2 August 2014 – The Aleph Blog

The Investments Matter More than their Form

Posted on 2 August 20143 August 2014 by David Merkel

Open-end Mutual Funds, including index funds
Closed-end Mutual Funds
Exchange Traded Funds, including index funds
Separately Managed Accounts
Unit Investment Trusts
Hedge Funds
Private Equity
Other Limited Partnerships [LPs], including MLPs
Variable Annuities (and Life Insurance)
Equity-Indexed Annuities (and Life Insurance)

What do all of the above have in common? ?The first one is the easiest — they are all investments. ?The second one is harder — they are all ways of investing in the ownership interests of corporations.

Think of the underlying investments within these investment forms when analyzing the forms as investments. ?Now the forms aren’t entirely neutral:

Index funds don’t take a lot of fees.
Hedge Funds, Private Equity, and Insurance Products do take a lot of fees.
Insurance Products are tax favored. ?LPs,?MLPs and Private Equity have some tax advantages. ?Separately managed accounts can have tax advantages, if managed right. ?If you make the right investment, buying and holding has tax advantages, especially if you take it to the grave.

Thus, you should look at the manager, to try to analyze if he has skill. ?You should look at the fees to see what you are giving up. ?You should look at the tax advantages.

You should also think about the sensitivity of the investments to the overall risk cycle. ?I don’t like the concept of beta, because it is not a stable concept, but in broad hedge funds have low beta, and private equity has high beta, relative to an S&P 500 index fund. ?But neither in aggregate have much outperformance, after adjusting for the beta.

There are many clever investors scouring the world of investments looking for underpriced assets. ?At a time like now, there aren’t a lot of underpriced assets. ?I might find 2-4 per quarter, but they are only relatively underpriced, not absolutely underpriced (I.e. at this price, you should buy it regardless the the economic environment).

Every now and then, the market falls apart. ?At such a time, two things happen.

1) Because some sector of the economy had too much debt, prices for the stocks and corporate bonds (or trade claims) fall, and the market as a whole falls along with them, though to a lesser extent.

2) During the crisis, many assets get oversold, and those with better knowledge can profit from the overselling. ?The best example I can think of all of the hedge funds that bought non-agency mortgage-backed securities, when they were thrown out the window indiscriminately in 2008, and many of those securities have returned to par.

The ability to achieve alpha (outperformance) increases after a crisis. ?Some who prepare for that, like Seth Klarman and Warren Buffett, create their own outperformance by taking more risk when other investors are running away in panic.

As my boss asked me in 2007, “Why have you not done so well for us the last few years, when you did so well 2003-5? ?I answered, “When I came to you, the market was like an apple cart ?that had fallen over and I picked up the undamaged apples. ?Today, the market is rational, and there are not a lot of easy pickings to be had. ?That is the difference between the bust and the boom. ?It is much easier for a fundamental investor to act during the bust.

Thus I would encourage the following:

Pay attention to fees
Pay attention to tax advantages.
The time at which you invest matters ?a great deal: try to invest when opportunities are the greatest (and others are scared stiff)
Ignore the form of investing, but invest with skilled managers (if you can find them, otherwise index funds).

Think of Seth Klarman who hands back money to his clients when markets are not promising. ?Few professionals have the intelligence?to do that. ? Fewer have the ethics and courage to do so.

For my equity clients, I have reduced exposure, and I am close to my maximum cash level of 20%. ?I am watching the market, and am willing to add to my positions, 10%, 20%, and 30% lower. ?I own good companies. ?As has been true in the past, I get close to zero cash as the market bottoms. ?The market is somewhat high now — I think of it as the 80th percentile. ?But it is not at nosebleed levels.

Analyze your investments, and sense the skill of managers, and lack thereof, and the degree of sensitivity to the market as a whole, which is likely higher than you expect.

Then adjust as you see fit. ?Every situation is different, except for the parts that are the same.

All for now.

