SharperDingaan

We would suggest to you that Bitcoin has been in existence for a very long time; between nations we just call them SDR's, with individual nations we call it QE. Central bankers make them, not individuals; and those bankers issue bank notes for everyday transactional use - to minimize the fraud inherent with the use of money. No cash? no transaction - so you have to go to a bank; the distribution network for money. In the drug world each bank would be a drug family, & each bank branch would be the pusher on your street corner. Just as each drug family defends its turf, so do central bankers; & just as drug families live in a hierarchy, so do central bankers. It's a great system, works on both sides of the law, & your 'innovation' either gets assumed by the families - or you sleep with the fishes. So my Bitcoin? If it gets assumed, it might actually be worth something; but if not ....... Do you feel lucky :P SD

Poseidon Concepts. Jan-Feb 2013. They delivered/erected/managed/broke-down/removed the on-site tanks holding fracking fluid for use in horizontal drilling. Good & simple technology, real function/need (fluid freezes at -20), established customers, strong demand, & a sub that was a spin-off from a bigger company. We bought it because we rushed our fences, had cash to deploy, they had just had an earnings miss (collapsing their share price), & fracking is well within our circle of competence. Should have been like shooting ducks in a barrel ..... Problem was the coy was a fraud, & it went into receivership shortly after the fraud was discovered. The spin-off was at the expense of competent accounting staff & functioning controls, & the take-or-pay contracts were not quite as interpreted. Add to it that we favor concentrated positions ... & the loss hurt (both us, & our 25% tax-man partner!). Lessons learned: Even if your process is reasonable OK, shite can still happen. Don't rush your fences, & pay up for quality; making that extra $ is a lot easier, & a lot more reliable. SD

The split on this well informed thread is very healthy. Most industrial engineers would argue that when you see such a well-defined two choice (bull/bear) split like this in the real world, you are looking at an inflexion (tipping) point. Forecasts are what we have; they are best guess, horizon dependent, & we act on them every day. Took an umbrella with me this AM because I expected rain (short-term), to go to the shop to swap radials for snow tires (medium-term), that I will swap back in early spring (long-term). No idea as to exact time of day, or date of occurrence, but I am pretty sure the future event will probably occur. But it is not a guarantee; the sun could break through, the shop could be closed when I arrive, or there may be no snow this winter. There is uncertainty. Uncertainty is marketing poison. All firms are selling branded action & direction: & branding is nowhere near as effective when markets are directionless. Were it soap or beer we would say the brand is ‘tired’, & rebrand to promote sales through a new campaign or product line extension. Sunk investment falls risk to rapid obsolescence, media & fund jobs go on the line, & that business angst feeds back into the market. Industrial engineers would simply argue that the prevailing trend in the lesser split is about to dominate for a period. How long, etc. depends on the science of the physics/chemistry/biology driving the process. Sometimes …… all you need do is think like an engineer ;) SD

Congrats!

Remind yourself that flattery is a deliberate part of the pitch, & it is done for a reason; the most effective way to launch a new fund is to get the manager to put in the start-up hours for free. You will be just another brand manager, selling the nth brand of soap or beer. At a P&G, or an Interbrew, we would call you a brand manager; putting lipstick on a pig does not change what it is. Brands have limited lives, and are expected to either fail or be periodically refreshed. Always a good plan to have a hedge; find something that would go up in the conditions that would make your fund fail, & invest in it. Rain or shine you walk away whole, & most of the time - richer if it rains. Options 101. Look around you. Most folks do not have one career, they have many; & what they do depends on the opportunities at the time. How many old brand managers does your firm have, & what do you suppose happened to those that aren't there. Options 102. If you play in the crocodile pool, bring a knife; crocodile boots look very nice. SD

If you have any ideas to reduce volatility and not sacrafice upside, I would like to know. This is the main reason we hold onto our low cost bases; if the stock goes down tomorrow we can afford not to sweat it. Problem is that the lower the cost base, the poorer the price signal - so we're also prone to holding when we really shouldn't be. The cure is judgement. SD

Check your messages .

