The Brainstorm

InfoEx has entered into a definitive agreement with StreetBrains.

2009-06-08T09:46:00.006-04:00

StreetBrains is really excited to announce some great news!!

New York, NY – June 8, 2008 - InfoEx (the Information Exchange) has signed a letter of intent to purchase certain assets of StreetBrains.com, LLC. StreetBrains provides numerous services, including marketing, operational support, and e-commerce payment mechanisms for independent research providers. These bundled services allow independent research providers to focus nearly entirely on what they do best, cover companies. This technology also provides access for the independent providers to a quick and efficient method to penetrate the retail market and sell reports on a “one off” basis. InfoEx provides a platform that matches trading activity and user activity on the system with relevant information of all types by creating a profile for each individual user. This profile is derived by use of InfoEx's proprietary "relevance engine" and is also used for email filtering, real time alerts, aggregation of research materials, RSS feeds, and various forms of non-conventional and conventional information. The acquisition will also allow InfoEx to apply its targeting relevance technology, for the first time, to the retail market.

“What attracted us to StreetBrains was the way they act almost as a "Hedge-fund Hotel" for independent research providers. There are many times in which clients have stated they also want the opportunity to discover the "Diamond in the rough", in terms analyst coverage, but time constraints and information overload often prevent the discovery from happening. StreetBrains helps create the diamond and InfoEx makes sure it is seen by the exact person looking for it" stated Dean Stamos, CEO of InfoEx. “While InfoEx has created a unique platform for the targeted delivery of research and information to the institutional investment community, StreetBrains has developed an approach that facilitates research operations, reports, conferences, and webinars which will be distributed via the InfoEx platform" Mr. Stamos added.

The two firms began informal talks a year ago and began working together in the fall on a promotional campaign to attract investment analysts to the combined offering. “Working with Joe Cammarata and Dean on the marketing project and reviewing the technology InfoEx has created made for an easy decision to become part of the information platform that InfoEx has created. Having the flexibility offered through the InfoEx dynamic technology platform will permit the StreetBrains brand to grow. We intend to bring professional level independent research directly to all investors from the long term hold investor to the advanced institutional money manager. The InfoEx platform can accommodate our needs perfectly” say Lawrence Margolis StreetBrains’ Managing Member.

The new StreetBrains platform including an advanced retail online store is expected to be launched in June 2009.

About InfoExchange

InfoExchange, Inc. was founded in 2007 to revolutionize the way Wall Street communicates. Using its patent pending Information Smart Router™ technology, InfoEx references clients’ trading data to determine what information is relevant to them -- streamlining information flow, reducing “electronic noise” and creating value by delivering highly-customized, timely content straight to the desktop or mobile device. (www.infoex.com)

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For more information please contact lmargolis@streetbrains.com or call Lawrence Margolis at (212) 430-3030.

2009-02-10T12:02:00.009-05:00

Are you ready for StreetBrains 2.0?

The Investor’s Information Marketplace

Over the last several months, we have been building our next generation research platform. The new platform has many enhancements including vast search capabilities so that users can find the information they need when they need it and a robust electronic commerce solution so that users can purchase reports and subscriptions any time 24/7. We will even be able to send your customized alerts right to your iPhone!

More providers. When the new system launches you can look forward to reviewing research form our growing research pipeline. We currently have over 110 providers moving towards the launch pad!

We are beginning to role out the new platform to a larger audience everyday. All existing users will receive a link to the new site as we finalize the functionality and complete beta testing. For more information please call your representative directly or our general information number at (212) 430-3000.

We look forward to providing a full scale roll out over the next couple of weeks so that you can begin enjoying all the benefits of becoming a member of the Investor’s Information Marketplace.

Thanks, Integrity!

2009-02-03T13:31:00.007-05:00

Yesterday, Integrity Research blogged about the current state and future of independent research and how the Wall Street woes are affecting analysts.

Integrity touches on some sobering truths regarding the industry, mentioning that ‘grim days’ are ahead. That might sound bleak, but StreetBrains wants you to know that not all’s lost! While analysts may be suffering and the future looks ‘grim’, we’re providing an answer. StreetBrains is a solution to your research needs. By improving our technology and adding more research providers on a weekly basis, we’re leaving our mark on the industry.

We may be in desperate times but there’s always a way to rise above. If you’re making scrupulous decisions and doing right by the people you serve, then you’re already one step ahead of the curve.

We thank Integrity Research for pointing out that StreetBrains has been making moves and adapting to the Wall Street woes. We appreciate being noted as one of the few research providers who are ramping up their offering in response to the poor economy.

StreetBrains has decided not to be a victim. We’re choosing to rise above the problems of the industry and strive for something better. Downsizing our offering would only hurt us; we’ve chosen to upgrade. With the imminent launch of StreetBrains 2.0, we’re proving, day in and day out, that we are here to compete and show the buy-side how good research really gets.

Young But Seasoned

2009-01-22T15:44:00.008-05:00

Earlier this week, during a call with potential client, we were asked, "Why StreetBrains?"

We noted the best-of-breed research portal, the enterprise search, the dynamic list of research providers, and all the other benefits our content and technology have to offer. But somehow, that wasn't enough. This client needed more. They were concerned that StreetBrains might be too young, too inexperienced, too new.

We are a young company. There's no denying that. Those concerned with the age of our business have every right to ask, "Why StreetBrains?" If you're an investor looking for research or investment strategies, you want to be sure that the source is stable and well versed in the language and history of the business.

As Barack Obama mentioned in his inauguration speech, we are a young nation but we must choose our better history. At StreetBrains, we do just that. While still a young organization, we have decades of Wall Street experience under our belt. Our analysts are well aged in the industry, some working in their field since they were teenagers.

The platform is new, but the content is seasoned.

We have built the StreetBrains platform around a large and strong group of independent providers who tackle their covered industries with a voice of experience and professionalism. Their work is second to none and we are proud to offer them an outlet that appropriately markets their value.

Though young, we choose our better history. We choose the pedigree of excellence that our content provides. We see ourselves as a very seasoned company and we are proud of the many analysts and research providers who have allowed us to offer the best information money can buy. We will be called too young, too inexperienced, too new, but we won't blink an eye because we are confident in the content that defines us.

More Providers Every Week

2009-01-21T11:09:00.006-05:00

With over 80 providers in our pipeline, StreetBrains is dedicated to delivering the best, most diverse, and widest selection of independent research providers to our clients. We understand that investors deserve information exactly the way they want it. Probe Financial Associates and EMEA Research are just two of our newest research providers offering expert hours, reports and investment updates. Check back with StreetBrains.com for more on these new products as we launch our new research portal.

Probe Financial Associates, Inc. (PFA) provides research expertise in telecommunications and relative IT sectors. PFA is the leading source of independent, unbiased research in the telecommunications/IT industry. Probe assesses the complexity and change that characterizes these industries. Our experts have extensive industry experience and the finest record for correctly forecasting major changes.

PFA offers coverage of a wide array of industry topics and companies, including these primary areas of expertise:

IP Networking and Services (VoIP, IPTV and other areas)
Wireless (mobile, broadband and other aspects)
Cable and Satellite (broadcast, content and communications)
Established Telecom (carriers, competition and M&A, equipment cos.)
PFA's Client Programs and Services

Probe Financial Associates offers an extremely attractive value proposition to a wide variety of investment management firms. We cover the complete range of companies, from mega-sized industry giants to mid-to-large cap companies, down to small and emerging players.

Our level of expertise is unparalleled and unchallenged. We are prolific in producing written reports that are always geared to important issues and developments or to relevant industry companies.

EMEA Research provides research focused on country allocation in Eastern Europe, the Middle East & Africa. EMEA Research discovers value by examining the intersection of political risk and investment opportunity.

EMEA Research offers risk-adjusted strategies focusing on country allocation, sector allocation and stock selection. With the exception of South Africa, equity markets in EMEA, trade in reaction to investor’s assessment of how news impacts a nation’s economic prospects and political risks. EMEA Research has observed that – even in the most liquid markets – if one sector makes an independent move, the entire market will follow; the best/worst stocks in their own universe trade up and down with the overall market regardless of fundamentals.

