Friday, May 30, 2008

Farewell Then Silverjet

Farewell
then
SilverJet -
Pioneer of
Premium-only
Air travel.

It
seemed like
a good idea
when
everyone was
flush.

But less
so when
you're
customers
GOT
flushed.

Perhaps
there's a
reason
why airlines
have three
classes of
service...

Railroaded

Mild-mannered, boring non-volatile (BBG Beta = 0.68) and owner of lots of legacy property , Nagoya Railroad Co Ltd (TSE Code=9048) was derailed into the close, this last trading day of May. Someone, somewhere was willing to spend approx $1mm to move the market value of this venerable transit company on the close a cool $270,000,000. THAT is leverage.

One would be forgiven for thinking this a fat-fingered trading error, which while possible, remains remotely so. It is a staggering amount of market value change for a reasonably sized company for a very small "investment". Undoubtedly the lucky buyers will make hay on Monday, while those benficiaries as of this Friday will find themselves poorer when trade resumes, provided their trains do not prove to be contaminated with dioxins.

Yes, mark-to-market is a beautiful thing for the price makers. But it demonstrates that all prices must be taken with a grain of salt, and in context.

Thursday, May 29, 2008

A Bad-Hair-Day For Aderans Management

After a long and bitter campaign, a Japanese wig-maker (I kid you not) Aderans Co. Ltd. (TSE Code #8170) has become the American activists financial Iwo Jima. This "victory", spearheaded by Steel Partners, occurs more than four years after initially accumulating a stake, and continuing its build to the current >25% (replete with large mark-to-market losses). The victorious battle plan consisted of a full-frontal attack by allied forces (the Dodge & Cox Brigade, assisted by the French Bleichroder battalion, and a large State Street contingent, presumably representing various guerrilla factions), in which the successful assault on Aderans HQ resulted in a capture of both the flag and incumbent management, followed by their burning and be-heading respectively.

So.."Congratulations!!" to all involved. You are now the proud owners of a no-growth wig company, suffering from major men's market declines due to changing demographics, and competition from baldness prevention, and pharmaceutical hair restoration products (ignoring the fact that the traditional "toupee" is seen as increasing vain and naff). Beauty is indeed in the eye of the beholder.

Now, in full command of the territory (or at least the front office and board-room), Mr Lichtenstein is free to pursue his as yet-detailed strategic initiatives to "prevent further value erosion", that (as Mr Lichtenstein has stated in the past) has so hurt stakeholders including shareholders, employees and pensioners. Presumably these value-enhancing initiatives include: paying out cash accumulated on the balance sheet to shareholders, raiding the pension fund, assuming more leverage, cutting the R&D and capital expenditure budgets, and raising dividends, and then auctioning the remains to a trade or PE buyer. I am sure the non-shareholding stakeholders will be thrilled at such prospects.

But is this really about Aderans Co Ltd (TSE Code #8170)?? Most non-Japanese analysts see this is an important milestone for Shareholder Rights in a country where Shareholders are seen as but another constituent...a minor stakeholder, maybe but even the owner, but NOT the Power Boss With the Ulitmate Say. And the milestone may be true, though only time will tell with certainty. But I have a rather different question about some other investors: those of Steel Partners Japan. For one would be remiss not to ask the question: "Did Steel Partners Japan Fund (and its managers) abuse their fiduciary responsibility granted to it by its investors in order to prove a point by throwing good-money-after-bad to achieve a victory with dubious immediate value?? "Cannon fodder" springs to mind.

Wednesday, May 28, 2008

Perino: "This is NOT the Scott we knew...."

The world is deeply in need of some levity, and today, White House Press Secretary, Dana Perino, delivered just that in addressing the Former Press Secretary's [Scott McClellan] stinging accusations directed at the The President's and his Administration's allegded use of lies and deception to justify the Iraq War. Of all the possible ripostes, Perino hilariously said
"For those of us who supported him before, during and after he was Press Secretary, We are puzzled. It is sad. This is NOT the Scott we knew....".
Duh! Of course it's not the Scott you knew...he's begun telling the truth! Now the job of the Press Secretary we know is tough, and being the whack-a-mole for this administration must be excruciating on a daily basis. Nonetheless, Perino persisted in providing further entertainment when she was asked whether the President would comment on accusations by his Chief Liar that, effectively, he lied on such a matter of paramount national importance, both past, present and future. She replied:
" "I do not expect a comment from him on it. He has more pressing matters than to spend time commenting on books by former staffers."
WHOOOAH! Sorry Dana, but this is not merely a book by a former staffer. This is a book by a very loyal defender of the administration and the former Chief Liar saying He was at the center of a web of lies spun by nearly all concerned to a priori justify policy.

Too busy to comment, indeed!

(apologies to Gary Trudeau for the DB - I'm sure he'll understand)

Fish to Oil Specs: Thanks!

Some creatures couldn't be happier with the dramatic rise in oil prices resulting from robust EM demand and monetary policies, gluttonous American use, commodity index funds, American monetary and fiscal policies and the dreaded Oil Specs. Indeed with Spanish and French fisherman in the streets as if it were 1968, fish - both coastal and pelagic - have been given a most welcome reprieve.

Spanish fisherman have moaned that while petrol - their main cost - and more than quintupled, fish prices on the dock have barely budged, and they want help...NOW! "Sorry Charlie!!" was the saying the tuna cannnery was reputed to have said to lowly albacore deemed unworthy of Starkist quality. Today, however, it is the fish (or what's left of them) for the first time in centuries, who've the upper hand and finning their ummm errrr snouts? at the greedy mariners.

Of course, I still see the deep sea party boats with patrons for whom "money is no object". But for many of the PWT sport fishermen, angling will gladly (at least for the fish and conservationists) be out of economic reach.

Sunday, May 25, 2008

TeamJapan (as explained by S. Suzuki)

Christopher Hohn and his TCI are obviously NOT Suzuki parents, for they would have better understood what they up against in terms of TeamJapan.

Shinichi Suzuki's Nurtured by Love, The Classic Approach to Talent Education is an illuminating account of his philosophy regarding life, music, and learning. It is wonderfully Japanese, in the best possible sense - the love part of my love/hate with Japan.

In the book, he recounts an anecdote from his days at the Nagoya Commericial School where he was class president four years running. The motto of the school was "First Character, Then Ablity". Noble enough. And so he explains:
During the final examinations, one of the students whom I shall call A, was discovered by B to be cheating and B announced the fact loudly to the teacher in charge. A was then sent out o the classroom, which was by then in an uproar. But when the examination was over, and as soon as the studentswere out in the passage, another student C, leaped upon informer B, a big boy, asking him what kind of friends he thought he was, and hit him. The others joined in and they all gave 'B' a sound thrashing. I was still in the classroom. It all happened in the twinkling of an eye. Presently they sent for me, the class president to come to the faculty rom. "What is meaning of this outrageous attack? Were you aware of it?"
Suzuki replied (and recall that he is pacifist, gentle human being with the highest moral character):

Suzuki: "I was. I struck him too."

Faculty: What? who are the students that struck him?

Suzuki: All the members of the class, Sir.

Faculty: And you think you did right, do you?

Suzuki: I do not sir. I think it was wrong to cheat. But I think it was extremely unfriendly to report him sir. Please punish us....


If only Hohn had learned violin the Suzuki way he could have saved his investors lots of money, not to mention loss of face....

Friday, May 23, 2008

Dear Mr Activist...

Hugh G. Fallis - General Partner
Chief Activist Officer
The Greenmail Fund
Main Street
Greenwich CT
USA


Dear Mr Fallis,

Our company has existed for 117 years. We survived several financial panics, a depression, two world-wars, a syphilitic emperor, an earthquake, two nuclear bombs, hyper-inflation, an occupation by MacArthur, the great bubble, and the most prolonged doldrums the modern world has seen since the great depression. Despite this robust longevity, we now find ourselves wondering whether we will survive the pox that you have brought upon us.

