Crypto Scam, The Crypto Company, Collapses on Non-Existent Volume

Content originally published at iBankCoin.com

 

This little pink sheeter ran up 20,000% because MUH Bitcoin, hitting a market cap of $12.6b, and now it"s all unraveling under the hard realities of mathematics driven by greed.

Even down 65% for the day, on 11,000 shares traded, the market cap is still over $4 billion.

According to the most recent financials published with the SEC, the company had a whole $3 million in cash.

Revenues were a touch under $500,000 with losses of $1.2 million.

Regarding their recent stock sale:

On June 7, 2017, the Company entered into (i) a Share Purchase Agreement (the “Restricted Share Purchase Agreement”) with Crypto Sub, and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company; and (ii) a Share Purchase Agreement (the “Free Trading Share Purchase Agreement”, and together with the Restricted Share Purchase Agreement, the “Share Purchase Agreements”) with Crypto Sub, Uptick Capital, LLC (“Uptick Capital”) and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company. Pursuant to the Share Purchase Agreements, the shareholders of the Company sold an aggregate of 11,235,000 shares of common stock of the Company to Crypto Sub and 100,000 shares of common stock of the Company to Uptick Capital, representing an aggregate of 100% of the issued and outstanding common stock of the Company as of such date, for aggregate proceeds of $411,650, including escrow and other transaction related fees to the selling shareholders (the “Stock Sale”). A portion of the acquisition cost equal to $399,300 is expensed as a general and administrative expense in the accompanying consolidated statement of operations.

The entire set up is highly suspect, reminiscent of the countless shell games played before by pink sheet operators.

Here are the clowns behind this brazen scheme.

On March 9, 2017, Crypto Sub issued 125,000 shares of common stock of Crypto Sub to an employee of Crypto Sub, in exchange for an initial investment made in the form of cryptocurrency, valued at $100,000, based on the fair value of the investment on the date of such investment. On June 7, 2017, the employee received (i) 1,875,000 shares of common stock of Croe in connection with the Stock Dividend issued by Crypto Sub, and (ii) 1,125,000 shares of common stock of Croe in exchange for all of the employee’s shares of Crypto Sub in connection with the Share Exchange.

On March 9, 2017, Crypto Sub issued 300,000 shares of common stock of Crypto Sub to James Gilbert, the President of the Company, in exchange for $200,000. On June 7, 2017, Mr. Gilbert received (i) 4,500,000 shares of common stock of Croe in connection with the Stock Dividend issued by Crypto Sub, and (ii) 2,700,000 shares of common stock of Croe in exchange for all of his shares of Crypto Sub in connection with the Share Exchange.

On March 9, 2017, Crypto Sub issued (i) 125,000 shares of common stock of Crypto Sub to Redwood Fund LP (“Redwood”) in exchange for $200,000; and (ii) 125,000 shares of common stock of Crypto Sub to Imperial Strategies, LLC (“Imperial Strategies”) in exchange for certain services rendered, valued at $200,000, as of the date of such issuance. Michael Poutre, the Chief Executive Officer of the Company, and Ron Levy, the Chief Operating Officer of the Company, are Chief Executive Officer and Chief Operating Officer, respectively, of Ladyface Capital, LLC, the General Partner of Redwood, and, as a result, had an indirect material interest in the shares owned by Redwood. Mr. Poutre is the sole member of MP2 Ventures, LLC, a member of Imperial Strategies, and, as of September 1, 2017, Mr. Poutre and Mr. Levy are Chief Executive Officer and Chief Operating Officer, respectively of Imperial Strategies and, as a result, have an indirect material interest in the shares owned by Imperial Strategies. On June 7, 2017, each of Redwood and Imperial Strategies received (i) 1,875,000 shares of common stock of Croe in connection with the Stock Dividend issued by Crypto Sub, and (ii) 1,125,000 shares of common stock of Croe in exchange for all of their shares of Crypto Sub in connection with the Share Exchange.

As of September 30, 2017, the Company pre-paid consulting fees of $60,000 reflected in prepaid expenses to MP2 Ventures, LLC, of which Michael Poutre, the Chief Executive Officer of the Company, is the sole member, for his services rendered as Chief Executive Officer.

Thus far, it appears James Gilbert, Michael Poutre, and Ron Levy are making a killing on this run up.

Additionally, a firm named John B. Thomas P.C., Uptick Capital, and Crypto Sub seem to be facilitating the transactions, acting as bankers for CRCW.

a Share Purchase Agreement (the “Free Trading Share Purchase Agreement”, and together with the Restricted Share Purchase Agreement, the “Share Purchase Agreements”) with Crypto Sub, Uptick Capital, LLC (“Uptick Capital”) and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company. Pursuant to the Share Purchase Agreements, the shareholders of the Company sold an aggregate of 11,235,000 shares of common stock of the Company to Crypto Sub and 100,000 shares of common stock of the Company to Uptick Capital, representing an aggregate of 100% of the issued and outstanding common stock of the Company as of such date, for aggregate proceeds of $411,650, including escrow and other transaction related fees equal to $1,525, to the selling shareholders (the “Stock Sale”). A portion of the acquisition cost equal to $399,300 is expensed as general and administrative expense in the accompanying statement of operations.

Crypto Sub is run by Michael Poutre, who is also CEO of CRCW.

Their CFO is a gent named Ivan Ivankovich, who was once CFO of Yellow Pages, former Ernst and Young stock.

Ivan brings more than 27 years of finance and operations management experience to his role as co-founder and Managing Partner of Full Stack Finance. The firm specializes in providing finance and accounting outsource services to early to mid stage venture-/angel-/PE-backed technology companies. His industry experience includes technology, internet services, online advertising, digital media publishing and telecommunications.

Ivan previously served as CFO of YellowPages.com and as Vice President, Portfolio Operations with Platinum Equity, a global acquisition firm specializing in the operation of technology companies. At Platinum Equity, Ivan’s primary responsibility was the management and operational supervision of its portfolio companies.

Ivan started his career with Ernst & Young joining their audit practice in Los Angeles. He is a Certified Public Accountant and a member of the California Society of CPA’s.

Mr. Poutre has a bit of a checkered past.

n July 16, 2010, Mr. Poutre entered into a Letter of Acceptance, Waiver and Consent (AWC) with the Financial Industry Regulatory Authority (FINRA) relating to alleged rule violations while he was associated with Maxx Trade, Inc. (Maxx Trade). The AWC set forth FINRA’s findings that Mr. Poutre had violated conduct rules by charging customers more than a fair markup for certain bond transactions. Without admitting or denying the allegations and findings against him, Mr. Poutre consented to a $5,000 fine and suspension from association with a FINRA member in all capacities for thirty (30) calendar days. Mr. Poutre signed the AWS without representation of counsel.

In another AWS related to Maxx Trade, on April 20, 2009, Mr. Poutre, without admitting or denying the allegations and findings against him, consented to a $5,000 fine and two-year suspension from association with a FINRA member in all capacities. FINRA alleged that Mr. Poutre had failed to provide complete responses to the staff’s requests for information and documents in violation of FINRA rules. Mr. Poutre signed the AWS without representation of counsel.

On November 8, 2006, Mr. Poutre submitted an Offer of Settlement (the “Offer”) to the National Association of Securities Dealers, Inc. (NASD), the predecessors of FINRA. The NASD accepted the Offer and issued an Order Accepting Offer of Settlement (the “Order”). Without admitting or denying the allegations and findings against him, Mr. Poutre consented to a $5,000 fine and ten business day suspension in all capacities. NASD alleged that Mr. Poutre had failed to provide certain emails the staff’s requests for emails in violation of NASD rules. Mr. Poutre signed the Offer of Settlement without representation of counsel.

