Rigged Chapter 8

"Astrofinance"

by

Ross M. Miller
Posted July 5, 2004

Randy and I had just left Zero’s suite when I detected a presence behind me. Startled, I turned around and was greeted by a smile that on anyone else would have been coquettish. Tara was looking more stunning than usual in a blue suit and white blouse with matching belt and high heels that brought us nearly eyeball to eyeball. She was holding a fresh copy of the Wall Street Journal.

“You mustn’t do that,” I said.

“Sorry, I just wanted to get your unvarnished reaction.”

“Well, you got it,” I said, still recovering. “Quite spiffy.”

“And the two of you are most spiffy as well.”

Tara followed Randy and me into our suite. We filled her in on the details from the sofa. I ended by warning her: “You should be on the lookout for anything unusual. Anyone who might be following any of us.”

“So,” she laughed, “not old boyfriends.”

“Not unless they’re with the government,” Randy contributed.

“I’m interested in hearing about this astrofinance that Randy’s says you’re working on,” I said.

“While I was visiting with my family and they were talking about the usual stuff last night, I started thinking about Percy Lowell and Planet X and wondered if maybe there was some kind of Planet X affecting the Lowell Aggressive Growth Fund.”

“Planet X, how exciting,” Randy said without and to no effect.

“The only way I know to isolate this mysterious force affecting Kenneth Paine’s fund is to convert stocks into celestial bodies.”

“And that’s why Zero’s been digging up financial data for you?” I asked.

“That’s right and I picked up this paper to spot-check some figures,” Tara said. “If you look up at any star—”

“Betelgeuse,” Randy added helpfully.

“Yes—say Betelgeuse—it has several numbers that astronomers use to distinguish it from other stars. First, at each point in time there’s its position in the sky. There are several ways of representing that, but the most straightforward is by the star’s altitude, how high it is, and its azimuth, its direction along the horizon. Those two numbers, each of which is expressed in degrees, describe every possible position in the sky.”

“What about stars below the horizon?” Randy asked. “No matter what I do I’ve never been able to see the Southern Cross from Alaska.”

“As well you shouldn’t. But it’s still there. From our current vantage point or back at the lab, its altitude is a negative number.”

“You astronomers think of everything,” said Randy.

“I wish. Objects also have numbers that represent their brightness and distance from earth. These numbers interact because, all other things being equal, closer objects appear brighter. Of course, distance isn’t something that we can measure directly, but something that we infer from a series of observations.”

“I think I follow you,” I said. “Every object in the sky can be converted into a set of numbers that uniquely identifies it.”

“Well,” said Tara, “stocks work the same way. It’s just that they have many more numbers and the laws of physics do not appear to apply to them. Even so, there are patterns that emerge.”

“Such as?” I asked.

“If you think of a company as a star, the size of the company is like its brightness. GFF, for example, is among the brightest financial stars.”

“But what do you mean by the size of a company?” I asked. “Aren’t there several ways to measure it and aren’t the business magazines always arguing over exactly which company is the biggest one in America?”

“There are lots of ways to measure size and I’ve looked at pretty much all of them and come up with my own way of computing it that makes things work out nicely.”

“I’m always amazed at how you physical scientists feel free to tweak things until they work out the way you want them to,” I said. “Mathematicians call that hand waving.”

“Well, whatever I’m waving, astrofinance is certainly not a physical science if it’s a science at all.”

“Sorry to interrupt,” I said, “sometimes it’s difficult to keep my inner grad student at bay.”

“Understood. Getting back to my example, size isn’t all that matters for a company. Boiling down all the hundreds of other numbers—earnings, sales, free cash flow, dividends, book value, short-term debt, long-term debt, implied volatility, beta, all sorts of ratios, and lots more—I came up with my own measurements based on these numbers that capture most of what’s going on with a company. I call them fluffiness and dependability.”

“Are those astronomical terms or something that Randy dreamt up?” I asked.

“They’re my terms, if you please.”

“Are you sure that you haven't been moonlighting on Wall Street? I know that guy. . .now what is his name. . . Donald Shawn—or something like that—has been putting the moves on several Alaskans..”

“You can chalk my knowledge of matters financial up to Harvard's revamped core curriculum and a roommate who was briefly an econ concentrator until she came to her senses.”

“Okay, so what about this fluffiness and dependability?”

“Fluffiness is the degree to which the price of the company’s stock cannot be supported by its ability to generate earnings. During the big Internet stock bubble, most of the dotcoms were extremely fluffy. Ken’s companies had a fair bit of fluff in them and I would have to put GFF on the fluffy side.”

“What companies aren’t fluffy, then?” I asked.

“Oh, your traditional companies.” Tara replied. “Dull businesses that no one gets excited over.”

“And what about dependability?”