Regarding Underemployment

Posted on 2 August 20142 August 2014 by David Merkel

This is just meant to be a few thoughts. ?I haven’t worked everything out, but I want to talk about how the labor markets are weak.

Yes, the headline statistics are strong. ?The U-3 unemployment figure is low at 6.2%. ?But look at a few other statistics:

My, but wages as a share of GDP has been falling.

And real wages have flatlined. ?No surprise that many feel pinched in the present environment. ?Even the Federal Reserve Chairwoman Janet Yellen expresses her doubts about the labor markets, which was expressed through the most recent FOMC Statement.

The problem is this: the relationship between labor employment and monetary policy is weak. ?It is weaker than pushing on a string. ?There are two major factors retarding the US labor market, and they are globalization and increased productivity from technology.

The value of knowledge is rising relative to less-skilled labor. ?As such, we are seeing increased income inequality in the US, but lower income inequality globally. ?Bright people in foreign lands who can transmit their skills over the internet can do better for themselves, even as more expensive counterparts in the US lose business.

Call this the revenge of the nerds. ?The internet enables bright people to profit from their differential knowledge, as it can be applied to wider opportunities.

Think of India for a moment. ?Many bright people with advanced degrees, but education amounts to little unless you can use it for your own benefit.

Here’s my main point. ?The FOMC con’t do much about the labor markets; their power is weak. ?The bigger factors of globalization and technology can’t be fought. ?They are too big.

Thus, you are on your own. ?The US Government does not have the power to re-create the unique middle class prosperity of the ’50s and ’60s. ?If you work for others, you are not your own master. ?Aim to make yourself the master of your situation, by making yourself invaluable to your clients.

Not Apt, Not Teed Up, Not Going

Posted on 2 August 2014 by David Merkel

Okay, let’s run the promoted stocks scoreboard:

Ticker	Date of Article	Price @ Article	Price @ 6/27/14	Decline	Annualized	Splits
GTXO	5/27/2008	2.45	0.022	-99.1%	-53.3%
BONZ	10/22/2009	0.35	0.001	-99.8%	-72.8%
BONU	10/22/2009	0.89	0.000	-100.0%	-85.1%
UTOG	3/30/2011	1.55	0.000	-100.0%	-92.3%
OBJE	4/29/2011	116.00	0.069	-99.9%	-89.7%	1:40
LSTG	10/5/2011	1.12	0.010	-99.1%	-81.2%
AERN	10/5/2011	0.0770	0.0001	-99.9%	-90.5%
IRYS	3/15/2012	0.261	0.000	-100.0%	-100.0%	Dead
RCGP	3/22/2012	1.47	0.045	-96.9%	-77.2%
STVF	3/28/2012	3.24	0.340	-89.5%	-61.8%
CRCL	5/1/2012	2.22	0.008	-99.6%	-91.7%
ORYN	5/30/2012	0.93	0.026	-97.2%	-80.7%
BRFH	5/30/2012	1.16	0.779	-32.8%	-16.8%
LUXR	6/12/2012	1.59	0.006	-99.7%	-93.0%
IMSC	7/9/2012	1.5	1.220	-18.7%	-9.5%
DIDG	7/18/2012	0.65	0.042	-93.6%	-74.0%
GRPH	11/30/2012	0.8715	0.073	-91.6%	-77.4%
IMNG	12/4/2012	0.76	0.015	-98.0%	-90.6%
ECAU	1/24/2013	1.42	0.004	-99.7%	-97.8%
DPHS	6/3/2013	0.59	0.007	-98.9%	-97.9%
POLR	6/10/2013	5.75	0.050	-99.1%	-98.4%
NORX	6/11/2013	0.91	0.090	-90.1%	-86.9%
ARTH	7/11/2013	1.24	0.200	-83.9%	-82.2%
NAMG	7/25/2013	0.85	0.085	-90.0%	-89.6%
MDDD	12/9/2013	0.79	0.060	-92.4%	-98.2%
TGRO	12/30/2013	1.2	0.150	-87.5%	-97.1%
VEND	2/4/2014	4.34	1.500	-65.4%	-88.7%
HTPG	3/18/2014	0.72	0.100	-86.1%	-99.5%
WSTI	6/27/2014	1.35	0.735	-45.6%	-99.8%
	8/1/2014		Median	-97.2%	-89.6%

