Monday, March 19, 2018

Private Equity 601

On the day that both Claire's and Toys 'R' Us file for bankruptcy, perhaps we can pause briefly and contemplate:

  • How vulture capitalists ate Toys 'R' Us
    After big success in the 1980s, Toys 'R' Us' performance turned lackluster in the 1990s. Sales were flat and profits shrank. Toys 'R' Us was a public company at the time, and the board of directors decided to put it up for sale. The buyers were a real estate investment firm called Vornado, and two private equity firms named KKR and Bain Capital. [...]

    The trio put up $6.6 billion to pay off Toys 'R' Us' shareholders. But it was a leveraged buyout: Only 20 percent came out out of the buyers' pockets. The other 80 percent was borrowed. Once Toys 'R' Us was acquired, it became responsible for paying off that massive debt burden[...]


    Whatever magic Bain, KKR, and Vornado were supposed to work never materialized. From the purchase in 2004 through 2016, the company's sales never rose much above $11 billion. They actually fell from $13.5 billion in 2013 back to $11.5 billion in 2017.

  • Claire's Plans Bankruptcy, With Creditors Taking Over
    Claire’s Stores Inc., the fashion accessories chain where legions of preteens got their ears pierced, is preparing to file for bankruptcy in the coming weeks, according to people with knowledge of the plans.

    The company is closing in on a deal in which control would pass from Apollo Global Management LLC to lenders including Elliott Capital Management and Monarch Alternative Capital, according to the people, who asked not to be identified because the matter isn’t public. Venor Capital Management and Diameter Capital Partners are also involved, the people said. The move should help ease the $2 billion debt load at Claire’s.

  • America’s ‘Retail Apocalypse’ Is Really Just Beginning
    The root cause is that many of these long-standing chains are overloaded with debt—often from leveraged buyouts led by private equity firms. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder—even for healthy chains.

    The debt coming due, along with America’s over-stored suburbs and the continued gains of online shopping, has all the makings of a disaster. The spillover will likely flow far and wide across the U.S. economy. There will be displaced low-income workers, shrinking local tax bases and investor losses on stocks, bonds and real estate. If today is considered a retail apocalypse, then what’s coming next could truly be scary.

Saturday, March 17, 2018

Candidates Tournament, midway through

We're nearly halfway through the 2018 Candidates Tournament (6 of the 14 rounds have been played).

The contest is hard-fought, with not much space from first (Caruana) to last (Karjakin). There have been 9 decisive results, and 15 draws. Of the decisive results, 5 have been with the white pieces, and 4 with the black pieces. Kramnik's games have been the sharpest, as he has had 2 wins, 2 losses, and 2 draws. Only Ding Liren, the 25-year-old Chinese superstar, has no decisive results yet, playing 6 draws so far.

Meanwhile, if all these beautiful, if deep and mysterious, grandmaster chess games aren't providing you enough entertainment, perhaps you need to liven things up (and no, I don't mean you should start rooting for the University of Maryland Baltimore County Retrievers, wonderful though last night's result was)?

Rather, you could get your way over to Twitch, and tune in to the hottest e-Sport online: I Want My ChessTV

Compare that to a typical session with the Chessbrahs, the most popular chess streamers on Twitch. Over the course of one of their streams, which can last up to four hours, you might see chairs thrown amid a torrent of f-bombs, freestyle rapping mid-game, and a never-ending barrage of trash talk. This is the new, online era of chess—set to the soundtrack of dance music.

Although certainly not the same thing as the Chessbrahs, chess as an e-Sport is finding, perhaps, some real traction.

Here, locally, there's a significant e-Sports chess event just a few weeks away: PRO Chess League Finals Set For San Francisco

The world's best chess players will travel to San Francisco to compete in a live championship organized by and Twitch, the companies announced today. This epic event will be the culmination of's Professional Rapid Online (PRO) Chess League, a groundbreaking, season-long competition with the world's top chess players representing international regions. The two-day event kicks off at 10 a.m. on April 7 at the Folsom Street Foundry and will also be live-broadcast exclusively on’s Twitch channel (

Twitch have immense resources behind them, as they are part of Amazon, now.

So, who knows? Maybe this is really a thing?

American Gods: a very short review

Once again late to the party, I came across Neil Gaiman's American Gods.

And devoured it.

My reaction to Neil Gaiman, in general, is quite similar to my reaction to Stephen King: amazing, fascinating, compelling books, but often the subject matter, or theme, or setting, is too disturbing for me and I avoid even attempting the book.

