Posts tagged ‘New York Times’

Ping Pong Vet Blasts Goldman

Source: Photobucket

In a recent New York Times op-ed, Greg Smith, former Goldman Sachs Group Inc. (GS) employee and ping pong medalist at the Jewish Olympics, came out with an earth-shattering revelation… he discovered and revealed that Goldman Sachs was not looking out for the best interests of its clients. I was floored to discover that a Wall Street bank valued at $60 billion would value profits more than clients’ needs.

Hmmm, I wonder what new eye-opening breakthrough he will unveil next? Perhaps Smith will get a job at Las Vegas Sands Corp. (LVS) for 12 years and then enlighten the public that casinos are in the business of making money at the expense of their customers. I can’t wait to learn about that breaking news.

But really, with all sarcasm aside, any objective observer understands that Goldman Sachs and any other Wall Street firm are simply middlemen operating at the center of capitalism – matching buyers and sellers (lenders and borrowers) and providing advice on both sides of a transaction. As a supposed trusted intermediary, these financial institutions often hold privileged information that can be used to the firms’ (not clients) benefit.

Most industry veterans like me understand how rife with conflicts the industry operates under, but very few insiders publicly speak out about these “dirty little secrets.” Readers of Investing Caffeine  know I am not bashful about speaking my mind. In fact, I have tackled this subject in numerous articles, including Wall Street Meets Greed Street written a few months ago. Here’s an excerpt**:

“Wall Street and large financial institutions, however, are driven by one single mode…and that is greed. This is nothing new and has been going on for generations. Over the last few decades, cheap money, loose regulation, and a relatively healthy economy have given Wall Street and financial institutions free rein to take advantage of the system.”


As with any investment, clients and investors should understand the risks and inherent conflicts of interest associated with a financial relationship before engaging into business. While certain disclosures are sorely lacking, it behooves investors and clients to ask tough questions of bankers and advisors – questions apparently Mr. Smith did not ask his employer over his 12 year professional career at Goldman Sachs.

Reputational Risk Playing Larger Role

Even though Goldman called some clients “muppets,” Smith states there was no illegal activity going on. Regardless of whether the banks have gotten caught conducting explicit law-breaking behavior, the public and politicians love scapegoats, and what better target than the “fat-cat” bankers. With a financial crisis behind us, along with a multi-decade banking bull market of declining interest rates, the culture, profitability-model, and regulations in the financial industry are all in the midst of massive changes. As client awareness and frustration continue to rise, reputational risk will slowly become a larger concern for Wall Street banks.

Could the Goldman glow as the leading Wall Street investment bank finally be getting tarnished? Well, besides their earnings collapsing by about 2/3rds in 2011, the selection of Morgan Stanley (MS) and JPMorgan Chase (JPM) ahead of Goldman Sachs as the lead underwriters in the Facebook (FB) initial public offering (IPO) could be a sign that reputational risk is playing a larger role in investment banking market share shifts.

The public and corporate America may be slow in recognizing the shady behavior practiced on Wall Street, but eventually, the excesses become noticed. Congress eventually implements new regulations (Dodd-Frank) and customers vote with their dollars by moving to banks and institutions they trust more.

I commend Mr. Smith for speaking out about the corrupt conflicts of interest and lack of fiduciary duty at Goldman Sachs, but let’s call a spade a spade and not mischaracterize a situation as suddenly shifting when the practices have been going on forever. Either he is naïve or dishonest (I hope the former rather than the latter), but regardless, finding a new job on Wall Street may be challenging for him. Fortunately for Mr. Smith, he has something to fall back on…the professional ping-pong circuit.