In September 2009, Mr. Poutre filed a voluntary petition for a Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Central District of California. Discharge was finalized on November 16, 2010.

According to the FINRA website, Mr. Poutre has 10 disclosures and has bounced around from firm to firm like a god damned pinball since 1994.

Back in 2005, Mr. Poutre was discussed online for meddling with two bucket shops who attempted to merge.

And here are the disclosures, which are so numerous I am shocked he hasn"t been banned from the industry.

2013: Allegations

PLAINTIFF, AN EARLY-STATGE INVESTOR IN TOUCHTUNES MUSIC CORP., ALLEGES THAT THE DEFANDANTS TOUCHTUNES MUSIC INC.,

VARIOUS INSIDERS OF TOUCHTUNES AND UBS AND PAINEWEBBER ENGAGED IN "MINORITY SHAREHOLDER ABUSE, OPPRESSION, FRAUD AND SQUEEZE-OUT." PLAINTIFF ALLEGES THAT PLANINTFF MADE HIS INITIAL PURCHASE OF THE TOUCHTUNES SHARES IN 1998 AFTER

RECIEVING RESEARCH AND ADVICE FROM HIS PAINEWEBBER SECURITIES BROKER REGARDING TOUCHTUNES. TIME FRAME: 1998-2006.

Damage Amount Requested

$12,000,000.00

2010: Allegations

NASD RULES 2110, 2440 - MICHAEL A. POUTRE PLACED ORDERS FOR THE SALE OF CORPORATE BONDS AND PLACED CHARGES ON THE ORDERS FOR MARKUPS, WHICH WERE NOT FAIR AND REASONABLE, IN CONSIDERATION OF THE FACTORS SET FORTH IN NASD INTERPRETATIVE MATERIAL 2440(B). POUTRE SOLICITED SECURITIES TRANSACTIONS IN ACTIVELY TRADED, LIQUID CORPORATE BOND TRANSACTIONS FOR CUSTOMERS AND CHARGED THE CUSTOMERS MARKUPS OR MARKDOWNS THAT EXCEEDED 3% AND $400. MOST OF THE TRANSACTIONS WERE LARGE AND, BECAUSE THEY INVOLVED CORPORATE BONDS, A MARKUP OR MARKDOWN OVER 3% WOULD BE CONSIDERED EXCESSIVE. THE CORPORATE BONDS INVOLVED WERE READILY AVAILABLE AND INVOLVED LARGE TRANSACTIONS OF HIGHER PRICED SECURITIES, WHICH JUSTIFIED LOWER PERCENTAGE RATES. THE MARKUPS AND MARKDOWNS WERE NOT DISCLOSED TO THE CUSTOMERS AND THE NUMBER OF VIOLATIVE TRANSACTIONS ESTABLISHES A PATTERN OF EXCESSIVE MARKUPS AND MARKDOWNS. NOTHING IN POUTRE"S OR HIS MEMBER FIRM"S BUSINESS ACTIVITIES JUSTIFIED THE MARKUPS OR MARKDOWNS OF OVER 3%.

Resolution

Acceptance, Waiver & Consent(AWC)

Sanctions

Suspension

Registration Capacities Affected

ANY CAPACITY

Duration

30 DAYS

Start Date

8/2/2010

End Date

8/31/2010

Regulator Statement

WITHOUT ADMITTING OR DENYING THE FINDINGS, POUTRE CONSENTED TO THE DESCRIBED SANCTION AND TO THE ENTRY OF FINDINGS; THEREFORE, HE IS SUSPENDED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY FOR 30 DAYS. THE SUSPENSION IS IN EFFECT FROM AUGUST 2, 2010 THROUGH AUGUST 31, 2010.

Broker Comment

IN CONNECTION WITH THE EVENTS RELATED TO THIS DISCLOSURE ON MAY 20, 2009, I FILED A LAWSUIT AGAINST MAXX TRADE IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF KENTUCKY. I CLAIMED AMONG OTHER THINGS, THAT THE PRINCIPAL OWNERS OF MAXX TRADE ADDED, WITHOUT MY KNOWLEDGE, A SEPARATE COMMISSION ON TOP OF THE FAIR AND REASONABLE COMMISSION I CHARGED MY BOND CLIENTS. THIS RESULTED IN THE IMPERMISSIBLE MARK-UPS THAT WERE THE SUBJECT OF THIS DISCLOSURE.

I ALSO MADE THESE ALLEGATIONS IN CONNECTION WITH A PARALLEL FINRA ARBITRATION AGAINST MAXX TRADE AND ITS PRINCIPALS. PURSUANT TO THE ARBITRATION, ON FEBRUARY 15, 2011 I WAS AWARDED COMPENSATORY DAMAGES, INTEREST ATTORNEYS" FEES, AND COSTS WITH RESPECT TO MY CLAIMS AGAINST MAXX TRADE AND ITS PRINCIPALS.

Here he was suspended for two years.

2010 Allegations:

FINRA RULES 2010, 8210: POUTRE FAILED TO PROVIDE A COMPLETE RESPOND TO FINRA REQUESTS FOR INFORMATION AND DOCUMENTS IN A PENDING INVESTIGATION CONCERNING HIS OUTSIDE BUSINESS ACTIVITIES.

Resolution

Acceptance, Waiver & Consent(AWC)

Sanctions

Civil and Administrative Penalty(ies)/Fine(s)

Amount

$5,000.00

Sanctions

Suspension

Registration Capacities Affected

ALL CAPACITIES

Duration

TWO YEARS

Start Date

6/7/2010

End Date

6/6/2012

Regulator Statement

WITHOUT ADMITTING OR DENYING THE FINDINGS, POUTRE CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, HE IS FINED $5,000 AND SUSPENDED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY FOR TWO YEARS. THE FINE IS DUE AND PAYABLE EITHER IMMEDIATELY UPON RE-ASSOCIATION WITH A MEMBER FIRM FOLLOWING HIS SUSPENSION OR PRIOR TO ANY REQUEST FOR RELIEF FROM ANY STATUTORY DISQUALIFICATION RESULTING FROM THIS OR ANY OTHER EVENT OR PROCEEDING, WHICHEVER IS EARLIER. THE SUSPENSION IS IN EFFECT FROM JUNE 7, 2010, THROUGH JUNE 6, 2012.

Broker Comment

IN CONNECTION WITH THE EVENTS RELATED TO THIS DISCLOSURE, ON MAY 20, 2009, I FILED A LAWSUIT AGAINST MAXX TRADE IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF KENTUCKY. I CLAIMED AMONG OTHER THINGS, THAT THE PRINCIPAL OWNERS OF MAXX TRADE FILED CLAIMS WITH FINRA THAT WERE INACCURATE AND DEFAMATORY RESULTING IN I BECOMING THE SUBJECT OF THE FINRA INQUIRY THAT WAS THE SUBJECT OF THIS DISCLOSURE.

I ALSO MADE THESE ALLEGATIONS IN CONNECTION WITH A PARALLEL FINRA ARBITRATION AGAINST MAXX TRADE AND ITS PRINCIPALS. PURSUANT TO THE ARBITRATION, ON FEBRUARY 15, 2011 I WAS AWARDED COMPENSATORY DAMAGES, INTEREST, ATTORNEYS" FEES, AND COSTS WITH RESPECT TO MY CLAIMS AGAINST MAXX TRADE AND ITS PRINCIPALS.

This man has been a wrecking ball in the industry and now presides over a multi-billion dollar scam. Ca

Biggest Short Squeeze In 11 Months Sends S&P 500 Surging Above 2,600

Equity investors, corporate boards, and momo machines are panic-buying stocks this morning, sending the S&P 500 above 2600 for the first time ever... as the yield curve crashes to decade flats...