American Gods is plenty disturbing, no doubt about it.

But it is also intoxicating and absorbing.

Whenever I think about Stephen King, and how he must work, I envision that there is some moment where he suddenly gets an idea, vivid and remarkable, and then he develops it and develops it and develops it, and the result is The Dark Tower, or some such.

With American Gods, I wonder if the original spark for Gaiman was actually captured in the title of the book, and perhaps went something like this: Who are the American Gods? We know about Norse Gods, and Greek Gods, and Egyptian Gods, and Chinese Gods, so surely there must be American Gods?

And as he thought about this, perhaps he thought, well: people came to America, and so perhaps their gods came to America, too?

Hyacinth learned some French, and was taught a few of the teachings of the Catholic Church. Each day he cut sugar cane from well before the sun rose until after the sun had set.

He fathered several children. He went with the other slaves, in the small hours of the night, to the woods, although it was forbidden, to dance the Calinda, to sing to Damballa-Wedo, the serpent god, in the form of a black snake. He sang to Elegba, to Ogu, Shango, Zaka, and to many others, all the gods the captives had brought with them to the island, brought in their minds and their secret hearts.

And yet, gods also emerge from a place, so what sort of gods might emerge from America? Well it would depend a lot on what Americans believed in:

"I can believe things that are true and I can believe things that aren't true and I can believe things where nobody knows if they're true or not. I can believe in Santa Claus and the Easter Bunny and Marilyn Monroe and the Beatles and Elvis and Mister Ed. [...] " She stopped, out of breath.

Shadow almost took his hands off the wheel to applaud. Instead he said, "Okay. So if I tell you what I've learned you won't think that I'm a nut."

"Maybe," she said. "Try me."

"Would you believe that all the gods that people have ever imagined are still with us today?"

"... maybe."

"And that there are new gods out there, gods of computers and telephones and whatever, and that they all seem to think there isn't room for them both in the world. And that some kind of war is likely."

But what would happen as these new gods emerged? And what would happen to those old gods, here in America?

"This is a bad land for gods," said Shadow. As an opening statement it wasn't Friends, Romans, Countrymen, but it would do. "You've probably all learned that, in your own way. The old gods are ignored. The new gods are as quickly taken up as they are abandoned, cast aside for the next big thing. Either you've been forgotten, or you're scared you're going to be rendered obsolete, or maybe you're just getting tired of existing on the whim of people."

The problem is, as Gaiman observes, that America is America, and that has some pretty serious consequences, both for the old and for the new:

There was an arrogance to the new ones. Shadow could see that. But there was also a fear.

They were afraid that unless they kept pace with a changing world, unless they remade and redrew and rebuilt the world in their image, their time would already be over.

American Gods is already 17 years old, and as I read through it I thought it was fated to be a book stuck in a certain time. After all, for a book about "gods of computers and telephones and whatever," there isn't a self-driving car or a social media app or a virtual reality headset to be found anywhere in the book.

But as Gaiman, an Englishman and yet also a converted American, knows deeply in his soul, so much of what makes America America is distinct from the momentary matters of a certain time or place:

"The battle you're here to fight isn't something that any of you can win or lose. The winning and the losing are unimportant to him, to them. What matters is that enough of you die. Each of you that falls in battle gives him power. Every one of you that dies, feeds him. Do you understand?"

Laser-focused and razor-sharp, Gaiman's clarity of vision and courage to let the truth emerge from the telling produces a sure and solid result, a book that doubtless will be read and re-read decades from now, for its story, in the end, is timeless.

Monday, March 12, 2018

Candidates Tournament is underway!

The 2018 2018 Candidates Tournament is underway!

The official site is having some troubles, but you can find all the games at several other sites, including ChessBase, for example.

Kramnik is off to a strong early start, with 2.5 points from 3 games, but the action has been lively and it is far too early to see how this goes.

Must. Find. Time. To. Follow. These. Beautiful. Games!

Thursday, March 1, 2018

Ancillary Justice: a very short review

You'd probably have to be living in a cave, or be paying absolutely no attention at all to the world of Science Fiction, to be unaware of Ann Leckie and her record-shattering Ancillary Justice.

Ancillary Justice won the Hugo award, the Nebula award, the Arthur C. Clarke award, the British Science Fiction Authors award, and heaven knows how many other awards.

