Where’s the Slack?

Don't worry, Strickland was wrong too

This June, the Fed’s most reactionary member, and noted hand talking enthusiast, James Bullard gave what I found to be one of the most reasonable presentation on FOMC policy in years.  It was titled ‘How Far Is the FOMC from Its Goals?’ and if you have not seen it please do give it a look here. In it he outlined a simple formula to quantify how close the Fed is to threading the needle on policy based on absolute distances from the inflation and unemployment targets levels.

The data from that presentation was from April.  I thought it worthwhile to update it since, for reasons I do not understand, the market is currently pricing Fed Funds rate hikes even further out today than they were then.

The Fed is currently closer to its dual mandate targets than 89% of the historical data and closer than any point in since 2004. This is a noted improvement from June when it was closer than 75% of readings.

It is important to recognize that when your target has multiple inputs and data is constantly in flux you are not likely to be precisely at your target often.  As a matter of fact, the Fed has not hit both targets in any month since 1960 when they started the PCE index.

The Fed targets are symmetrical so it is worth remembering when economists like Krugman, Stevenson, & Wolfers point out the Fed is “missing on both mandates” today, that it strictly a function of their political viewpoints.  The Fed is always missing the mandates but the goal is to set the best policy for 6-12 months from now.

In all previous examples the Fed has changed course on rates within three months of being this close to targets, which is one of the many reasons I maintain the view I’ve expressed for the past 20 months.  First hike Q1 2015 and continuing at 200 bps a year.

Unilife Releases OrbiMed Loan Covenants: Is Default Imminent?

In May, we explained how UNIS – with the helping hand of the SEC – was able to file the OrbiMed credit agreement and leave out very important details, particularly what financial performance it had to achieve to avoid triggering an event of default/covenant breach:

As far as we know, we are the only observers to find this unacceptable, as it allows UNIS to severely impair analysts’ and investors’ ability to evaluate the firm’s default risk and valuation.
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My Ten Commandments for Finance Twitter

"Fucking cool it chief!" - Moses

I am a noted admirer of rules and have recently fielded some requests for my rules of engagement on twitter after a tweet from my friend @munilass. I am sure these are not ideal for everyone but for me, as a private account with only opt in interaction and a rather specific industry focus, they have proven valuable. The rules are ever growing but here are the top ten that stuck out.

  1. Do not send traffic to bad content. If you do, you are paying for more of it.
  2. Avoid tweeting about topics where you lack expertise and unfollow those who regularly do. Credit on this thought process goes to Ray Dalio for “Ask yourself whether you have earned the right to have an opinion.”
  3. Do not complain about the stream. You chose that content and it is your fault if it sucks.
  4. Limit your number of follows to a level that you can reasonably read.
  5. Do not subtweet. It is cowardly and wastes everyone else’s time due to lack of context.
  6. Do not use straw man arguments to prove a point. Address thesis directly with whoever presented it.
  7. Do not feed the trolls. If you engage those lunatics you are the problem.
  8. RTs are endorsements.
  9. Block someone every day. Trust me this will save you some outrage.
  10. Keep your stream dynamic. Cut dead wood and add new voices, this medium cannot be stagnant.

Though I’m a man with a passion for rules, the trick with these and all others, is possessing an understanding and knowing when to break them.

Rulers For $0.25! Markers For $0.97! Honey, Get The Kids, Lets Go To Staples!

I don’t cover Staples (NASDAQ:SPLS), nor do I claim any particular expertise in the office/school supply sector or other tangential businesses in which Staples attempts to operate. However, I can’t help but question the strategic thinking behind their current back-to-school commercials/promotions. Check out this extremely dorky “viral” video promotion to see what I mean.
“Rulers for $0.25! Markers for $0.97! Honey, get the kids, we’ve got to get to Staples before we miss out on these amazing savings” …said no one.
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Stone Street Advisors LLC Seeks Equity Research Interns

Stone Street Advisors LLC is seeking 2-3 undergraduate (exceptions made for graduate students on a case-by-case basis) interns interested in fundamental equity research (value-oriented, mostly bottom-up). This position is geared towards those interested in pursuing careers in investment research, investment banking, and asset management, to name a few. Ideal candidates will have coursework in accounting and finance as well as other business/law classes. Candidates do not need to have previous investment research experience however it would be nice. There are no university, GPA, test score, etc. limitations for intern positions. Candidates must be extremely self-directed as the role involves a large degree of autonomy and self-teaching. There will be a significant amount of education and instruction involved as well. Interns will largely work remotely with ~weekly in-person meetings and as-needed voice/video calls. Internships are part-time (approximately 20 hours/week +/-) and start in July and extend through the end of summer, with the option to be extended into the Fall. The position is unpaid.

