Beautiful (and small) But Unloved

While the the shares of metal bashers and manufacturers of all manner and variety in all geographical locales aroun the world, vault higher at seemingly increasing rates on the back of the US Fed throwing in the proverbial towel, and ditto for manufacturers of fertilizers, Asahi Industries (TSE Code#5456) remains neglected and unloved despite its in-vogue pursuits, trading at but 25 cents on the dollar it did at the start of 2006. But while chasers of "What's hot!" should (says I, by extension) find this attractive, value investors too should be (but are not...yet) frothing. For it trades for nary 0.75 historical book, (0.6x forecast book), LESS than 6x trailing and 5x forecast earnings (albeit they are the company's own estimates) , a 3% hitorical dividend yield, and a veritably unbelievable EV/EBITDA of 2.2X suggesting to the cynical that all the preceeding is vapor, and that the world, and Asahi Industries businesses will likely end - if not tomorrow - then shortly thereafter.

From a distance, she is as attractive as they come. Of course, the flaws may be many, and the future less bright than current foreseen by management. But if that will soon be the case for their core businesses of re-bar and fertilizer, then there is one monstrous market non-sequitir inflating throughout BOTH the developed and the developing world. Since I tend to maintain a healthy respect for markets, but understand that some companies - particularly new and smaller ones - do fall through the cracks, I would not be betting upon the imminent reversal of the gloval liquidity complex, but might suggest those interested in something between a 2-bagger and a 4-bagger, potentially do their own research on this little erstwhile stone that's dropped so prodigiously during the past 21 months.

Open Letter To Mr & Mrs America

Dear Mr & Mrs America,

I would like to take this opportunity to write to you in order to explain precisely why you won't be able to afford that European vacation this year, and why the cost of living has risen as it has.

I understand you have lots of questions, and that your sources of potential enlightenment are prone to disinform you. And that you might feel like markets are punishing you, personally at the moment. Let there be no mistake: they ARE, and it is, in all frankness, your own fault .

To avoid doubt, and for the sake of clarity, I will use bullet points to assist your digestion of the facts as they are:

- the Gov't is YOU and YOU are the Gov't. Their debt is YOUR debt. As a result, your children will soon despise you, if they do not already do so.

- you have no national energy policy to speak of. This means that while everyone else in the world was moving towards great efficiency in energy use, YOU were buying SUVs, top-loading agitating washers, blindly and chaotically sprawling your suburbs, and building uninsulated 4500 sq ft homes with 30 ft gallery celings that could never be reasonably heated or air-conditioned with anything other than $30 or less oil.

- your energy levies are far to low relative to the quantities that need to be imported if you wish NOT to impoverish yourselves at the expense of your transport bill. This would not be quite as problematical if you in fact had more things to export than dubious mortgage paper, but in the absence of such levies, you cannot "eat your cake and have it too".

- your federal marginal tax rates are set too low relative to what you spend (and seemingly demand from gubmint), as well as in relation to all the rest of your peers in the OECD.

- your military spending is WAY too high relative anyone, anything and everything in the known universe. Do you really think it preferable to consume Cluster bombs and M1 Abrams Tanks in lieu of basic medical care, a prosthetic hip replacement in older age or raising kids that can spell algebra, as well as adequately perform it??

- this is of course why you feel like you are being taxed heavily, but that you've nothing to show for it - at least not things you can use such as: health-care, education, public infrastructure, public transport, consumer & environmental protection, social safety nets and so forth.

- you consume too much - more than you produce - and you do not save. Remember the parables about 7 fat years and 7 lean ones? Of the Ant and the grasshopper? Sometimes shit just happens and YOU ARE NOT PREPARED! Since it y understanding you are religiously faithful, think of it terms of the Old Testament: It was the Pharaoh who organized the stores of grain for the 7 lean years. The bible SAYS it's OK to let the government save for you by raising taxes, but don't encourage them to torch the grain stores!

- globalization IS challenging for workers in advanced economies. But progressive taxation and wise redistribution can help reduce the stress of adjustment in society, and fund the transitioning to higher-value added goods and services. It also encourages the majority of people to believe the system is a good one (for everyone - not just asset owners). Cutting taxes to give the wealthy even more during times of rgeat stress and adjustment is both unnecessary and unwise - at least until such time as the more basic economic problems facing the nation are confronted.

- the Asian mercantilists are one of the most prolific sources of "something for nothing" the world has ever seen. They should be nurtured and valued, irrespective of their shenanigans in interest rate and fx markets. But YOU risk killing the golden goose by engorging yourselves like gluttons at a smorgesbord. You should be treating it parsimoniously, using them to provide labour intensive goods at attractive prices. But if you (and I mean your companies too) abuse this privilege, you will as a by-product produce too many dollars to digest. Yes, the markets should adjust, and make such imports more expensive, the more we want, and so we are seeing it now. But YOUR leaders have been aware that the markets have NOT been working and rather than take action deal with the problem of excess demand and overly-zealous vendor financing (like raise taxes, or levy a VAT-like consumption tax) they chose to ignore it. And remember that despite what any charlatan may tell you: tax cuts have NEVER "paid for themselves".

- your political process is broken and morally bankrupt. Your leaders and policy so important to your country and the world can be "bought" - directly - for insultingly small sums of money. The folly of this would amusing were it not so incredibly sad and dangerous.

- your leaders - speaking quite frankly - suck. But YOU voted for them. Ergo..

I undertand that you may find some of what I've said contentious, uncomfortable, bordering upon the insulting. Confronting truths dissonant one's current perceptions is never easy. But, if you do not desire to see your nation, your old age, your savings, and your children's futures continue to disintegrate before your eyes, you really must get a little more stoic about things and DEAL WITH REALITY AS IT IS which contrary to what you've been told, involves difficult consumption decisions and personal sacrifices to rectify, that in a fair and just nation would and should be borne by all segments of society.

Yours truly.

"a Cassandra"


p.s. - You also simply must do something about your diet, and foreign policy. It's a small world and its getting smaller, so as people, maybe we, too, should consider downsizing rather than supersizing.

BOJ Action Note

Humble and self-effacing are the Japanese, never wanting stand-out or upstage those in the limelight. This is no better exemplified than the US FOMC's [reckless, feckless, bold, decisive, munificent, stupid](please choose one of the preceding) decision yesterday to slash rates by 50bps, which was followed today, by the BoJs [spineless , automatic, expected, cynical, prudent, lame](please choose one) decision to leave the official lending rate unchanged at 0.50% [yes, that's one-half-of-one-whole percent or in English, almost free]. In case anyone had any prior doubts about what the decision might hold, I offer you a photo (see above left) from the Official BoJ Press Conference that (almost) no one attended, not least The Press who were otherwise engaged on more important matters covering the monthly executive meeting of the Association of Shibuya Flower Arrangers, and the opening of a new Mosburger outlet in Toshima ward.

But The Press who've been preoccupied with the US Federal Reserve Bank's decision, and fawning over Mr Greenspan who has miraculously given no less than 241 interviews during the past two weeks (that's 17.2 per day! not bad someone > 100 yrs old!) paid for their myopia and missed the scoop of the day which was the BoJ's announcement that current Toshihiko Fukui will be stepping down, and , will be replaced by none other than Honda's "Asimo" (pictured right). MOF officials expressed their regret, widely citing Mr Fukui as being "The Greatest & Most Effective BoJ Governor The MoF has ever had!", citing the fact that he did absolutely nothing since his election in 2003, ALWAYS picked up the tabs for lunch for his mates, AND contributed to the disposal of that nuisance Murakami. Looking forward, officials said that Japanese researchers had been working very hard on Asimo's neural net softwarre programming. They highlighted that Japan's monetary policy could be run by a fish as well as a robot, but Asimo has mastered the art of vaccuuming the office floor as well as signing his name upon restaurant cheques, so that he may continue the tradition of picking up the tab for Japan's ill-conceived industrial policies.

