New Year's Resolutions: It Might Be Too Late for Bernie Madoff, But Not for StreetBrains!

Not everyone believes in resolutions. As it is, a lot of people are too busy to make changes - too stuck in their ways to lead a more positive personal and professional life. Some people think resolutions are cliche and insignificant. But after this year, wouldn't it be a good idea to introduce something new? I'm sure there's a few people in our industry who will probably resolve to add a bit more due diligence to their operations. In the end, there's always something we can do - setting goals, making changes, being more careful.

At StreetBrains, we started early. We've been working on our resolutions for months as we've been looking to bring the right kind of change to Wall Street at a time it needs it most.

We've resolved to improve our research offering. More analysts, more information - a pipeline of research providers that is making StreetBrains the largest and most diverse research portal.

We've resolved to make it easy. Our old site was good, but now it's better. Information catered to your tastes. No one goes to a steakhouse to see a vegetarian menu. Why should your user experience on our website be any different? Want to see research on telecommunications? Get it directly without having to comb a jungle of information.

We've also resolved to be the best. We don't want to be that company that reminds you of some other company in the Wall Street research space. We want to be unique and we want your experience on our site to be unique. StreetBrains is filling a void. As we see it, we are setting a new standard. We've resolved to build a new platform for investors that is best of breed.

We welcome you to be a part of our resolutions.

Looking Forward: StreetBrains '09

While we try to forget about '08, is there something to be learned? Maybe a few things, but let's not dwell on the disappointments. The TARP, Lehman Brothers, Bernie Madoff, bad markets... the list goes on.

'09 should be better, right? It has to be.

At StreetBrains, we're not going to focus on the negative news. '08 has taught us that our industry isn't perfect no matter what paper you print it on. So what?

The answer is to move on. Keep going. Do the right thing. Think and act positively.

Information Matchmaker

It's a new year. StreetBrains loves a new year. We love staying fresh, we love changing it up and we want you to benefit from our embrace of change.

Our new website, StreetBrains 2.0, will soon be launching. With our new research hub, we will be your information matchmaker. Have a research need? No problem. We make it simple and easy to get the insight you need to make trading decisions. We are opening the door to an information portal that will match your profile with the right research. Looking for research on the Middle East? Want to know when to buy energy related stocks? All of our research is at your fingertips. We have a research pipeline of 76 providers representing over 170 analysts - one of the largest teams on Wall Street, independent or otherwise.

StreetBrains has been working very hard to make '09 a very exciting year. We want you to share the excitement with us.

Change? It’s our obsession.

We’re greeting the changes in Washington with open arms. Being Wall Streeters, it’s the lifeblood of our industry. Change has been a part of, and continues ceaselessly, in our industry; the challenge is to meet it. We’ve embraced the shift by responding to your needs. It’s that simple.

Barack Obama is winning with ‘Change’ – so are we. We’re living and working in an era where ‘stagnant’ is a dirty word. All of us have to learn from our environment and pay close attention. If you’re not adjusting to a variable wind, then you’re going to be blown away.

Wall Street’s changing too…

For five years, Institutional Investor has published a ranking of what the buy-side values most in their research. What Investors Really Want is a ranking that highlights the concerns of institutional investors. The following are lists of priorities over the past 2 years that were gathered in the All-America Research Team survey. Take a look at what has changed…

2007

Rank	Sell-Side Research Attribute
1	Access to Management
2	Industry Knowledge
3	Analyst Accessibility/Responsiveness
4	Special Services
5	Analyst Integrity/Professionalism
6	Useful and Timely Calls and Visits
7	Financial Models Idea Generation
8	Communication Skills
9	Written Research Reports
10	Stock Selection
11	Earnings Estimates
12	Management of Conflicts of Interest

2008

Rank	Sell-Side Research Attribute
1	Industry Knowledge
2	Analyst Accessibility/Responsiveness
3	Analyst Integrity/Professionalism
4	Access to Management
5	Special Services
6	Written Research Reports
7	Idea Generation
8	Useful and Timely Calls and Visits
9	Financial Models
10	Earnings Estimates
11	Research Delivery
12	Stock Selection

Source: Institutional Investor

The Fundamentals of the StreetBrains Formula:

1. Industry Knowledge… That’s StreetBrains.

2. Analyst Accessibility/Responsibility… That’s StreetBrains.

3. Analyst Integrity/Professionalism… That’s StreetBrains.

4. Access to Management… That’s StreetBrains.

5. Special Services… That’s StreetBrains.

We could go on, but you get the picture.

Since our inception, we’ve been two steps ahead of the curve. When we see change coming, we move with it instead of against. In our industry, where there’s a need, there’s StreetBrains – that’s the motto we live by and that’s how we succeed.

Pioneering Website

One item that didn’t even make the list in 2007 was ‘Research Delivery’… Inside StreetBrains’ forthcoming, attractive website and portal, information will be at everyone’s fingertips. We’re giving you research exactly the way you want it. No complicated delivery methods, no unwanted emails… just a one-stop universe of information where you navigate and access remarkable research in the most fundamental and innovative way possible.

We’ve faced the challenges, we’ve embraced change. Sometimes it’s as simple as knowing what people want.

Hitting the Streets

It was an interesting scene at 745 7th Ave!

Calling All Analysts!

Unfortunately, the markets are a mess and it’s causing some panic at bulge bracket research desks all across the industry. If you’re a Wall Street analyst that hasn’t been laid off yet, then you’re probably sitting in your office wondering what’s next.

In uncertain times, you have to do what right for you. At StreetBrains, we empower analysts to do just that. No matter what happens, the buyside needs to maintain coverage and access to talented analysts. We deliver targeted research to powerful clients. Our operation proves that you don’t need put limits on investment insight. The analysts write research on their terms – we do the heavy lifting.

Street Brains values the diversity of talent in the industry and is looking for new research providers to join our platform. In an effort to court those whose security in the bulge brackets may be a bit doubtful, Street Brains will be hitting the road with a billboard truck that will be touring Manhattan. Keep an eye out for our sign, and if you would like any more information about who we are or what we do, or if you’re an analyst looking for details about joining our platform, feel free to contact us at 212.430.3000.














Key Messages of the Campaign

• Street Brains offers Wall Street analysts the opportunity to write valuable investment research on their own terms and cover markets the way they want to, with more freedom than ever before. If they go independent, they have more choices. Through our partnership with InfoEx, we enhance the delivery of information to our buyside clients, offering seamless navigation of research.
  


• Street Brains analysts draw outside the lines. In our view, duplication of analysts is a good thing. We empower individuals to work outside the restrictions of bulge bracket firms.
  


• Street Brains is a trusted research partner, providing services that help the buyside during this harsh time of consolidation and change. We offer continuity. With InfoEx, we provide relevance in information gathering – content directed the way you want it.
  


• The buyside needs to maintain coverage and access to talented analysts. With the appropriate exposure, our analysts attract the attention of many powerful clients.
  


• Ours is a “virtual” world. If an analyst loses his infrastructure, does that mean the buy-side should suffer decreased coverage? Street Brains provides a new kind of infrastructure where research and targeted distribution operates hand-in-hand.
  


• Street Brains provides a conduit for virtualization of research departments. Street Brains helps with the heavy lifting – marketing, sales and distribution. Our partner, InfoEx, helps maximize the distribution channels and caters to the client through methods that best serve their needs.

A Time to Vet

We do it every day, whether we realize it or not - when we meet and greet, when we dine, when we work, when we watch TV. We are vetting everything in increments. We are judging people, situations, events, products, even ourselves, almost every hour of the day. We quickly roll questions around in our heads like laundry in a dryer until we can make a decision on whether or not we want to accept someone or something into our lives.

