’re not serious, not believable, and are clearly playing to the idiots in the audience.

Short selling, the act of selling shares you don’t own, with the expectation that you’ll be able to buy them back later at a price equal to or lower than the price at which you sold the. Simple, really. And it’s got nothing to do with wanting to harm the company whose shares you’ve sold short. It’s simply an expression of opinion that the shares are overvalued, for one reason or another.

Selling short, then spreading false rumors against a company is an offense for which one can be pursued in a court of law. Funny thing, though – not selling short, then spreading false rumors against a company is also an offense for which one can be pursued in a court of law. If you do the verbal algebra, it becomes clear that selling short has nothing to do with the illegality of false rumors. And the law recognizes this – selling short is, in anything approaching sane regulatory times, not illegal at all.

Selling short can occur for many reasons, in many different contexts. Everyone I’ve read focuses on bets that a stock might or should go down. I’ll go you one better. For instance, to take a random example, let’s just say that the Investment Banking group in Goldman Sachs’ Chicago office were doing a public offering of stock for a client.

Such offerings typically include an underwriter’s option for an additional 15% of the shares being offered as “the green shoe”, to cover overallocations. Since an investment bank typically has no interest, and certainly has no requirement, to be an owner of stock in the companies for which it provides underwriting, if an offering looks successful, and the demand is high enough to make exercising their option for the “green shoe”, the normal action an investment bank takes is to sell short a number of shares equal to the amount of the green shoe, knowing that they’ll be able to replace those shares with the additional 15% for overallocation. If the stock has run up in the aftermath of the offering, better still – they can sell stock that’s more expensive than the offering price, knowing full well that they can replace it at the offering price. But at a minimum, they already know the price at which they can buy the stock in the future, so this isn’t a bet that the stock will go down.

Treasury Secretary Hank Paulson, having been the head of investment banking for Goldman Sachs’ Midwest Region (1983-1988), then managing partner of the Chicago office, followed by co-head of IB for the entire firm, can safely be presumed to know all of this.

Neither SEC Chairman Cox and Fed Chairman Bernanke has any experience in capital markets, but neither of them can assert ignorance of the role that short selling plays in the market.

And who’s been calling loudest for limitations on short selling? The investment banks, solvent and formerly-solvent:

Lehman:

Lehman executives complain that they have been singled out by hedge fund investors that are short selling — or betting against — their stock, and Mr. Fuld has called senior executives at competitor banks demanding that their employees stop criticizing Lehman.

Morgan Stanley:

The mood was far different at Morgan Stanley, which lobbied vigorously for the ban on short selling. The bank’s shares shot up 21 percent, to $27.21, on Friday. Analysts said the reprieve might be only temporary, though, because the firm’s business model still requires a big balance sheet and core base of deposits for financing.

Goldman Sachs:

…the SEC is this afternoon holding a meeting to “determine if they need to take further steps to curtail what both Mac and [Goldman Sachs CEO Lloyd] Blankfein characterize as improper short selling that is really causing damage to the share price of Morgan Stanley and Goldman Sachs.” Blankfein also spoke with Cox to complain of short selling of their stock, as did New York senators Chuck Schumer and Hillary Clinton, according to Gasparino’s sources.

And so on. Fannie Mae, Freddie Mac, Bear Stearns, AIG, and a host of others, all now functionally dead as public companies, claimed loudly, with much gesticulation, that short sellers, not their crappy business models or abysmal risk management, were the reason for the drops in their stock prices.

New York’s AG Andrew Cuomo:

Likening such traders to “looters after a hurricane,” New York Attorney General Andrew Cuomo Thursday said his office is investigating “a significant number” of complaints about improper short selling in shares of Lehman Bros., AIG, Morgan Stanley, Goldman Sachs and other financial stocks.

Cuomo said his investigation would use the New York state Martin Act, which subjects violators to criminal as well as civil penalties, to combat the illegal practices.

“The markets need to be stabilized,” Cuomo said. “And one way to bring about such stability is to root out and deter short-selling that is based on the spread of false information.”

Sorry, Spanky – you left one class of people out: Weather forecasters before a hurricane. Deter short selling based on the spread of false information? Sure – go ahead, although there are already laws in place to do that, so knock yourself out enforcing them, with my blessing and encouragement. Disallow short selling itself, as though there’s no valid reason for a non-rumor-spreading trader to do? Utterly stupid. And impressive only to the self interested (the banks) or ill-educated (all other non-bankers who’ve complained about short selling).

