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Tuesday 24 June 2014

A Social Economic & Ecolological Paradigm

FPM principals have been expecting a rise in interest rates for some time since 2011: with hindsight of time-told evidence and our longstanding10-year deleveraging economy paradigm (as foretold by economists Reinhart and Rogoff), FPM revise its forecast to a low-rate global environment into the medium future. The reader will understand that this is a bold revision at a time when financial services are not only vying for higher rates but indeed anticipated from Federal Reserve between 4Q14 and 1Q15. Remember that the economic recovery in terms of positive GDP growth started in 2Q09, therefore now beyond the halfway stage of the mooted 10-year economic stagnation paradigm, FPM would not be surprised to see no more than an overall 25 bps hike between 4Q14-1Q15. 

Make no mistake, any small rate-hike would not be a signal for policy shift in interest rates. Rather yet another in a long line of smoke-and-mirror tricks to timely bolster waning economic confidence. A show of stable economic growth would be the intended effect. That greatly acknowledged behavioural science characteristic of market participants called "confidence" is at junctures seemingly crucial to a world of rational investment decision makers! The recent Wall Street Journal op-ed promoted this as "private animal spirits" - more criticism of this stale brand newspaper in our next YAALA series.

Based on traditional economic understanding FPM forecast in earlier blogs that a first interest rate hike would happen by 1Q14 this year - Doh! In fact in Europe earlier this month the central bank there imposed unprecedented negative interest rate policy on banks depositing money at the European Central Bank, citing flagging economic recovery. It is the same situation in the United States of America, as reflected in mentioned WSJ article trumpeting for policy shift:

The Federal Reserve's Open Market Committee on Wednesday stuck to its path of reducing its bond purchases by $10 billion a month… [it also] Fed slashed its growth prediction to 2.2% for 2014, which is down sharply from the nearly 3% forecast that it made in March… The move reflects the minus-1% growth in the first quarter, which could turn out to be even worse with revisions… Predicting future growth is notoriously hard, but this is the fifth consecutive year that the Fed has been too optimistic…” WSJ June 19, 2014

 FPM perceives developed countries’ economic weakness as structural and cyclical in the long-term. The developed countries being at structural saturation levels in terms of economic activity will not necessarily be expected be characterized by excess spending-power, which would certainly contribute to inflation increases. Yet unofficial economic growth policies of these anaemic growth economies are through population expansion via immigration which is helping to minutely tick-up GDP growth, lest the statistics reflect the real structural economic downturn. We validate this unpopular growth policy through the discontented nationalist voting patterns in the recent European Union elections. Using a corporate finance comparison, the population expansion economic policy could be said to be growth through acquisition rather than organic expansion. In the UK, the Office of National Statistics, confirmed a population of "64.1m in mid-2013 – up 400,600 on mid-2012". This is not a Y-O-Y rise in new births (from "Bonking Britain"!) or newly registered population but net inward migration.  Below are some 'stats' for the number-crunchers about  US jobs growth versus population:

Increasing Population and Real Unemployment (Source: EPI.ORG)

The proponents of interest rate rise suggest that a benign policy environment induces more borrowing and creating asset bubbles. Indeed only those afflicted with foolhardy short-termism imprudence would lead to detrimental debt addiction. A rational approach to bearing debt is also logical.  Debt accumulation is a choice prudently assessed on the ability to service one's debt i.e. pay the interest and coupons on expectations based on interest rates. Therefore, in a world of job insecurity and excess spare capacity of long-term skilled unemployed workers, the low-rates are helping debt-ridden suicide jumpers away from the precipice! That debt-indulgence is an insidious and malign threat to an entity’s well being only tells half the story. Indeed, have we forgotten or are we distracted and detracted from the debt crisis of many developed countries. Remember the US “fiscal cliff” wrangle over raising the debt ceiling (as related aside, the war in Iraq alone has cost taxpayers US$ 4 trillion), European Union debt crisis, and the downgrading of national credit ratings (including US and UK losing its top triple-A ratings). We believe these were real and impending threats in an already feeble pretentious global economic recovery - we don't know from certitude of analysis that these were not PR-contrived media diversions.

