Benedicte Gravrand, Opalesque London:

Some funds of hedge funds (FoHFs) and due diligence (DD) providers have had to review their methodology since the beginning of the credit crunch and the subsequent uncovering of frauds such as Madoff’s. Opalesque spoke to several industry players about their approach. Our conversations are presented in a Q&A format – as are DD forms.

Most of the FoHFs interviewed for this series said they had not re-organised their DD resources – they had been doing it right all along – although one said that “meaningful evolutions were implemented in the second half of 2008.” Although no new risk areas have been introduced since last year, all managers t………………….

For full article :  http://www.opalesque.com/56048/The_evolution_of_due_diligence_Part_5048.html

Traders around the country are erupting in furor over Jim Cramer’s unfortunate comments in support of the proposed Trader Tax.  Speaking on CNBC in his regular shoot-from-the-hip slot, Cramer basically said what amounted to “why not?” when asked about the Democrats’ backward idea to extract a percentage of every transaction on the markets.

I read his clarification on TheStreet.com this morning, and frankly, it was weak…something about how a Trader Tax would help bring jobs back or whatever, completely absurd.  I got the impression that he wished he hadn’t said anything on the subject to begin with and wished he could back off of his original support for it.  Oh well.

In the meantime, Eric Jackson, an activist investor, contributor to TheStreet.com and the voice of Breakout Performance, posted a very well-written look at what the consequences of a Trader Tax may mean here in the US:

While I support Cramer’s interest in seeing job creation flourish in America, I completely disagree that the “trader tax” will accomplish this aim. To the contrary, I think allowing such a tax to take root here would accomplish just the opposite. In my view, such a tax would encourage large amounts of capital to relocate outside of America, jobs would be lost (not gained) and total government tax revenue would likely go down.

For a preview of what could happen in the U.S. if this trader tax was imposed, look at Britain. At the moment, the U.K. is in even worse fiscal shape than the United States. Because of that, its Labour government recently introduced additional taxes that specifically target hedge funds’ trading profits. Government bureaucrats assumed this was an easy way of generating tax revenue. What they failed to appreciate is that capital has never been more fungible than in today’s global market.

London-based hedge funds immediately announced they were relocating to Switzerland in droves, where they would face none of the new taxes levied in the U.K. With those funds go certain administrative and back-office jobs. But more important, ask London bankers how they feel about losing the many profitable revenue streams attributable to doing business with hedge funds that will now be sent to Swiss banks.

Read the rest:

Trading Tax Stiffs the Little Guy (BreakoutPerformance)

Read Also:

Cramer vs. Furor  (NYP)

Chuck Schumer Opposes the Trader  (TRB)

Reuters – U.S. regulators are increasingly looking beyond stocks in their insider trading investigations to examine derivatives and credit default swaps, a top Securities and Exchange Commission official said.

The expansion comes as the SEC, state and federal criminal authorities pursue the biggest insider trading case involving hedge funds — a case that has already ensnared the billionaire founder of Galleon Group, traders, lawyers and other Wall Street personnel.

“Insider trading can take place in several different venues,” Scott Friestad, SEC associate director of enforcement, said in an interview. “In many of these investigations, we are looking at trading across markets whether it involves options, the underlying common stock, or nontraditional securities like credit default swaps.”

Friestad had no comment on Galleon and its founder Raj Rajaratnam, both targets of an SEC civil lawsuit.

The government remains under heavy political and investor pressure to more aggressively bring perpetrators of financial fraud and illegal profits to justice.

Earlier in November, the Obama administration set up a task force that includes the SEC, the Treasury Department and the Justice Department to thwart financial fraud after a rise in mortgage scams and Wall Street trading scandals.

The SEC, headed by chairman Mary Schapiro, faces its own pressure to be more vigilant, after ignoring tips that could have led it to stop Bernard Madoff’s $65 billion fraud sooner.

HARDER TO DETECT

In April, the SEC said it had about 150 active hedge fund investigations and more than 50 probes involving credit default swaps, collateralized debt obligations, and other derivatives.

“Individuals with material nonpublic information have the potential to profit through nontraditional means,” Friestad said. “In some cases, people believe that they can avoid detection by trading where they think investigators aren’t looking.”

In May, the SEC brought its first case involving credit default swaps, which insure corporate debt against default. It charged a former hedge fund manager and a Deutsche Bank AG (DBKGn.DE) bond salesman with trading swaps of Dutch media conglomerate VNU NV.

Yet unlike stocks, options and bonds that trade on exchanges, credit default swaps and most derivatives trade over the counter, making it harder for regulators to rout out wrongdoing.

