The Common Man Approach To Channel Checking

What really defines insider trading these days? That's what the FBI wants to know, as the government organization has begun cracking down on channel checking firms and hedge funds over what exactly is legal, and what isn't. The FBI has gone so far as to ask technology researcher John Kinnucan to wear a wire during his discussions with Michael Steinberg, but Kinnucan supposedly refused. Steinberg manages a technology-focused fund for SAC Capital. Neither of them have been accused of any wrongdoing. Hedge funds, including SAC Capital, Diamondback and Loch Capital, as well as mutual funds like Janus JNS and Wellington have received subpoenas from the FBI requesting where they get their information from. There's already been one arrest in the probe, as the FBI arrested Don Ching Trang Chu in connection with the probe. I recently spoke with Philip Laverson, portfolio manager at Matrix LLC, who weighed in on the current insider trading scandal and how he deals with it. Philip said, "In order to avoid getting insider information rules, I keep all my research based on common man research principles." Laverson went on to say that he subscribes to Blueshift Research, because they use the "common man" way of research that he described when I spoke to him. Blueshift does what any Joe Investor can do, just on a broader scale. Founded in San Francisco four years ago by Craig Gordon, an early user of survey techniques at RCM's Grassroots Research and founder of independent market research firm Off the Record Research, Blueshift uses a proprietary pattern mining process to help clients answer industry- and company-specific research questions across a range of topics including retail, technology, healthcare, and industrials. What differentiates Blueshift from other Wall Street research firms is that their primary research is obtained by gumshoe investigative work that could also be be achieved by the common man. "Our research doesn't rely on numbers alone. We base a lot of our findings off conversations with customers, industry journalists, bloggers, store employees and competitors, as well as first hand observations," said Reverdy Johnson, Director of Research at Blueshift. "It's the type of research anybody can do - and already does - when they are shopping or talking with friends. We just do it in a more systematic, intentional and organized way. And on a larger scale." The company has a team of about 15 freelance reporters across the country in cities like L.A., Chicago, New York and Dallas who observe inventories, check displays and markdowns, note sizes that are in or out of stock on visits in the field. They talk to store employees about what customers are buying, trying on, spending trends, trends on the rise and decline. They also ask about competitors and seasonal shifts. Blueshift asks customers for their views of the trends, the brands, what they've observed as shoppers, and if they are shopping more or less at the specific store. These are the types of questions that anyone, including a regular retail investor, can ask and expect to get an answer to. "Clients are appreciative of our primary research and the way we gather it, overlayed with web-crawling capabilities centered on generating new ideas in search of alpha," said Blueshift CEO Bill Jenks. Johnson stressed that each reporter clearly identifies themselves as trend researchers and discloses that they are conducting research on behalf of clients on Wall Street. They also offer sources a copy of the research report in which they participated and do not pay any of their sources. Johnson went on to say that sometimes their findings don't always coincide with what Wall Street is thinking on a stock, and that their findings aren't impacted by their clients thesis. One example of this is Urban Outfitters URBN, which a client asked them to do due diligence on in October because Wall Street was down on the name, due to excessive inventory and possible styling misses. In talking to Urban's core customers, visiting stores, and speaking with fashion trend bloggers, Blueshift learned that the clothing company remained on trend, sales were trending in the right direction and there weren't excessive inventory issues like Wall Street thought. Urban recently reported blowout earnings for the third quarter, and the stock popped sharply higher after the news. "It's nice to know that I don't have to worry about ethics violations by using a firm like Blueshift," said Laverson. "These guys have given me some great reports on a diverse group of names that have helped me have a really good year." So you see, the common man can do these kinds of channel checks and have that edge that hedge funds and other parts of Wall Street have over us.