Friday, December 18, 2015

The fine print......

I always enjoy writing about things I've never seen happen before.....unfortunately, they are happening with regularity now.  Last week the Third Avenue Focused Credit Fund (a mutual fund in the family of Third Avenue Funds) froze redemptions.  That's right, you can't get your money out of the fund.  Mutual Funds are perfectly safe and liquid...right?  I've heard of Hedge Funds, freezing redemptions by negotiation or as part of the investor agreement.  But I've never heard of a Mutual Fund taking these steps  (It certainly may have happened, I just can't recall hearing about it recently). The press release says they are in contact with the SEC and coming up with a plan.  Their marketing materials refer to "THE POWER OF ORIGINAL THINKING", and as far as I can tell, this is some of the most original thinking I've seen in a while.... and their originality seems to be what got them into this mess in the first place.

Here's a recent (hypothetical) phone conversation between Third Avenue and a sweet little old lady retiree I'll call Margaret:

Margaret: Good morning sir, I'd like to get my money back.
TAF: I'm sorry you can't have it.
Margaret:  But I need it.  I need to feed my cats & buy Christmas presents for the grandchildren.  My broker said you had $8 Billion dollars and I could get my money anytime.
TAF: I'm sorry, you just can't have it back...it wouldn't be fair to all of the other suckers.....uhhh.... I mean.....investors who want to stick it out.....
Margaret: But when I signed up you said I could have it back whenever I asked....It's in the ...what's it called....the "Prospector?"
TAF: I'm sorry Margaret, circumstances have changed, all of the risk disclosures are buried deep in the prospectus and the 6 month old form N-Q on file with the SEC.  It's just not our fault that you lost all of your money.  You really should be more careful.  You screwed up, you trusted us.  Luckily, nobody ever goes to jail for this stuff.
Margaret:  (In tears...sob...sniff) I don't trust you people anymore.

I had never heard of Third Avenue before last week, but the more I dug into it, the more I found this whole mess to be absolutely riveting.  Here's a quick summary of the Third Avenue Family of funds.  All numbers are from the 7/31/15 N-Q: (Link below)




Here are the bullet points that jump out at me.
  1. Most of the Cash/Equivalents (liquidity) is kept in the Real Estate fund.
  2. The Morningstar Rating for the Real Estate Fund is "Five Star".  The rest of the funds are "One Star" or "Two Star".
  3. All of the funds are filed on the same N-Q, presumably the same legal entity, so in the event of a liquidation or liquidity event in one of the funds, the assets of the entire family are "fair game".  I'm not a lawyer so I'll defer to my lawyer friends/readers to comment/advise on this topic.
  4. 15% of the Assets of the Focused Credit Fund are currently in default. The most notable assets total $198 million (Lehman Brothers Bonds, Altegrity Bonds - Ch 11 in Feb 2015, and.Energy Futures Bonds - Chapter 11, April, 2014). Authors Note: Really? Lehman Brother's Bonds with a 2008 Maturity still on the books valued at 10% of face? Ar you kidding me? I'm sure Dick Fuld will stop by to write you a check, along with a full apology, any day now. 
  5. 20% of the Real Estate Fund is invested in Chinese/Asian Real Estate Management Companies trading in Hong Kong (HK). 
  6. The Assets in the Focused Credit Fund have a Cost/basis of $2.5 Billion and a current reported value $2 Billion (Including assets in default and "Level 3" assets). 
  7. "Level 3" assets, as described in the N-Q amount to $545 million (6.7% of the family's NAV).
Valuation

Let's take a minute to discuss valuation and the mechanics of Mutual Funds & ETF's.  When I look at these funds I try to get a handle on management's philosophy and their perception of value.  As we all know, whether it be your home, your car, your business, your favorite old chair in your den that your wife has been begging you to get rid of,  you never know what something is truly worth until you put a "For Sale" sign on it. Sometimes you are pleasantly surprised as to what the market will bear.  Occasionally, like with my favorite old chair, nobody wants it and it ends up in the Goodwill dumpster.

So, you might ask, why is this such a big deal?  Third Avenue only has 4% of its assets in default and 7% classified as "Level 3".  They'll survive that?  Won't they?  Maybe.  Historically, Fund managers tend to overstate the value of il-liquid assets.  They rely on their "best judgement" as to what the asset is really worth and unfortunately, a write-down is usually the last resort. Obviously, the mere existence of  significant Level 3 assets as well as aggressive valuations of same are cause for concern. Once there's a liquidity event, credit hiccup, performance issue or perhaps, like Third Avenue, a freezing of assets, investors tend to want to  cash out quickly.  I know I do.  I determine I've made a mistake, things aren't as they seem, and I run for cover.  I can put my money anywhere I want. Why should I keep it a fund that might not be what it appears to be?  Thus the "run on the bank" begins.

Contrast this mechanism with a common stock, bad news simply triggers a price adjustment and the investor hits the "sell button" at a lower value.  Done deal.  The company isn't forced to buy back its' shares.  Bad press for a mutual fund or ETF can trigger a wave of selling of Level 1 & Level 2 Assets simply because there's no market for the Level 3 assets.  It's similar to a margin call.  The fund would prefer to wait until things settle down a bit, but they can't.  They have to raise cash to fund the redemptions.  Apparently, Third Avenue was either unable or unwilling to do so.  But, to Third Avenue's credit, they went to the SEC, presumably disclosed everything and are trying to work out a plan. At least I'll give them kudos for that.  It's much more conciliatory than the recent parade of Chinese executives who have simply "gone missing" with the cash box.    

Now let's take a look at what the FASB says about accounting for securities:

In accordance with FASB ASC 820-10, Fair Value Measurements and Disclosures, the Funds disclose the fair value of their investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. Fair value is defined as the price that a Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment under current market conditions. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The three levels of the fair value hierarchy are as follows: 

Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Funds have the ability to access at the measurement date; 

Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active;

Level 3 – Significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)


In accountant-speak, Level 3 assets are "SAY-SO" valuations i.e.) Not LIFO or FIFO...they are what I Say-So.  I don't have data on this, but my suspicion is that Level 3 assets generally end up in the Goodwill dumpster, along with my favorite chair.  Obviously, management has a real incentive to maximize their "estimate" of the value of these assets since the NAV of the fund depends on it.  Somebody will buy this POS at that price someday? ...won't they?  After all, management wouldn't want to do anything which might cause a panic and have people try to cash out. Since they aren't planning on putting a "for sale"  sign on the assets soon, and nobody bothers to read the N-Q, nobody knows the fund is swimming naked and of course, they never plan on the tide going out. Technically, it's not a mis-rep...I guess.  As always, everything is kinda-sorta disclosed if you look hard enough and have a Masters Degree in Finance. Luckily, for the industry, nobody ever goes to jail for messing up an accounting estimate, or two, or three.....etc.

Moreover, let's say (hypothetically) that Margaret (who does not have a Masters Degree in Finance) is investing in the Third Avenue "Value Fund" because her son-in-law's nephew, who goes to the same church (and gets paid a nice commission) told her that the "Value Fund" is just like Warren Buffett.....It's Value Investing" and the Real Estate Fund is really safe since we all know that Real Estate doesn't lose value. Margaret thinks she's investing in a conservative, value oriented fund, when in reality, has no Idea that she actually has positions in Chinese Real Estate and il-liquid/defaulted Junk Bonds.  She is unaware that her life savings can potentially be used to pay redemptions on the higher risk asset classes because the high risk/il-liquid funds are housed in the same legal entity.

So, why do I have my shorts in a bunch about this?

Why?....because these are usually just the tip of the proverbial iceberg.  Third Avenue is a poster child for optimistic valuations and taking full advantage of the accounting rules which allow them to report trash as treasure to the SEC.  Unfortunately, in the world of finance, once you see something you've never seen before, you start seeing it often.  If one Fund, ETF or business is doing it, lots of them are doing it.  Why?  Because 1.) They have to find a way to compete for investor funds; 2.)  they can get rich; and 3.) They can get away with it.

Finally, I invite you to re-read my October post "Why Genius is about to fail.....again....." in the context of what you've just read about "Margaret" and her hypothetical experience with Third Avenue.  I hope you all go home tonight, pull your prospectuses and N-Q's and start doing your homework before it's too late.

Third Avenue is an easy one to analyze.  It's small, simple and unfortunately for their investors, soon to be out of business as currently  constituted.  The mis-steps and the accounting "methods" are obvious to anyone who wants to take the time to read and understand the filings.

Finally, again, referencing the content herein, I'll leave you with one, and only one, rhetorical question:

Does anyone really understand Blackrock?




Form NQ
http://www.sec.gov/Archives/edgar/data/1031661/000093041315003754/c82410_nq.htm

Prospectus p21 investment strategies - p40 redemptions
http://thirdave.com/wp-content/uploads/2015/12/Third-Avenue-Funds-2015-Prospectus-with-supplements.pdf

Bloomberg - Janet Yellen - Third Avenue
http://www.bloomberg.com/news/articles/2015-12-16/third-avenue-bled-managers-billions-of-assets-before-fund-shut

Third Avenue - Focus Credit Fund - Investor Class
https://www.google.com/finance?q=MUTF%3ATFCVX&sq=third%20avenue&sp=3&ei=puNyVqmBF4mPmAH7mLmwDg

Energy Future - Chapter 11 - April 2014
http://www.wsj.com/articles/SB10001424052702304163604579531283352498074

Altegrity - Chapter 11 - Feb 2015
http://www.wsj.com/articles/altegrity-files-for-chapter-11-bankruptcy-1423446150




Sunday, December 13, 2015

Breaking News: Yahoo! CEO, Marissa Mayer projected to resign.....