1) FPM regard moderately rising actual inflation as necessary and good in context; despite that age-old phenomenon being manipulatively managed down in the recent decade at 2%-5% levels in most developed and to a lesser extent in developing economies. Inflation is necessary at least as a sign that economy is over-heating i.e. too much money chasing too fewer good in context of increasing economic growth. Yet the reality is that the 'real money' is not chasing those goods and service. Instead printed money or credit expansion by multiple governments towards propping-up the global credit markets is misallocating taxpayer resources, ever since the Great Recession of 2007-08, and also well before from pump-and-prime stimulus policies. Inflation also indicates firms have growth expectations through pricing power – which would suggest future corporate health. Corporate war-chest spending on share-buybacks is indicative of low potential economic growth, and done for stimulating share-price performance and enhancing the wealth effect. Whereas the obfuscated reality is that input-factor costs and raw materials are being driven-up through commodity and other asset speculation stemming from unprecedented massive credit expansion; or the now tapered “Quantitative Easing” programmes. These higher input-costs are passed to consumers in clandestine ways that does not show up in measurement of actual inflation levels. So without letting the cat out of the bag i.e. inflationary worries, interest rate rise is not a threat. Economic fundamentals still appear weighted towards deflation tendencies so is a rate increase is not possible in that context. Introducing the next reason why interest rates won't rise rapidly is that actual and expected inflation diminishes the value of debt i.e. debt destruction.

2) With North American aggregate debt alone estimated at some US$ 60 trillion, any fast or sharp rise will utterly destabilise governments, corporations and individual debtors, sinking the economies into further cycle of recessions and recoveries; a cycle which when reflected upon over time we like to describe as a "new equilibrium restorative pause" (at least in the non-BRICS countries). Rapid economic growth is not good for economies - doing things right takes time! Sustainable future requires long-term planning NOT mammon-orientated short-termism: 'make a buck out of whatever good and hell breaks out'. FPM aim to reinforce that by hijacking a logo from the Climate Revolution activists "What's Good For The Planet Is Good For The Economy".
Source: Vivienne Westwood Ltd, FPM
While investment strategists are tuned to economic fundamentals like strong employment and rising inflation to connect the timing and actuality of eventual interest rate rises, FPM thinking holistically  believe there are socio-economic ecological political factors that maybe underpinning a low rate environment for many years to come. The much needed multi-billion dollar reallocation of capital towards lowering fossil-fuel dependency requires long-term massive global investments at lower costs of financing. More below.

3) US Government policy of tapering or turning-off its monetary stimulus is not the same as the US Fed or other central banks being ready to raise interest rates. In fact the ideas are at opposite ends by degrees! The occasional lip service and rhetoric of talking-up the possibility of climbing interest rates is not a real threat for the over-riding reasons economic fundamentals given in point 1 and 2 above. FPM’s interpretation for the Federal Reserves’ neutral stance on interest rates is not only that economic fundamentals warrant it, but also politically speaking that there would be back-lash short of a people’s revolution if the political classes again seemed to be helping unscrupulous banks and other sizeable asset owners. Simply put, banks are in the business of lending money / capital and creating wealth. Yet if returns on lending / investment activities are low i.e. small interest receipts and other capital asset returns, then banking activities are not as profitable. This somewhat appeases and satisfies the struggling masses of the ‘ragged trousered philanthropists’ i.e. you and me. Witness the estimated 50,000 people protesting against austerity cuts in London UK on Saturday 21st June.

Another political impetus for a low growth economic environment despite forecasts and sugar-coated propaganda, stems from global climate concerns. For real! There is finally a real recognition that global climate change induced by man’s activity is a real threat to the sustainability of planet Earth. On the basis of resulting increase in air travel, carbon emission and 'carbon footprint' concerns, FPM's does NOT support the clandestine government policies of population expansion by immigration. The exigency of proactive action is now! If the biggest markets for man’s productivity and economic activity can be stalled then carbon dioxide CO2 emission is also reduced. Without delving too deeply into the science of climate change, we are on the cliff’s edge towards increasing the average global temperature and setting of a sequence of ecological consequences with disastrous effects for humanity. We recommend web-searching Bill McKibben or simply go to website 350.org where he explains the urgent maths of climate change. FPM’s projects in funds and investments is oversight of emerging trends and assessing their value. And indeed we see global warming and solutions as a game changer with great enterprise value. Don’t take our word for it visit Risky Business.

