Friday, March 25, 2011

2-for-1 Book Reviews: "Lay the Favorite" and "Gaming the Game"

 I am cross-posting here and on Davian, the technology and marketing partner for my inflation-focused autotraded product

Of the two, "Lay the Favorite" is by far superior in the literary sense, while "Gaming the Game" is poorly written but has a lot of details on actual booking and betting operations.

"Lay the Favorite" by Beth Raymer is an autobiographical book, chronicling her entry and work in the world of high-stakes sports betting.

Raymer stumbles into working for "Dinky," a professional bettor in Vegas while working as a waitress. Dink is a Jewish guy from Queens who ended up moving to Vegas to work professionally. He teaches Raymer the ins and out of the job: lines, runners, various contacts around the country. Dink bets his own money exclusively and does not do bookmaking. He comes across as a very smart and genuinely nice guy. They do go down to the Caribbean during the offshore gambling boom: Raymer describes a non-stop Spring Break scene with money flowing in at incredible rates, though few of the bookies who set up shop there were able to build a serious, professional enterprise.

Raymer moves to NYC for boxing, and ends up working for another major gambling figure, and a friend of Dink's, on Long Island. "Bernard Rose"'s character is also intricately chiseled: a sharp, gregarious glutton who, like Dink and Battista (from below) works long hours across many markets. She does a stint in Curacao with Bernard, too, while the boom still lasts. Raymer eventually leaves this world for a new life and a new boyfriend.

Overall, the book is very enjoyable and can even be classified as "chick lit" while a guy might read it for the underworld detail. The writing is crisp, the stories flow and connect well, while the characters are unforgettable. 

"Gaming the Game" by Sean Griffin is the story of the alleged mastermind behind the NBA referee betting scandal, James "Sheep" Battista.

The books seems to have been edited only for spelling, and not for style. The result, outside of the direct interview quotes that take up about half the volume, is a tedious, tortured narrative, often clearly taking Battista's street-talk and putting it in the storyline. There is also quite a bit of minutiae on local bookmaker "legends" and a drawn-out appendix that make the book sound like a rushed term paper stretching for the required length. This is ironic considering that the author is a professor (criminal justice) at Penn State- Abington. There are other fillers, such as pictures of the airport Marriott where the characters met or the front doors (really) of the high school the characters attended. The final style quibble is the gratuitous use of "consequential" (28 times), "legendary" (10 times) and "seminal" (5 times).

That said, the book is a must-read for fans of true crime and sport bettors. Through a series of interviews, Griffin chronicles Battista's rise to the top echelon of professional bettors and his subsequent downfall, driven by opioid addiction and his involvement with the NBA ref scandal. The book also works to correct the wrongful impressions that the media had created about Sheep: he does not seem to have been involved with organized crime, and he had not been a threatening figure in the "industry" that forced the ref to participate in the scheme.

Battista comes from a hard-working lower middle class family from a Philadelphia suburb. He gets by in school and eventually enrolls in a university, but drops out shortly thereafter. He had been around drug dealers, and starts using his shoe salesman job for this purpose. He then moves on to an electronics store, where he organizes an embezzlement scheme but gets caught. Eventually he winds up working in the bar/restaurant scene, and starts picking up bookmaking skills. He learns the trade with a couple of local bosses before forming up his own group, The Animals (based on the guys' nicknames). They work very hard and do well, hide from the local mafia, move to Vegas, spend some time in the Caribbean running a sportsbook, and then break-up. Battista eventually moves up and becomes a helper to four or five of the really large professional bettors, helping them place bets (one of these is "The Computer," who was, my guess, profiled on 60 Minutes recently).

To use the finance terminology, the sharps are portfolio managers: they have analysts (handicappers) working for them to find value: a discrepancy between the actual line and what the line should be. Then the PMs make the capital allocation, and traders, people like Battista, would have to place the order in the market without moving it (or moving it in the other direction prior to placing the real money).