Stacia Hachem works with a team of independent consultants focusing on in-country investment opportunities & quantitative research.

An extensive rolodex, based primarily in EMEA countries, is put to use to obtain in-country opinions on companies, industries, sectors and countries.

PatternWatch Speaks with Steve Malzberg

2009-01-14T14:43:00.006-05:00

Steve Frenkel, senior analyst of PatternWatch, will be on the Steve Malzberg Show on WOR-710 today at 4:50pm. They will be discussing various topics related to the economy and markets. If you're near a radio or computer, tune in to hear what Frenkel has to say. He will be offering some fresh insight that draws from all three of his PatternWatch products (Stocks; Currencies/Commodities; Interest Rates).

http://www.wor710.com/

http://www.malzbergtalk.com/site/?page_id=17

If you are interested in speaking with Steve or receiving samples of his reports, please contact StreetBrains at 212.430.3000.

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

2008-12-31T06:50:00.005-05:00

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

2008-12-23T16:08:00.007-05:00

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.

2008-11-21T13:48:00.006-05:00

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

2008-09-25T15:29:00.004-04:00

It was an interesting scene at 745 7th Ave!

Calling All Analysts!

2008-09-24T14:20:00.005-04:00

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

2008-09-05T14:20:00.004-04:00

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?

2008-08-13T14:09:00.002-04:00

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

2008-08-07T08:23:00.003-04:00

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

2008-07-18T12:00:00.005-04:00

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...

2008-07-11T10:57:00.003-04:00

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

2008-06-26T15:33:00.010-04:00

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?

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'Ubuntu' Trumps 'MVP'

2008-06-19T09:52:00.003-04:00

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

2008-05-21T11:34:00.005-04:00

“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

2008-05-14T17:02:00.002-04:00

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

2008-05-09T12:10:00.001-04:00

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!

2008-05-01T14:24:00.002-04:00

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?

2008-04-22T10:47:00.004-04:00

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

2008-04-15T13:00:00.011-04:00

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

2008-04-04T10:29:00.004-04:00

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

2008-03-26T11:40:00.003-04:00

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

2008-03-18T13:42:00.005-04:00

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

2008-03-14T11:24:00.002-04:00

(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!

2008-03-10T16:49:00.003-04:00

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?

2008-03-07T08:08:00.005-05:00

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

2008-03-04T11:53:00.002-05:00

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

2008-02-29T14:39:00.003-05:00

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

2008-02-25T11:31:00.002-05:00

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

2008-02-19T14:57:00.003-05:00

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?

2008-02-14T13:58:00.002-05:00

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!

2008-02-12T13:35:00.000-05:00

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….)

Any Given Quarter

2008-02-07T13:50:00.000-05:00

**Disclaimer: This entry was written by a disgruntled Pats fan who dropped $5k to take a whirlwind trip to AZ only to watch my team fall from grace in the most despicable fashion. The SuperBowl views reflected here are not supported, nor endorsed by the obnoxious, gloating Giants fans I contemptuously call "colleagues."

Whether you were a Patriots fan, a Giants fan, or an agnostic viewer, this weekend’s SuperBowl proved one thing:

The unthinkable can occur on Any Given Sunday...and it did.

If you were tuned in, what you might have seen was an up-until-today mediocre Eli Manning have the game (or 4th quarter, at least) of his career – which included the luckiest of all lucky plays when he scrambled away from an imminent sack and tossed a prayer up to Tyree for a miracle completion.

Impressive? Yes. The result of a calculated and well-designed play? Not so much.

The SuperBowl MVP-crowned quarterback, happens to also be the leader of a much less glamorous NFL category: Turnovers. And Sunday certainly didn’t go by without a few near additions to this category, as Eli, on three separate occasions, threw the football directly into the fumbling hands of the Patriots defenders. Despite being in the right place at many of the right times, the Patriots were unable to capitalize on these errors.

Not to take anything away from the well-executed Giants defeat of the New England Patriots, but our question is this:

Despite one All-Star performance on a random Sunday in February, who would you rather have as your QB:

An 18-1, League MVP, Tom Brady or 14-6, Turnover-leader, Eli Manning?

Take Care of the Ball

We ask about Tom versus Eli, because we think it makes for an interesting parallel to how firms identify their top independent research providers (IRPs). You’re probably wondering, “How so?”

First off, let's understand how many IRPs receive payment. Some firms who utilize the research and insights of IRPs have implemented broker votes for paying outside IRPs. These votes are ultimately set up so that brokers can provide payouts to analysts who make the most accurate calls. Some of those broker vote systems use analytics that will help them to ‘calculate’ who provided top results, and others are arbitrarily decided upon.

I guess our question is really, is this the most reasonable way to pay for – and encourage the consistent production of - quality research? Wouldn’t firms rather pay an analyst that consistently provides quality insights and information, rather than one who happens to accurately nail a quarterly EPS down to the penny? It could happen any given quarter, and you might just be the one to capitalize on this lucky call. But that doesn’t mean his prediction is indicative of future success - just a lucky, one-off guesstimate.

Analysts that provide accurate information should absolutely be rewarded – however, a ‘call-by-call’ comparison against their peers seems to be a flawed model for identifying top quality research and insight.

Bottom line: I’m sure most of us secretly pull for a Cinderella story…but more times than not, smart money is best placed on proven success. When in doubt, it may not be as glamorous, but it’s probably best to hand over the reigns to the guy who’s proven time and again he can take care of the ball.

Lessons Learned From Sporks

2008-02-04T14:08:00.000-05:00

If you made it through elementary school, chances are, you’ve used a spork at some point in your lifetime. Upon introduction to this odd tool, you likely thought to yourself “in theory, this makes a lot of sense.” After all – why have two separate utensils when you can just have one?

But as you moved on through life, this tool seldom reemerged. It seems that most people preferred to have two separate utensils, each to be used at the appropriate time and for its designated purpose, despite the convenience of the bundled item. Apparently, the multi-use tool often proves not to perform either of its jobs as efficiently as the separate utensils.

And therein lies the key differentiator between success and failure of bundling. The services or items bundled must produce equal or enhanced quality performance than the a la carte items or services.

Why are we talking about sporks?

The spork is a fitting parallel to the ‘bundling’ of execution and research that takes place in the financial industry – while it makes sense in theory, it fails in practice.

Like the spork, neither function is able to deliver optimal performance in the bundled model, and therefore, the bundled model is flawed and unsustainable. Like a TV with a built in VCR, the convenience and seeming practicality is undercut by the problems that occur when one of the bundled pieces or services fails. Upon failure, the entire system needs to be replaced, and worse, it can be difficult to assess which piece actually caused the issue so that future problems can be avoided.

The bundling of execution and research has the same inherent problem. Consider this:

Joe pays $.03 a share for execution, despite the fact that best execution pricing could get him execution for less than a penny. But Joe gets research as an ‘add-on’ because he pays $.03 a share, so he pays more for the ‘bundled’ service.

But now, Joe’s paying outrageous fees for minimal returns, and he doesn’t know why so he can’t figure out how to fix the problem. Is he paying too much for execution? Is the research he’s buying poor quality so it isn’t delivering trade ideas that will generate great returns? There’s no way to tell, because the services are bundled together, therefore masking which piece of the bundled product is the source of the failure. This is a detrimental disservice to Joe – and to all investors.

The UK has already implemented requirements for execution and research to be unbundled. It is still unclear whether or not the US will implement similar rules, but hopefully the SEC will acknowledge the inefficiencies that occur in the bundled model. Many firms are taking the shift in the UK as a cue that similar requirements will be imminent in the US, and are using this as an opportunity to offer more transparency to their investors.

More…ehem…’Shortcomings’

In case you’re curious, here are some other bundled items that seem practical in theory, but never quite made it big:

Smell-O-Vision (movies with scent) http://en.wikipedia.org/wiki/Smell-o-vision
Flowbee (vaccum/haircut system) http://www.flowbee.com/
Umbrella Hats http://www.umbrellahat.net/
Windshield-wiper glasses http://www.shadesoffun.com/Nov-CP/wiper_sunglasses.html

Expert Networks: Elephant Trap?

