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REAL TALK ON
ALTERNATIVE INVESTMENTS
BUSINESS & FINANCE

The Daily Alpha: Alternative Thinking on “2 and 20”, Economic Data Leaks, and Bitcoin Origins

Garrett Baldwin

The platform for news and unique perspectives on the timely business & economic issues that impact alternative and private investors




Here’s Bill Clinton… explaining how short-term capital gains taxes that he lowered operate.

Once again the British press had to cover Clinton’s speech because the mainstream media is too concerned about Beyonce’s Lemonade stand or whatever…

The Daily Mail’s headline: “Bill Clinton takes on Bernie as he attacks ‘billionaires’ and ‘greedy’ hedge fund bosses (but that could be rather close to home for Chelsea’s hedge fund husband)”

A more succinct headline would be: Man Yells at Cloud

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First off, that was Andrew Jackson on the $20 bill?

I could have sworn it was John Kerry....

So, should Harriett Tubman replace Andrew Jackson on paper money?

This debate is swirling across television… Twitter… Facebook… and national print.

We simply can’t wait for the next news cycle.

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April 20, 2016

“The U.S. Attorney’s Office for the Southern District of New York has opened a criminal investigation regarding matters to which the Panama Papers are relevant.”

This is what US Attorney for Manhattan Preet Bharara wrote to the International Consortium of Investigative Journalists asking for their cooperation to discuss the Panama Papers.

Fortunately, it was not a subpoena that would force journalists to hand over 11.5 million pages of documentation. The ICIJ is the body of global journalists who are working with media outlets to report on these documents as they are evaluated.

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“The aim should be to better assess potential systemic risks from these funds.”

The election season is fully underway, but what you may be missing is the regulatory season in Washington for the financial system.

While everyone got together in 2010 to draft Dodd-Frank, it was almost like no one really cared about whether or not the systemic problems of the financial crisis were still always there. There wasn’t much follow through and a lot of the laws still needed to be written.

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While hedge fund readers continue to monitor the story of Bill Ackman and Canadian drug giant Valeant Pharmaceuticals, there’s another stock that is now in worse shape and dragging down funds in epic fashion

SunEdison is punishing David Einhorn and other managers.

The stock was the big idea of Einhorn at the 2014 Robin Hood Investment Conference.

Now, as Fortune explains, it’s a portfolio killer.

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Over at FinAlternatives, news breaks that U.S. legislators have asked Pershing Square founder William Ackman for information about drug price hikes in the pharmaceutical industry. The investigation is tied to his large stake in Canadian drug company Valeant Pharmaceuticals, which has been facing more-and-more problems it seems each day.

Ackman’s Pershing Square Holdings fund is down 25% so far in 2016, largely due to the sizeable stake in Valeant.

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Rhode Island’s state pension fund may soon pull its money out of Luxor Capital Partners.

Cliffwater told the Employees’ Retirement System of Rhode Island (ERSRI) to pull $35 million out of Luxor as the hedge fund continues to mount losses. Cliffwater’s Thomas Lynch says that

Luxor isn’t as good of a stock picker as advertised.

Why push the exit? “Poor investment selection and inadequate hedging,” writes Lynch.

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First up, Draft Kings and FanDuel are halting paid gaming operations in the State of New York.

Second, New York Attorney General Eric Schneiderman responds in the quote above like he’s never been to Wall Street before, missed the aftermath of the financial crisis, and didn’t read the book 13 Bankers.

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The Daily Alpha - 3.21.16

Garrett Baldwin




Bill Ackman’s Valeant position has weighed mightily on Pershing Square Capital in 2016.

The stock is off more than 73% this year, and down more than 60% over the last week. Company accounting problems, a change up of leadership, fleeting sales, and concerns about a default risk are just the first page of the company’s list of problems.

The stock jumped 15% today on new that Ackman will be joining the Board of Directors after the company announced it will transition away from CEO Michael Pearson, who just returned recently after a bout of pneumonia. Ackman will need a quick turnaround, as his hedge fund is off more than 26% this year.

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2016 has been off to a tumultuous and unnerving start – well at least for those whose retirement portfolios are at the mercy public equity and debt markets.

The “happy new year season” has barely ended and already over a trillion dollars has vanished from public equity markets. In the first few weeks of 2016, the DJIA has already lost approximately 8% while NASDAQ has plummeted nearly 15%. (Note: the official deadline for wishing someone a “happy new year” remains debatable).

Investors haven’t been able to find a safe haven in bonds either.

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Keep Calm and Take Janet Yellen at Her Word…

That has been the mantra of the mainstream talking heads for the last few hours as they try to understand how and why the markets continue this free fall.

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It’s a tough day for stock pickers in emerging markets on news that Nick Barnes and Martin Taylor are shuttering hedge fund Nevsky Capital and returning money to investors.

It was 2013 when the fund was up double digits, but recent turmoil in emerging markets and competition from computer-driven trading strategies and index funds have diminished the fund’s money-making potential. Both managers will still be able to hang their hats knowing that they were able to provide an 18.4% annual gain since 2000, a figure that beat their peers by 10 times.

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Following a very long December, a flurry of magazine deadlines and a long-deserved Honeymoon for its editor, the Daily Alpha is back and will be running full throttle in 2016.

As promised…

Let’s dive into it. You know the drill.