I notice an interesting phenomenon occasionally whenever I get a chance to play golf in Florida. I'm so focused on hitting my next shot that I fail to notice the big, old alligator in the weeds next to my ball. Fortunately, I'm usually playing with folks that know where the alligators like to hang out and they are kind enough to call the beast to my attention, lest they be obliged to refer to me as "lefty" or "peg-leg" on future outings.

Last month, Jeff Smith at Starboard Value LP wrote a wonderfully worded, laser-focused, well thought out, "time is of the essence" letter to Marissa Mayer noting all of the various options Yahoo! has at it's disposal to unlock shareholder value. (Letter Here)

No need to get into the details of Jeff's letter here, you can read it at your leisure. Of course, Jeff's strategies would be absolutely correct, and perfectly logical if this were a normal "unlocking of shareholder value" situation. Unfortunately, as you might guess where I'm going, Jeff is missing a big old Alibaba-gator sitting in the weeds. Here's a paste from my 11/20/2014 post on Laura Logan's CBS News page (and this blog).

When this scheme is discovered, the results will be devastating. BABA stock will be worthless. Yahoo will be out of business. The current Market Cap of Chinese ADR's including BABA is just north of $1.5T (US& Dual Lists included). They will all get an indiscrimanent, overnight 50% haircut, causing a liquidity crisis the likes of which we've never seen.

Let's say, hypothetically of course, that more than a year ago, my assessment was absolutely, spot-on correct.

A few months ago, I further described the consequences to shareholders of Yahoo!, Softbank (and now Rekesh Aurora) as well the long list of financiers supporting these businesses in my "Anatomy of a Financial Contagion and Kayaking the Chicago Wilderness" post.

Since everyone seems to be sending letters around and leaking them to the press, here's the letter I've drafted to Jeff Smith Re: the disposition of Yahoo!'s Alibaba shares and, of course, "leaked" on this blog.



Here's the problem:

It can be presumed, as "insiders" that Ms. Mayer, et al have a full grasp of what's going on at Alibaba. She is in the "either known or should have known" trap.  She probably asked more than a few questions re: Jackie Reses abrupt resignation distancing herself from "anything to do with the greatest IPO in history". I know I would have.

It's an odd, unprecedented situation. Ms. Mayer can't stop or control what Alibaba is doing, yet, she will be held accountable for how she handles the repercussions.  She might turn out to be the greatest CEO in history if she figures this out.....she's in uncharted waters. i.e.) How do I legally transfer this Alibaba mess to someone else, for the benefit of Yahoo! shareholders (or at least minimize the damage to same) without running afoul of the insider trading rules. (17 CFR 240.10b5-1) . Unfortunately, no matter what Yahoo!'s Board and Management believe, in the end, neither the initial Alibaba spin-off or the newly proposed Reverse Spin-off as currently proposed will be exempt from 10b5, nor considered non-taxable under IRC 355 i.e.) The Spin-off or Reverse-Spin-off can't possibly satisfy the active business purpose requirement due to the disproportionate value of the Alibaba shares.  Perhaps this is why they are indicating that the divestiture will take more than a year?  They are hoping that the rest of the market figures out what's going on and the valuation problem will take care of itself?  As always, hope is not a plan.

When Alibaba crashes and burns Ms. Mayer and Yahoo! management will most likely face legal action by whoever is left holding the bag of Alibaba-gators once the spin-off takes place, or if Alibaba implodes before the spin off, she/mgmt/board will likely be sued by Yahoo! shareholders for not acting fast enough to dump the stock. Inevitably, she will either look like she had no idea what was going on (incompetent) or complicit (a crook). Neither epithet leaves a palatable legacy. In any case, it's more likely than not that someone will eventually be presented with a large tax bill from the IRS at some point. The real twist would be that the taxes would attach at the time of the IRC 355 exchange. Theoretically, if Alibaba crashes after the spin-off, the tax bill would be maximized and the underlying asset generating the tax (Alibaba stock) would be worth significantly less, ironically leaving little/no assets with which to pay the tax? I suppose Marissa could just try to make the Ken Lay/Andy Fastow "Hey, I didn't know anything, I just ran the place" argument, but that strategy never ends very well.

The way I see it, Marissa, Yahoo! management and the board have only two options:

1.) Disclose everything they know about Alibaba's financial condition and begin selling/spinning-off or otherwise divesting the Alibaba stock immediately thereafter. That would be one hell of a press conference.; or:

2.) Resign immediately and set up a plan, in conformance with the 10b5 rules to divest their personal Yahoo! shares over the shortest period of time allowed by law and hope that this mess hangs together long enough to get out with at least some amount of cash and a bit of dignity.  Based on her current situation, she could probably negotiate $30 to $50 million in total "out-the-door-walk-away" compensation.   Of course, Marissa will have to bone up on her "Wowww....what luck, we got out in the nick of time!" Blankfein-like speech she's going to have to give at the "what did you know and when did you know it?" Congressional hearings.   But she'll be fine.  Nobody ever goes to jail for this stuff.

Bold Prediction:

So there you have it. I'm projecting that Marissa Mayer, and any other executives or board members with first hand knowledge of this mess will resign relatively soon. It's the only logical choice for them to make.

Don't get me wrong, I've never met her, but I'm sure that Ms. Mayer is a wonderful person. She's just in a horrible, impossible situation. As if Mother Theresa's frock were caught on railroad tracks.....there's nobody rooting for the train.

Finally, please note, I'm not an insider. I'm not talking to any insiders. I'm not breaching anyone's trust. I've come to these conclusions because I've seen this movie before and apparently, I'm one of the few analysts truly enamored with the SEC filings. Again, it's all in the filings. All you have to do is connect the dots.




Additional References:

Jeff Smth's Letter to the Yahoo! Board

http://starboardvalue.com/publications/Starboard_Value_LP_Letter_to_YHOO_08.10.15.pdf

Nikesh Arora - $483 million personal bet on Softbank....with borrowed money.
http://www.japantimes.co.jp/news/2015/11/29/business/corporate-business/no-sweat-risk-taker-arora-lets-%C2%A560-billion-ride-softbanks-future/#.Vmi3v3arS00

Jackie Reses Resignation letter to Alibaba Board - September 16th, 2014.
http://www.sec.gov/Archives/edgar/data/1577552/000000000014048770/filename1.pdf

Yahoo! Filings & 12/9/15 Press Release
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001011006&owner=exclude&count=40&hidefilings=0 

LA Times - Estimates of Marissa Mayer's "walk away" money
http://touch.latimes.com/#section/-1/article/p2p-85294590/

Marissa Mayer Compensation History
http://people.equilar.com/bio/marissa-mayer-yahoo--inc./salary/668659#.Vm2Pemt5mSM

Marissa Mayer - CNBC - Change of Control payout discussion.

http://video.cnbc.com/gallery/?video=3000464853

Maynard Webb and Marissa Mayer CNBC Press Conference - 12/10/15

http://video.cnbc.com/gallery/?video=3000464428

Monday, December 7, 2015

So....how accurate was Deep Throat this year?......

As an investor, I believe it's important to review my decisions, thought process and results on a periodic basis.  Moreover, I've really enjoyed sharing my thoughts with you over the last year.  That said, in the interest of full disclosure, I'd like to review my posts over the next few paragraphs and let you decide how accurate my advice has been.

Questions received re: my last few posts.....

First, I'd like to post a few additional thoughts to address some general themes in the comments I've been receiving.  

Q: Re: "Why Genius is about to fail.....again"  Why do you hate technology?  High speed trading has benefited investors, reduced the cost of investing and made stock market access available to everyone.

A: I don't "hate technology".  Technology deployment has absolutely driven down trading costs and increased both the quantity and (sometimes) the quality of information.  In fact, this blog couldn't exist without technology.  Re: "Why Genius is about to fail.....again" The only thing I can refer to is the White Paper written by Eric Hunsader and referenced on pg. 280 of Flash Boys.  The paper chronicles the microsecond exchange activity that takes place when a large order is placed on a public exchange, in this case, a Buy order of 20,000 shares of Ford Motor Co. (F) at $17.38 a share.  The microsecond analysis shows how once a large order is submitted, there is a flurry of activity, primarily the cancellation of orders, the immediate withdrawal of liquidity and the inability of the order to be filled in its' entirety at the requested price.  The HFT's "jump the line" controlling shares that should have gone with the initial order, driving the price up.  It's estimated that the cost of this "slippage" (Flash Boys pg. 280) to a large money manager is a "tax" of roughly $240 million on $80 Billion in trades.  The money, of course, comes from Pension Funds, Mutual Funds and retirement accounts.  As a point of reference, today, the NYSE alone handles roughly $30 Billion a day in volume. The significant byproduct of this HFT phenomenon is the evaporation of "fake" liquidity when large orders are placed as described by Carl Icahn on his "Danger Ahead" website..  That said, there are also a number of studies, that HFT profits have fallen off dramatically, decreasing by more than 80% since 2009, yet the "fake" pseudo liquidity still exists.

Q: Why are you so doom and gloom?  You've been talking about this stuff for a year and nothing has happened?  The markets are humming along just fine.