Greenspan Kiss &Tell: The [Unpublished] Excerpts

In her latest attempt to out-scoop Macro-Man, Cassandra - using a small army of veiled Iranian women in combination pioneering German software that, to date has been employed piecing together shredded STASI files - managed to resurrect excerpts from the nuked chapters of Greenspan's memoirs. Who would've guessed that under his thick exterior, and cryptic lingo was prescience and senstivity on a previously unknown range of social and scientific issues!

Greenspan on the Invasion of Iraq: I have typically kept out of the political fray, at least that outside of my day to day concerns as head of the America's Central Bank. And while I will admit to being seduced by Richard Perle's Powerpoint presentation on how the invasion would create a libertarian domino effect in the entire region, I certainly had my reservations, which I voiced privately on several occasions. The first time was to my driver, back in Dec 2002, when I told him "...on balance, not upsetting the status quo might be in the greater long-run interest, if upsetting the balance is not deftly managed...". The second occasion was at home early in Jan 2003, when I whispered to my cat, MilkyGalt, that some of the intelligence that the Administration was using to justify the threat was "hanging in the balance". Of course this categorical opposition vindicated, and had I known how bad things have turned out, I would have voiced my concerns even louder.

Greenspan on Chinese Product Recalls: It has been concerning to me ever since the Chinese-made lights on my Christmaskuh Bush shorted-out and nearly burnt my house down, that the quality of Chinese products would evolve into serious issues for consumers. In fact, I wrote a letter to the manufacturer (cc:ing Walmart for the record) that "...grave consequences could result for US-China trade if crucial issues pertaining to the sustainable mutual exchange of goods and services
were not addressed...". I also asked for a refund of the $2.49 for the damaged string of lights (which I duly received). Of course I would have spoken out much louder, and used my position of influence had I known that heinous lead, and counterfeit ingredients would threaten the lives of millions, my small error in judgement being not the recognition of the problem, but underestimating the nefarious nature of the villains.

Greenspan on September 11th: I have long been a champion of freedom and liberty, and make no apologies for casualties in its pursuit, be it the Soviet Union or the average laborer of the world. I had long-held suspicions that the first attempt by radicals to bring down the towers would be followed by another, more serious attempt. So convinced was I of this that I wrote a very long entry in my personal diary to the effect "...necessary US retaliations to the USS Cole Bombing I fear will lead to a tit-for-tat struggle that will challenge the balance of policy, possibly yielding another retaliation perhaps again upon the symbolic economic infrastructure of our nation..." Of course, my role as Chairman of the FRB precluded making any public pronouncements, though rest assured I mentioned this in private to some influential people who I won't name so they won't be embarrassed by their inaction.

Greenspan on Drug-Coated Stents: Ever since my doctor told me that if I didn't improve my diet, I'd be wearing stents, I've researched their evolution quite closely. I appreciated early-on the cost vs. benefit of stents, but I was certainly suspicious when drug-coated ones were adopted so quickly, much floating-rate mortgages were adopted by would-be housebuyers and those looking for an extra kick in their refinancing. Like variable-rate mortgages, I initially endorsed the drug-coated stents, issuing the following caveat "...I see no reason to fear the insertion of drug-coated stents versus original-recipe, provided the recipient has reasonable expectations about the actual benefits such stents will provide..." This, of course was similar to my unequivocal warning to those borrowers taking out variable-rate mortgages, which for the record, was NOT my fault that said borrowers were buggered due to subsequent rises in interest rates.

Greenspan On The Virtues of Vitamin 'C': Iconoclasts like Linus Pauling and Ayn Rand have always attracted me, intellectually. But that doesn't mean I espouse every crackpot idea that such luminaries champion. Take Vitamin-C. I told my family, privately, that Pauling's recommendation to consume grams of vitamin C each day was likely to prove ineffective as a polciy for better health. Too much of a good thing, like taxes, or asset price rises (like I always said privately) are inimical to long-run stability and growth. I admit however that I never told Dr Pauling directly that I thought he was a crackpot for such notions. I did however, warn Senator Bunning at a Humphrey-Hawkins hearing, when I saw him gobbling up a plateful of ascorbic acid tablets that pursuing such a single-mind course of action was unwise, would keep him awake at night, and if nothing else, he should be drinking some fresh-squeezed OJ with them to make them more effective.

Greenspan on Crumbling Infrastructure: I frequently wrote in my diary, and warned anyone who asked (though careful not to do so in public and so unwarily influence public policy beyond my restricted brief, that failure to invest and inspect our public infrastructure would result in catastrophic consequences, and that one day, we might see bridges collapse directly from under the wheels of cars. I thought, philosophically, that the best approach would be for the private sector to handle it, and so I always lobbied (privately of course) for the market solution of pay-by-use, where the proceeds would be used to direct effect upon infrastructure endangered by neglect or poor government-inspired engineering. So while I did not directly predict the bridge collapse in Minnesota, I certainly foresaw the less-desirable outcomes that could result from inferior ideologies.

Greenspan on the Space Shuttle Challenger: I have always been suspicious of government intervention in space, our ability to recognize and react to space-bubbles, and so it was apparent to me that NASA was on a collision course with disaster. So concerned was I that our efforts were not only in vain, but contributing to potential disaster, I directed, on several occasions, FRB researchers to attempt to establish the link between Government Intervention and space, and lower space productivity. Naturally these results were kept internally, in order to unnecessarily roil markets, but the results were clear: space-bubbles are virtually impossible to detect and even more difficult to pop.

Greenspan on the Hurricane Katrina: My critics have falsely accused me of suggesting that residents of New Orleans "got what they deserved", using this out-of-context remark to indict my preference for laissez-faire and market-based outcomes. Nothing could be further from ten truth, and this was very very hurtful to me, being so intentionally mis-quoted, on something as tragic as the worst natural disaster America has ever seen, when what I actually said was: "They deserved what they got [for living below sea-level in a floodplain].

Greenspan on The Unabomber: As I public figure, I've learned to live with critics and detractors, since it's impossible to be a public figure with bold ideas and a contentious ideology without upsetting more sensitive segments of the population - especially the weak-minded altruists. But I reject accusations that anti-government crackpots and perpatrators of heinous crimes against the people like the Unabomber or Timothy McVeigh were in any way influenced from the same philosophical milk-teat as myself or Milton Friedman. This is nothing but character assassination, and while I'll admit that I restrained the Fed from intervention and supervision for which it was notionally charged, it was only because I believed that the cure was worse than the illness, which is exemplified by the lingering effects the FRBs own experiment with near-zero interest rates. But it is just mean and nasty and place me in the same sentence of McVeigh and Kuczynski, irrespective of how many times they claimed to have read "Atlas Shrugged"

Attention: Puking Japanese Real Estate Shares

Oh how quickly (and viciously) things do change! Less than a quarter ago, investors were falling over themselves for Japanese Real estate, while developers themselves had picked up the pace (and prices) of acquisitions for projects. And, even after investors had pushed cap rates of REITs to below 3%, GE and others made public pronouncements about allocating further billions to the asset class in Japan. Ummmmm, yeah.