***Other Relevant Articles and Video:

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in FB, GS, MS, JPM, LVS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

March 17, 2012 at 4:57 pm 1 comment

Groupon: From $0 to $6 Billion in 26 Months

Click Here to View Interview

Between football and basketball television viewing, along with non-stop eating, I have found little time to update Investing Caffeine. However, between Oreo and eggnog curls I did find time to plop on the couch and watch an interesting interview with Groupon CEO, Andrew Mason. This is the internet-based coupon company that started operations in November 2008 and has already grown to 40 million members (adding 3 million per week). Within 26 short months, Groupon has already established a presence within 35 countries and supposedly garnered a $6 billion takeover offer from Google (GOOG).

Regardless of whether Groupon becomes a multi-billion division of Google, I’m certain Mr. Mason’s wallet has grown fatter over this year, just as I sit down for another 4,000 calorie, belt-busting, holiday meal.  Happy viewing and Happy New Year!

Related Article: Valuing Facebook & Twitter  

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and GOOG, but at the time of publishing SCM had no direct position in Groupon, KFT, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

December 27, 2010 at 12:35 am 1 comment

V-Shaped Recovery or Road to Japan Lost Decades?

The Lost Decades from the 1989 Peak

The Lost Decades from the 1989 Peak

On the 6th day of March this year, the S&P 500 reached a devilish low of 666. Now the market has rebounded more than 50% over the last five months. So is this a new bull market throttled into gear, or is it just a dead-cat bounce on route to a lost two decades, like we saw in Japan?

Smart people like Nobel Prize winner and economist Paul Krugman make the argument that like Japan, the bigger risk for the U.S.  is deflation (NY Times Op-Ed), not inflation.

Now I’m no Nobel Prize winner, but I will make a bold argument of why Professor Krugman is out to lunch and why we will not go in a Japanese death-like, deflationary spiral.

Let’s review why our situation is dissimilar from our South Pacific friends.

Major Differences:

  • Japanese Demographics: The Japanese population keeps getting older (see UN chart), which will continue to pressure GDP growth. According to the National Institute of Population and Social Security Research, by 2055 the Japanese population will fall 30% to 90 million (equivalent to 1955 level). Over the same time frame, the number of elderly under age 65 is expected to halve. To minimize the effects of the contraction of the working population, it will be necessary both to increase labor productivity, loosen immigration laws, and to promote the employment of woman and people over 65. Japan’s population is expected to expected contraction in Japan’s labor force of almost 1% a year in 2009-13.

    Source: The Financial Times

    Source: The Financial Times/UN (Declining Workforce Per 65 Year Old)

  • Bank of Japan Was Slow to React: Japan recognized the bubble occurring and as a result hiked its key lending discount rate from 1989 through May 1991. The move had the desired effect by curbing the danger of inflation and ultimately popped the Nikkei-225 bubble. Stock prices soon plummeted by 50% in 1990, and the economy and land prices began to deteriorate a year later.  Belatedly, Japan’s central bank began a series of interest rate-cuts, lowering its discount rate by 500-basis points to 1% by 1995. But the Japanese economy never recovered, despite $1-trillion in fiscal stimulus programs.
  • The Higher You Fly, the Farther You Fall: The relative size of the Japanese bubble was gargantuan in scale compared to what we experienced here in the United States. The Nikkei 225 Index traded at an eye popping Price-Earnings ratio of about 60x before the collapse. The Nikkei increased over 450% in the eight years leading up to the peak in 1989, from the low of about 6,850 in October 1982 to its peak of 38,957 in December 1989. Compare those extreme bubble-icious numbers with the S&P 500 index, which rose approximately a more meager 20% from the end of 1999 to the end of 2007 (U.S. peak) and was trading at more reasonable 18x’s P-E ratio.