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H.L. Mencken once wrote, “The urge to save humanity is almost always a false front for the urge to rule.”

And, here we are again…a gathering of world leaders – many of whom are the world’s largest personal carbon emitters themselves – but all of whom have probably never read Thomas Kuhn’s The Structure of Scientific Revolutions or understand why it’s the single most important book anyone should read before completing coursework in Climate Economics or Environmental Policy – arrive on personal jets to argue that carbon emissions are the single biggest threat to humanity – over – say terrorism, deforestation, rampant poverty, economic calamity due to obscene debt levels produced by the same leaders, or just good-old fashioned 20th century authoritarianism.

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Janet Yellen’s demands that we don’t politicize monetary policy.

So, she responded to a bill aimed to boost transparency and accountability at the Fed, how else? By politicizing the Federal Reserve and monetary policy.

The Fed Chair opposes a law that would force the central bank to set its interest rate policy based on a mathematical rule.

Yellen says that doing so would “severely damage” the U.S. economy.

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I recently read a thought-provoking article by Dealflow CEO, Steven Dresner, titled, “If you want crowdfunding to succeed, start by de-coupling ‘finance’ from ‘fin-tech.’” What I found most interesting was that the financial data veteran described technology as the “enabler” not the “end game.”

Was Dresner intimating that technology has now become the veins - as opposed to the heart - of a FinTech business?

Based on this thesis, I wonder whether Wall Street is not only mis-valuing FinTech businesses, but today’s technology companies in general.

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“The value of Berkshire’s holdings increased 19% to $127 billion, as many of those shares declined. Overall the S&P 500 lost about 7% of its value during the quarter.”

CNN Money announces a few changes to Warren Buffett’s Berkshire Hathaway (BRK.A) holdings on a day that analysts began parsing through 13Fs. Buffett wasn’t the only big name announcing some big stakes in some big companies.

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It didn’t take a U.S. jury long to decide the fate of Michael Coscia under the 2010 Dodd-Frank Act’s spoofing law. Five years ago, the financial reform bill outlawed any attempt to manipulate prices by placing orders that were never intended to be traded upon.

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Bill Ackman isn’t shy about his feelings for Herbalife.

After all, this not-to-subtle comment about the health marketing came after he had just given a speech in a Chicago church in January 2015. At the time, he said that HLF stock was poised to fall to zero within a one year.

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Some alternative investors speculate on land. Others buy baseball cards. Some might invest $50,000 into a startup, and others might purchase Bitcoin. Well, one Greek investor just dropped five figures on a historic cracker.

A biscuit preserved from a Titanic life raft sold for $23,000 in an auction this week.

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There isn’t a more succinct way to tell a group of investors that your hedge fund is down roughly 20% due to weakness in the healthcare sector.

If anyone has a better way, let Glenview Capital’s Larry Robbins know.

The above is what Robbins wrote in a letter this week. According to the Wall Street Journal, Robbins has had a very difficult last three months, exacerbated by sharp declines in biotech stocks.

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The custodian is placing the celebratory balloons in the rafters of CNBC’s studio just in case we see a hike in interest rates on Wednesday afternoon.

This week, the Fed Open Market Committee will hold its seventh meeting of 2015 to discuss monetary policy. Although economists don’t anticipate a rate hike until December, the markets don’t see more than a 50% chance of an increase until March 2016.

America’s leading financial news channel is back in full “interest rate” coverage… as producers appear to believe that non-stop speculation (about something we already know won’t happen) is good for ratings.

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Throughout my career, I’ve been a strong advocate of financial fairness and Wall Street reform.

My research has centered on a creed that wealth gaps can be successfully narrowed by democratizing access to capital through laws and technologies that facilitate micro-alternative investing. Such liberalization can help solve many of the issues that have been the subject of recent political debates.

With that in mind, the Alpha Pages will be publishing my new column that focuses on the industry’s most disruptive and exciting alternative investing platforms, particularly the ones that offer investors of any class the potential to build for the future.

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Markets will continue to react to Friday’s decision by the PBOC to slash its primary interest rate 0.25%. The cut represented the sixth time since November 2014 that the central bank has lowered rates. The EUR/USD will also be in focus when Germany releases its monthly Ifo Business Climate Index. Consensus expectations for the European Bloc’s largest economy call for an index rating of 107.8, slight decline from the previous month.

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The Alpha Pages - 10.21.15

Garrett Baldwin




Well, this isn’t going well.

On Tuesday, shares of Valeant Pharmaceuticals cratered as much as 40% after receiving a series of downgrades. Short-selling firm Citron Research issued a report that alleges fraud on how it operates with “specialty pharmacies.”

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The Daily Alpha - 10.20.15

Garrett Baldwin




First off, welcome back. Personally, I apologize for the delay, but when a concept goes into a beta role, and you combine October baseball with a magazine editorial schedule, priorities had to be shaped. Moving forward, the Daily Alpha will arrive around 3 p.m. EST, an hour before market close. It’s an ideal read after the bell, and you’ll always be able to find it in the morning.

Anyway, let’s get to it…

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The Daily Alpha - 10.09.15

Garrett Baldwin





The Daily Alpha - 10.08.15

Garrett Baldwin




So there it is…

Deadspin explains that an NFL lobbyist joined the Bush White House and worked on crafting the 2006 Internet gambling law and how it would be enforced.