.... I'm wondering if you mind sharing how well has this concentration approach worked for your portfolio in the past? We have extreme ROI volatility, worsened by few equities & the use of a max $ investment in equities. Rolling 10yr compound returns of 25-30%, but in any given year we can range from -35% to +140% (43% 2013 YTD). We pick well, but are not good at assessing how long an idea may take to come to maturity, hence our focus on risk. We buy cheap punch cards & hold forever, which can be costly. ie: we hold a big position in PD at an ultra-low cost base, entirely funded with house money; but year over year it has been a terrible investment (& per convention, should therefore be sold). Totally misses that we are already up 250%+, & when we do eventually sell ... it will be a 12 bagger, with a div yield in the 20-30%/yr range, with proceeds more than enough to buy a large apartment in Manhattan - if we so desire. But in the meantime ... put up with negative ROI. Over time our volatility (& extremes) have declined. In our early days of 100% equity we relied on small size, options, & cash inflow to cover our risk. Option use changed to hedging as we could afford the actual common, & dropped away entirely as positions got big enough to warrant hedging by other methods instead. We hold FI to park $ for distribution, & hedge our positions. If we have to average down, the incremental investment is usually no more than what we have already recovered of our original investment, & invested in that FI. With growing size we add distressed debs to offset the portfolio drag; but the higher FI weighting overall lowers compound ROI & reduces volatility. You could not do this as an institution, & most would not do this as their retirement strategy. But if you think that you might want to buy a business at some future point; the equity build, & the business/industry experience that comes with it, is very useful. Our Cdn partnership was originally created to fund a brewery ;) Hopefully the patrone also gets to be a Master Brewer! SD

US residents will suffer a 15% withholding tax on any cash dividends received from Canadian investments, if those investments are not in tax sheltered accounts. There is no withholding tax if the dividend is paid in stock. Little advertised is that some well known Canadian blue-chips offer DRIPs with the DRIP shares bought at 95% of MV. To avoid the withholding tax in a non tax sheltered account, simply take shares over cash, and sell the shares ;) SD

Just to stir the pot ;) There is zero reason why she cant do something else; ie: teach English in Asia, construction, truck driving, tv production, write magazine articles/books, join the army, war correspondent, etc. Thousands before her have done exactly that - she isn't special. She made her own bed, & knew the risks. Thousands of other women before her have been in the same position, & all of them have come to their own solutions. They may not have liked their choices, but they made them; including marrying below their station. Everybody grows up. SD

Seems show (prestige) is important .... only she cant pay for it ..... Not the brightest .... will not move to a better locale, because bank of dad will not fund it (closet brat?) ... Cant declare bankruptcy.... so marrying out is the next highest & best use of depreciating age & looks .... Optimal if hubby is a rain-making sugar daddy, with the good taste to croak out within 5-10 years ? Expensive to terminate early. High risk, low return. If you're really so inclined, just buy a good hooker .... or set her up as a madam!

Couple of add-ons: Re Slave to Kelly: Kelly is just a principle applied in a particular way. Nothing prevents you from applying that principle a little differently, according to situation; as many here do. Re Concentration: For practical purposes, most concentrated positions are actually independent of each other. You invest your whole financial services sector allocation in 1 bank, not 5; & it is in either Europe, Asia, or NA. Your next allocation is in some other sector, in some other geographic location. With only 3-4 stocks & only 3-4 locations, co-variance is pretty mild. Re Time Horizon: Strategies change as time & investment thesis advance; they do not stay constant. Todays dividend paying equity investment can easily become tomorrows synthetic FI, with all accumulated house money removed via margin. SD