“It is much more difficult for the SEC to detect insider trading using derivatives because there is no central market and hence no ability to conduct real-time surveillance,” said Mark Schonfeld, a former director of the SEC’s New York office.

“Insider trading in equities and options is almost always detected by market surveillance,” said Schonfeld, who now co-chairs the securities enforcement group at law firm Gibson Dunn & Crutcher LLP.

Bills pending in Congress would impose new rules designed to shed light on the $450 trillion over-the-counter private swaps market, including requiring derivatives dealers to report trades and forcing more derivatives onto exchanges.

Even if new rules are imposed, some parts of the market will remain opaque.

The challenge of detecting insider trading in some markets was highlighted at the height of the financial crisis in September 2008.

When the SEC was trying to figure out whether investors were manipulating the stock of financial institutions, it ordered two dozen hedge funds, broker-dealers and investors to hand over information about their trading and credit default swap positions in several companies.

Whoa … “if you own any shares in alternative energy companies I should start dumping them NOW.”

THIS SHOULD ALL START A MAJOR SELL OFF AND SINK THESE ORCHESTRATING PUMP/DUMP SCHEMERS, USING NATIONAL MEDIA AS THEIR PROPAGANDA TOOL!

Senator to demand probe of global-warming ‘fraud’

WELCOME TO OBAMALAND: I’VE SEEN YOUR FUTURE AND IT DOESN’T WORK

Al Gore is a FRAUD: Peer Reviewed Scientific Study

Antarctic Ice Growing Same As Arctic!

30,000 Scientist Sue Al Gore For Global Fraud: No Global Warming – NASA: Planet Cooling Since 2003

Anthropogenic Global Warming (AGW) Was A Perpetrated Fraud

Late last week, servers at Britain’s Climate Research Unit, a part of the University of East Anglia, were hacked and over 172 megabytes of data dumped onto the internet for public access.

The data paints an ugly picture of scientists operating as political hacks orchestrating smear campaigns against global warming dissidents, deleting files rather than make their data publicly available, and manufacturing data to prove their case when the actual data does nothing of the sort.

The University of East Anglia has confirmed the authenticity of the documents. With that confirmation, we see global warming for what it is — a scam perpetuated by scientists intent on gaining access to money.

Even the Washington Post has felt the need to cover this story. The Australian Herald Sunwas one of the first to cover the story. They note:

The 1079 emails and 72 documents seem indeed evidence of a scandal involving most of the most prominent scientists pushing the man-made warming theory – a scandal that is one of the greatest in modern science. I’ve been adding some of the most astonishing in updates below – emails suggesting conspiracy, collusion in exaggerating warming data, possibly illegal destruction of embarrassing information, organized resistance to disclosure, manipulation of data, private admissions of flaws in their public claims and much more. If it is as it now seems, never again will “peer review” be used to shout down skeptics.

This is clearly not the work of some hacker, but of an insider who’s now blown the whistle.

Ed Morrisey, at Hot Air, and others have done significant digging into the emails and documents. The highlights are:

1. Prominent environmental scientists organize a boycott of scientific journals if those journals publish scholarly material from global warming dissidents.
2. The scientists then orchestrate attacks on the dissidents because of their lack of scholarly material published in scientific journals.
3. The scientists block from the UN’s report on global warming evidence that is harmful to the anthropogenic global warming consensus.
4. The scientists, when faced with a freedom of information act request for their correspondence and data, delete the correspondence and data lest it be used against them.
5. The scientists fabricate data when their data fails to prove the earth is warming. In fact, in more than one case, scientists engaged in lengthy emails on how to insert additional made up data that would in turn cause their claims to stand out as legitimate.

FELON GEORGE SOROS

Andrew Bolt of the Australian Herald Sun has sifted through the emails and finds some surprises that, at first, he was not sure were authentic, but have now been confirmed to be authentic. One, from Kevin Trenbeth in Bolder, CO, to a group of fellow global warming scientists, admits “that [they] can’t account for the lack of warming at the moment and it is a travesty that [they] can’t. The CERES data published in the August BAMS 09 supplement on 2008 shows there should be even more warming: but the data are surely wrong.”

Another, from Professor Phil Jones at the Climate Research Unit, admits he “completed Mike’s Nature trick of adding in the real temps to each series for the last 20 years (ie from 1981 onwards) amd from 1961 for Keith’s to hide the decline [in global temperatures].”

This is damning stuff.

