Wednesday, November 28, 2012

The SEC Will Take Down SAC Capital

The indictment of Mathew Martomo marks the sixth time a current or former SAC employee has been charged with insider trading. The Feds have had Stevie Cohen, SAC's founder, in their sites for years. This new suit marks the first time Cohen has been directly named, albeit as "Portfolio Manager A."

The Naked Dollar has has written in the past about how insider trading laws are poorly written and there's a lot of gray area. But what of SAC? Is this an unfair government vendetta of some sort?

I don't think so.

The most damning evidence against SAC is, ironically, their track record. Not evidence that you can use in a court, mind you, but common sense evidence that they're not playing by the rules. I have seen their monthly numbers, going back 20 years, and to be blunt, they're not possible. SAC has averaged about a 30% return for 20 years. This, in and of itself, is remarkable, far exceeding the likes of Buffett or Soros. But what most observers miss is what SAC's gross returns have to be to achieve this.

SAC charges the highest fees I've ever encountered: a 3% management fee and a 50% incentive fee. To demonstrate how much these fees slash off the top, let's say they have a 10% year before fees, not bad result. But then subtract 3 points for the management fee and 3.5 points for the incentive fee, and the investor is left with a paltry 3.5% net return. Not so great, although SAC is presumably content because they have pocketed 65% of the return for themselves.

To produce a net return of 30% requires a gross return of...wait for it...63%. While this is not impossible to believe for a single year, or even two, it is wholly unbelievable for twenty. We're talking many standard deviations better than Soros, Buffett, Lynch, or anyone you care to measure against. More damning, they are doing this with billions of dollars, meaning much of their trading activity has to be restricted to highly liquid stocks, which are by their nature more efficient, i.e. less prone to the sort of mispricings that money managers can exploit.

Cohen operates his business by lording over dozens of isolated trading groups, each pursuing their own strategies. Make the company money, and you are paid well. Lose money, and you're shown the door pretty quickly. It is speculated that Cohen has insulated himself from potential charges by having plausible deniability about the actions of the individual groups.Yes, they can go after him on something called "failure to supervise," but this is sometimes hard to make stick.

But here's the thing. The trade in question, the one Martomo has been charged with, was massive. The profit alone was $276 million. There's no way Martomo executed a trade of this size without approval from Cohen.

No way.

I hope SAC is innocent, I really do. The hedge fund industry doesn't need this kind of publicity when the vast majority of its players are law abiding citizens. But I don't know how it's possible to legally produce the returns they do, for as long as they do, with as much money as they do. Heck, it would be hard to nail returns like these even with inside information.

And there's this:

The Cohen Spread, Greenwich
And this...

 A $12 Million Stuffed Shark

It's not illegal to own a big house, of course, and nor is it illegal buy stupid, overpriced art. But the Obama administration has created toxic atmosphere of class envy, bordering on hatred, and sustaining such a zeitgeist requires putting faces on your enemies. Guilty or innocent, Stevie Cohen makes for a very compelling villain.

This is why, one way or another, the feds will bring Cohen down. They may get a conviction, they may not, but no matter. Death of a thousand subpoenas is still death. Investors will bail. Personally, I can't believe they haven't already, but I guess 30% is hard to walk away from.

Tuesday, November 27, 2012

Three Realities

The following is a fabulous post, reprinted with permission from a recommended blog called BeeLine (

Three Charts to Start Your Week

I love data.  I especially love data when it is presented in graphic chart form.  A picture really is worth a thousand words and a well done graphic chart brings data to life.  A good chart can tell a story with the data.  In my view the best data and charts deliver information that puts an issue into proper context.  Data does not mean anything unless it is put in context.

I came across three charts this weekend that I think are worth sharing because they pass all the tests above.

The first chart shows the control of state capitals since 1938.  The red represents the number of states where both houses of the state legislature and the governor were controlled by the Republicans.  The blue represents where the same is true for the Democrats.  Gray indicates where there is some type of shared control in the state.