But woe be she who bought such such securities in the public market!! For the pendulum has swung, though one would be forgiven for thinking it was actually a trebuchet, and no a pendulum. By way of disclosure, I am not recommending any of the following, however, with authorities seemingly unwilling to to normalize rates, and whatever reval of USD & EURO vs East & South Asian exporters, hard assets in YEN still appear to yield nice positive net carry in YEN, and very attractive implied positive carry while buying the assets at or below book. Have a look at the following, which potentially are the jetsam of distressed hedgie sales made necessary to repay investors for Sept 30.

Here we have Keihanshin Real Estate (Code 8818). OK, so it's Osaka based, but at 0.75 book and 13.5x FY07 earns(7.5% Cap rate net of tax!), on moderate leverage this is a steal. Mostly nice modern office blocks, but some seedy pari-mutuel betting offices, it so compelling that a prominent Tokyo lawyer Kanehide Yoneyama has been hoovering up shares now for the past four years and is now the 2nd largest shareholder next to a mutual insurance association.
Nippon Commercial Real Estate (Code #3229). REIT listed in 2005, now at 0.83x historical book and 18X next year's earnings for a 5.5% cap rate. Viewed as very attractive by most analysts for their nice high quality and growing portfolio with fair value seen up at 600,000++ vs. 380,000 current. Seems to be a large forced seller into the end of the calendar quarter.
Code#8981 Japan Hotel and Resort is now at 0.93x book and 17x 2007 estimated earnings (>8% cap rate). Morgan Stanley Real Estate owns 6% of this one and further falls will make these acquisition targets themselves. Market cap of $400mm puts this below the radar but a 33% fall in the last 3 months - all which is valuation compression - makes this worth a closer look.

Shoei (code# 3003) was a pathetic textile also-ran before they reoriented themselves first into electronics, and then more importantly and timely into real-estate. They are now trading at book value with an implied 10% cap rate. Jean-Marie Eveillard discovered this hidden asset play before the big run-up (and before Fidelity and JF/JP Morgan piled in). Shoei is famous as being the first target of a Japanese-led hostile takeover bid back in 2000 when its potential asset value was first recognized. Rising rents, good performance of properties acquired on the cheap, and completion of in-house financed developments makes this something to look at more closely, now that its been puked from its YEN 3500 top to a more realistic and interesting level of YEN 1600. I will admit to having been short at times in 2006, but only for a trade. Now, however, I'll admit to readying for a punt on the long-side.

Bears Anonymous

The following is a voyeuristic peek into a meeting of the Stamford, CT branch of "Bears Anonymous", held a Rippowam High School....

(Camera pans on participants taking their chairs , seated in a circle in a schoolroom (a dozen or so men and women of varying ages. The moderator, a clean-cut optimist, who is always "fully invested" clears his throat and begins...)

Moderator: I'd like to welcome everyone this evening. I understand this is a big step for the mere act of admitting you have problem is the first step to overcoming it. We have a number of new faces here tonight and I'd like to welcome all of you, as well as those are returning. First and foremost as we are here to share our problems, support each other, so we can begin the road to recovery. Remember: the only requirement for member ship and attendance is that you must refrain from going Short. (Moderator turns to early-thirties man) Let's start with you, Sir. Please Introduce yourself and begin...

Chuck: Hi everybody. My Name is Chuck, and I am a bear. I have had a bearishness problem for a long time. Not just a predilection for the usual contrarian stuff, which when I look back I have had since I've been a child, but a real nagging and pressing fear that the financial sky is about to fall at any moment.

I don't know where it first began. Maybe it was 1987. Yeah, that scarred me. I was naive and long and got slapped 20% that day in Oct 87. I tried to get out, but ended up at close to the levels at which it closed. A couple of years worth of savings that was!! But things recovered, and I was out of the market and then I didn't get back in because they looked like the world was really were going to end with thirld world debt, S&L crisis, and the massive commerical real estate crash that was seemed bound to cause a depression. In 1991 when the UAL deal exploded - you know all those Reagan deficits coming home to roost - I thought that we were set for an ever deeper recession, but I was wrong, and again uninvested when the market started rallying. The come 1994, and the bond market exploded and it looked like the end again - budget deficits, trade deficits, political gridlock and still working off the thriftbank and S&L issues, not to mention the near-destruction of the texas oil patch and agricultural sectors. Damn! If that wasn't enough to keep me out of the market, I don't know what is, but it did, and I reckoned I'd get a better opportunity to get in soon.

Then came large cap cap growth and technology speculation. Germany and Japan were in near-depression, yet investors are paying silly prices for pharma and global large cap growth. Who would thought they could continue to grow like that and justify the high prices? Not me. Missed it again.

All the while, I told myself: "It's ok. It's good to be prudent. The reckless will suffer like the Okies of the 30s. And, it's only opportunity cost. Better one in hand than none in the bush". And I probably had a hundred other justifiactions and rationalizations for my bearishness.

1998 came along and I was finally proven right with the unraveling of LTCM and bitchslapping of Russia! Now we would finally see the deleveraging yielding to parsimony that was needed to return assets to value and redeem America's sense of thrift! So I sat on the sidelines, waiting for the real blood in the streets. But the Fed cut rates for fear of Y2K, the tech bulls ploughed ever-more money into the market. Some said don't fight the Fed, but I rationalized my bearishness that the Fed was "pushing on a string" and their efforts would have no effect.

The market did crash in 2000 - the tech and dotcom market anyway - and the broader market stood at 5 year lows, but I looked back to the financial history of the 30s and thought when it hit its lows in 2002 that this could continue for a decade, especially with a war imminent and, with near-zero rates, it really looked like the Fed was pushing on the proverbial string. So I sat tight, waiting for a better entry point.

Then weak dollar, credit bubbles, twin deficits, foreign accumulation of US reserves, muddling war in Iraq, incessantly rising energy prices and peak oil, and on each occasion - Aug 04, Mar and Nov 05, May and Nov 06, Feb 07 the market swooned, corrected, only to rally even more strongly out of the trough as if it were teasing me, taunting me, seducing me then mocking my now increasingly irrational fears and bearishness. And they were irrational, they must habeen irrational right? for the market continued its inexorable rise on each occasion, laying waste to the rationalization or justification of the day for NOT being long long long.

It's taken nearly twenty years - almost the entire length of this grand new experiment in seemingly unlimited and unrestricted credit - for me to realize that this is MY problem. The world is just the world, and its not going to end tomorrow, and that its better to suffer with the fools in the event the system unravels, than sit idly by and watch alone, a big pile of savings become a small pile of savings.

In turning over a new leaf, and recognizing that I have a bearishness problem, I have terminated my subscriptions and vowed never again to read Stephen, Roach, Marc Faber, David Tice, Dr. Hussman and Fred Hickey. I will not read Martin Wolfe, and will make Investors Business Daily my read of choice in the financial markets. I will personally go and apologize to Vic Niederhoffer and Charles Gave for all those less-than-nice things I said about them. Further, I have placed 50% of my money into a Vanguard global equity Index Fund, and also have vowed not to look at its asset value more than once a quarter. I have taken 25% of my funds and placed in them in a global balanced fund, and earmarked the balance for disciplined allocation on any subsequent drops, and for global growth funds. I have also asked my doctor to prescribe some little blue pills that will help me see the bright side of life, and stop being so pessimistic. I have told me secretary NOT to hang up on salesmen that cold call for you never know when a good idea might fall on one's lap through a seemingly altruistic phone call. And I am going to stop all that stupid exercising and dieting in a bid to become "fat and happy", enroute to my ultimate goal of being fat, happy, AND lucky!!