Monday 16 June 2014

The Soft-Landing ‘Global Resolution’ for Steven Cohen’s Avatars

Recent Smokescreen Stories by Main Stream Media ‘MSM Muppets’ in the SAC Capital insider trading saga:

Bloomberg June 9th: Cohen’s Point72 Bans Instant Messaging for Some Managers
Bloomberg June 5th: SAC’s Martoma Sentence Delayed as Defense Seeks More Time 
Bloomberg June 5th: Story: SAC's Steven Cohen Is Still Defiant, Possibly Humbler
Bloomberg June 4th: Steve Cohen Misses His Chats With Corporate Insiders

FPM reveals the artifice in the current episode of the SAC-saga, as contrived by Steven A Cohen's defence attorneys at SAC Capital and peddled by his spokesman Jonathan Gasthalter at Sard Verbinnen and Co. Oh, and with the pandering financial mainstream media in tow!

In cyclical convergence of hedge funds with mutual funds, Mr Cohen should know that employing a public relations company in non-transparent world should bring about new alternative media explosion. And not all reputation or hype is good - right or wrong! "Garsthalter Gas" has managed to sound the reputation clarion about "Stevie" and his  "insider trading buddies" - so SAC-Saga is not quietly going away.
SAC is now renamed to 72Point Asset Management and with new makeover into a "hedge fund family office", and its principal Mr Cohen is awaiting debarment from securities industry for running an insider trading racquet and pleading guilty on on 4 counts of securities fraud.  Rather than being informatively to the point, the above listed smokescreen stories are primarily designed to distract and detract from the main embedded and often hidden agenda. FPM is incensed enough to aim to set the record straight. 

A Soft-Landing Pay-off for  Steven Cohen’s Avatars Steinberg and Martoma is the obfuscated real story and our alternative headline. If court proceedings is indeed a soft landing we expect Mr Cohen won't be barred from the securities industry. Without the good old fashioned ‘U.S. Justice For Sale to Billionaires’ plutocracy, the court case should now be culminating into a proverbial spectacular car-crash scene for the ‘perps’– i.e. Mr Martoma and Mr Steinberg finally co-operating towards criminally indicting kingpin Mr Cohen.  Testimony or co-operating witness plea against Mr Cohen in exchange for a reduced sentence especially in Mr Martoma's case should still be possible, as he is still awaits sentencing according to legal professionals. A car crash scene for the insider trading perpetrators and web-of-securities-fraud Mr Cohen was anticipated. An epic car crash serving to appease higher social values of financial integrity, securities enforcement justice and the wider public interest benefits. These virtuous values should still matter even for appearance sake! 

The pending criminal court proceedings against former SAC portfolio managers  Mr Steinberg (appealing his conviction and sentencing) and Mr Martoma (awaiting his postponed sentence hearing) are simply playing out the ‘global resolution’ of the July announced criminal indictment against SAC Capital (United States v. S.A.C. Capital Advisors, L.P., et al., 13 Cr. 541 (LTS)).

 A guilty plea and a record dollar settlement of US$ 1.8 bn, including the US$ 616 mn civil forfeiture in earlier settlements related to the two parallel insider trading cases at SAC’s sub-funds Sigma and CR Intrinsic.  The respective criminal cases against SAC are in fact the current pending appeal cases involving Mr Steinberg when at Sigma and Mr Martoma when at CR Intrinsic.

A plea bargain by the convicted ‘perps’ in exchange for a lighter prison sentence of 5-6 years instead of the guideline 10-20 years that’s been threateningly touted as media distraction in both cases, was anticipated. As reported in FPM’s coverage “TheCalm Before The Storm: SAC Takeaways – Part 1”, not many expected a mere 3 ½ years sentence for Mr Steinberg, having being found guilty on all 5 charges. Mr Martoma's sentence hearing is postponed. We don’t believe it is a prosecution tactic to make him sweat, but rather to dramatise the judicial masquerade.