Source: National Conference of State Legislatures as reported in The New York Times

Notice that it has been 50 years since the Republicans controlled so many states.  There has also never been a period since 1938 when the Republicans made more gains in state government than in the years since Barack Obama became President.  This does not look like a political party that is having difficulties in connecting its message with a changing demographic.

The second chart I came across involves the disastrous state of the public pension costs facing the state of Illinois.  Illinois is a state that has been controlled exclusively by Democrats in its state house since 1982 except for one two-year Republicans majority in the mid-1990's.  Democrats have controlled both houses of the legislature and the governorship since 2003.  This shows what happens when a political party is owned by the public sector unions.

The share of total revenue the state collects that must be used for annual pension costs has risen from 3.6% in 1996 to 22.0% in 2013.  It is headed for nearly $3 dollars for every $10 in revenue by the end of this decade.

Source: Institute for Illinois' Fiscal Sustainability
As an indication of how bad it is in Illinois, the pension plan for its state legislators (the General Assembly Retirement System) has less than 12% of the assets it should have to meet its future pension obligations under new accounting rules.  Between now and 2045 this pension fund is estimated to be on the hook for $895 million in pension payments and it has just $53 million in current assets.  The pension plan for teachers in the state is only 18% funded according to the same accounting rules.  Pension debt grew by nearly $12 billion in the last year alone in Illinois.

There is no question in my mind that Illinois is headed for bankruptcy.  They seem to have gone beyond the point of no return.  Remember, this is a state that increased individual income tax rates across the board by 66% (from 3% to 5%) and corporate tax rates by 45% last year.  How high do taxes need to go to fill this hole?  There will be few taxpayers left who will want to pay that bill.

The third chart deals with CO2 emissions.  Remember the Kyoto Protocol in 1997 that the liberals argued was absolutely critical for the United States to adopt to save the planet?  Of course, 70% of the world (including China and India) were exempt from the treaty.  The U.S. Senate voted against Kyoto 95-0 in 1997.  However, this is another issue that many on the Left still like to blame on George W. Bush as he refused to endorse adoption of Kyoto in his Administration.  Of course, the Senate during the Clinton-Gore administration made it clear that the United States would not sign Kyoto if it excluded China, India and other countries.  The Bush position was identical to the Senate position in 1997 but why let a little fact like that get in the way?  How has carbon emissions growth worked out since that time?

Notice that China's emissions have almost tripled since 1997.  India's have doubled.  Carbon emissions in the United States are lower today than they were in 1997.  China is now emitting about 50% more carbon emissions than the United States.

I found it interesting in researching this subject that last December Canada pulled out of the Kyoto Protocol that it had agreed to in 1997.  It did so to save an estimated $14 billion in penalties.  In making the announcement the Environment Minister of Canada blamed an "incompetent Liberal government who signed the accord but took little action to make the necessary greenhouse emissions cuts".

Who was right on Kyoto?  What exactly has it accomplished compared to what it was supposed to accomplish?  It looks to be nothing if the goal was to reduce worldwide carbon emissions.   Of course, that was not the real goal anyway.  The real goal was to attempt to soak the rich (the United States) with enormous financial penalties which is a favorite past time of the far left.  Why are facts like these so often swept under the rug by the liberal media?

Credit:  Watt's Up With That

Monday, November 26, 2012

Thursday, November 15, 2012

Why Certain People's Sex Lives Are Our Business

During the Monica Lewinsky scandal, the cultural left brayed that Bill Clinton's sex life was none of our business. The same crowd tried to make this argument about Anthony Weiner, but Weiner couldn't survive pornface. Lately, they seem to have changed their tune where David Petraeus is concerned. (The political calculus is different, and the left is nothing if not an utterly political animal.)

But what should the bedroom standard for politicians and high government officials be? Some might make an entirely moral argument that holds the political class to the highest standard. After all, as leaders, they should set an example for our children. Well, the upper West Side precincts don't particularly care for moral standards, so this argument won't impress them. But is there another, more practical reason to give a damn?