RS

Yes, there is now growing skepticism over the veracity of the global warming conjecture since Cimategate broke.  For those new to the scandal, RedState has the highlights:

1. Prominent environmental scientists organize a boycott of scientific journals if those journals publish scholarly material from global warming dissidents.
2. The scientists then orchestrate attacks on the dissidents because of their lack of scholarly material published in scientific journals.
3. The scientists block from the UN’s report on global warming evidence that is harmful to the anthropogenic global warming consensus.
4. The scientists, when faced with a freedom of information act request for their correspondence and data, delete the correspondence and data lest it be used against them.
5. The scientists fabricate data when their data fails to prove the earth is warming. In fact, in more than one case, scientists engaged in lengthy emails on how to insert additional made up data that would in turn cause their claims to stand out as legitimate.

CON ARTIST BARRY SOETORO

Last week’s Climategate showed how misguided the President’s environmental policies–like cap-and-trade policies–have been. By cracking into the servers of the Climatic Research Units, hackers exposed the fraud of global warming in dozens of emails written by the world’s environmental experts. According to the messages, scientists were manipulating the facts to hide their own inconvenient truth, which is that global temperatures have actually been on the decline. Of course, plenty of scientists had debunked those theories before the controversy, but President Obama insisted on moving forward with his agenda in direct contradiction to the facts.

Yes, there were many who didn’t need explicit evidence of misrepresentation to see the games that were being played.  Wesley J. Smith, writes,

“I didn’t need these e-mails to figure out the game being played by the global warming hysterics… Here’s a clue: If the Democratic Congress refuses to investigate, they know it’s true. Ditto the UN and the UK Parliament. Alas, that is my prediction..” -

Sadly, global warming has become a cause that has been used to support any number of illigitmate agendas.  For example, fund contraception and abortion before global warming destroys the earth. A mandate (wink) is not necessary.”  Now the house of is collapsing and the church of global warming has been exposed.

Update from Michelle Malkin:

The [New York] Times’ lead environmental blogger, Andrew Revkin, haughtily refused to reprint damning e-mails leaked by a hacker in the burgeoning “ClimateGate” scandal. The documents reveal a long trail of manipulated data, but Revkin balked at the ill-gotten trove. The blabbermouths at the Times had no problem exposing national security secrets to undermine Bush. But shed light on scientific hoaxes that undermine Al Gore? Unethical!

PLB

John Paulson of Paulson & Co, the legendary hedge fund manager who made tens of billions betting on the mortgage crisis between 2007 to 2009, likes gold.  He really likes it.  He likes gold more than a friend.

To most market participants, this is not news, but here’s something you probably didn’t know:  Paulson owns more gold than several major countries!  Combined!

Here’s how we get that 110 tonne abstract to represent his gold position:

Based on several analyses of his filings, Paulson’s wagering roughly 15% of his $30 billion hedge fund in the precious metal ($4.3 billion).  His investment is spread out between ETFs, physical bullion and shares of gold mining stocks, but for the purpose of this discussion, we’re going to look at them in the aggregate as representational of a bet on gold (which they are).

I am using the “tonne” as my unit of measurement because that is how the World Gold Council measures a nation’s gold reserves.  A tonne is a metric ton, it equals 1000 kilograms.

Assuming Paulson & Co currently owns $4.3 billion worth of gold and using the recent price of $1100 per ounce of gold,  we come up with a total of 3.9 million ounces:

$4,300,000,000 / 1100 oz = 3 909 090.91 ounces

Paulson’s 3.9 million ounces million ounces add up to 110 metric tonnes (35,273 ounces in a tonne):

3.9 million ounces divided by 35,273 oz per tonne = 110 tonnes

As can be seen in the chart above, Paulson holds more gold than many nations with individual populations in the millions and economies in the hundreds of billions.  His reasoning for being so bullish is that there are roughly $200 trillion investable assets (in dollars) in the world, but only $800 billion of that wealth is in gold.

Whether or not the world is truly under-invested in gold is up to you to decide, but Paulson’s bet is a big one by any measure.

Sources:

Reserve Asset Statistics (World Gold Council)

Paulson & Co 13 F Filings (SEC.Gov)

Read Also:

Investing Fads By Year 1996-Present  (TRB)

Full Disclosure:  This is a forecast-free website, the author draws no conclusions here about any of the publicly-available data being referenced nor does he endorse any particular investment or strategy.  Nothing on this site should EVER be construed as research, advice or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

FT – A few weeks ago, Claudio Borio, head of research at the Bank for International Settlements, warned in a solemn note to Group of 20 leaders that modern financial policymakers are “driving while just looking in the rear-view mirror”: western finance officials have focused so much on past risks that they fail to spot new dangers.

Worse still, as policymakers rush to implement reforms in response to one financial calamity, they are apt to create distortions that pave the way for the next disaster. Just such an unintended consequence could now be festering in the banking sector, as its balance sheets are increasingly stuffed with government bonds.