The only reason that fantasy sports are called a “game of skill” is because of lobbyists—again proving that they are a semi-serious news organization with way more integrity than mainstream sports news outlets, Deadspin’s analysis on the ongoing DraftKings’ controversy has gone deeper than what CBS Sports, ESPN, and Yahoo are willing to go.

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The Daily Alpha - 10.07.15

Garrett Baldwin




A bloodbath of a sell-off has rocked Yum! Brands today, proving that you can’t paper over results in the face of crisis. The restaurant stock is down 18% today and alarm bells are ringing about the company’s performance.

Stifel’s Paul Westra says that Yum! Brands is poised to see more pressure from activist investors in the coming months in the wake of a dismal quarterly earnings report for the global restaurant provider. During a somewhat testy conference call between analysts and executives, the company blamed economic problems in China and internal marketing executions.

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I read with interest the SEC rule proposal on liquidity risk management for mutual funds and exchange-traded funds (ETFs). This was no small task given that the release weighs in at well over 400 pages, and the text, to say the least, is dense. My first reaction was that if adopted, this rule proposal will require significant changes to fund operations, disclosure and reporting requirements. My second reaction was to go back through the release to see what nuggets the SEC had provided in terms of direct or indirect guidance to help mutual funds and ETFs manage their liquidity risk today.

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Once again, this is why we can’t have nice things…

The New York Times reported on Monday that one-day fantasy site DraftKings is mired in a controversy. There are accusations that “employees were placing bets using information not generally available to the public.”

DraftKings and FanDuel have defended the integrity of the one-day fantasy industry after news broke that a mid-level content manager at DraftKings won $350,000 on his company’s rival site.

This story includes charges that the employee may have used information in a way that some compare to insider trading.

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The Daily Alpha - 10.02.15

Garrett Baldwin




New York Global Group CEO Benjamin Wey is in trouble with the Manhattan court system. He faces 25 years in prison for a charge in securities fraud, a multi-million-dollar sexual harassment suit from a former intern, another charge of money laundering, and a very angry spouse who can’t be happy with his infidelity.

But Wey seemed more concerned about his ability to see Swan Lake on Tuesday night.

In an absurd letter from his lawyer to Manhattan federal Judge Alison Nathan, Wey was upset that his ankle bracelet and court-enforced nightly curfew conflicted with an evening at the ballet.

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The Daily Alpha - 10.01.15

Garrett Baldwin




Russia’s military strikes inside Syria are raising concerns about potential escalation. Geopolitical tensions are on the rise again…

Based on statements from Hisham Jaber, a retired Lebanese Army major-general, this situation doesn’t end any time soon, and it will be a greater source of tension between the United States and Russia for the duration of the Obama presidency or longer…

The Wall Street Journal explains.

But while the U.S. government might not like the Putin offensive, there’s one group of investors that are liking Russia right now: Hedge funds.

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Startup investing is obviously all the rage out on the West Coast of California. HBO just released Alexandra Pelosi’s short documentary San Francisco 2.0, a 40-minute dive into the impact of technology companies’ accent on the City by the Bay. If you haven’t seen it, it’s definitely worth a watch.

But there’s another place where technology investment is poised to change the dynamic of a nation: India. This week, Qualcomm announced plans to invest $150 million into startup companies based in India though its Qualcomm Venture fund. (Side note: Yahoo consensus has a QCOM one-year stock price target of $72.20 – that’s more than 26% from yesterday’s closing price.)

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The Daily Alpha - 09.29.15

Garrett Baldwin




Starboard Value Partners has revived Olive Garden, turning all-you-can-eat bread sticks into some serious dough.

The stock has rebounded, and before the Monday selloff in the broader market, shares hovered near $70 per share.

The company has experienced six consecutive quarters of financial growth.

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The Daily Alpha - 09.28.15

Garrett Baldwin




On Monday, hedge fund managers reacted to Donald Trump’s plan to close the “carried interest” loophole and raise taxes on America’s top earners.

As expected, the wealthiest of the wealthy offered a simple reaction.

When/if taxes are raised, they’re either going to find new loopholes in the tax code, or they’ll move money to places where tax rates are lower than here in the United States.

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The Daily Alpha - 09.25.15

Garrett Baldwin




House Speaker John Boehner will retire from Congress next month, ending a tumultuous five-year stretch as the face of the lower chamber.

In the process, Wall Street loses one of its closest allies.

As Dealbreaker wrote today, John Boehner received more money from Wall Street money that any other member of Congress. He regularly defended the financial sector and was staunchly opposed to the Dodd-Frank Act and further regulation.

Pull back the pages of Open Secrets, and one can find that he received $1.2 million from Wall Street during the 2014 election alone.

Not bad work if you can get it.

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The Daily Alpha - 09.24.15

Garrett Baldwin




Many people don’t think of the Colombian peso as a petrocurrency. Given that Colombia is 19th in the world in terms of oil production, it’s 1 million barrels per day makes a very little scratch in terms of global demand. However, oil and gas shipments comprise roughly 58% of the nation’s exports.

And like all major producers, Colombian officials anticipated that oil prices would remain above $100 per barrel. They built their annual budgets, welfare systems, infrastructure spending, and social programs on the expectations that their energy producers would flood the government coffers.