All accounts tell me our founder was a wise, caring and generous man. His ingenuity, drive, and continued curiosity built our foundations. Through his success, he had acquired much land surrounding the site of original factory in town to stage our operations, and was wealthy by any measure. Most of the streets in the vicinity still carry our name in some form, even though ownership is but a distant memory. You see, when the downturn came, my great-grandfather swore he would do everything in his power to insure that the employees, who'd helped make his success, who loyally served him, and gave their energy day-in and day-out to the Company would NOT be fired and thus impoverish their families, so he and his children could continue to live in luxury and keep his land. First he cut his own household's expenses so he could decrease his draw. Then he asked his most loyal and senior managers to do the same. And then his employees. Only then did he sell the land, tsubo by tsubo, to insure that his promises were kept. And so, the Company, and its workers, survived, where many other time-honored enterprises were less fortunate. And as a result, we continued to manufacture our wares, bringing joy to our customers, livelihoods which brought food to tables of our employees - from the factory floor to the export office - and dividends and profits to her owners when times were good.

We've survived the years through understanding what our customers desire, investing in research and the latest technology to insure our products are of the best quality, and the unmitigated dedication, hard work, and harmony with our workers, and through a maintaining conservative approach to financial management which six generations of experience has taught is useful for surviving inevitable downturns, after which we've thrived when such doldrums are exited. But I do not expect you to understand the wisdom of such an approach since they do not teach it in business school, and have little respect for the knowledge of your elders, particularly when it runs counter to the parochial pursuit of short-term profit. More worryingly, they seem to be teaching you methods of so-called financial engineering that go against every instinct of prudence that we've honed from generations of actual experience.

Despite this venerable history, we are not immune to the cycles of the market and our economy. The 1990s were difficult times, requiring sacrifice and perseverance. Profits were low as was the value of our shares. You acquired your initial holdings at a good price, and I do not fault you for this. Had my family greater resources, we too would have acquired more. With such a substantial shareholding, we (admittedly with reluctance because we are cautious people) welcomed you to our constituency and after frank discussions, we did everything you asked. We paid out cash from our reserves. We increased the dividend preventing the rebuilding of reserves. We pared our R&D, and advertising budgets, and curtailed long-term investments that we otherwise would have made. Finally, we sold our cross-shareholdings to continue to pay dividends.

At first, if one looked ONLY at the share price, one would have thought your advice was to a resounding a success. But upon closer scrutiny, this was a mirage. Though our share price was rising, the only perceptible difference in ownership on our register was from entities affiliated with you, which leads me to believe that it was your own buying that caused the share price to rise, and not a vote of confidence from the market more generally. I have my suspicions about what agent/principal dilemmas might cause you to do this, thereby treating your fiduciary responsibility so callously, but this is not the time nor the place to discuss that.

But what a difference two years makes! Today, thanks to your self-serving advice, we find ourselves in a most precarious position as hard times approach. Unlike the past, today we have little reserves to weather the coming storm. Our capital equipment requires updating, but you pressured us to pay our capex budget to you in dividends. Our sales are deteriorating in line with the macro-economy, and it is likely we will slide into loss this year, further limiting our ability to invest and innovate. We could perhaps sell shares, but investors' appetite is very diminished, and with our diminished balance sheet, and our share price much reduced from levels at which you collected your large one-time non-recourse incentive fees, this is a last resort option. And the debt markets are all but closed for a smaller enterprise such ours. Historically, we'd saved for the rainy day, but thanks to you, our cupboard is bare. You, of course, can shut your doors and little will change. If we shutter our factories, a thousand families will be severely hurt, and several thousand more who make up our suppliers and our customers will be similarly impacted. And, I ask you, for what higher purpose? What noble objective have you achieved in the name of "shareholder rights", "optimal capital structure", other than a campaign that resembles "Sherman's March" or the "Sack of Rome"??

Tolstoy famously wrote: "It is worse to deceive yourself than to deceive others". Your rhetoric and your actions are disingenuous and have willfully left this place, and in turn, the earth upon which we share and dwell, a place that is worse off than you found it, whatever and however you may attempt to justify it to your conscience and your investors.

So "thank you" for NOTHING. Like your President, you have destroyed in a few short years what previous calamity, hardship, and time itself could not accomplish, and for this you should feel deeply ashamed.

Truly Yours,

A. Suzuki
Honorary Chairman
Nagoya, JAPAN

Thursday, May 22, 2008

Today's Irony

Was I the only one who found irony in this report detailing Citiigroup's "payoff", "bailout" or what have you, to investors in one of its hedge funds?? Oh how we in America used to laugh triumphally at poor Yamaichi's or Nikko's fumbled attempts to "pay back" their valued clients who'd been burned by this zaitech idea or that failed trading idea. Ahhh yes, in the good old days, brokers would routinely sell a block of shares to "he who needed to be repaired", run-up the price of the shares, and then buy them back at the higher price, settling their obligation. I wonder what Citigroup is calling their restitution? Just another mileage marker on the highway of moral hazard...

Icahn to World: "Obama Sucks"

Bloomberg reported to that billionaire super-investor Carl Icahn said Barack Obama would suck as President and be very very bad for "the country" (surely he means himself? - ed.) , citing what he termed Mr Obama's complete "lack of economic understanding". He also accused Mr Obama of being "a democrat" and said "we all know that democrats spend spend spend and tax tax tax". He further suggested that if elected he's likely to have majorities in both house which would be very very bad because they're errrr ummm Democrats.

My oh my, what a very, very weird thing to say! And what a weird time to choose to say it! But for what purpose? To influence the outcome of the democratic ticket? The rhetoric that Mr Icahn put forth is unusually beneath a Princeton alumni and an obviously very bright spark, at least in the game of corporate finance. But since his points seemingly came straight off the list of latest RNC talking-points, one wonders whether Mr Icahn's latest foray into the Internet with Yahoo has been keeping him awake at night, so forcing him to listen to the vitriol spewed forth from late night talk radio.

But aside from Mr Icahn confusing RNC talking points with objective reality (he IS in his seventies) the facts of government expenditure, and actual prudent economic stewardship over the last three and one-half decades bears no resemblance to that painted by Mr Icahn, or the seeds of fears he wishes to sow. Anyone in any doubt of the foregoing need only look at historical graphs of Federal fiscal expenditure and tax receipts over the past 35 years to see when, what and who are responsible for the pathetic state of our fiscal and monetary affairs, and the nuking of any attempts by forward-looking folk to insure that American policies continue to be oriented towards sustainable prosperity - particularly with respect to energy. Of course the administration is only one of the villains, for Congressional reps (of both parties) and the American people themselves must take their share of responsibility for buying the snake-oil on offer.

Perhaps Mr Icahn IS indeed genuine in his concern for America, and is doing it - as does Mr Soros - out of conscience and conviction. Yet, while he tars and feathers Mr Obama over the incipient higher rates he ostensibly will bring, it is worth asking whether perhaps rates NEED to rise from levels artifically depressed from four years of unbelievably large official intervention by Asian, GCC and other emerging authorities. Or perhaps this is really a salvo from friends of AIPAC that is not-too-subtly directed towards insuring Mr Obama is "on board" with The Agenda, acutely timed to coincide with Mr Obama's floundering attempts to find the right timbre for a controversial, more-even-handed American policy stance between Israel and the Palestinians.

I do not know the actual and correct answer, but I have a gut feeling that there is something awkward and not genuine about this bold off-topic proclamation by a Wall St. titan.

Gross: Greenspan Made us Billions!!