These days, there is a near-unanimous belief among western regulators that one way to prevent a repeat of the 2007-08 crisis is to stop banks taking crazy risks with subprime mortgage bonds or complex instruments such as collateralised debt obligations (CDOs). Instead, banks are being urged to hold a higher proportion of their assets in the form of “safe” instruments, most notably sovereign or quasi-sovereign debt. G20 regulators are holding regular meetings in Basel to draw up rules on how banks should do this, as part of a wider reform of financial regulation.

In theory, that move sounds very sensible. One reason why large banks crumbled last year was that many were carrying vast quantities of highly rated CDOs and other toxic paper. These not only lost their value during the crisis, but also became impossible to trade, creating a liquidity shock for the banks.

Government bonds, by contrast, remained liquid during the recent crisis (and have been so in the past few decades). So it appears appealing to hold more of them, particularly given that sovereign debt is also widely presumed to be ultra safe; so safe that the yield on government bonds is known as the “risk-free rate”.

But could this flight to the “safety” of government bonds in itself be creating subtle new dangers? Government debt, after all, has soared to levels not seen in peacetime for centuries, if ever, in many countries, not least the US and UK. Fiscal deficits are swelling across the western world. And the level of political commitment to curbing those deficits remains uncertain – not least because with yields currently so low there is less pressure on politicians to push through reform.

That does not necessarily mean an outright default looms any time soon; indeed, default seems highly unlikely. However, it is easy to imagine that some countries will end up eroding the value of their bonds by debasing their currencies in the coming years, printing money and stoking inflation.

It is even easier to anticipate a sharp rise in bond yields – and a corresponding sharp fall in bond prices – particularly when central banks stop their quantitative easing programmes. Some smart hedge funds are betting on just that.

More

Bloomberg – The U.S. Securities and Exchange Commission will focus on financial instruments such as derivatives as it broadens a crackdown on insider trading by hedge funds, enforcement director Robert Khuzami said.

“The days of insider-trading scrutiny being focused almost solely on the equity markets are now gone,” Khuzami said today at a New York legal conference on hedge-fund regulation. After bringing its first insider trading case tied to credit default swaps in May, the SEC will “roll back the curtain on those markets and look at patterns across all markets,” he said.

Insider trading has become “systemic” behavior in the hedge-fund industry and the SEC is working with criminal authorities to ferret out misconduct, Khuzami said this month. Billionaire Raj Rajaratnam and his New York-based Galleon Group are among more than 20 people and firms the agency has sued since Oct. 16 in its probe of hedge funds.

The SEC brought its first insider-trading case tied to credit-defaults swaps in May, when it sued a Deutsche Bank AG salesman on claims he illegally fed information on a bond sale to a hedge-fund money manager. Prices on credit-default swaps, which insure investors against bond defaults, have surged before corporate takeovers in recent years, fueling speculation that traders are abusing inside information. The SEC has said since at least 2007 that it’s examining the trades.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. The contracts, typically expiring after five years, pay if a borrower fails to meet obligations.

Khuzami, in an interview today, declined to say whether the SEC has any current insider-trading investigations involving derivatives.

More

“AN FRANCISCO (MarketWatch) — Gold has long been favored by a fringe of the investment world, but this year some of the world’s leading hedge-fund managers have loaded up on the precious metal amid concern government efforts to avoid another Great Depression that could undermine major currencies and fuel rampant inflation.”

http://www.marketwatch.com/story/new-gold-bugs-taking-gold-mainstream-2009-11-23

This actually concerns me because it seems the gold trade is becoming a bit “crowded”. I also believe we’ll see a “counter-rally” of the U.S. Dollar. Possibly 15%-20%, even possibly 25%. IF the U.S. Dollar rallies then I expect to see most commodities and especially gold to come down a bit. Possibly to the $900-$950 level. That being said, I’m long-term bullish on gold in general.

Just like relative performance, you can't eat a media persona

I’m not going to write one word of background on one of the most undeservedly commented-on businesspeople in the City of London.  Instead, this post is a long-awaited good-riddance.  Nicola Horlick has dumbfounded this commentator in her every appearance in the media.  Her self-promotional tactics actively undermine her desire to gain credibility, and the results ain’t pretty.  (Check out this lovely appearance in an Economist piece, at the 1′36” mark.)  In reality, she has done nothing but lose investors’ money in ever more gobsmackingly incompetent ways.  (A 10% allocation to Madoff late in the fraud makes a mockery of hedge fund due diligence processes.)  As a result, 2009 hasn’t been kind to her, professionally.  Her businesses are being plucked out of her grasp at new lows in asset management valuation history. (View this up to the 30″ mark.)  Today’s FT mentioned Aberdeen paying GBP5m to manage GBP130m in assets in Horlick’s listed Bramdean vehicle, along with another GBP250m in assets from the Hampshire county council.  Well done, Ms. Horlick, does a 1.3% price-to-AuM valuation sufficiently “dampen you down?”  Real funds of funds managers get 4-6x that.  Do the rest of us a favor: leave the real work to real professionals and DON’T COME BACK.