My name is Chuck. And I have a bearishness problem. But I have now acknowledged my problem in hope that such recognition is the first step towards getting better. Thank you.

(applause of other members, camera pans on circle and focuses in on upon late twenties girl with tears in her eyes; Camera fades out, other members get up and give Chuck a group hug.)

(NB: While the author neither admits nor denies having a bearishness problem, the above account is entire (well, mostly anyways) fictional.

Farewell then Shinzo Abe

So farewell
then
Shinzo Abe,
Prime Minister
no more.

You had
a Class-A
Criminal grandpa,
(though not according to you);
but you
didn't have
Elvis Hair.

You were
the youngest PM
in Japanese history.
Now,
your legacy
is to be
the youngest
ex-PM.

(With apologies to EJ Thribb & Private Eye)

Animated ABCs of International Finance - Part II

It's that time again, the time for a follow-on to Avian FX in Part-II of Cassandra's Animated ABCs of International Finance. In Part-I, Cassandra highlighted the remarkable similarities between Currencies and some of our best-known and loved feathered friends.

In Part-II of Animated ABCs of International Finance, Cassandra exposes the animated likenesses of Supranational and Central Bank financial market participants, before tackling the private market in Part-III.

-----------Supranationals-------------
The IMF -

Danger Mouse & and his short-sighted sidekick, Penfold, bear a strong likeness to the IMF. They are hailed by secret invitation, responding to crises often in a rather bumbling and ineffectual way, but eventually coming out on top, if only as a result of luck and the good fortune only available to animated Superheroes and Stevie Cohen. But the likeness runs even deeper: rumour has it that the IMF are finally moving from their DC headquarters to - yes - a new purpose-built red Post-Box somewhere on Baker Street.

The BIS -

The nearest thing to a global central banking authority isthe Bank for International Settlements, a splitting image of one Vitalstatistix, the middle-aged, obese, moustached, but generally reasonable leader of Asterix's tribe of indomitable Gauls. Even-tempered, but generally unambitious, he loves good food, and has only one fear: "that the sky may fall on his head tomorrow". However, like the BIS he rarely alludes to this in actual words and, even then, only as a rallying cry: "We have nothing to fear but …".

The World Bank -

Undoubtedly the least relevant actor on the global financial stage (excepting perhaps the EBRD) is the World Bank. Irrelevant at least to developed markets, and recently emerged emerging markets. In fact, the substantial investment activities of their large and influential pension fund probably generates more ripples in financial markets, than their lending or funding activities. Given this reality, Bob The Builder is a rather apt image, not least because he is oh-so-benign, well-meaning, never losing his temper, and always intent on doing good (even if it doesn't always work out that way). So tell me again how the fuck did they got saddled Paul [They'll Welcome Us With Rose-Water & Kisses] Wolfowitz?? And Bob certainly fixed HIM!!

The WTO -

There is general disagreement on precisely whose interests the WTO's General Agreement on Tariffs and Trade is out to defend, though many have a sneaking suspicion that it is the developed nations and their transnational corporations. If this is the case, then I reckon that a striking image is borne by Kimba The White Lion, a heroic animated white lion cub drawn in Japan in the late 1960s, but, like the Little Rascals, has now been withdrawn due to the potential offense it might cause, and the generalized political incorrectness of a White Lion defending Africa against the danger of the wild animals and the darker-skinned heathen natives (allegorical suggestions anyone?). I guess one could safely call him the Ian Smith or PW Botha of cartoon characters: a good Protestant work ethic in combination with a less-than-universal sense of morality.

-------The Central Banks-------

The Fed -

I was a child of the 60s and so my brain was imprinted with the relatively benign images that Californian and Japanese animators had to offer. In the new millennium however, I will pccasionally spy my kids dosing upon rather cynical, verging upon the nihilistic, cartoons. "Catdog" is one such example, about conjoined but contrary "brothers" that is a wonderful analogue for the The Fed and its irreconciliable twinned-objectives. "Cat" (inflation control) is the smarter one, and is always hatching some kind of plot to get his brother to do something for him or to calm down, so that Cat doesn't get beat around and hurt. It may not show all the time, but he deeply loves and cares about his brother. "Dog" is the more lovable of the two brothers (maximum economic growth). Dog loves to play and party and play some more. He loves baseball and playing fetch with frisbees, balls, sticks, etc. One of his biggest interests is in chasing the garbage truck (Wall Street? Interest Groups?). He is very friendly and happy, but does have a breaking point. He's also very sensitive, and if he fails at something he feels horrible and worthless. It usually takes his brother Cat to help snap him out of it and relax (presumable the money supply). Rarely has there been a better metaphor for the FRBs inherently schizophrenic objectives. More recently, with Dr Bernanke however, there is an alternative animated likeness: Gumby and Pokey (who admittedly are actually made of clay or rubber). Like the Fed, Gumby have a 35-year record using "stop motion" techniques to do what he does. While occasionally heroic, Gumby is, like BB, quite literally, spineless. The show also featured Pokey, a red-orange clay pony who perhaps is a Donkey allegorically representing Congress, and Gumby's nemesis, the "Block-heads", who represent collectively The Leveraged Speculators, the Momentum Traders, Mortgage Zaitech Charlatans, and all official organizations buying USD paper to both neuter US rates and insure continued mercantile advantage.

The Bank of England -
Assuredly represented by none other than DM's Boss, Colonel 'K', the "Old Lady" reeks of errrr umm Halitosis? And while the BoE is no longe the boss of anything (except regional UK house prices) it does have a distinguished list of emigres to the BIS such Andrew Crocker. Like "The Old Lady", Col. K has a tendency to either forget what mission he was about to give DM, or go off at a random tangent. Some sources claim that he's a walrus, but this is not so, although it's hard to determine exactly what he is – a gopher, perhaps? He has a nubile (and never seen on-screen) secretary named Miss Boathook. Col. K, having been born in Malaysia to the the Hon. Quentin Ascot Shoetree Knight-Knight Sleepwell and the Hon. Lady Amaryllis Hippeastrum Forfar-Fife like many senior UK public servants lives in Chorleywood.

The BuBa -

Perhaps the Bundesbank is relevant no longer. And perhaps its mystique has all been mistaken since we've witnessed no less than three Germanic banks in as many weeeks say "mea culpa" after choking on US asset-backed shite recently. Thank goodness for "Heimlich Manouvre", which if nothing else, sounds like a sound Germanic rescue plan. That said, there IS and remains a 50bp spread between German credit and other Italian credit and according 30bps or so vs. France. Irrespective, the stereotype is one of some Buba or fmr Buba-official be it Issing, Weber et. al. always whinging or moaning, much like Oscar the Grouch whom we see here in classic form ensconced in his humble stainless-steel abode. Perhaps it's a Germanic trait to always see the world half-empty. Wittgenstein was terribly unhappy, but then he was Austrian. Nonetheless, show me a happy German philosopher (or Central Banker) and I'll give you some subprime CDOs valued at par. Really!!

