GalaTime

The Science of Entrepreneurship

I think to build a great company you need to have a well defined hypothesis based on a theory for a market’s evolved future.

And I think the most effective way to enter that market is to build a company like a scientist testing the theory. As an experiment.

True. Or do what Felix Dennis suggests in How To Get Rich

Keep your eye on the ball marked “The Money is Here”.

John Mauldin: The Paradox of Deficits

I think the bond market is looking a few years down the road and saying that $1-trillion deficits are simply not capable of being financed. And if the debt is monetized, then inflation is going to become a very serious issue.

When you run deficits that are 4-6-8% or more than nominal GDP, at some point things simply back up. Can we ride along for a few years? Certainly. Japan is getting ready to see its debt-to-GDP ratio rise to almost 200%. But everybody can’t do it all at once.

Call it the Paradox of Deficits. We have been running a large trade deficit in the US for years, because the people (China, Japan, and the Middle East) who wanted to sell us “stuff” were kind enough to turn around and invest the money in our bonds. This in turn created Greenspan’s conundrum, as it helped keep down US (and global) interest rates. Combine that with a massive increase in leverage, a few bubbles, and we now arrive at a true crisis.

BCA Research: Oil Breaks Out: Is It Sustainable?

From an intraday low of ~ 2250 in October 2008 to a high of 4450 early this morning. Double in 7 months. Go figure.

Sigma Rising: The Junk Rally and Quant Hedge Fund Underperformance: a Lesson in Asymmetric Risk

Given the current market environment, the risk of an equity portfolio is similar to the risk of a book of options with large gamma.

Large positive gamma means that the value of equity increases at a quickly increasing rate as the value of the firm’s assets increases. Reinterpreted in the context of an equity risk model, we can say that stock Beta and specific risk will increase at an increasing rate as the firm experiences positive asset returns (and vice versa for negative returns).

The above two observations can explain the explosive returns observed in banking stocks during the recent rally. According to the theory, observing these type of explosive upside returns is more probable than ever given that banks have witnessed unprecedented volatility in banking assets, coupled with the fact that most banking stocks are very close to being at-the-money.

It’s not uncommon for quant funds to be short the very firms that have the highest gamma and long the firms that have the lowest gamma. While many of these portfolios appear to be factor neutral, the embedded gamma causes these portfolios to become quickly unhinged.

Managing portfolio risk by only looking at portfolio standard deviation (or tracking error) is a recipe for disaster.

Harper’s Mag: Invisible hands:The secret world of the oil fixer

Oil, first and foremost, is a $2 trillion international industry, and most of this annual haul is extracted from under undeveloped nations. Sometimes, a company will reach out to rulers of oil-rich states on its own, negotiating and striking deals with them through official emissaries.

More often, though, a company will instead work through men like Calil and Eronat: independent fixers, whose job it is to know the leaders and other government officials for whom oil serves as both piggybank and “political weapon.” A fixer can open doors for his corporate clients, arranging introductions to the various potentates he knows. He can help companies navigate the local bureaucracy, or provide the lay of the land with political and economic intelligence, or point to important people or companies that should be courted or hired in order to curry favor. And, in some cases, the fixer can feed money to those in power, in payoffs that often would be illegal under the stringent American and European anti-bribery laws.

Gulbenkian drew the map that defined a cooperative agreement among the French, Dutch, British, and Americans—their governments and companies—to extract oil from the former Ottoman territories. This “Red Line Agreement” earned him the bulk of his fortune, and his success established the model of the independent, cash-dispensing oil fixer. The modus operandi was simple and straightforward: the fixer took money from a company seeking an energy concession, kept one part for himself, and funneled the rest into a Swiss bank account belonging to foreign officials who awarded the concession. When the officials got their money, the fixer’s sponsor got its contract.

Morgan Stanley: Growth Cycle – Taking Stock

Corporate revenue growth has closely followed IP growth. IP growth touched a 16-year low of -2.3%Y in March 2009, from the peak of 13.6%Y during the quarter ended January 2007.

Government spending has increased sharply since October 2008, from an average of 25.2%Y growth during April-September 2008 to 67.1% during October-December 2008, and 51.7% during the two months ended January-February 2009. We estimate that the consolidated fiscal deficit (including off-budget expenditure) will be 12.4% of GDP in F2009 (12-months ended March 2009) compared with 6.8% of GDP in F2008.The corporate sector is suffering from large operating leverage.

The gap between corporate capacity for growth and realized growth is expected to be much wider in the current cycle than in the mid-1990s; that is, the capex binge has been much larger in the current cycle.

 

To repeat myself, Nifty EPS target before year end: 190. (Current: 210)