Goldman Sachs’ CEO Lloyd Blankfein and his largest investor, The Wizard of Omaha, Warren Buffett , descended from the mystical heights of Valhalla with some startling news.  They were bearing a new mythical golden ring.  As they held the ring aloft they made a bold proclamation.  They would embark on one of the grandest social entrepreneurial programs of all time by offering some of the rings precious power, about $500 million worth, to capital starved small and mid-size enterprises (SMEs).  The 10,000 Small Businesses Initiative will distribute $100 million per year over the next five years to SMEs through Community Development Financial Institutions.

These lords of commerce have heard the cries from endangered SMEs.  In their infinite wisdom Blankfein and Buffet understand that the real economy needs to resuscitate and incubate the critical SME segment as an absolute prerequisite to a vibrant economic recovery.    The buzz about this news in the marketplace ranged from cynical suspicion at one extreme to puzzled bemusement and  ecstatic aplomb at the other.

What motivated Goldman to announce this initiative is an interesting question.  Was it guilt, greed or a sense of corporate social responsibility?  Some suggest it is a master PR move to counter a growing public perception that Goldman Sachs,  the poster child of government favoritism and bailout largess,  has leveraged its unfair advantage to achieve historic levels of profitability.  Thus enabling management to pay obscene bonuses to company employees.  But capital has no psyche,  and half a billion dollars is a tall bill to underwrite absolution for some phantom form of guilt.  True to its nature, capital always  seeks a place where it will find its greatest return.  Goldman and Buffett are casting some major bread on the receding waters of a distressed economy.  As its foretold in the Good Book , doing God’s work will produce a tenfold return.  If the Bible’s math is correct, thats a lot of manna that will rain down from heaven for the shareholders of Goldman Sachs and Berkshire Hathaway.  Looks like our modern day version of Moses and Aaron have done it again.  Leading their investors across the dangerous waters of the global economy to live in the promised land of happy shareholders.

As one of the world’s preeminent investment banks and purveyor of capitalist virtues,  company shareholders must be questioning how Goldman’s managers will realize a return on this investment?  Has management examined the potential corporate and societal moral hazards surrounding the program?  Surely shareholders have asked when they expect to be compensated for this significant outlay of capital.   The desire to realize gain is a more plausible motivator and makes more sense for an enterprise like Goldman and the storied investment Wizard from Omaha.

Its wise to ascribe the best intentions and virtuous motivations to actions that we may not fully understand.  This program should be viewed as a seminal event in the history of corporate social responsibility and social entrepreneurship.  Its important to understand that institutions that practice corporate social responsibility do not engage it solely as a philanthropic  endeavor.  Indeed, the benefits of good corporate citizenship pays multidimensional dividends.  All ultimately accrue to the benefit of company shareholders and the larger community of corporate stakeholders.

Goldman’s  move to walk the point of a capital formation initiative for SMEs seeks to mitigate macroeconomic risk factors that are prolonging the recession and pressuring Goldman’s business.   Goldman needs a vibrant US economy if it is to sustain its profitability,  long term growth and global competitiveness.  Goldman needs a strong regional and local banking sector to support its securitization, investment banking and corporate finance business units.   Healthy SMEs are a critical component to a healthy commercial banking sector.  Goldman recent chartering as an FDIC bank holding company may also be a factor to consider.  This SME lending initiative will provide interesting insights into the dynamics of a market space and potential lines of business that are relatively new to Goldman Sachs.  This initiative might presage a community banking acquisition program by Goldman.  At the very least the community banking sector is plagued with over capacity is in dire need of rationalization.  Goldman’s crack team of corporate finance and M&A professionals expertise would be put to good use here.

Goldman’s action to finance SMEs will also serve to incubate a new class of High Net Worth (HNW) investors.  Flush with cash from successful entrepreneurial endeavors, the nouveau riche will be eager to deploy excess capital into equities and bonds, hedge funds and private equity partnerships.  Healthy equity markets and a growing Alternative Investment Management  market is key to a healthy Goldman business franchise.