VIX down, Stocks Up...

 

While USDJPY momo is helping, stocks are quite decoupled...

 

And so are bonds...

 

But it"s all about the squeeze... the biggest short squeeze since December...

Just Two Charts

Before the cash equity market opens, we thought these two charts may help...

FX carry is not helping...

 

And bonds ain"t buying it...

 

Bonus Chart - the yield curve just hit a new cycle low...

The Swiss National Bank Now Owns A Record $88 Billion In US Stocks

In the third quarter of 2017, one in which the global economy was supposedly undergoing an unprecedented "coordinated growth spurt", and in which central banks were preparing to unveil their QE tapering intentions, in the case of the ECB, or raising rates outright, at the Fed, what was really taking place was another central bank buying spree meant to boost confidence that things are now back to normal, using "money" freshly printed out of thin air, and spent to prop up risk assets around the world by recklessly buying stocks with no regard for price or cost.

Nowhere was this more obvious than in the latest, just released 13F from the massive hedge fund known as the "Swiss National Bank." What it showed is that, just like in the prior quarter, and the quarter before that, and on, and on, the Swiss central bank had gone on another aggressive buying spree and following its record purchases in the first quarter, the central bank boosted its total holdings of US stocks to an all time high $87.8 billion, up 4.2% or $3.5 billion from the $84.3 billion at the end of the second first quarter.

As reported earlier this week, as of Sept.30, the Swiss central bank had accumulated foreign exchange worth 760 billion francs (roughly the same in USD) due to its relentless open market interventions to depress the Swiss franc, and has "invested" those funds created out of thin air in both stocks and bonds. At the end of the second quarter, it held 20% in equities, of which the bulk was in US stocks.

While we are far beyond the point of debating central bank intervention in equity markets (we do want to remind readers that until several years ago, it was considered "fake news" to even mention it, and those who accused central bankers of manipulating stock markets were said to be paranoid tinfoil basement dwellers), we want to point out that unlike the BOJ, which at least keeps its capital markets distortion local, the SNB, which likewise creates money out of thin air (then sells it for dollars in an attempt to keep the Swiss franc depressed) is actively causing substantial price distortions in the US.

While we doubt this will be investigated with stocks are at all time highs, we look forward to the Congressional hearings after the crash when the scapegoating and fingerpointing begins as it always does, and everyone is "stunned" to learn that central banks were responsible for blowing the biggest asset bubble the world has ever seen by directly buying stocks.

What else did the SNB reveal in its 13F? Two main things.

First, its top 20 holdings are as shown in the following chart. The central bank was clearly not shy in adding to its top positions.

And while we have yet to learn if Warren Buffett was actively frontrunning the SNB once again during the quarter, by buying even more AAPL shares, a look at the SNB"s holdings of AAPL stock which again increased modestly to 19.2 million shares, making it a larger holder of AAPL stock than Schwab and Franklin Resources (with 18.3 and 17.0 million shares respectively), and just behind Janus with 20 million shares, shows one of the main reasons why the Nasdaq has until recently been hitting new all time highs on a daily basis.

The chart above also explains why Goldman, despite warning of rising client worries about record low volatility and record high valuations, remains bullish on the Nasdaq 100: after all, when a central bank can and does create money out of thin air, then splurges on the handful of tech companies that have the biggest impact on the broader market, pushing both the Nasdaq and all indices higher, what is the point of even talking about "risk"?

Source: SNB 13-F

Kass: "Investors Seemingly Learned Nothing From History"

Authored by Doug Kass via RealInvestmentAdvice.com,

“‘A bull market is like sex. It feels best just before it ends."” – Warren Buffett

Excuse me for being redundant, but the following Jim Rogers quote that I posted yesterday underscores Mark Twain’s famous quote that “history doesn’t repeat itself, but it often rhymes”:

“When things are going right, we all need a 26-year-old. There’s nothing better than a 26-year-old in a great bull market especially in a bubble. They’re fearless. They don’t know. It will never end. They will tell you why it will never end. They know that it cannot end and will never end. So in the bull market, you’ve got to have a 26-year-old. But when they end you don’t want the 26-year-old around… they make a lot of money. They don’t know why they made money. So they don’t know why they lose money. They don’t know what happened.“ -Jim Rogers on Realvision

Back in 1997 I wrote this editorial in the Other Voices section of Barron’s that echoed Rogers’ recent quote.

In the difficult business of piling up a fortune everyone has an infallible strategy and a set of assumptions, technical and./or fundamental, that leads them to investment nirvana.

But it is never easy. The rules change and so do the players.

From my perch I steadily have listened to the irrational being rationalized as the bulls declare, with straight-faced confidence, that valuations in the 95% decile should be ignored because a synchronized global expansion will “earn out” from these extended metrics.

This confidence is expressed despite a plethora of possible adverse outcomes, particularly in the interconnected world in which we live.

The positive outcome of steadily expanding global growth coupled with low inflation and equally low interest rates may yet prove to become reality. Geopolitical friction may subside. Political partisanship in Washington, D.C, may succumb to cooperation, leading to the initiation of tax and regulatory reform and the repatriation of overseas corporate cash. The Orange Swan may wake up and reject the extreme influences of the Republican right. Trump may stop threatening a war with North Korea in a ping-pong of outrageous and provocative tweets. The rate of growth in real GDP may expand to 3% and we may be in another new paradigm of uninterrupted growth. S&P profits will grow at a rate of 8% annually, ad infinitum. Natural disasters will be a thing of the past and global warming concerns are nonsensical. The North Korean Rocket Man may be all hat and no cattle. The proliferation of ETFs, which in number now exceed the number of listed equity securities, and the ever-present quant strategies that are ignorant of fundamentals may not yield a “flash crash,” easily accommodating any selling waves. Every dip will continue to be bought. And interest rates and inflation may be in a permanent stage of adolescence.

But, I am blinded by a sense of history, and the belief that few of the conditions in the last paragraph are likely to be met.

In our flat, interconnected and network world, the odds favor less stability over more stability.

To this observer the markets’ dominos are exhibiting signs of falling around all over — in consumer packaged goods, in (T)FANG, in retail and elsewhere. Yet the selective memory of the talking heads in the business media emphasize the narrowing field of outperforming stocks (e.g., Nvidia Corp. (NVDA) and Deere & Co. (DE) ) that have been working, failing to see those falling dominoes around them.

Fear and Doubt Have Left Wall Street

The ever-present risk to the contrarian is that, over the short term, the past literally is repetitive and the crowd typically outsmarts the remnant. Tuesdays always follow Mondays and Wednesdays follow Tuesdays. But as we extend time cycles, history seems to move from repeating itself to rhyming with the past.

History undoubtedly teaches lessons about investment, but it does not say which lesson to apply when. “Find value, always” is as good a precept as any, but value is subjective and its definition is liable to change. In highly speculative markets, value means, to most, “it is going up.”

Stay abreast because in bull markets there is rarely a clear demarcation between progress and fantasy. I remain of the strong belief that we are in a Bull Market in Complacency that likely ends poorly and that has reduced the upside and has expanded the potential market downside.

To the bullish cabal the market “feels” great now (for, as Warren Buffett says, it is because, like sex, if feels best at or near the end), but after an eight-year bull market it may be time to consider the investment contrary. As James Surowiecki wrote in “The Wisdom of Crowds”:

“Diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromise.”

Investment returns likely have been pulled forward by central bank liquidity, low interest rates and passive investing. However, over the next five years returns may be substandard at best, but more likely, negative. At worse, we face an incipient bear market.