Applauded only by the greedy & ignorant? Must be a great plan, then. I’ll take all this addle-pated nonsense about “gangs of people getting together to sell shares of a stock” seriously when several things also happen:

• The same idiots decide to go after “gangs of people getting together to buy shares of a stock” (Cramer – I’m looking at you and everyone like you).
• Someone explains to me the difference between a short seller selling a share of stock and an actual holder of the stock selling a share of stock. The market neither knows nor cares.
• Which raises the question of what’s next? Disallowing down-ticks entirely? Disallowing any sale of the stocks of the protected 799 alleged-financial companies? Even by widows and orphans who actually hold shares? What is this, the Hotel California?

“Issue Two” (please read that to yourself in John McGlaughlin’s voice, for best effect)
Read the rest of this story »

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Or, to be more correct, at least part of the system. Some of the time.

First, there was the Emperor AG and Premier Governor of New York, Eliot Spitzer, getting his, and a reasonable person could hope he’s got still more coming to him, given the pompous hypocrisy of the crusades on which he embarked before his fall.

Today’s news, however, on Alaska’s Ted Stevens, is equally satisfying to read. Charged with public corruption, and seemingly certain to be found guilty given the brazen and entitled nature with which he sought the spoils of his office, the only shame here might be that, at 86 years old, he’s unlikely to be incarcerated for the term he deserves, if at all. He’s been a national joke, most recently at least, for the Bridge to Nowhere pork fiasco, and his indictment cements his status as an embarrassment to Alaskans, Republicans, the Senate, and Americans.

Most people think that there’s a general presumption of innocence in America, but that’s only true within the court system, and in the issues that surround the court. I’m happy to report that my odds of serving on any jury of Mr. Stevens’ peers are zero, and I’m neither the judge nor the prosecutor in his case, so I owe him no such presumption.

He’s dirty, and the only thing better than having him indicted and removed from office would be to step back forty years, and take he and all other grandees of his sort out of the political process entirely. Glad-handing thieves, selling the citizens’ best interests for their personal aggrandizement, are among the lowest forms of life in America.

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In an item in the May 5, 2008 WSJ, I saw the “Fund Track” column, by Daisy Maxey, entitled “Democratic Booster Blue Fund Group Has Been Singing the Blues Lately”

The focus of the story was on a small Washington DC based fund that’s done poorly of late.

Blue Fund Group is having a rough year.

Blue Investment Management LLC, the fund group’s Washington, D.C., investment adviser, has liquidated Blue Small Cap Fund, which managed less than $1 million.

It is now in the process of changing the name of its Blue Large Cap Fund, which has a little more than $10 million in assets, to, simply, Blue Fund. So far this year, that fund has underperformed both its large-cap growth category and the Standard & Poor’s 500-stock index, according to Chicago investment-research firm Morningstar Inc.

Odd, that. Not the results, particularly, but the fact that the story appears at all. “What’s the problem?”, I wondered, and what makes this tiddler of a fund worthy of coverage in the WSJ? I read on…

In addition, in a rather odd development, $9.5 million of the large-cap fund’s assets were invested recently by a trust that has said it may hedge its bets on some of the fund’s holdings.

Blue Investment Management was formed in 2006 to invest in companies that “act blue” and “give blue,” those that engage in practices consistent with progressive values and give the majority of their political contributions to Democratic candidates.

Following a proprietary managed index of U.S. companies, the large-cap fund invests in “blue” companies in the S&P 500 index, while the small-cap offering had invested in “blue” companies in the Russell 2000 index.

Additional info, according to an April 2007 article at Morningstar:

The Blue funds (Blue Large Cap and Blue Small Cap), launched late last year, invest in companies that give a majority of their political contributions to Democratic candidates and organizations, in addition to passing various standard social screens. There are no funds focused specifically on Republican-leaning companies, though the Free Enterprise Action fund (FEAOX), launched two years ago, promotes free enterprise and opposes shareholder resolutions that might dampen companies’ profitability, including most SRI-type proposals. Also, the Camco Investors Fund (CAMCX) specifically uses socially conservative screening criteria, as do several of the religious funds we looked at in our earlier column, notably the Ave Maria and Timothy Plan funds.

Quintuple odd.

No “Republican-focused” funds? Because nobody would buy them, I presume, preferring instead to just focus on companies well-situated to make money.

Aside from the fact that the new biggest investor in Blue Funds may choose to hedge its bet, taking contrary positions to that of its now-majority owned fund, the slack-jawed investment thesis behind the fund is a real eye opener.

How is it, I wonder, that someone was able to correlate the political contribution tendencies of companies, and then to target them for investment? Wait – I’m not done yet: Of course it’s simple, though a bit labor-intensive, to do such a thing, but having done such a thing, how could someone have done such a bang up job of choosing a thesis with a correlation apparently approaching -1? And then put client money behind such a spastic idea? And still slept at night?