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The Daily Alpha - 09.23.15

Garrett Baldwin




Democratic Presidential Candidate Hillary Clinton announced that she opposed the construction of the XL Keystone Pipeline, which would carry more than 800,000 barrels of crude oil a day from Canada to the U.S. refinery network in the Gulf Coast.

Clinton’s campaign team likely surveyed a few hundred voter polls on the issue before taking the stance.

If, however, the pipeline becomes popular again among primary voters, expect her to do her best Bill Clinton impersonation and redefine what the word “oppose” means.

Shares of TransCanada Corporation (TRP) fell 2% today, but that had more to do with a broader decline energy sector. The alternative energy sector also seemed unenthused.

Everyone is paying more attention to China and the Pope.

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The Daily Alpha - 09.22.15

Garrett Baldwin




Well, this escalated quickly.

MSMB Capital founder Martin Shkreli has just thrown himself into the 2016 Presidential race, but not as a candidate.

The hedge fund founder and CEO of Turing Pharmaceuticals jacked up the price of a popular HIV drug from $13.50 per pill to roughly $750. The company purchased the 62-year-old drug called Daraprim in August. After the New York Post featured the price change, which will dramatically affect patients,

Shkreli was a target on Twitter.

He received one question about how he is able to sleep at night.

His answer: Ambien.

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As noted on Friday, employment and inflation data stink.

With three rounds of QE, the U.S. economy received no median wage growth, little inflation movement, a lackluster employment sector with numbers are cooked, and 95% of income gains going to 1% of the nation.

What else has QE produced?

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Assume Breach

Garrett Baldwin




This is a story about cyber security and its effect on traders.

It’s about vulnerabilities in a financial system that over-relies on technology to make trading faster and more efficient.

For traders and investors, the desire for ease-of-use and functionality that expedites buying and selling has been developed by application developers who typically underestimate security risks.

For brokerages, investment firms and exchanges, cyber security has become one of the most important concerns of the 21st century. The July software glitch at the New York Stock Exchange (NYSE) immediately reminded traders of the 2010 event in which Russian hackers placed a “cyber bomb” on the Nasdaq.

It never detonated, but it’s curious that it took four years for government officials to conclude their investigation and release information to the media. Cyber attacks are a sensitive topic.

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The Federal Reserve’s decision to delay an interest rate hike sets the tone for what could be a volatile week for traders and investors.

For the week of September 20 to September 25, central banks and economic leaders will likely react to the Fed’s statement on Thursday that global economic factors (without specifically mentioning China) had factored into the rate decision.

Here are the top stories to watch this week.

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You’re busy…

Well, no you’re not.

It’s Friday. So here’s today’s Alternative Thinking on the Fed’s Interest Rate decision… and four other things that might keep you up at night…

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Regardless of what the Federal Reserve does today with interest rates, CNBC is getting ratings. Jim Birdsall, the network’s voice, has been dramatically reading scripts about the rate decision as ominous music plays. Anchors are offering countdowns—two hours, “one hours,” less than 45 minutes… With this much media enthusiasm, the hosts of Power Lunch are going to burst into the studio through a large paper banner with a giant peacock on it. Even after Janet Yellen speaks, CNBC will talk about interest rates for the next year with the same solemn trust in centralized planning that gushes above a white-and-blue ticker tape that no one has read since the invention of Yahoo Finance.

Today’s interest rate decision has traders holding their breath, which, by definition, reminds us all that the central bank is the center of the universe – and has been since the onset of a financial crisis that it completely missed ahead of time.

Isn’t that the actual problem going on today?

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We’re ramping up the Alpha Pages in September to build a site dedicated to Real Talk on Alternative Investment, Business, and Finance.

Part of that is discovering a number of different stories that you might have missed. But you’re busy… and we’re busy.

Here is today’s Alternative Thinking on Interest Rates, Fantasy Sports, Hackers, Real Estate, and Fine Wine.

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Hackers make a decision to attack a firm through one of two methods: technology or socially, says Mr. Green, a security specialist who asked to remain anonymous during our interview with four ethical hackers.

It’s possible to attack a financial company through the network system. Another expert who wished to remain anonymous, Mr. Orange, says he could walk into a financial firm and attempt to exploit security breaches just by signing into a guest network in the lobby. There’s the idea of dropping USB flash drives on the ground and hoping someone in an organization who is intellectually curious – and naïve – enough to plug it into their work computer.

“I’ve seen this attack before,” says Erdal Ozkaya. “It cost a company $3 million.”

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In the October issue of Modern Trader, Garrett Baldwin sat down with four ethical hackers to discuss the threats to the financial sector. The complete interview can be read on newsstands at Barnes & Noble next week.

However, a few portions of the interview were cut for spacing. However, these two sections tell a critical story about the role of ethical hackers in today’s digital world.

What follows is an exploration into the rise of the ethical hacker, the challenges that companies face as cyber threats accelerate, and the fine line that experts walk in this sensitive industry.

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Yesterday all eyes were on Apple’s product launch.

This is because Apple has become a bellwether for the stock market as a whole.

Legendary short seller Jim Chanos spoke candidly to CNBC, explaining that institutional investors and hedge funds are treating Apple stock as a “hedge fund hotel” where they can buy a single name and ride it upwards as opposed to concocting complex trading systems as they did in the past. Indeed, SEC filings by hedge funds bear this out, and so the product launch attracted a huge audience, generating play-by-play reporting on CNBC and Yahoo Finance.

