On Minyanville’s Pivot

This week I’m reading Josh Brown and Jeff Macke’s Clash of the Financial Pundits (New York: McGraw-Hill, 2014) during my work commute. Brown and Macke interview financial media pundits and bloggers. Minyanville’s Todd Harrison has overshadowed the book’s release in announcing that the popular financial news site will pivot to financial services:

 

Our current business model does not extend to financial services, and that’s OK — it’s broken anyway. I do, however, believe that what we’ve built is extremely valuable to a broker-dealer looking to leverage a fertile audience, acquire new customers, optimize the social sphere, turn clients into community, market through new channels, engage next-generation investors, and build a lifetime relationship.

This, in my view, can be accomplished by attaching Minyanville to an existing financial services firm as an incubation lab and allocating our assets and abilities across their business model. There are several reasons this makes sense — among them, education, credible content, and creativity are rare commodities on Wall Street.

Financial institutions have been reticent to embrace the online world given regulatory and reputational concerns; they now understand the digital realm isn’t going away and the millennial generation — along with a massive transfer of wealth — is quickly approaching. If they don’t incubate the human capital and creative elements necessary to service the entire vertical across multiple channels, they will be left behind.

Minyanville provides a plug-and-play, end-to-end solution that delivers smart market commentary with editorial rigor through a FINRA- and SEC-compliant mechanism. This is not traditional research; content is the best online currency — engage the audience in a daily dialogue with one foot inside the firewall (give them a reason to stay in the walled garden) and the other foot outside the firewall (broaden the brand shadow and more effectively target the marketing spend).

 

Over 14 years ago when Richard Metzger and Gary Baddeley hired me to edit the Disinformation website they were pivoting to television production, publishing, DVD, and video-on-demand interests. Stratfor’s George Friedman planned the StratCap hedge fund before Anonymous hacked his geopolitical intelligence website.

 

Behind all of these moves are two strategic realities: (1) most web content generates zero income – a painful truth for editors and writers; and (2) value creation often lies in tailored products and services for a website’s audience. Minyanville’s version of (2) was a subscription service for premium content. Disinformation’s version was book, DVD and video-on-demand projects — the site became mostly user-generated content from March 2008. This was all prior to Henry Blodget’s career ‘second act’ with BusinessInsider.

 

I made a series of decisions about these shifts over the past decade. After undergraduate and postgraduate school I pursued a university-based research career from 2004 whilst doing a second editorial stint with Disinformation. I stopped freelancing for magazines during this period due to publishing embargoes that the research consortium I worked for placed on my research. After leaving TDC Entertainment on 29th February 2008, I turned down several offers to edit websites or to be involved in publishing projects. After March 2007, I self-funded my academic research. Today, I blog – as Josh Brown does – primarily for self-education.

 

On the surface Harrison’s pivot decision for Minyanville to partner with financial services as an “incubation lab” looks like an entrepreneurial venture. I’m a little skeptical:

 

(1) As Brown and Macke show in their new book, most financial commentary is noise that is unhelpful to traders. Twitter, Andrew Ross Sorkin’s Dealbook section in The New York Times, and a Bloomberg or Wall Street Journal subscription provides most of the major financial news and the major newswire services.

 

(2) Harrison omits that most website content is usually either for subscription traffic, or is a loss leader.

 

(3) I read Fundamentals of Stream Processing (New York: Cambridge University Press, 2014) and it confirmed that the real alpha is already in complex event processing, machine learning algorithms, news analytics, and high-frequency trading algorithms. This area is at least 4 to 5 years old in quantitative finance already. It may continue to disrupt the broker service model that Harrison has in mind. How many of Minyanville’s customers really have the financial assets to become high net worth customers for a broker?

 

(4) Harrison looks to the Millennials as the new investor class – but most of them can save money and time by paying US$1 for William Bernstein’s monograph If You Can: How Millennials Can Get Rich Slowly; investing in a low-cost index fund like Fidelity or Vanguard; and reading free web commentary for self-education. More Millennials are likely to use mobile services than subscription-based websites.

 

(5) As George Friedman found with his StratCap venture, developing alpha/edge in investment and trading is a very different skillset to financial news or commentary. My experience from several different contexts over a 10-year period is that news arbitrage strategies are hyped by journalists and editors — but have significant alpha decay for traders — particularly in a market dominated by high-frequency trading algorithms and low-latency arbitrage. Brown and Macke confirm that this is the case for retail traders who try to trade the news on Bloomberg or CNBC – and that the major news outlets are set-up with availability and disposition biases in mind.

 

(6) Thomas Frank’s One Market Under God: Extreme Capitalism, Market Populism, and the End of Economic Democracy (New York: Doubleday, 2000), Thomas Schuster’s The Markets and the Media: Business News and Stock Market Movements (Lanham, MD: Lexington Books, 2006), and Dean Starkman’s The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Financial Journalism (New York: Columbia University Press, 2014) show that the financial media-retail trader nexus has been a problem noted in the 1995-2000 dotcom and 2003-07 real estate speculative bubbles, and also in the 2007-09 global financial crisis.