A: I guess all I can say is, to paraphrase Warren Buffett, any good economist or investor can tell you what's going to happen, they/we just can't tell you when or how big it will be.  Next, if I've conveyed any sort of "doom and gloom" tone in my writing, I apologize.  That was never the intent.  I'm simply identifying and discussing odd, out-of-balance, global financial topics.  We've been on a great run over the last few years. We all hope that the ride goes on forever.  I'm just concerned, based on what I see, that it won't/can't....and I want to let my readers know.

Review of Deep Throat posts in date order:

Given the above, here are a few of the observations and projections made within this blog and where we're at today.

November 2014 -  Posted on Laura Logan's CBS News page and re-posted here on  12/26/2014 - Posted Alibaba's numbers are "suspect".  At the time the stock price was at $110.  Today it's at about $80 and has been as low as $57.  Mr. Market is just beginning to figure Alibaba out.

December 22, 2014 - Qihoo 360 was trading at $60.  I gave it a negative review.  Today it's at $70 and has been as low as $41.  Here was my review from last December:

"....the sole purpose of this enterprise is, apparently, to line the pockets of insiders.  Therefore the Intrinsic Value of this business, and the corresponding share value is US$0.00."

Even though the market seems to have, at least thus far, disagreed with my analysis, I'll stick with this valuation.  It's a dog with fleas.

December 23, 2014 - I referred to Lending Club (LC) as an "Impending Disaster" when it was trading at $28.  Today it's at $12 and on life support.

December 24, 2014 - The Valuation Problem.  I opined that the valuations of US Stocks were too high at the time.  At the time the S&P was at 2,060.  Today it's at 2,070, with a little wobble in August.  My opinion and the metrics supporting it, haven't changed.  Those of you who have been out of the equity markets haven't forfeited anything.

January 8, 2015 - Alibaba, the Ultimate Shadow Bank.  Like the Valuation Problem, the market hasn't figured this out yet.  As I had elaborated in the November 18th, 2015 post, I was talking with an analyst..,  there's significant undisclosed credit risk associated with the Alibaba/Alipay/Ant Financial relationship.  This will become apparent in 2016.

January 30th, 2015 - In Once Upon a Time... I discuss the Alibaba 12/31/14 6k and financial statements. Items of note were 1.) US$10 Billion Increase in "Questionable Assets" in just nine(9) months; 2.) Share-Based Comp being 16% of revenue; 3.) The blatant nondisclosure re: Alibaba/Ant and the integration of all of the absurd US$10 Billion in acquisitions accomplished in the prior nine (9) months.  Since then, as I've discussed in posts described below, the buffoonery has accelerated.

February 7th, 2015 - The Chinese Laundry, I provide details on how China's elite have been using Alibaba and other ADRs to move wealth out of mainland China.  Various sources estimate that hundreds of billions of US$ equivalents have been moved to dollar and Euro denominated investments and real estate in the third quarter of 2015.  The US Treasury estimates that capital flight was $200 billion in November 2015 alone. The flight is continuing.

February 17th, 2015 - What the Smart Money thinks about Alibaba.  Analysis of hedge fund holdings of Alibaba.  The conclusion was that Hedge Funds were generally not taking significant positions in Alibaba. The sentiment has continued.   As of the 9/30/15 13F's, only two (Viking & Blackrock) of the 22 hedge funds tracked s had a net-long position in Alibaba.  Ten of the 22 funds had held significant positions as of 9/30/14..

March 10th, 2015 - In The shape of things to come.... I discusses the parallel between NQ Mobile and Alibaba.  I described NQ as:

The answer to the question...."Is this business worth $4.00/share?"  I'm sorry, I don't even know how to answer the question.  I can't even classify this as a real business (It's certainly not run like one) and therefore I have no idea what it might be worth.  It's evolved into some sort of misguided start-up with weird baggage.  I don't know what to make of it and how it exists as a publicly traded security. It's a "money pit".  I can pretty much guarantee it's not worth anything near it's current $300 million market cap.  Like so many ADR's on life support, I expect this one to "go dark" at some point soon.

Today NQ Mobile is still bouncing along at $3.50 a share.  Not dead yet, but it's been given last rites.

March 28th, 2015 - The China Syndrome.  The post contained, among other projections: " The Shanghai, HK & Shenzhen markets would lose at least US$ 4 Trillion (40%) in value.  Again, as a point of reference, these exchanges lost roughly 2/3rds of their value during the 2009 US financial crisis."  Four months later, that's exactly what happened.

April 13th, 2015 -  "China's Dream....Defying Financial Gravity" where I described the inevitable devaluation of the Renminbi and capital flight from China.  Since that post there have been several RMB devaluations and the PBOC has spent nearly $300 billion in US$ Bonds and FOREX reserves to stabilize the floundering economy and protect the mainland equity markets from collapse. This, of course, will continue.

June 15th, 2015 - Alibaba, a year in review.  Review of the year end financial statements.  Elaboration on the "Questionable Assets" and accounting Shenanigans, as well as a detailed discussion on how Alibaba is faking GMV and Revenue.  

July 21st, 2015 - Tencent....10 cents is about what it's worth..... What can I say, the business was a fraud six months ago and it's still a fraud today.  Unfortunately, I don't see how you can short this "beloved" stock.  In the words of John Maynard Keynes "The market can stay irrational a lot longer than you can stay solvent"

August 21st, 2015 - Don't worry...be happy.  A detailed discussion on how the collapse of China's equity markets will impact US asset values.  The discussion focused on Hedge Fund leverage and the consequences of an abrupt liquidity event.  This "open item" remains one of my greater concerns in 2016.

September 14th, 2015 - Anatomy of a Financial Contagion and Kayaking the Chicago Wilderness. A detailed discussion of how Alibaba's inevitable collapse will destroy both Softbank and Yahoo!
  
October 14th, 2015 - Why Genius is about to fail....again.  An analysis of Carl Icahn's concerns about leverage and liquidity, specifically related to ETF's.  

November 2015The four November posts:  Bowenpress estimates 64% of Alibaba's "singles day GMV is fake......; I was talking with an analyst......The Silliness Continues....;  One of these things is not like the others......;  All of these posts discuss the ridiculous financial metrics being reported by Alibaba.  Especially in relation to the "stealth recession" currently underway in China.  I had assumed that investors would have discovered the level of mis-rep by now, but it seems to be taking longer than I had anticipated.  Again, my assessment of the intrinsic value of Alibaba hasn't changed.

Summary

After reviewing my work over the last year, much of the above has either, a.) Already happened; b.) Begun to happen; or, c.) Is too soon to tell.  So far, I've not seen anything I've said where I was "dead wrong". Honestly, based on the dire consequences if my forecasts are at all accurate, I actually wish I was "dead wrong" on much of it.

Again, I can only tell you what's going to happen, I have no way of knowing exactly when it will happen or how big the event(s) will be.

HAPPY HOLIDAYS! 




Saturday, November 28, 2015

Bowenpress estimates 64% of Alibaba's "singles day" GMV is fake....

Bowenpress, a SanFrancisco based Chinese language news website, founded in 2004, is reporting that the 11/11/15 "singles day" is not all that Jack Ma and company make it out to be.  As my readers know, I'm not conversant in Chinese, but I have a number of good friends who are.  You can get a rough translation using Google Translator, but here are some of the more remarkable translations, per my good friends:

"On TMall's Global Shopping Festival of 11.11.2015, the platform saw 91.217 bln in transactions, of which 68.67%, or 62.642 bln, were by mobile handset. creating yet another Chinese consumer miracle.Today, the total return rate for TMall and Taobao is 64%, exposing the high rate of fake transactions on those platforms.

Deep Throat note:  At 91.2 billion transactions with US$14.3 Billion in associated GMV, this would put the GMV pre transaction at 15 cents each.  i.e.) More silly numbers prompting the question "exactly what's included in a transaction?". 

"On this topic, Jack Ma gave a surprising response: 'Double 11 will be here for a century, even if Alibaba itself is gone, Double Eleven will persist!'

"Today, the return rate from TMall and Taobao has already reached 64%,worth 57.4 bln RMB (USD$9.2 Billion) in amount returned, showing that as long as there are Taobao and TMall, there will be a lot of faked transactions.

"Industry sources say as long as there is Taobao there will be fake transactions. Take one example: If two online stores have the same products at roughly the same price, and one has made 1,000 sales and has a lot of positive reviews,while the other has just a few dozen purchases and so-so reviews, what choice will the customer make? You can believe that most customers will choose the store with more transactions and more reviews."

Caixin, the Beijing based media group, understandably, hasn't picked up this story yet, being under more government scrutiny .  The closest they've come to questioning the veracity of the numbers is to question whether "Singles Day" is really beneficial to the Chinese economy.

Of course, this is yet another source which is validating the content of this blog, as well as the questions posed by other news organizations Barron's (John Laing), Fortune (Jen Wieczner), Bronte Capital (John Hempton) , MarketWatch (Francine McKenna) , CNBC) as well as Gorgon Chang's prophetic article from 2014 citing estimates from the China Industry Research Network, Gartner and Barclays that Alibaba's GMV, as well as that of other eCommerce businesses, was roughly 25% overstated..  

I wouldn't be surprised if the Bowenpress estimates aren't at least directionally correct.  To beat the ever-higher figures from previous years and blow by analyst estimates, Alibaba would need to continually inflate their fake numbers.  There's a cottage industry that's been developed arrounf fake GMV.  It's probably becoming a core skill set!  