Responsibilities include but are not limited to:
- Financial statement analysis
- Financial modeling and valuation
- Developing and performing stock screens
- Industry/company research
- Preparation of research reports and supporting material
- Data collection
- Marketing/sales
- Ad-hoc assignments (no food/coffee trips, don’t worry)

Resume/cover letter not required although strongly encouraged. Be creative, don’t be afraid to use whatever material/approach you think appropriate to demonstrate your qualification for the position. If your initial application suggests you may be a good fit, you will be given approximately a week to identify an investment opportunity that you think will return 50%+ over the next 1-3 years and to provide analysis to support your conclusion. We are looking to gauge your base knowledge/experience, resourcefulness, and thought process rather than the particular outcome, although we are, naturally, looking for good ideas with solid analytical support as well.

If you want to learn, are teachable, and hungry, please apply here.

A Brief Example of The Limitations of Algorithmic Investment Selection

Earlier today, I came across this interesting piece of “research” identifying Jos. A. Bank as a compelling long opportunity. For those out of the loop, JOSB is in the process of being acquired by Mens Wearhouse for $65/share. As you can see, since MW made its most recent offer (raising the price to $65, that is), JOSB hasn’t exactly been a great stock to trade, to put it gently. To wit:

+3% and change since JOSB filed the press release announcing the higher takeout price, raised from $63.50 on 3/11 of this year, which was just the most recent bump in the long road that has been the MW-JOSB journey (which, if you’ll recall, started with JOSB offering to buy MW back in September of last year, a brilliant strategy in my humble opinion). The odds of the bid being raised from $65 at this point are, in my fairly well informed opinion, lower than the odds that MW’s board will change its mind after conducting due diligence (itself unlikely, but non-zero). Put simply, any trader/investor can do 5 minutes of work, 15 tops, to realize there’s little upside, and a lot of opportunity cost, not opportunity, getting long JOSB at this point.

TheStreet’s QuantRatings system, available for the bargain price of “less than $1 per week!” touts, among other things, “In-depth analysis of the stock’s most important fundamental and technical factors…”
One would hope that, among the many factors this or any system “analyzes” the existence of a tender offer (easily found in SEC filings, press releases, etc by man or machine) would be one of them. Alas…

With novice and professional traders/”investors” alike increasingly relying on any “new information” in the market to inform their decisions (or, too often, confirm their preexisting views), such garbage systematic “research” is as much, if not more a source of risk than a source of opportunity.

Making money investing/trading is not easy; assuming for even a moment otherwise is a surefire way to shoot oneself in the foot.

As always,


Stone Street Advisors LLC Equity Research Performance Analysis, 2011-Present

When I started Stone Street Advisors, I hadn’t yet developed the full business plan, mission statement, or anything along those lines; I just wanted to do research and consulting differently, and had a general plan for so doing. Over the past few years I’ve refined my approach and my thinking to the point where today, I can be very clear about what the company does, why, and how we add value to clients.
Simply put, our philosophy is that given finite resources and a finite amount of very high-return, high-conviction equity opportunities available at any given time, our effort is best spent identifying only the very best investment ideas, even if that means coming up with a few per year. We believe generating a handful of great ideas is far more valuable to our clients than several handfuls of ok-to-good ones. To be clear, we don’t presume to replace our clients’ existing research capabilities, but rather seek to complement them. We do not manage money, nor maintain a portfolio (actual or virtual), allowing us an unbiased perspective to focus solely on identifying long and short opportunities that we expect will return 50%+ over the next 12-24 months. While we do not explicitly make allocation or risk management (entry/exit/limits) suggestions, we try to convey all relevant risk factors to clients, especially for short and contrarian ideas.