It’s possible to grotesquely overthink investment theses, even when, unlike the strategists of the Blue Fund, you leave political proclivities out of the mix. Running such a tiny fund, and apparently running it nearly into the ground, causing closure of the “small cap” side of the fund, abandonment of the “large cap” moniker on the other half, and causing the new largest investor (sort of) to consider hedging its exposure to your attempts at splitting atoms with your mind (and political views) seems like an item one would leave off one’s resume.

The same goes for all “Socially Responsible Investing”, if you ask me, not that you did.

Unless, of course, the goal isn’t to make money at all.

Granted, it’s been a tough year in the markets, but it’s not been impossible to make money. For comparative purposes, one of the things I do on a daily basis, with a very small portion of my time, is participate in running a proprietary hedge fund. The assets under management seem similar to those reported for the Blue Fund family by the WSJ, yet our focus is solely on making profits. And overall, we’re up more than 40% so far this year.

It’s not impossible, and properly done, it’s not even particularly difficult. The difference might be that there’s no ideology behind our investment choices, and no attempts at claiming correlations that don’t exist in the real world.

There’s nothing wrong with social, or political, responsibility. Neither has much of anything to do with investing, however. I don’t invest to help those in need or to advance a political point of view – I invest to make profits. To help those in need, I give to the Red Cross. And to advance a political point of view, I vote.

In investing, as in many other things, avoiding confusion about why you’re doing it is a fundamental prerequisite to being even mildly competent.

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Via a WSJ email alert of a few minutes ago:

NEWS ALERT
from The Wall Street Journal

April 14, 2008

Conservative leader Silvio Berlusconi appeared to clinch Italy’s national election Monday, making it likely that the media mogul will return as prime minister for a third time. Berlusconi’s center-right Freedom People party was set to get 164 seats in the upper house of parliament, the senate, while the Democratic Party of center-left rival Walter Veltroni was expected to win 139 seats, early projections showed. Though votes were still being counted, Veltroni called Berlusconi to concede defeat.

The election was called in a rush after the previous government, headed by center-left Prime Minister Romano Prodi, collapsed in January after only 20 months in office.

Assuming that the election plays out on present form, I’m not sure which I find funnier, Veltroni (about whom I’ve nothing bad to say) calling for concession when clearly things aren’t going his way, or the fact that the reporter was able to write the story with a straight face.

This, of course, brings to mind Hillary Clinton’s suggestion that Barack Obama would look good in Vice President’s shorts.

And now that I think about it, it also brings forth an old Monty Python skit.

(from 3 minutes in, actually, but the entire skit is a classic)

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A conspiracy of dunces, that is, spreading conspiracy theories.

Shockingly, to me as I’m sure it is to you, this one comes from a guy who’s a buddy of Ron Paul, (“R”, TX).

Via Dan Primack’s PE Week Wire:

The candidate is Murray Sabrin, a university professor who once ran on the Libertarian ticket for governor of New Jersey. He’s now running for U.S. Senate as a Republican, and last week received an endorsement from political soul-mate Ron Paul. More specifically, Paul sent out a so-called “Money Bomb” for Sabrin, which is basically an email asking supporters to immediately make an online donation. The idea is to raise lots of money in a single day, and then use the windfall as evidence of growing grass-roots support.

He got his money bomb, because the Paul-\bots are nothing if not slavish in their devotion to the directives of their jingoistic hero, Dr. Ron Paul. And it blew up Sabrin’s site, but good.

Soon after Paul lit the fuse, however, the Sabrin website crashed. It and some associated email accounts were down for approximately 16 hours, before being put back online. The campaign was furious. It had discussed the expected traffic surge with Network Solutions beforehand, and that it had been assured the site would be fine.

Or not, as it turned out – Network Solutions isn’t responsible for design and coding errors in its clients’ sites, and Sabrin’s site was buggy.

This is where it gets just bizarre. The Sabrin campaign seemed to have two choices at this point: Either accept that the crash was caused by its own coding mistake, or blame Network Solutions for having faulty technology. But it went for an unexpected third avenue: Accuse Network Solutions of taking down the website for partisan political purposes.

Which of course Sabrin’s campaign did. Utterly implausibly, but there you have it. For details, click the link to Dan’s story – it’s a good read.

As a larger issue, no wonder people are falling serially in love with Barack Obama – he promises, in some feathery and highly general way, to deliver us from this sort of functional retardation.