2008-01-30T10:58:00.000-05:00

According to Integrity Research, “at the end of 2007 at least 26 firms generate between $325 and $375 million in sales by providing expert network services to the buy-side.”

It’s undeniable that the demand for experts of all shapes and sizes has grown exponentially in the past couple of years, and will continue to grow as market volatility drives the need for more information upon which to base trade ideas. Since the implementation of RegFD, it has been increasingly hard for investors to ‘go to the source,’ for any useful/actionable information, so expert networks are a seemingly sensible way for hedge funds and other institutional investors to get a lay of the land without having to wait for company ‘spiel’ to be released.

But, with no real obligation to properly serve the interests of investors, the ‘experts’ – no matter how carefully ‘vetted’ by the network itself – are still not in any way, shape or form, accountable or held to the same standards as a Registered Investment Advisor (RIA). The further these networks expand, the more difficult it will be for networks - and regulators - to keep a pulse on credibility and expertise.

Because regulation of pure-play expert networks is still rather lax, the level of accountability for the experts themselves is minuscule. There has not been a major incident…yet. But if there were to be a major incident today, the information provider (expert) is not held accountable by any standards at all…which should cause investors to proceed at their own risk.

Of course hedge funds and other institutional investors are, by and large, big boys and girls, who should be able to make decisions for themselves about information they find credible and information they do not. But if one of these institutions loses millions or even billions after being mislead (purposely or not purposely) by a so-called 'expert' – who will be to blame?

More Landmines

Beyond the lack of regulatory oversight, there are two other downfalls for pure-play expert networks. The first is that these experts are not exclusive to any one network. So, in essence, these experts could be delivering the same insights to all of your competitors – or worse, in cahoots with the competition. With some hedge funds and other entities choosing to launch their own expert networks, it’s clear that many are not comfortable with the lacking exclusivity that exists in the industry.

The other downfall is that expert networks are a purely ‘pull’ model. What we mean by that is, you have to have the ideas first – there is no dialogue, or anything coming in to you. So, sure, you might wake up this morning and decide that pencil erasers are the next big thing, and you can find a whole range of experts to tell you why they are, why their not, and even put together a custom report outlining how and why – but you have to conjure the notion of pencil erasers as the next great investment all on your own.

At StreetBrains, we believe that the true value of expertise, in any realm, is for experts to offer both ‘push’ and ‘pull’ insights. StreetBrains calls this model the Actionable Information eXchange (AIX.) More specifically – after enduring our stringent vetting process, analysts are accessible and available to discuss incoming ideas, but also push out to clients fresh information and ideas they are encountering as they assess the markets. Furthermore, this information is delivered exclusively through StreetBrains research HUB, to a finite number of customers.

To learn more about the benefits of the StreetBrains AIX, click here.

We Called It

2008-01-24T13:42:00.000-05:00

As the adage goes…

“It ain’t braggin’ if it’s true!”

StreetBrains analysts have spent the first 24 days of 2008 beefing up the benchmark for correctly calling market moves. Below are some of the items that StreetBrains independent analysts have nailed in the past few weeks.

(See how smart analysts can be when they’re able to say what they’re really seeing and hearing, rather than being muzzled by investment bankers, traders, and compliance departments?)

Steve Digilio, The Bank Notes, told us in November ’07 that ’08 would bring at least one major bank consolidation or acquisition, and 3 top bank CEO departures/ousters. 24 days in, we have already seen Countrywide acquired by Bank of America, and Jimmy Cane step down as CEO of Bear Stearns.

In September ’07, Larry Rothman of DebtVisions made the definitive call that retail was in a tailspin. To date (from his call on 9/28), the RLX has declined 13.8%.

On January 9th, 2008, Jim Sterling of the Sterling Account (who was up a whopping 44% last year on his calls) wrote a report titled “Throwing In the Sponge” where he advised the exiting of all energy stocks. He still loves many of the companies, but the stocks are going to continue to be battered for a long while out, he claims. Since January 9th, the XLE is down 7.95%.

Gotham Research proves that there’s money to be made, even in a bear market – if you’re nimble. The following 3 pairs have brought in generous returns when closed out today:

IEF/XLE – iShares Lehman 7-10 Year Treasury Bond Fund vs. Energy Select Sector SPDR Fund. Closed long IEF and short XLE spread from 9/21/07 with an advance of 26.04%.

USB/SPY – U.S. Bancorp vs. SPDR Trust Series I. Closed a long USB and short SPY spread from 1/10/08 with an advance of 17.35%.

ONB/VTI – Old National Bancorp vs. Vanguard ETF Total Stock Market. Closed a long ONB and short VTI spread from 12/12/07 with an advance of 18.46%.

Last but certainly not least, Steve Frenkel of PatternWatch, whose several CNBC appearances in the past few weeks you can find in blogs below, has also been consistently spot on in calling the Dow, S&P, Gold, and CCI Index moves. Click here to view his most recent television appearance, where he discusses the current state of the market.

Wall Street Sings the Executioner's Song

2008-01-22T12:39:00.000-05:00

Yesterday, Sara Hansard at Investment News wrote a brief update announcing that the SEC will soon be releasing new guidance on soft dollars. Although there is no indication that the SEC plans to mandate the explicit separation of research dollars from execution dollars, it seems clear that they endorse the value this separation of services brings to investors, and will be watching carefully to be certain that firms are providing this level of transparency to their clients.

In the article, Jennifer McHugh, senior adviser to the director of the SEC’s division of investment management explains that the separation of research and execution has “had a positive result.”

Although soft dollars (or CCAs/CSAs) were not immediately embraced by most large U.S. brokerage firms, the inevitable separation of research from execution services is leading many large firms to seek opportunities to partner with independent research providers (IRPs). By doing so, these firms are hoping to keep a tight leash on their execution dollars - even if it means abandoning their own in-house research offerings for the more lucrative/less overhead option of IRP partnership.

To no one’s surprise, in-house research may once again face the internal firing squad, as their execution-focused counterparts have increasingly less success selling their commoditized research.

The New Arm Candy

While IRPs may be the new arm candy for execution providers to shop around to clients, this could potentially be a detriment to the end user. Great research will have a difficult time setting itself apart from the pack as more providers gain the ‘endorsement’ of execution firms who are looking to coattail on IRP trade ideas by securing the execution business on the back end of the trade.

For this reason, anyone using independent research will need to be very selective about research providers they choose to work with. The vetting process for finding quality research is a critical component for finding top quality ideas and insights.

Click here to learn more about StreetBrains vetting process.

Frenkel's 'Tea Leaves' Suggest Throwing in the Towel

2008-01-18T14:38:00.000-05:00

For the second time this week, Steve Frenkel, chief technical analyst with PatternWatch - a member of StreetBrains' Actionable Information eXchange (AIX) - was invited to come on CNBC to discuss his views of the market.

In a segment titled 'Reading the Technical Tea Leaves' on today's 'Powerlunch' program, Steve got to talk about what he does best: analyzing and interpreting technical charts.

Although Frenkel's assessment of the current state of the market may not coincide with popular opinion, he certainly doesn't lack conviction in his calls (as Michelle Caruso-Cabrera points out.) And to the dismay of many investors, his calls for a vastly declining market have been spot on.

Click here to view the segment.

Gold Losing Its Luster

2008-01-16T11:50:00.000-05:00

Yesterday, StreetBrains technical guru – Steve Frenkel of PatternWatch – was on CNBC to discuss whether or not there are still investment opportunities in Gold.

While Douglas Doyle of Blanchard & Company (which on their website boasts they are “the largest and most respected retail dealer in rare coins and precious metals in the United States”) called for Gold to reach $1150 this year (shocking prediction from a firm that specializes in precious metals), Frenkel countered that Gold technical indicators show that Gold is well on it’s way back down to $720.

At the time of this posting, Gold sits at $877, down $33 from where it was yesterday just moments prior to our CNBC appearance, and down $39 from it’s $916 high (which Frenkel had previously targeted as the high).

Click here to watch the video.