As expressed in yesterday’s opener, the nature of and players in the investment business have changed. This helps to explain the Teflon nature of the S&P 500 Index.

But as Grandma Koufax used to say, “my matzah brei doesn’t grow to the sky,” and every day we move closer to a Minsky Moment.

The salutary environment perceived by many today may be transitory and weak in foundation.

The potential political, geopolitical, economic and market outcomes are many, and a clear and market-friendly path is not certain.

Bottom Line

The name of the game is money. It was Lord Keynes who first saw that the handling of it is a game. Most discussions of money and investing speak only of economics and statistics, but that’s only a part of the game. The other part is people, individually and together, the emotional investor and the irrational crowd.

And it again might be the market scene that is often (as it was in 2000 and 2007) seen only in kids’ eyes or in the eyes of older investors who behave like 26-year-olds at or near the end of every significant bull market cycle:

“‘See, see,’ said the Great Winfield. ‘The flow of the seasons ! Life begins again! It’s marvelous! It’s like having a son! My boys! My kids!"” -Adam Smith, “The Money Game”

Do some reading over the weekend as it appears that the only thing many investors have learned from history is that they haven’t learned from history.

Pine River Closing Master Fund Following Surge In Redemptions

Back in January 2016, we reported that Pine River Capital Management, then run by noted hedge fund investor Steve Kuhn, was shuttering its Fixed Income fund, and returning roughly $1.6 billion to investors. The wind down was surprising for one of the industry"s most prominent names: Kuhn was one of four managers who helped the Pine River Fixed Income Fund score some of the industry"s biggest gains. They included a 93% return in 2009, fueled largely by bets on the housing market.

Unfortunately, the hedge fund had remained unable to replicate its profitable ways in recent years, and according to both Reuters and Bloomberg, Pine River is closing its master fund following a wave of client withdrawals that would bring assets below $300 million.

The fund, which started in 2002, had about $1 billion in assets prior to the latest redemption schedule. Because the withdrawals would cause the portion of illiquid assets to increase relative to the overall fund, the managers discussed placing those investments in a segregated account called a side pocket.

As Reuters adds, clients said the request was a response to a move by investors to pull more money than Pine River expected from its $1 billion flagship fund, which has significantly lagged behind the S&P 500 the past two years. As a result, Pine River had asked fund investors in recent weeks if it could segregate roughly $90 million in illiquid assets to sell them off over time instead of immediately. The assets Pine River wanted to place in a side pocket included equity and debt in Africa and Latin America, according to Reuters sources, and equity in and loans made by online lending firm CircleBack Lending.

And while investors approved of that plan, the firm’s managers ultimately decided instead to close.

The reason for the untimely death of the fund is familiar: the multi-strat master fund suffered from years of lackluster performance against a backdrop of rising investor discontent with hedge funds’ high fees. According to investor documents, the fund gained 1.7% this year through August, and was up 1.4$ last year after dropping 2.75 percent the year prior. That compares with 11.9% and 12% in total returns by the S&P 500 for the YTD and 2016 periods. The fund"s average annualized return is 9% since its 2002 inception through August.

The redemptions in its flagship fund add to recent challenges for Pine River. Its assets under management dropped by more than 40% since a 2015 peak of about $15 billion and there has been turnover among its investment professionals, including the departure last year of key portfolio manager Steve Kuhn.

Steve Kuhn

As Bloomberg adds, the decision marks another turn for the Minnetonka, Minnesota-based hedge fund firm, which has closed a handful of funds and seen staff departures over the last year or so. In addition to the liquidation of its fixed income fund, Pine River is also closing its $560 million China hedge fund and ending long-short equity trading amid a shift toward event-driven strategies, Bloomberg reported this June and July. Additionally, the firm’s money manager Renos Dimitriou is planning on spinning out his $1.7 billion government bond-trading fund into a standalone company.

Pine River still oversees $1.5 billion in customized accounts and $4.1 billion across two real estate investment trusts according to Bloomberg. That’s a fall of nearly two-thirds from $15 billion in assets under management in 2015. Pine River is hardly alone: "since 2015, the hedge fund industry has lost more money than it’s attracted from investors in every quarter but one, according to Hedge Fund Research Inc. More hedge funds have closed than opened for the last two years."

Forget Tulips & Bitcoin - Here's The Real Bubble

While the broader market for Swiss stocks has risen modestly this year, one "entity" has outperformed its peers by such a staggering margin, it has left bamboozled market experts struggling for an explanation.

And that company is…the Swiss National Bank.

The price of a share in Swiss National Bank in August rose above 3,000 francs ($3,143) for the first time, more than double the level of a year ago, and up 50% since mid-July, as the Financial Times noted in a story about its performance.

Shares of the SNB trade like any other company listed on the Swiss stock exchange, though because of their price liquidity is somewhat thinner. The Swiss cantons together own 45% of the SNB while 15% is owned by cantonal banks and the remaining 40% by private individuals or companies. The Swiss Federal Government owns no shares.

Given the SNB’s holdings – it has demonstrated a voracious appetite for Apple stock and currently holds more than $80 billion in US stocks – the shareholder-backed hedge fund is also having one hell of a year. Perhaps it’s understandable that shareholders see these gains as a driver of value.

And of course, the FT has a few theories about what’s been driving the bank’s astounding gains.

One is that, because of the bank’s stellar P&L, it will almost certainly make a dividend payment this year (it has occasionally failed to do so, like in 2015). Dividend payments are fixed by law at a maximum of 15 Swiss franc per share.

If paid in full, that would amount to a yield of 50 basis points – far superior to the minus 15 basis-point yield on the country’s 10-year bond.

Another is that some German investing newsletter issued what amounts to a “buy” call:

“German investor newsletter Actien Börse encouraged a buying spurt after likening the shares in July to ultra-rare “Blue Mauritius” 19th century postage stamps. Trading in the 100,000 SNB shares is thin, so even modest buying or selling leads to significant price swings.”

Of course, these arguments seem specious: Investors could still probably lock in higher yields by buying Treasurys and hedging their exposure, as one example. And the influence of that newsletter sounds like it’s being overstated.

However, the FT hints at one possible driver that’s probably closer to the truth: Private investors are trying to front-run a possible share buyback by the central bank. As the FT notes, the SNB wouldn’t be the first central bank to buy back its shares.

“Another theory is that investors are speculating they might be bought out. Central bank buybacks have happened before. In the early 2000s, the Basel-based Bank for International Settlements — which acts as a bank to central banks — bought out its private shareholders so it could focus on its public service functions, rather than the interests of financial investors.”

Regardless of their motives, the stock’s gains are almost definitely being driven by private shareholders. As we reported last year during a smaller bout of appreciation in the SNB"s stock, it’s unlikely that a canton or a cantonal bank would buy the shares en masse because their ownership has been carved in stone for many years.

And as the FT notes…

Harder to explain, however, is why the price of SNB shares has risen so steeply this summer.

“Institutional investors do not invest in them, so there is no demand for analysis or coverage,” says Andreas Venditti, bank analyst at Vontobel in Zurich. “Since the impact of even small financial market moves on its financials is so huge, it would be difficult to do a reliable earnings estimate.”

The alternative is that a private investor is quietly buying up all the stock available. The single largest private shareholder is a German national called Theo Siegert, a German business leader and professor at Munich University. He owns 6.7% of the Bank, more than any Swiss canton except Bern. Still, if the buyer was Siegert, he would have to file a new report as a large shareholder once he crosses a 10% threshold.