Community banks, principal lenders to SMEs are  still reeling from the credit crisis are concerned about troubled assets on their balance sheets.  Bankers can’t afford more write downs on non-performing loans and remain highly risk adverse to credit default exposures.  Local banks have responded by drastically reducing credit risk to SMEs by curtailing new lending activity.  The strain of a two-year recession and limited credit access has taking its toll on SMEs.  The recession has hurt sales growth across all market segments causing SMEs to layoff employees or shut down driving unemployment rates ever higher.  Access to this sector would boost Goldman’s securitization and restructuring advisory businesses positioning it to deepen its participation in the PPIP and TALF programs.

The financial condition of commercial and regional banks are expected to remain stressed for the foreseeable future.  Community banks have large credit exposures to SME and local commercial real estate.  Consumer credit woes and high unemployment rates will generate continued losses from credit cards and auto loans.  Losses from commercial real estate loans due to high vacancy rates are expected to create significant losses for the sector.

Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs.   Its a growing contagion of financial distress.  This contagion could infect Goldman and would have a profound impact on the company’s financial health.

The 10,000 Businesses  initiative will strengthen the free flow of investment capital to finance national economic development and empower SMEs.  It strengthens free market capitalism and has the potential to pool, unleash and focus investment capital into a strategic market segment that has no access to public equity and curtailed lines of traditional bank credit. The 10,000 Businesses initiative  will encourage wider participation by banking and private equity funds.  In the aggregate, this will help to achieve strategic objectives, build wealth and realize broader goals to assure sustainable growth and global competitiveness.  All to the benefit of Goldman Sachs’ shareholders and it global investment banking franchise.

Goldman Sach’s has always been a market leader.  We salute Goldman Sachs’ initiative and welcome its success.

In  September of 2008,  Sum2 announced The Hamilton Plan calling for the founding of an SME Development Bank (SDB).  The SDB would serve as an aggregator of capital from numerous stakeholders to focus capital investment for SME manufactures.   More on the Hamilton Plan can be read here: SME Development Bank.

Risk:  SME, bank, recession, unemployment, credit, private equity

You Tube Music: 10,000 Manaics, Natalie Merchant: Dust Bowl

Take a trip down memory lane with me, if you would, and maybe even have a chuckle at your own expense. After all, at one point or another, we’ve all been caught up in a few of these over the years.

Here is Investing Fads and Themes by Year, 1996 to Present

It’s right around now that discussions with clients begin on what some of the upcoming investing fads, themes and trends might be for the coming year.  We don’t “believe” in any of these crazes, but recognize the potential opportunity in being early on a few of them.

It’s hard to formulate a hypothesis of what next year’s investing themes may be without any idea of what’s come before.  I put the above chart together to remind myself of just how much I’ve seen since my first job (summer intern) on Wall Street back in ‘96.

Below is the all-text version,  Enjoy!

Investing Fads and Themes by Year, 1996 to Present

1996 – Initial Public Offerings, Microbrews, Irrational Exuberance  (Alan Greenspan, Federal Reserve Chairman)

1997 – Viagra, Cigars, Telecom/Cable  (John Malone, Chairman of Liberty Media)

1998 – E-tail, Venture Capital, Clicks & Mortar (Jeff Bezos, Founder and CEO of Amazon.com)

1999 – B2B Internet, Y2K, Tracking-Stocks, Carve-Outs (Frank Quattrone, Silicon Valley Investment Banker)

2000 – Wireless, Optical Networking, Competitive Local Exchange Carriers, Linux (Jack Grubman, Smith Barney Telecom Analyst)

2001 – Old Economy, Defensive Stocks (Warren Buffett, Legendary Value Investor)

2002 – Security Tech and Defense Companies  (Donald Rumsfeld, Secretary of Defense)

2003 – Biotech, Fiber To The Premise, More Biotech (Mark B. McClellan, FDA Commissioner)

2004 – VoIP, 3G Wireless Rollout, China  (Patricia Russo, CEO of Lucent Technologies)

2005 – Oil, Homebuilders, India, Viaticals/Life Settlements  (Aubrey McClendon, CEO of Chesapeake Energy)

2006 – Residential Real Estate, Green/Cleantech, LBOs, Video Games and Consoles  (Bob and Bruce Toll, Home Builders)

2007 – Private Equity, Hedge Funds, LBOs, BRIC, Commercial RE  (Stephen Schwartzman, CEO of Blackstone Group)

2008 – Gold, Leveraged ETFs, Short-selling, The Safety Trade  (John Paulson, Hedge Fund Manager)

2009 – Dollar Carry Trade, Emerging Markets, Commodities, Forex  (Benjamin Bernanke, Federal Reserve Chairman)

2010 – Hmmmm….