The ‘Race to Zero’ Zooms On

2008-01-14T16:13:00.000-05:00

The fact that commissions are drying up, and that brokers are competing over a half or a quarter of a penny at this point to win execution dollars, is nothing new. However, the Race to Zero will kick into high gear in 2008, as research desks get slashed at large firms (which used to be an ‘add on’ that justified higher execution pricing), and the surge in unbundling execution from research sends clients searching for best execution providers.

Brief History

With the onset of the tech era, commissions started facing their first hurdles in the 90’s. New execution providers flooded the market promoting faster and cheaper execution than ever before. Existing brokerage firms were able to implement similar technologies that also touted volume scalability that kept them in the game. As technology improves commissions become increasingly more commoditized, and thus coined was the ‘Race to Zero.

Current State of the Union

Large brokerage firms now look primarily to volume, not pricing as the key to feeding the execution beast. However, as most large brokerages look to slash their workforce, the research departments – long considered a ‘cost center’ and often referred to as the ‘red-headed stepchild' of the brokerage world – will certainly take a hit. With less research being written internally to justify higher execution pricing, unbundling research will almost evolve organically from the current issues in the market.

Mid and small executing brokers who provide research – despite their hopeful musings that the sky is not in fact falling - are facing some trouble. Many seem to have hung their hat on the idea that hedge funds want to continue to use an over-abundance of executing brokers, so that competitors won’t be able to follow their trading patterns. Based on our talks with market insiders, this notion seems rather unreasonable. We’re not suggesting that any hedge fund out there is handing his entire trade book over to one execution firm, but minimizing the number of executing brokers is not only something most have said they’re willing to do – from a cost point of view, it’s a priority.

Mid and small guys who recognize the threat on the horizon still have the opportunity to choose a business, any business – either research OR execution – not both – and have a chance at survival.

Alpha or Artifice?

2008-01-10T17:38:00.000-05:00

A story titled “And God Created Alpha” from the January 5th edition of The Economist, knocks some fund managers off their high horses by making an important point about replicators and other tools/products being developed to mirror the returns of well-performing funds:

“…If those returns can be reproduced by a set of mechanical rules, is skill really involved?”

We’re not here to throw under the bus any fund managers who’s masterpiece-like returns have made them the idyllic poster-children for knock-offs and frauds, but investors should know that the faux-Picasso and the Canal Street Prada purse have found their way to the fund industry. The difference here is – if the returns are the same, will anyone care that it’s a fake? Probably not.

In a volatile market where hedge funds themselves are not able to generate the same volume of returns, can replicators really find their place in the market? Or will it be survival of the fittest, where only the top performing hedge funds will survive, the rest will fold, and replicators will vacuum up the dollars left behind by the vacating failed funds and go on to match the leaders?

Is there such a thing as ‘alpha’? If replicators succeed, will ‘alpha’ find itself thrown into a category with wives’ tales and urban legends? It could be a true concern down the road, but for now, replicators can’t win if they don’t have great fund performance to replicate. So, at very least, the top-performing funds won’t be closing their doors anytime soon.

However, with these new competitors trying to steal a piece of the pie, there won’t be any room for mediocre performance amongst hedge funds that have been riding the gravy train of ‘hedge fund’ allure. Where artifice substitutes for alpha, there will be abundant failure.

Securing Alpha

The surest way to ward off replicators is to outperform the indexes. Funds that find top-quality research and information to set them apart from the pack will be crucial if they are to outperform ‘synthetics’.

As The Economist story points out, “it’s certainly not a crisis yet…but it ought to be a long term worry.”

StreetBrains Top Reads for 2008

2008-01-04T11:02:00.000-05:00

If you haven’t already immersed yourself in the following books, you’re missing out. Some are new, and some are ‘oldies but goodies’ that stand the test of time, but all are required reading for any self-professed market junkies. Enjoy!

Mavericks at Work: Why the Most Original Minds in Business Win
by William C. Taylor, Polly G. LaBarre

Hedge Hunters: Hedge Fund Masters on the Rewards, the Risk, and the Reckoning
by Katherine Burton

The Predictors
by Thomas A. Bass

Blood on the Street: The Sensational Inside Story of How Wall Street Analysts Duped a Generation of Investors
by Charles Gasparino

(an oldie but goodie…or a great re-read!)
Liar's Poker: Rising Through the Wreckage on Wall Street
by Michael Lewis

The Coffee Trader
by David Liss

Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score
by Andy Kessler

My Life as a Quant: Reflections on Physics and Finance
by Emanuel Derman

The Last Tycoons: The Secret History of Lazard Freres & Co.
by William D. Cohan

The Dark Genius of Wall Street: The Misunderstood Life of Jay Gould, King of the Robber Barons
by Edward J. Renehan

Wall Street Analysts Avoid the “B” word

2008-01-02T11:02:00.001-05:00

If you were off drinking egg nog martinis in Saint-Tropez in late December, you may have missed “Settling for ‘Hold’” - a very informative piece of commentary from Bloomberg’s David Wilson. (click here for full story.)

Wilson first relies on Bloomberg’s own database of research to present his case. Most notably, he points out:

Just 43 percent of the calls made [in December were] buy ratings or equivalents, including ``overweight,'' ``outperform'' and ``accumulate,'' according to data compiled by Bloomberg. The percentage is the lowest since these numbers were first tallied a decade ago.

Sell ratings and comparable calls have amounted to 5.7 percent. That's less than half the peak reached in July 2003, when brokerage firms were reeling from then-New York Attorney General Eliot Spitzer's investigation of Wall Street research.

Analysts are retreating into the relative safety of ``hold'' recommendations, telling investors who own shares to keep them and those who don't to avoid buying them. The number of ratings in this category surpassed 50 percent for the first time in October and rose to 52 percent this month.

Wilson goes on to make an important point. He says, “Analysts' growing reluctance to say ``buy'' on companies, including securities firms, is understandable. U.S. stocks more than doubled, as measured by the Standard & Poor's 500 Index, in the five years ended Oct. 9. They have since gone through a so - called correction, or a more than 10 percent loss.”

We agree that collectively, it is understandable that analysts have been reluctant to say ‘buy’ and that the overall sentiment of the market led the ‘abundance of ‘hold’ calls. However, we also think that the reluctance of analysts to seek out new ‘buys’ sheds light on the fundamental problems inherent in the Wall Street research model.

When analysts are siloed off to exclusively cover specific companies, they are pigeon-holed into making some sort of call on those names, rather than seeking out new names that are more primed for investment. If the sector the analyst covers doesn’t do well, their position may become obsolete within their firm. This is precisely the problem – an analyst who is on the front lines is most qualified to see trouble in the sector or company he covers. He should be rewarded for identifying coming problems and threats - not punished by his firm, or stonewalled by a company he downgrades. The model is inherently flawed.

We’re not suggesting we have the solution for fixing the way research is handled, but we do believe that the industry is long overdue for an overhaul. The current model is not scalable, and does not lend itself to improving the quality of research.

A Ray of Hope

One encouraging sign reflected in Wilson’s story was uncovered in research conducted by Greenwich Associates:

Stock recommendations dropped to 8 percent of commissions from 18 percent during the period, the Greenwich, Connecticut-based research and consulting firm found.

This finding suggests that good information and new insights and ideas – not straight stock recommendations - are gaining ground as the benchmark for quality research. This is not particularly helpful to research desks at large brokerage firms, where stock recommendations will continue to govern coverage until ‘the powers that be’ come to their senses – but for independent analysts and research firms, like StreetBrains, this shift can be capitalized upon immediately by increasing the information channel, and scaling back on stock recommendations.

In our experience, PMs are plenty qualified to pick stocks, and don’t really need many recommendations from outside sources. What they do appreciate are new insights and valuable information upon which to base those picks.

The Value of Vetting

2007-12-28T14:33:00.000-05:00

We see it in all sectors, professions, and projects: A vetting process for identifying value. Whether it’s the A&R guys who find us the best bands; the headhunters that find us the best executives; or the search engines that finds us the best information – we are a society that has come to value the processes that fast-track us to top results.

We’re learning the same is true for StreetBrains and its vetting process for qualifying the analysts we add to our brand. To give a rough idea, 400+ analysts have been through StreetBrains vetting process in the past 8 months. However, we have only launched 10 of those as brands. Our purpose has always been that we want to represent great insights and analysis, so we’ve been extremely selective in bringing on new brands who offer insights that cannot be found anywhere else. But we’ve learned from several clients recently that the value of our vetting process is actually much bigger than that.