Question of the day:  What would happen if we found out that 64% of Walmart's or Amazon's sales are fake?  

I think I'll get on-line right now and start snapping up some of those Cyber-Monday deals!

Happy Holidays!

Original Bowenpress post URL
http://bowenpress.com/news/bowen_40416.html

Wednesday, November 18, 2015

I was talking with an analyst......

...over the weekend who is considering initiating coverage on Alibaba. The fundamental question she raised was "what's a reasonable target for the stock?" She's an avid reader of this blog and wanted my thoughts on how to "strip off the fluff" and zero in on the real value of the core business. As I had discussed in the last post, most analysts and Hedge Funds are concerned, and rightly so, about the veracity of the accounting (consolidation and asset carrying values), rapid cash burn as well as the GMV legitimacy.

We also discussed my "Bold Prediction", that Alibaba would be looking at issuing bonds soon. She revived an interesting alternative, that warrants some discussion. Jack and company might be accelerating the Ant Financial/Alipay IPO. Although, my prediction was based primarily on simplicity (They would cookie-cutter the November 2014 Bond Issue), an Ant/Alipay IPO could be much more lucrative, with estimates floated by the financial press of up to $50 Billion. My guess, after talking with friends "in country" is that the Alipay IPO is might be off the table, or at least on life support for now.

Here's why...

Based on the Alibaba IPO filing 424(b)4 filing (pg 258-267) there are several components of "Other Income, net" as reported on the financial statements.

1.) The transaction processing fees payable to Alipay/Ant(SMFSC) on Alibaba's platforms. According to the filing, this fee was running at about 4.5% of revenue and 0.14% of GMV at the time of the filing. Authors Note: Really? Alipay can perform escrow services for 0.14% of the transaction value? They must be incredibly efficient.

2.) Alibaba is entitled to 37.5% of the pre-tax Net Income of Alipay/Ant(SMFSC)

3.) Alibaba is entitled to 2.5% of the average Daily Loan balance, presumably to be accrued in the financial statements and reported in "Other Income, net".

4.) An IPLA - Intellectual Property (Royalty) agreement as well as a "Shared Services" agreement whereby Alibaba sends a bill to Alipay/Ant(SMFSC) on a regular basis. Presumably, this number is calculated by Maggie Wu calling the CFO at Alipay/Ant(SMFSC) and telling him/her what the number should be.

As is typical for Alibaba, the financial relationship with Ant/Alipay(SMFSC), namely, the transaction fees paid; the offsetting 37.5% pre-tax profit sharing; as well as the 2.5% commission on average SME loan balances, have never been disclosed since the day these line items were referenced in the IPO filing. Presumably, all of these expenses and revenues are netted/buried in "Other Income, net" line of the Income Statement.

With 900 million Alipay users and a significant financial interest/exposure/relationship, the numbers are clearly material and should be disclosed. Period.

According to the IPO filing, the transaction fees payable by Alibaba to Alipay for 2012, 2013 and 2014 were running approximately 4.5% of revenue and 0.14% of GMV at the time of the IPO. Since the transaction fees are netted against the profit sharing and commissions yielding roughly zero, we can do some extrapolation, providing there are no other "odd", undisclosed, material transactions thrown into the mix. Let's assume, for the sake of argument, that Ant financial is run like most of Jack's other businesses, i.e.) Like his own personal piggy-bank, presumably used to reward friends for their loyalty , provide a source of fun-money and fund odd, money-sucking eCommerce start-ups and acquisitions. If we assume that Alipay has no/little pre-tax profit, we come up with some interesting suppositions per the schedule below.

Per the above, based on the law of large numbers, let's say that the relationship of Alipay fees paid to revenue holds constant. When we apply the 4.52% ratio to revenue we can calculate the fees paid. We can also extrapolate and adjust Alibaba's Net Income to see what the business might look like if there was no relationship with Alipay/Ant(SMFSC). We can remove the fees (as a proxy for the Profit Sharing 37.5%, SME Loan Balance 2.5% payment and IPLA/Shared Services obligations owed to Alibaba) as well as the "Write-up/Gain" of "Deemed Disposals of Investees and other BS" as described in the financials. When we calculate "Adjusted Net Income" the exercise yields a stunning result. Namely, for an enterprise the size of Alibaba, it has no earnings/net-income to speak of . In fact, from 2014 prior to the IPO, Net Income has declined from US$3.1 Billion down to an annualized rate of roughly $2 Billion while Revenue is on pace to more than double during the same period. Again, with meteoric growth like this Alibaba should be hauling cash to the bank in dump trucks, yet they have puny earnings and are burning through cash. Perhaps Alibaba management should consider "managing to a profit margin" despite their repeated, public refusal to do so. Moreover, the above doesn't yet reflect the inevitable future write-offs of the rest of the "Questionable Assets" as described in my prior posts.

In addition, if we assume that Alipay has little or no pre-tax net income (37.5% Profit Sharing), we can conclude that the offset to the Transaction Processing fees is attributable primarily to the 2.5% payment on "Average SME Loan Balance" and calculate the amount of loans outstanding accordingly. This "SWAG" tells us that SME loans outstanding have increased rapidly from roughly US$8.1 Billion in 2014 to about $24.5 Billion today.

Credit Risk associated with Ant Financial (SMFSC)

You'd also have to be living under a rock not to have heard about the explosion of debt, "Wealth Management Products" (WMP's) and Money Market instruments in China. As we've all learned, rapid increases in debt levels, loosening of underwriting standards and easy money generally cause a corresponding increase in defaults. People/businesses get overextended and they can't pay their loans back. Who knew? Gordon Chang (Forbes) just wrote a nice piece on the acceleration of bond defaults in China referring to an eventual "debt tipping point" which might have some bearing on Alipay/Ant (SMFSC) going forward. Since nothing has been disclosed re: the financial condition of Alipay/Ant (SMFSC), as Investors we can either assume:

A.) That Alipay/Ant (SMFSC) is a button-down, smartly managed savvy financier making loans to only the most credit worthy businesses and individuals, at interest rates that protect shareholder value; or

B.) A bucket shop making bad loans at a breakneck pace to any knucklehead who walks in the door in order to show incredible top-line growth.

If I were to guess, since Alibaba management has never been shy about disclosing favorable financial metrics and we know nothing about Alipay/Ant (SMFSC) , I'm thinking the latter (B) is the more likely of the two.

What if Alipay charged "Normal" Processing fees to Alibaba?

Based on the 0.14% of GMV fee that Alipay charges Alibaba to process the escrow services, it's clear that either: 1.) The reported GMV number is silly (a distinct possibility as described in prior posts); 2.) Alibaba is getting the "deal of the century" on processing fees since the two businesses are related; or 3.) Both.

Hypothetically, let's say, for example that Alipay charges a "normal" processing fee of 2% of GMV. For the fiscal year ended 3/31/15, Alibaba's estimated processing cost increases from US$550 million to US$7.7 Billion. Adjusted Net Income (Excluding the $1.5 Billion of Asset write-ups as described in the Table above) is reduced from $1.8 Billion to a Net Loss of $5.3 Billion.

So with "real" sustainable earnings reduced from a roughly $2 Billion profit to $5 Billion annual loss, it's clear that without a fundamental change in the revenue/cost structure, Alibaba isn't worth as much as it appears. This is especially true if Alipay/Ant(SMFSC)/Jack requests a price increase.

Earnings Management

Finally, has it occurred to anyone that this construct is designed (perfectly) to manage earnings and siphon same away from BABA to Ant/SMFSC? and/or even visa versa depending on Jack's mood or which way the wind is blowing? According to the filings there are 300 +/- separate operating companies/businesses in the VIE. There's never been ANY discussion of which businesses are consolidated, accounted for under the Equity Method or how these far a-flung businesses (Movie Companies, Soccer Teams, Software Development, Logistics/Distribution, etc.) have an impact on Revenues and Expenses. On every 6K thus far, all of these diverse businesses and revenue/expense streams are reported in a big blob entitled "China Commerce". This is, of course, no accident. As investors, it's painfully clear that management has been going to great lengths to show us only the most favorable half of the puzzle.

Back to the Original Question.....

So what's the stock price target for this mess? There clearly is "some value" in a brand as ubiquitous as Alibaba. The tentacles reach far and wide. They are a "beloved" company. Everyone in China uses the Alibaba ecosystem.  I get it.

 On the other hand, all the signs of an Enron/Valeant/WorldCom/LTCM/Lehman/WAMU, etc-esque, out of control management, off the books, pervasive half-truths and financial mis-rep are all there. Given the above, the only thing I can be sure of is that the target price should be substantially below where it is today. After all of the write offs and recapitalization, the core business would probably be worth somewhere around 20x its 2013 earnings (prior to all of the Shenanigans) or roughly US$20 Billion.....so somewhere around $7 a share. Of course, current shareholders would be wiped out on the re-Cap as preference classes would generally get paid first. Unfortunately, that's just the way these things go.

Of course, there's a good chance that my calculations above could be materially in error, yet these guesses are all we have to go by. As investors, we wouldn't have to speculate and perform all of these financial gyrations if Alibaba management would simply fully disclose these numbers. But as we've seen so often in the past, subterfuge and obfuscation, describing only part of the puzzle are more the rule than the exception when it comes to financial disclosure for Alibaba and the rest of these odd eCommerce ADR's.

