Wednesday, January 31, 2007

Taking an L on Corn Ethanol

G'day, all.

So I ran across this article on the other day which had me seriously thinking about the near term future of corn ethanol, and the long term prospects for cellulosic ethanol.

Basically, the corn folks may have it all wrong in the long term. Of course, I couldn't help but be frustrated that I don't live in the Caribbean, where there are ample supplies of sugarcane. But I digress.

The economics don't even make sense, in the intermediate term. While in the short term I would expect to continue seeing a bid, corn ethanol looks to be the natural gas of biofuels due to the volatility of the market. Corn demand up due to ethanol production (nevermind feeding people and animals), then substitution kicks in (yes, it can work both ways!) OR demand destruction. So the price drops again, until the ethanol producers back off, and the yo yo continues. (Market forces at work, baby!) Then there is the Sanford Bernstein estimate that corn ethanol is only profitable with oil above $70 per barrel!?!? Add to that the fact that, right now, a gallon of corn ethanol costs almost as much as as gallon of gasoline, with only 70% of the energy density of gasoline, and you have a pipe dream.

"To limit supplies and bolster prices, a 54 cent-a-gallon U.S. tariff on imports blocks shipments from countries outside the Caribbean and Central America."

One day, the market will be allowed to work instead of being manipulated in such daft ways. Clearly the American consumer isn't being protected here. Who thinks this shite up?

We can choose between corn for energy (which it doesn't appear to be good at) or corn for food (which it is good at). Hmmm. I wonder which use will win. On second thought, maybe I know already, unfortunately.

My question becomes "who is doing the research on making cellulosic ethanol viable?" Find that gem and, well, I think you can add some nice alpha to your portfolio. I think I'll start looking now.

After my con call...and after I check my commodities account.

Goodnight. Maybe.

Tuesday, January 30, 2007

Quote of the Day

"Rich people have the option of acting poor. Poor people do NOT have the option of acting rich." - Khyron (e.g. me)

Monday, January 29, 2007

Grudge Match: PE vs. Tech

Umm, the answer is "no".

The question is whether private equity "gets" technology enough to make a successful go at buyouts in that arena.

I think the article lays out the reasons more clearly than I could. Now, why has Silver Lake been successful? I'd attribute it to Roger McNamee's background as a technology analyst and technology venture capitalist gave him above average knowledge of the industry. Now, that's not to say that the big name PE shops couldn't bring on specialists to help manage these investments. But I doubt they are likely to, because (and this is just my opinion/observation), they seem to be very ego driven. Each new buyout becomes another trophy, not an actual business problem to (re)solve. Add to that the fact that few PE shops these days are interested in the bread-and-butter work of corporate restructuring that was the original foundation of the industry, and I don't see how they would make a tech buyout work. They'd be too interested in levering the company, extracting dividends from the proceeds and re-IPO'ing the operation, to actually FIX it. Of course, as the article also points out, given the requirement to maintain cash flows to service the debt, and notorious advance of technology which seeks to stem those cash flows, that kind of shortsighted strategy can only end poorly.

I vote tech. PE will never figure out how to make these situations work, until they become dedicated to it like Silver Lake or Platinum Equity are. Tech is fundamentally a business, like any other, but one with very different requirements from the ones typical taken on by PE investors.

Alpha in University Endowments

While I'm sure most of my readers have already devoured this piece at The Economist, I want to take it from a different angle. (Thanks to Abnormal Returns for the lead in analysis that started me down this path.)

First, I have to say that I love this line:

"Perhaps they can stay solvent longer than the market can stay irrational."

We shall see.

Anyway, we all know the story of the big endowments. The Economist article throws out a few stats to help support that story - the big funds have the best returns from employing the best, most swashbuckling managers and occasionally even paying them well. (I'm sure Jack Meyer might disagree with that assessment, which is the cause of the "occasionally" in that sentence.)

But what about the smaller endowments, the ones not blessed with the girth of Harvard, Yale, Stanford, Duke or MIT? How are they looking on the alpha generation front? I imagine the picture is not as pretty.

