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Breaking: Yahoo Finance Message Boards raided by FBI

Posted on November 24, 2010 at 1:55 pm

In an incredible twist, the FBI and DOJ have raided the Yahoo Message Boards today as part of an expanding investigation into insider trading.  According to most recent reports, the FBI is investigating numerous players in the investment field (including 6 hedge funds) in what pundits are calling Insider Trading Fest(ivus)

Posing as bigdaddywantmoney123 and insiderhoneypot, two detectives have been monitoring suspicious activity for the past 7-11 years on the industry’s most active site to share useless, inane, political opinions.

After serving a warrant to…um…eh…(WTF?? Who’s in charge over there at Yahoo?!), the FBI sent a team of forensic detectives to do their thing on the Yahoo Finance Message Boards on a set of servers located in Sunnyvale, CA.

The smoking guns

$BIDU: On the Baidu ($BIDU) message board, asiantradermakingseriousyuan said that his cousin’s brother’s wife who lives in Beijing knows BIDU’s CEO’s brother’s nanny and she says the company is on fire. Clearly, impactful nonpublic information.  Google, here we come!

$AAPL: Over on the media device juggernaut’s boards, user macforlifebaby said that he’s got an in with a janitor who cleans Steve Job’s dentist’s office and reportedly, the Apple Computer CEO had a least three teeth whitenings in the past 3 years.  Heady stuff — what you trying to hide, Steve, eh??

$AMZN: This one’s really good. You know the hot Kindle book reader device sold by Amazon.com.  Well, supposedly, someone’s posting on the message boards who works at UPS in Seattle and he estimated that he’s picking up more boxes this year than ever before at the retailing giant.  God, that’s good info!

$PCLN: This one seems a bit far-fetched but illustrates how individual investors are not playing on a level playing field when it comes to investing.  So, you know how you can bid on hotel rooms on Priceline.com?  Well the stock is one of the best performers over the past 12 months and IwanttohaveWilliamShatnersbaby says that he (she?) noticed that hotels in New York city are going for less than they were 3 months ago.  Short it baby!!

In all seriousness, the FBI is taking these allegations seriously and says its aim is to prevent leakage of potentially tradeable info onto the message boards.  The FBI has suggested the Internet to be turned off periodically and power cut to those homes suspected of aiding and abetting these criminals.

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  • What Urban Meyer’s retirement means for investors

    Posted on December 10, 2010 at 4:36 pm UTC

    Massively winning University of Florida football coach Urban Meyer announced his resignation (again) from coaching. After some health problems and a premature announcement of his exiting coaching last year, this move appears is permanent

    What prompted a coach that has built one of the most successful and winningest football programs in the US to just give up and quit?

    At the end of the day, I’m very convinced that you’re going to be judged on how you are as a husband and as a father and not on how many bowl games we won (Washington Post blog)

    Winners leave on top

    Being successful in investing — like life — means knowing when you’ve seen your fortunate share.  Exiting a winner shows a certain gratitude for what you’ve been given, whether monetary abundance, family bliss, or other gifts.  Staying around too long, trying to push the envelope beyond this natural departure point doesn’t work.
    I’m sad when I watch Brett Favre play football.  I’m embarrassed for him.  He doesn’t know when to say goodbye.  One of my favorite players of all time, Detroit’s famed running back, Barry Sanders surprised everyone when he just bowed out.  He had a few more years and a few more thousands of yards in him.  But he was done.  Michael Jordan battled with his fate, returning to basketball, when he should have been at home, coaching, investing — anything but continuing to do the same things that had made him so successful in the first place.

    Leaving is harder than staying

    Sticking around for Meyer would have been the easier decision, but not necessarily the right one.  It took a huge pair of testicles to do what he did.  That’s a true sign of leadership and success.
    History has a natural replacement cycle.  People die and new generations of people replace them and their roles.  Successful investors should recognize this pattern, be thankful for what they have and realize at some point, it’s someone else’s turn to take over.
    No one says you have to remain invested.  That’s just one of many false aphorisms we’ve been fed.

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  • High nominal stock prices don’t mean anything (or do they?)

    Posted on December 1, 2010 at 1:15 pm UTC

    I’m curious why so many high-flying stocks in our current market also carry very high (nominal) price tags.  As investors, we’re used to seeing Buffett’s Berkshire Hathaway shares priced in  mortgages (plus $100k).  But look at the prices on these stocks that have been standout performers this year:

    • $NFLX (around $200)
    • $PCLN (around $400)
    • $GOOG (near $600)
    • $BIDU (over $100)
    • $AAPL ($300 and change)

    Why not just split the stock?

