According to Coller Capital, and highlighted by Jason Kelly at Bloomberg, investors’ newfound selectivity will help eliminate 20% of private equity firms. Just one of many reasons is alluded to by the June 13, 2011 bankruptcy filing by Perkins and Marie Callender's restaurant, a portfolio company of Castle Harlan, which will lose all of its $245 million investment.

This isn't new information or surprising to many deal-by-deal practitioners such as Coventry League, as we witness the level of talent (or lack thereof) on a continual basis (in public and private equity investing) and wrote about the upcoming debt overhang at over-levered portfolio companies (De-leveraged Buyouts; Nov. 2009).  Nevertheless, more transparency about these zombie-like private equity firms is positive for the industry since many of these below average firms and professionals tend to overbid and under-perform from a post-acquisition operating perspective. 

  Unfortunately, the investment and M&A industry is not like, say, professional sports.  In sports, athletes are continually evaluated mostly on an objective basis and are displaced by those who demonstrate better prospects and abilities.  Exceptions, to an extent, are made for legacy athletes (e.g., Brett Favre) – sometimes. In investing, especially at firms that don’t charge fees based on performance (think wealth management-type firms and mutual funds), many professionals exist not necessarily by their objective abilities and performance but rather mostly by subjective reasons that often include cosmetic aspects of one’s background, personal connections and whatnot. 

Additionally, the industry perpetuates a myth that it is practically impossible to consistently outperform market indices (read: collection of companies selected by preset screens) using similar risk (typically defined using price fluctuations with time horizons less than a year). 

Why apparently sophisticated investors, including high net-worth individuals and institutional investors continue to deploy capital irresponsibly is puzzling.  This is best addressed in a separate blog; however, we'll leave you with this: InkStop.  It was a retail chain outlet focused on selling ink cartridges for printers.  The business model was terrible (high fixed costs; low-priced products; market trend of low-cost, quick-delivery Internet options; etc.).   Yet, several "sophisticated" investors found this business model attractive enough to actually request an investment memorandum and subsequently invest in the company.  After the company's prompt fall to bankruptcy, some of these same investors amazingly cried foul.  Moral of the story: Stupid is as stupid does.  

Below is an extract of a cease and desist letter mailed to TPM Media LLC (dba TPMMuckracker) regarding its writing about the NYSE and using a photo depicting the exchange.  A full summary can be read on Reuter’s blog, Felix Salmon: A slice of lime in the soda or at Wired.com.
  
NYSE has common law and Federal trademark rights in and to NYSE’s name and images of the Trading Floor… Moreover, NYSE owns Federal Trademark rights in one depiction of the Trading Floor and common law rights in the Trading Floor viewed from virtually any angle (collectively, “Trademarks”). Accordingly, NYSE has the right to prevent unauthorized use of its Trademarks and reference to NYSE by others.
 
Apparently some ignoramus is using NYSE letterhead and signing Chief Counsel Kendra Goldenberg’s name to stupid letters.

             

Against the wishes of global banks and investors, but with the wishes of its citizens, Iceland allowed its too-big-to-fail institutions to default (i.e., no taxpayer-funded bailouts).  Guess what?  A Great Depression in Iceland didn’t occur.  Rather, its economy has stabilized  and is performing well, relatively speaking. 

Elsewhere, in contrast, leaders have been using fear-mongering and outright threats (if citizens don’t enable massive bailouts, then the equivalent of financial Armageddon will happen).  The latter is disturbing because leaders are essentially saying if citizens don’t permit bailouts, then civil-servant leaders will make things worse than otherwise (drastically reduce public pensions, services, etc.).  If these were company managers, their actions would be considered fraud by a rational Board of Directors and promptly removed from service. 

A good example of the aforementioned fraud and potential fraud on citizens can be gleaned from what is happening in Greece.  In short, Greece needs to restructure its debt; in other words, it needs to default.  However, global banks and investors (take your pick) that speculated in credit default swaps, and international institutions (IMF, central banks) intend to do whatever it takes to prevent Greece from formally defaulting. The most recent ploy is to frame a default as a “voluntary exchange;” doing so is deemed to not trigger a payout by the sellers of CDS.  However, a sovereign nation has no reason to play semantics with how it defaults, and is not beholden to sellers of CDS…unless there are implied threats against the country for doing what is best for its citizens.

So, as indicated in the blog by Automatic Earth titled “Honey, I Swapped the Greeks,” the concern is not with Greece defaulting and reducing the principal due to bondholders.  Instead, the concern is with the huge payouts that would be required by CDS sellers (think insurance companies and banks; hedge funds; holding companies like Berkshire Hathaway; et al.)…and the money is not there to payout.

                  Total Greek bond notional CDS: $5.4B 

                  Total Greek bond market: $374B

                  Total Greek CDS market: $455B (ergo the problem with a formal default)

And, if Greece proceeds to formally default and not engage in semantics, then one can estimate the carnage from contagion of CDS payouts as defaults spread to larger sovereign nations that are in similar financial straits…

UPDATE: 20 June 2011.  (*) Note: Bloomberg's values in chart, and figures highlighted in article do not sync.  It appears one of the sources does not use the appropriate currency.  The magnitude, ratios and schedule are apparent regardless. 