Tangentially, Battista gets involved with Donaghy, an NBA ref, through a small-time drug dealer with a Napoleonic complex who is a mutual acquaintance/friend from high school. It appears that Donaghy had been betting, quite successfully, on games he reffed for years. He ends up being paid for his "picks" by Battista, who himself places sizable bets on the inside information. Donaghy is portrayed in the book as a greedy, aggressive, misanthropic and socially maladjusted man. 

Of course, the word gets out, and the FBI is eventually on the case. Battista is the only one who does not cooperate, and all three end up with similar sentences. Battista is now free and trying to rebuild his life outside of the underworld, reconnecting with his five children and repaying the restitution he was ordered to pay.

The book is interesting in several other ways. It offers an inside glimpse into the world of high-stakes betting and the hoops these guys go through in order to place bets (hopefully the system will change, and the US will get Betfair, a true peer-to-peer exchange, where anyone can bet or lay). The other significant new piece for me is the entire shadow banking system that exists to support the bookmakers who currently operate on the ground in the US: this is a network of guarantors, deposit-keepers and cash runners, spread around the country, settling accounts once per week, collecting or forgiving debts, transferring cash, etc. Unlike lotteries or casinos, it appears that most illicit sports bets are done on credit, with periodic settlements. Finally, there are the market dynamics of how lines move based on money flows, rumors and news.

Thursday, March 17, 2011

Linkfest of Linkfests

Linkfests are great. They are a very efficient way of gathering information and analysis. People who share links consistently deserve admiration as they greatly improve the ecosystem.

Here are the linkfests I follow in my RSS feeds. I link to recent editions so you can go and check them out for yourself. There is no particular order of importance as many are not directly comparable.

Barry Ritholtz/The Big Picture: One of the most influential bloggers shares Afternoon Reads quite often. Generally finance-focused.

Yves Smith/Naked Capitalism: Published author and voice of integrity does an extensive list daily, always with a picture of cute animals at the end as an "antidote".

Bess Levin/Dealbreaker: Dealbreaker is well known for its proprietary flow of information and rowdy commentariat, but wonder-editor Bess also has opening and closing links with nice summaries.

David Merkel/Aleph Blog: Merkel shares interesting reads with commentary on twitter, no linkfest per se on the blog itself.

Josh Brown/Reformed Broker: one of my favorite bloggers and emerging media mega-personality does not one but two linkfests, one on the blog and one for RIAs on the WSJ

Clusterstock: There are a few daily things there that can loosely qualify as a linkfest but I always go for the main morning one and Wall Street Gossip in 60 Seconds in the afternoon.

Felix Salmon/Reuters: Famous corporate blogger shares a few links nightly.

John Carney/CNBC: Former Dealbreaker and Clusterstock guy, now at CNBC, does a headline roundup. Unfortunately, he does not have a full RSS feed which means that I visit about 5% of the time.

Miguel Barbosa/Simolean Sense: This is the Renaissance Man linkfest. Miguel painstakingly puts together a long collection of cerebral articles on a wide variety of topics every Sunday. You can feel smarter just by reading the summaries. He shares links continuously throughout the week but the Sunday effort is true feast.

Crosshairs Trader Blog: trading-focused links

Calculated Risk: another titan blogger shares his finds periodically. CR also has very high quality weekly summaries and graphs.

Tadas Viskanta/Abnormal Returns: the only full-time links "curator" in finance that I know of. He does an early edition and a full edition of carefully categorized links, along with interesting periodic interviews. Daily read even just to pick up what people talk about.

MaoXian: MaoXian's shared links are easily the most eclectic bunch that "the Chairman" collects as he surfs: homemade nutella recipes to Beijing air quality to stocks making new lows, it is all there.

Pakiya Funds: weekly links on various topics of interest to value investors

Jay/Market Folly: Many people know MF as the pre-eminent hedge fund tracking service, but he also has a periodic, high quality reading list.