A recent study by the Noble Group – a UK investment bank – found that financial directors of AIM (Alternative Investment Market) listed companies had a very low awareness of independent research.

The findings show:

75% of respondents could not name an independent research company.

58% did not even try to name an independent research company.

17% thought they could name one but named a broker or an information service rather than an independent research company.

Only 24% could name an independent research company.

Part of the problem with even the best of the best independent analysts is that most clients don’t have the time to go out and seek out and assess the quality of every independent researcher they come across. In theory, they like the idea of using independent research…but, where to find them? We’re hearing more and more often that firms find this ‘discovery’ process to be a daunting task.

By bringing a variety of analyst brands onto one platform after a stringent vetting process, StreetBrains is able to cut an enormous amount of ‘vetting’ time out for the client. That client is now able to focus on finding tradable insights, rather than trying to assess credibility, writing style, or brand focus. In essence, we bring the mountain to Mohammed.

The Noble survey also found that 84% of the surveyed AIM financial directors think that broker research is biased.

While this comes as no surprise to us, it underscores the importance of increasing the awareness and visibility of truly independent analysts. (Truly being the operative word…but that’s a topic for another day!)

Bottom line: if the objective insights of independent analysts can be more easily accessed, it seems that their insights would be welcomed by clients who are clamoring for non-biased research.

The End of Pollyanna Propaganda?

2007-12-20T11:40:00.000-05:00

It almost pains us to ‘pile-on’ with yet another blow to Wall Street’s favorite punching bags, but let’s be honest, they’ve brought this upon themselves.

In yet another story this week that bullies research analysts about their collective incompetence (to make the distinction, we are referring to the 'mouthpieces' at big firms who are payed to spew rhetoric, not analysts who are independent and conflict-free), Geoff Colvin, writing for Fortune, brought us ‘Analysts in Fantasyland.’ To excerpt from the painfully accurate account delivered in Geoff’s story:

Maybe Wall Street analysts are more honest and less compromised than they were pre-SarbOx, but recent events show that they're still awful at their most important job: predicting bad news. They haven't lost their habit of falling in love with the companies they cover and refusing to face unpleasant realities until everyone else has already done so. Now, eight years after they were inflating the bubble, we again have to question whether analysts do retail investors any good.
The latest evidence: Analysts have only just discovered that corporate profits in the fourth quarter aren't going to be nearly as strong as they had supposed a month or two ago. The consensus view going into the quarter was that S&P 500 profits would go up 12 percent to 15 percent, a large jump coming on top of the 20 percent rise in last year's fourth quarter. In light of the credit crunch, the housing collapse, and the towering price of oil, that forecast seemed highly - one might say insanely -optimistic. This it proved to be, but only after the quarter began did the consensus view finally lurch into the real world. Their growth forecast is now about 1.5 percent and still falling.
It has been obvious for many months that profit growth would have to slow way down simply because it couldn't continue at recent rates. Profits have been rising sharply the past few years, which makes sense after the hole they fell into in 2001 and 2002. But by early this year they had grown to 12 percent of GDP, way above their historical average of 9 percent. Analysts knew all this, and in case they didn't, various commentators (including Fortune's Shawn Tully) were insistently pointing it out. But the analysts, ever hopeful, chose to believe that U.S. companies would perform magic.

Although their hand was somewhat forced, in-house analysts are finally able to call it like they see it (as long as they talk ONLY about what has already occurred/is occurring). Perhaps it’s better late than never? Could the days of Pollyanna Propaganda be over?

We doubt it, but at least they’re not denying the sky is blue….for now.

Wall Street Swarmed With McFlys

2007-12-17T15:59:00.000-05:00

For those of you who remember the 80’s classic, ‘Back to the Future’, I’m sure you’ll agree – George McFly is the most spineless character in cinematic history.

Sadly, it seems that McFly has cloned himself a thousand times over, and his spawn have infiltrated Wall Street in the form of research analysts.

In Scott Patterson’s ‘Ahead of the Tape’ column in today’s Wall Street Journal, he pulls the lid off of Wall Street research in his story titled, ‘Analysts Botch Profit Forecasts on Home Turf.’ (click here for full story.)

While the entire article goes on to point out conflict-ridden research coming out of the Street, particularly in the wake of the subprime mess, one quote in particular stuck with us.

Paul Hickey, co-founder of Bespoke Investment Group is quoted in the article, saying, “You often see brokerage companies giving their peer companies the benefit of the doubt, so they don’t get in this shooting match.”

What is it exactly that has stripped Wall Street analysts of their backbone? Fear of being fired? Perhaps. But that exists for all employees, no? Even full out whistleblowers out there in the past 5-10 years have stood up to ‘The Man’ and been rewarded, so the fears of these analysts to issue negative or contrarian reporters seems unfounded. Yet Wall Street analysts seem to cower in their corners, doing as they're told, content to simply keep their heads down, collect their paychecks, and pray they aren’t asked to become a profit center. McFlys.

With only 7% ‘Sell’ ratings on the year, and with all of the Biffs out there pointing the bullying finger in their direction, in-house analysts are going to have a tough go in ’08. Independent analysts have a tremendous opportunity to make inroads with players on the prowl for valuable research.

Appropriately, here’s the dialogue from a scene between Biff (the bully) and McFly (the spineless wuss):

Biff Tannen: And uh, where's my reports?

George McFly: Uh, well, I haven't finished those up yet, but you know I... I figured since they weren't due till...

Biff Tannen: Hello? Hello? Anybody home? Huh? Think, McFly. Think! I gotta have time to get 'em retyped. Do you realize what would happen if I hand in my reports in your handwriting? I'll get fired. You wouldn't want that to happen, would ya? Would ya?
George McFly: Of course not, Biff. I wouldn't want that to happen. Now, look. I'll finish those reports on up tonight and I'll run 'em on over first thing tomorrow. All right?

We Called It

2007-12-13T16:58:00.000-05:00

As previously mentioned, every couple of weeks we will be highlighting some of the big calls made by StreetBrains’ portfolio of independent analysts.

Remember: StreetBrains provides conflict-free research – the analysts do not hold positions in the stocks they cover, and are not affiliated to any investment banking outfits. Period.

Below are some of our calls:

Boo-hoo, Mickey - PatternWatch put the squeeze on Walt Disney (DIS) this past Friday, when they pointed to technicals and fundamentals that supported shorting this stock. Click here to read ‘Mouse Trapped’ by Carrie Coolidge from the 12.24.07 issue of Forbes, now on newsstands.

Known best for great pairing ideas, Gotham Research recently was up 15% on a Bob Evans (BOBE) (long) / Brinker (EAT) (short) pairing. They worked their magic again when they closed out up 11% on a Commerce Bancorp (CBH)/Bancolumbia (CIB) play last week.

Photizo Group continues to cultivate their contrarian calls by putting a BUY rating on Xerox (XRX) this past week.

Coming from very different sector perspectives, both Sterling Account and inMotion issued BUY ratings on Schlumberger (SLB) recently. Perhaps they’re on to something….

Fund Fees: What are you paying for?

2007-12-11T14:38:00.000-05:00

It’s probably safe to say that anyone with money to put into a hedge fund doesn’t mind paying a high percentage management fee as long as you’re getting a phenomenal return. It all comes down to value.

Same goes for Manhattan real estate – if a broker shows you your dream townhouse, but you have to pay a 20% broker fee, you wouldn’t blink. You’d be ecstatic that you could stop sifting through all of the unsuitable apartments, and the value of finding what you’re looking for would justify the expense attached to finding it.

In both of these scenarios, the ends justify the means. Unfortunately, for less risky investments, the returns are not high enough to eliminate the question:

What are you paying for?

In the case of mutual funds and pension funds, which, by design, are not typically risky investments, of course the rewards are not usually as exponential as might come from a hedge fund investment. Yet, they have more hidden fees attached to them than Paris has boy-toys. The lack of transparency in fund administrator services and 12b-1 fees as well as management fees, loads, expense ratios, turnover rate, taxes…goes on and on.

