Jay Green of Inyx submitted to Westernbank a letter of credit allegedly from Pareto Securities which provided a $300MM short-term bridge financing for a buyout of Inyx. The letter was signed H. Suain, International Operations. Green identified him as Harald Suain.

The CFO of Pareto in an affidavit claimed that 1) There has never been any H. Suain or Harald Suain. 2) The letter is not authentic and not even on authentic Pareto letterhead. 3) Pareto never offered any such letter of credit to Inyx.

In other words, the letter is a forgery. This would be the third accusation of forgey against Kachkar. Apparently he submitted similar letters of credit from Countrywide Bank and also Mellon Bank in the UK. Countrywide has also called the letter a complete forgery.

Who is Harald Suain? The only record that I can find for that name is a guy in Europe who is an agent for a Norwegian Soccer Coach, Trond Sollied. Well Kachkar is a big soccer fan as he tried to buy the Marseille Soccer with the forged Countrywide letter.

The forged Pareto document is online so we can have a look at this signature and see if it resembles the handwriting from the usual suspects, Kachkar, Green or Benkovitch.

## Tuesday, July 22, 2008

## Monday, July 21, 2008

### Growth and reversion to the mean

Here is an update of the previous post on whether a high 5-year growth rate predicts the next 5-year growth rate. The answer is still No but now with more statistical significance.

I have collected more data. Now I am using every stock on the NYSE, NASDAQ and AMEX.

I require that there is 10 years of data and that in each 5-year period, there is at most one year with earnings data not available or earnings that are negative. If earnings are negative (or unavailable) that one year, I ignore it and fit the growth rate to the remaining four data points. So there is a slight bias towards higher growth rates but this bias is the same in both periods so this should not cause any correlation. Growth rates above 50% or less than -50% are discarded. The results are insensitive to increasing this number 50% to 80%.

There are 2206 stocks that meet these requirements. Here is the result. (Click for higher resolution)

The top panel just shows the last 5-year growth rate versus the growth rate 5-years previously. As before there appears to be little if any correlation. The red dashed lines show the median growth for each period which is 10.5% for the last five years and 7.1% the five years before that. This higher growth in the latest period is probably real and is expected since the period 1998 to 2002, the internet bubble, went from a boom period to a recessionary one and the last five years 2003-2008 included the recovery and housing bubble. It looks like we are now going into another recessionary period due to the housing bust. The Pearson's correlation coefficient is -0.0953. This slight negative correlation is explained below.

The lower panel is even more informative. The stocks are sorted by the growth rate in the previous period and divided into 19 percentile groups. That is, each group has equal number of stocks and has similar previous 5-year growth rate. For each group, I calculate the median of the previous 5-year growth rates and the corresponding median of the last 5-year growth rates. These two median growth rates are plotted versus one another with error bars indicating the error due to having a finite sample. Clearly, there is no indication that the median growth rate in the next period has anything to do with the median growth rate in the previous one. The blue line shows the y=x relation that would be expected if the best predictor of future growth rate was the past growth rate. Clearly this is NOT a good fit to the data. The red horizontal line just shows the median growth rate in the last 5-year period. This fits the data points quite well. This would indicate that the hypothesis that "Future growth rates are independent of past growth rates" is consistent with the data. There is one deviant point which has the lowest growth rate in the previous period and in fact the highest growth rate in the more recent period. I haven't yet looked into this in detail but these may be highly cyclical companies such as oil, energy etc. This point probably is the cause of the slightly negative Pearson's correlation coefficient.

Overall, this study points toward mean reversion. Companies that are growing at higher or lower than average rates will most likely revert to average growth rates in the future.

The application to investing also seems to support the "value investing" method rather than the "growth method" at least in their simplest incarnations. That is, stocks that have grown rapidly and (usually) sport a high valuation on earning probably will not grow any faster than the stocks that have grown only slowly or even had negative growth. So paying a higher valuation for "growth stocks" does not appear to be logical. I will investigate this in more detail in future posts.

I have collected more data. Now I am using every stock on the NYSE, NASDAQ and AMEX.

I require that there is 10 years of data and that in each 5-year period, there is at most one year with earnings data not available or earnings that are negative. If earnings are negative (or unavailable) that one year, I ignore it and fit the growth rate to the remaining four data points. So there is a slight bias towards higher growth rates but this bias is the same in both periods so this should not cause any correlation. Growth rates above 50% or less than -50% are discarded. The results are insensitive to increasing this number 50% to 80%.

There are 2206 stocks that meet these requirements. Here is the result. (Click for higher resolution)

The top panel just shows the last 5-year growth rate versus the growth rate 5-years previously. As before there appears to be little if any correlation. The red dashed lines show the median growth for each period which is 10.5% for the last five years and 7.1% the five years before that. This higher growth in the latest period is probably real and is expected since the period 1998 to 2002, the internet bubble, went from a boom period to a recessionary one and the last five years 2003-2008 included the recovery and housing bubble. It looks like we are now going into another recessionary period due to the housing bust. The Pearson's correlation coefficient is -0.0953. This slight negative correlation is explained below.

The lower panel is even more informative. The stocks are sorted by the growth rate in the previous period and divided into 19 percentile groups. That is, each group has equal number of stocks and has similar previous 5-year growth rate. For each group, I calculate the median of the previous 5-year growth rates and the corresponding median of the last 5-year growth rates. These two median growth rates are plotted versus one another with error bars indicating the error due to having a finite sample. Clearly, there is no indication that the median growth rate in the next period has anything to do with the median growth rate in the previous one. The blue line shows the y=x relation that would be expected if the best predictor of future growth rate was the past growth rate. Clearly this is NOT a good fit to the data. The red horizontal line just shows the median growth rate in the last 5-year period. This fits the data points quite well. This would indicate that the hypothesis that "Future growth rates are independent of past growth rates" is consistent with the data. There is one deviant point which has the lowest growth rate in the previous period and in fact the highest growth rate in the more recent period. I haven't yet looked into this in detail but these may be highly cyclical companies such as oil, energy etc. This point probably is the cause of the slightly negative Pearson's correlation coefficient.