By the end of trading, Apple stock declined nearly 2%, indicating that investors were not impressed.

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Readers of the September issue of Modern Trader already know that sports-gambling is a massive industry. But most of the hundreds of billions in dollars wagered are done so on black markets due to a federal ban that limits sports wagering to just four states.

With football season kicking off tonight, perhaps it is unclear just how badly the federal ban on sports gambling has been working, and how badly the U.S. needs reform.

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We’re ramping up the Alpha Pages in September to build a site dedicated to Real Talk on Alternative Investment, Business, and Finance. Part of that is discovering a number of different stories that you might have missed. But you’re busy… and we’re busy. So here’s today’s top Alternative Investment news in just five quotes a day.

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QOTD
Quotes of the Day

Garrett Baldwin




Heading into the second week of September, the August heat has shown no sign offering any level of compassion to hedge fund managers. As FinAlternatives noted last week, some of Wall Street’s biggest titans have been humbled by global volatility fueled by China and falling energy costs. Over the weekend, David Stockman laid the blame on what happened in August at the feet of the Federal Reserve.

But he was also quick to take dead aim at a class of “hedge fund hot shots” that he says has been riding a bubble since 1987. Stockman especially doesn’t mince words for Omega Advisors head Leon Cooperman. Aside from calling him a “insufferable blowhard,” Stockman points out that Cooperman is blaming “last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater,” as explained by the Financial Times

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We are honored to have received notice that the awards committee at FOLIO, which hosts the most prestigious awards competition in magazine media, has nominated the debut issue of MODERN TRADER for an EDDIE award for the BEST ISSUE in the business and finance category. In 2014, the same EDDIE award for BEST ISSUE went to the Harvard Business Review, with Forbes and Inc. magazine each receiving Honorable Mentions.

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In April 2010, New York Times reporter Andrew Ross Sorkin tabbed a column that highlighted the similarities between the casino mentality of some Wall Street banks and traditional sports gamblers leading up to the financial crisis.

“One side bets the value will rise, and the other side bets it will fall. It is no different than betting on the New York Yankees vs. the Oakland Athletics, except that if a sports bet goes bad, American taxpayers don’t pay the bookie,” he wrote.

The comparison is touchy on Wall Street, Capitol Hill and in trading pits. That’s why it seemed important to seek the insight of hedge fund manager, mathematics professor, probability theorist, Blackjack Hall of Fame member and best-selling author Edward O. Thorp.

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Is there any difference between a quant who goes to Wall Street and one who goes to Vegas? There are two schools of thought on this question.

The first school argues that there is little meaningful difference between most investing and most gambling, and therefore investors don’t deserve an extra dollop of sanctimony and grandeur; in fact, they need to be cut down to size and labeled for what they are: Glorified gamblers.

The second school argues that investing differs in kind (and not just in degree) from gambling, and this difference carries moral weight because investors benefit society by producing a net gain in social value, whereas gamblers compete in zero-sum games among players (or negative sum games once we factor the cut given to the house). An investor improves the world. A gambler may improve his own world, but he leaves the outside world unchanged.

Let’s break them down and find out how and where these two ideas came to a head.

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In its simplest form, gambling is when a person risks money specifically for the mere chance of receiving more money. Chance is the probability that a particular outcome will occur—e.g., on a spinning roulette wheel, how likely it is that a ball lands in a red compartment marked “13.”

Notice that our knowledge about the gamble, about the odds of winning, is irrelevant to the outcome of the gamble. Thus, if we are asked to guess a number between 1 and 24, our knowledge of the odds of guessing correctly has no influence on whether our guess is the correct one.

The outcome is solely based on probabilities. Furthermore, there is no underlying product or service exchanged in a gamble. When we walk away from a slot machine, our pockets only contain either more or less money than when we arrived. So, there is nothing with any inherent value in a gamble.

Finally, in order for organized gambling to exist, the house (the organizers of a gambling game) must win the vast majority of the time. Put another way, the sum of gambling winnings must be less than the sum paid to gamble. This certain loss of money is why no rational person goes to the casino to fund their child’s education or earn money for groceries. This last point cannot be overstated as it introduces the main problem with gambling: Imprudence. It is imprudent to participate in a venture that requires the participants to ignore what they know to be true. In the case of gambling, this knowledge is that the gambler will, on average, lose.

So, the one gambling must willingly believe a lie.

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Gambling
Where Gambling Meets Trading

Modern Trader, William Ziemba




The debate about whether “trading” is a high-class sobriquet for “gambling” is not a mere parlor game. It has real-world consequences.

For if trading is really gambling (as some in Washington have proclaimed since the financial crisis), then perhaps gaming authorities should regulate stock markets instead of the Securities and Exchange Commission. Perhaps all the gains of investment managers should be taxed as gambling profits instead of capital gains. And, on the psychological front, investors would need to rethink their own appearances; right now, investing carries the imprimatur of logic, foresight, measured reason and prudence; whereas gambling has negative connotations of illegality, recklessness and desperation.

Many in the financial community feel degraded by the gambler label. Yes, they wear suits, have ornate offices and trade massive amounts of money on exchanges.

But what, precisely, is the elemental particle that distinguishes trading, or its more respected “investing” activity from professional gamblers?