There you have it....like nearly every analyst out there, I'll agree......Alibaba is indeed a STRONG BUY....at $7.00 per share.





Additional Reading:

Alipay IPO
http://www.bloomberg.com/news/articles/2015-01-30/alibaba-finance-arm-said-to-plan-2016-initial-public-offering-i5je2vu0

Bond Default
http://www.forbes.com/sites/gordonchang/2015/11/15/chinas-largest-bond-default-ever-the-last-tipping-point/?utm_source=followingimmediate&utm_medium=email&utm_campaign=20151115


Thursday, November 12, 2015

The Silliness Continues....

I'll be brief....Yesterday Alibaba released it's un-audited, unverifiable, Singles Day GMV figures, which increased to US$14.3 Billion, more than 50% over last year's astounding number.  Based on the previously published "US$30 per order" metric.  Chin'a "singles" placed roughly 476 million "orders" on the Alibaba "ecosystem" in one day. (pardon all of the quotes but each of these terms has a special meaning when it comes to Alibaba)

According to China's NBS, there are roughly 110 million "single" (unmarried and not including widowed) people living in China's urban areas, acknowledged by Alibaba as their more affluent, "wheel-house" customers. By that math, in one day, despite working long hours, these hard working, busy, Singles somehow found the time to place 4+ orders each within the Alibaba ecosystem. Alibaba must indeed be an incredible marketer to achieve more than 100% market penetration on a holiday/promotion that didn't even exist a decade ago!....and they accomplished this feat in a financial crunch where there are no other significant Chinese ADR's I could find that currently have substantially increasing revenue!....Bravo!

Alibaba apparently achieved this never before seen market penetration through their cutting-edge advertising, for instance, hiring Kevin Spacey channeling his role as Frank Underwood to sell M&M's, burner phones, raincoats and disguises.  Apparently, House of Cards is HUGE on Sohu (China's Netflix).....who knew?

Before I get inundated with e-mail from Chinese shoppers telling me how much they love Alibaba and that they couldn't live without it, let me just say, I understand, I get it..  Alibaba is ubiquitous, everyone in China uses it. It's everywhere.  It's a "beloved" company.  The concept is GREAT! Conceded.  My concern has always been about shareholder value and transparency.   Unfortunately, Alibaba has neither.  People are beginning to catch on.  Here's a Video Clip on CNBC,  Pacific Square's Herb Greenberg saying the same things I've been saying for more than a year.

As I type, there are hedge funds around the globe surveying Chinese consumers just to get a handle on the veracity of these numbers.  Taken at face value, the Singles Day numbers seem absurd.  

Bold Prediction:

Right now, based on the GMV and Revenue numbers reported, Alibaba should be taking cash to the bank in dump-trucks, yet, the hard facts are that, if the numbers are to be at all believed, since 12/31/14, they've been burning through cash at a rate of nearly $2 Billion a quarter (Currrent Assets - Current Liabilities) and with the acquisitions of Youku Todou and  Suning that burn-rate will be increasing. I can hardly wait to see what happens when they try to pay their bills with "Goodwill".

Moreover, as you might recall, the primary purpose for the IPO was to "Cash Out" the consortium of US banks who had over-extended a maxed out ($8 Billion) revolving line of credit to Alibaba.  Once they figured out what was going on, the banks dumped the exposure onto American Investors via the IPO and an US$8 Billion Bond Issue in November of 2014.  As an aside, the interest rate on the Revolver was variable around 6.7% at the time of the IPO.  The bonds were issued at various rates from 1.625% to 4.500% depending on the term.  The ADS, of course, pays no dividend.  Quite an improvement on the credit/risk profile overnight I must say.

Currently, there is no significant credit facility in place, at least as disclosed in the financials. Presumably, US Investment Banks won't give them another nickel after they saw the handwriting on the wall in August of 2014, so Alibaba will be scouring the globe for cash shortly.  Again, I'll play the "if I were treasurer" game. What would I do if I had to try to fund this mess?  I'd call my US Investment Banker friends of course, and for enormous fees, I'm sure I could convince them to underwrite another bond issue, I'd probably be looking for US$5 Billion, Of course US$10 Billion would be better, but I might not want to appear greedy.  Based on my fantastic plans, incredible projections, persuasive persona and exhibited meteoric, although dubious growth, I'd convince the 30-year-old, Ivy League, wet-behind-the-ears analysts at the US rating agencies to slap a AAA rating on these bonds so I could sell them to Pension Funds, Mutual Funds, Widows and Orphans, just like we did with those wonderful Mortgage Backed Securities a few years ago.  I will have done my job as treasurer, get a huge bonus and Jack will have lived to fight another day.

The more things change....the more they stay the same.

CNBC - Herb Greenberg - Pacific Square - Alibaba Accounting Issues
https://finance.yahoo.com/video/red-flag-alibaba-greenberg-174100058.html

Kevin Spacey, House of Cards & Singles Day
http://www.usatoday.com/story/tech/2015/11/10/kevin-spacey-house-cards-china-alibaba-singles-day-frank-underwood/75552002/

USA Today - Singles Day
http://www.usatoday.com/story/tech/2015/11/11/chinas-e-commerce-company-alibaba-sells-record-143-billion-singles-day/75575434/

CIA Factbook Population Stats
http://www.indexmundi.com/china/demographics_profile.html

NBS Population Stats
http://www.stats.gov.cn/tjsj/ndsj/2014/indexeh.htm

Bond Issue
http://www.sec.gov/Archives/edgar/data/1577552/000110465914082832/a14-23964_4ex99d1.htm

SEC Public Correspondence
http://www.sec.gov/Archives/edgar/data/1577552/000119312514237452/filename1.htm

From my post on Lara Logan's CBS News Blog (December of 2014 - Also reposted on this blog)

Here's a curious Question & Response from the 6/16/14 Public Correspondence; p15 filed on the SEC site:
SEC Q: We note your statement on page 106 that you believe that your “current levels of cash and cash flows from operations and from existing credit facilities will be sufficient to meet [your] anticipated cash needs for at least the next twelve months.” However, we also note that it appears that you drew down the remaining capacity on your US$8.0 billion credit facility in April 2014. As the credit facility has been fully drawn down, please revise your disclosure accordingly.
BABA A: In response to the Staff’s comment, the Company has revised the relevant disclosure on page 116.
I guess my bigger question might be:  Why would any Treasurer max out an US$8 billion USD$ credit line when 91% of BABA's business is denominated in RMB?  Especially since there are possible PRC restrictions on using RMB to satisfy US$ denominated bank debt? There are lots of possible answers here.....none of them would be good.

Let's talk about the BABA Credit facility in a little more detail.  Of course, it's underwritten by the same players who are underwriting the IPO. All references are to page numbers in the 424(b)4
-Affiliates of Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs (Asia) L.L.C., J.P. Morgan Securities LLC, Morgan Stanley & Co. International plc, Citigroup Global Markets Inc., BOCI Asia Limited, CLSA Limited, HSBC Securities (USA) Inc., Mizuho Securities USA Inc., BNP Paribas Securities Corp., ING Financial Markets LLC, RBS Securities Inc. and SG Americas Securities, LLC, as well as DBS Bank Ltd., are lenders, and an affiliate of Citigroup Global Markets Inc. is the facility agent and security agent, under the US$8.0 billion credit facility (p314)
-The US$8 Billion facility was fully drawn down at of 3/31/14.  An additional US$3 Billion facility was put in place In April of 2014.  (p45)
-The weighted average interest rate for all long-term other borrowings for the year ended March 31, 2013 and 2014 was approximately 6.3% and 6.7%, respectively. (pF-64)
-BABA increased bank debt from US$0.00 in March of 2012 to more than US$ 10 billion as of June 2014. (27 months)
- The interest load, at 6.7%, US$670 million/yr., could break the covenants required by the facility. (p144-145) & (p45)
-If the Covenants are broken: "including by failing to maintain certain financial ratios, our lenders will be entitled to accelerate our debt obligations. Any default under our credit facility could require that we repay these loans prior to maturity as well as limit our ability to obtain additional financing, which in turn may have a material adverse effect on our cash flow and liquidity" (p45).
Again, I'll ask, why would any Treasury Officer incur that level of debt and interest expense, so quickly, in a foreign currency, potentially causing the debt covenants to be broken in the relatively near future?   The plot thickens.....stay tuned.....


Sunday, November 1, 2015

One of these things is not like the others......


When my children were young we used to enjoy the little Sesame Street song  "One of these things is not like the others".  The tune asked: "can you guess which one?"  We always had lots of fun solving the puzzles and in fact, this little tune has served me well throughout my career.  Often, to this day, when I'm reviewing SEC filings trying to understand the numbers, the tune inexplicably pops into my head.  Although, over the years, the "things" have gotten a bit more complex.

Speaking of the above, I took the time to listen to Alibaba's Investor call earlier this week.  As usual, the irrelevance and subterfuge of the presentation was surpassed only by the banality of the questions asked by the analysts.  As usual, Alibaba reported meteoric GMV, huge revenue growth, and sizable increases in other, unverifiable e-Commerce metrics. The market reacted accordingly this week, pushing the stock back up over $83.00 at the time of this post.