I stumbled across this link while doing a search on the topic of the endowment of the university I attended (Howard University in Washington, DC). A few hundred million in your endowment does not provide access to the best resources, the best talent, or the best vehicles, clearly. So how does a small endowment go about generating returns even approaching those of the the largest endowments? Is it even possible? I mean, if Meyer's guys could take enough flak to make it more worthwhile to leave Harvard, how is a small private university, or an HBCU, supposed to attract the talent necessary to drive the returns of its endowment?

Now, of course, the answer is probably "it isn't supposed to". That leaves these institutions even more beholden to the well known public markets - equities, bonds (maybe, especially Treasuries), and the other usual suspects. However, participation in true alternative investment markets remains sorely lacking, I'm sure.

A small university endowment (< $1B) should have some flexibility to generate better absolute, risk adjusted returns, however, even if not being able to exploit the same level of alpha generation as the big boys. There are (unfortunately?) hedge funds in this size range. Maybe the optimal approach is the application of so-called "portable alpha" strategies? Maybe its about shelling out the extra compensation for the proper talent, even if it is a small group of individuals (ex-Amaranth traders, maybe)? Of course, the numbers could get big quickly, and if Harvard alumni had the temerity to protest the compensation of one of the best (THE best?) manager in the endowment universe, how can a small liberal arts school or HBCU even fathom hiring a team of such people. How much risk is there for a college or university president, at this level, of such a move?

Anyway, this is something that bothers me on a personal level. Although it fundamentally has little to do with alternative investments and access to them, that is a symptom of a much more pervasive problem. I don't believe it to even be a "race" issue (in the case of HBCUs). It is really a class and size issue. But I still don't like it.

Whew! Finally done. Until next time, gentle readers...

The Creative Pursuit of Alpha

I like this strategy for its inventiveness. Makes me wonder if there are any cases I can bring on behalf of the U.S. government. Of course, once you factor in the legal fees, Mr. Brickman's cut, and whatever other expenses I'm forgetting to mention, the take probably won't be too huge. But since this looks like an activist role - from the other direction - it should still end up being a win for Greenlight. We'll see how it plays out. Very interesting, though.

Schweet! It has been a very alpha newsworthy start to the week.

Alright, I'm (almost) off to bed...

Now You, Too, Can Enter the World of 007 Finance

I can!?!? Fuggin' cool!

Ok, this is getting a bit ridiculous. Is it me or have "alpha-centric investing strategies" become the topic du jour of the MSFM? This worries me.

Spot the Investment Thesis!

Trends worth consideration. 1, 5, 7 and 8 are the most relevant to me.

1 is an indictment of the current U.S. government and the people who allowed it to remain in place. Uh. Oh. Yeah. Nevermind.


Moving on, 5 and 8 are purely investment theses. Hmmm.

As for 7, well, Dubai gets it. See what happens when emerging economies can't fall back on oil to corrupt their politicians and sell to the U.S.?

Thanks to Uncle Jack for this one.

Sunday, January 28, 2007

Is real estate the asset class most prone to bubbles?

Interesting question over at The Housing Bubble Blog. Food for thought.

Blood in the streets, baby, that's what I'm waiting for.

Incorporation Process Started

I FINALLY got around to completing my application with BizFilings for the startup. Feels good to have it out of the way. I look forward to getting the paperwork in hand because there are some things that I need to get done which require proof of the corporation's existence. I love progress!

More to come...

Friday, January 26, 2007


Almost time for bed. I've just been trying to get a few last items worked out, sending e-mail to my real estate partners and financing thoughts to my software partner. Sometimes it feels like there is too much stuff going on.


On Friday's agenda is to finish up the new corporate registration materials, finish some posts that I've been working on for this site, cancel my trip to Trinidad, and do more reading.

And get more sleep.

Until next time...