Sarah Palin had to overcome a few obstacles this past week. She proved that no matter who you are, what you look like or how you speak, someone will always be asking, “How’d you get here?”

Who is she? What’s her background? Why Palin? Why a governor from Alaska? What has she done?

On the heels of her VP announcement and the unfolding of her teen daughter’s pregnancy, the republican vetting process was called into question. Everyone wanted to know how much exploration went in to her nomination. Many were confused as to what a vetting process even looks like. In the end, no one really knows what went into the vetting of Governor Palin, but if you’ve ever stringently vetted someone before, you might know that its not like finding a good cup of coffee – it’s so much more.

Interestingly, the StreetBrains website enjoyed a spike in web traffic this week with many visitors viewing our vetting process page. Many seemed to want to know more about the process and what it meant. Were they looking for answers as to how Sarah Palin was evaluated to be McCain’s running mate?

At the core of the StreetBrains vetting process is a meticulous examination of value. Before an analyst joins our platform, we want to know exactly what he or she has to offer our clients. We assess their professional history, methodology, points of differentiation, and the unique value their research provides. What can this research provider deliver? Do they have credibility? What do they do and what is the advantage?

Vetting is not a simple procedure. It takes a good amount of time and requires our undivided attention – we know because we do this every day. Essentially, the process necessitates a series of pointed questions that should challenge whatever or whomever you are vetting.

The days of plastering a pretty face on the screen and assuming your audience will bite are long gone. The recent interest in vetting proves that your audience needs and expects more. Vetting is a process that should be taken seriously. Our analysts are put through it, our leaders are put through it – perhaps accountability isn’t lost on our society quite yet.

Quattrone's State of the Union?

The New York Times published an article yesterday by Andrew Ross Sorkin (“Analyzing Wall Street’s Research”) detailing Frank P. Quattrone’s statements at the AlwaysOn conference in California. At the conference, Quattrone offered his distaste for Eliot Spitzer’s Global Settlement, making the argument that it has hurt small cap business and dulled the competitiveness of these companies in the US financial markets.

In the end, Quattrone would like a repeal of the settlement but would still expect to see disclosure of banking / research conflict.

Quattrone’s argument is quite compelling (and self-serving). After all, it doesn’t really matter if research and investment banking sleep under the same roof – the key to keeping it rewarding to the industry is through disclosure. Even with the Global Settlement, we are not working in a conflict-free world, thus the purpose of the settlement remains terribly unresolved even though its aftermath is still being felt by the small cap. The fact remains that there is still enough space in the market for everyone – independent research providers continue to clearly add value.

Better disclosure at investment banks benefits the industry greatly, and might be the answer we’ve been looking for. In our opinion, if you want to distribute conflicted research, it should run with an asterisk that discloses that conflict. Certainly, this would be more conducive than putting asterisks next to Barry Bonds’ home run record. If you want to play ball, play by set of rules.

That would be fair, right? Investment banks should be held to such expectations. Disclose your conflict, play ball; in a park with rules where disclosure terms are fair, there’s enough room for all the players.

There will always be an audience for independent research. If the investment banks distribute research with proper disclosure, then Quattrone’s right – there’s no reason not to tear down the wall.

Seems Like Old Times

It’s déjà vu all over again!

The Financial Times published an article on their website yesterday detailing the apparent plan by Citigroup to shift its equity research operations into its institutional securities division. The Global Research Settlement encouraged Citi to keep these two entities separate, but this news indicates that Citi is looking to cut costs and perhaps fold research back into banking.

Mom always said…

… If you don’t have anything nice to say, don’t say it at all. Ironically, that’s the problem.

The reality is that the research coming out of investment banks has never been conflict-free. No legislation imaginable could force Citi, or anyone, to write truly unfavorable recommendations for a given company. When such a high percentage of investment bank (IB) research is positive, it’s difficult to say that the insight is uncontaminated. Investment banks don’t want to make enemies.

Therein lies the problem. There is a significant difference between the research churned out by Wall Street and that which is delivered through alternative providers. No legislation could possibly curb the inherently lopsided predisposition of IB research. This new plan by Citigroup is just one indication that any concession made by the investment banks is probably on the way out the door. Seems like old times, indeed!

Making Sense

Citigroup wants to turn a cost center into a profit center; the only way to do it is to fold equity research back into institutional securities. It makes sense, but at what expense?

This is likely just the tip of the iceberg. There’s no real incentive for investment banks to continue dividing these segments of their business. The last decade was just a dream – we saw attempts to make research more unbiased, but the world where IB research is infallible never really existed.

But what will this mean for the future? Once the research settlement ends in 2009, there’s no telling what will happen. If the IBs go back to doing business the way they’ve always been, then independent research providers will be even more attractive. Conflict-free, unbiased research will always have a place in our market considering that the IBs will likely revert back to their old ways.

Bugs, Quirks and Hiccups

Apple’s new 3G iPhone launched last week greeting the market with fresh applications, cheaper prices, and faster speeds. Enter, hiccups.

Since last Friday, iPhone users have encountered several issues ranging from poor MobileMe functionality to complete iPhone black-out. If you change things up, there’s always the possibility that any well-laid plan will meet setbacks, especially when launching a high-tech product like this.

Should Apple lovers be shocked? If you’ve bought an apple product, you’re probably in the majority of consumers who have found most of their devices flawless and their compatibility seamless. You would expect the quirks to be minimal, perhaps non-existent. However, the reality is that nothing is perfect; Apple customers understand that problems may arise. Everyone is still buying iPhones, right? Apple’s brand is still in tact – they can afford to have hiccups.

Would You Still Buy Research?

Regardless of the offering, a product must add value upon its release. Apple wouldn’t launch an iPhone the size of a Kindle with a fatal flaw in its wireless technology – Apple knows better than that. There would have to be an incentive to buy, adding value to your work or your life. Hiccups or not, iPhones will still be flying off shelves because of the value offered.

Wall Street is a different world, and a research product is far different from an iPhone. When held to an investor’s high expectations, research providers are not given leverage – there is no room for error. Research providers must be resilient, precise and completely entrenched in their work. Every part of the process must add value. There isn’t a research provider anywhere who would hand-write their insights on scroll paper, seal it with wax and then send it to a client via horse courier – at least not in this century.

The same is true for the content. What adds more value: the analyst who walks the factory floor, or the analyst who makes phone calls asking what the factory floor looks like? The standards of a research provider must be high, as it should be assumed that someone is always paying attention to quality. At StreetBrains, we’ve identified realistic strategies and goals that enhance our products and their distribution invaluably. Our clients demand the best and we pride ourselves on delivering just that.

Whatever you offer must beat expectations, so as to never raise doubt about your value. In this world, you can’t afford to deliver bugs or duds; unless, of course, you have the iPhone 5G.

And the All-Stars Keep Coming...

I've come to the conclusion that the two most important things in life are good friends and a good bullpen. -Bob Lemon

The upcoming MLB All-Star Game reminds us of one important point: victory is the work of many great players.

The All-Star Game transcends a star-studded publicity stunt, remaining a competition where the best players can showcase their larger-than-life abilities. The bullpen is the key – the bases would be empty without it.

At StreetBrains, we are adding to our list of all-stars, stacking our bullpen to exemplify the best in investment insight. Our roster is incomparable and continues to grow. Just three hours before the first pitch is thrown at Tuesday’s All-Star Game, StreetBrains will be unleashing our newest all-star.

At 2pm on July 15th, Joe San Pietro, a former aerospace/defense analyst at Wachovia, will be hosting a webinar that will informally launch his brand, DEFINITIV, on the StreetBrains platform. His addition to our bullpen is just one of the many ways in which StreetBrains is adding value and sustaining victory.