Bloomberg reported yesterday that according to Bill Gross, AG's sagely advice "has made billions of dollars" for PIMCO's investors. Which begs the obvious question: what did he reveal as a private citizen and adviser to asset management companies that he couldn't reveal to the public, and the other branches of government during his tenure as Chairman of the FRB? Gross elaborated that
During a 30-minute discussion on banks several months before the global credit crisis, Greenspan's ``brilliance in terms of forecasting the potential for exactly what happened was a big money saver for us
Ummm. OK. IF we accept that AG is a brilliant forecaster of possible, but yet-to-emerge, crises, then why the fuck was he silent to Congress on rising budget deficits and role of the Bush Admin tax-give-aways that made it worse? Why did he mimic a blind, organ-grinding monkey when house prices were vaulting relative to incomes, productivity growth and GDP, and EVERYONE was removing equity from overvalued assets and further goosing prices by encouraging anyone and everyone to roll their 30yr fixed mortgages into ARMs?? Why did he hold his tongue on Bush admin neglect of energy policy - despite the sizable share of oil imports in the nation's trade deficit and the obvious fat-tailed negative impact this would have on all thinks financial should prices rise? Why if term funding mis-matches were an issue, or he was concerned about bank use of off-balance sheet vehicles for gaining additional leverage with greater fee income and their potential unraveling did he never mention the shadow banking system, or the need to scrutinise it or supervise it in a single phrase before congress? Are we to believe that Mr Greenspan, upon leaving his official role had an epiphany about the future outcome of his life-work as FRB chief that he was oblivious to when he was the Man With The Plan? I think the whole thing is implausible and STINKS, and lawmakers should consider the creation of an eponymous 'Greenspan Law' preventing senior civil servants from conducting and advising related business for reasonably longer periods than currently existing, to avoid the inherent conflicts his bond market sojourn has revealed.

Wednesday, May 21, 2008

Raise Margin Requirements NOW!

  • When you're driving too fast for safety, you slow down.
  • When deficits rise, you cut spending and/or raise taxes.
  • When someone is kind to you, you express your appreciation.
  • When an investment is no longer attractive, you sell it.
  • When inflation rises, you raise interest rates or tighten fiscal policy.
  • When bread is cooked you take it out of the oven.
  • When you cannot afford a discretionary purchase, you don't buy it.
  • When representatives govern poorly, you don't re-elect them, or their party.
  • When your political system ceases to function properly, carefully consider what is broken, and fix it.
  • When you have reasonable evidence that leveraged commodity speculation and physical hoarding by financial and policy investors is materially impacting prices and adversely affecting the Public Interest you should begin to react by RAISING INITIAL AND MARGIN REQUIREMENTS!! (oh and you might consider closing the loopholes that allow specs to obtain hedge margins and slap a "Tobin" tax upon transactions.It also might be worth exploring some cross-border harmonization too)

Beyond Greed

Beyond Greed. That was the story of the Hunt Brothers (temporarily) successful commodity pecadillo. And like many naive speculators of today, they were incited by an ideologically-gripping bomb-shelter anti-government gold-bug rhetoric about worthless fiat currency and impending financial armageddon. Now, before Moldy and all those psychologically, and financially over-invested in their long-of-commodity positions send me hate mail, let me say I am of the Masters view put forth before Congress yesterday (as reported by the Wall St. Examiner via Yves Smith). As such, I do unequivocally agree with them, The Blamers and the Anti-Inflation Brigade in believing that the ultimate problem lay in poor monetary, fiscal policy and non-existent energy policy and the ultimate excessive liquidity (and thus demand) that these have created. And as result I absolve The Specs, for they are not the ultimate villain, but The Messengers. Indeed slaying them, without confronting the ultimate issues would be but duct tape on the broken pipe.

That said, Masters has a good point. In fact, many good points about the impact of speculative hoarding on prices (not just by HFs but, by you&me through our Pension Funds GSCI Commodity Swaps and retail commodity-based ETFs). And the rub is: despite that they ARE all "right" and rational, because policy IS lame, and the long-term portfolio efficient frontier IS moved (at least on a modeled, and, a to-date implemented basis) to a more optimal level, (though tomorrow is always a new day) there is an most important point to be derived from Masters. That is, from a societal point of view, there is an enormous Composition Fallacy at work here. It simply cannot be better for everyone, (i.e. The Public Interest cannot be served) if everyone hoards their commodities two years forward, irrespective of how much sense it makes for anyone to do it individually (or within their hedge fund allocation) so long as others are increasing their hoarding. Skeptics would of course answer that if the price is so "wrong", then why don't the real sellers simply "sell"? This may, of course, be correct in the ultimate long-term, but coming from a commity trading background, this is nonsense in the short-term for there are too many imperfections and failures in current commodity markets for either instantaneous or near-perfect supply responses that would validate such a view, and numerous positive feedback loops that further prevent the same.

So what are we to make of such Congressional scrutiny? Part of me is naturally suspicious since these are the same irresponsible buffoons that got us here (or enabled our progression, or did nothing to stop our directional inertia) in the first place. That said, if one goes back to 1980, the slaying of the Silver Specs and some of the wildest and most unsettling of market edge was (according to Stephen Fay's account in "Beyond Greed") triggered by the Government's actions upon speculative activity, which was a precursor to the final inflationary Vampire Slaying undertaken by Volcker. Note, the proximity of the initial anti-speculative actions to the ultimate monetary policy change, and the proximity of the monetary policy change to advent of a new administration.

I cannot make a precise guesstimate of how "far along" we are. Or even whether the monetary holy cross will ever be used to move policy towards greater balance - both domestically and internationally. But, I can say that leveraged speculators and those riding the commodity-alpha wave should be concerned by the fact of the hearings, and Masters rather frank testimony to the potential lynch-mob . This is because the lesson from the Hunt Silver debacle was "Don't fuck with the people who make the rules, since the rules can be changed which will torpedo even the rightest and best-laid of market operations". You see, for elected lawmakers, speculators make the most excellent political sacrifices. This is because politicians can be seen to be doing something (anything!) to counter-act the real increasing cost of stuff, without actually doing anything that costs them aything (except a few campaign contributions), or more importantly asks their electorate to - heaven forbid - change their lifestyles. For this reason alone, leveraged specs should take specific note exactly where the fat-tail lay, for when pen hits paper in Executive Order or Rule-Change from above, there will be NO EXIT!

Tuesday, May 20, 2008

Three Little Pigs - CFA version (Updated)

Once upon time there were three little pigs. One day, they gathered around their mother (who was a CFA as it happened) and listened to her say: "Little pigs, it's now time you all went out into the world and built yourselves portfolios of your own. "Luck be with you. But...you must be careful to watch out for the Big Bad Black Swan."

So the three little Pigs set out on their merry way to build themselves portfolios that would make their mother proud, withstand the prevailing shocks of the day, and test of time, and produce fine cocktail party conversation when they socialized with the other Pigs.

The first little pig built himself a portfolio of AAA rated US RMBS securities backed by less-than-high quality mortgages which he was told (by the rating agency and the bond salesman) had excellent modeled risk characteristics for the additional yield, Chinese shares (for their future growth potential), and a basket of US Municipal and Financial Guaranty insurance companies whose underwriting record the first little pig assessed with hindsight "was near-perfect" rarely having to pay a claim (e.g. ABK, MBI, AGI. MTG, and PMI). The First little pig enjoyed his new portfolio, and felt safe, as it did wonderfully - impressing friends and family alike and attracting the attention of London-based fund of funds, and hedge fund seeders, and all manner of private hot-money investors, until one day, the Big Black Swan came swaggering down the road, and asked to have a look at his positions. The Swan (whose "big" and "bad" reputation was really undeserved for he was really just a bit of a skeptic) said to the pig: "Little pig, little pig...just wondering but, ummm, do you think that portfolio of yours will withstand a bit of huffing and puffing?" Oh indeed it's a very conservative portfolio - with uncorrelated value and growth elements, backed up by the finest of American residential collateral!". "It won't fall...not even if all the shares in my China tea-basket falter!" said the little pig. The Swan shrugged his wings (for he'd heard this before) and went on his way. A while later, he ran into the pig, who was looking decidedly worse for wear, threadbare, and forlorn. "What happened to you?" said the Swan. "Well , my RMBSs got downgraded and now there's no market for them (25 offered - no bid), my China shares halved and the dollar's STRENGTHENED vs. RMB, and my safe insurance basket been 'Acked to pieces!" "Shit happens" said the Swan...