Wednesday, January 24, 2007

Thinking about risk premiums

I was perusing this post at All About Alpha again when it occurred to me that if long only large cap mutual funds, and long only strategies in general, depend on risk premium (e.g. that's what encompasses the majority of their returns and thus should be used as the basis for compensating their managers). If that IS the case, markets would appear to be in for a bumpy ride in the near future. Risk premiums have been compressing and are fairly low among a range of asset classes these days (leading to levering up of bets and further afield searches for untapped asset classes). So if the risk premiums are dropping while the risks themselves are staying constant or increasing, at some point, the music has to stop and the situation normalizes. That sounds like a fairly painful event for someone. (Maybe you? Maybe me? Maybe we?)

Now, maybe I'm just thinking about this too simplistically. This just happened upon me while I was catching up on my reading. Fascinating stuff to consider though, and simultaneously very scary. I'll be mulling this over for a little while longer.

Risk Appetites

Can't say there hasn't been ample warning.

The question is really who is going to take it up the a-- when and just how badly.

Tuesday, January 23, 2007

Should Have Seen This Coming


I had completely taken my eyes off SUNW while I've been working on this startup situation then they go and do this. And on the schedule that I was expecting too. I haven't even finished my options app yet! So much for buying any SUNW $6 calls in the near future. We'll see if they hang above that tomorrow during the day, because those calls are definitely in the money right now.


Lesson Learned: Don't procrastinate on a good idea!

Lesson Learned: Thorough, thoughtful analysis can pay off. Do more of it.

It has been sort of like watching a public company that might otherwise be a CANSLIM candidate find its way to profitability. Granted, SUNW has been public for some time, but if I remember correctly, the "C" in CANSLIM means current earnings per share. Until now, SUNW hadn't had any of those for about 5 years. You could see them creeping closer though, especially after the "N" in CANSLIM - new CEO - took root. I was just a bit early, but the makings were there. So in that regard, I'm ecstatic. Now I just need to do more of that more regularly.

Until next time...

PLUS and minus

Found this short bit at MarketWatch, courtesy of Fierce Finance, about a new structured product for retail investors from Morgan Stanley called "Performance Leveraged Upside Securities". All I can say is "Wow!" I wonder who would buy one of these anyway? Who gets pitched this stuff? Sheesh!

Casinos Divide to Conquer

Interesting bit in today's WSJ (subscription req'd) about breaking casino companies into essentially their constituent parts - land companies and gaming companies, ala the hotel breakups of the recent past that turned Marriott and Hilton into managment companies as opposed to being necessarily operating companies. It started me thinking about why this may (or may not) work. These proposals seem to be based around the soaring property values on the Las Vegas Strip. However, I don't see how separating real estate from relationships is as easy as separating alpha from beta, at least in this business.

For one, and maybe I'm being the spoil sport here, but doesn't this create more overhead for the casino management companies? Say, for example, if MGM Mirage were to break off its real estate operations into a separate company which owned the actual physical land. MGM now has to pay reasonable, if not market, rates to the real estate company so that the real estate company can cover its costs. It gets worse if the debt stays with the real estate, as mentioned in the article, because the REIT, or whatever form the real estate operations take, has to have the cash flow for debt service.

Another point of concern is the licensing. This may not be as big of an issue, but it still something that needs to be considered. The hotel and resort operations are one piece, but the proper people have to be licensed to run the actual physical casinos. Presumably that is what the casino operating company would handle. Of course, I could be off base.

On the whole, I'd say that this kind of model doesn't seem to fit the casino business all that well. That's not to say some PE shop might not try it. However, the casino business is much more a relationship management business these days, as the article points out about the Harrah's buyout. Getting the regulars to come in and continue spending is the backbone, and the glitz and big spenders is an add-on. Separating the relationships from the facilities might look good on paper, but it sounds like a losing proposition to me.

