Opinion

James Saft

If short you must, look for fraud

Oct 1, 2014 20:36 UTC

Oct 1 (Reuters) – If you want to cash in as a short-seller,
better to do some forensic accounting rather than looking for
silly valuations.

Short selling, the tactic of selling a borrowed security in
the hopes it can be bought back later at a lower price to repay
the loan, falls broadly into two categories. In one the short
seller suspects or alleges a fraud or misrepresentation, while
in the other the trade is based on the belief that the stock is
overvalued and will fall.

Jim Chanos’ highly lucrative short of the Byzantine fraud at
Enron in 2000 and 2001 is perhaps the archetype of the first
school, a speculation with a more than satisfactory ending for
him as the stock tumbled from the high double digits into
bankruptcy protection as accounting chicanery came to light. The
dotcom bubble offers many examples of the valuation type of
shorting opportunity, companies that were as honest as the day
is long but possessed of suicidal business plans and ultimately
dependent on the discovery of a series of greater fools to
supply the needed capital to fund the burn rate.

Those short sales of mortgage-backed securities during the
last financial crisis might be considered a hybrid, combining as
they did a certain amount of fraud in the mortgage process with
an unhealthy dose of silly valuations of real estate and derived
securities.

Wall Street wisdom on these two schools is that identifying
fraud pays better than bubble-pricking stocks with crazy
valuations, a belief pithily expressed in April by famed
short-seller David Einhorn of Greenlight Capital.

Bill Gross and the Great Man theory of investing

Sep 30, 2014 04:10 UTC

By James Saft

(Reuters) – Judging by the Bill Gross affair, the Great Man theory is alive and well among investors.

This demonstrates nothing more clearly than on what slender offerings the investment industry, with all its billions spent on people, processes and strategy, actually earns its money. 

Gross, a 70-year-old with a fabulous long-term record of performance as a bond manager but some rocky recent data, resigned suddenly on Friday from Pimco to jump to smaller rival Janus Capital, a move reports said came just before he was to be dumped.

Companies risk missing capex boat: James Saft

Sep 25, 2014 21:06 UTC

Sept 25 (Reuters) – Corporate America’s decision not to take
advantage of low rates and easy terms to invest in new capacity
may turn out to be a mistake of historic proportions.

Combine a lost decade of investment and some of the easiest
debt terms in a long generation and the costs of delay look like
they may be high.

Just as many argue that the U.S. itself should be borrowing
cheap and long to invest in infrastructure, so it seems that
corporate chieftains should be locking in current easy debt
terms and investing the proceeds.

The contrasting Buffett and Ma ways

Sep 24, 2014 20:54 UTC

By James Saft

(Reuters) – Jack Ma and Warren Buffett embody two great and contrasting businesses in finance.

One sells lottery tickets and the other sells insurance.

Ma pulled off the largest-ever IPO last week when he floated Alibaba in what might be called the most successful lottery in history, at least from the ticket seller’s point of view.

But I don’t just mean that in the sense that Alibaba is a major speculation. Alibaba’s flotation, and IPOs generally, are lotteries in a very specific and technical sense, and they are structured in the way that they are because the market makes such a fantastic bid for them.

Alibaba and China’s slowdown: James Saft

Sep 23, 2014 04:01 UTC

Sept 23 (Reuters) – Is it a) funny, b) disturbing, or c)
irrelevant that Alibaba went public at a sky-high
valuation just at the point at which the red-hot economy which
spawned it seems content to settle into a creaky middle age?

Few of the investors throwing money at Alibaba hand over
fist last week seemed to notice, but China really is now
presenting a new version of itself to the world. Rather than
riding to the rescue when growth slows, as recent industrial
production data, the worst since 2008, shows it most clearly is
doing, China now is taking a more cautious, passive stance.

“China will not make major policy adjustments due to a
change in any one economic indicator,” Finance Minister Lou
Jiwei said on Sunday, adding that the country can’t rely on
government spending to speed infrastructure investment.

The low-vol anomaly, or doing well out of others’ mistakes

Sep 18, 2014 18:45 UTC

Sept 18 (Reuters) – Sometimes in life you really can get
more for less, but usually only when someone else is a) acting
foolishly, or b) taking advantage of a client.

So it appears to be with the low-volatility anomaly, a
persistent and puzzling phenomenon under which lower-volatility
stocks, which in theory should offer lower returns, actually
outpace their higher-vol peers. This of course flies in the face
of mainline theories of modern finance, which assume that assets
are priced, in aggregate, based on how risky they are and which
assumes volatility as the prime measure of risk.

Except, when you look at the data, that is not actually how
it works. Among the 1,000 largest U.S. stocks by capitalization
between 1967 and 2012, the bottom fifth in volatility returned
an annualized 11.65 percent, as against just 9.81 percent for a
cap-weighted index, according to data from asset allocation
specialists Research Affiliates. Among global stocks from
1987-2012 the corresponding figures were 10.58 percent for
low-volatility shares against 7.58 percent for the index.

Fed dot chart illusions: James Saft

Sep 17, 2014 20:16 UTC

Sept 17 (Reuters) – Like one of those old Op-Art posters
beloved of hippies, staring too long into the Fed’s dot chart of
interest rate expectations can make you see things which aren’t
there.

The Fed’s monetary policy statement on Wednesday has to be
read as dovish, retaining as it does the “considerable time”
language which some have taken for shorthand that interest rate
rises are at least six months away (a characterization Janet
Yellen disputes, at great length, but without enlightening us
with much specificity). The statement also included other dovish
touches, notably an acknowledgement that there “remains
significant underutilization of labor resources” as well as new
language noting inflation has been “running below” the Fed’s
objective.

And yet, the so-called dot-chart, a scatter chart of where
individual committee members expect rates will be in the future,
has thrown a scare into some investors who feared that rate
rises may be on tap sooner than expected.

China hasn’t got investors’ backs: James Saft

Sep 16, 2014 04:07 UTC

By James Saft

(Reuters) – (James Saft is a Reuters columnist. The opinions expressed are his own)

In a world in which investors increasingly assume policy-makers have their backs, China may be about to demonstrate how it can work the other way.

Chinese growth is decelerating sharply from sky-high levels, with August industrial production slipping to a 6.9 percent growth rate not seen since the crisis year of 2008 amid a broad-based slowdown in the kind of fixed investment which has traditionally powered its economy.

China hasn’t got investors’ backs: James Saft

Sep 16, 2014 04:01 UTC

Sept 16 (Reuters) – In a world in which investors
increasingly assume policy-makers have their backs, China may be
about to demonstrate how it can work the other way.

Chinese growth is decelerating sharply from sky-high levels,
with August industrial production slipping to a 6.9 percent
growth rate not seen since the crisis year of 2008 amid a
broad-based slowdown in the kind of fixed investment which has
traditionally powered its economy.

This makes the official government target of 7.5 percent
annual economic growth look a vain hope, with economists rapidly
ratcheting down their forecasts.

Never confuse risk and volatility

Sep 10, 2014 20:27 UTC

By James Saft

(Reuters) – Of the many lazy and dangerous ways of thinking about investment these two rank near the top: that risk equates with volatility and that risk and rewards are a straight tradeoff.

Both are overly simplistic and both lie at the heart of some of the most colossal errors in recent finance. And while both contain large amounts of truth at their core, both concepts represent shorthand versions of reality rather than tools which always, or even usually, work.

In financial theory, volatility, the amount a security goes up and down in price, is used more or less interchangeably with risk, something hedge fund giant Howard Marks argues is mostly because volatility can be reduced to a number.

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