    Source: Dow Jones

    Source: Dow Jones

  • Debt Levels not Sustainable:  Japan is the most heavily indebted nation in the OECD. Japan is moving towards that 200% Debt/GDP level rapidly and the last time Japanese debt went to 200% of GDP (during WWII), hyper-inflation ensued and forced many fixed income elderly into poverty. Although our debt levels have yet to reach the extremes seen by Japan, we need to recognize the inflationary pressure building. Japan’s debt bubble cannot indefinitely sustain these debt increases, leaving little option but to eventually inflate their way out of the problem.
  • Banking System Prolongs Japanese Deflation: Despite the eight different stimulus plans implemented in the 1990s, Japan lacked the fortitude to implement the appropriate corrective measures in their banking system by writing off bad debts. An article from July 2003 Barron’s article put it best:
After the collapse of the property bubble, many families and businesses had debts that far exceeded their devalued assets. When a version of this happened in America in the savings-and-loan crisis, the resulting mess was cleaned up quickly. The government seized assets, sold them off, bankrupted ailing banks and businesses, sent a few crooks to jail and everything started fresh, so that deserving new businesses could get loans. The process is like a tooth extraction — painful but mercifully short. In Japan this process has barely begun. Dynamic new businesses cannot get loans, because banks use available credit to lend to bankrupt businesses, so they can pretend they are paying their debts and avoid the pain of write-offs. This is self-deception. The rotten tooth is still there. And the Japanese people know it.


The Future – Rise of the Rest: Fareed Zakaria, Newsweek editor wrote about the “Rise of the Rest” in an incredible article (See Sidoxia Website) describing the rising tide of globalization that is pulling up the rest of the world. The United States population represents only 5% of the global total, and as the technology revolution raises the standard of living for the other 95%, this trend will only accelerate the demand of scarce resources, which will create a constant inflationary headwind.

For those countries in decline, like Japan, demand destruction raises the risk of deflation, but historically the innovative foundation of capitalism has continually allowed the U.S. to grow its economic pie. Economic legislation by our Congress will help or hinder our efforts in dealing with these inflationary pressures.  One way is to incentivize investment in innovation and productive technologies. Another is to expand our targeted immigration policies towards attracting college educated foreigners, thereby relieving aging demographics pressures (as seen in Japan). These are only a few examples, but regardless of political leanings, our country has survived through wars, assassinations, terrorist attacks, banking crises, currency crises, and yes recessions, to only end up in a stronger global position.

This crisis has been extremely painful, but so have the many others we have survived. I believe time will heal the wounds and we will eventually conquer this crisis. I’m confident that historians will look at the coming years in favorable light, not the lost decades of pain as experienced in Japan.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 10, 2009 at 4:00 am 4 comments

High Frequency Trading: Buggy Whip Deja Vu

Slow Frequency Traders (SFT) Moving the Direction of the Buggy Whip

Slow Frequency Traders (SFT) Moving the Direction of the Buggy Whip

Innovation can be a thorn in the side of dying legacy industries. With the advent of the internal combustion engine from Swiss inventor Isaac de Riva (1807) and the subsequent introduction of Henry Ford’s affordable Model-T automobile (1908), the buggy whip industry came under assault and eventually disappeared. I’m sure the candle lobbyists weren’t too happy either when Thomas Edison first presented the light bulb (1879).

Legacy broker dealers and floor traders are suffering similar pains as those in the buggy whip industry did. New competitors are shrewdly exploiting technology in the field of High Frequency Trading (HFT) and as a result are gaining tremendous market share. Supercomputers and complex mathematical algorithms have now invaded the financial market exchanges, shrinking the profit pools of slow-moving, fat-cat broker dealers (a.k.a., Slow Frequency Traders – SFT) by simply trading faster and smarter than the legacy dealers and exchanges. As Dan Akroyd says to Eddie Murphy in the movie Trading Places, before making millions on the commodities trading floor, “It’s either kill, or be killed.” And right now it’s the traditional broker dealers and floor traders that are getting killed. According to a study by the Tabb Group, 73% of U.S. daily equity volume currently comes from high frequency traders (up from 30% in 2005). And despite only representing 2% of the relevant, actively trading financial institutions, the HFT industry generated an estimated $21 billion in profits last year.