While buybacks are unlikely, and a leveraged buyout of the central bank woud be impossible - though it"d make for an interesting case study - there’s only one probable conclusion left: The SNB is pushing global stock prices up, in the process creating the next bubble. And now private traders are gobbling up shares of the bank itself, adding a dangerous feedback loop to the equation.

The SNB isn’t the only central bank that trades publicly. Both the Bank of Japan and the Bank of Greece are publicly traded, as is the Bank of Belgium; but when it comes to massive wealth-multiplying asset purchases, the BOJ is the real master.

And we all know how that turned out. 

Amid Dreary Landscape, Event Funds Stage A Comeback

The US hedge fund industry is in rough shape as the Federal Reserve’s lift-all-boats monetary policy has made it increasingly difficult to beat the market. US hedge funds endured nearly $100 billion in redemptions last year, as only 30% of US equity funds beat their benchmarks. But as confidence in traditional stock pickers dwindles, so-called “event-driven” funds are attracting renewed interest in investors, particularly in Europe, where near-zero rates and relatively attractive valuations are expected to stoke a boom in M&A activity,Bloomberg reports.

After these funds experienced some high-profile stumbles in recent years – one such fund managed by John Paulson’s Paulson & Co. posted a 49% loss and endured billions of dollars in redemptions – some Europe-based funds are seeing billions in inflows. Kite Lake Capital Management, Everett Capital Advisors and Melqart Asset Management have garnered billions in fresh investor capital over the past two years.

“Kite Lake Capital Management almost doubled client assets this year, while Everett Capital Advisors nearly tripled its funds since launching in January 2016. The money overseen by Melqart Asset Management has grown 12-fold since the firm started less than two years ago.

 

The three event-driven funds have $1.5 billion in combined assets and invest across Europe, where an increasingly buoyant economy and record-low interest rates are boosting dealmaking. Their resurgence is part of a comeback effort by a hedge-fund industry that’s only now starting to recover from a wave of investor redemptions and years of disappointing returns.

 

"We like event-driven because there are lots of opportunities for them,’ said Philippe Ferreira, a strategist at Paris-based Lyxor Asset Management, which oversees $135 billion and is looking to increase its exposure to the strategy. Strong M&A volumes are rather good for merger arbitrage. They also have increased exposures to financials, which benefit from monetary policy normalization."

According to data from HFR via Bloomberg, event-driven funds returned on average 10% last year, more than twice the gains of the broader industry, and another 4 percent in the first five months of 2017. These gains occurred as the M&A failure rate was cut in half over the past 12 months, when US regulators opposed high-profile deals in the health-care, pharmaceuticals and telecom industries.

“This is luring investors back, particularly in Europe, where corporate earnings, faster growth and reduced political risk following elections in France helped boost European M&A volumes to $508 billion this year, up 14 percent from the same period of 2016. Transactions include Johnson & Johnson’s takeover of Swiss drugmaker Actelion Ltd.

 

Melqart said its assets have grown to $500 million from a launch size of $40 million in October 2015, with the fund making 48 percent for investors.

 

Kite Lake, which returned 13 percent last year, oversees about $625 million, up from $355 million in December, according to a company official. And the Everett Opportunities Fund said it’s getting closer to achieving the $550 million level at which it plans to shut to new money. The hedge fund made 10 percent for investors last year.”

Still, despite the rosy outlook, investors have continued to pull money from M&A-focused funds this year – though the pace of outflows has slowed somewhat. Investors pulled less than $4 billion from event-driven funds during the first four months of 2017, compared with about $60 billion over 2015 and 2016. Meanwhile, the number of new funds being launched rose during the first quarter for the first time in 12 months. The industry has attracted net inflows of $12 billion so far this year, helping push the AUM of hedge funds globally to a record $3.1 trillion.

Indeed, it seems the industry is beginning to recover after the industry saw its largest outflows last year since 2009 - making 2016 only the third year on record where investors pulled more capital than they allocated.

Bloomberg claims that the picture for event-driven funds outside Europe is somewhat less rosy as US merger volumes fall nearly 11 percent to $751 billion, following two strong years where companies spent trillions on M&A. Yet some US funds are already reaping hundred-million-dollar paydays from their merger bets. Amazon’s purchase of Whole Foods Market was a coup for activist hedge fund Jana Partners, which owns nearly 10% of WFM. After that highly publicized windfall, we wouldn’t be surprised if investors start asking their money managers to explore similar strategies.

An Absurd Unintended Consequence Of Abnormally Low Rates

By Chris at www.CapitalistExploits.at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW: An Absurd Unintended Consequence Of Abnormally Low Interest Rates

Even the dullest amongst us have heard about compound interest.

The story goes like this: you can become wealthy - not rich, but wealthy - by foregoing those lattes, $100 haircuts, and saving a decent portion of your income. You earn interest on those savings and let it compound.

By the time your hips are giving in and your bladder has begun to leak it"s all turned into a decent little stash while the Jones" next door who"ve spent their lives upgrading the Lexus every year and holidaying in Hawaii will be asking you for a loan to pay for the leaking roof.

This all works when you can actually earn interest on your money.

And so ever since our central bank overlords with their well intentioned but entirely destructive policies have driven rates through the floor the ability to achieve yield has been destroyed.

The distortions globally are truly breathtaking.

Take a look at this:

In the world of illiquid private assets such as venture capital and private equity asset prices are determined largely by:

1. The valuation based on the last successful financing round


2. Any liquidity event (trade sales, IPOs)


3. Or... "belly-upedness"

Last month the WSJ ran an article about Investindustrial, a European private equity fund run by one Andrea Bonomi who, while running an existing fund, just raised gobs of new money ($800m to be exact) and launched a new fund to buy the assets of the old fund.

Wait! What??

The story, according to the WSJ, goes like this:

"Buyout firms face increasing competition from patient investors like sovereign-wealth funds. One has found a way to play them at their own game: Investindustrial, a European buyout firm, is creating a new fund to buy €750 million ($800 million) of assets it already owns.

Investindustrial, founded by Italian dealmaker Andrea Bonomi, has decided on this novel course of action as it responds to greater competition for assets from institutions such as sovereign-wealth funds, which don’t have restrictions on how long they can own companies. The competition is pressuring buyout firms to devise new ways to own companies."

Maybe...

Let"s put ourselves in the shoes of Bonomi and ask a few of questions.

How would you solve a "valuation issue" as well as a "liquidity issue" when, after looking for buyers for your funds" assets, the intersection of willing buyer and that of your private equity fund"s NAV doesn"t intersect where it "should"?

If you could turn fictional paper profits into real ones with a liquidity event, would you?

If you could earn fees on both the buy and sell side of a transaction, any transaction, would you?

If you couldn"t find a buyer at the valuations you"ve been reporting to your LPs, pray tell, how would you solve both the "valuation" and "liquidity" problem?

Looks to me like Andrea is taking the mickey, but hey, if he can find fools investors willing to go along with it then who am I to be a buzz kill?

Tip of an iceberg...

Now consider pension funds who, in order to maintain their funding, need to deliver a particular return. Returns, I might add, which the liquid market are quite simply not providing them.

Remember, pension funds invest the vast majority in "safe" investments and are therefore predominately invested in fixed income markets, which brings me all the way back to the chart I started this discussion with. Yikes!

As you can see by going to zero or negative interest rates, the true market price of risk isn"t just distorted, it"s largely completely unknown at this point.

Since the market can"t function through proper price discovery mechanics quite literally every asset price globally - whether it be equities, bonds, real estate, and even cash - is distorted.

Ask any money manager what method they"re using to price risk premiums at and they"re all lost. Nobody really knows and yet we have to price assets somehow.