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I’ve just slogged through all ninety-two pages of Donald Trump’s financial disclosure submission to the Federal Election Commission, and I can’t make heads or tails of it.

I cannot tell how much Trump is worth, if anything. His empire, if he has one, is as mysterious as his haircut, and as impervious as his skyscraper in Chicago - a gigantic phallic mirror named after himself.

But if I had to guess, I would say he is worth very little in terms of real, lasting assets - probably a few bps (one-hundredth of one percent) of his professed net worth of $10 billion.

The mainstream press erred horrendously by taking seriously Trump’s disclosure to the FEC, by asking reporters to sit down with the document and try to understand it on its own terms, so to speak. This approach yielded nothing but exhaustion and bewilderment. No one dared speculate that Trump’s purpose in disclosing so much was to disclose so little. It was a 52-Card Pickup, a maze of trees without a forest. The assets - some as small as the single digit thousands - pile up like obsessive compulsive do-dads in the claustrophobic home of a hoarder. The range of projects goes beyond greed and passes into desperation. High rise buildings and golf courses are one thing, but the list of assets quickly degrades into obscure wineries, Israeli vodka and energy drinks, a mattress and clothing line, television shows, a pension from the screen actors guild, bottled water, book royalties, speaking gigs, and endless inchoate and impossible to value ‘marks’ (i.e. trademarks) and positions in partnerships that have his own name.

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Sin City is spreading out. And Vegas-style casino gambling has moved way beyond the Strip.

In fact, 23 states now have commercial (not tribal) casinos. And, Vegas is sharing its favorite vice with the world. Because the most significant growth is overseas.

Macau’s gaming revenues hit a record monthly high in December 2012, growing by 13.5% to reach $38 billion in 2012.

But recently, Macau’s hot streak has lost its luster. Gaming stocks like Wynn Resorts Ltd. (WYNN), Las Vegas Sands Corp. (LVS), and Galaxy Entertainment Group Ltd. (GXYEY) are in focus this week after new data indicated casino traffic continues to plummet in Macau, China. According to reports, gaming revenue slumped 34.5% in July compared to the same month in 2014. In June, revenue slipped 36%, a signal of a broader downturn in economic spending in China.

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During what we now call my “single years,” I played a lot of poker, most of it online.

After years around the psychological soup of the stock market, I found the combination of math and psychology to be highly entertaining and occasionally profitable.

I played then, and still do, a very tight, aggressive style of poker. I always kept in mind poker legends Doyle Brunson’s advice to get my money in the middle when I had the best of it.

I would go on long winning streaks, but always got caught by gamblers ruin and my own ego. I would take a carefully built bankroll and try to move up to higher limits and get crushed by players who were a lot better than I was. (They were also very inconsiderate. They never even bothered to thank me for my generous donations to their stack.)

Then I ran across David Sklansky’s simple system for tournament poker.

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On July 8 at 7:30am EST, United Airlines grounded all of its flights, worldwide, due to a system-wide computer glitch.

A spokesperson for the world’s largest airline, Charles Hobart, issued a statement, via email, that it had “experienced a network connectivity issue”. However, it was not until after multiple passengers flooded Twitter with live updates on the situation that the airline issued this official statement on the so called ‘computer glitch’. According to United passengers, the airline’s entire computer system was down and agents were handing out hand-written boarding passes. This interruption affected more than 3,500 flights in the busy morning travel rush.

The transportation disruption causes a large impact on its own; however, it came shortly before an unprecedented, nearly four-hour halt in trading on the New York Stock Exchange (NYSE) occurred for undisclosed ‘internal technical reasons’. Immediately, executives at the NYSE issued a statement that the problem was due to a problem with their computer systems and not the result of any sort of external cyber-attack. As if these two ‘glitches’ were not enough, the Wall Street Journal’s WSJ.com site was down. Also, due to another undisclosed technical issue.

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CNBC presents a paradox in the hedge fund community.

It plays constantly, but hardly anybody watches it.

The channel mostly functions as white noise emanating from wall-mounted monitors on trading floors and in financial firms.

Given its ubiquity, one might think it was highly regarded.

But traders and portfolio managers treat CNBC with scorn or indifference.

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Modern Trader
False prophets

Garrett Baldwin, Illustrated by Mario Zucca

Art by Mario Zucca
Art by Mario Zucca

This is a story about trust. About why many Americans have tuned out and lost hope in financial “experts.” It’s about the insights, foresights, reckless predictions and lack of conviction from media outlets, Wall Street analysts and talking heads that monopolize today’s market dialogue.

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In the world of fashion, they say trends from years ago always come back. Well, the same is true in the not quite so glamorous market of over the counter (OTC) derivatives. Seven years after the crisis, the same contracts once more vilified than a Supermodel’s waist size are once again the talk of the street – that’s Wall Street not the high street. So, what does that mean for investors?

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Except for Food Services and Drinking, Retail figures do a lousy job of tracking recreation. Disneyland’s multi-billion dollar ticket sales? Not included. Airline tickets, hotels? Not included. And gambling. And prostitution. And drugs. That’s where Moneyball Economics comes in and set the record straight.

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Stony Brook University boosts an enrollment of more than 26,000 students, and counts talk show host Joy Behar, major league pitcher Joe Nathan, and Pulitzer Prize winner Scott Higham among its notable alumni.