There's no disputing that Ancillary Justice deserved all this acclaim. If the point of Science Fiction is to warp your world-view, to push you a bit outside of your comfort zone, to make you imagine different worlds, different ways of being, different notions of existence, then Leckie has it all.

In spades.

And she manages to make it not only mind-bending, but also very entertaining.

But somehow, it is all ... a bit ... odd?

The oddness comes at you from all directions.

Why is every character referred to as "she", even though some are male, and some are female. Or something.

Why do they all wear gloves?

What is the whole sub-plot about singing/chanting/humming?

And don't even get me started on the whole topic of whether a hive-mind artificially intelligent machine can somehow rebel against itself and spontaneously bifurcate into multiple independent consciousnesses.

Ancillary Justice is certainly interesting, but I guess I was hoping for a bit more derring-do and a bit less introspection.

Wednesday, February 14, 2018

Loitering: a very short review

Oddly, I came across Charles D'Ambrosio's Loitering via the Acrostics puzzle in the Sunday New York Times.

However it arrived on my desk, it was truly a wonderful find!

Loitering is somewhat a re-issue: apparently D'Ambrosio had released many of these essays 15 years ago, in an alternate collection that is now out of print. So many of the essays are nearly two decades old; others are newer.

Old, new, or in-between: these are phenomenally good essays, and D'Ambrosio is a writer of startling skill.

As the greatest writers do, D'Ambrosio sees everything through the lens of language.

This can be a disconcerting experience. For example, here is D'Ambrosio, who has become interested in how mobile homes are constructed, marketed, deployed, and lived-in (perhaps he is thinking of buying one?), visiting a suburban town where a number of these homes are in use:

I stopped a couple of places to look through a few more completed houses. All along I'd been intrigued by the lack of language inside these model homes. There were no words, spoken or written, and even the few decorative books seemed mute on the shelves -- not words, but things. Language in the modular industry belongs largely to the manufacturing end of the business, and there, in technical brochures and spec sheets, it's thick and arcane, made up of portmanteaus and other odd hybrids that are practically Linnaean in their specificity. You get Congoleum and Hardipanel Siding and Nicrome Elements. At the factory all that language is assembled and given narrative development in the tightly plotted path the house takes as it progresses from chassis to truck. But once inside the finished home it ends, there's a kind of white hush, a held breath, and all narrative, defined simply as a sequence of events in time, is gone. Silence and timelessness take over so that when the door opens and you cross the threshold you feel you've stepped out of life itself.

Who tries to interpret a mobile home in terms of its language? Who contemplates "Language in the modular industry?" Who visits a mobile home assembly line and observes that "language is assembled and given narrative development?"

A writer does.

At least, a writer of D'Ambrosio's bent does.

But what is this "language inside these model homes" that he is so interested in?

As he explains, it's truly there, if you just know how to look:

In house #19 I find an icy aspect to the arrangement of family artifacts and like Keats before the Grecian Urn I can't quite puzzle out the story. Photos have been framed and set out on tables and shelves but the pictures are of those same corny people who haven't aged a bit since they came with your first cheap wallet. Who are these blonde women with unfading smiles? Whose bright kids are these? What happy family is this? In the kitchen two ice cream sundaes sit on the counter. Those sundaes will never melt, nor will they be eaten. The cookbook in the kitchen is open to a recipe for blueberry pancakes but in the living room a bottle of wine and two glasses wait on a coffee table. What time of day is it?

Yes, indeed, there is language here, and D'Ambrosio has found it.

(By the way, I love the gentle allusion to the famous first sentence of Tolstoy's Anna Karenina: "Happy families are all alike; every unhappy family is unhappy in its own way.")

Loitering continues along like this, nearly every essay a gem of blinding clarity that wastes nary a word, aiming directly and unerringly to the heart of the matter.

Not everything is perfect: I got very little out of the essay Hell House, except to admire its skill in execution; and the essay Misreading was a complete miss for me.

But when D'Ambrosio is on, oh boy is he on.

Take, for just one more instance, since I can't bear to let this pass un-celebrated:

... the difficulty of writing ... of capturing the sound of the sentences, a sound that isn't precious, by eliminating, as much as possible, the emotional fussiness of commas -- instead using hard consonants and the natural stresses of our largely iambic language to create the rhythm.

I mean, do you see what he just did there?