Allow me to suggest that there are reasons to hold most officials to a very high standard. First, there is national security to consider. If you are in a position where you have access to classified information, you shouldn't be fooling around for the obvious reason that you can be blackmailed. The honey trap is the oldest espionage trick in the book.

On this basis, it is fair to ask the president, his top advisors, the Joint Chiefs, members of the House and Senate Intelligence Committees, and senior officials at the NSA and CIA to all keep it in their pants for the greater good.

But there are broader issues, and it's not just national security that we need to consider. Basically, if someone has the power to make important decisions or affect policy, they, too, can be compromised. What if someone on the Judiciary Committee was blackmailed into voting a certain way on a Supreme Court justice? Obamacare passed by a single vote - what if someone was quietly coerced?

Ponder, also, how much easier this is to pull off in today's digital world than it once was. Heck, the "honey" doesn't even need to have actual sex with the target if they can just get something damning in an email, a text, a tweet, or a Facebook post. Once the "send" button is hit, all control is lost.

I'll go one step further: there doesn't even need to be a "honey." It can be a creepy operative sitting at a computer. Here's how you'd do it:
  1. Find a picture of a random hot babe on the internet.
  2. Create a fake Facebook or Twitter account using the picture of the girl.
  3. Start friending or following politicians and flirting with them online.
  4. Steer the flirtation in a sexual direction (assuming the pol doesn't do it first).
  5. Inform the politician that he will vote a certain way on a crucial bill or he will be exposed and his career ended.
Do you know how easy this would be to do? I'd be shocked if it wasn't happening already.

(Parenthetically, you would think Petraeus, as head of the CIA, would have some pretty cool covert techniques at his disposal to keep an affair quiet...or not, since he communicated with his paramour through GMAIL! Yikes.)

I would like to suggest, as I have before, that we have actually had a significant case of sexual blackmail in our country's history. How else to explain how this man...

...didn't fire this one...

The Kennedys hated J. Edgar Hoover. Bobby, in particular, had strong feelings, and running the Justice Department, he was forced to work closely with Hoover. Hoover had actively supported Nixon in 1960 and was arguably a tyrant, having run the FBI as his personal fiefdom since its founding. Why didn't JFK simply fire him?

The answer is one of two things. The first possibility is that Hoover, undoubtedly possessing evidence of JFK's and RFK's varied affairs, was blackmailing the administration. The second is that the Kennedys simply feared that Hoover had the goods. Either way, America had to live under an unchecked, tyrannical FBI director for longer than it should have, all because the Kennedys couldn't keep it in their pants.

There you have it, an actual real life example of why the personal behavior of politicians matters.

Don't get me wrong, I think character matters, too, and there are plenty of politicians who manage to keep to the straight and narrow. But those of a more libertine bent don't put much stock in this argument. Fine, that's their prerogative. But I can only assume that they don't think extortion is a desirable course of events. Extortion is not a moral position that one is for or against, it's just a dangerous potential subversion of the democratic process.

Here's to hoping we can start holding our leaders to a higher standard.

Monday, November 12, 2012

America: Who Pays the Bills?

I remember a couple of years ago, Michelle Obama urge an assembled crowd of adoring college students not to "sell out" by working at a private company. She wanted them to do things like work at non-profits. Gee, I thought, what if they all took her advice? Who the heck would pay the bills?

This got me wondering: how many people, do you suppose, are actually supporting this country? By that, I mean how many people are actually producing the wealth on which everyone relies, in one form or another? I didn't know, so I decided to find out.

Most jobs "pay for" themselves because they produce definable excess wealth. For instance, a factory owner will pay x to a worker because the value of person's work is worth more than x (this is also known as surplus value, a concept that Marx found contemptible). These are jobs that produce wealth. No one must contribute to that worker's salary out of the goodness of their hearts, or through taxation.

Other professions, such as government workers, teachers, clergy, foundation professionals, etc., rely money that must be taken from others via taxation or persuaded from others via charity.

So, how many people are footing the bill?

