SHARPE RATIO = MOST POWERFUL RETURN CALIBRANT

Headline:
Harmonizing High Absolute Returns + High Sharpe Ratio.

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All Professional L/S Money Managers Desire To Maximize Absolute Investment/Trading Returns.

However…2 Critical Factors Escape Many =

1. The Quantified Risk Required To Obtain Returns…

Which Is Particularly Tricky…As Risk Can Only Be Precisely Measured In Hindsight…

+

2. The Time Period Required To Generate Returns…

As Extremely Lengthy Holding Periods Can Offer Broad + Challenging Portfolio Implications…Such As Decreasing Return Per/Increment Of Time.

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Further…These 2 Crucial Features …Risk + Time…Provide The Cornerstone For…

The Most Supreme…Yet Under-Appreciated…Return Metric =

SHARPE RATIO.

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The Sharpe Ratio Is Nothing More Than A Simple Quotient…

Absolute Return – Risk Free Return / Standard Deviation of Returns

…That Brilliantly + Simply Illustrates Portfolio Risk-Adjusted Return Profiles.

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Even Then…The Sharpe Ratio Proves To Be An Even Tighter Metric With The Inclusion…

In The Denominator…Of The Square Root Of The Time Period To Achieve Returns [as originally articulated by William Sharpe in 1966]…

Absolute Return – Risk Free Return / Standard Deviation of Returns * Square Root [Time Period]

…But Excluded By Most Contemporary Calculations…

Primarily Because It Softens The Quotient’s Result…

By Increasing The Value Of The Denominator.

Thus…Most Present Day Indications Of Sharpe Ratio = Severely Misleading + Over-Stated.

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Interpretation Of The Sharpe Ratio = Elementary…

As A Higher Absolute Result Is Preferred.

Sharpe Ratios Of 1.25 Are Generally Considered Good….1.75 = Excellent…2.00 + Greater = Superb.

As A Basis For Comparison…The Annualized Average Sharpe Ratio For The S&P 500 [1934 – 2022] = .45

…Which Includes The Square Root Of The Time Period In The Denominator.

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Despite Its Attributes…One Of The Greatest Criticisms Of The Sharpe Ratio =

The Ratio Is Not Necessarily Correlated To Higher Absolute Returns…

And That Is True…

But It Is Also True That High Absolute Returns Do Not Always Come At The Expense Of A Depressed Sharpe Ratio.

So…While Concurrently High Absolute Returns + Sharpe Ratios Are Nearly Impossible To Consistently Achieve…

They Are Attainable Over Truncated Time Frames.

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Thus…These Dual Objectives…Of High Absolute Return + High Sharpe Ratio…

Ought Not To Be Abandoned Due To Their Infrequency…

Because The Legitimate +  Persistent Pursuit Of These 2 Elevated Quantitative Goals…Also Yields Significantly Positive Qualitative Consequences.

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Consider The Following Investment/Trading Scenario…For The L/S Money Manager…

Long Position: Initiated At $50/Shr.
Long Position: Liquidated At $65/Shr.

So…A 30% Return = Great Investment/Trade.

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Now…Contemplate 2 Different Pathways To $65/Shr.

Scenario I:
Long Position: Initiated At $50/Shr.
Price Draw-Down To: $40/Shr.
Revert To $65/Shr.

Scenario II:
Long Position: Initiated At $50/Shr.
Price Draw-Down To: $47/Shr.
Revert To $65/Shr.

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The Ultimate Profit…In Both Scenarios…Is Identical.

However…The Sharpe Ratio Impacts Are Quite Different…

As Scenario II Towers Above Scenario I…

Because A Higher Sharpe Ratio = Lower Capital Draw-Down.

Even Better Sharpe…

If Scenario II Trotted A Shorter Time Path To $65/Shr. Than Scenario I.

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Contemplate Also…For Each Scenario…

The Psychological Impact On The Investor/Trader…

As Capital Draw-Down = Concern/Stress = Poor Decision Making.

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For Scenario II Investor/Trader…The Concern/Stress Level = Low…

Freeing Up Mind-Share To Focus On Capital Management + Portfolio Composition = Sharp/Sound Decisions = Increasing Confidence = A Virtuous Cycle.

For Scenario I Investor/Trader…The Concern/Stress Level = High…

Consuming/Diverting Mind-Share + Impulsive/Sloppy Decisions Can Follow = Decreasing Confidence = Negative Feedback Loop.

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Naturally…Only The Confident Investor/Trader Is Capable Of Producing…

The Exceedingly Rare…And Very “High Class” Problem Of…

High Absolute Returns + High Sharpe Ratios.