Now for tonight’s loser-in-waiting: Apptigo [APPG]. ?This is a company that ?until four months ago was a development stage company for selling Irish horses in the US. ?This is a company that has never earned any money, and only has positive net worth at present because of raising capital when the prior company acquired Apptigo in a reverse marger, and renamed itself Apptigo.

This is a company that says it will make money off of selling apps. ?Well, they have one app at present, and it is called?SCORE – Match Maker. ?It has a grand total of seven likes at the iTunes Store. ?Now let me hazard a guess here, and say that it is difficult to create a broad network for matchmaking. ?The value of a network goes up proportional to the square of its nodes. ?How will they attract enough attention in the iTunes ecosystem to make ?a significant network? ?Even if this is a legitimate company, I don’t see how it will be easy to make it work, as the promoter said it would be easy.

The promoter also said this in tiny type:

Important Notice and Disclaimer: Flying Under the Radar Stocks is an independent paid circulation newsletter. This report is a solicitation for subscriptions and a paid promotional advertisement of Apptigo, Inc. (APPG). Flying Under the Radar Stocks received an editorial fee of twenty five thousand dollars from Micro Cap Media Ltd. APPG was chosen to be profiled after Flying Under the Radar Stocks completed due diligence on APPG. Flying Under the Radar Stocks expects to generate new subscriber revenue the amount of which is unknown at this time resulting from the distribution of this report. Micro Cap Media Ltd. paid nine hundred forty-eight thousand, three hundred sixty-three dollars to advertising agencies for the cost of creating and distributing this report, including printing and postage, in an effort to build investor awareness. This report does not provide an analysis of a company’s financial position, operations or prospects and this is not to be construed as a recommendation by Micro Cap Media Ltd. or an offer to buy or sell any security or investment advice. An offer to buy or sell can only be made with accompanying disclosure documents and only in states and provinces for which they are approved. Do not base any investment decision based solely on information in this report. Although the information contained in this advertisement is believed to be reliable, Micro Cap Media Ltd. makes no warranties as to the accuracy of any of the contents herein and accepts no liability for how readers may choose to utilize the content. Readers should perform their own due diligence, including consulting with a licensed, qualified investment professional. Further, readers are strongly urged to independently verify all statements made in this report APPG?s financial position and all other information regarding APPG should be verified directly with APPG Audited financial statements and other relevant information about APPG can be found at the Security and Exchange Commission’s website at www.sec.gov. It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. The information contained herein contains forward-looking information within the meaning of section 27a of the Securities Act of 1933 as amended and section 21e of the Securities Act of 1934 as amended including statements regarding growth of APPG. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act, statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties. ?All forward-looking statements are based upon current assumptions that are believed to be reasonable. In the event any such assumptions turn out to be incorrect, forward-looking statements based upon those assumptions will not be accurate. Flying Under the Radar Stocks presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. More information can be found at APPG’s website www.apptigo.com. (underline emphasis mine)

I actually like this disclaimer, except for the fact that it is in tiny type, while the proclamation of the investment’s fake virtues are in big type. ?So, I have a simple proposal for the SEC regarding newsletters like this: the type size of any disclaimer must be as large as the the largest type in the document.

This is fair, and consistent with other laws that regulate “the fine print.”

I emailed the CEO of Apptigo to ask him whether he knew about the stock promotions (there are three going on), and whether the company, its major shareholders, or its management was benefiting from the promotion. ?There was no answer, though I wrote to him on Thursday.

Regardless, avoid promoted stocks, dear friends. ?No company of any good reputation pays anyone to promote their stock. ?Avoid promoted stocks.