DEFINITIV is one of the best sources for aerospace/defense research. With a large roster of industry contacts and unmatched experience, San Pietro is able to find hidden value and strategic plays within the sector.

StreetBrains is excited to continue our all-star tradition.

If you would like to join the DEFINITIV webinar on Tuesday, July 15th, please contact Robert Livingston at 212.430.3043 or James Kempski at 212.430.3050.

The CCA/Soft Dollar Paradigm

The following post answers common questions related to CCAs, Soft Dollars, and how to use these arrangements to pay for 3rd party research services.


What are Client Commission Arrangements and how are they different from traditional soft dollars?

A Client Commission Arrangement – or CCA – is an arrangement where a fund manager, or trader, will instruct its executing brokerage firm to allocate a designated portion of the commission dollars it pays to the brokerage to in turn be used to pay for legitimate research services. In this scenario, the brokerage firm sends payment to the approved research service on behalf of the client (fund manager, or other).

Soft dollars, which have previously fallen out of favor due to abuses by investment managers, are monies designated from a commission pool to pay for research and services. CCAs, though paid for through the same commission pool, differ as they are seen as a far more transparent form of payment for independent research.

With an easier payment arrangement available to fund managers, paying for “a la carte” research and services – in this case, alternative research – has become more streamlined, and therefore the alternative research market has boomed in the past few years, in tandem with the use of CCAs. According to Integrity Research, the alternative research industry spawned $1.8 billion in revenue in 2006 and is expected to grow to $2.5 billion by 2010.

CCA usage has emerged as the most attractive way to maintain best execution pricing while also obtaining the highest quality research.


What are the advantages of “Unbundling” execution from research?

The advantage of unbundling lies in maintaining low execution fees and taking control over the quality of investment insight your fund demands. By unbundling these two important business components, clients are able to ensure they are paying for only best execution (i.e. 1/10 of a penny), and then can pay separately for research that their firm truly values. This capability eliminates the existing problem that many funds encounter with bundled services: they aren’t certain what they’re paying for – execution or research. In some cases, the research is not helpful to clients, but they perceive that the research comes ‘free’ with the cost of execution. Unbundling forces both execution providers and research providers to separately provide the highest quality offering, and ensures that the end user receives the best in both services.


How do I know if I am able to use CCAs? Who is qualified to pay with soft dollars?

If you are an investment manager or any type of institutional investor looking to obtain third party research, you are eligible to pay using CCAs or soft dollars. (See below for a more in-depth description of services that can be paid for via CCA.)


What are the advantages of using CCAs to pay for research?

CCAs are a smart and effective way to generate funding for your research initiatives. Investment banks want to maintain their execution business with you, so they will work with you to parcel your CCA dollars as you deem needed. As a result, you pay less for execution and take personal control over the research you wish to receive.


Is StreetBrains able to be paid for via CCAs?

With regards to Section 28(e) of the Securities Exchange Act of 1934, StreetBrains falls under the legal confines of Section 28(e) and thus our research can be provided through CCAs and soft dollar arrangements. We meet the following criteria:

(1) It must fall under the statutory limits of 28(e)
(2) It must “provide lawful and appropriate assistance in the performance of his (the advisor) investment decision-making responsibilities.”
(3) The amount of client commissions is reasonable in light of the value of the products or services provided by the broker dealer.”

In defining Street Brains as a “research service,” we meet the following clauses as stipulated in 28(e):

(A) furnishes advice, either directly or through publications or writings, as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities.
(B) furnishes analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts


How do I go about arranging CCA payments for StreetBrains research?

If you would like to arrange CCA payment for StreetBrains research, contact your prime broker to arrange CCA payments to be designated for payment to StreetBrains.

If you would like StreetBrains to arrange CCA payment, contact us with the name of your prime broker-dealer and we will take care of the rest.


Who should I contact at StreetBrains for more information regarding CCA payments?

Please contact Michael McLean at mmclean@streetbrains.com, or call at 212.430.3091.

'Ubuntu' Trumps 'MVP'

If you’ve watched the Boston Celtics this season, you may be familiar with “ubuntu” - the team philosophy employed by the 2008 ‘Celts.’ Wikipedia describes Ubuntu as “an ethic or humanist philosophy focusing on people’s allegiances and relations with each other.” (You may also recall the concept of unbuntu as it played out in the film In My Country.) Anyways, it would seem that the concept of ubuntu was officially validated when the Celtics clinched the NBA title with a 40 point win to put the exclamation point on their 66-16 season.

The amazing feat accomplished Tuesday night by the Boston Celtics – overcoming last season’s embarrassingly disastrous results only to come back just one season later and secure the title by succeeding over the Lakers and their league MVP – the concept of ubuntu could certainly be deployed within the investment research industry.

If we’ve learned one thing from a team’s defeat, and from the strife in the financial markets in the past year, it’s that when you hang your hopes all on one big player, you’re setting yourself up for failure.

There’s No ‘Kobe’ in ‘Team’

In the investment research world in particular, the crumbling of major financial institutions, such as Bear Stearns, has led many top quality analysts to be orphaned and without partnership and affiliation. These analysts are still great analysts, but the current market volatility makes it difficult for many firms to justify the expense of a single ‘MVP’ analyst – no matter how Kobe-like he or she may be.

The research world, instead, has shifted. Our marketplace has become one where investment firms need more than just one top quality analyst on a specific sector. They need more than one broker executing their trades in order to protect themselves from blow ups. They need ubuntu. But employing a full team of great analysts internally can be costly, as can executing trades through too many brokers. Firms like StreetBrains offer the perfect alternative to solving the research conundrum.

Essentially providing ‘fractional’ ownership of an analyst, StreetBrains is able to give clients access to exclusive and unique insights from top quality analysts. Under this model, clients are able to utilize the full ‘strength of the bench’ when needed. In a volatile market, wouldn’t you rather have the option of going to Eddie House, PJ Brown and James Posey than continue to hope and pray that Kobe’s got a trick up his sleeve?

We think that great analysts work best when complimented by other great analysts. We know our clients expect greatness, and we stack our roster to ensure that their expectations are fulfilled.

We Called It

“It ain’t braggin’ if it’s true!”

Gotham Research, one of StreetBrains’ key brands, has had a very profitable ’08. Some highlights include:

On 5/14, Gotham closed its position from 12/13/07 on Hercules Offshore (HERO), up 26.61%.

On 5/15, they closed a position on EMCORE Corp (EMKR), up 23.075% from 4/3/08. Additionally on this day, Gotham closed their position on FelCor Lodging Trust Inc. (FCH) from 2/27/08 which was up 18.93%. Gotham also closed a spread on Occidental Petroleum Corp. (OXY) vs. Ultra Petroleum Corp. (UPL) up 6.97% from 1/25/08.

On 5/20/08, Gotham closed on Royal Gold Inc. (RGLD), up 13.32% from 5/2008; Seabridge Gold (SA), up 14.56% from 5/9/08; DryShips Inc. (DRYS) from 1/25/08 up 92.08%.

On 5/21/08, Gotham closed spreads on Altera Corp. (ALTR) vs. SPDR trust (SPY) up 24.60% from 10/25/07; and Platinum Underwriters Holdings (PTP) vs. PartnerRe Ltd. (PRE) up 11.33% from 10/19/07.

2nd Degree Burn: The Information Loss Superhighway

Surfing is often considered a territorial sport. It’s likely that passionate enthusiasts are drawn to the ownership of a hot spot, compelled to keep it to themselves or within a tight group.