The ECB -

Like the ECB, Mighty Mouse can fly, usually trailing a mysterious orange energy, which is capable of solidifying for use as a moving platform to carry other characters. He’s swift and agile during flight, able to stop suddenly, to change directions quickly, and to perform complex aerobatic maneuvers with ease. Mighty Mouse has formidable super strength and invulnerability. The limits of these powers are unknown, but he’s sufficiently tough enough to withstand being engulfed in the blast of a building full of military-grade bombs and ammunition when it explodes. He has MAGNOKINESIS and can hurl bolts of white lightning from his hands that allow him to mentally control ferrous metal objects. At will, Mighty Mouse can create an invisible deflection field that surrounds his hands, allowing him to deflect attacks or reflect them back at his opponents. He has been seen to use a type of x-ray vision to see through oblique objects and has the ability to stare his opponents and even inanimate objects into his command. Pretty impressive! Sound familiar, huh?

The Reserve Bank of India -

Of all the EM CBs (outside perhaps of Korea), the Reserve Bank of India resembles Underdog, for doing the unpopular thing, at least in comparison to its BRIC-brethren. Underdog's most frequent saying when he appeared was:

There's no need to fear, Underdog is here.

and to be fair, the RBI at least appears cognizant of the issues, and has at least made an attempt to fight-the-fight.

But Underdog usually caused a lot of collateral damage wherever he went. And whenever someone complained about the damage, Underdog replied:

I am a hero who never fails.
I cannot be bothered with such details.

Bank Negara -

I will be honest in admitting that I do not know any Indonesians personally, excepting a restauranteur in my old neighborhood. I've eaten Gado-Gado, Nasi-Goreng and Satay, and they certainly seem nice enough on TV (they were much kinder to Suharto & Son than say the Romanians were to Ceaucescu). But there is just something wrong about Bank Negara...wrong in the Bill the Cat sense, as if the combined stress and pressure repetitively getting it wrong LARGE in the FX market, combined with ECS therapy, has produced something like an animated feline cross between Ozzy Osbourne and Billy Idol...

The Bank of Japan -

Ahhh the BoJ, the one you've surely been waiting for. Yes, where have they been. It's as if they cut rates to ZERO, set their phones to auto-answer and went to play 46,983 holes of golf, which, in Japan, I estimate, would take more than 7 years of playing EVERY calendar day 1/365 yr please). Of course, they found time whilst on the 19th to call in, and place some orders for errrr something like $800bn USDs in 2002 to 2004 (1.5 trillion in current dollars). And so, Caspar the friendly Ghost is very apropos, so long as "friendly" is interpreted in respect to the subsidy provided to the US consumer, and the Keidanren (and its largest members), and not in respect to long-term systemic integrity. "Hello Kitty" was my #2 choice here, but "the invisible bank", the bank that still scaresthe beejesus out of traders who transgress their will, is still best.

The PBoC -

Felix and his memorable bag of tricks. THAT is the PBoC. Yes, a dollar peg, sterilization bills, outright unsterilized intervention, a financial sector still dominated and/or indirectly controlled by SOEs, widening bands at a snails' pace, and export subsidies are but a few the neatest ones. His black body, white eyes, and giant grin, coupled with the surrealism of the situations in which his cartoons place him, combined to make Felix one of the most recognizable cartoon characters in the world, and a splitting image of the PBoC. Moreover "Felix", in latin translates as "Luck", something the Bank will need if they hope to get back a $1 in real terms for every $1 that they've thrown away ...errrr, I mean, invested. Savings Glut indeed! (Sorry Macro-Man ... "He Who Must Not Be Named" is not an animated character)

Pfwoooor!!

The radio silence has been due to some travel asI am visiting London again, which I enjoy after many years of residence here, both as a student and professionally. Yes, things have changed. The number of servants shining their bosses Rollers in The Boltons continues to increase. The plumbing remains as lame as ever (can someone please explain the English incompetance with manipulating water??). The number of east europeans continues to sky-rocket (though it remains possible to pick-out the Russians from the crowd with ease, and despite the bravado and Putin-sque chest thumping, they remain the butt of jokes from the other east europeans and Hey!, will someone tell those Russian girls to peel the labels off heir sunglasses after they buy them). Road-rage is just prevalent as it was before the congestion charging, and there is non-stop renovation and gentrification work nearly everywhere, despite the seemingly preponderance of "ToLet" signs mushrooming on every peripheral street. And though the builders in the trade remain as they were, the names of companies and their vehicles have gone decidely upmarket, with a cleverness that makes them sound more like a Soho Design Firm, than a contractor. And, since last time I opened the real-estate-porn mags the estate agents shovel through the letter-boxes, prices must have increased another 30% (at least in the Chelsky-Prospekt and surronding postal codes with a few miles of Oligarch ground-zero).

Tired of Hotels, I contracted a short-let in fashionable part of town, through the internet. Now I must admit to being skeptical so I kept a Hotel reservation in my pocket just in case it was fraudulent, and when the agent chap was late and not picking up his phone at the agreed meeting time, I thought I'd been "had". But eventually he showed-up and I breathed a sigh of relief - less about the money than about the possible compromising of my judge of character and bullshit-detection skills. My dealings prior had been by phone, and I reckoned the agent to be a hungry 25 yr old sowf London errand-boy working hard on behalf of landlords. I'd thought he'd show up on scooter to deliver keys, or perhaps a Vauxhall. Wrong!! Property has, to date, apparently been good to lots of folk, and he turns up in a spanking shiny and new black Range Rover. And he was not just the errand boy, as he too is leveraged-up on a portfolio of short-let flats, as are his mates.

But the revealing thing was when I questioned him about yields. "Phfwooor, yields? Ha ha! No one cares about yields". "It's going up baby!". "He continued, "Take this flat here (FYI - a renovated basement studio lipsticked with recessed halogen lights, large flat screen entertainment centre and Franke fittings and Bosch turbowasher (but still shitty plumbing!) went for GBP210 a year-and-a-half ago, now its GBP405! He continued, "My mate, he bought a flat a year ago for 400, had 30k of carry for the year, and 20k of rental income and flipped it out 12mo later for 550. Yield? Who needs yield when prices are rallying like that??" "Ummm errr yes I interrupted, but, I was here in 1988 and I could swear I remember the secretary's all talking about their real estate triumphs in precisely the same language with exactly the same enthusiasm, but it too ended in tears". "It ain't gonna happen", he chimed. "At least not here. Not now, not to me. Things are different now. We've got Russians coming. It's a unique micro-climate. Everyone wants one. [insert additional reason of choice for denial here] And anyway prices HAVE kept going up, right?" He looked at me for confirmation that I couldn't give.

Anecdotally, over the past few days, there seems to be a whole lot of flats empty & warehoused like that which I seen in my walks. I wonder if they are lereaged, and if so, by how much? I wonder whether the huge scale of gentrification is being undertaken speculatively and with leverage or whether its been comissioned privately, for cash, from LAST year's city bonus. And what would Shiller say about historical values, affordability et.al. after the continued run-ups? I'm not forecasting doom, for the restaurants remain full, and city is bubbling with life and wealth. Perhaps it will continue. But it is worth considering the impacts of deleveraging and US recession upon London Real estate, arguable the BEST asset class amongst its peers. For something that is leveraged, illiquid, with large bid-to-spreads that has doubled in the last year or two, and where lots of inventory is held by the specs for speculation, could just as easily see a quarter to a third taken right off the top, even before margin calls or negative equity kicked in. The rapidity with which residential values have compressed and transactions all but seized-up in some US markets is an awesome sight to behold. And the certainty with which that sees the market at this point in the cycle just smacks of classical overconfidence, and those exposed should, at the very least, take note.

