Friday, August 24, 2007

The Washington Post Says “Global Alpha Male Quant Crisis Over!”

Well, the crisis roiling the “quant” hedge fund community is officially over—or, at least, on hold—according The Washington Post.

No, I’m not talking about the newspaper Washington Post, which I never read, and which I doubt has ventured any opinion about whether or not the quant crisis that forced bizarre, mechanical short-covering and bizarre, mechanical long-selling of individual stocks by computers in the early days of August, the likes of which I’ve never seen, is over.

But the stock Washington Post is certainly looking that way.

Now, for starters, the Washington Post Company (ticker WPO) is not your typical fast-money trading vehicle. In fact, it is probably one of the very last stocks you might ever dream of being caught up in some Goldman Stanley Stearns & Lynch Global Alpha Male Hedge Fund, LLC disaster.

First, there are only 7.8 million shares outstanding, and most of them are owned by Berkshire Hathaway and fans of Berkshire Hathaway—the ‘Never Sell’ crowd we studied in our “Pilgrimage to Omaha” series early this summer.

As a result, average daily trading volume in the Washington Post is a less-than-whopping 16,000 shares. Most publicly traded companies trade 16,000 shares before the lights go on in lower Manhattan.

Second, the business of the Washington Post is sound, if not spectacular, and by no means cyclical. And while you might think the Washington Post would be a good short-selling candidate along with the rest of the newspaper industry, it is in reality not a newspaper company any more.

Just 20% of the company’s business is the old-media newspaper and Newsweek; 80% is television stations, cable TV, and the educational provider Kaplan. In fact, of all major newspaper chains, only E.W. Scripps has moved as aggressively away from its origins as Washington Post.

Consequently, WPO is one of the few publicly traded newspaper chains showing revenue growth and healthy profitability.

Third, WPO’s shareholders—and I have been in this category—tend to own the stock to have and to hold, not to flip. Consequently, the stock itself, thanks to the patient shareholder base and recession-resistant nature of its franchises, has a “beta” of only 0.57.

For perspective on that number, “Beta” is a measure of a stock’s volatility. A stock that moves up and down in line with the overall stock market is said to have a “beta” of 1.00.

A more volatile stock would have a higher “beta” than the market. Google, for example, has a “beta” of 1.24, which means Google’s share price tends to be 24% more volatile than the overall market, thanks to the company’s young, fast growing, risk-taking culture.

Consequently, at 0.57, the Washington Post has the “beta” of a corpse.

Thus, with a reasonable business model, limited float and low “beta,” the short interest in WPO has been virtually non-existent.

Until late last year.

That is when the stock’s short interest began rising steadily—roughly 10% each month—from a mere 50,809 shares in August, reaching 100,000 in June and jumping to 119,193 in July. Thus the shorts more than doubled their position in less than a year.

The stock, meanwhile, went, slowly and fairly steadily from $740 per share to nearly $800 during the early summer months, while the company itself was also doing fairly well, all things considered, despite normal quarterly earnings fluctuations which are to be expected in a company with Warren Buffett—who abhors quarterly earnings management—on the board.

Then, on August 3rd, the company reported earnings that meant nothing much in the scheme of things—and yet the stock made a Google-ish 60-point move to a high of $850 on four-times the normal average volume, closing up 4% $825.50 a share.

The only possible explanation at the time was that since Rupert Murdoch had just won approval from the Bancroft family to buy Dow Jones, he might also pay a stupid price for the Washington Post.

But there was no follow-through in the shares, which settled down the next day and the next, and went back under $800.

They erupted again on August 8th and 9th (a down 350-point day on the Dow) hitting $880 a share on six times normal volume, only to settle back below $800 on the 10th .

Meanwhile, other stocks with similar characteristics—high price/earnings ratios and high short interests—were likewise jumping, and it became clear something other than a Rupert Murdoch rumor was driving the stock.

To whit, some Global Alpha Male Quant Fund, LLC was covering a short position, very badly.

And sure enough, when the short interest data (which for reasons I have never understood, is tallied on the 15th of each month) came out this week, it showed the short interest in the Washington Post had suddenly stopped going up.

In fact, the short interest declined modestly. And I suspect September’s numbers will show a further decline, as whatever Global Alpha Male Quant Fund, LLC finishes its business.

Or perhaps the Global Alpha Male etc. LLC’s computer will decide to look through the Washington Post annual report and see what kind of business it has been short, and who is on the board of directors and what the long-term value of the enterprise might be...and instead of buying high after selling low, will hang onto the shares for the long term?


Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


hundredyearstorm said...

Was short Radio Shack and noticed in early July that Goldman Sachs Asset Management filed owning 13% of it. I also noticed that D.E. Shaw all owned a significant chunk. I had no idea about these quant funds, but looking back now, I bet both of those positions were taken by the computers. RSH had "earnings momentum", "stock price momentum" and I'm sure a number of other quantitative "factors" that led the models to buy up all the RSH they could. How'd that work out for the smartest guys in the room?

It was disconcerting at the time though. I was searching in vain for the piece of information I was missing as to why these highly respected entities owned such large positions in such a clearly overvalued and struggling company. Turns out the reason was "the model says so"

Alex Khenkin said...

Having recently read When Genius Failed, the history of the LTCM debacle, I am amused to see exactly the same players going through exactly the same motions less than a decade later.
Small Investor Chronicles™

Mark said...

Obviously, you're "goofing on" the quants, but some of them have been some of the best-performing funds in history, and for an extremely long (in Wall Street terms, at least) period of time. In fact, the big ones have supposedly already made up their losses from earlier in the month. Methinks you are a very smart, "old fashioned stockpicker" who is, perhaps, a tad jealous.

Alex Khenkin said...

Mark, you made Jeff's case yourself - "some of them", and "an extremely long (in Wall Street terms, at least) period of time" (clearly not long enough to draw reliable conclusions as a blowup can wipe out all previous profits and then some). In a large universe of quants some are bound to end up better-performing, just like out of 10000 coin flippers some will flip tails 10 times in a row. It's called "survivorship bias".

Nish said...

This is great article with good info. How do you dig this info ?

Jeff Matthews said...

It's called "research."

Charles Butler said...

Removing the element of leverage that is not available to the same degree to places like mutual funds, quant funds have not generally been such wonderful performers in the last couple of years. To say they've outperformed traditional investments is to compare peaches to pears... unless of course their risk models have been correctly formulated (ahem).

Thomas said...

This happened to tons of stocks. White Mountains (WTM) is a small Berkshire-like insurance company that no one has ever heard of. Its beta went from 0.5 to 4.0 in the last month. I'm always amazed that one of the inputs these quant models don't factor in is liquidity.

Bill Miller had a great quote in this month's Fortune. "These things flow through the system, and are part of the system. I saw one quant quoted over the weekend saying, 'Stuff that's not supposed to happen once in 10,000 years happened three days in a row in August.' Well, I would think that you would learn in Quant 101 that the market is not what's known as normally distributed. I'm not sure where he was when all these things happened every three or five years."

S. said...

Nice post as usual, Jeff. I noticed Leucadia (LUK), also ran while Goldman blew up. LUK, like WPO affiliated with Buffett, has returned nearly 30% a year going back to 1975. These Goldman guys really know/knew how to pick 'em!

pondering said...

I've notice recently several references to "we" here at Jeff Matthews is we I take it to mean Lucy right?