As early as September 2013, during the mentioned settlement negotiations, there must have been strong possibility of prosecution evidence leading directly toward incriminating Mr Cohen. Which we believe will become apparent in the SEC censure against Steven Cohen when it is commenced as scheduled in August.  Whether enforcement authorities are successful in banning him permanently from practicing the industry or a lap-wrist limited ban. Those civil administrative proceeding has now been re-scheduled for August this year. Watch this space!

To avert guilt and reputation damage from such a disgraceful banishment from securities investments Mr Cohen has reportedly hired the legal heavyweight David Boies, towards end of last year. What the myopic muppet reporters didn’t point out, in any certain way, the numerous class actions unfolding from the 4 counts of securities fraud guilty plea that SAC Capital has submitted to the courts. FPM are canvassing litigated stock-holder's registrar firm. Watch this space!

"If you expect to lose a case, you settle when the situation becomes dire, you try to save face by claiming that you are a responsible person doing it to avoid anyone else having to suffer, along with the formulaic 'to avoid the cost and distraction of a trial.'" Erik Gordon, a law and business professor at the University of Michigan. " Reuters, Sept 25, 2013

The unexpectedly light sentence for Mr Cohen’s oldest colleague does mean that SAC Capital's US$1.8 bn 'payoff' in early November last year was ‘global’ plea settlement. A settlement which precluded further evidence being solicited to incriminate Mr Cohen himself despite admission of guilt for the firm bearing his name in the settlement. A done deal which was speculated in preliminary plea discussions in September and agreed by November. Remember SAC was only indicted at the 11th hour due to 5-year statute of limitations about filing charges from the date of the original stock trading incident. SAC was indicted on July 25th that same year. Below is one of the few indications that the ‘global resolution’ of the case in fact occurred:

A criminal defense lawyer, who did not want to be identified because he has had some involvement in the SAC Capital litigation, said he would be surprised if the hedge fund's lawyers agree to any deal short of a global settlement. He also said he would not approve of any deal that did not rule out the possibility of prosecutors subsequently charging Cohen.Reuters Sept 25, 2013 

Further systemic-hypocrisy in financial services is showcased when Federal enforcement’s prosecution and SAC’s defence parties got together with their highly-paid attorneys, the April sworn-in SEC chairman Mary Jo White was rhetorically warning of a change towards will hold individuals accountable to securities fraud and that financial settlements should not be seen as merely a cost of doing business. We applaud Mary Jo White in her stance but in our reputation risk thesis she could just be another regulatory “bag of wind”. She has also avowed to modify a decades-old SEC practice of letting defendants settle without addressing the alleged wrongdoing. Watch this space!

I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in. It is a subtle shift, but one that could bring more individuals into enforcement casesRedress for wrongdoing must never be seen as a cost of doing business made good by cutting a corporate check” SEC Chairman Mary Jo White in a speech at the Council of Institutional Investors conference in Chicago, Sept 26, 2013

In FPM’s fair and diligent way of exposing the vital truths in the obfuscated SAC-saga there has been one legal explanation in the press as to why SAC Capital the firm can be convicted but yet the 100% owner is able to dodge criminal prosecution. Here are the explanations of New York Times via its Dealbook section.

…As long as prosecutors can show that SAC traders acted “on behalf of and for the benefit of” the fund when trading illegally, then a jury is permitted to impute liability to SAC itself.  Peter Lattman of New York Times, Sept 24, 2013

…The law of corporate liability allows the government to attribute the bad acts of employees to a company as long as the employees acted “on behalf of and for the benefit of” the company”  By Ben Protess and Alexandra Stevenson, of New York Times, February 2, 2014

The Court proceeding has been portrayed by the main-stream-media and PR via "Gasthalter’s Gas" as judiciously weighed-up and hotly litigated cases leading to fair-verdict convictions and respective penalties. Make no mistake, the preservation of the status-quo of plutocratic hedge fund billionaires is a defeat for the securities enforcement authorities towards the public interest.  It is clearly not in the public interest if capital market integrity and judicial judgement becomes a mre public relations whitewash.  An expediently lenient sentencing of Steinberg and Martoma stinks of done deal and masquerading court justice. 