(Is your head spinning yet?)

The unbundling initiative that is being largely lead by the independent investment research world would likely help alleviate some of these incurred costs, while also putting money back in the pocket of the Portfolio Managers (PM).

Say what?

That’s right. The guy making you money, should make good money. No one disagrees with that statement. His management fee – if he’s made you 30% this year - is a non-issue. The part that should be called to question is – what other fees are you paying that are unjustified, or being billed to you for unused or under utilized resources?

Like that $150 gym membership you pay each month to have access to something you don’t use – at some point it’s time to reassess the fees you pay and ask: What exactly am I paying for?

Bundled research – the research provided as an ‘add on’ to execution - falls into that camp. This research is often redundant, lacking of value, and gets as much use as your dormant gym membership. Yet it continues to be purchased because it is as common practice in the industry.

Part of the reason this cycle has yet to be broken is that PMs fear unbundling would create more work for them. Though it may take some work on the front end to seek out the top providers for execution and research, respectively – the pay off on the back end of having insightful, actionable research on one hand, and best execution on the other would alleviate headaches for both PMs as well as investors.

The clock is already ticking for PMs to jump on the unbundling bandwagon. Regulators are taking a look at how unbundling can help paint a much clearer picture of incurred fund fees and now it’s only a matter of time before requirements are enacted here in the US as they have been in the UK.

Unbundling could potentially revolutionize the way that funds do business, and bring in some serious revenue for those who embrace it. In a business where being late to the game can cost you everything, we think we will continue to see firms jump on board the unbundling bandwagon.

DeCommoditizing Investment Research

2007-12-07T16:18:00.000-05:00

In the brilliant book, Mavericks at Work (a must read) – there’s a great quote from Vernon Hill at Commerce Bank who says:

“We’ve shown that you can decommoditize a commodity business. Nobody needs another me-too bank.”

The notion of decommoditization is one that the investment research world should take to heart. The lack of insight and value in most investment research has become appalling. When the biggest difference to be found in ten research reports is a 2 cent discrepancy in target price, it’s safe to say that research has become a commodity. But how can analysts change the playing field?

Realistically, it’s not easy for in-house analysts. They are all talking to the same sources as their competitors and learning the same information at the same time (thanks to SarbOx, RegFD and other regs). They all have a mandate to cover specific companies, and truthfully – they really aren’t there to be creative and see/analyze outside of the box. This is a necessary tool, and not one to be undervalued. But is it necessary for firms to have this research from more than one source?

The answer, of course, is no. But big firms – for CYA reasons – need to have in-house analysts dedicated to the companies that their firm invests in. Makes sense. They can’t rely on outside analysts for that. But why would they pay another firm to receive the same research they produce in-house?

Right now, it’s simply because in most cases, they get the research ‘for free.’
(READ: they get it for 3 cents a share as a tack on to their execution pricing.) So why pay for MORE research in addition to that research?

Many firms are starting to understand why. They’re asking themselves what the value is in the commoditized research they currently pay for through their execution, and they’re recognizing how little new information they are accessing. This is leading to a trend in unbundling for some in the industry. It’s possible that decommoditization has already begun. But can it continue?

We believe it can. The feedback StreetBrains gets from clients is that straight forward research is important, but so is insightful, objective analysis. Value is the name of the game – and if indie research providers can step their game up and provide new insights and niche material to their clients, rather than duplicating what firms are already doing in-house or receiving as an execution add-on, decommoditization of this valuable product will occur.

On Wall Street, Sell = Salmonella

2007-12-05T14:48:00.000-05:00

If you read Dana Cimilluca’s story in yesterday’s Wall Street Journal titled, “Research Analysts: Best-Paid Concierges?” (click here for story) and thought, “That’s just absurd!” - you’re with us.

In the independent research world, we tackle this issue on a daily basis. Some independent research providers pride themselves on their abilities to set up company management meetings for their clients. In fairness to them – in many cases, this is what clients want. We are constantly surprised at the interest and desire amongst our hedge fund and bulge bracket firm clients to have such meetings. Not to suggest that company management doesn’t have anything insightful to say – but when have you ever been to a company meeting where the company provided insights into how they are falling short or worse - failing?

What is the true value of these meetings? And more importantly, are they really worth paying commission pricing for? Are there actually companies out there who are unwilling to sit down and meet with hedge funds and other institutional investors without a middle man (analyst) being involved? Wouldn’t it be much more simple and cost effective for these high powered investors to go directly to company management and arrange a meeting?

"The Catering Business"

We affectionately refer to our research counterparts who focus on company management luncheon schmooze sessions as ‘The Catering Business.” In the catering business approach to research, an analyst issuing a SELL (GASP!) recommendation on the host company is the equivalent of serving up salmonella to the black-tie crowd at Cipriani.

Besides the fact that regulatory rules won’t allow for companies to really open up in these meetings, does any party involved really expect an analyst to offer up an objective, insightful, potentially critical report after a company has played host to interested investors?

If so, we respectively contend these people reside in FantasyLand.

Since access to companies is important to analysts’ abilities to do their jobs, it’s no wonder sell recommendations this year have dropped to 7% (according to WSJ story). Our question is, why would anyone want such conflict-ridden research, let alone pay for it? Do these people still have Jack Grubman on speed-dial?

Isn’t it about time that analysts band together and raise the bar for objective research? Isn’t it up to analysts to manage companies’ expectations about what a company meeting entitles them to? It should be a chance for them to be heard – not an automatic guarantee of a buy rating.

Analysts should take a page from journalists and recognize that their job is to provide objective and insightful perspectives – not make friends. Fears of being stonewalled, bruised egos, and negative market impacts should not have any impact on the integrity of an analyst’s research.

StreetBrains believes analysts should leave the catering to Cipriani, and focus on writing insightful, objective research.

Rejecting Researchecution

2007-12-02T22:06:00.000-05:00

Just as Hollywood’s got Brangelina and TomKat, Wall Street has Researchecution: a hybrid coupling that seemed like a good idea once upon a time, but ultimately has the shelf-life of canned fruit.

The days of Researchecution – the ‘bundling’ of research and execution costs - are very close to numbered here in the US, and are already a thing of the past in the UK. Increasingly more Wall Street firms are asking themselves why they continue to bundle these services, and the case for client commission arrangements (CCAs; commission sharing agreements/CSAs; soft dollar arrangements, etc, etc.) to aid ease of payment for a la carte research - while enabling best execution pricing - is gaining traction. However, this isn’t the first divorce that some on Wall Street have been reluctant to embrace.

Not long ago, you may recall the painful breakup of investment bankers from their beloved research desk counterparts. Although research had been a supportive and loyal partner, investment bankers abused the relationship, and eventually divorce ensued.

The same separation is imminent for research and execution. The issue of transparency over what monies pay for execution vs. what monies pay for research will eventually come center stage – whether it be on a regulatory level, or internally at firms as they struggle to justify all spending in the current volatile market.

The questions that firms are starting to ask themselves are: “What are the benefits to unbundling research from execution? Will it save my firm money? Is it necessary? If so, why has the SEC not implemented a rule requiring unbundling? What advantage will it provide? Will it cost me more in compliance?"

Integrity Research’s blog on Sunday offers a ‘state of the union’ for the current environment for CCAs. At StreetBrains, we’ve been having these same discussions with clients and potential clients as well. The landscape for CCAs is still somewhat uncharted territory and some firms are hesitant to jump on the CCA bandwagon. However, an increasing amount seem to see the value and advantages to unbundling.

To answer the questions above:

1) The benefits of unbundling research from execution are many. First, you will be able to ensure you are getting best execution pricing (since you won’t be ‘factoring in’ research costs.) Second, you can pay solely for research you want and use, rather than being bombarded with research you neither want nor need. You can establish relationships solely with those research providers you value and trust. Third, unbundling research costs from execution costs make for more transparent bookkeeping – and although there is no rule that currently requires that level of transparency, the likelihood of such a rule coming about is imminent.
2) There is little research out there thus far showing whether or not unbundling saves money. What we do know is that unbundling helps firms to more accurately assess the value of their research purchases, so they are able to adjust spending accordingly. Although the cost savings are still unclear, what is clear is that unbundling provides a clearer picture to assess what you are paying for. In a market environment where purse strings are tightening, the ability to pinpoint the cost: value ratio is of utmost importance.
3) Although there is no rule currently requiring research to be unbundled from execution pricing, such a rule is likely to come – and soon. So, using CCAs would seem (and does seem, to many of our clients) to be a no-brainer – stay ahead of the regulatory curve; get a clearer picture of what your firm is spending its money on; and pay for what you value. (best execution, and great research.) Additionally, unbundling improves transparency without adding to compliance costs.

