I could have sworn that "hedge funds" were toast last year. Their business model was being seen to be the fraud that it is, and their performance was not living up to expectations (that is if you had any confidence in the performance they were reporting).
But by referring to "hedge funds" perjoratively we are doing most hedge funds a gross injustice. Now to be sure, the business model is a complete scam (2/20 with lock-ups), but the idea of taking a holistic investment approach has its merits. Of course, hedge fund investment strategies come in different shapes and sizes, and so it is an oversimplification (if not disingenuous) to refer to "hedge funds" as if they were all the same.
The hedge fund industry is like most other industries. The top 10%-20% of funds hold 80%+ market share. Most hedge funds that put their shingle out are small asset managers pursuing some specialized investment strategy. They use a little leverage here and there, but on the whole these are not organizations or strategies that can bang the market around. The real "hedge funds" are the major bank proprietary trading desks. When people refer to "hedge funds" euphemistically, this is who they really have in mind.
Friday, October 30, 2009
Friday, October 23, 2009
That does not compute
Saw an article today proclaiming that the long term avg. PE ratio based on trailing earnings is about 14-15, while the long term avg. PE ratio based on forward earnings is about 11.
I'm not disputing these claims (I actually think they reflect generally embedded expectations), but something does not compute here.
A forward PE of 11 relative to a trailing PE of 15 implies 36% expected earnings growth.
Obviously long term earnings growth is not 36% pa, and so I think we can read something about the positive bias of the market into this.
I'm not disputing these claims (I actually think they reflect generally embedded expectations), but something does not compute here.
A forward PE of 11 relative to a trailing PE of 15 implies 36% expected earnings growth.
Obviously long term earnings growth is not 36% pa, and so I think we can read something about the positive bias of the market into this.
Wednesday, October 21, 2009
The "free market" paradox
Now there is no such thing as a pure free market system, just as there is no such thing as a pure egalitarian system.
The capitalist system as we know it is an amalgam of different markets, industries and entities generally constrained by a system of market-based rules, laws and institutions, all of which is married to a social-democratic safety net. The emphasis and balance between free market institutions and govt based redistribution networks varies a little from country to country, but the basic framework is the same across most developed nations.
I find it amusing that some of the most vocal supporters of the TARP, central bank bailout measures, and government stimulus were also some of the greatest proponents of free markets. The belief that you need to abandon the market to save the market is ironic on its face. This speaks to a crack in the free market ideological armor (it will be interesting to see where this leads).
Taking a step back from the bailout, I just find it strange that we generally don't give two thoughts to the irony of a central bank in the midst of "free" financial markets. Faith springs eternal, and the human ability to sustain incongruent positions is pronounced.
The capitalist system as we know it is an amalgam of different markets, industries and entities generally constrained by a system of market-based rules, laws and institutions, all of which is married to a social-democratic safety net. The emphasis and balance between free market institutions and govt based redistribution networks varies a little from country to country, but the basic framework is the same across most developed nations.
I find it amusing that some of the most vocal supporters of the TARP, central bank bailout measures, and government stimulus were also some of the greatest proponents of free markets. The belief that you need to abandon the market to save the market is ironic on its face. This speaks to a crack in the free market ideological armor (it will be interesting to see where this leads).
Taking a step back from the bailout, I just find it strange that we generally don't give two thoughts to the irony of a central bank in the midst of "free" financial markets. Faith springs eternal, and the human ability to sustain incongruent positions is pronounced.
Friday, October 16, 2009
Back at it again
No sooner had we rallied 60%+ off the bottom than the bulge bracket boys were back at it again...you just can't wean them off cheap money.
Goldman Sachs, JP Morgan, Credit Suisse, Morgan Stanley, Merrill Lynch, Biggs, Wien, et al - they've all declared it safe to get back in the water. These are firms and guys who have never known an asset they didn't want to buy (or sell to someone). Whether out of habit, or simply because it is in their best interests, they are back playing the same old tune.
"All is well. We love equities. We love commodities. We love bonds. We hate cash."
The "buy" bias that pervades the street is understandable, but reprehensible. It pays scant regard to those traumatized by the financial market implosion, and the possibility that they may be leading them back to slaughter. It wouldn't be so bad if they got the turn right, but the fact they are only now coming out with the "all clear," is a recipe for disaster (we're now at the stage of the sucker rally).
Given the still strong negative sentiment shrouding the market, given the momentum in the market, given the recovery in the economy, given an open monetary faucet, and given the big boys all marching their clients back into the market, the rally still has legs (1200 here we come...but we're coming around the end turn).