Our starting point is the number of employed people in the U.S.:

154 million

From this, we subtract

State and local government workers (incl. teachers) - 16 million

Federal workers - 4.4 million

Non-profit health care workers - 5.7 million

Higher Ed professionals - 3 million

Clergy and other religion professionals - 1.6 million

Civic, social , and fraternal organizations - 0.5 million

Arts and culture foundations - 0.35 million

Total: 31.6 million

This is the number of people who have jobs, but whose jobs must be funded through taxation or charity. Subtracting this from 154 million, we get 122.4 million as the number of workers who are producing wealth.

But there are lots of other people, too, principally the young, the old, the sick, and the unemployed. These groups do not produce wealth and must also, in all or in part, rely on funds from others.

The population of the United States is 311 million. There are 122 million people keeping the ship afloat. Also ponder this: for every three working age Americans with a job there are two without. I would suggest these things are unsustainable all by themselves, but it's only going to get worse. Ten thousand baby boomers retire each and every day.

I will sum up the Obama administration's approach to this for the next four years: "Nothing to see here. Move along."

(Note: this piece is not meant to suggest that professions such as teaching provide no value, of course they do. I taught myself, and I'd like to think I wasn't wasting my time. It is simply meant to point out some very harsh economic realities. My data source was the Bureau of Labor Statistics.)

Friday, November 9, 2012

Election 2012 - Atlas Has Shrugged

The Naked Dollar Electoral Model correctly predicted that Barack Obama would secure re-election. It is now three-for-three.

This is of scant comfort. Sort of like the old joke, second prize is two weeks in Philadelphia. But this is why one creates dispassionate models, because they refuse to factor in emotion. I personally was wrong about the election, primarily because I underestimated turnout in Democrat precincts.

What I also overestimated was any determination on the part of the American people to choose liberty over dependence, and this is a very sad thing. The takers now outnumber the makers.

I tried to read Atlas Shrugged in high school. I think I got through about sixty pages. Atlas is not an easy book. About three years ago, I picked it up again and forced my self to get through it. It gets easier once you get past page sixty, as it turns out.

If you haven't read it, it about a United States in an advancing state of redistributive socialism. The redistribution is as much about crony capitalism as it's about transfer payments to the poor. One by one, the great capitalists - the ones who don't want to play a rigged game - start disappearing. No one knows why or to where. They have decided to go on "strike," having been getting milked dry by a corrupt system that at once despises them and yet needs them to survive. Government actions were justified under the banner of "fairness." After all, the rich didn't get their wealth by honest means. They must have taken it somehow. Others are more deserving.

Any of this sound familiar?

The capitalists decide they won't play the game anymore. The only solution is to withdraw from the very system that they were holding up. The inevitable collapse needed to be hastened, so the country could start anew from the ashes. The capitalist heroes walk away from their factories, implicitly saying to the socialists and bureaucrats, "Here, if you think it's so easy, you try it."

As Margaret Thatcher famously said, "Socialism works only until you run out of other people's money."

Let me tell you what I'm hearing. One very wealthy friend of mine - a truly successful capitalist - told me he is ceasing all venture investing as well as all charitable giving. He is also reorganizing his investments in the most defensive manner possible. Think things like non-dollar cash. Another friend is ceasing all giving to schools. He views - correctly - these gifts as feeding the problem, with schools indoctrinating our kids with the very ideology that makes a Barack Obama possible. (Indeed, a college acquaintance of mine who is now a professor informed me the day after the election, on Facebook, that wealth is not created, it is simply "aggregated." Translation: you didn't make that, you took it.) A charity I know had five six-figure donors last year. All bowed out after the election, fearing significant tax hikes. Hell, let the government solve that problem.

These people I'm talking about are fighters, too, but they seemed to now be resigned to our country's fate. That is profoundly sad and more than a little frightening.

Around 1790, a historian named Alexander Tyler listed the eight phases of democracy:

1. From Bondage to spiritual faith;
2. From spiritual faith to great courage;
3. From courage to liberty;
4. From liberty to abundance;
5. From abundance to complacency;
6. From complacency to apathy;
7. From apathy to dependence;
8. From dependence back into bondage.