Let's start with the obvious.   First, China is in a "stealth recession".  Despite what the NBS publishes, like the chronically unemployable, drunken uncle at the Thanksgiving table, nobody mentions it and the rest of the family pretends he's invisible as he drools into the candied yams.  Yes, I know, you are thinking, "Good old Deep Throat has lost his marbles.  Per the NBS, China is growing at 'about 7%'....Alibaba is a juggernaut!".

Well, let's all warm up our vocal cords and start singing our little Sesame Street song.  Below is a chart showing Alibaba's quarterly GMV in comparison to the quarterly revenue of some of the largest businesses in China.  The Market Cap of these seven (7) businesses is just shy of US$ 1 Trillion so the revenues should be relatively representative of China's economic activity compared to prior quarters. I've selected the five (5) largest ADRs by Mkt Cap, a Utility (HNP), another e-Commerce stock (JD) as well as a variable tracking the Shanghai/10 Stock Index.  The company data was compiled from the SEC filings.



As we can see from the above graphic,  the Chinese people have apparently fallen gonzo-crazy-in-love with Alibaba.  Even though, during the  quarter, China's stock markets crashed, falling 40%, it seems China's consumers continued to relentlessly shop, driving Alibaba's GMV up 28% YOY.  Oddly, during the quarter, they spent significantly less (QOQ) on gasoline and fuel (PetroChina -8%), financial products (ChinaLife - 30%), Cellphone Service (ChinaMobile - 4%).  Moreover, electricity consumption (Huaneng Power),  E-Commerce Consumer Electronics (JD.com) and Internet Search/Service (Baidu) revenues remained flat.  So the Chinese consumer is apparently forgoing these everyday necessities in order to shop on Alibaba?  Again, the enormity of this GMV reported as "flowing through the Alibaba ecosystem" is staggering,  It's 1.6 times the Revenue of PetroChina, the second largest Oil Business in the world (600,000 employees).  It's larger than US Walmart revenue. The annualized Run-rate represents roughly 10% of China's Consumption (NBS). (Walmart is roughly 2.5% of US Consumption)

The Investor Call

Generally, people tend to ask fewer questions when they are paid a lot of money not to ask them.  I get it. Nonetheless, the Investor Call was informative on many levels, despite the absence of any questions regarding:

1.) US$3 Billion booked in the quarter (US$7 Billion in the last 6 months)  as a "Gain on deemed disposals /disposals/revaluation of investments" and composition of same during a 40% Market Crash;
2.)The US$500 Million of Share-Based Compensation (14% of Revenue);
3.) Zero % Revenue growth in two of their most ballyhooed acquisitions, AutoNavi and UCWeb;
4.) The massive increases in "Questionable Assets" (Goodwill, Intangibles, Land Use Rights, Investment in Equity Investees, Investment Securities) of US$8 Billion in the quarter. These "Assets" are now US$29.4 Billion and represent 58% of all Balance Sheet Assets.  Again, this miraculous asset write-up took place in a quarter where the Chinese Stock Markets had crashed.

That said, there were actually three (3) pretty good questions asked.  It was the answers that, at least, to me, were a bit confounding.

Question #1:   Asked by Ming Zhao of 86Research  : Minute 28 of the call ming@86research.com.
Mr. Zhao asked about GMV Category Mix.  What types of products are being sold?  Where are the growth areas?  Daniel Zhang responded with a general (paraphrased), "Consumer electronics, cell phones, large appliances, basic necessities, food and beverage, especially fresh food, are popular on-line."  Really?  That's the product mix analysis?  I would have hoped to get a little more granularity, perhaps, for example, something like "Today, 50% of our GMV is comprised of  Industrial Goods, Real Estate, Loans and 'Bad Assets' closed off-line, outside our platform (like Craig's List), but recorded as GMV anyway; 45% is cheap clothing and chotchkies delivered randomly by 1.5 million bicycle and scooter operators; and the last 5% is illegal, counterfeit, knock-off American & European brands."  Perhaps my expectations re: transparency are just a bit out of line with management's thinking.

Question #2 - Ross Sandler of Deutsche Bank - Minute 34 of the Call. - ross.sandler@db.com
Mr Sandler asked about the macro outlook of GMV going forward, referring to China's slightly stalled economy.  Joe Tsai stepped in and commented that (paraphrased) "If China's  economy is going gangbusters then Alibaba will certainly benefit.  On the other hand, if things slow down a bit, the Chinese consumer won't be affected very much, since consumption is relatively low by Western standards and bound to increase.  Consumers have plenty of cash, savings and liquidity. Wage growth has also increased and shoppers have a high savings rate."  My comment would be that, after reviewing the revenue numbers for the businesses above, given the conservative, frugal nature of the Chinese consumer, and a decades long, ingrained pre-disposition to save and NOT shop, wouldn't you expect them to "hunker down" and slow spending in tough times?  It's unlikely, and in fact, to my knowledge has never happened in the history of modern economic science, that consumer and retail spending would somehow continue to ramp up in a slowing economy.

Question #3 - Robert Lin of Morgan Stanley - Minute 21 of the Call - rob.lin@morganstanley.com.
Mr. Lin asked (paraphrased), "Given the growth of on-line to off-line retail and that brick & mortar stores are now reporting that 25% of their volume is through Alibaba, how is GMV reported?"  He was presumably getting to the core of a potential problem where GMV, similar to what goes on at JD.com, is recorded as sales (GMV) multiple times without the product ever leaving the store.  i.e.) a stereo is sold, returned and sold again.  My sources inside China have estimated that JD.com's Revenues are probably overstated by 20%-30% because of this monkey business.   As discussed in prior blog posts, per the SEC filings, Alibaba does not report merchandise returns and/or allowances as a reduction to GMV like other e-Commerce businesses (Amazon, E-Bay, etc) do.  The response by Daniel Zhang was, predictably (paraphrased) "GMV is reported on our on-line sales".  Again, not exactly the transparency I was hoping for.

So, here's today's Thesis to be tested over time:  

Of course, I'm not directly accusing anyone of incompetence, misrepresentation, puffery or anything illegal here.  I'm just posing a possible thesis:

Is Alibaba really an unstoppable marketing juggernaut, capable of defying modern economic theory and market forces, with the ability to show double digit YOY growth forever?  Or.....is there a more obvious explanation of the numbers presented in the Investor Call.......i.e: the books are cooked.




10/27/15 - Presentation
http://www.alibabagroup.com/en/ir/presentations/pre151027.pdf

10/27/15 Investor Call
http://edge.media-server.com/m/p/htxeh3jg/r/1

10/27/15 - 6k Filing
https://www.sec.gov/Archives/edgar/data/1577552/000110465915072968/a15-21796_1ex99d1.htm

SEC Filing Search - PTR, HNP, BIDU, JD, CHL, LFC, BABA filings.  JD.com 9/30/15 Revenue from Yahoo! Finance - Analyst Estimates (11 Analysts Average)
https://www.sec.gov/edgar/searchedgar/companysearch.html

Wednesday, October 14, 2015

Why Genius is about to fail.....again.....

One of the joys I derive from this blog is the opportunity to think about, share and weave diverse ideas from seemingly unrelated sources into a flowing tapestry of financial prognostication.  Thus, the following is one of the more complex, confusing and tedious topics I've attempted to tackle thus far.   Given that preamble, I'd like to suggest the following materials you may want to become familiar with.  This post will make a little more sense if you have a working knowledge of same. (URL's listed in the References at the end of this post)  As always, if you'd like to skip the suggested reading and trust my analysis you are welcome to give it a shot.  I'll try to summarize/simplify my work as much as possible.

Suggested Reading/Viewing

  • When Genius Failed - Roger Lowenstein - (any library or book store)
  • Flash Boys - Michael Lewis - (any library or book store)
  • The 6/30/15 10-Q's of JP Morgan, State Street, Blackrock, Goldman, Citi, Bank of America & Wells Fargo
  • The 12/31/10 10-K's of same.
  • SEC Report on Market Events - Flash Crash - 5/6/2010
  • CBS 60 Minutes - "Hands off the Wheel" the future of self driving cars.

Carl Icahn & Today's Thesis

A few weeks ago Carl put an entertaining little video clip on his website entitled "Danger Ahead". I didn't know what to make of it at first. There's some political rhetoric, philosophy and a dire warning. The cartoon of Janet Yellen and Larry Fink driving an "Interest Rate Party Bus" over a cliff as well as Carl's characterization of BlackRock as a "very dangerous company" caught my attention, if only because when billionaires make fun of other billionaires it makes for good theater. Carl is apparently really concerned about junk bonds, lack of liquidity and all of Larry's "Dangerous" ETF's. So here's my Question/Thesis.


  • Is Carl: A.) A disgruntled billionaire upset because he's not getting a big enough piece of the pie, airing his anger and frustration in public?, or: B.) Brilliant?


I've written about valuations, leverage and Hedge Funds in several prior posts (See: The Valuation Problem, Valuation - Additional Data, Don't Worry, be Happy) but I felt Carl was touching on something even deeper and more ominous in his video clip .  So, let's start where we always start when we want to figure something out.  The SEC filings of course!

The table below shows the Tier 1 Capital & Ratios, Equity, Bank Assets, Assets Under Management (AUM) and Off-Balance Sheet Assets (OBS) for "The Usual Suspects" as of 6/30/2015 vs. 12/31/2010.  All of the businesses below are apparently speeding along merrily on Carl's "Interest Rate Party Bus".