Many more firms are beginning to understand the implicit value of unbundling, and are looking to independent research providers such as StreetBrains as they divorce Researchecution. To learn more, please visit our complete “Myths and Facts” page that helps dispel some common myths about paying for independent investment research.

What Makes Research 'Valuable'?

2007-11-30T16:27:00.000-05:00

One of the annoying buzz phrases that all independent investment research companies and analysts grapple with is:

What is our value proposition?

While the term itself is cliché and overused, the question is a pertinent one. The simple answer would be to say ‘it’s all relative.’ To some extent, that’s true. Instead of trying to define value, we’re going to outline the questions we (and our analysts) find ourselves grappling with as we develop research that reflects the needs of our clients.

First, does the investor need new, fresh investment ideas? Are they looking for new trends/sectors to look at that they have not paid attention to before?

Does the investor have ideas and just needs to see research that supports or clarifies the ideas? Or does he want research that says the opposite of what he’s thinking/seeing, so that he better understands the full picture?

Perhaps the investor is looking for new, smaller companies who are up and coming? Or insights that are contrarian?

How far ahead do they want to look? Are they long or short term, and are they trying to shift that strategy?

The truth is –it’s simply not a perfect science. Unfortunately, research needs don’t fit nicely into any single one of these boxes.

Perhaps the proper differentiator is much more simplified. What if the analysts are able to tell a story that no one else could possibly tell? For instance, an oil analyst who’s been an oil company CEO, and spent a lifetime in the energy sector; or technical analysts who use a proprietary analytical technique; or analysts who cover 6 times as many companies in a specific sector as most of their competitors?

What better way to ensure that your insights are valuable than to bring to the conversation something that no one else can?

The jury is still out as to whether we’ve re-discovered fire, but, feedback from the StreetBrains ‘Ask the Analysts: 2008 Outlook’ panel yesterday certainly suggests we’re doing something right. (click here for materials from the panel event.)

November 27th, 2007: Happy New Year!!

2007-11-27T11:13:00.000-05:00

Remember when you were in college, and you would set your clock ahead by 45 minutes to ‘trick’ yourself into getting up in time for class?

Today, we’re encouraging all investors to ‘trick’ themselves - think like today is the start of 2008. Pop some corks, throw some confetti - and reevaluate the information you base you’re trading decisions on – get yourself back on track to succeed.

As we embark on this New Year, keep in mind that there’s one simple investing mantra that separates the savvy from the inept:

Buy on Call, Sell on News.

Many investors seem unable to avoid the plight of piling onto a sinking ship. Not to overuse our boating metaphors, but, once a ‘call’ is in the news – it’s safe to say that ship has sailed.

Particularly in a world where investing ideas are sanitized and Cramer-ized – trading decisions are often hinged more on what has happened than what will happen. While that strategy might sometimes work in a bull market, the bears will eat you alive.

Unfortunately, many investors don’t have the discipline to resist the allure of a company that’s being hyped in the news. Particularly in today’s world where access to company information is so abundant, many investors mistake awareness [of a company’s present] for insight [about a company’s future] and as a result of the poor investment decisions that ensue, they are left with miniscule returns – or worse – losses.

This week, StreetBrains is hosting an event to help reset the focus for investors. Our ‘Ask the Analysts: 2008 Outlook’ panel will address some of the big calls our analysts are making for 2008 to help investors get out in front of the ball. The analysts will discuss what they are forecasting for their coverage sectors; what will happen to the economy; what will be different by 2009. These are the issues that seed lucrative trading ideas – not today’s Wall Street Journal headlines.

Thinking out ahead of the news – not following the news – is a tough tactic to constantly deploy when most of us find it overwhelming just to keep up with and digest the information that is current. But, discipline and great investment insights will be key to navigating the turmoil that will take place in the markets in 2008.

Here's to '08!

In-House Research: Threat Level: Elevated

2007-11-21T09:54:00.000-05:00

Tumultuous markets are leading to an increasingly treacherous landscape for in-house analysts at large and mid-sized firms alike. While the majority of the blame game is taking place in the credit arena, soon, it is likely to penetrate other areas as firms search for ways to regain some of their lost revenue. Before long, the in-house research desks will be asked to stand before the tribunal and prove their worth.

In-house research has been the red-headed stepchild within firms since the fallout in 2001. Seen as a cost center, the research desk has been tossed around from division to division within firms, with no one wanting to take on the ‘overhead’ of supporting them. In a tightened market, the ‘hot-potato’ toss will likely resume for who is responsible for the in-house trading desk.

Are the days of in-house research over? Will we see all research end up being outsourced, where firms can more easily scale their usage of research with the rise and fall of commissions and revenues? It would seem that the day is nearing where these questions are seriously asked.

In any case, it is likely that an increasing number of great in-house analysts will jump ship and move into the independent side of the business to places like StreetBrains.

Making the case for independence

While having a big firm's name to put on your business card used to grant instant credibility for analysts, now, many industry peers will instead make the assumption that your research is a) tainted or b) commoditized. You turn on CNBC, and more and more lesser known firms are popping up as credible, independent sources, whose insights are not commoditized. The playing field is leveling – and rightly so – where the success and credibility of an analyst is more a reflection of track record than affiliation.

Independent analysts are also helping their own cause by proving time and again that it’s not just the big boys who have the tools to get calls right. On the contrary, in a constricted market, it’s hard to ignore the possibility that leaks and cracks in those ‘Chinese walls’ between investment bankers and research desks may deteriorate quickly when a firm’s best interests are at stake. For many institutional investors, it’s just not worth the risk to rely on this type of questionable intel when placing big trades.

So, while highly scrutinized (sometimes unfairly) large investment firms walk the tightrope of finger-pointing and protectionism – the path is being cleared for independent analysts to step up to the plate and establish their value.

While the internal battles ensue at the big Wall Street firms, those analysts who have found the right formula and business model are in a position to capitalize.

We Called It

2007-11-20T13:16:00.000-05:00

Moderator’s Note: Every week or two, we’ll be putting together a brief update section, such as the below to give our readers an update on how our analysts are doing and where their insights are being published. Check back for more calls-come-true!

As mentioned in the previous post, Photizo Group – part of StreetBrains independent research consortium – was the sole analyst group (1 out of 14) on the Street to have a BUY rating on LXK (Lexmark International). After having this fact highlighted in an article in Sunday’s Barron’s, the stock jolted up 2.08% on Monday - a day when the DJIA was down 1.66%!

Also over the weekend, DebtVisions was cited in the FT, after calling that the Alltel deal would have trouble getting done.

Two other StreetBrains analysts kicked off the holiday week with timely calls:

MediValu was one of very few analysts to have a BUY rating on Pharmion (PHRM), with a $55 price target. Pharmion was acquired by Celgene (CELG) for $72 a share.
The Bank Notes put a BUY rating on Franklin Bank Corp (FBTX), calling the15.28% drop off in the stock price on 11/19 “unfounded.” The analyst covering FBTX for Keefe, Bruyette & Wood seemed to have the same sentiments – he issued the same call this morning. Together, they seem to be the only two analysts ready to stick their toe back into the water of this stock.

Last but not least, have we mentioned that StreetBrains’ oil analyst, Sterling Account, is up over 43% on its calls for the year? (As per Sterling Account, please click here for full details of their calls.)

More to come....

He Who Stands Alone....

2007-11-18T21:14:00.000-05:00

Henrik Ibsen once said, “The Strongest Man in the World is He Who Stands Most Alone.”

The same can be said for investment research – the strongest research is that which sets itself apart entirely from its peers.