The second pig, after leaving home, was suspicious of assuming too much market risk, and so took a different approach and built himself a portfolio of blue-chip hedge funds with pedigree managed by ex-Harvard Superstar Jeff Larson, ex-Morgan Stanley superstar, Vikram Pandit; ex-Goldman Partner Ron Beller; and Bear Stearns bravado Ralph Cioffi; as well as a wodge to UBS superhero, Jon Wood, (on top of a "safe" multi-strat called Amaranth managed by Nick Maounis (because he was a conservative pig at heart, and liked the diversification that a multi-strategy arbitrage-oriented fund afford him).

The second little pig, feeling impervious to risk, was admiring his stable of managers, and feeling very wealthy and important when one day, while lunching at Nicole Farhi's, the Big Black Swan came swaggering over to his table, and asked to have a look at his positions. The Swan (who despised being confused with a goose) said to the pig: "Little pig, little pig...I was just wondering but, ummm, do you think that portfolio of yours will withstand a bit of huffing, puffing, volatility spikes and global financial deleveraging??" Oh yes, it's a very conservative portfolio - with uncorrelated alpha sources and the best brains, risk-control, and financial systems and oversight that money can assemble." "It won't fall down...not even if all the China shares in my managers' long momentum portfolios puke!" said the little pig confidently. The Swan shrugged his wings (for he'd heard this before) and went on his way. Some time later, he ran into the second pig, who was almost unrecognizable, no longer dressed in a smart Saville Row tailored clothes, but now-donning the simplest of Indian white cotton robes. "What happened to you?" said the Swan. "Well", said the pig, "my multi-strat manager combusted up on natty gas, deleveraging and hubris bankrupted several of my others, and Jon Wood's SRM choked on a large piece of North Rock and an even larger piece of Countrywide, so I've gone off to an Ashram like David Weill before me, to find some spiritual solace". "Well, shit does happen" honked the Swan somewhat sympathetically...

The third little pig was cleverer than her siblings, and sought out the the strongest materials with which to build her portfolio. She (quite literally) stuffed it with steel producers, commodity ETFs and other physcial things that hurt when you dropped them on your foot, global mining and resource companies (especially Iron Ore and Metallurgical Coal). And she bought potash mines from the Dead Sea to Saskkatchewan, a block of apartments across from the Kremlin, and deep-water platforms and GOM fields wherever she could find them. Concerned that she might be top-heavy on "value", she leveraged and bought a bevy Emerging market shares in Brazil and Russia, and added a short USD vs. long AUD position on top of the highest yielding carry basket she could fund with JPY and CHF. To round it out, she used her remaining credit lines (in short-term USDs) to buy a portfolio of modern "masterpieces" by Lucien Freud and Damien Hurst along with a couple of renaissance-era triptychs.

She was living large, flying private to this island of hers or that, and on this particular day was freshening up in bath of some vintage Krug, when the Big Black Swan came swaggering past, and asked to have a look at her positions. Proud, and unmodestly she bared all. The Swan (who really wasn't black, but actually was a dusky grey) said to the pig: "Little pig, little pig...I was just wondering but, errr, do you think that portfolio of yours will withstand a bit of huffing puffing??" "Oh yes," she replied, it's made for precisely that..." "You see it's actually a very conservative portfolio - with uncorrelated alpha sources and the best risk control against inflation and depreciation money can buy, ." "It won't fall down...not even if all the buildings in western China fall down. In fact, IF they do, it will boom even more when they rebuild them!" the third pig laughed. The Swan shrugged his wings (for he'd heard this before). "Well, Shit still happens" honked the Swan, as he walked away, but not before clucking: errr "What happens should real rates rise or ...?!?!"

Destination: Tarnished

The death of Eos and critical condition of Silverjet, pioneers in executive-only travel, nary a few months after the peak in one of the most rollicking parties in the history of humanity, is telling us something. Precisely what may be open to debate. But it is interesting to note that their place in the food chain was (and still is in some circles) deemed to be somewhat impervious to the economic vicissitudes of the hoi polloi, along with Hampton beach homes (now falling hard), and prime London Real Estate (also accelerating its slide). This alone would cause even the mildly curious to ask "what's next?". For as the tide of unlimited availability of credit recedes, we will discover what oddities were NOT "made", but merely "borrowed", and whose impressionist acquisitions, mega-ship, and Gulfstream-IV were facilitated by the good graces of lenders and [temporarily] flush overenthusiastic consumers.

Undoubtedly, the bull market in nearly-free-credit had taken all manner of vulgarity, ridiculousness, as well as contrapreneurism to heretofore unseen levels. Certainly legitimate fortunes have been "made". Others seemingly conjured from vapor, like Vikram Pandit's have been quite literally "banked", though this may not be an entirely wise thing in and of itself if he still holds it in the Bank's shares or deposits. But one of the fascinating lessons of the tech wreck when the shareholder registers were exhumed, and SEC filings studied, was how many people believed their own bullshit, and as a result, how few people excepting the really lucky (who were taken out of their stock for cash) and the really "canny" (like Philip Anschutz and Gary Winnick) who huckstered, on-sold,, and cashed-out their way to unimaginable riches which barring the emergence of the Bolshies should provide adequate amusement and comfort for their offspring's offspring's offspring's offspring....

But as quickly as it comes, so it very often evaporates - and with even greater rapidity! Be they hedge fund pots-o'-gold (Peloton, Drake, Amaranth, Sowood etc.), staid long-only shops (WP Stewart) or aggressive and/or over-zealous banks and broker-dealers (think Northern Rock & Bear Stearns). So, with Silverjet rather tarnished, and Eos grounded, one should begin to wonder what other less-than-sustainable business models based upon assumptions of $30 oil, never-ending economic growth, unlimited future availability of credit at prices, and on terms that would curdle the blood of even the most unrestrained of lenders like Walter Wriston, are now directly or indirectly at risk.

Eight-years of trickle-up economics (both domestically in the US and internationally) will soon be ending. In its place will emerge a concept called "shared pain". This will result in higher taxes for the top quintile, and top decile in particular. Progressive taxation will return (outside of energy), and in a form of class-warfare detente, the US will join the civilized world in providing universal single-payor healthcare, higher-quality education, and more public transport in an attempt to offset the pain of convergence inflicted by globalization. In the process, we will see a further squeeze upon the former bull-market in McMansions, second homes, both at the beach and on the slope, country-club memberships, sales at Tiffany's and Coach, expensive private-schools, stupidly-priced Napa Cabernets, luxury "spa's" (at which most it still remains virtually impossible to get a decent deep-tissue massage), concert-ticket prices, sporting-event ticket sales, motor-boat sales, 2nd-hand luxury yacht prices, amongst other things that are undoubtedly correlated, but which have inevitably escaped by immediate attention.

Already, I have seen the edge taken off of car-rental prices, and the number and size of deals for hotel-rooms that but nine-months ago were firmly bid and non-negotiable. Weaker (more leveraged?) hands need to service debt as the incentives for private equity managers are to pull out all the stops in order to avoid pulling the plug, for THAT realizes losses, and stops the flow of management fees to their enterprise. And with new deal flow virtually non-existent, even with no debt in the capital structure pf the PE firms, Mayfair & Manhattan offices are expensive, and payrolls are undoubtedly bloated. This is similar to the dynamics of of Japan's zombie enterprises in the 1990s, whose continued raison d'etre of existence was to pay interest on debt even if producing at zero operating profit, much to the detriment of prices in general, and the income statements of more efficient competitors in particular. And with so many deals done with debt with far more generous covenants than typical of historical bank finance or public market debt, the eventual pressures upon prices will felt across the board.

Some will see and dismiss the death of EOS as peculiar to the airline industry, an unfortunate casualty of higher oil prices. I, however, see more it as more emblematic of "a loan too far", and indicative of the beginning unwind in stupid, over-extended, bull-market businesses that will eventually produce a luxury cull of major significance.

Monday, May 19, 2008

Pet Loss Trauma

There is nothing more sad than a child who loses a dear pet, or, for that matter, their one-and-only favorite cuddly-toy. For many youngsters, this is their first brush with mortality - a head-on, rub-yer-noses-in-it confrontation with life, parochial loss, and the immutability of death.

