Tag Archives: wall st

7 Ways The Investment Banking Industry Is Built On Fraud, Lying, And Stealing

1 Jun

The asymmetry of information in research, mergers and acquisitions, trading volumes and patterns, buy-side and sell-side orders provides investment banks with vast resources of information that they leech to drive profitability. This should be vexing everyone in the country right now and yet we don’t even see. Banks blowing their own smoke were behind the curve and they represent the very core of our systemic economic problems. The deception continues. Although this article focuses on hedge funds it is more relevant to investment banks. Via disinfo.com:

1. Insider Trading. If the Feds could tape every hedge fund we’d get an earful of how hedge funds use “expert networks” to transfer bits of illegal information that provide hedge fund managers with knowledge of events that are sure to move markets and make them a bundle.

2. Ponzi Schemes. Madoff isn’t the only one. Hedge funds and Ponzi schemes are made for each other since the funds are designed to evade so many disclosure regulations. It’s virtually a sure thing that every new year will reveal another Ponzi scheme through which a hedge fund steals money from investors and then uses new investor money to pay returns to the old investors.

3. Tax Evasion. No surprise here. Wherever you find billionaire financiers, you’ll find schemes to move money around the globe to dodge taxes. Fortunately, Rudolf M. Elmer, a Swiss banker, has blown the whistle on an international web of rich investors, banks and hedge funds that evade taxes by illegally shifting money to low-tax jurisdictions. There’s something particularly slimy about hedge fund tax dodging, given that they only pay a 15 percent federal tax rate no matter how much they make.

4. Front-running trades. With their high-speed trading systems and algorithms that sense ever so slight market moves, the biggest hedge funds and banks are able to trade just a fraction of a second before the rest of us do. The SEC is also worried that brokers leak information about large trades by institutional investors to hedge funds so that favored hedge funds can pull off the trade just a split second sooner, thereby earning a quick, easy, and illegal profit.

5. Late Trading. When Eliot Spitzer was New York Attorney General (and earned the handle, “Sheriff of Wall Street”), he uncovered hedge funds maneuvering around trading rules like a Ferrari speeding around the hapless shmoes stuck in midtown traffic. In violation of all rules, hedge funds were allowed by mutual fund managers to jump in and out of mutual funds many more times than normal investors, enabling them to score high returns at the expense of regular mutual fund customers. They even got away with booking trades hours after the market closed for the day—a real perk, since market-moving announcements often are made right after closing.

6. Accounting Irregularities. Boring stuff, but the stuff of big money. Hedge funds and banks cook the books to avoid showing losses and to artificially inflate profits. Hedge funds are also deeply involved in helping other companies—like Enron and WorldCom—bend their books. According to a study by Bing Liang at the University of Massachusetts, as of 2004, 35 percent of all hedge funds cited no dates for their last audit. Hmmm.

7. Setting up bets that can’t fail. I just can’t get enough of how banks and hedge funds collude to rig securities so that they are designed to fail. The best part is that in order to win their negative bets, they have to market the securities to chumps as if they were pure gold. This ploy always seems to involve a big investment bank and a hedge fund. You have Goldman Sach’s dancing with Paulson and Company, and then there’s JP Morgan Chase doing a two-step with Megatar.

Bear of the Day: Zacks Investment Research

21 May

Zacks Investment Research provides stock commentary, ratings and investment ideas mainly to the retail investor base. I would presume that they have a smaller institutional following as well but that the retail focus represents their core offering. Personally I have no need for Zacks as I have a Bloomberg terminal, but even in the absence of that I would stick to Google or Yahoo Finance. I rarely see anything from Zacks of value. In fact I cannot ever recall anything from Zacks that I have ever benefited from. Most of it seems to be targeted at getting you to sign-up to their newsletter franchises to expand their margins.  Their upgrade and downgrade ratings are purely a reflection of earnings outcomes and follow the general trend on Wall St i.e. wait until a company reports earnings, if good and upward revisions to future earnings guidance = Zacks upgrade, poor results and downward revisions to future guidance = Zacks downgrade. If you want to weasel your way out of making a call = Zacks neutral. As you can see you don’t need to pay a subscription for this amazing insight.

Furthermore, Zacks also seem to have an overwhelming number of ratings which are neutral. What does that mean? There are a number of stocks where an investor would want to remain neutral or not to have a position, but Zacks takes that to another level. Just take a look at some of their marketing material. When I clicked Zacks Top 10 stocks for 2011 this is what I got: 

You know the look, it looks like one of those penny stock scams in the way it is structured and presented. It seems unbelievable that the yellow box says: “Most investors are still skeptical about today’s market. But thousands of Zacks members don’t care. They know that often the best market action is not to fight the tide but to exploit it”. This investment thesis is likely to lead to a spectacular tragedy.  

And here we are please “Subscribe to Zacks Top 10 now and get these stock picks immediately”. To reinforce this further in postscript, “P.S. Again, I strongly encourage you to subscribe to this service today.” Avoid Zacks, most of their material is freely available elsewhere. 

Why I love analyst downgrades

9 Apr


Analysts are mostly incorrect in the majority. A Bloomberg study (http://www.bloomberg.com/news/2010-10-14/goldman-gets-38-right-as-no-1-firm-rating-financial-companies-worldwide.html) supported by empirical data tracked analyst stock predictions. The study affirmed what most apt investors were more than aware of. Analyst downgrades sometimes provide a wonderful opportunity to purchase good stocks at cheaper prices and to build a sizeable position.  High frequency trading and short-term day trading has heightened these pressures; the system has become dsyfunctional. What surprises me the most is how analysts cover such a small spectrum of stocks within their sectors and yet they are still so remarkably wrong! Dan Niles, of Alpha One Capital Partners, as are others, is a great technology analyst however.

Concept of ‘noise’ in markets

9 Apr

Markets are not efficient, they are sentimental, driven by emotion, groupthink and momentum.  The only defense of efficient market theory is in the difficulty of making returns in the market. This is not because all the information available about stocks are priced in and therefore the markets adjusts to that reality; it is due to all the economic systemic events that are disruptive to the system, which is further induced by market volatility.

Noise is a crucial concept in markets. Fundamentals should drive markets. Noise is anything that is perceived to impact an instrument. The resilience of specific stocks should not be overlooked.

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