Word of the Day: Spin-in

Summary:
Spin-ins are startups founded by people from a more established parent company. They usually work to develop products and technology aligned with the goals of the mothership, but keep track of everything (including venture capital raised) on a separate balance sheet. If certain technical milestones are hit, the spin-in is then absorbed back into the company, which it can then ride to profitability or leverage to raise further rounds. Cisco Systems has long been a major proponent of this strategy, and it’s clearly worked for them.

Notes:
But there’s also another way to do it. A spin-in doesn’t have to be a simple technology play. Instead, the parent company works with investors (since it has the clout) and the management team to build a real company with real revenues of its own. That way, if it gets gobbled back up after two or three years, it can be immediately accretive to the parent company. This is an attractive option for bigger companies looking to balance their investment in innovation against dilution of corporate earnings. Not to mention that it will help both venture firms and management teams address the issue of liquidity in a world where IPOs, mergers and acquisitions are becoming few and far between.

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Word of the Day: The Pecora Commission

Commission established by the U.S. Senate to study the causes of the crash of 1929. The hearings lasted for two years (1932 - 1934) and resulted in the U.S. Congress passing the Glass-Steagall Act in 1933, which mandated a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities.

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Word of the Day: Haircut

The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin, and collateral levels, or the difference between the actual market value of a security and the value assessed by the lending side of a transaction.

Notes:

• The term haircut comes from the fact that market makers can trade at such a thin spread.
• When they are used as collateral, securities will generally be devalued since a cushion is required by the lending parties in case the market value falls.
  

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Word of the Day: The Paradox of Thrift

Posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income – the fountain from which savings flow.

Notes:

But, as pointed out by Steve Waldman:

• often forgotten hidden assumption in the "paradox of thrift"
  
• true: one person's spending is another person's income
• but: does not follow that an increase in saving translates to a decrease in aggregate income
• two kinds of spending: consumption and investment
• e.g. buying Ferrari vs. laying a subway line
  
• nearly all savings are actually spent on investment goods
• no "paradox of thrift":
• what is "saved" is really spent on current production of future capacity
• plenty of paychecks to go around
• no "fallacy of composition": individually and in aggregate, today's thrift lays the groundwork for tomorrow's abundant consumption
• but: for this to work out, two things must be true:
  
1. today's savings must be invested in projects that will actually generate future wealth
2. savers must believe they will retain a stake in the increased wealth commensurate with the size and wisdom of their investments
• we have a financial system in order to make these facts true

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Word of the Day: Backshoring

Refers to manufacturing increasingly moving back to the West, or, rather, to where the markets are. This does not necessarily mean that all of it will return to the West, as emerging countries are also enormous markets (local production will serve local consumption there). But narrowly defined production costs will become less important in deciding where to locate manufacturing. See de Meyer and Holweg.

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Word of the Day: (Statistical) Arbitrage

Summary:
Arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete. In practical terms, this is generally only possible with securities and financial products which can be traded electronically.


Statistical arbitrage (as opposed to deterministic arbitrage) refers to highly technical short-term mean-reversion strategies involving large numbers of securities (hundreds to thousands, depending on the amount of risk capital), very short holding periods (measured in days to seconds), and substantial computational, trading, and IT infrastructure. It involves data mining and statistical methods, as well as automated trading systems. StatArb has become a major force at both hedge funds and investment banks.

Notes:

• arbitrage on Wikipedia
  
• statistical arbitrage on Wikipedia
  

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Word of the Day: the Uncanny Valley

Summary:
In video gaming and robotics, the paradoxical point at which a simulation of life becomes so good it's bad. A term coined by the Japanese roboticist Masahiro Mori.

Notes:

• Mori observed that the more humanlike his robots became, the more people were attracted to them, but only up to a point:
  
• if an android become too realistic and lifelike, suddenly people were repelled and disgusted.
• The problem is in the nature of how we identify with robots
  
• When an android, such as R2-D2 or C-3PO, barely looks human, we cut it a lot of slack.
  
• It seems cute.
  
• We don't care that it's only 50 percent humanlike.
  
• But when a robot becomes 99 percent lifelike—so close that it's almost real—we focus on the missing 1 percent.
  
• We notice the slightly slack skin, the absence of a truly human glitter in the eyes.
  
• The once-cute robot now looks like an animated corpse.
  
• Our warm feelings, which had been rising the more vivid the robot became, abruptly plunge downward.
  
• Mori called this plunge "the Uncanny Valley."
• As video games have developed increasingly realistic graphics, they have begun to suffer more and more from this same conundrum.
  
• Games have unexpectedly fallen into the Uncanny Valley.

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Word of the Day: Naked Shorting

Summary:
Ocurs when an investor agrees to sell shares without having borrowed them first. Believed (e.g. by the SEC) to be creating volatility because it encourages lots of hedge funds to sell shares and then rush to buy them again.

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