Private equity assets, for their part, provide these guys with an ability to extend maturities and on the face of it reduce volatility. After all, how volatile is an asset which only changes hands once every 5 to 10 years and one which has done nothing but go up as investors have been pushed further and further down the risk curve?

As Bloomberg recently pointed out:

"According to The Pew Charitable Trusts, allocations to alts by pension funds have gone from just 11 percent in 2006 to almost 30 percent today."

And as Credit Suisse in a research note mention:

"In 1980, there were only 24 private equity firms and deal volume only modestly exceeded $1 billion. Today, there are more than 3,000 U.S. private equity firms and assets under management for buyout funds are roughly $825 billion, up from $80 billion in 1996 and less than $1 billion in 1976.12 Two of the largest private equity firms, The Carlyle Group and KKR & Co, each have more than 720,000 employees in their portfolio companies, which means they both employ more people than any U.S. listed company except for Wal-Mart Stores, Inc."

Private equity ticks many of the required boxes for pension funds.

• Reduced volatility (until you have to sell),


• Higher returns.

And that, my friends, opens a whole new can of worms because, as the demographic pig moves through the python, redemptions will increase, meaning asset sales will need to be taking place. And this right at a time when global liquidity is contracting. But that is a fun topic for another edition of World Out Of Whack.

Question for the day

Cast your vote here and also see what others would do

- Chris

"Low and expanding risk premiums are at the root of nearly every abrupt market loss." — Raghuram Rajan, the governor of the Reserve Bank of India, who is one of the few economists who foresaw the financial crisis

--------------------------------------

Liked this article? Don"t miss our future missives and podcasts, and

get access to free subscriber-only content here.

--------------------------------------

An Absurd Unintended Consequence Of Abnormally Low Rates

By Chris at www.CapitalistExploits.at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW: An Absurd Unintended Consequence Of Abnormally Low Interest Rates

Even the dullest amongst us have heard about compound interest.

The story goes like this: you can become wealthy - not rich, but wealthy - by foregoing those lattes, $100 haircuts, and saving a decent portion of your income. You earn interest on those savings and let it compound.

By the time your hips are giving in and your bladder has begun to leak it"s all turned into a decent little stash while the Jones" next door who"ve spent their lives upgrading the Lexus every year and holidaying in Hawaii will be asking you for a loan to pay for the leaking roof.

This all works when you can actually earn interest on your money.

And so ever since our central bank overlords with their well intentioned but entirely destructive policies have driven rates through the floor the ability to achieve yield has been destroyed.

The distortions globally are truly breathtaking.

Take a look at this:

In the world of illiquid private assets such as venture capital and private equity asset prices are determined largely by:

1. The valuation based on the last successful financing round


2. Any liquidity event (trade sales, IPOs)


3. Or... "belly-upedness"

Last month the WSJ ran an article about Investindustrial, a European private equity fund run by one Andrea Bonomi who, while running an existing fund, just raised gobs of new money ($800m to be exact) and launched a new fund to buy the assets of the old fund.

Wait! What??

The story, according to the WSJ, goes like this:

"Buyout firms face increasing competition from patient investors like sovereign-wealth funds. One has found a way to play them at their own game: Investindustrial, a European buyout firm, is creating a new fund to buy €750 million ($800 million) of assets it already owns.

Investindustrial, founded by Italian dealmaker Andrea Bonomi, has decided on this novel course of action as it responds to greater competition for assets from institutions such as sovereign-wealth funds, which don’t have restrictions on how long they can own companies. The competition is pressuring buyout firms to devise new ways to own companies."

Maybe...

Let"s put ourselves in the shoes of Bonomi and ask a few of questions.

How would you solve a "valuation issue" as well as a "liquidity issue" when, after looking for buyers for your funds" assets, the intersection of willing buyer and that of your private equity fund"s NAV doesn"t intersect where it "should"?

If you could turn fictional paper profits into real ones with a liquidity event, would you?

If you could earn fees on both the buy and sell side of a transaction, any transaction, would you?

If you couldn"t find a buyer at the valuations you"ve been reporting to your LPs, pray tell, how would you solve both the "valuation" and "liquidity" problem?

Looks to me like Andrea is taking the mickey, but hey, if he can find fools investors willing to go along with it then who am I to be a buzz kill?

Tip of an iceberg...

Now consider pension funds who, in order to maintain their funding, need to deliver a particular return. Returns, I might add, which the liquid market are quite simply not providing them.

Remember, pension funds invest the vast majority in "safe" investments and are therefore predominately invested in fixed income markets, which brings me all the way back to the chart I started this discussion with. Yikes!

As you can see by going to zero or negative interest rates, the true market price of risk isn"t just distorted, it"s largely completely unknown at this point.

Since the market can"t function through proper price discovery mechanics quite literally every asset price globally - whether it be equities, bonds, real estate, and even cash - is distorted.

Ask any money manager what method they"re using to price risk premiums at and they"re all lost. Nobody really knows and yet we have to price assets somehow.

Private equity assets, for their part, provide these guys with an ability to extend maturities and on the face of it reduce volatility. After all, how volatile is an asset which only changes hands once every 5 to 10 years and one which has done nothing but go up as investors have been pushed further and further down the risk curve?

As Bloomberg recently pointed out:

"According to The Pew Charitable Trusts, allocations to alts by pension funds have gone from just 11 percent in 2006 to almost 30 percent today."

And as Credit Suisse in a research note mention:

"In 1980, there were only 24 private equity firms and deal volume only modestly exceeded $1 billion. Today, there are more than 3,000 U.S. private equity firms and assets under management for buyout funds are roughly $825 billion, up from $80 billion in 1996 and less than $1 billion in 1976.12 Two of the largest private equity firms, The Carlyle Group and KKR & Co, each have more than 720,000 employees in their portfolio companies, which means they both employ more people than any U.S. listed company except for Wal-Mart Stores, Inc."

Private equity ticks many of the required boxes for pension funds.

• Reduced volatility (until you have to sell),


• Higher returns.

And that, my friends, opens a whole new can of worms because, as the demographic pig moves through the python, redemptions will increase, meaning asset sales will need to be taking place. And this right at a time when global liquidity is contracting. But that is a fun topic for another edition of World Out Of Whack.

Question for the day

Cast your vote here and also see what others would do

- Chris

"Low and expanding risk premiums are at the root of nearly every abrupt market loss." — Raghuram Rajan, the governor of the Reserve Bank of India, who is one of the few economists who foresaw the financial crisis

--------------------------------------

Liked this article? Don"t miss our future missives and podcasts, and

get access to free subscriber-only content here.

--------------------------------------

Hedge Fund CIO: "Expect Enormous Losses In The Next Correction As There Is No Price Discovery In Index Investing"

In today"s excerpt from Eric Peters Weekend Note to clients, the CIO of One River Asset Management focuses on the one topic that is first and foremost on the minds of the active investing community: the unprecedented shift from active to passive management, and what it means for not only the industry, but for markets during the next "normal correction."

“Each day since the election $1bln has moved from active to passive management,” said VICE, standing in the shadow of America’s mountain of private wealth assets. When you buy the S&P 500, you pay the prevailing price for every one of those stocks.

“There is no such thing as price discovery in index investing.” And there will be no price discovery on the downside either. The stocks that have been blindly bought on the way up will be blindly sold.

“When these markets do finally have a correction there will be no bid for many of these stocks.” 

“The people who are indexing now are the same ones who were selling in 2009,” continued VICE, agitated. “I just spoke at a conference filled for wealth advisors from all the major players. They say the same thing - today’s buyers are not long-term investors.” They’re guys who put $1mm into index ETFs.

“When they lose 6%-7% and decide to sell, who will be on the other side of those trades?” And the stocks that will be savaged worst will be the ones that lagged the indexes on the way up. “It reminds me of 2000, when people piled into the QQQs.” 