George/Fat Pitch Financials "Festival of Stocks": weekly links primarily on value topics

Some Assembly Required: this is a bit of a left-leaning, alarmist daily links list that I keep an eye on for topics I rarely encounter otherwise

Ed Harrison/Credit Writedowns on delicious: CW links primarily to news articles

Tim Iacono/TimIacono: Daily news links, well sorted

James Altucher/Daily Finance: yes, that Altucher does links periodically

iShares blog: the mothership of ETFs has a blog, and a relatively new weekly links effort, I hope it stays

Marginal Revolution: slightly more econ-focus here, more or less daily

Insider Monkey: a relatively new blog focused on insider moves and hedge funds that shares good finds periodically

Tom Brakke/Research Puzzle/RP Pix: underfollowed but very thoughtful blog and separate "pix" with links

Surly Trader: sorted news links weekly

Sunday, March 6, 2011

Review of Client 9: The Rise and Fall of Eliot Spitzer

Short version: I recommend viewing the documentary Client 9.
Longer version: Client 9 is an excellent two-hour documentary movie on former NY governor Spitzer, covering his time as a NY Attorney General to his resignation as a governor after the revelation that he had been using a deluxe escort service. The director of the movie is Alex Gibney who also made Enron: The Smartest Guys in the Room. I was not impressed by Enron, as the movie skimped on a lot of the relevant technical details, had little input from the main actors and presented Enron in an uniformly negative light.

Client 9 is very different. The filmmaker interviews Spitzer at great length on many topics, as well as his main aides, adversaries and other actors. The story is complex, there are a lot of legacies at stake, and I walked off thinking that the only people who were really fully honest in the interviews were the "regular" prostitute he was using and the Madame. Everyone else, Spitzer included, comes across as calculating and being sincere only on select items. Spitzer's collaboration can be viewed as an attempt to start his public image rehabilitation, so on a couple of occasions he compares himself to great tragic figures, like Icarus, while at the same time continuing to insist he was the good guy excluding the prosties (and even there, he sells it as something better than an affair with emotions and as something easier to compartmentalize and rationalize).

The movie does not highlight what is widely viewed as a perversion of justice by Spitzer's AG office: the use of press releases and selective leaks to muscle companies and people into settlements before even going to court, often with negative effects on the stock price. Some companies rolled the dice and fought, some settled, but the overall perception was that while Spitzer actively marketed himself as a sheriff, he was really collecting feathers for his hat on his way to Albany, and, later, on his way to be the first Jewish president of the US. At the same time, "the Sheriff" had missed a number of abuses that came to light post-crisis, including mortgage fraud, control fraud, "naked" CDS contracts and many others. With the benefit of hindsight, Spitzer's efforts were off-the-mark in the bigger scheme of things while the extra-judicial methods were not commendable.

The story line follows Spitzer as an AG going after Wall Street's so called "research" in which high-powered analysts were publicly recommending internet and telecom stocks while bashing them privately. The movie highlights Jack Grubman, formerly of Citi, and a "failed writer" who "stumbled into research", Henry Blodget, who referred to some of his "buy"-rated stocks as POSs. Blodget now runs Business Insider, an online news and slideshow service. Spitzer did have an impact on the research business, for the better in my opinion, at least because the research is now more independent (on the surface). Of course, there is the argument that broker research is conflicted by default as the banks seek other business from the covered companies.

Spitzer's next target is AIG, at the time one of the most powerful companies in the world. AIG had engaged in a transaction with Buffet's Gen Re that had the effect of concealing AIG's true level of reserves. A number of people from Gen Re were indicted and sent to jail, and the then-CEO of AIG Maurice "Hank" Greenberg is called an "un-indicted co-conspirator." Greenberg is very evasive in the movie interview claiming practically no knowledge of the matter while the handwritten (!) memo of understanding between the two has his initials all over. Greenberg is fired by his board which is something unprecedented for a company of this size and stature.