And Only The Confident + Humble Trader…

Accepts + Understands The Tangential Features Of This “High Class” Problem.

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Contact The Author: [email protected]

REGULATOR HQ JUST 2.5 CITY BLOCKS FROM FRC GROUND ZERO…STILL MISSED IT

Headline:
True That…

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The Recent Tumult In The Global Banking Sector = A Train-Wreck For Bank Equities…

Especially The U.S. Regional Banks.

Surely A Black Swan + Thin Tail Event…Highlighted By The Swift Downfall Of SIVB…

And Subsequent Contagion To Many Regional Banks …Including FRC.

Nevertheless…It Seems There Were Substantial Oversight + Regulatory Failures.

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Further…It Is Not Surprising That Both FRC + SIVB…Were HQ-ed In The San Francisco Bay Area…

The Capitol To So Many QE Enabled…Venture Capital Financed…Free Cash Flow Burning Zombie Companies.

Ironically…It Also Appears The Zombie Co’s Bankers [FRC/SIVB] Were As Financially Irresponsible…As The VC Idea’ed Business Models…Of Their Zombie Clients…

By Acting As Inadequate Fiduciaries On Behalf Of Their Zombie Clients’ Deposits.

And That The VC’s Also Carelessly Deposited Their Capital Into These 2 Dodgy Banks…

It Is All So Financially Incestuous + Reckless.

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Quite Notably…The Primary Regulatory Body Charged With Overseeing Both FRC + SIVB = The Federal Reserve Bank Of San Francisco

Currently Led By It’s…Proudly Woke President…Mary Daly.

Scrutiny Of Daly’s SF Fed…Will Almost Certainly Reveal Massively Insufficient Technical Oversight + Enforcement…Of Both FRC + SIVB…

These 2 Rapid + Stunning Bureaucratic Derelictions Have…For Now + Possibly Permanent…Crushed Any Confidence In Daly’s Ability To Successfully Lead A Crucially Important Federal Reserve District Bank.

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Even More Embarrassing…The Regulatory Failures Essentially Occurred In The SF Fed’s “Backyard”    

…As SIVB’s HQ Was Just 45 Miles South Of San Francisco…In Santa Clara…

Which…Considering The SF Fed’s Authority Extends To 9 Western States…Is Not Too Far Removed.

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As For FRC’s Adjacency To The SF Fed…You See…

First Republic’s Corporate Headquarters…Are Located In San Francisco/111 Pine Street..Just 2.5 City Blocks From The SF Fed/101 Market Street.

A Simple 4 Minute Route…According To Google Maps.

So…Conducting A High Quality + Thorough Audit/Exam Of FRC Could Not Be More Convenient.

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But Then…Maybe The SF Fed’s Auditors/Examiners Were Reluctant To Navigate The Nasty 2/10ths Mile Walk On SF’s Market Street…

As Weaving Through Aggressive Homeless Camps + Open Air Drug Dens + Urine Soaked Sidewalks…

Could Be Viewed As A Brutal Gauntlet From Hell…

Intentionally + Justifiably Avoided By Most.

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But Seriously…

The Ultimate Lesson Here…With Respect To Bank Oversight =

Regulatory Diligence + Expertise + Vigilance Ought To Supercede ALL

Including The Imprecise + Sloppy Woke Agenda…

Preferred + Prioritized + Promoted By Daly’s SF Fed…

Seemingly…At The Expense Of Institutional Financial Stability.

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Contact The Author: [email protected]

CAPITAL STRUCTURES CURRENTLY MORE FRAGILE THAN DEPOSIT SECURITY


Headline:
You Can Ignore Reality…But You Cannot Ignore The Consequences Of Ignoring Reality.

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Bank Capital Structures = Debt + Equity…

Both Are Fortified + Supported By Deposits.

Deposit Instability/Outflows = Stress + Weaken Bank Capital Structures.

Currently Compromised Capital Structures = Prompted + Amplified By…

“Mark To Market” Losses…On Banks’ Enormous U.S. Treasury Note + Bond Portfolios [AKA Reserves].

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Reserve Losses = A Function Of…

Sloppy Reserve Portfolio Structure = Too Long In Duration…

As Banks Stretched For Yield During 10 Years+ Of A Positively Sloped Yield Curve…Anchored By ZIRP.

Fixed Income Investment Script + Yield Curve Flipped Violently Last Year…

Brisk + Steep U.S. Interest Rate Increases Pressured/Punctured Reserve Valuations…

SIVB Reserve Disclosure = Sudden Capitulation + Liquidation Of Entire $20B Portfolio =

Catalyst For Regional Bank Deposit Flight + Panic.