Along the way, there is plenty more. The best of the lot, I think, is an epic essay that starts with a wounded robin, spends pages in the most complex literary analysis of J.D. Salinger's The Catcher in the Rye that I think I've ever read, and ends up being not an exegesis, or at least not only an exegesis, but really an investigation of the loss of D'Ambrosio's younger brother to suicide as a child.

Loitering is a book for the ages; I will surely pay attention to D'Ambrosio's other work, when I encounter it.

Friday, February 9, 2018

Oh my goodness this is complicated

I'm not in finance.

I'm a software engineer.

But, really, the two professions are not all that far apart.

So I feel like I ought to be able to grasp some of the most basic aspects of finance.

But this baffles me: Volatility Jump Has Traders Asking About VIX Note Poison Pill:

An ETP meant to mirror moves in the front of the VIX’s futures curve plunged more than 75 percent in after-hours trading following an 80 percent spike in contracts that comprise its underlying index during the trading day, potentially putting in play triggers that would enable the fund’s owners to liquidate it to avoid losses.

OK, so an "ETP" is an "Exchange Traded Product":

Exchange-traded products (ETP) are a type of security that is derivatively priced and trades intra-day on a national securities exchange. ETPs are priced so the value is derived from other investment instruments, such as a commodity, a currency, a share price or an interest rate. Generally, ETPs are benchmarked to stocks, commodities or indices. They can also be actively managed funds. ETPs include exchange-traded funds (ETFs), exchange-traded vehicles (ETVs), exchange-traded notes (ETNs) and certificates.

(Please ignore the acronym defined in terms of other acronyms, for now)

And the VIX is the "Volatility Index":

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the "investor fear gauge."

But what actual ETP's are we talking about, here? Well, here they are: Comparing VIX ETFs/ETNs (XIV, SVXY)

The VIX (CBOE Volatility Index) was created in 1993 to measure the 30-day implied volatility using at-the-money S&P 100 Index option prices. In 2003, the VIX was calculated based on the S&P 500 Index, and it seeks to estimate future volatility by averaging the weighted prices of S&P 500 options over an array of strike prices. Rather than trading options or futures on VIX, sophisticated investors may consider exchange-traded products (ETPs) linked to the VIX, such as the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEARCA: XIV) and the ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY).

Uhm, er, ok. All clear now?

Well, some people weren't: Volatility Inc.: Inside Wall Street’s $8 Billion Mess

The fallout from the implosion of this vast array of arcane bets mounted quickly on Tuesday. Credit Suisse moved to liquidate one investment product and more than a dozen others were halted after their values sunk toward zero.

The meltdown began last week when stocks started to plunge and volatility spiked to levels not seen since 2015. The VIX -- officially, the Cboe Volatility Index -- surged to 50 on Tuesday, before dropping to 30.

Well, don't feel bad. This is hard for everyone, I think.

Matt Levine takes a swing at it: People Are Worried About the Stock Market

The CBOE Volatility Index, the VIX, is a measure of short-term expected volatility in the S&P 500 Index; it closed at 17.31 on Friday and 37.32 on Monday. That is a 115.6 percent move, but, eh, you know, it is also a 20 percentage point move, and off a pretty low base.

But the great thing about modern finance is that it inexorably turns abstract quantities into prices. The VIX is not investable -- you can't buy the VIX for $17.31 or whatever -- but you can get pretty close. For instance there are VIX futures, and exchange-traded products based on those futures that attempt to capture the daily changes in the level of the VIX. If you owned the iPath S&P 500 VIX Short-Term Futures exchange-traded note (ticker VXX), then you were up ... huh, well, 33.5 percent yesterday, a nice day but not quite the 115.6 percent gains you might have hoped for. (The VXX "continued to climb in post-market trading, shooting up as much as 48 percent since the close.").

If on the other hand you owned the VelocityShares Daily Inverse VIX Short-Term ETN (ticker XIV), or the ProShares Short VIX Short-Term Futures exchange-traded fund, which are meant to provide the inverse of the daily VIX performance, then you were ... hmm ... [rechecks calculations] ... yes it says here you were down 115.6 percent yesterday? I mean, you weren't. For one thing your downside is limited to 100 percent; you can't owe the ETN more money than you invested.

"Your downside is limited to 100 percent."

OK, that part I understand.

It's still pretty complicated, though.

Pseudonymous blogger Kid Dynamite takes a swing at it, too: $XIV Volpocalypse – A Sea of Disinformation and Misunderstanding

There are multiple kinds of ETPs (Exchange Traded Products).