The movie then makes the tenuous connection between the AIG Financial Products division that caused the bailout and the Greenberg years. This is a big overstatement: the AIG FP scandal (and the MBIA and Ambac situations) is illustrative of massive regulatory failure specifically from the regulators who need to control insurance and insurance-like products. Further, the AIG bailout was a political decision to save the well-connected companies who had voluntary (!) credit exposure to AIG. But this is a different topic.

Spitzer's going after Greenberg is stopped by the US Justice Department, more specifically Michael J. Garcia, who advises the NY AG to step off the case as the federal government will be taking over. Nothing happens after this. Garcia appears later as the prosecutor of the prostitution ring that brought down Spitzer.

Next up is NYSE's chief executive Dick Grasso, who fought Spitzer in court and won (on a technicality, per the movie). The headline marketable issue here is CEO pay (viewed as outrageous) so Spitzer goes after the (then) non-profit NYSE and the outsized CEO pay package which, in Spitzer's view, is illegal by NYS regulations of non-profits. Spitzer gets a powerful nemesis in the process, Ken Langone, the head of the NYSE board compensation committee and co-founder of the Home Depot. It is alleged in the movie that Langone had someone following Spitzer who saw him buying money orders in a US post office. Langone speaks at length about Spitzer's alleged shortcomings, including anger management problems, sexual addiction and subversion of proper legal process. Langone is very sincere about his intense dislike of Spitzer though he avoids any detail in the "behind the scenes" action to bring Spitzer down.

The movie takes a brief look at the gubernatorial elections and Albany politics (for the uninitiated, Albany has been an absolute cesspool for years). Spitzer, as a governor, very quickly ticks everybody off (even in his own party). Again with the benefit of retrospect, as a governor, Spitzer, like all other governors, has zero foresight on the actual problems that face the states. Further, again in retrospect, his lieutenant governor choice, David Paterson, is well-below what can be considered executive level material. Clearly Spitzer needed the voting block that comes with Paterson and did not expect that he'd be stepping down.

Spitzer locks horns with Joe Bruno, the Senate majority leader, on a number of issues, including "troopergate" and the budget. Bruno is later convicted on corruption charges (something not that unusual in NYS, unfortunately). Bruno is interviewed at length for the movie and gives a lot of spicy details of the fights. Along the same lines, the filmmaker talks to a fair number of Spitzer aides both from his time as an AG and as a governor, a NY Post journalist and a "sleazy" political consultant, who is alleged to have been brought in to harass Spitzer (as well as Spitzer's father). My take is that the Spitzer period as a governor can be viewed as a failure, his lieutenants are guardedly loyal and somewhat objective, while Spitzer's enemies do not hide their true feelings, from hate to jubilation at the downfall. This makes the movie very special: it is rare to get a glimpse of true emotions in a high-profile case like this.

On to the downfall itself. Spitzer is pretty honest about it, he says he brought himself down.

There is a fair bit of speculation as to how the investigation of the Emperor's Club had started. The official version is that there was a suspicious activity report filed by a bank on a wire transaction in which Spitzer did not want his name used. Since there are thousands of these filed daily, the movie implies that it was a private investigator following Spitzer who reported a suspicious money order transaction at the post office. Either way, the FBI tapped the agency's phones and computers, and collected enough data to indict the couple running the ring. However, the charges describe briefly Clients 1 through 8, and spend a lot of time on Client 9. The NYT takes on the story, and the rest is history, like they say.

Obviously, it is highly unusual to detail so much on the clients, and the movie implies that the whole thing was a set-up to bring Spitzer down as the FBI does not normally go after prostitution rings, the head of the investigation is Michael J. Garcia and few other tidbits that point to a heavy political motivation. My view is that if you live by the sword, you die by the sword, and the alleged subversion of justice was not different, in character, to what Spitzer had been doing as an AG.