The table above shows a couple of remarkable items for these businesses.  First,  all of the above, where applicable, meet the "Well Capitalized" Tier 1 Capital definition per the FDIC.  Yet, from 2010 to 2015 Balance Sheet Equity has increased a mere $168 Billion while Total Assets (Bank Assets, AUM & OBS Assets) have increased roughly $20 Trillion.  A table containing the related page references to the 10-Q's and 10-K's as well as the links to same are listed in the References Section below.
The bar chart to the left describes the enormous increase in Assets Under Management (AUM) of $3.8 Trillion and OBS-Assets (OBS) of $15.7 Trillion from 12/31/2010 to 6/30/2015. The Pie Chart below illustrates the percentage composition of the change in Asset Value. Note that the combined increase in Equity over the period, for this sampling of the largest financial institutions in the country, when compared to the change in asset value is what accountants might refer to as a "Rounding Error".  Further note that there is no SEC requirement to describe the OBS increase.  For example, State Street discloses the $28.6 Trillion of OBS Assets as a single line item on pg 4 of their 6/30/15 10-Q with a few details "by continent" and "by type" on pg. 12.  That's it.  You'd think $28. 6 Trillion might merit a bit more discussion.  The "creation" of all of these assets wouldn't necessarily be disconcerting if the economy and earnings were booming, but unfortunately, they are not.  Again, the relationship between this asset growth and the real economy is out of balance.

The Pie Chart below describes the Composition of this $20 Trillion increase, with Assets Under Management (AUM) and Off-Balance Sheet Assets (OBS) leading the charge.  Keep in mind that this $20 Trillion increase ($98 Trillion Total Assets), is attributable to the nine(9) businesses listed above.  According to the Investment Company Institute (ICI) there are nearly 17,000 Investment Companies operating in the US today.  If I were to guess, I'd bet that the smaller businesses are doing their best to mimic the behavior of the big guys.


So let's think about the above in layman's terms.  Financial Institution Assets are easy to understand.  When you deposit cash with these institutions, that's their Asset with an offsetting Liability (i.e. they owe you the money).  Assets Under Management (AUM) are a little trickier.  These are generally Securities held in a fiduciary/management capacity subject to a change in value where the institution has a more limited liability to the owner of the Securities.  In other words, they'll have to give the securities, or the equivalent value back at some point if requested.  Value to be determined at along the way, therefore they are "on" the balance sheet.  Off-Balance Sheet Assets (OBS) are even more difficult to visualize.  Generally, OBS Assets, or "Assets in Custody" are derivatives, futures, options, or some sort of contract which the institution has no offsetting legal liability.  For the purpose of this discussion let's just say that OBS Assets are simply contractual "Promises" to pay somebody something at some point in the future.  The form is generally, "I'll Promise to pay you $1 Billion dollars worth (today's value) of Asset A in a year in exchange for your Promise to pay me $1 Billion worth (today's value) of asset B in a year. Since we are both fine upstanding citizens and have AAA credit, there's no problem if we accomplish this transaction with, as they say "no money down". The Promises are built on trust and faith in the counterparty's ability to deliver.  Unfortunately, like the man who finds out that he's unknowingly married a retired escort, it's not unreasonable to expect at least some level of infidelity and a few broken Promises along the way.

These Promises are usually based on the value of some other security, property or index.  OBS Assets are recorded in nominal form and are generally not described in financial statements.  The thinking is: They don't have to be recorded as Assets and offsetting Liabilities since the institution has no legal obligation re: same. The institution is simply a repository, the same way that the contents of Safety Deposit Boxes are not assets of the institution or recorded on the Balance Sheet.  Of course, like Safety Deposit Boxes, the institutions charge fees for their OBS custodial services.  The concept of these Promises has been around for a long time, yet, in the history of finance we've never had more Promises on the books, or more retired escorts managing them.  Now let's take a look at why all of these Promises have been created.

The Dawn of the ETF

ETF's have been around since the early 1990's with the launch of SPY,the "Big Dog" of  ETF's which tracks the S&P 500 Index and currently has AUM of roughly $170 Billion.

US ETF assets have nearly quadrupled since 2008 from $531 Billion to More than $2 Trillion today according to the Investment Company Institute (ICI).   These are relatively complex vehicles, although in Carl's words "nobody understands these things".  They are marketed as mutual fund equivalents, intended to track stocks, bonds, indexes, etc., but let's take a look at some of the wording in a Prospectus.  The language below happens to be from BlackRock's iShares S&P 500 (IVW) ETF (p S-2), but many/most of these funds have similar language.
________________________________________________________________________________
BFA uses a representative sampling indexing strategy to manage the Fund. “Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to that of the Underlying Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the Underlying Index. The Fund may or may not hold all of the securities in the Underlying Index. The Fund generally invests at least 90% of its assets in securities of the Underlying Index and in depositary receipts representing securities of the Underlying Index. The Fund may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates, as well as in securities not included in the Underlying Index, but which BFA believes will help the Fund track the Underlying Index.

The Fund seeks to track the investment results of the Underlying Index before fees and expenses of the Fund. The Fund may lend securities representing up to one-third of the value of the Fund’s total assets (including the value of any collateral received).

____________________________________________________________________________

The remarkable thing about this structure is that these funds can use just about any financial instrument imaginable to achieve the intended results. They can also "loan" shares up to 1/3 of the portfolio. (Remember Re-Hypothecating & Infinite Leverage from my "Don't Worry, Be Happy" post?)

The SPY Prospectus, (which specifically prohibits the Fund from owning futures/derivative and Depositary Receipts) lists all of its equity holdings by share.  Conversely, many ETF's don't provide a "balance sheet" actually describing the Fund's holdings.  They produce a "fact sheet" or marketing materials describing the largest  intended holdings. These "holdings"  might be the actual stocks, they might be "loaned stocks" or they might be represented by Depositary Receipts or futures/derivatives.  For example, in the IVW and funds with similar structure, due to "Representative Sampling", there may, in practice, be very few of the underlying S&P 500 Stocks actually held by the ETF.  The structure of the fund not only allows this misdirection, but encourages the behavior on the part of the fund manager.  Returns are magnified and cost of capital is reduced since the ETF has little/no requirement to deploy capital on underlying assets.  They can rent Promises and the Prospectus gives them written permission to do it.  The same, defined returns to ETF Unit/Shareholders, can be accomplished through derivatives or other means.  Profits generated from the additional leverage can by siphoned off via fees and overhead since the fund is obligated to match the returns of the index. The end result is that Unit/Shareholders believe they own a piece of the S&P 500 when in reality, there might be very few "hard assets" in the ETF.

Feeding the Beast

If you've had a chance to read Flashboys  and When Genius Failed you'll probably follow along pretty well with the concepts in this section.  If you've not had a chance, I really think you'd enjoy these works if you're looking for a good weekend read.  Flashboys is a wonderful, David v Goliath tale about a few young men who perceived a "wrong" and did everything they could do to figure out what the "wrong" really was, and their corresponding effort to correct it.  The story pits these young men up against computer whizzes and the Titans of Wall Street, while describing, in layman's terms, the inner-workings (and shortfalls) of the technology and infrastructure of the financial markets of this country.  When Genius Failed is an "ancient" work by Wall Street standards (2000) describing the rise and fall of John Merriweather's LTCM.   It's a story of judgment, hubris and financial controls gone awry.

When we combine these two story lines we can see how nearly inconceivable levels of brilliance, ego, wealth, energy, initiative and technology could create the financial ecosystem we have today. Over the last decade we've developed a financial system which rewards the creators of financial instruments, traders who deploy cutting edge technology, disruptors who instantaneously arbitrage markets and institutions which collect significant risk free transaction fees.

Twenty years ago there were two primary Stock Exchanges (NYSE & NASDAQ) in this country. Floor traders wearing odd colored jackets used hand signals to buy or sell securities. They wrote down their deals on order pads and handed them to "keypunch girls" to get them into the "computer".  Those days are long gone.  The trading floors are nearly vacant, a non-functional relic occasionally used by the media, I suppose, to convey some sort of nostalgic backdrop for interviews and photo-ops.  Today, according to SEC filings, there are eighteen (18) separate National Stock Exchanges, six (6) futures exchanges, two (2) exempt exchanges and nine (9) recently approved applications for "new" exchanges.

As suggested above, we have tens of Trillions (perhaps hundreds of Trillions...no one knows for certain since most of it is OBS) of dollars in newly created notional value Promises relating to Stocks, Bonds, Mutual Funds, Trusts, Currencies, Commodities, ETF's, Swaps, Futures, Options, ADR's, Derivatives, etc. all designed to be traded at lightning speed an multiple platforms and Exchanges, potentially around the globe in the blink of an eye. The Industry has created dozens of order types (there used to be just "buy and "sell") specifically designed to provide HFT's the ability to glean information about the pulse of the market a few mili-seconds ahead of every other participant.  Specifically, we've created innumerable points of price dislocation, countless securities and instruments which can be "dislocated" and an environment where automated front running has become legalized in the name of reducing the bid/ask spread.  The guy in the plaid jacket driving the Cadillac used to siphon millions from the markets and he'd end up in jail.  Now, the programmer from MIT siphons billions and he's on the cover of Forbes.

The opportunity to earn a fraction of a cent every millisecond via arbitrage and cross-exchange price variation abounds.  The opportunity to earn high-churn transaction fees is everywhere.  The use of practically free money/leverage to multiply profits has never been more prevalent.  The incentive for na├»ve investors to sink money into risk-on vehicles, due to the dearth of safe alternatives with an acceptable yield is accelerating.   The computing power deployed to exploit all of the above is in place and working overtime.   Finally, the lap dog SEC has abandoned its role as a regulator and become a de facto, rubber stamp operating division of US Investment banks.  This has indeed, become a perfect storm.
    