Advice to Germany: "Stick to Manufacturing"

Pssssst. You. Herr Doktor Finanzenarbeiterwirschafter. Yes You. Come here. I've got a bit of advice for you (and anyone else of Germanic lineage that sees themselves in the mold of Soros , Tudor Jones, Cohen or Kovner

Nothing personal but....

"STICK TO MANUFACTURING!!
KEEP AWAY FROM FINANCE!!"


Errrr....that's all.

Queasy Sights

Anyone who has spent lots of time on boats (particularly oceanic offshore swells) with those who have not or with whom it simply disagrees, will know the unmistakable tell-tales of seasickness. First the colour disappears from the suffering one's cheeks. They appear listless in posture, staring into the distance. They hug the sides or rails to provide them with a reassuring proximity to the sea in order that they not embarrass themselves in the event of ummmm an event. Then, they point their nose to the wind desperately hoping and praying that the unsettled feeling that they are going to imminently vomit will pass. They slouch yet further, appear even more pallid - even green. Then, in an involuntary spasmodic contra-digestive ballet, the afflicted sort of weave and wave back and forth trying in vain to hold in what must, against all decorum and effort, come up and out, in a violent, but ultimately cathartic LIFO explosion. This is NOT a pretty site if the afflicted were consuming beer and Cheese-Doodles before they were overcome by the need to involuntarily regurgitate.

Markets, particularly the onset of bear-markets, I would argue, repeatedly display certain similar tell-tales. These may not be readily reducible to numeric formulas, or DeMark counts, but one can often distinguish them when they encounter them, much like the sea-sick would-be sailor. Some are particularly adept at recognition in a BLINK! kind of way. And others seemingly do it more or less continuously. But whereas the human body is bounded by a limited set of vital signs, and the swell of the ocean and rocking of the boat induces a more or less consistent interaction and reaction with the our biological constitutions, financial markets are dastardly complex, rarely if ever invoking precisely the same set of interactions between variables, with the importance of variables themselves evolving dramatically over time. And perhaps the biggest mind-fuck is that markets typically play out over much longer periods, with innumerable traps along the way that plausibly attempt to sway opinion or cause even the most detached observer to waver in her conviction or investment plan. Nonetheless, keen observation, experience, distillation, coupled with constant re-examination, and perseverance can allow one to filter the noise and essentially achieve the same result as looking at the soon-to-be-seasick sailor and correctly forecasting the technicolour yawn about to ensue.

While Lance Armstrong is reputed to have oxygen-carrying arteries the size of a thoroughbred and Roger Federer is (according to sports physiologists) reputed to have a uniquely broad range of motion conferring physiological advantage, one might reasonably look back at Wayne Gretzky and wonder what it was that made this small and slight Canadian probably the greatest hockey player who ever lived, for on the surface it wasn't a physical advantage, in most physical of sports. I recall in an interview, that he described it as vision. To someone who is not an aficionado, ice-hockey is mind-blowingly rapid and chaotic, even for those that skate. But to Gretzky, he apparently sees it all in slow-motion. He is able to visually take it all in and sub-consciously and effortlessly anticipate where and what everyone will do next, adjusting and responding to optimize each turn, movement and pass of the puck. For he wasn't not faster. He just thinks, and responds quicker and better. But for purposes of analogy, I am taken by the concept of seeing with extreme-clarity, in slow-motion, something incredibly noisy, chaotic and complex.

I am no Gretzky, nor do I fancy myself as one. But I do have reasonable and deep experience, and I do ruminate upon events, markets and the macro-economy at length from a position both above and within the trenches, and for what it's worth I have this uncanny feeling that I am seeing this cycle and this probable cyclical and market-top evolving in slow motion in almost picture-perfect fashion, the kind that financial historians will be able to aptly describe while posing the question "What the fuck were they [the leveraged speculators and providers of credit of the era] thinking?!??"

The Good, the Bad & the Ugly

Equity Market Neutral funds come in a variety of flavours and strategic pursuits. Some are dsciplined, other nebulous by design. But like footprints in the snow, one cannot hide from the trail left by one's returns. This could be good or bad, depending upon whether the results in fact, corroborate one's pursuit, or unveil it's charlatan roots for all to see. The past month's events provides a fascinating peep into this world, with a guided tour by yours-truly.


First is the BMNIX, the Rosenberg Laudus small-cap value fund that plunged so spectacularly and sympathetically with Tyhke, GS, AQR, and Renaissance. BMNIX is unabashedly skewed towards the smaller-cap and the value on the long side, presumably versus things with less value on the short side. Rosenberg has always had a healthy respect for momentum, so, potentially, their pari-passu was NOT on the short-side, but on the long. Interestingly, they meaningfully recouped most of the extreme dislocation drop, probably as a result of higher turnover, and the fact that value-oriented pari-passu small-cap were as illiquid on the up-bounce as they were on the puke. Bravo!

Next we have the approx $2bn JP Morgan Market Neutral Fund. Yeeeehaw! OK so he's recovered most (down only 2% mtd), but an 11% unleveraged peak-to-trough drawdown with probably 400 to 500 names per side. Ooooooch! I cannot infer what exposures caused that, but my guess is he must have had excess resource and value exposure on the long side coupled with the pari-passu short portfolio that WENT-UP when the market was going south.


Another dubious horse from the same JPM stable is the Highbridge US Market Neutral Fund. Though apparently different managers, and different holdings (this one is seemingly more concentrated and less diverse) it too suffered what was a 10% unleveraged drawdown. And again while nothing jumps out on the long side, without detailed analysis, one might assume that it was the ill-behaved short-portfolio that was the culprit. Maybe it was THEIR fault, for Highbridge admitted deleveraging, and the pari-passu would of course have hit their sister-short portfolios. The de-risking also perhaps accounts for why they only recovered less than half their loss, for if they cut (even some), they would have locked in losses at distressed levels indeed.



The next rung down on the ladder, we have TFS MArket Neutral Fund, who got slammed on the order of 13.5% peak-to-trough unleveraged. Ouch! Perusing his holdings, the only thing I can say is that his 150 or so long portfolio positions resembles everyone else (and the market) less than perhaps any other manager. They are certainly NOT "value" (portfolio PE of 65x), and are skewed to the tech and growth areas so their yearning for "Capital Appreciation" must be founded upon hope and prayer. Judging from performance, this market neutral iconoclasm should not be worn as a badge of courage. The horrid time must have been exacerbated by high pari-passu on the short side.


Near the bottom, we have the Robeco Boston Partners Market Neutral Fund. I found this interesting because they've historically done a nice job of unearthing attractive value+growth on the long side that encouraged Robeco to "buy the firm". They are more fundamental than their brethren, but that apparently doesn't guarantee success. I would suggest their approach is more an over/under valuation relative to more sophisticated sector/market/stock-level valuation, for their returns regress upon this factor rather highly. And notably, the level of relative over/under valuation has indeed been a poorer predictor of returns since mid-Q2 than most other simple value or price-reversion factors. But -12% from their highs and nearly -5% ytd, one must ask why these valuation tails are not more effective. The answer probably lies in the misfourtune of the over-shorted short side which should (and will) go down and underperform, but probably not until existing shorts puke more and unwind positions diminishing short-interest to levels where actually selling will take the price down.