Overall, this study points toward mean reversion. Companies that are growing at higher or lower than average rates will most likely revert to average growth rates in the future.

The application to investing also seems to support the "value investing" method rather than the "growth method" at least in their simplest incarnations. That is, stocks that have grown rapidly and (usually) sport a high valuation on earning probably will not grow any faster than the stocks that have grown only slowly or even had negative growth. So paying a higher valuation for "growth stocks" does not appear to be logical. I will investigate this in more detail in future posts.

## Monday, July 14, 2008

### Does past growth correlate with future growth?

I did a little test to see if the past 5-year growth rate correlates with the "future" 5-year growth rate. Since I don't have access to the future data, I will use the earnings data from the past 10 years split into two parts. I have a list of stocks whose earnings I have looked at over the past few years. This is not a random sample by any means but should not be terribly biased. If there is any bias it might be that I typically look for companies with consistent results which might bias things in the direction of positive correlation.

Here is the list of tickers. There are 157 stocks. All have been pruned to have at least 9 years of data.

aa aame abk adp aeo afl ahm aig ajg all anf apol appb axp azn ba bac bax bbby bbt bcs bdx bmy bni bpop brl bro bud c cat cc cfc chc cinf cl cle clx cors crft csco ctas ctx dd dell deo dhi dis drl e educ eth expd faf fast fbp fdc fdx fitb fnm gd ge gfr ggg gm gsk hasx hban hd hsy ibm intc intu ir jnj jpm k kbh kcli key ko ksws leco lfg liz mbi mcd mdt mer mhp mlea mmc mmm mo mrk msex msft mtb mtg mth mxim ncc nke nsec nte nwlia ofg orcl ori pep pfe pg phm plxs pmi ras rdn rf rgf ri rt ryl sbux sial snn stc sti stj strt swm syy t tbl tgic tma tmk tol tsn tss tues ug uhco unh ups usb ust utmd utx vz wat wb wdfc wfc wfmi whi wmt wwy xom

For each of these I calculate the 5-year (annualized) growth rate of earnings in the most recent five year period (years 5 to 9) and in the more distant 5-year period (years 0-5). The growth rate is calculated by using all of the points and fitting an exponential curve to these points. I throw away growth rates greater than 50% or less than -50% to avoid have large numbers skew the averages.

Here are the results:

The mean annualized growth rate in the first 5-year period is M1=11.9% and the standard deviation is S1=15.2%.

The mean annualized growth rate in the second 5-year period is M2=13.9% and the standard deviation is S2=13.9%.

The Pearson correlation coefficient R is -0.0329.

R = 1/(N-1) * Sum_i (G1_i-M1)/S1 * (G2_i-M2)/S2

with N=157

So there is a small (and probably negligible) NEGATIVE correlation. Thus, there is no evidence at all that the 5-year growth rate is useful in predicting the growth rate of the next five years.

This study does not claim to be conclusive by any means but it shows that if there is such correlation, it is not very strong.

See scatter plot below of the growth rates plotted versus one another. No correlation is apparent.

Here is the list of tickers. There are 157 stocks. All have been pruned to have at least 9 years of data.

aa aame abk adp aeo afl ahm aig ajg all anf apol appb axp azn ba bac bax bbby bbt bcs bdx bmy bni bpop brl bro bud c cat cc cfc chc cinf cl cle clx cors crft csco ctas ctx dd dell deo dhi dis drl e educ eth expd faf fast fbp fdc fdx fitb fnm gd ge gfr ggg gm gsk hasx hban hd hsy ibm intc intu ir jnj jpm k kbh kcli key ko ksws leco lfg liz mbi mcd mdt mer mhp mlea mmc mmm mo mrk msex msft mtb mtg mth mxim ncc nke nsec nte nwlia ofg orcl ori pep pfe pg phm plxs pmi ras rdn rf rgf ri rt ryl sbux sial snn stc sti stj strt swm syy t tbl tgic tma tmk tol tsn tss tues ug uhco unh ups usb ust utmd utx vz wat wb wdfc wfc wfmi whi wmt wwy xom

For each of these I calculate the 5-year (annualized) growth rate of earnings in the most recent five year period (years 5 to 9) and in the more distant 5-year period (years 0-5). The growth rate is calculated by using all of the points and fitting an exponential curve to these points. I throw away growth rates greater than 50% or less than -50% to avoid have large numbers skew the averages.

Here are the results:

The mean annualized growth rate in the first 5-year period is M1=11.9% and the standard deviation is S1=15.2%.

The mean annualized growth rate in the second 5-year period is M2=13.9% and the standard deviation is S2=13.9%.

The Pearson correlation coefficient R is -0.0329.

R = 1/(N-1) * Sum_i (G1_i-M1)/S1 * (G2_i-M2)/S2

with N=157

So there is a small (and probably negligible) NEGATIVE correlation. Thus, there is no evidence at all that the 5-year growth rate is useful in predicting the growth rate of the next five years.

This study does not claim to be conclusive by any means but it shows that if there is such correlation, it is not very strong.

See scatter plot below of the growth rates plotted versus one another. No correlation is apparent.

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