Although we at Coventry League try to think independently more often than not, we are aware that many prefer to outsource their critical thinking to broad frameworks such as political parties and whatnot.  Accordingly, below is a chart comparing the economic recession during the Reagan era to that of the Obama era (obviously still in progress).  The entire article titled “A Tale Of Two Recessions And Two Presidents” can be found at Investor's Business Daily. 

Oh, the age-old correlation-implies-causation argument.

Please reference the blog titled "How to Spot Advocacy Science: John Taylor Edition" posted yesterday by Freakonomics.  It depicts charts prepared by Stanford professor John Taylor and acknowledged by Harvard professor Greg Mankiw (who also linked to the charts without a word about their veracity...until others publicly did so - including Krugman in his blog titled "What’s Behind Low Investment?"). 

Perhaps these two economists, and like-minded peers, will author a book titled "Predictably Disingenuous."

Below is a mini-curation of a few interesting articles addressing Barriers to Entry, Shorting Restaurant Chains, Keynesians, and our Emerald City - Seattle:

If Coventry League starts questioning practices of management or, even worse, is short a company’s securities, then it’s often a harbinger of things to come.  Please reference Coventry League (and its predecessor)’s shorts of Enron and Lehman.  We didn’t even make an effort to buy-to-close, and simply held through bankruptcy and elimination of the securities.

That said, if the following charts prepared by Mary Meeker in the document titled USA, Inc. were attributable to a company, rest assured Coventry League would be heavily short, albeit hedged.  In this case, the charts relate to a sovereign nation, which has unique alternatives versus a corporation – namely the ability to print money and create revenues (taxation).  Using these abilities to any meaningful extent exacerbates the problems, however. 

So, without further ado, please engage yourself with the referenced charts above and in the source file (or at Mish's blog) – but do so while on a ground floor office suite.

Mother Jones magazine posted an informative infographic highlighting aspects of the U.S. economy from an inequality perspective.  Viewing it in its entirety is encouraged as it includes detailed sources and complements our prior blogs regarding perception (people actually perceive little economic inequality, when in reality it is severe) and owners of Congress (reasonable interpretation: major financial institutions).

Below is one illustration from Mother Jones. It reveals people's perception about inequality and social stratification in the U.S. (click image to enlarge).  The data are attributable to professor Michael Norton of Harvard Business School and behavioral economist Dan Ariely of Duke University.

As some might realize from the illustrations, there is a winner-take-all arena in which citizens and companies compete, with notable legal and political protections available for the winners.  To wit, companies considered too-big-to-fail and citizens in the top 1% got bigger and wealthier, respectively, since the beginning of the 2007 recession.

Notwithstanding, we are not attempting to address the factors exacerbating the economic inequality and malaise; rather; we are deferring to the opinion of the Federal Reserve Bank of Kansas City President Thomas Hoenig who stated the following:

“I am convinced that the existence of too-big-to-fail financial institutions poses the greatest risk to the U.S. economy. They must be broken up. We must not allow organizations operating under the safety net to pursue high-risk activities and we cannot let large organizations put our financial system at risk."

And, if these references are not enough, then here are two more sources:

• The Economist: Winners Take All (14 Feb. 2011).  It includes an interactive chart.
• Zero Hedge: A Detailed Look At The Stratified U.S. Consumer (15 Aug. 2009).  It includes extensive charts and sources.

So, if we can form any lessons from the recent riots and revolutions in the past year in Greece and currently in the Middle East, one should be that social stratification and inequality can only last so long until there is a backlash from the masses to restore balance.

Or, as they say In mathematics: reversion to the mean.

We wrote about the deflation versus inflation debate last year, and provided a couple of perspectives regarding how to frame, or define, the terms: namely, changes in money supply versus changes in nominal prices.

Today, Stoneleigh at The Automatic Earth provides a better and more detailed explanation in her post titled "Inflation for the Innocent, Hyperinflation for the Clueless."

 “It is not reality that drives markets, but perception, which is emotionally-driven rather than rational. If we assume markets will behave rationally, we will be wrong-footed every time.”

She also addresses the recent surge in commodities prices and acknowledges speculation, which is also described in this Bloomberg video about cotton hoarding in China.

The Guardian presented a concise infographic titled "Arab youth: the tipping point" regarding key factors indicating potential youth uprisings.  Two criteria are (a) percent of population comprised of youths and (b) their respective unemployment rates.  The latter are stated values.  It is likely those rates are understated, as they are in the U.S.

Based on the data, some of the ingredients exist for further youth uprisings in Northern Africa and the Middle East.  One factor not included is population density, which seems to act as a catalyst, as witnessed in the densely populated Egypt (primarily Cairo region).

So, who is most likely to be next after the revolution in Egypt? 

Algeria.