We know closed-door negotiations took place as regards the conditional guilty plea payoff asserted by SAC defence attorneys. The guilty plea, US$ 1.8 bn settlement involving makeover in to a family office with new name 72Point Asset Management was no small concession by Mr Cohen. Since the done deal payoff the reality about the court proceedings is a specious court drama. The most recent episode of this drab soap is with Judge Sullivan presented as having erred in his interpretation of what legal components constitute an illegal insider trade. Really! Suggesting those previous parallel trial judgements and that of Steinberg could be vacated or re-tried. This intended cliff-hanger in Steinberg case affects Anthony Chiasson and Todd Newman judgements, which are also now pending appeals. FPM understands this is a red-herring story, as FPM principles have all been examined on CFA Code of Conduct and Ethics and none remember that to commit insider trading there must be knowledge of payment to the tipster! Legally speaking we cannot confirm it may not be a ruse.

In any case, Judge Sullivan’s case pertaining to the shared material non-public information regarding Dell and Nvidia, has no parallels with Elan and Wyeth’s drug trails case in Judge Paul Gardephe’s oversight of Mr Martoma’s criminal trial. Really, what nonsensical farce is playing out since the global deal between authorities and Mr Cohen had been consummated by the multi-billion dollar global settlement in November 2013.

The minimally covered story by the MSM financial press is the announcement of defence’s request for postponement of Mr Martoma’s sentencing hearing, originally scheduled for 10th June, a day before Mr Cohen 58th birthday.

When FPM searched keywords “Martoma sentence” on his scheduled trial date, there was minimal coverage of the online news about the postponement. Is it possible that New York Times DealBook site and the Stateside pink sheets “Wall Street Journal” and others are concealing the important announcement of the sentence hearing being kicked into the proverbial long grass. Only Bloomberg and its sub-division BusinessWeek seemed to be reporting at all. A wide-circulation PR announcement about the sentence hearing delay would have raised too many questions. So Mr Cohen’s PR-agent Gasthalter’s Gas and SEC spokesman may strategically have disseminated news only to selective journalists.  A conspiracy and mere journalistic incompetence are also probable explanation to the omission. A delay in court proceedings which will allow Mr Martoma to still plea bargain with prosecution for a reduced sentence or accept facing severer sentence and financial penalty. In dramatic terms, the prosecution is haranguing Mr Martoma for an un-deliberated hurried decision, by seeking a postponement only till the month-end of June. If prosecutors are involved in the stage-managed theatrics, post global settlement, then shame on the profession. The Probation Department had reportedly (see excerpt below) sent Mr Martoma’s attorneys sentencing guidelines which must have had him and his beautiful wife and three children jumping out of their skins:

…Martoma argues federal sentencing guidelines require a term of between 5 and 6 1/2 years. He claims he’s responsible only for the bonus he received, not the entire gain by SAC… Martoma’s lawyers requested in a letter to U.S. District Judge Paul Gardephe last week that the June 10 sentencing be postponed for more than a month, citing a late report by the court’s Probation Department. The department said sentencing guidelines call for Martoma to receive between 15.7 years and 19.6 years in prison, according to a court filing by Martoma. Federal prosecutors in the office of Manhattan U.S. Attorney Preet Bharara agreed to the delay, but want it rescheduled for later this month… Bloomberg BusinessWeek June5th, 2014

Talk about mosaic research! That’s what understanding the public relations announcements via the pandering muppets of the mainstream financial media is like. Alternatively, ask Sherlock Holmes to understand conclusions! The reporting is tantamount to information degradation of very little added value. That’s why we had the old maxim “Don’t believe everything you read in the papers!

Tuesday 10 June 2014

The Calm Before The Storm: SAC Takeaways – Part 1

In the long-running insider trading saga of billionaire hedge fund manager Steven A. Cohen and his eponymous firm SAC Capital - a firm nowadays with a face-lift as “Point72 Asset Management”- there are still a few twists in the tale.