 

I will keep an eye on what Harrison’s Minyanville evolves into and what it incubates. However, Harrison’s pivot decision looks like an exit.

15th June 2013: Requiem For Equity Research Analysts?

In 2003, I did Masters essay post-mortems on the 1995-2000 dotcom bubble (PDF) and the 1998 collapse of the hedge fund Long-Term Capital Management (PDF). It was a turning point: then-Professor Richard Slaughter and I had discussed the more subcultural material I had written for Australia’s 21C Magazine and New York’s Disinformation website. The new material was like a requiem for the 1990s stockmarket, and for equity research analysts, in particular.

 

I kept reading about the dotcom era rise-and-fall of sell-side analysts like Jack Grubman, Henry Blodget, and Mary Meeker. I had my first taste of what being an equity research analyst might be like when I worked on the Smart Internet Technology CRC report Smart Internet 2o10 (PDF). We didn’t get any formal training in security analysis but I did some MBA classes in accounting, strategy, and opportunity evaluation. Our research team developed a qualitative screening methodology using expert consensus and thematic criteria. We did client briefings where we were sometimes asked for market views and stock picks. Then, Blodget wrote some Slate columns; came out with The Wall Street Self-Defense Manual (New York: Atlas Books, 2007); reconciled publicly with Eliot Spitzer; and launched Business Insider as a second act.

 

Still, no-one talked about equity research analysts in the same way as they did when Grubman, Blodget, and Meeker were dotcom stars. Securitization and ‘know your customer’ had replaced disintermediation as industry watchwords. Boris Groysberg’s Chasing Stars: The Myth of Talent and the Portability of Performance (New Haven, CT: Yale University Press, 2010) shifted attention from the foreground of dotcom era sell-side stars to the investment research organisation that the equity research analyst was in.

 

Equity research still featured prominently in CFA Institute training. But the dotcom scandals around Grubman and Blodget changed the public image of equity research. Turney Duff‘s excess-driven and somewhat derivative book The Buy Side (New York: Crown Business, 2013) appeared more attractive than examining analyst buy ratings or developing quantitative factor models. The public glamour of analyst-driven sales has diverted attention from the shift over the last decade to Bayesian probability and other structured analytic techniques that came from intelligence analysis. Buy-side analysis still remains secretive compared with sell-side analyst reports, which now get leaked to internet trading sites.

 

There are a bunch of core books around if you still decide to pursue a career as an equity research analyst:

 

  • The CFA-oriented Equity Asset Valuation (Hoboken, NJ: John Wiley & Sons, 2010) gives some of the core skills needed. Jeffrey C. Hooke’s Security Analysis and Business Valuation on Wall Street (Hoboken, NJ: John Wiley & Sons, 2010), and Martin J. Whitman and Fernando Diz’s Modern Security Analysis: Understanding Wall Street Fundamentals (Hoboken, NJ: John Wiley & Sons, 2013) give further details on security analysis and valuation methods that equity research analysts commonly use.
  • Jeremy Bolland’s Writing Securities Research (Hoboken, NJ: John Wiley & Sons, 2010) discusses the securities report as a writing genre, and the research methods involved.
  • James J. Valentine’s Best Practices for Equity Research Analysts (New York: McGraw-Hill, 2010) is the most encompassing and detailed of the career guides available. Gillian D. Elcock’s How To Get A Research Analyst Job (Herts, UK: 2010) covers the buy-side and asset management. Roy Cohen’s The Wall Street Professional’s Survival Guide (New York: FT Press, 2010) gives a coach’s perspective on how to move from buy-side to sell-side roles; how to format a curriculum vitae that is achievement and results-oriented; and how to prepare for interviews.

 

This suggests that in 2008-10, the equity research analyst role underwent a post-dotcom re-evaluation, during the 2007-09 global financial crisis. Or, equally likely, publishers decided enough time had elapsed from the dotcom era scandals to publish some new books for the next generation of financial professionals.

14th January 2013: Second Acts

Minyanville‘s Justin Sharon has profiled five ‘second acts’ in finance: Michael Milken, Henry Blodget, Martha Stewart, Jamie Dimon, and Apple.

 

Sharon’s choices have several lessons for career planning. Milken and Blodget developed new media and philanthropic vehicles after legal prosecutions ended their Wall Street careers. Stewart survived an insider trading case to re-establish her super-profitable media empire. Dimon waited for the right job and used his attention to detail to benefit from merger negotiations. Steve Jobs made turnaround cutbacks at Apple and then oversaw the development of disruptive new products that created profitable new markets. The common thread in all five cases appears to be: resilience; ‘decision rights’ control of an organization used as a personal vehicle; and either creating or seizing on breakout opportunities.