Each generation since the emergence of civilisation seemingly has a similar encounter with respect to stability, their money, and financial markets (or their precursors). Those in our lifetimes are burnished in our memories - like 1987 - though such recent episodes are mild by comparison, despite their eye-popping one-day moves which were, with hindsight little more than speed-bumps in the great candle-chart of time as measured and punctuated by price, leverage and speculation.

Whether by war, mismanagement, revolution, or natural disaster, complete, total and utter losses and/or hierarchical reorderings are distinct possibilities and recurrent in the history of man, culminating in the extreme in societal obliteration. It is, of course, not binary, but rather a continuum that's yielded extreme inflations (just look at the dozen or so >20% prints on UK CPI, and that is only since the 1960s!); extended depressions, and elongated misery that historically have been persistent enough to lay waste to the most prudent of asset allocations.

Little in modernity even rates on the historical comparative scale. 1970s Britain was gut wrenching and soul-destroying for many, yet no one missed an FA Cup, or north-London derby. And one might suggest that 1970s USA too was a brush with disaster, yet no one can recall a popular fascination or collective memory imprint such as those associated with the Great Depression, or Weimar or post-WWII Japanese inflation. Japan in the 1990s, or the US Tech wreck? Hardly. Yugoslavia in 1990s? Yes civil war leaves meaningful scars, but even the Levant, like its namesake re-rises like a mushroom in a wet and verdant pasture.

Argentina begins to register on the scale, with its vaporisation of savings, impovesishment of the middle-class, wiping clean the slate of debts, and near-mass unemployment, though Russia, post-Soviet demise was perhaps singularly the only event in our generational modernity that qualifies, bar none. Everything else is, by comparison, spilled milk.

It is almost impossible for children to project-froward, imagining loss, particularly one that is so finely and tenuously tethered, just as "the people" and markets have great difficulty imagining how delicately balanced modern civilisation's systems are, and how quickly they - along with everything financial - can be swept away by events unfolding or as yet unimagined. Today, despite the impressive litany of knowledge and skills man has acquired that diminishes the value of historical comparisons, so too has mankind and civilisation reached a scale and complexity that are also unprecedented. Urbanisation, "just-in-time" global logistics, Malthusian limits, heretofore not seen dependency ratios, mind-boggling agricultural intensity and environmental degradation, each of these capable of producing "shocks" that can rupture the web of dependencies with resultant cascades that could be "fatal" to financial systems - and societies - in the historical sense.

Of course, we all have to grow up. We all must experience "that crushing loss" to one's tender innocence and so, still-raw nerves, at some point, just as each generation encounters it's financial Waterloo. Yet contemplating such possibilities and ruminating upon whether THIS is the "big one" makes me long for my rabbit, exhausted as I am from trying to protect one's hard-fought gains and patrimony, however modest it might be...

Thursday, May 15, 2008

Please Tattoo This Upon Your Brain

Lawlessness is more than a nuisance for law-abiding citizens. And ever since the inflationary sheriff (the bond market) was run out of town by hegemonic non-US Central Banks market intervention, poor fiscal policy, and not-so-benign neglect by the US Fed, have left bond shorts hign-and-dry. In the process, the good citizens of Saversville have yielded the streets, first to the free-money shadow-banking system snake-oil salesmen whose wares pushed up asset prices everywhere and in everything, and then (with the exception of the Art Market), has now yielded them to the gang of commodity renegades. Vigilantes have started the round-up of rogues in core asset markets, but the streets remain dangerous as global liquidity in general, and remaining financial market rogues continue to target basic stuff.

Should the good citizens of Savesrville care? And, if so, Why? There is no need to demonstrate once the again the inflation in real house prices and the well-known near departure of median home prices from median incomes (half the core assets), and the deflationary effects that might will likely result. And while it is true that the convergence (between house prices and incomes) can happen via rising incomes, the competitive pressures upon OECD median household incomes resulting from globalisation makes this appear less-than-likely at the moment.

Equity comprises the other major portion of "core assets". The three graphs (ultimate source I am told is UBS's Andy Lees - a thoughtful London-based analyzer of macro trades and megatrends) gives a vivid picture of what one might expect to equity ratings in the event inflationary fears are requited, and/or ticks up further. This picture should be a cornerstone image in every equity investor's mental archive, but with horizons ever-short, and more attention upon "the nominal" vs. "the real", equity investors appear to be behind the curve (at least as represented by ratings as implied by the regressions below) , if of course we are to believe the bias in traded physical commodity prices as well as un-hedonized un-Boskinzed CPI baskets .

Tuesday, May 13, 2008

Electric Power Development (#9513): A Synopsis


Some things are simpler to understand than others. Be that as it may, some activists seem to have difficulties comprehending even the most overtly simple of concepts. But then there are always some people that must learn the hard way.


* TCI ostensibly thought Elect Power Dev was "Cheap" and ripe.

* So did I, and thus, I bought some.

* And TCI bought some too. (Lots more than me)

* And TCI bought more.

* In the process, TCI ramped the price.

* So I sold my stock to TCI (TYVM!)

* TCI collected huge Perf Fees as a result of this ramp. TY (investors) VM.

* After the buy & ramp, they made some noise (as activists do).Something to do with investing less and paying shareholders more.

* I shorted some stock for the fun of it.

* TCI were told by Mgmt (and 2-in-3 shareholders) in no polite terms to "Fuck to the fuck Off". Ok maybe it wasn't that impolite (but it well could have been).

* TCI subsequently lost lots of mark-to-market money as 9513 fell ~50% and underperformed TOPIX by 33%.

* I bought my short back. TYVM.

* TCI didn't have to return to their investors, any of their perf fees formerly earned.
* TCI still had their [large] position so made more noise, this time pitching investors on the benefits of something they called "MAXIMIZE VALUE VIA EFFICIENT CAPITAL STRUCTURES". Errrr ... In other words: "Cut investment. Leverage-up. And pay us more dividends".

* Elec Power Dev Board said in a Press Release: "The last time we checked WE were the management, and YOU were the shareholders. IF YOU want to be the MANAGEMENT, Then YOU must BUY the MAJORITY.

* TCI accepted their dare, and said they would like to buy more.

* This may have been a ploy, but at less than YEN4000/share (5% earnings yield) and nearZIRP YEN rates, this perhaps was sincere.

* 9513 only has a YEN600bn market cap, so this remained plausible given TCI's apparent AUM.

* A plan was hatched by TeamJapan to win, once and for all.

* MoF and MITI said: "We are GOD. You are NOT. You are not welcome here. Now Fuck the fuck off"

* TCI now has a very large and less-than-marketable position in 9513, with no immediate exit.

The moral? Do not tug on Superman's cape, Do not piss into the wind, Do not fuck with the people that make the rules unless (a) you've already made enough money, (b) you have a good "Plan B" (e.g. compromising pictures of important Ministers with, for example, Spitzer's ho') or (c) it's not your money.

Monday, May 12, 2008

Oh, and I'll Call You in the Morning....

In what will be my shortest post of the year, I will offer some friendly advice to investors and allocators alike: IF yet another would-be HF manager who's made some money punting around in Macroland tells you whether by glossy brochure, official press release or in person, that they "...are targeting 15% returns per annum....", you should politely excuse yourself from their company. For let it be known that this is the HF managers' equivalent of looking deep into the eyes of one's [temporary] affection and saying "...of course I love you...", or, in the absence of such cynical disregard for The Truth, the height of naivete. The last time such drivel was so rampant was 1997...

Month-End Performance Steroids Anyone?

I have never been a big believer in coincidence. So on May 2nd I wondered aloud about some April 30 month-end shenanigans in the post Mark of Desperation. Of particular interest was "Who?".

Despite being opinionated, I do not wish to slander anyone. I do believe however, I have answered my own question (with the help of MoF filings) and will leave it to you dear readers to see whether you can figure it out too and answer the subsequent pregnant YEN100-per-share questions: #1: What on earth were thinking?; #2: Did they think no one would notice? and finally question
#3: What conclusions should their investors draw from such ummmm errrrr disclosed transactions??