It’s all crap, of course – not specifically because it’s Mr. Obama (a fascinating & intelligent gentleman, good with a turn of a phrase, though married to an apparently divisive and demogogic wife and devoid of either the experience or anything that passes for coherent strategy to, you know, actually run the country). It’s crap because he’s a politician, and they’re all full of crap, as they pretty much have to be in order to aspire to the position they seek.

If Mr. Obama’s, or anyone else’s, putative “war on cynicism” had a ghost of a chance of succeeding (and it does not), one of the first things they would propose would be that, every time someone trots out a ludicrous conspiracy theory designed solely to motivate the lowest quartiles of the IQ spectrum, the government could declare a moment of silence, followed by a moment of pointing at that person and laughing.

Hey, a boy can dream.

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From the Los Angeles Times, via a WSJ email snippet this morning:

Los Angeles Times: While in private business, Mitt Romney — whose presidential campaign cites his record of closing state tax loopholes as Massachusetts governor — used shell companies in two offshore tax havens to help eligible investors avoid paying U.S. taxes, federal and state records show. Mr. Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands, but his aides and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Mr. Romney’s former company, Bain Capital, and thus boosted profits for Romney and his partners.

Sadly, this tells me nothing I didn’t already know about Mitt Romney – he’s clearly a smart guy, and he’s clearly a competent businessman. Whether either of those makes him the best suited presidential candidate is both another thing completely and a matter which doesn’t concern me at all right now.

However, the intimation that there’s some undercurrent of hypocrisy here strikes me as overbaked by half – he used the system, properly & as designed, to benefit those to whom he had a fiduciary duty. The fact that he and his partners boosted their profits from having satisfied their clients strikes me as precisely the result he expected, and deserved.

Surely there are other crucial things about him we need to know, but this ain’t on that list.

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Back on May 21, 2007, I saw an article that I almost, almost thought worthy enough of derision that it justified a post. For reasons that now escape me, I decided otherwise at the time. However, as sometimes occurs, it’s again become current, so I’ll revisit.

This, from the Austin American Statesman:

A panic attack move into private equity?
By Robert Elder | Monday, May 21, 2007, 02:07 PM

Writing in the May 18 issue of Grant’s Interest Rate Observer, Dallas investor and state of Texas pension official Frederick “Shad” Rowe tees off on the leaders of the Teacher Retirement System of Texas pension fund.

Rowe examines the Texas teacher fund’s recently announced plans to move massive amounts of its holdings into private equity and out of publicly traded stocks. The strategy strikes him as the investment equivalent of a panic attack.

(Rowe notes that the Texas Pension Review board, which he chairs, has no authority over TRS investment strategy and that he’s writing as a private citizen.)

Rowe writes that the teacher fund is trying to juice returns by moving into so-called alternative investments (hedge funds, buyout firms, hard assets such as timber, toll roads) a little late in the game. Maybe even just in time for the private equity bubble to pop and the very stocks the teacher fund is selling to rise in value.

Please ignore for a moment the fact that private equity and hedge funds are not the same thing – Rowe’s core point, I think, was that high return comes with high risk. Big shock, that. But it appeared, in May, not to have occurred to the managers of TRS. I don’t know whether TRS had gotten around to the absurd reallocation plans they announced at the time, increasing allotment to alternative investments from 3% to 35%. But Mr Rowe had the opportunity to weigh in again on the subject in a story from today’s WSJ:

Pension Managers Rethink
Their Love of Hedge Funds
By CRAIG KARMIN
August 27, 2007; Page C1

Many public pension funds in recent years have become eager to invest in hedge funds. Now, some are getting cold feet.

Pension-fund managers from Louisiana to Ohio are saying they may slow their push into these funds after the recent losses suffered at big hedge funds — including ones run by Goldman Sachs Group Inc. and AQR Capital Management — have reinforced some of the risks.

Indeed, one critic suggests that pensions would be foolish to keep pursuing hedge funds. “It’s like planning a vacation to an exotic land, and finding out that there’s an outbreak of bubonic plague,” says Frederick Rowe, chairman of the Texas Pension Review Board, which provides oversight of Texas public pension funds.

I’m not certain which is more admirable – consistency, correctness, or the fact he avoided doing an overt Icky Shuffle and rubbing their nose in it. But in any event, Mr Rowe was stating the obvious back in May, all the while not claiming there was anything inherently wrong with hedge funds or their doppelgangers in the alternative investment universe, just that the TRS was clearly not thinking things through in their sudden mania for the flavor of the month.

Good for him, and, I guess, good for the teachers covered by the TRS. I have no dog in the race, but I hope the managers of the TRS paid attention back in May, for the sake of their beneficiaries.

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