In a story in this week’s Barron’s, one of the Street’s brightest, most well respected investment columnists, Michael Santoli, pointed to insights from StreetBrains’ analysts, Photizo Group, to support the idea that LXK (Lexmark International) is a BUY - despite the fact that 13 of 14 analysts on the Street have a SELL or HOLD rating on the company.

Photizo Group – the leaders in imaging industry research – are the sole analysts rating LXK as a BUY.

StreetBrains clients who read Photizo Group research have been privy to these insights about LXK for months. This Barron’s story underscores the value of StreetBrains research: Our analysts are experts on niche industries, companies and sectors, and we provide insights that our clients aren’t hearing anywhere else.

In addition to the Barron's placement, DebtVisions - also part of StreetBrains research consortium - was featured in the Financial Times this weekend, discussing the unlikelihood of the Alltel deal getting done. (click here to read the full story.)

Indie vs. In-House Research: What’s the Difference?

2007-11-15T16:41:00.000-05:00

A brilliant economist once said in a conversation with the media:

“[Brokerage] firms providing only their own research to clients (and no independent research) is like Gideon shoving Bibles in motel room drawers.”

The case for independent research has certainly been made – particularly after the global research settlement, but what still seems to be unclear is: what’s the difference?

From where we sit, it seems to play out like this:

Big brokerage houses have a research desk that covers, by and large, only the companies and sectors that it is expected to. That is not meant to be a criticism. Let’s put it this way:

If you’re an investor trading GE, and your brokerage house doesn’t have an analyst in house who covers GE, aren’t you going to be a little skeptical? Meanwhile, firms have had to cut back on a lot of research, so as not to cover companies or sectors that no one cares about.

As a result, it’s no real wonder why most firms have in-house research desks that seem to be in place more as a ‘CYA’ for the firm, rather than as the center for intel that they should be.

This is also no fault of the in-house analysts. Many of these guys would love the opportunity to make more ‘edgy’ calls. But for many, it could be an uncomfortable position inside the firm to be labeled as the ‘boat-rocker.’

Some might argue that it is the trader who has devalued the in-house research desk – because most traders have ideas and insights of their own, and really only rely on in-house research to support the ideas they already have – not to help generate new ones.

The in-house research model has become inherently flawed, but there’s no clear direction to point the finger at who’s to blame.

Independent research, almost more as the result of a forfeit, rather than a showdown, has become a champion in the research equation. Particularly truly independents – those who have no broker/dealer component - where analysts have become the ‘trusted advisors’ traders – entrusted to generate fresh ideas and offer new insights.

There could be room for everyone in this sandbox. Independent researchers to generate fresh, new ideas and insights. Traders to add onto those insights with some of their own, or to choose which insights to follow through on. And in-house research to support the traders’ decisions, and help protect the integrity of traders’ investment decisions.

But the hard truth is: Egos will always get in the way. Everyone wants to have the good idea. So all parties will want to prove that they are the source of the best investment ideas. That’s what we’ve set out to do with our analyst roster here at Streetbrains.

The good news for all independent researchers is that, for now, the regulatory environment; in-house turmoil and reporting changes; the volatility of the market – and of course, Gideon and his Bible-shoving - all underscore the need out there for our product.

Dispelling Common Myths About Independent Research

2007-11-14T15:42:00.000-05:00

We spend a lot of time talking to our clients and to potential customers, and most days, the issues they discuss with us are the same. So today's blog will address the 7 most common misconceptions we hear - and offer our responses to the issues.

7 MOST COMMON RESEARCH MYTHS

MYTH #1: “All investment research is the same.”

FACT: StreetBrains takes research a step further than what currently lands in your inbox – our research focuses on specialized sectors, niche trends, and unique companies that will help you to garner unmatched returns.

MYTH #2: “There’s no such thing as truly independent investment research.”

FACT: StreetBrains has no investment banking arm or broker-dealer, so our analysts are able to offer opinions free of any conflicts of interest. Period.

MYTH #3: “My firm doesn’t pay for independent research – We get it for free.”

FACT: If your firm pays for execution and is provided with research as an ‘add-on’ or ‘bundled’ service – your firm is paying for that research. “Bundling” of research and execution makes for opaque record keeping, and will soon become extinct.

MYTH #4: “Unbundling research from execution services probably wouldn’t save my firm any money.”

FACT: By unbundling research from execution, you can secure best execution pricing. Then, you are able to take your research dollars and pay separately - and more transparently - for high quality research that delivers actionable information and profitable returns. Unbundling is gaining steam as the preferred approach to obtaining quality research.

MYTH #5: "When the global research settlement terms end in 2008, firms will do away with independent research."

FACT: Although the ten firms involved in the global settlement will not be required to distribute independent research, these firms, as well as most other large firms, have publicly noted their intentions to continue offering third-party research. Because the global settlement required firms to handle their in-house research differently, independent research continues to be a valuable asset to the firms.

MYTH #6: "Soft dollar payments for research will soon be eliminated."

FACT: Although the issue of soft dollar payments looks likely to move to the SEC's front burner before the end of 2007, it is unlikely that soft dollars will be eliminated. It is unlikely that more disclosure and regulation will be required under current soft dollar arrangements, however, the SEC will be looking for ways to show mutual fund boards how they can easily distinguish proper soft dollar arrangements from bad. License-fee payment models - such as StreetBrains' - help deliver transparency of pricing in soft dollars arrangements.

MYTH #7: "Fundamental research is still the most widely used and desired investment analysis."

FACT: According to a recent study by Integrity Research Associates, specialized research has outgrown fundamental research as the leading category of analysis for independent research providers in the UK. As fundamental research becomes increasingly more commoditized, institutional investors continue to search for analysis that gives them an edge on their competitors.

The Investor’s Dilemma: Drowning out the Research Noise

2007-11-13T16:22:00.001-05:00

Calling all institutional investors - raise your hand if you agree with this statement:

“The volume of research I receive is impossible to review, and all it does is clutter my inbox.”

Yet another prospective client made this very statement today. It feels good to know we’re the solution, not the problem.

The tides have turned for investment research, and independent research providers, by and large, have not been quick to adapt to the new needs of their clients. Clayton Christensen (author of "The Innovator’s Dilemma"), who brought us the notion of ‘disruptive technology’ – would say that the investment research industry is missing a tremendous opportunity.

Consider this:

Not long ago, research reports used to stack up on our desks, and we’d have to sort through them page by page. Now, the new dilemma in research is that instead of research overrunning our desk space, it’s cluttering our inboxes.

Where does it end?

Some companies, such as themarkets.com think they’ve done clients a grand favor – they aggregate all of the research the client has purchased, and they allow them to filter it and make it searchable, so the volume of research is more manageable.

Perhaps I’m missing something, but wouldn’t it make more sense to just pay for the research you want – as opposed to paying for research you may or may not want and contracting another party to filter what you’ve paid for?

And then, taking it one step further, simply make that research available in one place, rather than having 75 emails in your inbox every morning that you’ll never be able to sort through?

Not to preach, but we think StreetBrains’ research solution would make Mr. Christensen proud.

Today’s Lesson: Unclutter clients’ inboxes. Provide to them what they pay for, in a format they prefer.

[Off soapbox.]

Welcome to The Brainstorm!

2007-11-12T16:04:00.000-05:00

I’m Larry Margolis, moderator of The Brainstorm, and co-founder and Managing Director of StreetBrains. The Brainstorm is still in its infancy, so we thought we’d tell you a little bit about what you’ll be able to find here as the blog expands.

As you may know, StreetBrains is an independent investment research consortium that provides limited distribution research to qualified institutional investors. The Brainstorm is where our analysts come to blog about the topics they are most interested in, or the issues and trends that are on their minds in between research reports.

Additionally, The Brainstorm is where we talk about trends in the research industry – what types of research institutional investors are looking for in the current market; new regulations and what they mean for payment arrangements (CCAs, etc); new trends in how independent research is being used and who’s using it; and the myths about independent investment research that we encounter as we navigate the business.

We welcome the opportunity to hear your thoughts and suggestions. To ask a question, offer feedback or make suggestions, please contact blog@streetbrains.com.

Please check back regularly to see what we’re Brainstorming about.

- LM