“I don’t know when the next major crisis will hit, no one does,” admitted VICE. “But I do know that even in the next normal correction, the market’s losses will be amplified enormously by this move away from active management.”

$500bln has shifted to index investments, distorting the way equities are valued and the historical relationship between short sellers and buyers. This flow creates artificial demand for poor-quality securities that have few natural buyers. “And now even Warren Buffett is telling investors to shift to passive.”

And a bonus: the world as seen through the eyes of active managers.

 “Long-only investors have the longest memories,” he said, just back from a grueling march through countless offices. “They don’t believe bond yields will ever rise.” Secular stagnation has cast a long shadow. “The age of disruption has shifted their psyche too.”

Every day their assets decline, fees too. Their job future is more uncertain today than in 2008. So much for the return of animal spirits, the running of the bulls. “And these guys are not alone. For all the talk of bullishness, it’s hard for anyone to be euphoric when our industry is in such decline.”

We doubt, however, that as the active managed industry slides into the sunset that the rest of the world will shed too many tears.

Is Public Equity A Broken Concept?

Submitted by Nick Colas of Convergex

Is Public Equity A Broken Concept

David Einhorn’s proposal to GM that it split its stock into dividend and capital appreciation shares got us thinking about the bedrock principles of public equity ownership.  Other catalysts for this examination: recent IPO SNAP’s lack of shareholder voting rights, the reluctance of venture capitalists to list their “Unicorns”, and the dearth of IPOs generally.  The critical question here is “Does the traditional one-size-fits-all model of publicly-held equity still work in a world that increasingly values customization?”  Further, will other social and economic trends force a change in this structure, such as aging demographics in the US population and the investment-heavy nature of major technological developments like autonomous cars, workplace automation, and artificial intelligence?  Bottom line: “public equity” needs to be a fluid concept that responds to the changing needs of both providers and users of capital.

If it is true that we learn the most from our mistakes, then I would posit that we can glean a lot of useful information from analyzing troubled industries rather than just focusing on commercial “Winners”.  For example, I have studied the US auto industry for the last 25 years as both a sell side and buy side analyst, and more recently in the context of the macro work I do in these notes.  It has been an education that has served me very well, even if the group has historically presented limited long term investment potential.

Here is a summary of everything I know about this auto industry:

• Demand is economically sensitive and volatile in major markets like the US, Europe and Japan. Since it takes years to design a new vehicle and that process is expensive, automakers have high fixed costs.  This leads to significant variability in earnings over a typical economic cycle and the threat of bankruptcy in a bad downturn is real.  “Hot” product offerings can mitigate this pressure, but not reliably so.


• There is too much supply. The auto industry employs a lot of people both in final assembly and in the supply chain.  These tend to be good-paying jobs, which means governments are perennially throwing money at car companies to set up shop in their jurisdiction.  Moreover, those same governments don’t ever want to see a plant close.  This makes capacity very sticky, and in some places like Europe there are still too many auto plants.


• Those two factors make it very hard to earn a decent return on capital over a cycle. Boom times bring excellent free cash flow, but those earnings are later consumed by the lean years.  As a result of both industry structure (point #2) and company-specific earnings volatility (point #1), public equities in the sector tend to have very low normalized valuations.

I was therefore intrigued by investor David Einhorn’s proposal, made public today, to split GM’s stock into two pieces: a dividend paying equity and a capital appreciation “stub”.  To be clear, I have no idea if it would improve the company’s equity market valuation.  You can read a description here and see the slide deck from his firm, Greenlight Capital, as well: http://www.zerohedge.com/news/2017-03-28/david-einhorns-presentation-how-gm-can-unlock-between-13-and-38-billion-value

Einhorn’s proposal got me thinking about the nature of public equity capital.  His thesis is that GM’s equity does not have a clean and distinct ownership base.  Dividend-seeking investors are put off by the company’s share buyback program since it drains cash for purposes they don’t value, and capital appreciation-focused investors would prefer that GM just use all their cash generation to repurchase shares.  Split the stock and the conflict goes away, or so the idea goes.

Regardless of the merits of the idea for GM, Greenlight’s proposal raises a provocative macro question: “Is a one-size-fits-all equity structure really the best approach to both maximizing corporate value and giving shareholders the types of investments they desire?”  Once you pose the question that way, a raft of other capital market trends pop up:

• Voting rights. The vast majority of public stocks feature a “One share, one vote” structure of corporate governance. Shareholders can elect Boards, vote on major corporate actions like takeovers and mergers, and lobby for changes in management if they feel the business is being mismanaged.


• The recent high-profile SNAP IPO had an unusual feature, however: no voting rights at all.  While novel, this is the continuation of a trend among technology companies, which in many prominent cases have dual classes of stock with different voting rights.  The intention here is to limit public shareholders’ traditional rights in favor of management’s/core shareholders’ long term business plans and judgment.

• Dearth of IPOs. Look at a long term chart of the number of Initial Public Offerings in US markets, and you’ll see a significant decline in the number of new issues from the 1990s to now.  The good times were in the late 1990s, of course, when it was customary to see 30-80 IPOs per month.  Now, that number is more like 10-20.


• Venture capital’s reluctance to list “Unicorns”.   You might argue that capital markets are simply more selective now and the 1990s IPO cycle was an outlier.  But then why are so many truly revolutionary companies like Airbnb, Uber, Lyft, Palantir, and other “Unicorns” all still private?  These are transformational businesses, but the venture capitalists that fund them see no need to take them public. 
  

  Now, I am sure that Uber’s shareholders are happy just now that the company isn’t subject to the daily vagaries of the stock market, but on balance the absence of “UBER” as a symbol on the NYSE or the NASDAQ  is troublesome.

  
  

At its core, the social compact between public equity markets and society is simple: over time, any investor should have access to the equity of important enterprises created by that society.  If that isn’t happening by virtue of some misalignment of incentives, then those need to be fixed.  The alternative – that the winners stay private but the losers are public – is untenable.  Investors will choose to hoard cash and capital will slowly stop circulating to its best possible use.

Given the pace of innovation that seems to be on its way, this problem may only get worse.  If the futurists are correct, there are several societal sea changes just over the horizon, from artificial intelligence to workplace automation to driverless cars, all in various stages of development.  The home for that capital right now too often has a Sand Hill Road address rather than 11 Wall Street.

We’ve come a long way from what now seems like a pretty humble proposal regarding one car company, so let’s put on bow on all this.  A few summary points:

• For all the innovation on offer in American industry, the concept of public equity is perhaps overly reliant on an outdated concept where one equity security with proportional voting rights is the only flavor available. It is, at least, a topic worth discussing.


• Investors, in their role as consumers, are used to custom solutions in every facet of their life – so why not think about how to apportion the value of a company to fit their needs? Yes, equity and debt are the traditional solutions.  But why do you think Exchange Traded Funds are so popular?  In part it is because they target investor needs in creative ways.  Corporate boards and investment bankers might take a page from that book.


• Demographics and technology may force the issue. An aging US population might embrace novel approaches to accessing the corporate cash flows of public companies.  And if there is a new wave of innovation ready to drop on us, the only nature hedge might be to have access to the equity of those businesses.  Even if they don’t carry voting shares or other traditional features.

Now, one caveat: all of this needs sufficient regulation to curtail abuse.  The mortgage market of the early 2000s is the cautionary tale here, of course.  Changes to the notion of public equity need careful scrutiny to make sure disclosures are complete and structures are sound.

But in the end, “Equity” will need to evolve in the same way everything else does in a capitalist society – in a way that serves both investors and users of capital.