Before paddling out this past weekend, a fellow surfer came up to me and explained that I couldn’t surf his break and that I would have to find somewhere else to go, down the beach about a half mile. Looking up and down the unobstructed 18 miles of shoreline, I thought about how ridiculous this was, especially considering that he had no idea where I was intending on heading out in the first place. Also, I didn’t recognize him; having known this spot for years, this triggered a warning sign in my head.

We stood on the beach talking, motioning through our wetsuits, trying to come to some sort of understanding. I kept the focus on his total lack of solidarity while he was most concerned in why I was picking this particular zone to paddle out. After a few minutes, it was clear that he was just waiting for me to tell him where to get in the water because he didn’t even know the break and was ultimately looking to see what I was going to do.

I was going to paddle out where I originally intended, directly where he didn’t want me to go. Since he was terribly stubborn about it, I knew he would do the exact opposite of me just to have a quarter mile stretch all to himself (probably the only thing he wanted in the first place). Instead of asking me straight out what was good in the break, he tried to strong-arm me into giving him information.

He ended up paddling out where he had originally wanted me to go. I could have told him about the dip in the shoreline over there that made the waves short and the rip current strong. And I could have told him about the sandbar that would have killed any swell energy close to shore. But why would I want him to come back? Why would I want him to know what I know? He hadn’t earned it.

This got me thinking about protecting information that you value and respecting it enough to not risk contaminating it by providing it to others who haven’t done the legwork.

Insights in the Hands of Expert Networks

If your expert network isn’t yet causing a headache for your compliance department, then they probably have you wondering, “How can they potentially compromise my investments ideas?”

‘Information loss’ is the nice way of saying, “You just flushed your best ideas out to sea.” In speaking with an expert network, you probably let them in on your insights, giving them a starting point from which they can begin to help you build support for your idea. In this process, there is no definitive standard in place to keep your ideas out of the hands of others. In trying to grow your ideas and generate appeal for them, you’ve essentially released them to the market, uncertain of how they are being assessed and used. Your ideas are lost. You’ve opened the door on your security, your intellectual assets now in full view.

If one day you pick up the phone and gather some insights from an expert network participant based on your impending investment decisions, take pause and think about how vulnerable your idea is to being compromised.

Communicating your ideas to expert networks is a risky venture that can potentially put your private insight on the Street, making your unique idea fodder for the masses.

As we mentioned last week, expert networks are valuable in theory, but when weighing the risks, there can be many uncertainties.

You wouldn’t sit in the middle of Bobby Van’s Steakhouse spewing your next best idea in earshot of your competition. Why would you openly discuss this information with an expert network?

‘Information loss’ is going to happen in any business. It’s the reason why painters don’t talk about their brushstrokes; why scientists don’t share their notebooks; and why Street Brains doesn’t email reports through highly accessible PDF documents. You want to make sure that limited means limited.

In working with an expert network, an expert has to take into account any insights he’s gathered from his conversation with you – that information is now part of his knowledge and expertise. When the expert picks up the phone to discuss it with others seeking his “expertise,” your conversation with that expert may very well help to shape that expertise. If your goal is to generate alpha – as is the case for most institutional investors – you put it seriously at risk when you rely on a source that is not accountable to you.

Holding the Hot Potato: The Expert Network Burn Factor

Should we be shocked to learn that our buy-side friends are a little concerned over the compliance problems that expert networks pose? In theory, it sounds nice to be able to shop for experts who will laud your investment ideas, pushing your good measure with their stamp of approval. However, what happens when that network lets you down? The paper trail won’t lead back to an analyst and the expert network surely won’t be sweating the mistake. No one wants to be holding the potato when the music stops, but without a doubt, it winds up in buy-side hands.

Integrity Research shows that 45% of surveyed buy-side compliance professionals are somewhat or very worried about compliance problems that may arise from their use of expert networks.

It’s only a matter of time before we see the crackdown. Without a stringent vetting process, expert networks will continue to cause compliance problems for their clients. How do you qualify an expert? How is he deemed reliable? What is keeping him from supplying potentially dangerous information to institutional investors?

45% of compliance professionals may be asking themselves those questions, but what about the other 55? Are they not banking on a backlash?

Institutional investors have good reason to worry about their relationships with expert networks. When something goes wrong, if a mistake is made and the investor loses money, the investor can’t just turn to those experts and say, “He did it.” When using the expert network, an investor is forced to ‘proceed at their own risk’ and take responsibility for any errors that result. As is usually the case with the financial markets, this is a useful – and often lucrative – way to operate…right up until the point where a big trade blows up based on faulty information.

Remember: If you wind up with a hot potato, the game’s over.

Farewell to Desk Jockeys: Show Me The Money!

The era of desk jockeys seems to be coming to a close as institutional investors push research providers to go far beyond critiquing company earnings and writing up ratings based on quarterly estimates. With a struggling economy breathing down their necks, investors are putting the pressure on analysts to show them the money and give them the edge. But what’s really changing? Can the research world adapt?

Some might argue that independent research providers (IRPs) have been waiting a long time for this opportunity to shine and truly show how their value stacks up against their Wall Street brethren.

Bloomberg News recently published an article by Peter Robison (“What’s Analyst Worth, Not a Penny as Estimates Miss”) which discussed how Wall Street analysts were missing estimates based on a trend of inaccuracy and anti-sell mentality. The problem for those analysts is unfortunately often well outside of their control, and rather dictated by their firms and compliance rules – they are expected to sit at their desks and write, and to ‘fill in’ a research report template. These strangle-held analysts are seldom able to think outside of the box or to expand the scope of their analysis to include information that can set their research apart from their Wall Street competitors. This scenario presents tremendous opportunity for independent analysts who deliver insights that “fall through the cracks” in the Wall Street research silos.

Most independent analysts know that sifting through earnings reports, judging company profiles and keeping an eye on trends is only the bare minimum – a starting point. While waiting on GE earnings, you might find a Wall Street analyst locked up to the point that he’s flicking the top of his Dwight Schrute bobble-head and running his eyes to a rearview monitor mirror every time a coworker passes by.

On the flip side, you’d find an independent analyst walking the factory floors, speaking to government officials, competitors, customers, and any and all sources able to pave the way to the most actionable investment insight. These analysts acquire unique credibility in their sector while always delivering more to their clients.

“Necessary Evil”

Obviously, those who consider analysts a “necessary evil” have never had the kind of relationship that they should be having with their analysts. Reading that, it would seem as though receiving potentially profitable information is a chore. Cut the cord – if you’re not happy, then you should only need to take the trash out once. If an analyst doesn’t show you the money, then it’s probably time to show him the door.

The Information Pendulum: Swinging Back to Pre-’03?

On Sunday, Integrity Research blogged about the consolidation they continue to anticipate amongst the 1,735 alternative research providers (ARPs) in their database. The blog got us thinking about the future. We certainly agree with Integrity that a consolidation period is coming, and it’s not a matter of if – but when.

We would anticipate that mid-2009 (if not sooner), when the global settlement ends, there will be an enormous shake up in the industry – the effects starting to occur now, as many struggling and mid-tier ARPs are looking to anchor onto larger entities in anticipation of losing settlement dollars.

The actual settlement dollars are fairly confined to a select few beneficiaries, but the demand for alternative research that came about as a result of the global settlement will still be threatened when the ‘cease and desist’ order ends in 2009.

The end of the global settlement will probably be a lot like Y2K – something that will drive a lot of buzz, but other than that, will be much ado about nothing.

Still, the attention that will be placed on independent research as a result of the pending ‘end’ to the settlement will drive many firms to reassess their research needs, and to consolidate accordingly.