Since we’ve yet to have a client ask to see our track-record, I never kept anything more than a mental accounting of our stock picking performance, that is, until this week. Below are the results of the long & short ideas that we have published (the dozens of high-level analyses we’ve shared have been excluded) since 2011, both in absolute terms and relative to the S&P 500.

Some highlights:

- Long ideas returned, on average, 237% from initiation to their high price or 222.8% relative to the S&P500
- Long ideas have returned, on average, 124.7% from initiation to their current price or 104.0% relative to the S&P500
- Short ideas have returned, on average, 56.2% from initiation to their low price or 71.4% relative to the S&P500
- Short ideas have returned, on average, 26.5% from initiation to their current price or 66.8% relative to the S&P500

For inquiries, please contact us via information@stonestreetadvisors.com.

Jordan S. Terry
Founder & Managing Director
Stone Street Advisors LLC

The Greatest Trade Ever

A few weeks back Bob Treue the president and founder of Barnegat Fund Management was kind enough to upload his November 2010 presentation at Oxford University. Here he explains at length and answers questions about his 2008 TIPS trade which became famous thanks to an academic paper and some coverage from the FT and Barrons.

I personally believe this was the greatest trade of all time. The trade idea itself was a rather straightforward arb opportunity brought about by the massive imbalances that arose during the period directly after the Lehman bankruptcy, but what made it extraordinary was the actual ability to execute.

The keys to the trade, as outlined here, were holding at least 50% of the fund in cash and equivalents as collateral for margin calls during periods of increased vol, selecting and educating a client base that was comfortable with the risks and rewards of a relative value fixed income fund, and hoodwinking desks like mine by negotiating the best ISDAs possible during times when dealers were less concerned about risk management.

Since it only had 25 views when I found it I thought it would be criminal not to share it. Enjoy.

Claims Rule Everything Around Me C.R.E.A.M.

Last week Bloomberg’s Michael McKee was interviewing one of my favorite economists, Neil Dutta of Renaissance Macro, and asked him whether he thought initial jobless claim deserved such a wide following or if it might be an overrated indicator. I was pleased to hear Dutta confirm its importance.

If anything this data point is underrated. It is hard data so it is not reliant on estimates (excepting rare examples like California last year when a state fails to correctly collect it). It is released with a six day lag so it’s about as close as one can get to real time. It is subject to an extremely low level of revisions. However, unlike numbers like NFP, durable goods, retail sales, or industrial production it rarely results in market volatility upon its release.

The lack of an upward trend in claims is why I stuck by my guns over the recent data weakness being an entirely weather related phenomenon. My charts below are a testament as to why it is unquestionably the best indicator of the domestic economy.

Let’s start with a comparison to another labor metric: Claims 4WMA (white) vs. Unemployment (orage).

One more labor metric: Claims 4WMA inverted (white) vs. NFP (orange) with recessions shaded red. Claims offers a far less noisy data set.

Overall economic growth: Claims 4WMA inverted (green) vs. GDP growth year over year (blue).

Soft manufacturing data: Claims 4WMA inverted (red) vs. US PMI (blue)

Hard manufacturing data: 4WMA inverted (orange) vs. US auto assemblies (white) with recessions shaded in red.

Sentiment data: Claims 4WMA inverted (green) vs. Consumer Confidence (white)

And the ultimate sentiment indicator: Claims inverted (green) vs. SPX (orange)

Initial Thoughts on Unilife’s New Debt Financing

Since I started looking at Unilife (UNIS), I’ve been extremely concerned with the company’s liquidity and solvency situation. They’ve been burning through cash like it’s going out of style and operating expenses are already very high and have kept growing at a fast pace. Operating losses every year meant the company already has significant negative debt service coverage ratios (i.e. they burn cash to pay debt service rather than using operating income to pay interest/principal). At the end of the last quarter (Dec 31), they were already highly levered with a Debt/(book) Equity ratio of ~0.74, placing UNIS in an elite group of companies — 0.74% of the 6,795 stocks in the Finviz.com database — with such high leverage and negative margins.
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