ETFs (Exchange Traded Funds) are generally easy to understand: the ETF holds a basket of stocks (or something else), and there are APs (Authorized Participants) who can bring that basket of stuff to the issuer in exchange for new ETF shares, or bring the shares of the ETF to the issuer in exchange for the basket of stuff. This “creation/redemption” mechanism allows arbitrageurs to keep the trading price of the ETF very close to its NAV (net asset value). If the ETF trades rich (above NAV), the arbs will short the ETF, buy the basket of stuff, and create new shares by delivering the stuff to the ETF, closing out their short. If the ETF trades cheap (below NAV), arbs will buy the ETF, short the basket of stuff, and bring the ETF to the manager, receiving the basket of stuff to close out their short. Simple, right?

Then we have CEFs (Closed End Funds), which don’t have this creation/redemption mechanism. Some of them have a provision where shares can be redeemed, sometimes only at specific fractions of NAV, but with CEFs there are no Authorized Participants who can create new shares to arb situations where the CEF trades rich to its NAV.

Finally we have ETNs (Exchange Traded Notes), which are debt instruments of an issuer, whose value is tied to some underlying formula based on the performance of specific assets. With ETNs, as with CEFs, it is often only the issuer who can create new shares to arbitrage situations where the ETN is trading rich. Many ETNs also have redemption mechanisms where holders can deliver shares (in minimum block sizes) to the ETN in exchange for the underlying assets or value thereof.

Is this helping? I dunno.

Kid Dynamite himself acknowledges that this is some pretty abstract stuff, and suggests that you might have an easier go of it with an older article that he wrote: A Leveraged ETF Trading Flow Case Study: Gold Miners – $GDX $NUGT $DUST

There’s a triple leveraged INVERSE ETF – $DUST (no positions) – which seeks to deliver negative 3 times the daily return of the same index. Here’s another confusing part for some people – its rebalance flows are in the same direction, even though it’s leveraged short. Let’s walk through it, shall we?

$DUST had $209 MM in assets as of 9/30/14. That means they’d need -3*209 = -$627 MM in (short) exposure to the GDX. Today, GDX was up 6.7%, so their short hedge portfolio is now worth $42 MM more (a loss of $42 MM for $DUST), or -$669 MM (their short went up in gross notional value). Their assets are now $209 MM – $42 MM = $167 MM. For the new (tomorrow) assets number of $167 MM, they’d need -3*167 = -$501 MM in exposure – so they need to COVER $168 MM in short exposure. In other words, the leveraged short ETF ends up short too much exposure when the underlying index goes higher, so they need to cover some of their short.

"Triple-leveraged inverse ETF".


And I've studied mathematics most of my life!

OK, one more time, back to the ever-patient, ever-accurate, ever-useful Matt Levine, the best financial writer ever to write a daily blog: Are Banks Worthless?

the XIV is just, you know, it is complicated, there are formulas in the prospectus, etc. Another complaint is that its complication might have caused it to blow up. Actually "might" is too weak a word; as Charles Forelle pointed out, the prospectus says, bold and underlined, that "the long term expected value of your ETNs is zero." Even if the VIX goes down, the XIV -- which is a bet on the VIX going down! -- will also lose money over time. If you bought XIV to bet on vol going down, and vol went down, and you lost money anyway, you might be aggrieved. "What a complicated product," you might complain, correctly, even though you were warned.

But what actually happened is that on Monday the VIX went up by 116 percent, and the XIV went down by 93 percent, and Credit Suisse AG, XIV's sponsor, announced that it would usher XIV off into the great financial-products hereafter. If you bought XIV to bet on vol going down, and vol more than doubled in a day, then you get up from the table, you shake everyone's hand, you say "well played XIV," and you walk away with dignity. You did that! That's on you. Perhaps you didn't understand the intricacies of the formulas in the prospectus, but the intricacies of the formulas didn't matter. You made a bet on the VIX going down, the VIX went up by 116 percent, you lost. That is that.

Let's see if I got this:

  1. Stock prices were remarkably stable, mostly going up, but basically not going up or down very much.
  2. People figured out a way to speculate on stock prices continuing to go up, or at least on stock prices not going up or down very much
  3. They made money on those speculative trades, enough money that they went and borrowed large amounts of additional money, in order to make more money.
  4. Then stock prices went down. A lot.
  5. And those people were sad.

You know, in some ways I think I'm smarter after all of this.

In other ways, I think, not.