Read Also:

Eight Trading Superstitions (TRB)

This is the final post in a 10 part series.

On April 7 2009, the Financial Times published an article written by Nassim Taleb called Ten Principles for a Black Swan Free World. Let’s look at them one at a time…

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Of the ten suggestions, this one has the most value by far.  Unfortunately, this one may be the suggestion that has the least chance of being taken up.  No one is talking about any part of this.  We seem to be moving to try to set the world back into the place that is was, or very close to it.

We should be asking “What should be the place of banking in our economy?”  This is not a question of allowing the free market to choose.  The free market has nothing to do with this.  The role of the banking sector is entirely determined by the government.  The banking sector had grown to eat up a huge percentage of all of the profits of the entire economy.  Does that make any sense to anyone?  Banking can be a symbiont with the economy or it can be a parasite or it can be a cancer.  Before the crisis, banking had definitely moved beyond the level of parasite to becoming a harmful cancer.  Too much of all of the profits of all of business activity in the entire economy were being diverted to the banks and with the pay structure of the banks, into the pockets of a very small number of bankers.  Did that make any sense whatsoever?  Is there any way that anyone can show that situation makes for a healthy economy?  The bubbles that happened twice could be seen as the way that bankers justified their huge take from the economy.  If values were growing rapidly, no one seemed to mind that bankers took so much out of the deals.

Source:Evolution of the US Financial Sector Thomas Philippon

However, if the economy and the values of businesses and assets in the economy grow at only a sane pace, and bankers try to go back to the level of take from the economy that they have grown accustomed to, then the amount of total profits left for the rest of the economy are bound to be negative.  So unless we re-think things and figure out how to muzzle the banks, then we are headed for more bubbles that will justify their stratospheric incomes.

The financial sector, once it exceeds a certain share of the economy, should be viewed as a tax on the economy.  Many protest the taxes that the government imposes because the money is not well spent.  Well, the money from this tax goes to personal expenditures of the bankers themselves.  There is not even any pretense that this tax will be spent for the common good.

One question that really needs to be answered is how much of this financial “innovation” that is touted as the result is really beneficial to the economy and how much of it is just unnecessary complexity that hides that take of the bankers and hedge funds.  The excuse that is always given is that all of this financial innovation helps to provide lubrication for businesses.  But that is more like an excuse than a reason.  Mostly the financial innovation has fueled bubbles.  It has led to the excessive leverage that feeds into one sided deals for hedge fund managers.

More often than not, financial innovation has helped to fuel the extreme fixation on short term gains in the economy.  Financial innovation has featured hollowing out companies to maximize short term values.  Quite often the companies “helped” by this process turn into worthless shells somewhere along the process.  This destroys that productive capacity of the economy to allow for the extraction of the maximum amount of short term profits.

Financial innovation helps to turn corporate assets into profits and to take those profits out of the firm through leverage.

So Taleb’s suggestion that we think through Capitalism 2.0 is a good and timely one.  But we need to start asking the right questions to figure out what Capitalism 2.0 will be.

Black Swan Free World (9)

Black Swan Free World (8)

Black Swan Free World (7)

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Black Swan Free World (3)

Black Swan Free World (2)

Black Swan Free World (1)

New entry for our Acronyms, Appelations and Aphorisms for our trouble age section:

CHARTIS: Cunning How AIG Reinvents and Tarts Itself Shamelessly

Past entries such as AIG – America’s Insolvent Giant may be reviewed here:

http://box3.wordpress.com/acronyms-appellations-and-aphorisms-for-our-troubled-age/

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, written by a former manager at Wall Street named Richard Bookstaber, is an insider’s take on why Wall Street 2007 was how it was. Bookstaber switched positions every once in a while, and his biography does tell a story about the evolution as well.

The book is a good read, almost never boring, though it does not deliver a lot of new facts. Bookstaber’s talent lies at connecting things, which in hindsight sometimes is a lot easier than in realtime from within the industry. His reflections are insightful and the structure of his chapters makes sense. For example, he suggests that most definitions of hedge funds are humbug. The one willing to accept should be ‘anything else than an old investment fund’. Then, you can put hedgefunds into different categories, based on trading strategies. Also, he describes the (successful) search for a free lunch, which economic theory says should not exist. The history of LTCM is straight to the point, but it has been told before.

The best chapter of the book is number 10. Here, Bookstaber looks at theories and how they work out in reality. Hedge funds supply liquidity, but is it still there when we really need it? Complex systems arise when actions are tightly coupled, and you cannot stop the system while it’s going. Should the system be left more simple? The discussions are forming a nice overview of what might or might not work when reforming the financial sector. The main lessons is that the financial system should get simpler again: the demon of our own design should be cast away.