What you don’t know about the public university—housed along the shores of Long Island – is that the school’s alumni are proving that you don’t need an Ivy League diploma to be a successful investor. Take a sneak peak at Modern Trader, and learn how Stony Brook alumni are beating the S&P 500 handily.

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In simpler times, American workers relied on pensions to secure their retirement.

Those who desired a supplement to their pension income opted to save during their pre-retirement years. Like television stations, investment options were primarily limited to three main providers.

Instead of having choices bog them down, savers had their pick of placing money in interest bearing savings accounts, stocks, or bonds. With the exception of the occasional need to get up from the sofa to change the television channel, life was rather uncomplicated.

Then the 70s arrived – bringing a rash of polyester and laying the groundwork for sweeping changes throughout the financial system.

Ever since, our capital markets have been in a perpetual state of transformation fueled by innovations in brokerage services, advisory tools, investment products, retirement plans, financial technology, and shifts in both the political and economic climates.

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Today, there are nearly seven million young adults unemployed in the United States; however, there are 3.6 million jobs unfilled, with a large share of these jobs requiring backgrounds in science, technology, engineering and mathematics (STEM).

Where can these individuals obtain the skills needed to fill so many STEM-related positions, particularly in the financial sector? That’s the center of a new effort by GFT, a financial services firm that works with 9 out of 10 of the world’s largest banks and well-known hedge funds. And this project could be a major step in solving the stunning talent gap facing Wall Street.

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On Tuesday, April 7, the news media reported that the White House, home to the most powerful family on Earth, was hacked and that foreign spies were the likely culprits.

Understandably, the details surrounding the incident are scattered and unclear. According to sources at the White House, there was no real harm since the hackers were unable to breach classified networks. In fact, the White House Press Secretary, Josh Earnest, was quoted as describing the attack as a simple “inconvenience”. As much as the White House wants to minimize the situation, the fact still remains, that someone gained unauthorized access to important systems that contain sensitive but unclassified information.

In order for the White House and businesses to to stop future attacks, we must address the problem at the core of many breaches: That problem is the human element.

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The thing that excites me most about today’s crowdfinance-inspired path of capital formation is its unprecedented ability to mitigate shareholder risk and groom more productive businesses. It does this by allowing companies to gauge consumer demand and presell products prior to it outlaying any manufacturing, marketing or other expenses.

Now that crowdfunding has reached the mainstream, there is really no excuse for any company – from startup to corporate conglomerate – to risk significant capital expenditures on an unproven product. In fact, the failure of a rewards-based crowdfunding campaign can usually be the earliest determinant of whether a startup should pivot or fold.

Yet what about those companies that aren’t launching new products, but are instead finding that their existing offerings have simply gone stale? At what point does a CEO stop wasting valuable time and shareholder money on undesirable merchandise and flawed business models, and start thinking about pivoting or folding? The answer may lurk in the clues listed below.

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America has an investing problem. An overwhelming number of millennials claim that either they lack the education to make their own investment decisions, or they lack the confidence to do so. So, who is doing something about it? Acorns, a company disrupting the savings and investing industry, one penny at a time.

Earlier this year, the Alpha Pages conducted an interview with Acorns, a fintecy company that won the “A Penny Saved, Penny Earned” category the Benzinga FinTech Awards in April 2015. The firm was also a finalist in two other categories: “Robo Advisor Tools – Best in Class,” and a nomination for “Founder of the Year,” which was shared by its co-founding father and son Walter and Jeff Cruttenden.

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Yield cos – dividend growth-oriented public companies – are not everything they are cracked up to be. Here’s the problem: Despite expectations of 10% to 15% annual returns, they’re actually not much higher than ten-year U.S. treasuries, clocking in at 3%. This disconnect isn’t a death knell for the structure but offers a pause for thought. If you’re an institutional investor and willing to wait it out as the market matures and expands, then yield cos hold great potential, but you might be waiting a while. The reality is that you can do better.

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Want to know the current state of the U.S. economy? Pay attention to how Americans are spending money on vices… sure that corner bar might be the place to have a chat about politics, but the monthly Vice Index is a comprehensive analysis of the world from booze to late night escapades. In the end, this is the black market, and it’s the clearest signal of how Americans are using their hard earned cash in arenas that government officials don’t have the resources to measure. All bartenders and prostitutes can say is “Thank God” for the end of bad weather.

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In a 1949 article called Why Socialism, Albert Einstein addressed his concerns about impact of technology on employment. “Technological progress frequently results in more unemployment rather than in an easing of the burden of work for all,” he wrote. Einstein idealistically proposed the establishment of a socialist economy as a solution to dealing with technological unemployment. Of course, he wouldn’t live long enough to see the glorious consequences of socialism in Russia, Cuba, or even Venezuela today. Putting both capital and technology in the hands of government has proved to be a remarkable disaster historically. But he got a conversation started, and that’s what Part II of this article series attempts to do…

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James Pethokoukis was late to the party. Last month, The Week author modernized a question dating back to economist David Ricardo in 1814 and the Luddites’ chief worry about the automatic loom during the Industrial Revolution. In the article, “Is the internet killing middle class jobs?” Pethkoukis reignites an age-old debate on the role (or non-role) of technology in fueling unemployment.

For more than 200 years, economists have debated the concept of “technological unemployment,” and today’s radical digitalization of the economy has reignited concerns that robots and automation could lead to widespread job destruction at a time that new industries are not emerging quickly. So how should investors protect themselves against the Robot Apocalypse?