    In recent historical markets, companies would have been quicker to split their firms’ stocks.  Although stock splits don’t impute any real economic change (instead of 1 share of stock worth $50, I now have two shares worth $25 a piece), a lot of research has been done analyzing the after-effects of splitting stock.  Ever since Fama, Fisher, Jensen and Roll’s seminal paper The Adjustment of Stock Prices to New Information (1969) , investors have been seeking to understand why markets react to stock splits.  I’m more concerned, though, with what the lack of splitting is signaling to investors.

    (Not) Catering to what investors want

    There’s an interesting paper by Alon Kalay and Mathias Kronlund (both of U of Chicago’s Booth School of Business) entitled The Market Reaction to Stock Split Announcements: Tests of Information, Liquidity, and Catering Hypotheses (2010).

    This paper veers from the current trend among researchers that stock splits were a form of catering – corporate boards splitting (or not) was dependent upon what they think investors are looking for (high/low prices).  [See Baker et al Catering through Nominal Share Prices (2009)]  This theory held that boards were constantly monitoring investor appetite for low or high priced firms and essentially managed their own stock prices, pushing and pulling to cater to investor demand.  Here, not splitting Apple stock would signal that corporations believe there is a premium valuation to be had by keeping the stock price high (perhaps a la Buffett).

    That wouldn’t tell us much about where Apple’s stock will trade in the future but it does say that Apple believes it can receive a higher valuation by keeping its nominal stock price high.

    On the other hand

    Kalay and Kronlund don’t buy the catering hypothesis and instead hypothesize that there is informational value in stock splits.  Not unlike why insider buy or sell their own firms’ stocks, decisions by corporations aren’t driven by marketing purposes (trying to find more buyers of their stock) but by fundamental reasons.  In the informational theory, stock splits “are often coupled with the manager’s belief that the firm is doing well.”

    Meaning, a manager is more likely to split a firm’s stock when he or she is optimistic about the firm’s future performance.  This theory does leave the door open that manager catering is behind the split but it contends that the abnormal returns from post-split are driven by a higher earnings expectation in the future (when compared to non-splitting firms).  So, I’m inferring here that not splitting the stock is signaling that management doesn’t see unexpected (to the public) earnings in the near future.

    So, do we back up the truck and buy $AAPL with both hands or should we infer management doesn’t see unexpected higher growth down the pike?

    photo courtesy of prw_silvan

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  • Tradestream Radio #2: hedge fund replication, insider trading, more

    Posted on December 1, 2010 at 12:20 pm UTC

    This week’s episode of Tradestreaming Radio is up and ready for listen. Let me know what you think and if you have ideas for future shows. You can listen below, find the transcript below or download directly to you iPod/iPhone via iTunes — search for Tradestream or go here.

    This episode includes

    • the huge insider trading probe into many of the largest US hedge funds
    • research networks (expert networks) and how they play a role in the investing process
    • interview with hedge fund replication research provider, AlphaClone CEO and founder
    • Ivory Tower Report: Smart investors think like economists (is that a good thing?)
    • Trend Watch: Seeking Alpha continues to grow and introduces its own investing app store

    Transcript Continue Reading »

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  • Insider Trading Dashboard: Everything you need to know

    Posted on November 28, 2010 at 12:56 pm UTC

    With the daily news of hedge funds being raided and expert networks being investigated, I wanted to put together a resource sheet for those looking to delve a bit further into the insider trading game.

    Research

    Decoding Insider Trading (Cohen): This new paper looks at a methodology to isolate insider traders acting on good information from noisy trades.  By looking at individual trades — versus looking at all insider activity — investors can mimic better-performing trades, boosting performance of insider trading strategies.

    Law and Economics of Insider Trading: A Comprehesive Primer (Bainbridge) 84 pages of insider trading awesomeness.  This 2001 paper deals with everything from the origins of current laws prohibiting insider trading to defining an insider to making a case for and against regulating insider trading. For a smaller, more concise paper on insider trading, see Bainbridge’s Insider Trading: An Overview

    Stock Market Anomalies: What can we learn from repurchases and insider trading (Core, Guay, Richardson, Verdi)

    How Informative are Analyst Recommendations and Insider Trading (Hsieh, Ng, and Wang) Evidence points to insider trading and analyst recommendations giving conflicting signals.  This paper documents that and provides theory why this may be the case.

    What Insiders Know about Future Earnings and How They Use It: Evidence from Insider Trades (Ke, Huddart, Petroni) Insiders do trade on this stuff up to 2 years before public release.

    Do Insider Trades Reflect Superior Knowledge About Future Cash Flow Realizations (Piotroski, Roulstone) Short answer: yes.