Goldman Sachs, JP Morgan, Credit Suisse, Morgan Stanley, Merrill Lynch, Biggs, Wien, et al - they've all declared it safe to get back in the water. These are firms and guys who have never known an asset they didn't want to buy (or sell to someone). Whether out of habit, or simply because it is in their best interests, they are back playing the same old tune.
"All is well. We love equities. We love commodities. We love bonds. We hate cash."
The "buy" bias that pervades the street is understandable, but reprehensible. It pays scant regard to those traumatized by the financial market implosion, and the possibility that they may be leading them back to slaughter. It wouldn't be so bad if they got the turn right, but the fact they are only now coming out with the "all clear," is a recipe for disaster (we're now at the stage of the sucker rally).
Given the still strong negative sentiment shrouding the market, given the momentum in the market, given the recovery in the economy, given an open monetary faucet, and given the big boys all marching their clients back into the market, the rally still has legs (1200 here we come...but we're coming around the end turn).
Where did we get our stomach for risk
It amazes me the gutsiness of the guys who sit on prop desks, or at hedge funds making market bets with 20x-30x-40x-50x leverage. I don't know how they do it! One wrong move and it all goes poof.
Is it ego? Is it hubris? Is it bravado? Is it incentives? Is it stupidity? Is it madness? Is it skill? Is it luck? Is it greed? Is it insecurity? Is it peer pressure? Is it culture? Is it ambition? Is it hope? Is it faith? Is it the will-to-power? Is it immaturity?
The one thing they invariably have in common is that it is someone else's money.
This penchant for risk among our financial superstars has slowly, but insipidly made its way through the system. To the point where modern Anglo-Saxon economies are a mere shell of their former financial selves.
One way or another change is coming. It may be through enlightened cultural norms (don't count on it), more likely it will be through enlightened self-interest brought on by economic necessity.
The choice is ours (if only there was leadership to help navigate the waters). We can either take our medicine now (manifest in a deep recession) or we will experience something a lot less savory later.
Is it ego? Is it hubris? Is it bravado? Is it incentives? Is it stupidity? Is it madness? Is it skill? Is it luck? Is it greed? Is it insecurity? Is it peer pressure? Is it culture? Is it ambition? Is it hope? Is it faith? Is it the will-to-power? Is it immaturity?
The one thing they invariably have in common is that it is someone else's money.
This penchant for risk among our financial superstars has slowly, but insipidly made its way through the system. To the point where modern Anglo-Saxon economies are a mere shell of their former financial selves.
One way or another change is coming. It may be through enlightened cultural norms (don't count on it), more likely it will be through enlightened self-interest brought on by economic necessity.
The choice is ours (if only there was leadership to help navigate the waters). We can either take our medicine now (manifest in a deep recession) or we will experience something a lot less savory later.
Friday, October 9, 2009
The M&A Dilemma
For an acquirer the time to buy is when prices are cheap. Like after the tech bubble bust, or post the recent financial crisis. Unfortunately, no one wants to sell then.
And so, the dilemma for an acquirer (one of many actually, including the problem of buying a lemon due to asymmetric information) is that they generally can only get a deal done once the target has appreciated in value (and consequently ain't worth buying).
Acquirers purchase anyways, mainly because they are personally incentivized to do so (ego, personal gain, etc.) and it is hard to sit with underutilized assets (whether cash or unused credit).
And so, the dilemma for an acquirer (one of many actually, including the problem of buying a lemon due to asymmetric information) is that they generally can only get a deal done once the target has appreciated in value (and consequently ain't worth buying).
Acquirers purchase anyways, mainly because they are personally incentivized to do so (ego, personal gain, etc.) and it is hard to sit with underutilized assets (whether cash or unused credit).
How About That!
Barack Obama given the Nobel Peace Prize.
Be interesting to see how the burden of expectation plays out internally, externally, and in US foreign policy.
I sure hope we can look back in hindsight and concur that he was in fact worthy of the honor.
There again, the awarding of the honor came before honor was due, thereby devaluing the honor. Bet the Nobel committee has its fingers crossed.
Be interesting to see how the burden of expectation plays out internally, externally, and in US foreign policy.
I sure hope we can look back in hindsight and concur that he was in fact worthy of the honor.
There again, the awarding of the honor came before honor was due, thereby devaluing the honor. Bet the Nobel committee has its fingers crossed.
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