Yes filings are good. They bring the occluded into plain view. So what do YOU think: Coincidence? Nefarious? Bravado? Happnestance? Algorithmic Buffoonery? Cynical? Or merely serendipitous?

Friday, May 09, 2008

Up The Down Escalator



When one thinks out loud or writes extemporaneously, one risks appearing the knave. But I will abandon my usual caution and pose a burning question to anyone and everyone:
Do you think The People are less discontented under an inflationary regime or a deflationary regime?
To get the discussion going, I will put to you that under an inflationary regime the vast majority of the people suffer from Hamster Syndrome whereby they are running inside the wheel faster and faster but never getting anywhere, or worse from "Up the Down-Escalator Dilemma" (Do you remember the Chameleons?) where it feels like (or IS) almost impossible to make any headway in the direction one desires. This is because real wages are falling whether people consciously know it, and income inequality and Gini's are growing. On the other hand, unemployment IS [temporarily?!?] lower than it otherwise would be, which is a high-intensity diminishing of the downside to those that otherwise wouldn't be employed. In sum, most people feel worse off with low intensity, whereas a few people feel better off with high intensity.

Under a deflationary regime by comparison, I will put to you that the vast majority of people don't feel as worse-off as they would under an inflationary regime, since real wages tend to be more stable, and income inequality and Gini's tend towards diminishment making one feel less worse off(relatively speaking) - and importantly it is the relative that counts most in human behaviour with respect to contentedness. However, the downside is that unemployment tends to be higher than otherwise would prevail under an inflationary regime, and so a smaller minority percentage of the workforce feels [rightly] to be worse-off and feels so with a high intensity.

Let me say first off that none of my assertions have been researched or proved. Secondly, I am aware of some economists' arguments that, for purely behavioural reasons, mild inflation is deemed positive for economic growth. I have tended to accept these arguments, though they too are mere assertions, like mine. Thirdly, there ARE externalities under both regimes, and we cannot ignore them for they are integral to the feedback loop of happiness or less discontentedness (note: these are NOT the same thing) and future well-being. Lastly, IF this were - more or less - true, then does it mean we, as a society, are better-off in terms of GNH (Gross National Happiness) by choosing the less-inflationary route, and redistributing to cushion the downside of those unfortunate high-intensity displaced souls, than conferring a dull ache upon the majority?

One final thought: Might globalization have an unspoken role here? "Up the Down-Escalator Dilemma" is a reflection of global wage convergence, while inflation is the political way of attempting to fight or mask an otherwise unpleasant reality: if you want to go upstairs, you might have to expend some reasonable energy and take the steps...

(and if you haven't already, go take a trip back to 1983 (Modern English, The Alarm) and listen to The Chameleons)

Thursday, May 08, 2008

SRM - "...You've Gotta Be Kidding...!!"

Denial, tantrum, appeal to higher authority and almost certain subsequent rejection. It rarely works on the tennis court. And it is unlikely to work for Monaco-based SRM and Jon Wood in regards to their formerly-large equity position in the now-busted Northern Rock. Like McEnroe, Jimmy Connors and Ille Nastase before him, it is a decidedly unappealing spectacle to witness, bordering on the embarrassing, for friends, family and spectators alike. For being a sore loser is, in the final analysis, simply unbecoming.

It appears undisputed that, at the time of implosion, there was no private-market alternative provider of new equity and associated debt on terms, and in quantities that would have prevented receivership and liquidation. Despite the increasing difficulties funding short-term in the capital markets while lending long for increasingly dubious activities, both SRM and RAB bet heavily that the markets would relent in their miserly-ness, affording an exit at a higher price. But they didn't. The Bank of England provided what might be termed as bridge finance in a large way, and wrote valuable puts to existing depositors and creditors, in a bid to stop other bank-runs and shore-up systemic integrity. This is the BoEs right, if not their obligation. One can certainly argue about the wisdom of this operation, its future impact upon systemic moral hazard, but their role as largest creditor is beyond dispute, as was Northern Rock's insolvency without the BoEs interventions. Out of the goodness of their hearts, a sense of fiduciary duty to the public coffers, and a desire to have NRK shareholder shut-the-f*ck-up, the Bank offered NRK shareholders five pence on the pound ostensibly as compensation for not liquidating the enterprise wholesale. It would seem that, as the largest creditor, this was their right, ignoring that they themselves are perhaps the equivalent of a "line judge" too on the intensity of "public interest" at stake with regards to systemic integrity.

So now we can quibble about the fairness of "price". It seems SRM is taking the position its worth up to 500p/shr or 1.6x book, versus their current award of 0.05x book, irrespective of the fact that prudent and solvent peers whose managements matched funding better, are all currently south of book. THAT point of departure makes SRM claims suspect from the outset, but we know all lawyers begin with inherently outrageous positions, for which they sit a special course in law school.

Receivership and subsequent liquidation are nasty, dirty and wildly inefficient undertakings. Bankruptcy lawyers and trustees milk the teat on which they feed for everything they can, and clearly do better than either creditors, employees or even former management, judging by the cars they drive, and neighborhoods they inhabit. Delays are rife. The market - with certainty - front-runs trades and predates all the flow, including the brokers themselves who are charged with handling sales in the market. Chinese walls, you see, are in fact Shoji screens of paper. And then, there is the size of the liquidation which itself would create large and meaningful market-price impact into a market already-soft and credit constrained particularly for an asset less-than-desired by investors, and a currency on the wane. I will admit that I have NEVER done a 200 billion-dollar trade before, but I do not think there is a market - any market - that would absorb that without meaningful price impact. Finally, and perhaps most importantly, NRK equity itself was already wafer-thin, and the percentage of new loans (originated at very elevated, indeed peak home collateral values, with lower initial equity) were large. Given the massive leverage of the enterprise, one can calculate with a pencil and the back of the envelope what degree of "liquidation discount" on the GBP98,834,000,000 of NRK Loan & Mortgage book would be required to annihilate the GBP1,600,000,000 of shareholders equity. And the result?? Not friggin' much!!! Perhaps, had the global credit crunch, associated delveraging, and emerging recession and house-price crashes in US, UK, Spain and Ireland passed as (painfully) though as quickly as a kidney stone, SRM's claims (and so too BSC's shareholders) might deserve more consideration. However, in the the scheme of things, and the course of global financial events that's followed, 5p on the pound is markedly generous.

It is of course SRMs right to sue. Maybe even their fiduciary obligation (though let's remember, they are domiciled in Monaco where obligation is spelled with small-fonts and a lower-case "o"!). But neither excuse does anything to change this observer's perception that they are simply being sore losers, and no one likes a sore loser...

Tuesday, May 06, 2008

A Kinder, Gentler Greenmailer

Often-spurned and wholly-despised greenmailer of Japanese companies - Warren Liechtenstein - recently wrote an uncharacteristically nice letter to the management of dental materials supplier Shofu Ltd (TSE Code #7979) commending them for their exemplary behaviour. The original letter (of which a transcription appears below), contained three lick-on gold-stars pasted into the top margin, a hand-written smiley face, and hand written note inviting members of the Shofu Board to join Mr Liechtenstein at the upcoming Mummer's parade. One might well wonder whether such a publicly visible display of affection by Mr Liechtenstein and Steel will help or hinder future compliance by management, since the unwritten penalty inside Japan for conspiring with the enemy, must be inordinately severe. (The transcribed letter is below)
Katsuya Ota, President
Shofu Ltd
11 Kamitakamatsu-cho
Fukuine, Higashiyama-ku
Kyoto 605-0983
Japan

Dear Mr Ota,

First I want to say that I disagree with that rude Mr Loeb and his disrespectful behaviour. We at Steel would like to think of ourselves as a softer, entirely more gentle activist, so we've arranged to adopt the kewpie doll for use on our new (Japanese) corporate letterhead.