Fund Portfolio Management (FPM) for its “No Smoke Without Fire” investment enterprise on reputation risk suggest that today’s expected announcement (June 10th) about Mathew Martoma’s sentencing could yet herald a fault line of tremors for Mr Cohen personally and set a precedent for the hedge fund industry. Especially in regards to the extent of criminal punitive sentencing in a caper that has been headlined as the “biggest insider trading scheme in history”, making the participants profits and/or avoiding losses to the princely tune of US$ 275 mn.

FPM expects the severity of the formulaic and deterrent-message in the sentencing to be significantly monumental. Seeing that Mr Martoma’s convicted crime exacted a record US$275 mn in ill-gotten gains, b) that he instigated connection and payments with the inside-information provider named Professor Sidney Gilman (a neurologist expert group witness who secretly provided non-public information on clinical trials of an Alzheimers-cure drug); and c) that his ‘offence level’ leads him right to the top of the conspiracy tree to Mr Cohen himself, via the 20-minutes conversation in July 2008 just before SAC Capital started unwinding it position in Alzheimer drug companies Elan and Wyeth.

FPM principle in his conscionable deliberation would expect the sentence to be harsh on a deterrent grounds basis, even though he was indicted and convicted on three counts, because of his central role in the conspiracy. And additionally, to induce Mr Martoma to co-operate with US prosecutors given the 6-8 years sentencing we expect today. Stop Press! At the request of Mr Martoma's defence attorneys the sentence hearing has been postponed and publically press-announced 5th June 2014! When the sentencing hearing, presided by Judge levies personal forfeitures and fines relating to the reported US$ 9 mn that Mr Martoma received as bonus for conspiring towards US$ 275 mn of illicit gains, could also be an inducement for Mr Martoma to squeal on Mr Cohen. Time in jail versus weighed up against hoarded assets / money hidden from prosecutors is the old trade off facing Mr Cohen's cronies in sentencing played out! How much is Mr Martoma’s silence worth to Mr Cohen? Mr Martoma has  3 children and a beautiful wife to sweat in hardened prison environment.  

Most of the pandering public press are speculating about 10 years sentence for Mr Martoma, our suggestion of 6-8 years analyses that in systematic-wide efforts to protect and earn the largesse of billionaire entrepreneur Mr Cohen, a maximum guideline sentence could not be applicable. Otherwise Mr Martoma would proffer the main cull for the baying public anger and show some moral rectitude rather than be the sacrificial lamb for Mr Cohen. We look at he another high profile case where the sentencing was also funninly leanient!!!

The 17-years veteran of SAC Capital and friend of Mr Cohen, Michel Steinberg, is the other most senior racketeer in the web of securities fraud seduced by illegal insider trading. Following his conviction in December on all five indictments, last month he received three and half years jail sentence. The prosecution had asked for a 5-6 years sentence. He got off lightly and the Judge even described him as "

a basically good man". Astonishing, the civility afforded to white collar criminals! That court case presiding Judge Sullivan also ordered Mr Steinberg to forfeit $365,000 and pay a fine of US$2 mn. Aggregate punitive redress by Mr Steinberg will include legal costs estimated by some legal experts as up to US$10 mn. Crime really does pay! at least on this occasion for Mr Steinberg’s attorney Barry Berke and his firm. He is currently free on bail awaiting the outcome of the US Court of Appeals for the Second Circuit in a related case-point in law. 

The case under Second Circuit appellate panel is expected to make imminent decision as to reversing or vacating the existing convictions. The convicted case involves the notorious ex-SAC Capital employees Anthony Chiassons (Co-founder of now defunct Level Global Investors) and Todd Newman (portfolio manager at also wound-down Diamondback Capital). They respectively received sentences of six and a half years and four and a half years, and are free on bail pending the appeal. Notice the central role of  Mr Chiasson and the severer sentence terms.  The argument that both men are presenting is that it is not illegal to trade on non-public, confidential information if they did not know that the person providing the information was receiving some benefit.

This SAC-saga still obviously has legs to run yet further!