“It’s a bit like a credit rating. Or what a credit rating would look like if an astronomer, and not some rating agency, issued it. It’s the ability of a company to stay afloat. Dependable companies tend to have little debt and steady earnings.”

“It would seem difficult for a company to be both fluffy and dependable at the same time.”

“It’s not, for the simple reason that many fluffy companies don’t have a lot of debt (or even a credit rating for that matter) because no one will lend to them.”

“So, is GFF dependable?”

“Not as dependable as you might think. They were before Mike came along, but he’s been on a borrowing binge of late.”

“So what does all this fluffiness and dependability do for us?” I asked.

“Well, once we compute their values, we can plot them out. I’ve done that on this laptop computer. While real astronomy plays out on a spherical sky, this kind of astronomy requires everything to be flat. The quick reason for this is that while if you travel far enough east you will end up west of where you started, not matter how much you fluff up a company, it can’t become unfluffy.”

“The Flat Earth Society must be proud of you; let’s see what you’ve got,” I said while I looked at Tara’s laptop.

“You know how in planetariums they usually start the show by turning down the lights so that at first the brightest stars appear and then the sky fills with the other stars, well I’ll do that here.”

With a few clicks, the screen on her laptop first went completely black and then bright white dots began to appear scattered over the screen. Then, most of the empty space slowly filled with dimmer dots.

“Where’s the Big Dipper?” Randy asked.

“While it’s a bit much to expect that the financial sky would match earth’s sky,” Tara explained, “it does have it’s own constellations. For example, I can highlight the companies that Ken’s fund owned at the end of the first quarter—the day before April Fool’s Day—in red.”

Tara pressed a key and several dots turned red in the lower right-hand corner of the screen and a few clumps of red dots appeared elsewhere.

“That looks like a toaster,” Randy said.

“No fooling. Those stars that make up the ‘toaster’ constellation are the semiconductor equipment companies that Ken owns.”

“Not to spoil anyone’s fun,” I interrupted, “but what does all this buy us?”

“Nothing, until we set things in motion. To put things in perspective, I’ll start by showing you one of Lowell’s index funds.”

Tara clicked away until most of the brighter dots on the screen turned red.

“This fund owns mainly large companies, which is why it looks so bright.”

“Bigger is brighter,” Randy said.

“Now let’s set it in motion. Each frame represents a single trading day.” The red dots moved slowly when they moved at all.

“It’s like watching grass grow,” Randy chided.

“That’s my point. Let’s go back to Ken’s fund and do the same thing.” More clicks. Now the red dots jittered while they drifted lower on the screen.

“It looks like they’re being sucked into a black hole,” Randy said.

“Yes, it sure looks that way,” Tara said.

“Why is this happening?” I asked.

“Beats me,” said Tara. “This black hole, or whatever you want to call it, is our Planet X.”

“Okay,” I said. “What’s the answer? How can we solve Lowell’s problems, make Roland happy, and get back to Alaska for pizza on Friday, all without calling too much attention to ourselves?”

“I don’t know,” Tara said. “I still don’t have a unified theory of what’s going on.”

“Which means exactly what in plain English?” I asked.

“It’s all a matter of cause and effect. I don’t know what’s causing the companies that Ken’s losing money on to behave strangely and beyond that I don’t know what effect this Planet X is having on Ken himself, much less the others at Lowell.”

“And, not to put words into your mouth, one effect might be for them to engage in fraudulent or otherwise illegal activities.”

“That might not be the way any of us would react, but given all the money that they have at stake, you have to wonder. Still, I wouldn’t want to jump to any conclusions from this limited information. Once we can look inside—”

“We’re getting there,” I said, knowing that no one liked to just hang around. “This morning’s meeting was a start. After lunch, the four of us are ‘invited’ over to visit their mutual fund operation, which is run by Lloyd Perkins, an unpleasant man who is Kenneth Paine’s boss.”

I quickly ran down the details of the meeting with Tara while Randy listened for any new information that I might reveal in my retelling of the story. Tara got a less detailed, more serious rendition of the meeting than Randy.

“It is interesting that the company is called The Lowell Group while this Lloyd Perkins guy is a Cabot,” Tara said after I had recounted my conversation with Roland.

“Interesting, why?” I asked.

“It's an old Boston saying that the Lowells only speak to the Cabots and the Cabots only speak to God.”

“Well, I guess they’ll have to speak to us,” Randy said. “Anyway, we’ve got Zero.”

I told Tara where Lowell’s downtown offices were and she said that she knew of a nice trattoria nearby. It was getting close to noon, so Randy and I parted company with Tara so that we could pick up any messages before we headed back out.

Upon entering the suite, I saw the light flashing on the telephone. I called for messages and there was one from Henry at the front desk. It said, “A car will be waiting for you at a quarter to five outside Lowell’s downtown offices.” I phoned down to see if Henry had any other details, but he was away from the desk. I told Randy about the message and all he could say was, “Hot date?”