Daily Alpha: Blunt Honesty, Strategic Oil Losses, BUSINESS ETHICS, and Accounting Cheats…

Daily Alpha: Blunt Honesty, Strategic Oil Losses, BUSINESS ETHICS, and Accounting Cheats…

Garrett Baldwin

Alternative Thinking on Blunt Hedgie Honesty… Strategic Oil Losses… BUSINESS ETHICS… Accounting Cheats… and the Ground Floor...

“I’ve failed to protect your capital.”

There isn’t a more succinct way to tell a group of investors that your hedge fund is down roughly 20% due to weakness in the healthcare sector.

If anyone has a better way, let Glenview Capital’s Larry Robbins know.

The above is what Robbins wrote in a letter this week. According to the Wall Street Journal, Robbins has had a very difficult last three months, exacerbated by sharp declines in biotech stocks.

The Journal said this is among the first public hints that hedge fund managers are under duress. Apparently, WSJ editors haven’t been paying much attention to other financial outlets that have been covering the Q3 bloodbath.

As we noted yesterday, Fortune offered a very strong piece about the herd mentality of hedge fund managers over the last year. Biotech stocks have been among their favorites, and as each attempts to out-jockey one-another, it turns out that owning the same stocks as rivals is now deemed a risk management strategy. The alarms have been ringing since August.

In 2014, the collapse of energy prices led to the closure of many different hedge funds, which all ended up owning the same oil-and-gas stocks that were on the decline. That same has been seen in the healthcare sector this year. It turns out that stock picking can be a dangerous game, especially when you’re not doing the picking, and instead just piggybacking off the next manager.

Great timing, as the next issue of Modern Trader, which subscribers receive later this week, centers on the debate between active versus passive management and the distinct conditions and actions that favor active managers against their benchmarks.

Turns out, copying directly off the next guy’s portfolio isn’t a reliable management approach over the long term.

"This behavior was entirely unacceptable and is not tolerated at our firm.”

Speaking of copying of the person right next to you…

JPMorgan has joined Goldman Sachs this week in announcing that it has fired junior level employees for cheating on internal training tests…

How did this become such a fad so quickly? Goldman recently made a similar announcement after releasing 20 analysts. DealBreaker notes that not only were Goldman analysts lazy – you could fail and retake the test – and underprepared – a 70 was passing, but many were just Googling the answers without thinking much about what IT might be doing to monitor them.

Meanwhile, JPM went ahead and told some trainees to book their own flights home after receiving the boot. They were caught using crib notes and for their wandering eyes during an accounting test.


It’s just one little accounting test. Why does it matter!!!

When has cheating in accounting ever led to problems for a company? 


Sure, that was just the one time... right? Oh...

Come on, these sort of events are very rare and have little impact on the markets? Oh.…

Okay... well, at least everyone learned their lessons, and it's not happening anymore, right? OHHHHH…

"The company I’ve heard described in the press in the past week is not one that I recognize."

Valeant Pharmaceuticals is either the best buy in the world right now or the best potential short.

Friday might paint a better picture when Bill Ackman at Pershing Square Capital holds a press conference to discuss his little-more-than-5% stake in the firm.

The accusations of questionable accounting practices hasn’t attracted the action of regulators just yet, but that day might be coming soon as pension funds begin to recognize their exposure due to widespread VRX ownership by the hedge funds in which they’ve invested.

Valeant CEO J. Michael Pearson said that the accusations are false, stressed the firm’s transparency, and said the firm has strong BUSINESS ETHICS

Meanwhile, it’s clear that the media isn’t feeling too sorry for Bill Ackman, who is now down ten figures over this VRX position.

The Deal wasn’t too subtle in pointing out that it was a short-seller that fueled the market’s sentiment against Valeant by saying Ackman was receiving "a taste of his own medicine."

It’s a direct shot at Ackman’s long-standing short position against Herbalife.

Pay attention Friday… this could produce fireworks.

“Now, for the finance-minded reader, the government's decision to sell oil now is embarrassing.”

Myles Udland at Business Insider breaks down the economics of Congress’ decision to sell oil over the next decade from the Strategic Petroleum Reserve, or SPR, in order to finance infrastructure projects between 2018 and 2025. Roughly 58 million barrels will go on sale.

And we stress the word “Sale.”

Forget the politics of saving oil for a rainy day, particularly when the U.S. is awash in oil.

Instead, just focus on the math. The Department of Energy says that the U.S. paid roughly $29.70 per barrel when building the reserve. Of course, adjust that for inflation, and you get $74 a barrel, according to ClearView Energy Partners. Then, you have to factor in the cost of storage infrastructure and maintenance. 

That combined figure would be the breakeven price for the assets.

And oil prices are probably half the value of what the breakeven figure would be.

Now, the U.S. isn’t a hedge fund, and it’s clear no one in Washington cares about turning a profit. They're selling a little more than three whole days of U.S. demand.

But why unload these assets? To build and repair U.S. roads and bridges.

Is this the only alternative?

First, the U.S. could borrow money while interest rates are at near-zero lows… 

Or, better yet, it could sell the one asset that it has more than it knows what to do with…

If the government really wants to sell a commodity, make a ton of money… and fund infrastructure… START HERE!

The U.S. government owns more land than France, Spain, Germany, Poland, Italy, the United Kingdom, Austria, Switzerland and the Netherlands combined.

Government-owned land is terribly mismanaged and an area the size of POLAND ALONE could be divested to pay for all the roads and bridges one could ever want...

Anyway, Matthew Yglesias at Vox offers an argument in somewhat defense of Congress’ position and decision to sell the oil below breakeven cost.

If you can get through his full rambling and misspellings without needing a drink, you win Most Patient Person of the Day.

A topic near and dear to our heart – the economics of technology and automation and impact on income – has faced a bloodbath of wrongful analysis on his part over the last few years.

"That’s why I want to introduce you to GROUNDFLOOR."

In case you missed it yesterday, the Alpha Pages has announced a new contributor to our content platform as we build a commitment to Real Talk on Alternative Investments.

Dara Albright, a renowned speaker, writer, and influencer in the crowd-finance community, has introduced her recurring column on alternative investment platforms. The company she profiled yesterday is called GROUNDFLOOR, the first micro-lending community for real estate.

For a full breakdown of this platform and potential opportunities in the crowd-finance space, read this piece, and check back regularly for more of Dara Albright’s insight.

See you Wednesday, a bit earlier than tonight's late post...


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