More Wheezing Canaries......   

The SEC Report on the Flash Crash of May 6th, 2010 was as much informative as it was a harbinger of things to come. As I've mentioned in previous posts, large market moves rarely have anything to do with a reaction to news or economic reports.  A 1% drop in housing starts can't/won't cause a 500 point drop in the DJIA.   Markets correct violently due to a lack of liquidity or default(s).  That's why markets correct. Period.  

To summarize the SEC Report, at 2:45 PM on May 6th, 2010 an order was put through for roughly $4.1 Billion of S&P futures contracts with a number of important parameters omitted from the order(s) instructions. The entire order was executed in 20 minutes rather than "over a period of days" as was expected. The trading systems of a number of HFT's and Institutions analyzed the activity and exited the market(s) abruptly, since the activity was beyond the scope of their circuit-breakers.  In other words, they didn't know what was happening so they shut down.  (Note, that a number of HFT's continued trading.) The spiral continued until it became apparent that the initial event was an aberration and the HFT's and Institutions returned to the market restoring liquidity.  Several "Blue Chip" stocks dropped 40% and a number of "stub" orders were filled at a penny per share before the market recovered. The exchange voided a significant number of orders that were filled substantially outside a prescribed trading range under the "clearly erroneous" rule. 

Since the Flash Crash we've had numerous "technical glitches" including:
  • The Facebook IPO debacle. 
  • The August 2012 collapse of the HFT firm Knight Capital as a result of a "technology breakdown" causing losses of $440 million in one afternoon.
  • The NYSE "matching engine problem" in November of 2012.
  • The 2013 BATS computer error which caused trades to be processed illegally outside of NBBO since 2008.
  • The August 2015, 1,000 point drop in the DJIA and subsequent recovery later in the day. 


As amazing as this technology is, we've learned repeatedly that due to the vastness and complexity of these systems, that things can and do go wrong. Related, and along the lines of incredible technology that has a few shortcomings, I really enjoyed the aforementioned CBS 60 Minutes piece on self-driving cars. The value that could be achieved in reduced accidents, traffic congestion, property damage, loss of life and injury; as well as increased productivity and fuel economy when this technology is perfected will be a game changer. However, today, the developers freely admit that they have some work to do. The systems don't yet do very well in snow, fog, rain or "certain situations". Occasionally, the driver-less car simply sounds an alarm and requests human assistance to bail it out of a situation it can't analyze. This is some of the most sophisticated software ever designed, by some of the most brilliant, creative people on the planet, yet, at least today, it can't account for every scenario.


As far as our financial system goes, we can expect more of these irritating glitches, resultant disruptions, volatility and occasional overnight business failures.  Some computer whiz uploads the wrong code and an HFT, like Knight Capital, goes bust. etc. "Certain Situations" will come up and alarms will sound.  In any case, the coal mine canaries will continue to chirp, choke and wheeze.  All the while the Investment Bankers and the SEC will be proclaiming that "all is well".

So What's the "Trigger"?

As I've discussed throughout this blog for nearly a year, there's so much potential for dislocation in the system that any number of things could trigger a massive asset revaluation.  Recently, Willem Buiter at Citi has become the third economist I'm aware of (after this blog and a friend of mine in Beijing who would prefer to remain anonymous for obvious reasons ) to make the "Chinese recession" call.  In his forecast, Mr Buiter suggests that China is sliding inevitably into a recession, referring to the "Mendacious data" put forth by the NBS.

Any number of other events, less obvious than a global recession, could trigger a revaluation.   It could be Carl's "High-Yield Bubble", "Accounting Games" or a "Dangerous Company".  It could be an HFT or Hedge Fund gone berserk, a Knight Capital-like Computer glitch, or even the sudden realization that $2 Trillion of Chinese ADR's and dollar denominated bonds are worth much less than they are currently trading at, as discussed over the past year in this blog.


Conclusion:

Carl Icahn might very well be a disgruntled billionaire, but he's indeed brilliant.  He sees what's happening and he is speaking up.  I'm glad I took the time to put some numbers to it.  I enjoyed the exercise.  Now, the only thing we can hope for, is that we don't get any financial "snow, fog, rain or...certain situations".




References:

SEC Study - Flash Crash - 5/6/2010
http://www.sec.gov/news/studies/2010/marketevents-report.pdf

SPY - Prospectus
https://www.spdrs.com/library-content/public/SPDR_500%20TRUST_PROSPECTUS.pdf

60 Minutes - "Hands off the Wheel"
http://www.cbsnews.com/news/self-driving-cars-google-mercedes-benz-60-minutes/

100 Largest ETF's by AUM
http://etfdb.com/compare/market-cap/

iShares - S&P 500 Growth - IVW - Prospectus
https://www.ishares.com/us/library/stream-document?stream=reg&product=I-SP5GRO&shareClass=NA&documentId=926166~926319~926348~925572~925662&iframeUrlOverride=/us/literature/prospectus/p-ishares-s-and-p-500-growth-etf-3-31.pdf

iShares - S&P 500 Growth - IVW - Fact Sheet
https://www.ishares.com/us/literature/fact-sheet/ivw-ishares-s-p-500-growth-etf-fund-fact-sheet-en-us.pdf

State Street
State Street 10Q - 2015 - pg 12 - $28T AUM - $18B Capital pg 44
http://www.sec.gov/Archives/edgar/data/93751/000009375115000183/stt-2015630_10q.htm#s5E4177212F369DCEF1CE49B02DEABFD7

State Street 10k - 2010 - pg 12 - $28T OBS - $2T - AUM - Capital $12B -  pg 44
http://www.sec.gov/Archives/edgar/data/93751/000119312511047982/d10k.htm

JPM
JPM-10-Q 2015- pg 40 - AUM - $1.8T - pg 34 assets under custody $20T
https://www.sec.gov/Archives/edgar/data/19617/000001961715000367/corpq22015.htm

JPM-10-k 2010- pg 103 - AUM $1.3T - pg 85 assets under custody $16T
http://www.sec.gov/Archives/edgar/data/19617/000095012311019773/y86143e10vk.htm

GS
GS-10-Q - 2015 - p121 - AUM $1.2T - p138 - $1.9T OBS-Assets
http://www.sec.gov/Archives/edgar/data/886982/000119312515273233/d934020d10q.htm#tx934020_12

GS-10-k - 2010 - p6 - AUM $840B - p73 - $798b OBS-Assets
http://www.sec.gov/Archives/edgar/data/886982/000095012311020067/y88213e10vk.htm

C
C-10-Q - 2015 - p28 - Assets $1.8T - p21 - $15.5T OBS-Assets
http://www.sec.gov/Archives/edgar/data/831001/000083100115000111/c-6302015x10q.htm#sFD6AA42943835055BFA274093C8635EA
C-10-k - 2010 - p28 - Assets $1.8T - p21 - $15.5T OBS-Assets
https://www.sec.gov/Archives/edgar/data/831001/000120677411000316/citigroup_10k.htm

BLK
BLK-10-Q - 2010 - p F4 - Assets $237B - p40 - $4.7T AUM - NO OBX
https://www.sec.gov/Archives/edgar/data/1364742/000119312515283171/d14172d10q.htm
BLK-10-k - 2010 - p F4 - Assets $178B - p41 - $3.5T AUM - NO OBX
https://www.sec.gov/Archives/edgar/data/1364742/000119312511050218/d10k.htm#fin125169_2

BAC
BAC-10-Q - 2015 - p136 - Assets - $2.1T- AUM $930B - OBS-Assets N/A
https://www.sec.gov/Archives/edgar/data/70858/000007085815000078/bac-630201510xq.htm#sFD875605F8375A0CB75C5BF908304AD9

BAC-10-k - 2010 - p24 - Assets $2.2T - AUM $644B -OBS-Assets N/A
https://www.sec.gov/Archives/edgar/data/70858/000095012311018743/g25571e10vk.htm#G25571128

WFC
WFC-10-q - 2015 - p6 - Assets $1.7T - AUM $1.4T -OBS-Assets -$1.3T
https://www.sec.gov/Archives/edgar/data/72971/000007297115000607/wfc-06302015x10q.htm

WFC-10-k - 2010 - p6 - Assets $1.3T - AUM $2.1T -OBS-Assets -$1.3T
https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2010-annual-report.pdf

ICI ETF - Factbook
http://www.icifactbook.org/fb_ch3.html#assets

Towers Watson 2010
https://www.towerswatson.com/en/Insights/IC-Types/Survey-Research-Results/2011/10/The-Worlds-500-largest-asset-managers-Year-end-2010

ICI Factbook - 2015 Report
http://www.icifactbook.org/fb_ch1.html

ICI - ETF Mechanics
https://www.ici.org/pdf/per20-05.pdf

ETF Data Base
http://etfdb.com/screener/
1732 ETF's $2 T AUM with $1.2 T concentrated in the top 50 ETF's.

Carl Icahn - Danger Ahead
http://carlicahn.com/

SEC - 18 Exchanges - 6 Futures Exchanges - 2 Exempt Exchanges - 9 recently approved applications
http://www.sec.gov/divisions/marketreg/mrexchanges.shtml