The Consequences of Consolidation

Consolidation in the research industry is not necessarily a bad thing, as long as there are independent entities that band together and remain independent in their thoughts, ideas and transparency, and they remain entirely separated from their influential investment banking and trading brethren. Once that pendulum swings too far back in the other direction, investment information could end up back at square one.

The risk that lies ahead is if research becomes too consolidated, and those entities eventually become larger, more ‘groupthink’ type delivery models, much like the pre-’03 research that came out of Wall Street. The danger of ‘consolidated’ ideas is that it creates an unhealthy imbalance to the financial markets when many investors are making their moves based on commoditized information. As we all know too well from both the current credit crunch as well as the ’01 bubble burst, irresponsible investment research consumed by the masses can lead to fatal consequences for our financial markets and economy.

Consolidation in the research world is likely inevitable over the course of the next year. However, providers of independent/alternative research would be wise to band together in the name of independence, and to continue to push the envelope by delivering a diverse offering of products through a variety of channels to limited audiences.

'Best' Can Get Better

Information is all about the source. Can brokerage-house analysts offer conflict-free insights? Even if so, is commoditized investment information ever great?

Navigating information is an art – having vision, critical. David McCullough shouldn’t need to travel through time to know what the air smelled like in Philadelphia in 1776. McCullough, a titan in his field, relies on the scripts of yesterday to produce truly great texts filled with unique, personal knowledge – information with vision. McCullough doesn’t want to write about something that most people already feel or understand. He doesn’t want his unique insight to be compromised or labeled inconsequential. Who would? Breadth and depth require the kind of independence and personality that is in short supply.

As indicated in a recent Barron’s article by Robin Goldwyn Blumenthal, “Sell-Side Story: Analyst Calls Ring Up Best Returns,” a new study from Goizueta Business School at Emory University showed that investors using brokerage-house research are likely to see higher returns than if they were to follow institutional and mutual funds. This sounds counterintuitive when you look at some of the year-end reports from ’07 that show Wall Street research had only 7% ‘Sell’ ratings, collectively, in a down market.

Are these analysts providing the ‘edge’ that investors want? Are investors outperforming their peers based on this commoditized and sanitized information?

‘Conflict-free’ and ‘exclusivity’: two terms which are not parts of a brokerage-house analyst’s vision. Yet, these two characteristics are the very traits that set great information apart from good information, ultimately providing the edge.

Investors can, and should, expect to receive actionable insights that provide them with an advantage over their competitors. The best information is surely not the kind that is universally accessible. There is a better way than the best way; the greater value is in preferred value. Institutional investors need to separate themselves from the masses to gain an edge in the marketplace. Limited distribution of information should be an integral part of the process for investors looking for that edge.

Most models are tragically flawed, leaving investors with more questions than actionable trade ideas. Street Brains offers the edge that investors are looking for – exclusive, unfettered, uncompromised insights. With the right vision, the best returns mean edging out your competitors. While an interesting barometer for the marketplace, the findings of the Goizueta study are a bellwether for mediocrity, not greatness. Valuable investment insight must conquer two key goals: beat market/sector averages and set investors apart from the pack.

Former Bear Stearns Research Analyst Launches REITology on StreetBrains Platform

This week, StreetBrains announced the launch of REITology through an exclusive partnership with Amy Lauren Young, formerly of Bear Stearns’ II ranked real estate team. REITology offers insights focused on the global real estate sector with a primary focus on companies with retail exposure.

REITology marks the 10th independent research provider to join the StreetBrains Actionable Information eXchange (AIX).

Former Bear Stearns Research Analyst Launches
REITology on StreetBrains Platform

New York, NY, April 2, 2008 - StreetBrains, LLC, the Actionable Information eXchange (AIX), today announced that they have partnered with Amy Lauren Young, formerly of Bear Stearns, to launch REITology, a research product that will cover the $14 trillion global commercial real estate sector, with a focus on companies with retail exposure. REITology is the 10th independent research provider (IRP) to join StreetBrains’ AIX.

REITology will provide written research as well as expert hours through the StreetBrains AIX. From company reports, retailing perspectives and international trends, to sector overviews and thought pieces, REITology’s insights will be delivered through written reports as well as through webinars and client-only panel discussions. Each REITology license will also include 40 hours of expert access in which customers may speak directly with REITology senior analyst, Amy Lauren Young.

During the pre-launch phase, REITology hosted two webinar events for clients and prospects. The first covered “The Reality of Retail REITs: What Consumers Aren't Consuming” and the second, held after Ms. Young returned from the world’s largest real estate conference, MIPIM, in Cannes, France, discussed “U.S. versus International Real Estate: Where are the Recession-Proof Investments?” Qualified institutional investors may click here to be granted a free trial, as well as access to the REITology webinars.

Prior to launching REITology, Amy Lauren Young spent nearly 6 years covering real estate at Bear Stearns & Co. Inc. where her real estate research team was ranked 3rd in its category by Institutional Investor in October 2007. Ms. Young previously spent 3 years at Deutsche Bank (formerly Deutsche Banc Alex. Brown Inc.); and two years at Lehman Brothers covering Conglomerates. Prior to the sell-side, Amy worked on the buy-side for four years in Denver, Colorado at Wells Fargo.

Additionally, after eight years of studying Mandarin Chinese, Amy studied abroad in East Asia, spending six months in Hong Kong and China. Amy is also involved in the Young Executive Board of Camp Interactive, a non-profit organization. She is a sustainer of the New York Junior League, and also an Apollo Circle member of the Metropolitan Museum of Art.

"REITology offers a unique perspective on the international retail real estate market by factoring in investor psychology into its valuation model," says Lawrence Margolis, Managing Director of StreetBrains. "Their research fits into the StreetBrains platform by delivering information and perspectives that are actionable and offer clients an edge."

To learn more about REITology, please visit www.reitology.com.

To learn more about StreetBrains, please visit www.streetbrains.com or www.streetbrains.blogspot.com.

###

StreetBrains LLC, the Actionable Information eXchange (AIX), provides limited distribution research and expert access to qualified institutional investors. Launched in May 2007, StreetBrains partners with unique independent research providers (IRPs) to bring exclusive analysis to hedge funds, proprietary trading desks, mutual fund managers and family offices via our proprietary research HUB. StreetBrains is not a broker/dealer, and operates free of any trading or investment banking conflict of interests and follows the Investment Protection Principles. To view StreetBrains' current AIX partners, please visit www.streetbrains.com.

20,000+ Wall Streeters to Wave Farewell by end of ‘09

The below story ran in Wednesday’s Financial News and that figure doesn’t include any losses from the Bear Stearns/JPM acquisition.

Gulp.

Wall Street may lose 20K jobs by end of 2009
Stephanie Baum
25 Mar 2008

Job losses in the financial sector in New York City are expected to reach 20,200 by the end of next year as the credit crunch deals its hardest blow to Wall Street, according to the Independent Budget Office of New York City.
The figures reflect an analysis of the mayor of New York’s preliminary 2009 budget and financial plan through 2012.
A spokesman for the budget office emphasized that the information in the analysis was subject to change.
The report provides estimates through 2009 based on information received by the end of February, before JP Morgan agreed to acquire Bear Stearns.
The spokesman said: “I hear repeatedly that every recession is different. This one is heavily based on finance and that’s going to hit New York City hard because New York is so dependent on the financial services sector... It remains to be seen how hard this will be.”
The agency predicts the financial activities sector will shed 12,600 jobs in 2008, a 2.7% decline from last year.
The estimate includes 5,300 jobs in the securities industry. Jobs tied to the credit market will account for the biggest percentage decline with 4,100 job cuts projected for 2008, a 4.4% decline over last year. It expects losses to slow down to 7,600 job in 2009.
Securities industry profits last year reached their lowest level since 1994 with $3.2bn (€2bn) according to the Independent Budget office estimates, a dramatic downturn from the near record $20.9bn in profits the sector produced in 2006.
The budget office expects losses to continue in the first quarter, but predicts an improvement in Wall Street’s performance later this year with “positive quarterly profits for the rest of 2008.” It predicts Wall Street companies will make a profit of $6.6bn and to nearly double next year to $12.2bn.
Investment banks and the mortgage industry have sustained much of the job losses since the onset of the credit crunch.
Another analysis of the city’s preliminary budget will be released in May.