    Insider Trade Disclosure, Market Efficiency, and Liquidity (Buffa): Policy implications after finding that informational efficiency and liquidity are lower in more transparent markets

    Institutional Investors and Insider Trading Profitability (Markarian, Bricker) Insider profits are inversely related to presence of institutional ownership.  Hedge funds/mutual funds may provide monitoring effect.

    MSM (Mainstream Media) on Insider Trading

    WSJ on Insider Trading (sub. req’d)

    Bloomberg.com: Insider Trading

    Google fastflip on Insider Trading

    Tradestreaming on Insider Trading

    Dealbreaker’s Insider Trading Fest(ivus)

    NYT on Insider Trading

    Dealbook on Insider Trading

    Books on Insider Trading Strategies

    Investment Intelligence from Insider Trading: If this book is the bible of insider trading strategies and research, its author, Professor Seyhun is Moses.  Great research into strategies for following insiders.

    Profit from Legal Insider Trading: Invest Today on Tomorrow’s News

    The Vital Few vs. the Trivial Many : Invest with the Insiders, Not the Masses

    Videos on Insider Trading

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  • Strapped for Cash, Do’s and Don’ts (Financial Literacy via Music)

    Posted on November 28, 2010 at 11:31 am UTC

    I find that I use music a lot to explain issues to my teenage children.  Not surprisingly, many tough issues are dealt with via music, rhythm, and lyrics.  Pop music has become a form of modern-day poetry for the masses — much like epic poetry for the Greeks.  While my kids flinch at memorizing anything for school, they have an ENORMUNGOUS repository of songs/lyrics resting under the hood.

    Fountains of Wayne: Strapped for Cash

    Lessons in debt management

    Fountains of Wayne (Wikipedia) has “Strapped for Cash”, a fun yet serious song about debt and the vicious cycle that can envelop a person, company or country.  Debt can take its toll on us, not only monetarily but also psychosomatically.  Feeling trapped, many investors turn to short-sighted activities that only increase the velocity of the debt cycle.

    Well it was Saturday night, I was sitting in the kitchen
    Checking out the women on Spanish television
    Got a call from Paul who was just let out of prison
    He said hey listen, there’s something I’m missing
    I said I’m on it, honest, it’s on its way
    You’re gonna get your money in a couple of days, okay?
    I’m just a little strapped for cash
    Take it easy baby, cut me some slack, I said (most of the time, creditors are willing to negotiate terms of debt and would rather see some return on their loans than a total zero.  Don’t be afraid to negotiate)

    I’m just a little strapped for cash
    Very temporary, don’t you worry ’bout that
    Strapped for cash

    So I headed out west to invest in the races (‘invest’ in races?  C’mon, this is a very dangerous strategy that involved betting/trading/investing in something else in order to win back money lost — bad idea and compounds the problem.)
    All the goddamn horses kept falling on their faces (investing requires patience, time horizon and a way to better your changes via value investing, dividends, etc.)
    Didn’t fare much better at the Taj Mahal
    Chalk it up to bad luck and free alcohol
    And now I’m laying low, you know I’m trying to stall (stalling just increases the anxiety — better to be proactive about debt and meet it head-on. Try negotiating and finding other ways to bring in some money via part-time jobs, hobbies, etc.)
    But I don’t know how much longer I can dodge the calls
    Sayin’

    I’m just a little strapped for cash
    Don’t you know I wouldn’t do you like that
    I’m just a little strapped for cash
    Give me a minute you know you’ll get it back
    C’mon

    Strapped for cash
    Strapped for cash

    Six bodybuilders pulled up in a Pinto
    Next thing I know they’re coming through the window (at some point, debt has to catch up to a person, company or society and payback can be harsh)
    Hate to keep you waiting, I know times are hard
    Now would you prefer a Visa or a MasterCard (quick word of advice: don’t use credit cards to pay off debt.  It’s extremely onerous debt and works to increase the velocity of the debt cycle — better to pay off credit cards first)

    Because I’m just a little strapped for cash
    Take a seat, I’ll be back in a flash, I said
    I’m just a little strapped for cash
    No need to have a heart attack (debt and the struggle to free oneself from it has definite effects on our health and psychological well-being)
    Bop shoo wop, bop bop shoo wop

    (lyrics)

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About Tradestreaming

Tradestreaming is a community of investors learning directly from experts. I’m Zack Miller, investor, entrepreneur, and founder of Tradestreaming.com and I literally wrote the book on how to invest in the age of Facebook and Twitter. Tradestreaming is the resource I’ve created to help me become a better investor.  I believe it will help you … Continue Reading