Marshall Petain was reputed to have said that "...He who fights and run away lives to fight [or not] another day..." Or maybe it was Bob Marley. In any case we commend your cooperation. And in the event you were having doubts about your actions, I can tell you that "Courage", is, economically speaking, over-rated. Whether what you've done is courageous or not obviously depends upon where your sitting. From where we are sit, we think you've been courageous, though we understand your friends and countrymen might think otherwise.

We've been shareholders for nearly eight years now. We bought the shares cheap, by any comparison to earnings and intrinsic value. And unlike many of the other cash-rich, prospect-poor enterprises that we've bought, ramped and greenmailed, you've, in fact, grown your enterprise. For this simple feat of not destroying value, we thank you since we own a lot of your stock. And unlike many of your counter-revolutionary pig-dog lackey peers, you've also bought back shares in the open market to support the value of our investment and we are grateful. For our part, we've continue d to buy more of your stock, at higher and higher prices. And though you've never thanked us, I know you are secretly appreciative of the impact of this upon your personal wealth, and the patrimony it will provide for your grandchildren.

Now, however, we find ourselves facing the new tomorrow. The credit crunch is impacting our ability to borrow. Many of our portfolio holdings have been crucified. We are unsure what our investors will do when their redemption dates roll around. And so it is with heavy heart that for the first time in eight years of association, we must ask something of you: Please buy our position from us in whole and immediately, at current market prices. Since we own nearly six months of volume, I need not paint a picture of what the liquidation of our position in the open market will consequentially do to Shofu's share price, the harmony of your shareholders, and with it, your patrimony.

Finally, allow me to highlight how envious I am of your position. For rarely in one's life is one able to simultaneously preserve and enhance one's honor when one sits in the middle between two conflicting parties (us and TeamJapan) and do so with a single financially-bold action. You have this opportunity before you, and urge you to seize it.

So I thank you for your cooperation - both past and future, and look forward to your reply.

Hopefully yours,

/signed/

Warren Liechtenstein
Steel Partners Japan Ltd. (et. al.)

A Trader's Day At The Fun Fair

Oh to be young again: The butterflies of a first kiss, the slowness with which time seemed to crawl, and, of course, the Fun Fair! Whether it was an amusement park, a traveling carnival or a newly-found fun-fair, the squeals and shouts of unadulterated glee were the same! Though the thrill of that first kiss may be gone forever, just because we're older, doesn't mean we can't enjoy a day out at the Fair, complete the archetypical attractions below, catering especially to investment types some of whom can never quite entirely leave their work at the office....


Commodity Whirlwind
Up, down, forwards, backwards, sideways, and always leveraged - you don’t know which way you’re going!! But plan your journey carefully as there are long lines to get on, and stampedes to get off. Experience the ultimate in non-stop thrills with a wild spin on this cutting edge geared steel coaster. Let the spinsanity begin!



Mortgage Sleds
Created by WallStreet in the 80s, these custom sleds are a unique combo of advanced materials and duct tape. The ride potentially runs over 30years, reaching a height of 130 (pct of par), with some of its cars having a top speed of -25bps-a-minute. With its runaway thrills and quirky convexity curves, Mortgage sleds have long been a favorite of those reaching for higher-yielding thrills.


Bear Trax
This junior coaster reaches an awesome height before achieving a phenomenal drop speed of 50pips/second. The climb is a typical long slow grind up before dropping precipitiously. These are followed by subsequent short and steep Bear Trax bounces and further fierce drops, so make sure you hold on to your seats! The Bear Trax is fast but fun, so both you and your little hedgies will want to ride again and again.


The Oil Train
Take a seat and catch a relaxing one-way ride on our scenic Petroleum Railroad. Cross over a faux desert resembling Saudi's great Ghawar field, then loop around close to a mock-ups of towering GOM platforms. Then it's back to the station through a tunnel constructed from a real section of the Alaskan Pipeline.



Shanghai Yo Yo
It's up, up, up and away as you soar through the clouds having screaming fun that grows with breakneck speed! And don't forget to check out the breathtaking view of globalization from up high before the gravity of inflation and unsustainable government policies brings you back down to earth.



PE Carousel
Take a ride on the original. Experience the circular thrill of the bid tussle, leaving the public markets, going private, extracting fees, raiding the pension fund, leveraging-up, slashing R&D & capex, busting debt covenants, default, chapter-11, investor apologies, before creditors deliver you back to the public market! Go for a whirl and see why it's memory-maker for all ages.


Carry-Trade Bumper Cars
Get behind the wheel, go for a spin and get ready to bump your buddy out of his position. No driver's license (or brains) required, since these cars have built in stops. One-way only to go — and please, for our Hedge Fund bumper maniacs, no head-ons (when levered).



2x Short Rydex Sea Dragon

When 1x is simply not enough, this 2x-thriller will deliver everything the leveraged thrill-seeker desires. Set sail for the skies, but hold on to your hats. Not for the faint-hearted, this action packed swinger will have your stomach (and P&L) doing flip-flops!


Short-Duration Music Express
Don't be deceived that you are not thrown into the air, or suspended on strings by centripital force. The Short-Duration Express looks gentle and safe, but when people fly to safety, this ride really gets cooking! Most stay only for a short while but until then, whiplash remains a distinct possibility on his deceptively fun ride.



Short-Vol Log Flume
Get paid to have fun?? You bet! You'll be white-knuckled until expiration as you race over undulating short-gamma rapids before (hopefully) dropping down one of the steepest log flume vol curves in the country. It's a ride you, your butterflies and your risk-managers won't EVER forget.


British Housing Bouncy Castle
No day at the funfair is complete without a hop on the British Housing Bouncy Castle!. Up Up and down, and lots of bouncing all around, it's great fun. Extra-soft to cushion riders from big falls! Just make sure you pay attention so you're able to find the exit in case the air goes out!


SIV Funhouse of Mirrors
Make yourself bigger, taller, and your balance sheet smaller more profitable! Hide those embarrassingly low capital-ratios and hard-to-value securities by removing blemishes from your balance sheet in the wacky tacky SIV House of Mirrors! Endless laughs and surprises as you change shape, create scary monsters, or just watch your capital disappear into infinity. See if you can find the real values! Great fun for the whole family!




Risky-Asset Panoply Screaming Eagle
Don't pussy-foot along the ridge-line between inflation and deflation. Get on board the Risky-asset Panoply and fly like an eagle as you soar seventy feet in the air. Feel the strength, power and superiority over those NOT long while riding the strongest wave in the world. Be thrilled by the lurches forward, and backwards and even be suspended upside down. You won't want to miss it — or maybe you do?

Monday, May 05, 2008

Sweaty Days

I hope Koreans will not be insulted, for I should remember more about their country from my couple of visits, though in my defense it's been nearly a decade-and-a-half since my last one. The Natural History Museum stands out, and I certainly eat and drank well (though Japanese might beg to differ). I learned to toast politely (though not silently) Korean style (something about never never never let your companion drink alone, and another about touching one's glass-holding elbow with one's other hand while toasting). Much everything else is, by now, blurred.

That is, except for one thing which stubbornly remains in my mind from that last visit during that hot, steamy humid Seoul summer: out of economic necessity, they were ostensibly ALL doing their bit to both ration available energy AND save money and so almost every single domestic company that I visited in their bright new glass-office buildings in the modern financial district had their air-conditioning turned off and it was unbearably hot and sweaty. When the Koreans set their mind to something, let nothing like a little sweat and B.O. stand in their way. They of course apologized, had the requisite electric fan in the meeting rooms for their foreign guest, but all the same, it was unbearably oppressive for someone coming from near the same degree of Latitude as Canada's Hudson Bay.

Watching oil's relentless rise, along with America's declining ability to finance it's oil purchases, and the continued inefficiency of her motor fleet, appliances, building materials, construction methods and energy use in general, for which there have have been few noticeable lifestyle changes in consideration of this reality, it occurred to me whether we might - one-day soon - see such a similar and heretofore almost unimaginable sight in America's skyscrapers, such as as I witnessed in Seoul but two decades before when oil itself was (seemingly) far more plentiful. Will the inviolable 70-farenheit-in-summer, and 74-in-winter be a thing of the past?