For the independent research world, Wall Street job losses provide an interesting conundrum: will most firms cut back on spending so drastically that they confine spending to bare bones, in-house necessities and entirely scale back the use of outside products and services?

Or will they invest in fractional ownership or outsourcing-type solutions that can help them to contain costs without all together sacrificing valuable insights and information?

Bottom line: for any companies servicing the financial sector, proving value, providing an edge, and impacting the bottom line has never been more critical. And for the users of information, keeping in-house costs contained will prove equally vital....

'Mad Money' Causes Mad Losses

Whether or not Jim Cramer ‘knew better’ about BSC when he made the statement below to Erin Burnett on CNBC yesterday afternoon:

“Look, let’s understand two things, I said the common stock was worthless on Friday, as soon as this thing was at 36 because we saw a look at the bonds. If you kept your money in Bear you made out. You got the liquidity. Keeping money at Bear – I guess I could have caused a run on the bank and said take your money out of Bear. I guess people could say hold it, he’s saying buy the common stock. I mean, what the heck. I cannot cause a run. It turned out the Federal Reserve guaranteed the money. I’m not going to tell people to pull money out of these places. The Federal Reserve is guaranteeing the money. They are not guaranteeing the equity. I got a lot of things wrong in my life, but I don’t regret the fact when I said don't take your money out of Bear. If you have your money in Bear you still got it today. Remember, there’s Bear Stearns the common and that person was going to pull the money out of Bear. We got a guarantee. JPMorgan is now Bear.”

One thing’s for certain: this is the danger that exists when a large group of investors rely on a single source as their primary source of investment information – and suddenly, that source is wrong.

We don’t mean to go lightly on Cramer – I mean, if he did in fact make the ‘strategic decision’ that he ‘could not cause a run,’ then 20/20 hindsight given what’s occurred tells us his response was irresponsible. But quite frankly, we think this was just one of those situations where it was impossible for him to come out unscathed. Would we have rather had him ‘cause a run’ on the bank? Would that have been responsible? I suppose we’ll never know.

The real problem is the bigger picture issue – when investors are looking to one source, and when that source understands the power (as Cramer well understands) and credibility their recommendations have with their audience, we’re treading into dangerous territory. Dangerous for the investment ‘advisor’ because he needs to responsibly weigh his influence into the words he chooses; and dangerous for investors, because this ‘skewing’ – no matter how honorable the intentions – can result in conflicted advice.

Clearly we didn’t learn any lessons from the Global Settlement back in 2003, or investors would recognize that when they blindly follow the direction provided to them by a single source, they know how the story ends: massive losses.

Hopefully investors – and maybe even Cramer himself – will learn a lesson from this situation and recognize that diverse views strengthen our market structures and help in educating investors so that they are more capable of making sound investment decisions.

We Called It

(Per our usual disclaimer…”It Ain’t Braggin’ If It’s True!")

On November 29th, 2007, StreetBrains held a client event where each of our analysts made their ‘Big Calls’ for 2008. Some of those calls have already come to fruition, and we’re not even out of the first quarter.

Steve Digilio, senior analyst at The Bank Notes made his call that a top bank would fail or be acquired in 2008, and today, he’s right twice over. Today JPMorgan Chase (JPM) and the New York Fed have had to step in and provide financing to a failing Bear Stearns (BSC). Also, the Wall Street Journal noted this morning that National City Corporation (NCC), the 13th largest bank holding company by assets as of December 31, 2007, has reportedly put itself up for sale.

Larry Rothman, senior analyst at DebtVisions, made the call back then that Sharper Image (SHRP) would file bankruptcy in 2008, which it did in late February.

Additionally, Rothman said that increased volatility would lead to increased convertible issuance from certain sectors, particularly biotech. Since then, Vertex Pharmaceuticals (VRTX) and OSI Pharmaceuticals (OSIP) have utilized the convertible market.

Last but not least, this Wednesday, March 12th, Gotham Research closed a pair trade - long Aetna (AET) and short Humana (HUM) - with an advance of 20.13%.

Uh-oh, Client 9! You got Hook-Winked!

We won’t beat the dead horse by recapping one of the ‘most glorious days on Wall Street’ (according to one floor broker), but the hypocrisy of the Client 9 scandal is deserving of its own definition.

How does a guy who tears down Dick Grasso by tearing apart his personal life (affairs, lovechild, whatnot) get off saying things like, “I do not believe that politics in the long run is about individuals, it is about ideas, public good, and doing what is best for the state of New York.” My how the rules do shift when people suddenly find themselves under fire.

Grasso’s likely throwing himself a party, as he now gets to play the role of the helpless victim who was unjustly taken down by a corrupt politician. Hats off to you, and your turn of luck, Mr. Grasso. We can’t wait to see the 60 Minutes exclusive interview we’re sure you’re already working on.

From a business perspective, we have to wonder what this will mean for the Global Research settlement, which is set to end in ’09. Will Spitzer’s fingerprints undermine the importance of the original causes behind the settlement?

We certainly hope not, but in the meantime, plenty of Wall Street types are going to pull up a front row seat to watch him squirm.

Accountability: Does Yours Add Up?

This past weekend, I walked into my upper west side laundromat to let them know that the wash-and-fold laundry they had returned to me was missing 5 garments. Upon the discovery of my missing items, I thought “Hmm. This must happen from time to time. They must have a lost and found for lost/dropped items, or a way to contact other patrons to track down misplaced pieces. I’m certain this can be resolved.”

To my dismay, not only did the store not have a lost and found, or a system to track down my (favorite) lost items, but the owner adamantly demanded that I “go home and check again” and assured me that her laundromat (and I quote):

“Does Not Make Mistakes.”

This statement infuriated me. I assured her that her business should certainly win an award, because if they in fact had never once made a mistake, as she claimed, then they were the first business in the history of all business to do so. I stormed out steaming, and short $600 worth of my favorite garments, with no one to hold accountable for my loss.

Once cooled off, I started to think more about accountability, and more importantly - lack thereof.


“Your First Loss Is Your Best Loss.” (‘Ace’ Greenberg)

Katherine Burton, hedge fund reporter at Bloomberg News and writer of the book Hedge Hunters, noted at a recent conference that the main thing that sets a great hedge fund manager apart from a mediocre one is their ability to reverse a position – or more specifically, ability to say “I was wrong” and get out of the water before the damages become too great to overcome. This, I thought, is what it means to be accountable. This, is what 'Ace' Greenberg (and the many others who have used this line) meant when he said “Your First Loss is Your Best Loss.” Mistakes will be made in any business (even at my delusional, former UWS Laundromat), but having strategies and processes in place to mitigate risk will help contain damages.

It seems many bulge bracket firms haven’t quite nailed this delicate risk/reward balance either, and instead, the research provided by these firms often sticks with any calls or positions it takes - despite prudent cause to adjust their recommendations.

Perhaps you’re thinking this is responsible, for analysts to not waver greatly in their positions, so as not to upset the overall flow of the markets. But if that is your contention, I would counter with one simple term, which quite succinctly embodies the type of thing that occurs when analysts are 'locked in' to positions:

Sub-prime.