We should add that each stock is stand-alone idea, independent of everything else in the portfolio, and that the portfolio itself is a stand-alone asset. Example: ABC may be a new addition. It is Kelly sized, leveraged, independent of the portfolio, & a bet on European recovery. Most likely a very large bank as any kind of recovery will have to pass through the banking system. DEF may be an older addition. It has been sold down to remove the leverage, but its too early to reduce the position any further. GHI may be a maturing addition. Leveraged to remove our capital investment & fund a FI instrument, & ideally a dividend payer entirely funded with house money. JKL may be a series of FI instruments; convertibles, laddered T-Bills etc. MNO may be a leveraged portfolio overlay; options, special situations, etc. where we have high conviction. PQR may be the cash/margin you have. + 25% through -40% plus, depending on circumstance. Total of 6 investments, with only 1 being Kelly sized .... & then only temporarily. ABC investments become GHI investments over time, & CF increases semi-annually as long as we continue to invest. SD

We use Kelly as the starting point, at initiation, then discontinue its use. We see the highest risk as being at initiation; a high conviction, leveraged punt, that could fall 30% the day after we buy it. The lower end of our uncertainty sets the initial size, the upper end sets the limit if we have to average down. Around 25% appreciation we sell down to remove the leverage, thereafter its a rolling quarterly 6-9 month forecast. Averaging down is a very dangerous game, when leveraged; the upper end Kelly forces selling. We focus on risk; so no leverage unless its tactical, & removal as soon as practical. Once we 'know' the security, we usually find our forecast picks up the seasonality & add a few points. It means you cant own the whole world, & that you have to be the guru/analyst on each stock you own; therefore you need the same CFA, & other technical certs, that most sell/buy side analysts have. Your advantage is few stocks, & you do not have to toe your employers line. Your disadvantage is that you are prone to sipping cool-aid; usually not a problem if you keep a lot of knuckle-draggers in your orbit! SD

Look at the I, G, & S utilities for yield, & oil/drugs for growth ;)

We don't need no stinkin' sophistication .... We got per-son-ALITY!

FFH strikes are deep out of the money, so the insurance cash costs are as cheap as possible; but FFH shareholders pay with high quarterly MTM adjustments. A valid approach. You're free to hedge FFH directly if you dont like it

You have to be able to enter/exit the hedge in scale, quickly, easily, & discretely. Equity indexes are preferred as they are also the instrument of choice for all kinds of other long/short strategies (ie: ETF's, market guaranteed rate deposits, etc.); your trades look like all those others, & nobody is any the wiser. Keep in mind they also have an oversized position in the restructured asset heavy RFP (one of a few), & a commodity collapse will trigger massive write-downs. As you cannot short your own stock, or industry sector in this case, equity indexes are the next best choice ;) They are in a box, & are executing fairly well - but are getting punished because it is too difficult for most to get their heads around. It is really an indication that they need to restructure their business into simpler, easy to understand, components. Unfortunately, we just do not see it happening any time in the forseeable future. o SD

Wests counterparty exposure: To do domestic business in China you have to do it with a partner. Either an entity that is state controlled in some fashion, or with state permission (ie: in an economic zone), or via a corrupted state mandarin giving you cover. No different to Russia. You start out with Chinese Assets, & Western Debt. Moving through time the Chinese books accumulate retained earnings that support new Chinese debt on a 1:1 basis; those Chinese debt proceeds then repay the Western debt. Western exposure is all cumulative investment less all cumulative debt repayment. Chinese exposure is all cumulative BV write-offs that have not yet occurred. The more corrupt the environment, the higher those unrecognized BV write-offs are, & the smaller the Western debt repayments. Assuming no additional investment - Western financial exposure declines over time, & Chinese exposure increases. Standard investment procedure for high risk locations. The commodities impact is not just pricing. If business is booming you open new plants closer to your buyer, & you justify the loans based on those higher commodity prices. Total investment increases, & China gets new P&E on the ground – in China. The experienced will make their state-of-the-art investments in the West, & only invest their old & used equipment in China. As much of the investment in-kind as possible. The expectation is that the music will stop, & that you will lose the entire Chinese investment. In the meantime at the company level, you book higher EPS, try to keep your payback period as short as possible, invest in commodity sellers (via the treasury portfolio), & hedge the index. When the music stops, your share price collapses, & the cash gain on the index finances your share buyback. Standard operating procedure. At the state level, you issue as much paper as practical to the Chinese, & try to lengthen the maturity as much as possible. When the music stops, you seize the paper as compensation for the lost Chinese investments. You stop paying interest, & defease the debt. Standard operating procedure. The net impact is mild, but the gross impacts are extreme & offsetting. Obviously the state level gaming is extreme, but it is nothing new (oil, arms, drugs, etc.). It is also one of the realities that hedgers do not like to remind people of. SD