Where do you think we are on this list? Arguably, seven. And while eight seems farfetched - come on, this is America! - there is nothing special about our country that makes us immune from the impartial hand of economics. In truth, we have been commiting slow-motion suicide since FDR. Ponder the growth of government spending relative to GDP:

Ignore the spike for wars, because those always scale back quickly. Focus on the baseline growth, because that's what's near impossible to stop as more and more people become addicted to the system. Under Obama, our suicide has hastened itself, the tipping point to insolvency now likely having been reached. (In his bid for re-election, Obama didn't even suggest a solution for any of this. Give the man points for being honest.)

What's so upsetting was that America seems to have collectively decided that this is all okay. The choice was quite a stark one, after all, and certainly no one was abused with the notion that our president was doing a bang-up job on the economy. But that's okay, as long as no one messes with my check. The culture of dependency has now been fully - and willingly - embraced. Gone is the America of rugged individualism. Gone is American exceptionalism, and we will now witness a more persistent decline in our personal liberties. I fear even if we wake up four years from now, there's no turning this ship around. Oh, there will be some sort of economic recovery, but it won't be a great one, and the downward cycle now seems written in stone.

Ironically, I am writing this from Colorado. I say ironically because it is to a small, hidden town in Colorado that all the industrial heroes in Atlas create their capitalist utopia.

Does anyone know where I can find it?

Monday, November 5, 2012

2012 Election Models - The Final Call

First, the electoral prediction. In 2004, this model hit the totals on the head. In 2008, it was really, really, close. To understand how this model is constructed, click here.

The call this year is Obama 281, Romney 257. Here's the time series:
Holy cow, does this look close. One medium size state sways it. May I say, I pray to God the model is wrong this time. On Wednesday, I'll either be pleased for the country or pleased for the model. I'll take country. Personally, I believe Romney will win.

Some better news can be gleaned from our momentum model, where all the late mo belongs to Republicans:

And the cumulative...

(To understand this model, click here.)

Republicans have had a huge surge since the first debate, one that has actually accelerated lately, if quietly. I say "quietly" because it has happened while presidential polling hasn't move a whole lot. But, perhaps, there is an underlying current here. The last surge is the most important. It doesn't guarantee anything, mind you. Gerald Ford had a big late move in 1976 but needed one more day.

We shall see. Buckle up.

Saturday, November 3, 2012

Who Will Show Up on Election Day?

Who will show up to vote? By this, I mean what will the breakdown be between Republicans, Democrats, and Independents? This is the only question that matters right now, because other things are known with a high degree of certainty. We know, for instance, that virtually all partisans will vote for their guy and that independents will split towards Romney by a minimum of +5 but more likely close to +10. All polling confirms this.

So, you tell me who's going to show up on election day, and I'll tell you who's going to win.

HUGE reputational bets on both sides are being made right now on this question. You have mavens like Nate Silver and Sam Wang on the left and Dick Morris and Michael Barone on the right, both agreeing about everything but who will show up.

Take Ohio. A Marist poll released today gives Obama a whopping six-point lead. Time for Mitt to pack it in, right? Not so fast. In 2008, a huge wave election for Dems, the turnout in Ohio was D+5. In 2004, it was R+5. What would you say a reasonable assumption might be for this year? Remember, every poll confirms that Republicans are way more fired up to vote than Democrats. So, what then? D+2 might seem reasonable, maybe even a draw.

Marist's poll has a sample of D+9, almost twice the turnout Dems got in '08. While it is true we just don't know yet, this seems ridiculous on its face. The argument on the other side is that long term demographic changes (i.e. the "browning" of America) are creating an inexorable trend where 2008 was merely a way-station.

This is a difficult argument to buy, given we all know there were vast numbers of people - youth and minorities in particular - that never voted before '08 and won't this time, particularly since they checked the transcendent, history-making box last time.

Nonetheless, polls have definitely tightened in the last couple of days as Obama seems to be enjoying a Sandy-bounce. This is far from a done deal for either side.