The fallout from the recent tax evasion settlement with UBS is reverberating throughout the G-20 community.  As we reported back in October,  the French Governments action directing banks to close branches and subsidiaries in non-OEDC compliant jurisdictions will pressure all G-20 participants to adopt a more uniform tax code and enforcement practice.  The drive to strengthen the respect of tax treaties and the closure of havens to custody assets beyond the reach of national tax authorities signals a new era in multinational cooperation and the eclipse of radical free market tax practices.

The principal drivers for this unprecedented level of cooperation and standardization is the dire need for national tax authorities to recognize and tax revenue streams to help address the burgeoning budget deficits the global economic crisis has has wrought.

Clearly the crackdown on tax evasion is gaining momentum since the global financial crisis has devastated national treasuries.  Enormous expenditures on stimulus programs and dramatically falling tax receipts has created a perfect storm and has created an enormous threat to the fiscal soundness of national treasuries.

Forbes reports that Singapore has become the latest in a flurry of jurisdictions complying with Office of Economic Cooperation and Development standards on transparency and exchange of information for tax purposes.  Fifteen jurisdictions have come into compliance since April 2009.  In addition to Singapore and the sea change occurring in the Suisse banking industry; other  governments that have lost revenue to tax havens are individually taking tough action:

–The U.K. government has informed the Isle of Man that it will reduce revenue transfers of value-added tax receipts to the island by 50 million pounds next year, 9% of the island’s revenue.

–French banks are starting to close down their operations in tax havens.

–In Germany, the hiding of funds in Liechtenstein bank accounts has prompted a backlash against tax havens.

–In the United States, White House advisor Paul Volcker in December is due to report on ways of eliminating revenue losses to tax havens.

This heightened regulation and standardization amongst  G-20 tax authorities is quickly closing any regulatory tax arbitrage opportunities for global investors.  The closure of preferential tax domiciles will heighten the power and reach of national tax agencies enforcement capabilities and the scope of their examination reach.  The IRS is stepping up its enforcement and institutional assets to assure that private equity and hedge fund industries comply with all the anti-money laundering laws and stringent tax codes.

Sum2’s IARP helps investment managers assess and manage the growing threat of audit and tax enforcement risk.  Sum2’s CARP helps large and mid-size corporations assess compliance and manage  IFI audit risk.

Risk: audit, enforcement, regulatory, tax, reputational, litigation

There’s a book out called “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis” and before you derisively sneer at what at first sounds like hysterical hyperbole in the subtitle, consider this bit of logic from Josh Kosman writing in today’s New York Post:

“You better sit down,” the secretary says. “I’ve got bad news…”

The Treasury Secretary is talking about private equity. It’s not the private equity firms themselves but the companies they own that are defaulting. During the boom years of 2001-07, private investors bought thousands of US companies. They did it by having the acquired companies take on enormous loans using the same cheap credit that fueled the housing boom. That debt is now starting to come due.

“Considering what we have already been through, how bad can it be?” Obama asks.

Now here’s where things get interesting.  In the hypothetical scenario, the writer does not for a minute think that the private equity firms themselves are in trouble (or perhaps he is simply dismissing the importance of them in the equation).  Rather, the crisis he is about to allude to concerns the underlying companies owned by these funds, and there are thousands of them:

“Well,” says the Treasury Secretary, “PE firms own companies that employ 7.5 million Americans. Half of those companies, with 3.75 million workers, will collapse, between 2012 and 2015. Assuming that those businesses file for bankruptcy and fire only 50 percent of their workers, that leaves 1.875 million out of jobs.

“To put that in perspective, Mr. President, NAFTA caused the displacement of fewer than 1 million workers, and only a slightly higher 2.6 million people lost jobs in 2008 when the recession took hold.

“A spike in unemployment will mean more people will lose their homes in foreclosure, and the resulting nosedive in consumer spending will threaten other businesses. The bankruptcies will also hit the banks that have financed LBOs and the hedge funds, pensions and insurers who have bought many of those loans from them.”

“Is this bigger than the sub-prime crisis?”

“It is similar in size to the sub-prime meltdown. In 2007, there were $1.3 trillion of outstanding sub-prime mortgages. As a result of leveraged buyouts, US companies owe about $1 trillion.

You’re probably not laughing now.  I personally did not have a handle on just how big the world of private equity had gotten but now I’ve got about trillion reasons to look into this stuff.

Do yourself a favor and head over to the Post to read the rest:

The Next Bubble  (NYP)