David Einhorn's Presentation How GM Can Unlock Between $13 And $38 Billion In Value

Moments ago, General Motors holder Greenlight Capital released a presentation in which David Einhorn recommended that GM should distribute, on a tax-free basis, a second class of common stock that the holder calls “Dividend Shares.”

Greenlight wants GM to split its common stock into two classes: one that pays dividends and a second that would entitle its holders to all earnings, including stock buybacks, after the dividend is paid, according to people familiar with the matter. Greenlight believes the move could attract new investors who are willing to pay more for potential earnings growth. GM has a market value of about $52.2 billion, and it pays an annual dividend of $1.52 per share.

The Dividend Shares should trade separately from the existing common stock. As shown in the presentation below, Einhorn believes that the proposed plan will unlock between $13 billion -$38 billion of shareholder value.

However, as CNBC"s David Faber reports, GM said to not agree with Greenlight’s proposal as it would jeopardize GM"s IG investment rating. Even so, GM shares are up 3% after Einhorn"s activist presentation.

As Bloomberg confirms, GM rejected the proposal to create 2 classes of stock, saying proposal is too risky and David Einhorn’s plan is “unproven." Somewhat ironically, GM also said that Einhorn proposal could lower share price, and that it has spent months talking about the proposal.

To be sure, this is not the first time Greenlight has pushed for higher prices at GM, which is one of his top holdings: Einhorn has said as far back as October 2012 that GM had a cheap valuation.

His full presentation below (link).

This Is What Happens When Private Equity Firms Run Out Of Things To Buy

What do you do when you"re part of an industry that has levered up $100"s of billions of dollars in investor capital and paid a handsome premium for pretty much every asset available all while "excess cash sits on the sidelines" because there are just no deals left to do at remotely attractive valuations?  Well, if you"re Investindustrial, a European private equity fund founded by Italian dealmaker Andrea Bonomi, then you simply raise a new fund to buy all the investments of your old fund.

And while that may sound like a joke, unfortunately it"s very true.  As the Wall Street Journal points out today, Bonomi has recently raised $800mm to buy assets that he initially acquired via a $1.1 billion fund originally raised in 2008. 

All of which raises a number of important questions like how exactly are valuations set for such a deal in the absence of a distinct buyer and seller negotiating a fair, market clearing price?  Presumably Bonomi tested the market for his assets but simply didn"t like the valuations he was offered?  If so, how could new Limited Partners ever possibly get comfortable with the valuations paid for assets being purchased from the old fund?  After all, the ole "mark to model" methodology didn"t work out so well for the Dallas Police and Fire Pension, among others.  

And then there is the question of fees.  Surely, LPs wouldn"t be willing to pay "2 & 20" for the runoff of an existing portfolio?  If so, sign us up.

Of course, according to the WSJ, Bonomi"s effort to buy his own prior investments has nothing to do with gaming fees but is rather just a creative way to be more competitive with sovereign wealth funds that don"t have term limitations on their funds...and if you believe that then Bonomi, a man who typically only sells assets to himself, would very much like to offer you the once in a lifetime opportunity to buy some ocean front property in Oklahoma. 

Buyout firms face increasing competition from patient investors like sovereign-wealth funds. One has found a way to play them at their own game: Investindustrial, a European buyout firm, is creating a new fund to buy €750 million ($800 million) of assets it already owns.

Investindustrial, founded by Italian dealmaker Andrea Bonomi, has decided on this novel course of action as it responds to greater competition for assets from institutions such as sovereign-wealth funds, which don’t have restrictions on how long they can own companies. The competition is pressuring buyout firms to devise new ways to own companies.

Moreover, the decision is in no way related to poor returns.  In fact, the primary motivator for recycling their old portfolio, at least according to the head of investor relations at Investindustrial, is that returns have been so amazing that it just makes sense to hold on to take advantage of further price appreciation. 

Historically, buyout specialists took pride in their ability to turn around the fortunes of ailing companies and sell them for a big profit within five years.

“There used to be no alternative to selling,” Carl Nauckhoff, head of investor relations at Investindustrial, said in an interview.

Investindustrial’s move to hold onto Port Aventura for longer comes as fierce competition is pushing up prices for companies, meaning it increasingly makes more sense to hold on to assets than to sell. Some sovereign-wealth funds and pension funds—traditional investors in buyout funds—are increasingly competing directly for assets. And they can hold them for as long as they want. In response, buyout firms like New York-based Blackstone Group LP are raising longer term funds so they can own companies for more than the traditional 10-year maximum.

Meanwhile, as Lazard notes, it"s only a matter of time before other funds attempt to copy Bonomi"s "innovative" approach to private equity investing. 

The deal could mark the start of a new trend because the increasing size of the buyout industry means many more funds are coming to the end of their lives than in the past, said Pablo de la Infiesta, a banker at Lazard Ltd. who advised on the transaction.

“Investindustrial has set a new direction,” Mr. de la Infiesta said in an interview. “I think everybody who has assets sitting in a fund that is coming to the end of its life will be thinking about it.”

Truly genius plan if we understand it correctly.

SNAP Initiated With Sell Rating, $10 Price Target At Pivotal

Pivotal Research"s Brian Wieser braved the storm today and issued the first "Sell" research on Snap Inc.

Snap is a promising early stage company with significant opportunity ahead of itself.

Unfortunately, it is significantly overvalued given the likely scale of its long-term opportunity and the risks associated with executing against that opportunity. Significant ongoing dilution from share-based compensation will likely represent an additional negative consideration for the stock. We value Snap at $10 per share on a YE2017 basis. As the stock priced well above this level in its IPO, we rate its shares Sell.

Snap presents investors with the opportunity to invest in the company behind an innovative, large-scale, and distinctively young-skewing platform which is establishing itself as a magnet for business unit talent and content partners alike. Snap also offers investors a share of the significant economic potential that should follow from Snap’s ongoing business expansion.

At the same time, there are significant risks offsetting these opportunities. Investors in Snap will be exposed to an upstart facing aggressive competition from much larger companies, with a core user base that is not growing by much and which is only relatively elusive. It has a promising and innovative advertising offering, but so far it is still mostly unproven and difficult to quantify its ultimate scale. Investors will also be exposed to what appears to be a sub-optimal corporate structure operated by a senior management team lacking experience transforming a successful new product into a successful company. High expenses and cash costs to run the company are negative as well. And then there are other negatives for shareholders given the degree to which they will be diluted through aggressive share issuances to employees and through the lack of voting rights that they will possess.

While we consider ourselves cautious optimists on the business itself, our model feels potentially “stretched” in even getting to $10 per share, or a $16bn valuation on a YE2017 basis. As the stock priced well above this level in its IPO, we rate its shares Sell.

Risks

As Snap is essentially a venture stage company, investors face a host of risks that are driven by greater uncertainty than might otherwise be presence in a digital media company.

In addition, Snap investors face the following company-specific risks:

• Investors in Snap will be exposed to an upstart facing aggressive competition from much larger companies


• Its core user base that is not growing by much and is only relatively elusive, if still findable on other media


• The company has a sub-optimal corporate structure operated by a senior management team lacking experience transforming a successful new product into a successful company.


• High expenses and cash costs will likely persist for some time


• Shareholders will be diluted through aggressive share issuances to employees


• Management is effectively entrenched, and shareholders are entirely disenfranchised because Snap’s publicly traded shares lack any voting rights.

This seemed to sum up a lot of veteran traders" perspectives this morning...

Is this a fucking joke? pic.twitter.com/PmpDde99C4

— Stalingrad & Poorski (@Stalingrad_Poor) March 2, 2017

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Full Report below: