the

21OCT14

daily

dillian@dailydirtnap.com

dirtnap

843 448 6141

VOL 6 NO 195

TECH IS TOAST
I am occasionally accused of trading by
anecdote, but honestly, I would rather
be accused of trading by anecdote than
trading by moving averages.
Was on Twitter two nights ago and got
caught in the middle of the latest Marc
Andreessen
tweetstorm,
which
was,
kidding you not, a list of other people
in tech that he anointed as thought
leaders.
Just when I thought we had
top ticked arrogant, we went and put in
an even higher tick.
Id put the
tweetstorm in here for show, but its
quite lengthy, and would take up a lot
of room.
It kind of makes me think back to Kevin
Roose, reporter at NYmag, who moved out
to
Silicon
Valley
to
report
on
arrogance, from Wall Street where he was
reporting
on
arrogance
before,
but
suddenly found himself with a paucity of
arrogance to report about. So if youre
a reporter, you go where the arrogance
is. This is as easy as finding a mullet
at a truckers convention.
Are Silicon Valley people arrogant?
I
would say yes.
Of course that is a
normative statement, but to do a little
compare-and-contrast, Wall Street guys
were getting this rich ten years ago,
and werent going around pontificating
on how the world should work. Like some
kind of recursive M.C. Escher drawing,
Andreessen was recently asked about
Silicon Valley the TV show, and he loved
it, even though there is apparently a
character based on him.
My guess is that Andreessen will feel
less compelled to be running his mouth
when fluffy tech is down 80% and the VC
industry comes to a screeching halt.
The tweetstorms will (mercifully) come
to a stop.
But this is how it works,

right?
If you want the answer to the
meaning of life question, you do not ask
the guys who have spent the last six
years getting their butt kicked.
You
ask all these tech billionaires, who,
just like in every other cycle, are
sitting on a mountain of unrealized
capital gains, which is not cash. And I
suppose at the end of the cycle we will
have all the stories about the folks who
coulda and shoulda sold, but didnt, and
are now back to making $125K a year as a
software engineer, maybe.
I want to point out that we have reached
max silliness when you hear about things
like Google trying to figure out how to
eliminate death, which admittedly would
be really cool, but also, a tech
companys R&D department doesnt try to
eliminate death on the lows, only on the
highs.
We are back to believing (just
like in 1999) that technology can solve
any problem. It cant.

FB
80
75
70
65
60
55
50
45
40
9/30/13
Source: Bloomberg

1/31/14

5/31/14

9/30/14

the
21OCT14

daily

dillian@dailydirtnap.com

This could easily be a three-page essay

but Ill start wrapping things up. This
might be hard for people on the East
Coast to understand, but its different
out there. I have some idea, because I
lived there fifteen years ago, through
both the up and down of the last cycle.
These people dont even know there is a
cycle.
Nobody in California, including
Jerry Brown, knows that there is a
cycle. So you invested in FB and made a
boatload of cash.
Nice track record.
Let me know when you make 10% for 10
years,
without
all
the
IRR
funny
business.
Remember what I said about
being right on one big bet versus lots
of small bets? You make the most money
being right on one big bet.
But the
person who is right on all the small
bets, I would rather listen to that guy
tell me how the world works, even if he
makes less money.

Glowworm

843 448 6141

from

GLW

This is how a whole generation of option

traders gets blown up.
So the story here is about Corning,
formerly Corning Glassworks, which is
where you get GLW in the ticker. GLW is
older than dirt.
No kidding.
They
company has been around, in various
incarnations, since 1851.
They are
known for making dishes and stuff, but
they divested that business back in
1998.
They also make Gorilla Glass,
they stuff they use in iPhones, and have
in the past made telescope lenses, but
back in the nineties, they really wanted
to concentrate on making...
Fiber optic cables.
So overnight Corning goes from making
plates and glasses to making fiber optic
cables, and you can see what happened
(and un-happened) to the stock.

1)

This is what happens

Valley goes nuts.

2)

This is why vol traders are vastly

underpaid.

3)

GLW is a real business with a real

product.
If anyone knows anything
about the optical networking boom
back
then,
the
price
of
cable
absolutely
crashed
(and
hasnt
really recovered).

4)

Occasionally
being
short
upside
calls can be suicidal, but very
rarely.

5)

Exhibit 1,054
inefficient.

100
90
80
70
60
50
40
30
20
10

Source: Bloomberg

9/30/90

9/30/00

VOL 6 NO 195

Okay, so a few thoughts here:

Speaking of which, another story

1999, during that last cycle.

0
9/30/80

dirtnap

9/30/10

on

why

when

Silicon

markets

are

Im really familiar with this one,

because the LMM where I clerked on the
floor traded options on this stock.
I

the
21OCT14

daily

dillian@dailydirtnap.com

dont remember how we did, but I seem to

remember getting smoked on everything on
the way down, so we probably got smoked
on GLW, too. To illustrate, we sold 20%
and 30% strike puts in YHOO, long-dated,
that all went in the money. OMG.
Regime change can be very deadly if
youre on the wrong side of it.
The
reason
I
bring
this
up
is
because...there is an outside chance
that we have had a regime change in vol.

VIX
50
45
40

dirtnap

843 448 6141

VOL 6 NO 195

hedge
funds
vastly
outperform
the
Vanguard Total Stock Market Index, they
will write about how they are losing
money on an absolute basis.
And Ive
been through enough cycles now to see
this play out in the newspapers a buncha
times.
So, dear reader, why do you invest in a
hedge fund? Because the guy is a genius
and will give you triple-digit returns?
I think most people, if they are honest
with themselves, dont even want to
invest with that guy, because he could
blow up. They invest with a hedge fund
precisely because the hedge fund will
not blow up, as opposed to VTSMX, which
will blow up! I.e, it was down 60% six
years ago (or at least the SPX was), and
that counts as a blowup.
Hedge funds are supposed to deliver
alpha above and beyond the market
return, and journalists work very hard
to prove that they dont, but on
balance,
I
think
that
they
do.
Obviously the business is much more
competitive than it was 10-20 years ago,
and its harder, but in the long run,
its superior to putting it all in VTSMX
even if you make less money in the end.

35
30
25
20
15
10
9/30/09

3/31/11

9/30/12

3/31/14

Source: Bloomberg

If so, there are lots of implications.

There Was One Catch

The financial journalists have a hatehate relationship with the hedge fund
industry, like, heads I win, tails you
lose.
So in bull markets the dumb
journalists will write about how hedge
funds are underperforming the Vanguard
Total Stock Market Index, ergo, they are
idiots.
Then in bear markets, when

There is also the idea that you can

invest in a strategy which is un- or
less correlated to the VTSMX which is
also generally true (but maybe less true
than before).
So why the fee structure?
Well, to be
frank, the absolute return manager tends
to be more sophisticated than the
relative
return
manager
(with
many
exceptions), but even still, dont shed
a tear for the relative return guys,
they make plenty of money charging 75bps
or whatever on a mountain of assets.
So much to say here, so little time.

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