Also, what happens when the leases come up for renegotiation? What if the REIT or whatever decides that it can get a better deal from a rival or startup operator? Would you feel the same about your favorite resort (mine is The Venetian, right now anyway) if it had to move to another location, a location that most likely would be off The Strip given the relative dearth of available land ON The Strip these days? What does that do to the hotel/casino operator's numbers when they get this kind of deal foisted upon them? I'm not saying its likely, and I'm sure (I hope) the leases are long enough to make it profitable during the term of the lease and provides options after the expiration of said lease. But the REIT could also decide to develop condos or apartments or something non-casino, and it would be well within its rights to do so. It just doesn't look like a winner to me.

But then, what do I know?

Monday, January 22, 2007

Back in the Game

Apologies for the lag. The last week has seen me sick, busy, traveling and generally all over the map. Now I'm again ready to play.

So far, things are pretty disappointing on the investment front. Just looking at the wheat charts puts me in tears. I've got 1 month before my March call expires. So far, I'm down. I'm not going to get into how much I'm down, just being down is bad enough. Might have to close this one out. This would appear to be my punishment for chasing performance. We'll see how much value I can salvage on that one.


Anyway, the trip to Cali was a success. I was able to sit down with one of my key advisors and get some good input on writing the business plan, putting together the financials, and other business related topics. On the technology side, I was able to procure some hardware to actually conduct testing of the product my partner is building. I feel good. We're working to have a running demo (that actually does something; at the moment the code runs but doesn't work through no fault of our own) by month's end.

Anyway, for those who are interested, Bill Gross has his January commentary posted over on the PIMCO website. Always worth a read, I think. On the same site, Paul McCulley has a convo with Morgan le Fay about the direction of the Fed Funds. As always, good stuff from the PIMCO crew.

Now that I'm getting back to my reading, I have to wonder how I missed this one over at (courtesy of Barry Ritholtz at TBP). Dollar decline, anyone? Yeah, I see a great future in this currency. Its never a problem until it is.

Anyway, coming soon will be a piece about alpha in the university endowment world, after I get a chance to read this in full.

Until next time...

Tuesday, January 16, 2007

Blog Recommendation -

Ok, I know I've been out of the loop but I've been trying to recover from my trip. Maybe I'll go into some detail about it later.

Right now, I'd like to introduce the unfamiliar to, where they relish in exposing the hidden tidbits buried in the footnotes of corporate SEC filings. I find it a useful source when I am scouting investment ideas too, to see if anything has appeared in the dark, unexplored crevices of the financial statements. A handy resource! Thanks, Michelle.

As for me, I've been very busy with the usual stuff this week. I promise I'll return to my normal schedule of blogging now that things are starting to calm down a bit.

Until next time...I'm off to run some numbers on properties through the spreadsheet.

Thursday, January 11, 2007

Quattrone's Next Move?

I apologize for the lag in posting. I'm out here in California yet again, sitting down with one of my advisors for this new venture when I can get some of his time. I'll be back in DC on Sunday, so things will start returning to full-on normal then.

This is something I look forward to seeing - the next act of Frank Quattrone. While I never dealt with the man, his reputation is, of course, legendary. So if a man such as Frank Quattrone goes into private equity or builds a hedge fund, as is being widely (mistakenly?) speculated, what does this do for the world of technology finance? Silver Lake was the first really tech-focused PE shop (at least, on a large scale, that I can think of). Roger McNamee's Elevation Partners has garnered a bit of a name in this arena as well, even though they seem to be more media oriented, along the lines of Steve Ratner's Quandrangle Group or Allen & Co. So Silver Lake is kind of the big tech PE name.

So what does happen if Quattrone builds a hedge fund? Of course you'll see lots of people who worked with/for the man in their past lives move into his firm. From the sound of things, I don't think Frank is a hedge fund type of guy. IB is very relationship focused, and Quattrone was the quintessential tech banker. Private equity would appear to be more up his alley.

So how does this affect the world of technology finance? More competition for technology deals seems obvious. A worthy competitor for Silver Lake is pretty much a wrap too. Increased deal sizes. These (generally, if you can stomach the thought of leverage) seem to be good things. On the startup side of the technology equation, I don't think we see much change at all. It'll be the established companies that worry or cheer because Frank is back in the game. The rest of us will just keep on movin' forward.