SIVB Investor Perception = “Tip Of The Iceberg” For Regional Bank Universe.

Thus…Severely Rattled Investor Confidence.

Furthermore And Importantly…

Regional Banks Are Subject To A Less Stringent Regulatory Framework…Than The Systemically Important TBTF Mega-Banks…

Resulting…For Now…In Much Harsher Financial Market Punishment For The Regional Banks.

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So…UNTIL Investors/Traders Perceive Banks As Sufficiently Capital Fortressed…

And Architected By A Diversified + Stable Depositor Base…

Confidence In Most Financial Capital Structures…Especially The Regional Banks …

Will Continue To Be Tremendously Scrutinized + Tested By Market Actors.

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However…When Investor Confidence + Perception Nadir…

The Subsequent Rally In Financial Equities Will Be Exceptionally Steep + Swift.

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Contact The Author: [email protected]

FIRING THE WAYWARD CLIENT = NO PROBLEMO

Headline:
Necessary Cull.

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Managing L/S Equity Risk Capital…

Is Not A Democracy…Between Client + Portfolio Manager.

Rather…It Is More Symbiotic…

As Both Client + Portfolio Manager Serve A Distinct + Silo-ed Function.

Clients Provide External Capital To The Portfolio Manager…

And The Portfolio Manager…With Discretion…Invests/Trades The Capital…

In Order To Generate + Maximize Absolute/Risk Adjusted Returns.

Financial Interests Are Aligned…As The “High Water Mark” [HWM] Calibrant Brilliantly Overlaps With A Percentage Of Profits Application.

It Is An Acute + Durable + Practical Model…For Both Client + Portfolio Manager…Reinforced By The Absence Of A Management Fee.

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Of Course…Portfolio Managers Are Regularly On The Hunt For New Capital…

Staggering HWM’s In Order To Moderately Diversify Their Business Risks.

Still…Not All Capital Is Created Equal…

As Each Tranche Of Capital Is Attached To An Actual Client Or Client Agent…

Requiring Different Levels Of Attention + Touch-Points…To Accommodate Each Client’s Unique Needs.

And These Professional Relationships Require Proper Care + Nurturing…In Order To Deliver A Superior Client Experience.

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Most Client Relation Successes Begin With A Universally Cogent + Concise Expectation Baseline Articulated By The Portfolio Manager…

Outlining The Investment/Trading Process As Well As Protocols For Communication + Compensation + Performance.

More Often Than Not…Attractive + Enduring Risk Adjusted Returns…

Offer An Experienced Portfolio Manager…A Good Probability Of “Landing” A New Prospect Or Additional Capital From An Existing Client…

But Almost As Important As Returns…Are A Collection Of Intangibles…

Existing Clients + New Prospects Must Actually Admire The Portfolio Manager + Process/Strategy…In Order To Award Their Business.

In Turn…It Is Also Wise For The Portfolio Manager To “Size Up” The Potential Client…Primarily Measuring Their Particular Behavior + Demeanor…

As Calm + Balanced + Stable Is Preferred…But Not Always Possible.

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My Client Roster…For The Most Part…“Gets” My Investment/Trading Process…

Fundamentally Value Based Equities…Medium/Large Capitalization + FCF Producing Market Leaders…Investment Grade Credit Profiles…Savvy Senior Executives Leading Companies That Are Currently Out Of Market Favor.

Concentrated Positions Are Applied Across A Collection Of SPY Companies + Sectors…With Staged Capital Commitment…

Allowing An Investment Hypothesis To Gradually Evolve + Gain Traction …And Usually…That Takes Some Time.

Though…There Are Some Clients That ONLY Care About Bottom Line Numerical Returns…And That Is Just Fine Too.

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Nevertheless…When Market Stress “Hits”

The Occasional Client Will “Shake” With The Market…Which I Most Certainly “Get”.

Typically…The “Shake” Is Quickly Steadied With “Live” Communication + Re-Iteration Of Investment/Trading Process…

And That The Current “Shake”…Likely…Offers Supreme Opportunity For Future Returns.

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Very Infrequently Though…You Get A Really “Bad One”

AKA…A Toxic Client…

And They Are The Worst Type Of Person…

Frequently Complaining + Griping…

Not Only When Capital Draws Down…

But Ironically…

Even When Investment + Trading Performance = Stellar.