Finally, at the bottom, we have a fund hilariously called "THE GERONIMO FUND", who in sympathy with its moniker, has also taken a grand leap into the abyss. In attempting to mimic HFR index hedge fund performance, the managers Mssrs. Prokupek & Krause, have managed to flame-out spectacularly, thereby insuring a return to higher education or a career change into Colorado's hospitality industry.

So Long AG A.G.

So farewell
Alberto Gonzalez -
80th AG of
the US of A

What took
you so
long to pull
the
rip-cord??

As GWBs "yes man",
And Lawyer to Enron
Who (amongst other illustrious things):
Fought Congress to keep Cheney's Energy Commission docs "Secret"
Dimmed the lights on the Freedom of Information Act
Argued the Geneva convention was for Sissies
Sanctioned PMCs to do what might otherwise land your bosses in Jail
Legal architect of Spying domestically Without Warrants
Denied existence of the constitutional right of habeas corpus
Fired 9 US atorneys following 26 meetings but couldn't recall any of it
Repeatedly Lied to the House & Senate
You would have made H.R. Haldeman proud!

Not since the
days of US Grant
has a pustule
like you been
lanced from
public service.

Most memorably,
you accomplished the
near-impossible:
You made
John Ashcroft
look
good.

Financial Look-a-Like

Surely I am not the only one who's noticed the uncanny resemblance between US FRB Chairman Dr Bernanke and esteemed Afghan Grand Poobah & LA Restauranteur Hamid Karzai. ...


Chairman Bernanke <<------------------------------>> Hamid Karzai

(with apologies to Private Eye)

Gross: "Rescue the Homeowners..."

I think it is a noble thing indeed to rescue the home-owning people and so save America from errrr itself(?!?). But which home-owning people? Are two-home-owning people more deserving of a life-buoy than than one who owns but as single home? "Who" are we we saving "them" from? Faceless foreclosure? The bank? Chinese mortgage-backed paper-holders? Our pension funds who own mortgage-backed paper? Are the folk who bought stupid interest-only low-teaser-rate mortgages more deserving than the ones who simply paid too much and find themselves in negative equity? Should we save those that patriotically took out home equity loans following 9-11 in order to spend as they saw their patriotic duty? Or should we "save" those who continually withdrew equity from their homes to cruise the world or buy a plasma TV, such that, like Icarus, they simple consumed too close to the sun?!? What about the people, who deserved the good life, and in whose pursuit deservingly stretched to buy an extra 2000sq ft with pool, 3-car garage, and gallery ceilings, leaving no wiggle room for the inevitable "shit" that all-too-often happens in the course of life. Perhaps, the US gov't can recoup costs by having a 24-7 reality TV show that combined CourtTV with "Judge Judy" and "How to be a Millionaire " in a macabre publicized real-life drama showing precisely "how" they got there, and throwing themselves on teh mercy of the errr court/government/panel have you to see if they qualify for a "subsidized mortgage", "elimination of some principal off the loan", "temporary interest rate relief"," stay of execution in respect of foreclosure, or for the lucky few (and truly deserving) few, outright annulment of the mortgage loan, and award of the contested home free and clear.

But I will ask the question: Are not the savers deserving too? Perhaps the savers should unite and ask the government to provide them with some redemption for the lax fiscal policy and negative real interest rates that have spawned inflation in the real basket of goods and services one uses and consumes each day. It IS perverse justice that the prudent one's who save for a rainy day, and consider wisely, the possibility that something might upset the best laid of plans, and so do NOT borrow 6-times their income on absurd luxury that the less wise did, and who as a result were so stretched they could not afford to landscape in the first instance, nor now they can afford the energy to heat or cool the royal waste of space. Where is culpability or responsibility?

That there has been a large transfer of wealth from savers and the equally-weighted American to military contractors, leveraged asset-buyers and their intermediaries is undeniable. Perhaps, in similar fairness we should create a look-back tax that assesses the gains (some or many ill-gotten) made from the asset inflation and money illusion and redistributes it the ordinary savers and pensioners? We can call it the Sowood Tax in sympathy with Mr Larson's magnanimous gesture of returning previously-earned performance fees to investors following his Fund's recent debacle. America is not for wont of wealth, but is for wont of more disperse distribution of it. When however the distribution is sooo skewed, taxing the average to save the average citizen seem reasonably daft, given the enormous tax holidays and munificent gifts adorned upon the upper-most percentiles. Perhaps the time has come for more meaningful sacrifices that begins to tackle what almost every objective observer sees as a way of life that depends upon unsustainable consumption, encouraged by absent levies upon the many externalities this life spawns. The bubble, is perhaps in the American Way itself. And everyone sees it, but Americans themselves.

Rant over.

"I Know Nothing...."

Anyone who read David Marsh's "The Bundesbank" intimately knows just how tight and conservative Germans, and the culture of German banking really are. Maybe its because they experienced first-hand and all too vividly the post-Versailles Weimar Inflation, or more likely the impoverished and inflationary days following the end of the second world war.

This is not to say that Germany sailed through the last four decades without financial indiscretion, slip or scandal. Some may be old enough to remember the spectacular failure of private Cologne-based Herstatt Bank, for which settlement risk is now indelibly associated. And there was was Jurgen Schneider, seems to have bit off a development or an office building-or-five-too-many. And let us not forget the almost equally spectacular blow-up of Metallgesellschaft who was perhaps single-handledly responsible for $10 oil that nearly sunk Texas and sent revolution throughout the middle-east. One might also include the giant LBO (fully valuing @ 1:1 ost/west DM conv the DDR, in the folly-list where caution was throw to the wind. But this was, to be fair, wholly political even. The hangover, still is being felt today.

But despite these occasional past lapses, it is still surprising that in the land that birthed BuBa chiefs, Helmut Schlessinger, Karl-Otto Pohl, and articulate anti-housing bubble provocateur Ottmar Issing, that we discover IKB and Sachsen Landesbank with ummm rather large (in my book) dollar sub-prime zaitech portfolios that one must assume are worth rather less than their historical cost-base, yielding what will undoubtedly be sizable if not catastrophic losses. As a result, it is incumbent upon Germans and non-Germans to ask: "WTF guys???" "What were you thinking??!?" "Have you a secret desire to work deep in the mines of the Ruhr?" Didn't you see what happened to Bob Citron? Or the jail facing BAWAG's Elsner & Zettler??

My knowledge is indeed limited here, and so I can barely comment but please, someone tell me whether we are witnessing a "Schneider-ish" fraud or a "Schultzianly oafish" investment strategy.