Source: The Financial Times

Source: The Financial Times

HFT Controversy: So what’s the big controversy regarding HFT? Critics of these high speed traders (including Joe Saluzzi at Themis Trading) claim the fast traders are unfairly using the technology for selfish, greedy profit motives, and in the process are disadvantaging investors. Screams of “front-running,” effectively using the information obtained from fast computer processes to surreptitiously trade before poor, unassuming individual investors can react, is a foundational argument used by opponents. Also the detractors argue that the additional liquidity (traditionally considered a positive factor by academics) provided by the HFT-ers is “low-quality” liquidity because the fast trades are believed to suck valuable liquidity out of the system and contribute to heightened volatility. HFT participants are equated to aggressive ticket scalpers, who in the real world buy low priced tickets and later gouge legitimate buyers by reselling the original tickets at outrageously high prices.


  • On HFT Price Impact: If HFT is so damaging for individual investors, then why have price spreads narrowed so dramatically since the existence of this fast style of trading? The computerization and decimalization of trading has made trading more efficient – much like ATM machines and e-mail have made banking and document mailing more efficient. Investors can buy at lower prices and sell at higher prices – sounds like a beneficial trend to me.
  • On HFT Volatility: If HFT-ers are demonized for the market crash, then why isn’t anyone patting them on the back or buying them a drink for the ~+50% surge in the equity markets since March of this year? Maybe the investment banks that were levered 30x’s, or the $100s of billions in unregulated mortgage debt stand to shoulder more of the volatility blame?
  • On HFT Price Discovery: At the end of the day, if HFT partakers (robots) are actually manipulating prices,  then reasonable and greedy capitalists (humans) will stabilize prices by either scooping up irrationally low-priced stocks and/or selling short  illogically high priced securities.

On HFT Front-Running and Flash Orders: The New York Times recently ran an article describing a very specific one sided scenario where “flash orders” tipped off HFT traders to unfairly exploit a profitable trade in Broadcom (BRCM) stock. However, trades do not occur in a vacuum. Other scenarios could have easily been drawn up to show HFT-ers losing money on their computer-based strategy. “Quite possibly these flash orders are happening as an unintended consequence of an automated algorithmic trading program,” says Alex Green, Managing Partner at AMG Advisory Group, an institutional trading consulting firm.  Flash orders are used when trying to display an order for a small amount of time while waiting to be displayed in the National Best Bid Best Offer (the bid-ask quotes viewable to the  public). 

In addition, if front-running is indeed occurring, it is happening at prices between the bid-ask spread, thereby incentivizing other market makers to lower their offer price and raise their bid price (a positive development for investors). Any trading occurring outside the bounds of nationally displayed regulated price quotes constitutes illegal activity and can result in time behind bars.

Common Ground – Dark Pools: One area I believe I share common ground with the SFT-ers is on the issue of “dark pools.” In this murky realm, trading occurs in pools of anonymous buyers and sellers where no price quotes are displayed. These pools are bound by the same regulations as other exchanges, but due to their opaqueness are more difficult to police. According to a recent WSJ article, intensified scrutiny has fallen on these dark pools by the SEC because a large number flash orders are routed to them. Although flash orders may not in and of itself be a problem, there is more room for potential abuse in these dark pools.

Conclusion: When all is said and done, it is very clear to me that innovation through technology has translated into a huge gain for individual and institutional investors. It may take a PhD to write the code for a complex high frequency trading algorithm, however it doesn’t take a genius to figure out spreads have narrowed and liquidity has risen dramatically over the last decade – thanks in large part to HFT technological innovation. Certainly technology, globalization, along with the introduction of electronic communication networks (ECNs) like Direct Edge, flash orders, and dark pools have made trading complex. With a denser group of players and structures, it is important that SEC Chairman Mary Schapiro continue to regulate financial market exchanges with the aim of improved transparency and equality. As long as the trends of heightened liquidity and narrowed spreads continue, investors will benefit while the buggy whip lobbyists (legacy broker dealers and floor traders) will continue to scream.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

August 3, 2009 at 4:00 am 10 comments

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