Some Of Their Other Distasteful Traits…

1. Condescending +
2. Disrespectful +
3. Frequently Wrong/Never In Doubt +
4. Ill-Mannered/Impolite +
5. Insulting “Back Seat Drivers” +
6. Judgmental +
7. Never Satisfied +
8. Righteous +
9. Sense Of Entitlement +
10. Unsolicited Advice

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Basically…They Are Classic Bullies…

With The Diplomatic Skills Of A Heart Attack…

Solely Operating With A Fear + Power Credo…

Believing The Only Effective Tactic To Motivate The Proverbial Horse…

Is Via The Whip…Rather Than The Carrot.

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Still…I Have A Considerable Threshold + Tolerance…

As They Are Paying Clients…

But A Threshold Nonetheless.

And If/When That Threshold Is Finally Breached…

That’s It…They Are Gone.

Capital Is Returned + The Client Relationship Is Permanently Terminated.

Then…I Simply Walk Away + Never Look Back…

Because…

ABSOLUTELY NOBODY Is Worth That Kind Of Grief.

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Contact The Author: [email protected]

CRYPTO = AKIN TO FINANCIAL PORNOGRAPHY

Headline:
Crypto-Industry Littered With Illegitimate + Sleazy Financial Actors.

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The Cult-ish Crypto-Crowd Fancies Itself As An Alternative/Digital Currency…Powered By Legitimate Block-Chain Technology…In The Tech-World Of Decentralized Finance.

Yet…At Best…The Crypto Market Is Nothing More Than A Frontier-ed Asset…

Born In Illegality…By Criminally Intended Computer Geeks…To Provide A Uniquely Un-Traceable Electronic Barter To Shield Their Illicit Financial Dealings …Which…In Actuality…Is Rather Clever.

However…Crypto Has Now Gone Mainstream…Perceived As Legitimate Tender By Ignoramus’…Especially The Uninitiated Millennials…

And Is Also Actively Quoted [By Most Mainstream Media Co’s = Bloomberg + Reuters + Wall Street Journal].

Recently…High Profile Celebrities [Brady + Curry + Damon + Kardashian] Were Recruited To Brilliantly Promote…What Increasingly Could Be Viewed As Electronic “Snake-Oil”…Despite Trusted Data Exchange Enabled By Block-Chain.

Unfortunately Block-Chain’s Substantial Digital Attributes Have Been Clouded + Hijacked Into A Highly Volatile Monetary + Speculative Monster…aka Crypto…

By An Inexperienced + Unsavory Den Of Enterprising Thieves.

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Crypto’s Nerds Correctly Claim That Block-Chain Technology = Immutable.

Thus…Because Of Block-Chain’s Immutability…They Also Indicate That Crypto Is A Reliable + Secure + StableCurrency Platform…

Indeed…The Platform Might Be Stable If The Crypto Players Orchestrating The Platform Were As Reliable + Secure + StableAs The Block-Chain Technology They Rely On…But Alas…They Are Not.

Because If They Were…Then Crypto Would Not Be So Easily Steal-able…

As Demonstrated By The 2014 Mt. Gox Theft + The Many Digital Billions Of Crypto-Assets/Tokens That Have Been Pilfered In The 8 Years Subsequent.

Basically…It Seems This Industry Is Being Navigated By Both Naive/Neophyte Computer-Heads + Sophisticated Electronic/Financial Culprits…Or A Combination Of Both…

Which Certainly Does Not Transmit To Secure + Stable.”

Yet The Dodgy Crypto-Market Somehow Survives…On Increasingly Shaky Ground…Primarily Because Of That Perfect Marriage Between…

Greedy + Ignorant + Obtuse Speculators
+
Acute Digital + Electronic Thieves

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Ironically…Theft-Ability Could Be Crypto’s Most Reliably Un-Stable” Feature…

Clearly Reflecting The Massively Inexperienced + Questionable Evangelists “Running The Show” Across Crypto.

So The Slow Moving Crypto Train-Wreck Continues…Most Recently Thanks To FTX’s

1. Amateur +
2. Bizarre +
3. Dubious +
4. Freakish “Leaders”…

Who Are Now Cutting + Running For Legal Cover Around The Globe…Further Soiling Crypto’s Already Dirty + Stained Reputation…

And Likely Cementing Crypto’s Circuitous + Eventual + Lengthy Demise Into The Financial Market Wasteland…As The Industry’s Aggregate Market Capitalization Has Already Tanked 73%…In Just A Little Over 12 Months.

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However There Is A Great Paradoxical Twist To Crypto’s Inevitable Financial Atrophy…

That Is…In Judicious Commercial + Professional Hands…Block-Chain Survives + Thrives…As Its Applications Are Extremely Broad + Deep.

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Contact The Author: [email protected]