The
Shadow
Banker

The Capitalist Revolution Begins Here

The Shadow

“The Shareholder Is People!”

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Det. Thorn: Something stinks here.
Hatcher: Look. You’ll sign this. And I’ll bury it.
Det. Thorn: Like hell you will. A member of the board of the Soylent Corporation was torn apart with a meat hook! You can’t sweep that carcass under the rug. Who bought you?
Hatcher: You’re bought as soon as they pay you a salary.
Det. Thorn: Yeah, well, who is “they?”

Yesterday the CEO’s of many major U.S. companies including those of Apple, J.P. Morgan, and Walmart issued a press release proclamation through a group called the Business Roundtable that public corporations should no longer prioritize only the interests of shareholders, even if that means that shareholders will receive fewer monetary benefits because of this change.

Putting aside the intrinsic reality that in order to run a successful corporation and ultimately maximize shareholder value these non-shareholder groups already must be given consideration, there’s a much more pressing question: Who are these shareholders?

[Read more…] about “The Shareholder Is People!”

The Biggest Threat to Financial Markets Right Now

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The biggest threat to financial markets in 2019 and beyond, is the dual-class voting structures gaining traction in the massive IPO’s coming to market and embodied by Lyft.  It’s also the greatest threat to this nation.

If Lyft succeeds in pulling off this IPO as filed and with minimal impact to its share price, [Read more…] about The Biggest Threat to Financial Markets Right Now

TRUMP TAX PROPOSAL WILL TURN THE USA INTO GREECE

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“It’s the economy money stupid”

Forget the noise and setbacks from Russia-gate, repealing Obamacare, white nationalists, North Korea, and inflammatory and inexplicable tweets. Despite these brouhaha’s their consequences will be judged as paltry in the big picture. That is because the mother of all destruction has been unveiled and I believe will also be passed largely untouched.  When it is, it will be extolled as a huge financial boon and an example of DJT’s skills at doing a deal.  Yet the president’s tax proposal will eventually turn the economy of the U.S. into one that resembles Greece.

Lauded as tax reform, the reality is that it is simply massive tax cuts followed by massive deficits in the future.

Not realizing the zero sum math, the average person willingly accepts [Read more…] about TRUMP TAX PROPOSAL WILL TURN THE USA INTO GREECE

SUBSCRIPTION LINE FINANCING IS ‘THE TELL’

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“The word “Snake” has lost much of its derisive character, but there was a time when the term (from  “Snake Eater”) was a taunt reflecting on the-purely imaginary-diet of the West Virginia Mountaineers.

In some of the factories the departments sometimes “worked in a pool”; that is, the earnings of, say, men working on a bias cutter were pooled and all shared alike in the total piece work pay. The Snakes, told about the pool, were known to report to work in high hip boots.”   A.W. Jones “Life, Liberty, & Property”

I’ve taken my shot at Private Equity and was very disappointed Warren Buffett did not comment on it at Berkshire’s 2017 annual meeting in the same manner he did with hedge funds last year1.  Therefore I’ll add some fuel to the fire.

I believe astounding PE returns are fictitious and institutional investors are misguided in using those returns as the basis for reinvesting in PE.  That is if the returns are even available.  As I have analyzed and outlined, the logic doesn’t make sense.  In fact, the returns are so incongruous from an efficient-market hypothesis, and the lack of granularity encompassing them so opaque, that they have a Madoff like quality about them.

Thus it was interesting to read six months ago about a heretofore unfamiliar term to this capital markets veteran, called Subscription Line Financing (SLF).  No furor arose then, nor several months later when elaborated upon further in a Bloomberg article questioning its use, and I am of the belief that the journalists are not fully aware of what they’ve uncovered.  That’s probably because the decision-makers, aka institutional investors and consultants, also don’t have a handle on the full ramifications of what SLF means vis-a-vis their underlying portfolio.  As an example of this let’s examine a snippet from the aforementioned Bloomberg article: [Read more…] about SUBSCRIPTION LINE FINANCING IS ‘THE TELL’

  1. He definitely would have been ahead of the curve if he had [↩]

SO WARREN, WHAT DO YOU THINK OF PRIVATE EQUITY?

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Let’s take an investment proposition whose model is to pay a significant premium to current market rates for acquisitions, throw in lots of leverage, charge enormous fees, and which allows the investment manager to value a company using basically any measure that they choose.  Are you as an investor ready to take the plunge and commit your savings?

Well what I have just described is Private Equity (PE), formerly known as the LBO business .1  Those that currently are invested in PE, as well as those who work in PE, point to the superior returns of this sub-asset class2 in the past.  Yet in aggregate, what have those returns really been?  Of equal importance, what do investors really think their returns will be going forward based on the dynamics I outlined in the first sentence?

My skepticism over historical returns in PE, is derived from a number of factors.  One of the most significant is that unlike the stock market and hedge funds, there is no easily definable and frequently cited index.  Equity markets have the most ubiquitous ones, such as the S&P 500 and Russell 2000, which are quoted daily in newspapers, radio, and TV, and can be brought up in real time on any financial website: Yahoo, Bloomberg, WSJ, etc.  Hedge funds also have easily obtainable indexes that are updated monthly soon after the funds report returns.  Here are two that are quickly googleable: HFRX and Barclay’s HFI.  While I would be the first to admit that these indexes are imperfect as they lump together a lot of completely different types of investment strategies under the vague moniker of “Hedge Funds”3, and may have many other imperfections4, at least third-party organizations have taken the time to painstakingly quantify a general number on a regular basis.  Furthermore, these indexes have increasingly been cited in the financial press, mainly to note how poorly hedge funds have been performing recently relative to other investments, and to question the large fees being paid out for this under-performance.  While PE supposedly also has third-party organizations compiling returns, just try and actually see them – it’s absolutely not going to happen on Google.  Worse, [Read more…] about SO WARREN, WHAT DO YOU THINK OF PRIVATE EQUITY?

  1. Sure, I know that PE encompasses so much more than LBO’s these days, but whether a PE firm is buying a whole company in the public markets or a private company or a division of either public/private, it still usually entails a bidding process w/ the winner paying the highest price.  Leverage/fees/valuation methodology all still apply.  This goes for real estate, distressed situations, credit, and all the other assets lumped into PE [↩]
  2. Alternative Investments is the usual moniker given to the full asset class, though really when you break it down PE is simply leveraged equity.  Furthermore, I fully concur with the sentiment that Alternatives are a compensation scheme, masquerading as an asset class [↩]
  3. Where do I even start w/ this term: first off, some completely hedge, and some very transparently do not at all, and some do so to varying degrees.   Some use leverage, some do not, and then some use massive amounts.  About the only similarities that most hedge funds do share is that they charge much higher fees than conventional money managers, and are predominantly invested in publicly traded securities [↩]
  4. are they weighted by AuM or not? Survivorship bias? [↩]