Wednesday, January 10, 2007

Tuesday, January 09, 2007

Alpha in the Movie Biz?

This one should make Equity Private proud! Bloomberg has a front page piece on Ben Waisbren and his cohort Ryan Kavanaugh (subject of her poison pen here and here and probably a few other places too). While the article focuses on Waisbren's efforts to crack the Hollywood financing code, my Spidey sense went off shortly into the read. Sure enough, if you get deep enough in, you find the Kavanaugh name.

Wow. You really have to wonder why people think they can find some magic quant model to apply to the entertainment business. I imagine that smarter people than these guys have already run the numbers and thats why the major PE players have stayed out of the business. Bright lights, big city, I guess.


Viva EP!


Monday, January 08, 2007

Marc Faber on Asset Mispricing

Am I a pessimist?

Nah! More like a realist, I think.

Okie, I go now. I have some reading to do, and hopefully a lunch meeting with an old boss. Startup fever, man!

(Maybe I'll sleep in there somewhere too.)

Until next time...

Global Warming Causing Oil Volatility?

Hmmm. No need to guess what I think.

Anyway, a warm winter drives down heating oil and possibly even natural gas demand. Doesn't that become a segue for a warmer summer, with increased natural gas demand? Of course, the geopolitical risks are everpresent. A weaker US economy (again, no need to guess how I feel about that one) helps power down petroleum pricing too. I can see that.

So the question is - what's missing?

I think we see higher oil prices by year end, but what happens in the middle?

If demand dries up in the US, I expect to see OPEC cut their quotas. We still have yet to see the impact of the 1 February quota cut. Demand doesn't seem to be decreasing anywhere generally, especially not in this country. (Whip out the H2s! Its springtime in January!)

So while the short term trend may be down, clearly the long term is up. Natural gas for May delivery, anyone?

Blog Recommendation - Accrued Interest

Ok, I just finished reading a lengthy post and comment and I have to say that although (because?) the commentary is HEAVILY steeped in bond market lingo, I can feel my brain growing. I love it! So take a look at Accrued Interest, where a professional bond guy named Tom G. explains his take on the world. Delicious!

More to come...

Saturday, January 06, 2007

China Raises Reserve Requirements

I just noticed this headline roll across on the Bloomberg website. Damn fractional reserve banking. But I can't help but to wonder what effect this will have on China's growth. I mean, from 11% annualized to, say - guessing here - maybe 8-9%? Just a thought that ran through my head. But better consistent, stable growth than a giant flameout on overzealous credit creation. Right?

I wonder if anyone has ever tried to determine, quantitatively, how much of an increase in reserve requirements is equivalent to a 100 bp increase in lending rates in any country's economy (China, US, Euroland, anywhere)? Hmmm.

Friday, January 05, 2007

BGI Builds Hedge Fund Giant Internally

This is the kind of stuff I love! I guess I'm a history geek too.

(Damn! I just noticed that they shortened the story from the version I read. WTF?)

Anyway, those books are going on my reading list though, including this one which was mentioned in the text cut from the original article. I do have 100 to get through before 31 December 2007.

Update: Looks like All About Alpha has a piece about this as well. Nice read. Do great minds think alike? I like to think so.

Lookin' Up

Or not.

I just looked at my portfolio update report and EVERYTHING was down. Ok, fair enough. It has been a rough week, not that I've been paying the closest attention. But damn! And still, my taxable portfolio is just a shade under $11,000. Now, I don't consider that too bad because I've ridden it up very well, and I'm overweight Japanese equities. Seriously overweight. I wonder how far it went before coming down to this level? Oh well.

My lunch meeting was cancelled, but I was able to slide in another one with a friend of mine who I've asked to advise on certain aspects of the business. Hopefully, the re-scheduled meeting will go through as planned on Monday. Now its time to spend some money. More investment in the business, but I will self-fund for as long as I possibly can. I'm seriously considering taking out a personal loan to avoid F&F or angel money. At some point, I anticipate bringing in "professional" investors, but I want to move that as far out into the future as possible.