There were three people interviewed regarding the escort operation. One is a painter/pimp who explains how the system works in general (including online ratings, charges, etc.) and how the famous "Kristen" came into the picture. The guy's monologue at the start of the movie is out of place but it makes sense as the movie develops. I actually met and spoke with him this morning in SoHo. He sells his paintings there on the street and had the trademark hat on, so I recognized him.

The co-owner of the agency is a girl that did six months in prison for running the business, and she's pretty forthcoming about the operation, the markets they served and so on.

The director had also interviewed at great length Spitzer's "regular" and hired an actress to read/act out the interview as the woman had moved on with her life and works, interestingly, as a commodities trader. Ashley Dupree, who became famous based only on one encounter, is not interviewed and is portrayed as someone who grabbed the spotlight aggressively on her way to becoming a D-level celebrity.

Overall, the movie is very interesting as it presents a number of important players in their own words while generally reserving judgments, half-truths and innuendos that normally go with American documentaries (Michael Moore's Sicko is so egregiously defective that it was banned in Cuba!). The story, as told by the moviemaker, is that Spitzer went after powerful interests and was brought down partly by them, partly by himself. While I do not think that this is a complete version (hence the mind-numbingly long review), it does a very good job at having people on the record discussing what happened, and contains a lot of unreported details.

Tuesday, March 1, 2011

Handy Guide to Investor Presentations

This is a public service announcement to all IR departments (with a sense of humor). Follow the template to avoid awkward moments during investor conferences. We list the essential elements of effective PowerPoint communications with your investors. Here’s what you need to say and show:

(1) You are “on trend”: whatever it is that you do, be it fried chicken, mining equipment or vaccines, make sure you specify the undeniable, secular trends you are on.

(2) You are a “growth” company: if there is any doubt, be explicit, “XYZ is a growth company.” Any information that you present should be sliced and diced to show growth. Make sure you accentuate the CAGR with a splash. If you do not have EPS, do “adjusted” EBITDA, if that doesn’t show, do only revenues. If you can’t even do that, do page views, employee count, ocean temperatures or obesity rates.

(3) Show Asians: Asian farmers, Asian children, Asians in business suits talking on a cell phone, Asians with shopping bags, Asians families eating.

(4) If your business destroys something, show it whole. If you cut trees and chew them into paper, show vibrant green saplings. If you pollute the air, show blue skies and flowers. If you are polluting the water, show alpine lakes or mountain streams. If you are outsourcing or claiming incredible “efficiencies,” show smiling workers.

(5) Don’t forget a map of the world, full-slide size. If you have a web site, you are global.

(6) Extrapolate into the future. If the stock market has been so-so, use straight-line. If the stock market has been strong, use exponential growth.

(7) Compare against the competition but make sure it is in the most favorable light possible. Your company is both the most efficient AND the most undervalued. If you are a conglomerate, present a sum-of-the-parts and lament that the market is discounting you instead of valuing you fairly.

(8) Mention something about shareholder value. This can be a discussion of buybacks and dividends. Do not, under any circumstances, discuss option grants that neutralize any buybacks announced. If you are actively destroying value through acquisitions, go full 1984, and say you are creating it through acquisitions.

(9) If your company really hit the floor in ‘08/’09, mention something about “lessons learned” and “being stronger and smarter as a result.” Do not credit stimulus spending, bailouts or ZIRP and its short-term effects.

(10) If you’re a commodity company, always place yourself on the upswing of the curve, with plenty more runway to go. Also on the graph showing future cyclical low earnings, make sure the low is higher than the current normal because this time, it is different (really).

(11) In the unlikely even that the company is in legal hot water, be explicit that you are cooperating fully, committed to doing the right thing, and that you have the strongest ethics policy in the industry. If there have been actual indictments, these are a few rogue actors acting on their own, without management’s knowledge, let alone tacit or explicit approval.

This post was inspired by The Reformed Broker's Recipe for a Trading Blog.