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A lack of a true free-market price mechanism has long made water too inexpensive to warrant long-term investment or proper conservation, and decades of political and environmental mismanagement by California’s politicians have disproportionately rewarded one favored class:

Farmers.

But the current water crisis could lead to systemic changes in water investment and the future of California agriculture, says Sprott Asset Management Founder Rick Rule. “This [crisis] is the result of political mismanagement, and the fact that an industry that comprises 3.5% of California’s GDP uses 85% of the water. There’s no free market price for water, which is why we’re still growing cotton in the desert.”

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On April 3, the Second Circuit let stand, without further review or dissent, its December ruling in United States v. Newman, 773. F.3d 438 (2d Cir. 2014). The decision threw out two convictions and increased the government’s evidentiary burden in insider trading cases.

In its original decision, the Second Circuit held that the government is required to prove – and did not prove in Newman – that company insiders, who disclosed material non-public information (MNPI), received a consequential personal benefit for the tipped information and that the defendant tippees knew about that benefit.

Here are the consequences of that decision…

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Vice spending is one of the most seldom used, but surprisingly accurate leading gauges of consumer strength and the economy. Everyone knows that when consumers have more money, they spend it on fun and luxury goods. That includes gambling, prostitutes, alcohol, and narcotics. And like any other luxury good, vice spending is a leading indicator: demand is quick to pick up when times are good and turns down fast when belt-tightening is the order of the day. Vice spending leads the way in terms of both inclination to spend and ability to spend. If luxury good spending is sensitive to shifts in the economic winds, vice spending is even more so.

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It took three years, but the SEC has approved equity crowdfunding for non-accredited investors.

Under the agency’s plan, certain private companies can raise investor capital over the internet without needing to register shares the SEC.

Crowdfunding enthusiasts have called this a boon for the American economy and entrepreneurialism, which began with President Barack Obama’s signature on the JOBS Act three years ago.

So, how much of a deal is this, really? It’s time to start asking real questions about the future of the industry.

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The intersection of sports and finance has long been a place of profits for statistics junkies and hobbyists.

In fact, many investors may be able to give you a better breakdown of their favorite team’s position players than they can the allocation of their portfolios. This week, we are profiling ten ways to profit from your sports fandom, examining the pros, cons, and additional readings that can help you boost your knowledge and locate new profit opportunities.

Some of these might even surprise you…

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Alshon Jeffrey, Chicago Bears WR,
Alshon Jeffrey, Chicago Bears WR,

On Super Bowl Sunday, John Elway’s Denver Broncos didn’t arrive in Glendale, Arizona to play in the NFL’s biggest game of the year. Led by future Hall-of-Fame Quarterback Peyton Manning, the Broncos fell short in the Divisional playoff round for the second consecutive year. But Elway’s other team was there for the Big Game and even bigger business opportunities.

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David Robertson knows his single-malt whisky—he was the Master Distiller at the Macallan on Speyside before moving to The Dalmore in 2006 to head their innovation team.

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E.J. Manuel
E.J. Manuel

A new investment strategy is shaking up the sports world, and could change the future of investing if the trend accelerates. It’s called Fantex, an online brokerage that allows investors the chance to profit directly from the multi-million dollar contract of today’s biggest NFL stars. This month, we break down the profit potential and the risk management issues in this new phenomenon.

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The Alpha Pages Interview
Senator Rand Paul

Jeff Joseph and Garrett Baldwin

Senator Rand Paul
Senator Rand Paul

Senator Rand Paul is an independent-minded thinker in the U.S. Senate, even challenging the conventional policy approaches of his own party on issues ranging from Iraq to drug sentencing. This month, Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.

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Off Topic
More Q&A with Senator Rand Paul

Jeff Joseph and Garrett Baldwin

Senator Rand Paul
Senator Rand Paul

More insight from Senator Rand Paul on a variety of matters ranging from finance to politics

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Liquid alternative investment funds saw the highest percentage of capital inflows last year in a head-to-head turf battle v hedge funds for investor assets. As regulatory efforts heat up in Washington, Deirdre Brennan of FinAlternatives considers new questions about management structure and fees.

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Bitcoin Poker sits at the intersection of currency speculation and online gambling. The potential to profit on only gaming is only fueled by the possibility of rising Bitcoin prices in the future. This month, Michael Friedman at Poker News breaks down how Bitcoin is reshaping the online poker world for everyday poker players, and what it means for gamers and speculators alike.

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WELCOME TO
THE ALPHA PAGES

"Real talk on alternative investments, business & finance"­ — that's what The Alpha Pages is all about.

Alternative investing is hardly a new concept.

With industry assets under management currently estimated at $10 trillion, the alternative investment world now encompasses a dizzying range of asset classes, trading strategies, derivatives and opportunity sets that are as arcane and sophisticated as the technologies that spawned them. From the acute algorithms of seasoned alpha-hunters to the bad actors promising big returns, it’s easy to get lost in the noise and it’s getting harder to understand the real profit potential.

The Alpha Pages will uncover the best and worst of the alternative investment industry, providing actionable data, insightful analysis and pointed commentary on issues that keep investors up at night.

That’s what we mean by "real talk".

@alphapagesceo, Jeff Joseph

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