Continuing down this not so far-fetched avenue, will baseball games once again be played in the natural light of day? Will Ice Hockey in Florida and Houston once again be banished to the shed of "This is a REALLY STUPID idea"? Will sailboats make a silent comeback over their noisy two-stroke outboards and monster-diesel inboards? Will we be watching the "Indianapolis 200" next year? Will the use of 'eminent domain' return to America - not to seize waterfront property but to construct new rail services? Will kids start riding their bikes to school again? Will drive-thru's become illegal or simply wither away unused? Will you need a permit to fly? Will people ever stop putting fertilizer on their lawns, and use it instead for their "OPEC Victory Garden"? Will Americans finally embrace the carpool? At what price do these things start to bite, and will the manufacture of artificial snow and firing-up of antiquated double-chairs to ferry people up the mountain become uneconomic? Will the US Air Force find itself having to adopt energy efficient training methods first pioneered by the Chinese (inset right)? Will modern skyscrapers ever have to to shut down the A/C to comply with rationing or simply to save a few bob? I'd like to know.

Friday, May 02, 2008

Mark of Desperation

When I was in high school, I was no saint and explored the boundaries of what I will politely term in hindsight as 'partially misspent youth'. But when it came to my studies, for whatever reason, I never cut corners. Indeed, I liked to learn, and remain, to this today, both curious, and a proponent of "there are no shortcuts to success". This may strike many hedge fund managers as unnecessarily Calvinist and puritanical, particulalrly those, who, contrary to my assertion, have conjured amazing wealth overtly looking for, and taking shortcuts.

I recall an AP History final that I took, which I aced something unsurprising since I passionately loved history. One day, my teacher, who'd taught me several occasions prior and who I admired profoundly, appeared before and was very cross, calling me into his office. He was red-faced (more than usual) with anger , and looking very disappointed and point-blank accused me participating in a cheating scam. I was distraught, disavowed all knowledge of any wrong-doing, and assured him that in any event (which was the truth), since I would never do such a thing, purely out of principal and conviction. What had transpired was that a friend who was sitting behind me, less conscientious and honest than I, had copied my (perfect) answers from my paper despite my best stealth efforts. This in itself would not have been problematical for my erstwhile friend had he not transposed a letter and number early-on, giving him a run of perfect answers, only they were off-by-one below the transposition point, for a grand total of 23%. That reality meant he was caught with his hand in the cookie jar in a manner that was beyond dispute. Amazingly, serially cheating (something he continued to pursue at univ I am told by friends who attended with him) didn't prevent this guy (now no longer my friend) from going to Univ. Pennsylvania Law School and qualifying for the bar in PA and NJ, an occurance that always causes me to look with suspicion upon ALL lawyers and people who take public oaths.

Markets are apparently no different. Cheats are rarely caught, and even more seldom called-out. For in American finance, one can resolve a potentially criminal matter quite conveniently without admitting or denying guilt. But if one looks, one can see highly probably examples of it all over the place. Whether it is price erosion before a poor earnings announcement, or accelerated gains and volume prior to takeovers or other positive news-flow, or periodic window-dressing for calendar periods, or option expirations, such "cheating" is everywhere.

Sometimes such cheating is more profoundly obvious and egregious than others, but the world is a big place, and the regulatory authorities really do not have the resources, nor as de facto trade associations, do they really care about run-of-the-mill window-dressing or market manipulation. Since I am in the proverbial trenches, however, I see more than my fair share (excluding those that might be subject to various behavioural biases). The one highlighted here is Toda Construction (TSE Code #1860), and the date is this past Wednesday, April 30th. On this day, someone felt compelled to buy sufficient quantities of stock, all day and particularly into the close, to assure a near 14% gain at its closing denoument. Blimey!

The obvious question is "who" might be so interested and what might be their interest? To the inset (right) you can see a holdings report, and recent filers. Could any of those have a concentrated interest, given their concentrated benefit, in seeing the price 14% higher at the close of the day (and month-end) than at the beginning?? Oh yes, it could be a mere coincidence. But such "coincidence" ex-news, ANY news or earnings report, or recommendation change, is more the exception than the rule. Yes there are many other potential explanations. But nonetheless, as a not uninterested observer of such phenomena (I am unashamedly short this puppy, let it be said, in smll quantity), what would Ockham say? And WHO would the ultimately attributed time & sales point to as the culprit? And finally, what excuse would they find to justify such buying ebullience, and would it both plausible and legal? I wonder if my "friend" is involved in such securities law?

Risk & CarryTrades...




















"Honey, I'm back......!!!"

(for now...)

Thursday, May 01, 2008

Why City Pay is So High (explained)

I will not deny it. I like the BBC, and rate the World Service rather highly. By comparison to most sources of "news" and information, I think them indispensable. In particular, I admire their critical analysis, general even-handedness (at least before tipping their hand), and their Jeremy Paxman, Tim Sebastian style of Hardtalk "in-yer-face" journalism that is not only scintillating to watch when successfully catching someone out, but socially necessary.

Even as devotee, I do not defend them categorically, and are disappointed when in American baseball parlance, they "swing and miss" such as they did this morning whilst reporting on the FT headline re: the BoE's report that The Worst is Over. Fortunately, for the economics team, it wasn't in regards to their analysis of the BoE report, or their subsequent evaluation of its findings. Rather it was in regards to a guest-speakers analysis regarding Mervyn King's (related) statements on financial sector compensation. The guest, a senior analyst at a well-regarded Banking Consultancy, mocked Mr King, (ok in my book) and defended pay levels (still within the bounds of reason) by positing that (now here is where you hold on to you seats) that the City MUST pay much higher salaries and bonuses (twice the UK national average) to its minions since (and here goes the incredulous dross) "...no one would want to work there otherwise...". And the BBC interviewer's response to this was ... "Oh yes right then...thank you very much....And in our next story...".

There are of course lots of [good??!?] or at least reasons why City pay is relatively high, but this Mr Consultant, isn't one of them. Not one of BBC's better journalistic days. Was it perchance a sunny spring morning in London today??!?

I Am China, Hear Me... Drip?!?

A funny thing happened last weekend. Some friends were visiting from out of town so I decided to take them (and their children) out for a gentle boat ride. While a bit gusty for my liking, the air was dry, few others were out, the water azure-blue and the light - absolutely fabulous!

We returned safely, ruddier in the nose and cheeks than when we left. I must admit that I still get nervous docking in tight places, particularly with lots of kids aboard and the wind is blowing. You see, Jews don't hunt, rarely fish, and typically pay others to skipper our boats. If only I had bow-thrusters! Fortunately, as it happened this parking day, I cut her hard to port, slid the starboard-engine into reverse ever-so-gently to straighten-her out, and glided into my berth, in exemplary fashion, not embarrassing myself in front of the real sailors at the club - all of whom like Canadian babies with skates strapped to the feet, have been driving seagulls since before they could walk.

Back to story. My spouse leapt onto the dock with the bow-line whilst I cut the engines and grabbed the stern line. Over the gunwale I dashed, and onto the dock. Picture perfect!! I pulled hard on the stern-line to pull her tight to the berth when....to everyone's surprise, particularly mine .... there was NO PURCHASE on the line I was pulling whatsoever, and backwards into the water, fully clothed, did I tumble!! "Who the fuck untied the stern-line?!!?" I howled, oblivious to the presence of children and everyones laughter. "C'mon, huh? Who did it!!??" Out of the water I climbed, dripping wet, Ha.. Ha.. very funny.

Sure I can laugh at myself. I am telling you about now, right? So, yes I saw the humour in it. But more than that, I saw an analogy. For unlike the seemingly mythical pushing on a string many of us were taught in "Introductory Money & Banking", here I was pulling on the proverbial string, but to little avail since it was mysteriously untethered. Now I saw it clearly: China might indeed decouple - but to what avail and consequence? I am China...and the result is that I am forlorn and everything is, unexpectedly, wet...