Think of what would happen were China to experience material banking disruption. All those new built empty cities, debt financed, with no visible CF to service that debt ..... so just how exactly is the magic being maintained, & what are the limits. Almost all financial flows with the outside world pass through a few, & tightly controlled, portals. Counterparty risk is concentrated, & controlled centrally. Most would argue that the financial risk, net of forfeited western deposits, is actually being borne by the outside world. The net risk may be small ... but it is net of extreme gross upside and downside volatility should China have a blowout. And every expanding trade nation suffers a blowout at some point .... Remove a good chunk of the demand from a commodity & its price will drop. Do it on a lot of commodities .... & at the same time; & you get contagion. Over the short term, the replacement cost of virtually everything falls like a brick (deflation), loan collateral evaporates, banks fail. Over the medium term; cash on corporate books flows to new equipment purchases, & the old equipment (plus the people who operate it) gets scrapped. Significant & material disruption for an extended period. China can close the wall again at any time, it is a communist country, & you are not going to be foreclosing on any Chinese assets in China. Crocodiles basking at the watering hole are playing the waiting game - & eventually those jaws snap on something. SD

Hopefully just another book of business in a field that they actually know something about; but the meter is running.

Given the size, the price, & the fact that they could have easily issued low cost debt instead ... most would expect that there is more to come. SD

Drink enough cool aid - & you are going to make errors. It is going to take a while for them to show themselves; but survive the ass kicking you deserve .... & you aren't going to be making any more of them for a while. Lot of upset folks over BB, & there is a need for a target - so why would you NOT expect the stock to drift lower over the next few weeks. And if there is the slightest negative around Q4 earnings, real or imagined ........ But 3 months from today, are you really going to feel the same way about it ? SD

You might want to look tactically at FFH, over the next 2-3 months ;) SD

HFT reminds us very much of Judo ... gaming, & the concept of letting your opponent do the work for you. Link your software to trigger off the frequency of key words showing up in select locations, tie the signal to the ticker symbol & derivative markets of select deeply traded stocks, feedback words/blogs/market data to drive up the count at your source locations, & let it rip. To get ... rapid volatility perfect for option trading ... so long as everyone plays the game. So .... if I put out some favourable messaging (selling calls, buying puts, synthetic shorting), & them suddenly dump a lot of negative (buying back calls, shorting), ... & keep doing it waves; I am going to make a LOT of money, & none of it illegal. I have essentially just created a new age Pump and Dump - move over Carnegie! Until you meet those evil bastards who also know how to play the game ;D You just got the opportunity to buy in a big long position at an artificially low price (short sold stock) I can dump positive messaging - at any time - to reverse the sentiment (& use their machinery) I can average up in the physical market - at any time - to push the message (using the low cost base & their machinery) I can sell the entire position via calls - hopefully at peak frenzy (they developed the put/call market for you) I can suddenly withdraw - at any time ( & let time decay erase the value of the calls I just sold) .... leaving a long position 2-3x its former size for no additional cost .... and a welcome mat to the door of a target that I may be trying to acquire - move over Mellon! Games will be played, but most would argue that they are not in the general interest of the population as a whole. SD