29th February 2012: StratCap

Stratfor Logo

 

Strategic foresight practitioner Stephen McGrail pointed me to a Yes Men press release on Stratfor/Wikileaks, where I found this gem:

 

Among the millions of other leaked Stratfor emails are some that reveal dubious financial practices, including an apparent insider trading scheme with Goldman Sachs Managing Director Shea Morenz, who joined Stratfor’s board of directors and invested “substantially” more than $4 million in the scheme, called StratCap. “What StratCap will do is use our Stratfor’s intelligence and analysis to trade in a range of geopolitical instruments,” wrote Stratfor CEO George Friedman in September 2011. StratCap was designed through a complex offshore share structure to appear legally independent, but Friedman assured Stratfor staff otherwise: “Do not think of StratCap as an outside organisation. It will be integral… It will be useful to you… We are already working on mock portfolios and trades.” (StratCap has been due to launch in 2012, though that could now change.) [emphasis added]

 

I wrote about Stratfor/Wikileaks here. The StratCap documents are here. They reveal plans by Stratfor chief executive officer George Friedman and colleagues to establish an event arbitrage and global macro fund that would trade on the basis of Stratfor’s geopolitical and strategic intelligence. Friedman and colleagues envisioned a $US25 million fund with a 10% equity investment from Stratfor: small for global macro but possible for a boutique event arbitrage or special event fund. The emails deal with the fund’s offshore structure; the service agreement; the role and compensation of Shea Morenz; and Stratfor’s role to provide StratCap with actionable intelligence.

 

“From where I sit, this deal is dead,” Friedman wrote on 23rd July 2011. The deal show-stoppers included Friedman’s discontent with attorney Bruce Herzog‘s handling of the service agreement and anger over a $US200,000 fee (“for Bruce’s clumsy attempts to undermine the process”); an immediate tax liability that impacted on the initial investment capital; potentially adverse effects on Stratfor’s publishing business and working capital; and the potential for Shea and StratCap to bankrupt Stratfor through demanding potentially unlimited strategic intelligence. These show-stoppers made the deal non-viable: it exposed Stratfor to credit and transaction risks.

 

Friedman explained in his 23rd July 2011 email to Stratfor colleagues:

 

I can imagine easily a scenario in which StratCap’s demands outstrips Stratfor’s means to the point that StratCap would hold Stratfor in default and even push it into bankruptcy with StratCap the major creditor. Nothing in the course of the negotiations gives me the slightest hope that Bruce would not do this in a heart beat and that Shea wouldn’t let him. I regard the proposed service agreement as a threat to the survival of Stratfor as a company under Don and my control. [emphasis added]

 

Friedman notes: “I have no intention of being the Chairman of a failed investment fund . . . I will not be the public image of StratCap, ridiculed for the failure of an enterprise that was built to fail.” (A reference to Jim Collins and Jerry Porras’s influential management book Built to Last.)

 

StratCap may have run into other problems if the fund had launched. In 2002, Goldman Sachs paid a $US110 million fine to separate its sell-side research from Goldman’s trading activities. So did dotcom era analyst Henry Blodget. Morgan Stanley paid  $US125 million in fines though analyst Mary Meeker escaped prosecution. It’s possible that Friedman and Stratfor may have faced similar fines or regulatory threats if they had proceeded with the StratCap deal.

 

Want to start your own event arbitrage fund? You might start with Robert Webb’s Trading Catalysts (London: FT Books, 2006) and Andy Busch‘s World Event Trading (Hoboken, NJ: John Wiley & Sons, 2007) on event arbitrage and special event strategies. On hedge funds, read Sebastian Mallaby‘s excellent history More Money Than God (London: Penguin, 2011), and for the best academic research, Andrew Lo‘s Hedge Funds: An Analytic Perspective (Princeton: Princeton University Press, 2010).

Henry Blodget’s ClusterStock

Former securities analyst Henry Blodget recently launched ClusterStock which provides daily news, commentary, and research analysis on the economy, energy, financial services, retailing and technology sectors.  ClusterStock’s parent company Silicon Alley Media appears to follow the Web 2.0 nanopublishing business model of Gawker Media‘s Nick Denton and Mahalo founder and entrepreneur Jason Calacanis.

In a 2008 last-minute submission to Australia’s Review of the National Innovation System I contended that market-based approaches may resolve some challenges in the organisational design and concept to cash/concept to market processes of R&D consortia and institutions.  ClusterStock provides an example for strategic implementation: coverage of market events by sector specialists, near real-time commentary on conference calls, and assumptions testing via reader/user feedback.  The public face provides an information filter and feedback loop in the incubation and idea generation phases of creative innovation.  R&D consortia could implement this web publishing model as a peristyle public face with separate internal processes for ‘commercial in confidence’ information and corporate/government partners.

For his side of the infamous dotcom era blow-up plus an insider’s critique of the investor ecosystem see Blodget’s informative consumer guide The Wall Street Self-Defense Manual (Atlas Books, New York, 2007) and Slate Magazine’s accompanying articles.