We agree that there is a balance that must be achieved, but we also think that analysts should have the freedom to weigh in the factors they believe are most pertinent. That is, by way of their title, what ‘analysts’ are suppose to do, isn’t it? Analyze the facts at hand, and make recommendations accordingly?

Fortunately, the independent research world has created a safe-haven for analysts to properly utilize their abilities. If they change their mind about a position, they are well within their rights to say so. On the contrary, if they adamantly stand by a call, despite absolute upheaval in the markets, they’re welcome to hold true to that as well – but the point is, they make calls based on all of the factors they feel are relevant to take into account, not the set of factors that are afforded them. Particularly in a volatile market, the ability to be nimble is a critical element for responsible, accountable analysis.

mjb

Good Money is on the Alpha Bet

Alpha is a huge buzz word in the fund management industry these days, as noted in the Special Report on Asset Management in this past week’s issue of The Economist.

Similar to how people default to call a tissue a “Kleenex” or a cola a “Coke”, the true meaning and value of alpha, it seems, is being diluted as it becomes overused and overextended.

There’s a lot of chatter out there about how ETFs, hedge fund replicators, and other relatively new investment vehicles are being designed to match the returns of hedge funds, and that perhaps alpha is a farce, and that if returns can be replicated without the implications of management fees and huge payouts to fund managers, then that is of course a more desirable way to invest.

We whole heartedly disagree.

While in theory it may sound great to get all of the upside reward of fund returns without the overhead/management fees, the logic is slightly flawed.

Consider this:

You invest with a managed fund – mutual fund, hedge fund, or other. Let’s say for argument’s sake that the average fund returns – meaning, the average return of a grouping of funds – is about 8%.

But, as an astute investor, you of course don’t want to invest with a fund that is just making the average. You want a fund that will outperform its peers, its index. On the high end of the scale, there are firms who have returned somewhere in the range of 20%. Perhaps this fund is run by a tried and true manager, who has mastered his skill. Perhaps he’s a pretty lucky guy this year.

Or perhaps, he’s got better, more exclusive information and analysis than everyone else to base his trading decisions upon.

This small pool of highly skilled managers who fall into the latter category seek out exclusive information that helps to ensure that they stay out ahead of the pack. This is where true alpha exists.

Of course we understand that the higher the best performer comes in, the better the index as well, but investors looking at fund investments typically see “average” as a four-letter word.

So, while the media, fund replicators, index funds, and funds with mediocre returns would very much like to lead investors to believe they can access alpha and the returns it generates by taking these various short cuts, we think outsized returns from managed funds - generated by alpha - will continue to speak for themselves.

The RaaS Revolution

For all of us tech geeks, the past decade or so has brought about the evolution of an important enhancement to the software business – Software as a Service (SaaS.) Essentially, SaaS means that customers (as explained by Wikipedia) ‘do not pay for owning the software itself, but rather for using it.’ In other words, although the end user may not pay $100,000 to own the software, they will pay the software provider $1,000 a month to utilize the software.

This is a win-win scenario – it means that the end user makes a smaller commitment (often on a monthly, or quarterly basis) – so there is flexibility in case it doesn’t work out – which is often an enormous hurdle in the purchasing process; the software provider is servicing the account, so the end user has an ‘on call’ service center to help them with any issues; and it works in the favor of the software provider because the client is paying them on an ongoing basis, which helps the company to establish a more long term business model.

SaaS may have taken some time to evolve, because this is not the way people were used to paying for things, but we do believe it’s here to stay. As we said in a blog earlier this week: If you show people a more reasonable way to do something that they’re already doing, you can, over time, shift their behavior.

We believe that this model can be (and is being) effectively replicated in the investment research world – or, more specifically, how institutional investors pay for research.


“Just Because It’s Always Been Done That Way Doesn’t Make It Right”

Research has traditionally been provided to portfolio managers and investors as an ‘add on’ to a trade. More or less, a ‘pay-for-play’ for ideas, where a sales trader calls with a great idea, and the PM appreciates the idea, so he kicks a few hundred thousand shares to the trader to execute, and those commission dollars (or pennies, really, as the case may be) cover the expense of the idea.

However, as commissions shrink, this model faces a serious threat. If commission compression means that there are less commission dollars to put toward research (to cover the overhead of having a research desk at all) – then research becomes a cost that cannot be covered or justified by the firm. The only way a firm can then justify the research is on volume rather than pricing. However, to be dependent on volume alone because commissions are almost completely compressed is an extremely risky business model, because it means there is no ‘cushion’ built in to pricing that helps you weather dips in your volume.


RaaS: Creating the Category

Research-as-a-Service, we believe, is the future of the research business, in the same way that SaaS is the future for software. Providing access to analysts as well as research, on a limited distribution basis; a payment schedule and commitment period that is comfortable for the end user, but provides a steady income stream for the provider; encouraging provider-customer interaction and feedback – are the key components to an ongoingly successful business model in the RaaS category.

The Payment Paradigm

In this weekend’s New York Times, Joe Sharkey wrote an article titled ‘The Skies Are Alive With Fees,’ which points out some of the payment adjustments and ‘unbundling’ of services that many airlines are undertaking in order to generate revenue. Since most passengers have been conditioned to pay in a more conventional, ‘bundled’ manner for flights, many are immediately skeptical of this new payment model – even though at first glimpse, it does seem to make sense and have some advantages.

After all, wouldn’t you rather pay for what you want, than pay for ‘perks’ you have no interest in or have any intention of using?

We point to the airlines’ new payment models, because it draws an interesting parallel to the current payment transition in the investment research world. As the SEC this past week has proposed rules that will require further disclosures for soft dollar transactions, different payment options that simplify payments for research services will become a more common part of the equation. Despite the growing popularity of flat-fee type payments for research, many portfolio managers (PMs) seem to have a difficult time embracing the idea of paying for research as a full product, rather than paying for each individual idea (through trade commissions). However, as time ticks down for the SEC to fully implement new disclosure rules, flat fee payment for research will seem like a far more desirable option. Disclosing a flat fee payment for research services will minimize compliance confusion and bookkeeping nightmares.

As with the airlines, it will also become attractive to portfolio managers and investors to buy the research they use and want, rather than paying for ‘add on’ research that delivers no value.

For independent analysts, the shift to a model where they can be compensated for full access to their insights, rather than solely for specific ideas, means that they are finally getting some of the respect – and compensation – that they deserve. PMs also benefit, because by essentially having fractional ownership of the analyst, they are able to access the insights of an analyst whose insights they trust, at a fraction of what they would pay to put that analyst on their staff. The SEC is creating a win-win situation by taking steps that benefit analysts who generate actionable ideas and the portfolio managers that use/need them.

There was a lot of resistance to the internet when it was first born, too, and people who were used to handling their business and information gathering in other ways had a hard time adapting…but before long, it was widely embraced because the advantages were indisputable.

If perks to flat fee payment are implemented – such as selling the research solely on a limited distribution basis, and making the analysts accessible as an extension of the PMs own research team, independent research providers with payment models like StreetBrains’ will prove to have indisputable advantages over the conventional model, too.

Movin’ On Up – Or, In StreetBrains’ Case, Down

Pardon the departure from our typical subject matter, but, today, we’d just like to gush a little bit about the new office space we moved into over the weekend, located in the Flatiron neighborhood of Manhattan.

After 3 long days of grueling work to get our new space up and operational, today is our first day up and running at 72 Madison Ave. So far, so good - save for the slight high we all have from the paint fumes.

The office itself is a wide open loft space (5,000 sf), with high ceilings, exposed industrial piping, hard wood floors, and just overall ‘downtown cool.’ Dark wood furniture, a few Carolina-Tar-heel-blue accent walls, and a pool table separating the two sides of the office give the space a StreetBrains ‘edginess.’