At least the commodities rebounded today. Program buying, anyone?

And my laptop had returned from the dead. Whew! I thought I'd lost it once and for all. Thank you, God! So I guess I can say it was a good day after all.


My apologies for the recent delays. All this excitement around my startup is taking its toll, along with sleep deprivation. The most interesting part is that we haven't (yet) filed the incorporation papers. That probably won't happen until the end of the month, with all the travel and other things. Before I can get to bed tonight I have to finish some real estate valuations. (Of course, this is looking worse and worse by the second since my laptop's backlight refuses to come on. Guess I'll be replacing my trusty PowerBook G4 sooner than I hoped.)

I've got a lunch meeting tomorrow with a former colleague about this venture, so this will be brief.

So let's do a general recap of all the in-progress projects.

There's the skunkworks project which has been progressing at a generous rate. I'm starting to wonder if it is contributing to my health right now. I know I need to keep on top of that, but there's just this intoxication I have with building this company. I haven't felt this way since early in my tech career. I'd say its even stronger than the feelings I had about the startup I worked for in 2000 - 2002. Its indescribable, so all I can say is "go do it yourself!" You'll understand once you start seeing the first inkling of fruits. A complete natural high. I recommend that everyone try it at least once, if only for the thrill of doing so.

Still doing the real estate. Real estate is an easy grind, conceptually, but it definitely requires time. I went to Baltimore this past Saturday to look at a house that had been offered to me and my partners by the owners. Nice little house, in traditional Baltimore fashion. But the drive is beast. 100 properties to get 10 offers to get 1 deal. No joke. But I can't complain. The deal of the century is always right around the corner. 5 houses - that's my goal. Contributing 5 houses to our portfolio. Need to start cranking on this. I think this year there will be even better opportunities to add to the portfolio on a cash flow basis. So much promise!

Wheat. What to say about wheat? I don't know. I'm checking the quotes much less frequently. I'm not sure if that is due to being so busy or so disappointed. Maybe the correction is coming right now. While there seem to be pockets of strength in certain markets, most of them seem to be trending down, commodities included. Now, I do not believe the commodity situation is bad in the long term. But to paraphrase Keynes, markets can stay irrational longer than you can stay solvent. Man, have I been taught that lesson. I guess the best thing to say about the wheat spreads and call I have is that it is money I can afford to lose. But I sure don't want to! And a quick chart check looks like we broke some support around 480 on the May contract. Damn! (Maybe that means people don't plan to eat as much cereal this year!?!?) Looks like I'll be calling my broker on Friday.

Consulting. I think this will have to go away completely this year. I love my friends and all, but given how they seem to misunderstand the role technology should play in their businesses, its time to cut my losses. I need the time anyway for this software gig. I hate leaving friends in the lurch like that, but something will change in this arena and soon. The opportunity cost here is just too great.

I think that covers everything. I didn't include my J.O.B. know. It serves its purpose and thats it. I wonder if there are any projects that I should take on just to be "well rounded"?

Anyway, I'm off, either back to the grind or sleep. At this point, sleep is winning. But I'll be back soon with another great blog and hopefully more stories of investment success. (No matter what the investment, we've got you covered.)

Until next time...

Wednesday, January 03, 2007

Blog Recommendation - Hedge Fund Blog

Original title, eh?

Nevermind that. I found this a little while back, I think late in the Christmas vacation cycle, but hadn't yet a chance to evaluate it. Well, the review is in and besides some interesting posts that raise thought provoking questions, how can you pass on the Hedge Fund Aptitude Test?

Pure comedy. I love it!

Anyway, a quick start to the new year. I know, its not glamorous. But hey, there's been no market action in this country for the last few days. But I'll be back for more real soon, especially once I get some more time to digest the "Portable alpha and diversification" post. That one really struck me for a some reason. I like it, and I hope to be able to articulate why.

Anyway, back to the grind. Until next time...