As cool as the space itself is, the true pride of the office is the enormous StreetBrains road sign that we had custom made to hang over our reception area (identical to our logo, except this is 5x7 feet, 150 lbs, and made of reflective highway sign material!). Once that was hung, it really felt like home. See picture above.

We still have some decorating to do, but overall, we are extremely proud of our new space, and can’t wait to host our first big social gathering to bring our clients, friends and family together to celebrate with us.

To read the full press announcement about our move, please click here.

Will Wall Street ‘Misremember’ the Lessons of the Global Settlement?

It’s safe to say that not much good came out of yesterday’s Clemens vs. McNamee battle on Capitol Hill. Both parties seemed to be on a crusade to display the most loathsome qualities of humanity, as Congress (having no more pertinent matters to tend to) refereed the clash.

If nothing else, the one good thing that came out of yesterday’s battle royale was that Mr. Clemens, in his infinite wisdom, pulled out his finest Bush-ism, and reminded us all that sometimes people simply “misremember.”

This got us thinking – misremembering is not a plight suffered solely by fallen heroes representing our national pastime. Misremembering runs rampant in our financial markets as well. We won’t delve deeply into this topic (we think you can probably recall enough instances on your own) but as one example, the brilliant financial wizards putting together subprime loans (as well as the mindless lemmings who jumped into this market with both feet) must have ‘misremembered’ the tale of The Junk Bond King. You get our gist.

With the global research settlement set to end in April 2009, we couldn’t help but wonder: Will Wall Street ‘misremember’ its lessons from 2003?

A Journey Back in Time, To Avoid Misremembering

To briefly recap history, the global settlement was the result of Spitzer’s investigation into Wall Street research which found that many (primarily bulge bracket) firms were providing tainted/conflicted research to their investors. The firms were forced to pay fines, and also to offer independent (i.e. outside) research in addition to ‘cleaning up’ their own research offerings.

Much has changed in the research world since 2003, as many new Independent Research Providers (IRPs) have jumped into the market – if for no other reason than to capitalize on the terms of the global settlement. With so many IRPs in the market, the definition of an IRP has expanded greatly as well. From expert networks, to quants and research tools, to traditional research providers – these offerings all fall under the IRP banner.

While it is a very positive move for firms to utilize and offer more independent research, it seems they may misremember the problem at hand. In-house research at the large firms has not made any great strides to improve quality or be less tainted. As a matter of fact, in December, the Wall Street Journal reported that Wall Street research hadn’t cleaned up its act at all – there were still only 7% ‘Sell’ ratings in Street research as of then.

Given the current state of the markets, we find it hard to believe that only 7% of stocks deserved sell ratings as of last December. So, either the analysts a) are in a stranglehold by their trading desk or investment banking counterparts, or b) they’re incompetent. As much as we do not believe the waffling accounts of either McNamee OR Clemens, we also do not believe Wall Street analysts are incompetent. We do believe, however, that many are the puppets of their bullying investment banking and trading brethren.

So, the question remains what will happen as of April 2009? Will Wall Street immediately drop its IRP counterparts, and open itself up to closer SEC scrutiny of their internal research? It wouldn’t seem to make sense, but, as firms look to eliminate any and all expenses that can help alleviate some of the pain of the subprime woes, it’s not entirely out of the question.

The SEC plays a major role as well, as they still have not issued guidance to require unbundling that mirrors the requirements in the UK. Although unbundling has steadily gained traction in the past couple of years, this key driver to the ongoing success of independent research has not yet been pushed through.

So, much like the Clemens/McNamee case, it’s hard to tell which way things will play out for the post-global-settlement research world – but we can only hope that the eventual outcome includes cleaner, clearer policies and programs designed to avoid these stumbling blocks in the future.

I Want it All, and I Want it Now!

We know them as the men who collect Ecosse Titanium Series Motorcycles, Bugatti Veyrons, Ferraris and Aston Martins. Men who spend over $500 million on their art collections, and $12 million on tiger sharks encased in formaldehyde. Men with temperature-controlled wine cellars containing chronological libraries of Romanee-Contis and Chateau-Lafites – many well past their drinkable stages. Men who shop for trinkets for their wives and mistresses at Harry Winston and Cartier, and buy Richard James suits and Charvet shirts for no reason other than they can.

The men described above are covetous. They exude a sense of entitlement. They expect to be granted access to the best of the best the world has to offer – and they hold out altogether until those demands are fulfilled. Many of these men, as you might have already guessed, are hedge funders. Creators of their own fate, their sense of entitlement is earned, not given. These men “eat what they kill” so to speak, and they work tirelessly to ensure that doors swing open for them. They strive for excellence, deliver it, and expect it in return. “Work hard, play hard” was coined to describe men like these. With Veruca Salt-like determination, they want it all, and they want it now, and they simply will not take “no” for an answer.

Understanding the mentality of a (successful) hedge funder in his natural habitat (as above) is a critical component to building a business that exists to serve the needs of a hedge fund.

Make no mistake - despite the tongue-in-cheek Veruca Salt comparison, we are not faulting these men for insisting upon the best of everything. In fact, if they did not have a 'want it all, and deserve it' mentality, they would not be as successful as they are. We do submit, however, that many people have a misconception about this rare breed of personality, and how to effectively work with and appeal to their attitude and behavior.

Demand Drives the Market. No, Demands Drive the Market

Yesterday, Cheyenne Morgan of Advanced Trading wrote a story entitled “Customize My Dark Pool.” (click here to read the full story.) We bring up the mentality of a hedge funder today because after we read this story, we realized that many companies and people marketing to hedge funds may not truly grasp their audience, or simply don’t have the capacity or business model to be able to comply with a hedge fund’s needs and demands (while still remaining compliant with regulators).

The story points out several key ‘buzz words’ that properly describe what hedge funds look for in just about anything that they bother with (no different than how they operate in their personal lives): “Premier.” “Exclusive.” “Unique.” These qualities are of utmost importance to the hedge fund audience. However, first, a business needs to assess whether or not their model can support this limited type of access that hedge funds look for to begin with.

In the case of dark pools (as discussed in the AT article), the jury is still out. While of course it makes sense that hedge funds would much rather pump their trades through a ‘black box’ of trade matching rather than have the whole world try to ride their coattails by having their trade patterns revealed at a larger broker, there is also reason for skepticism when it comes to the allegiances of these ‘dark pool’ offerings.

It sort of reminds us of that girl or guy you might have dated in college, who, you knew had cheated on every person he/she had ever dated, but promised they would NEVER cheat on you – putting trust into a ‘dark pool’ and buying their shtick that ‘you’re their #1 customer’ as they go sing that song to twenty other firms can (and should be) a bit disconcerting. Many seem to be offering ‘security’ out of one side of their mouths and ‘open access’ from the other. Either they don’t know their capacity/capabilities, or they don’t know yet which one sells. If there are clear lines to be drawn that will help hedge funds clearly understand the draw for one dark pool offering over another, the marketing efforts are in need of some bolstering.

StreetBrains had the hedge fund mentality in mind when we developed our model, so we are able to rest easy. We provide limited distribution research and expert access, solely to qualified institutional investors. It doesn’t get any simpler than that, and it’s exactly what hedge funds covet. Unique…limited…premier. Check. Give them what others can’t have. That’s the key.

At the end of the day, whether it’s undrinkable wine, inedible food, ugly paintings or broken statues - value is in the eye of the beholder. (After all, wealth as we know it might cease to exist entirely if the affluent stopped buying $6k Neorest toilets and $15 Renova toilet paper based solely on the fact that other people can’t afford it….)