That GS Confidential Memo

INTERNAL MEMORANDUM
**CONFIDENTIAL**

TO: All Goldman Sachs Marketing & Communications Staff
FROM: Mark Carhart & Ray Iwanowski - Gllobal Alpha
DATE: August 17 2007
SUBJECT: 2007 Performance & Semantic Guidelines

++++++++++++++++++++++++++++++++++++++++

Following recent market volatility, presumed temporary hiatus of modeled performance, and $3bn vote of confidence from Mr Greenberg and the GS Capital Committment Committee, we think it is advisable to unify the lingo that we use to describe investment performance, market conditions, and the factors that drive our P&L. At the suggestion of David [Viniar], we will heretofore employ the straight-forward and highly descriptive (unoffical) acronyms of the US armed forces as follows:

BEIFT - Behold, Every Indicator Forebodes Trouble; (pronounced "beefed")
BOHICA - Bend Over, Here It Comes Again
CF - Cluster F*cked (i.e. multiple factor failure)
CHAOS - Chief Has Arrived On Scene (i.e. deleveraging imminent)
FISHDO - F*ck It, Sh#t Happens, Drive On (not to be used in the presence of P&E clients)
FUGAZI - F*cked Up, Got Ambushed, Zipped In; (refers to out-of-control situation such as a chaotic jungle warfare combat or extreme market volatility environment where we can't get out of positions, and can't due more due to losses)
FUBB - F*ck#d Up Beyond Belief
FUBAR - F*ck#d Up Beyond All Recognition
FUBER - F*ck#d Up Beyond Economic Repair
FUMTU - F*ck#d Up More Than Usual
FUNDY - F*ck#d Up, Not Dead Yet;
GFU - General F*ck Up
GMFU - Grand/General Market F*ck Up
JANFU - Joint Asset 'N Financing F*ck-Up
JAAFU or JAAFFU - Japan Asset Allocation F*ck-Up; (note: the use of JANFU combined with a radical increase in Japan Asset Allocation F*ck-ups, has led to the rare but increasing use of JAAFU/JAAFFU
LUUBO - Luck Used Up, Bail Out!
MOAFU - Mother Of All F*ck-Ups
MUBAR - Mortgages Unraveling Beyond All Recognition
REMF - Rear Echelon Mother-F*cker (i.e. short-squeezed by others deleveraging)
SAMFU - Self-Adjusting Market F*ck Up (inspired by Andrew Lo@MIT)
SAPFU - Surpasses All Previous F*ck Ups (Viniar: a 1-in-10,000 year event...??!)
SMUBAR - Spread Markets Unwinding Beyond All Recognition
SNAFU - Situation Normal: All F*cked Up (i.e. V.A.R. risk measures)
SUSFU - Situation Unchanged: Still F*cked Up
TOFU - Things Ordinary: F*cked Up
TARFU - Things Are Really F*cked Up
TUIFU - The Ultimate In F*ck Ups

(with thanks to Wiikipedia)

Scary Movie ?

What has just happened? Well you see there are formulaic scenes in early every horror flick: the boy with excess curiousity, the waif running away who trips, the rise from the dead calm following victory, and so forth.

The young boy whose incessant curiousity compels him against all good reason to explore the spookiest nooks and crannies of the rickety house with viewer thinking, "OH NO! DON'T, PLEASE DON'T PLEAEEASSSE DON'T OPEN THAT DOOR', after which the innocent opens it followed by chaos, terror, blood, screams and mayhem. Yes that describes the credit bubble, of which the US sub-prime mortgage mess is but one expression.

Then there is the archetypical scene in which the lovely, scantily-clad, and always young and female is running away from something terrible, horrible possibly supernatural, and ALWAYS very dangerous (ostensibly through the woods, often when its raining) who inevitably slips, falls and twists an ankle (breaks a leg, get trapped under something-or-other), leaving our heroine helpless and paralysed by fear as the imminent danger encroaches upon her. Sometimes she does manage to [temporarily] escape or is [temporarily] rescued by heroism or happenstance. Equity markets it would seem, have just witnessed such an occurance with foreign Japanese equity "longs", and Japanese domestic housewives short the YEN vs high carry currencies , both proverbially spraining ankles in their haste to runaway! runaway! runaway! from IT.

And there is of course the scene where the hero or heroine believes the danger to have mortally passed, with the villain/monster/beast/alien either [apparently] incapacitated, injured, mortally wounded, and perhaps appealing to the emotions and superior sympathy of the hero (and viewer) and usually accompanied by weepy music, in order to make a confession/apology of sorts, drawing the hero closer closer closer dropping his guard until with a rapid fury and force accompanied by loud suspenseful music, we get.....RATE CUT!!!! RATE CUT!!!! , mauling [at least temporarily] the shorts, doomsters, nattering naybobs, and those that sold their Japanese stocks down 10 or 15% last night, all at once.

Needless to say, following more excessive force, multiple gunshots, or help from rescuers, the villain, alien, credit monetser or what-have-you, is usually slayed [really!, and for good!] despite the previous fits and bouts apparent recovery. But lingering again, one never really knows for certain. I think I'll rent "Dead Calm" tonight just to keep me on my toes....

An Autopsy

Here are my observations on the recent, errrr ..... hiccup (?) in quant-land (note for the squeamish that the photo is of an "Autopsy Dummy", available by mail order for those parents looking for an out-pf-the-ordinary gift for their pre-med inspired offspring):

1. Obviously some folks puked in July. You know who you are (either because it is YOU, or because YOU are an investor), so there is no need to repeat the roll-call here.

2. The usual suspects (as in the past) are "Macro-oriented Multi-Strats", de-leveraging, probably as a result of losses elsewhere (replay of same old song).

3. As is apparent to all, others vomited positions sympathetically, either because they panicked, they were told to, they had to as a result of external forces, or because of some type of stop loss.

4. It is unlikely that IBs predated funds since they all have rather large similar positions of their own.

5. Smallcap value got hit the worst , providing an eye-opening wake-up call to principals, risk-managers, and portfolio managers alike as to the true potential cost of trading this type of inventory in the modern age of limited dedicated liquidity provision. (Truc du chef: when grilling Quant PMs insure you ask them about the cost of liquidation during times of others liquidating. Any single digit whole number percentage estimate should be viewed with suspicion).

6. "Short-interest" IS a fine proxy for pari-passu risk. Anal-retentive types can have some confidence in piecing together competitors' portfolios with quarterly 13F-HRs, the absence of positions within these disclosures, and published short-interest even with the poor granularity, data quality and omissions.

7. The biggest contributor to out-sized (and yes, unprecedented) moves, in my opinion, was NEITHER the size of unwinding of positions, NOR the pari-passu or its concentration (though young 'uns who got spanked should take note), but the fact that the quantitative & stat-arb communities are the dominant liquidity providers in the US equity markets. It was their withdrawal from providing liquidity, exacerbated by mimetic liquidation and prevailing market structure that made it seem so bad. Likewise, when the news was "out", and rumour was fact, and demands for liquidity reversed direction, so too were the liquidity-providers absent permitting the similar magnitude reversal on Fri and Monday.

8. We all have known that (like US energy policy) US equity market structure is fragmented and sucks. One couldn't have designed such a byzantine order even if that were one's expressed objective. We know that specialists are the scum of the earth having been granted monopoly front-running privileges (which they pursue in earnest), and that, in their place, the new breed of liquidity provider (DEShaw, Two-Sigma, Citadel, Tykhe, Highbridge, and the IBs) are purely discretionary in their dedication and application of capital. This should serve to heighten awareness of what it might cost to "get-out", and lead EVERY participant to qualify any answer regarding the cost of trading, and b y extension the value of "mark-to-market" in general, and the cynicism and discounts that an investor may wish to attribute to such values ascribed to holdings by agent-managers.

9. Lots of Capital remains deployed in relative value long vs. Short strategies. Short-interest remains asymmetrically high on the tails of this deployment in aggregate, particularly i "expensive" thematic high-growth, high-earnings momentum situations. On the long-side a reasonable amount remains dedicated to smaller-cap and value-biased situations that en-masse, have a higher-sensitivity to market-wide earnings . Some of the recent poor performance is related to exposure to this "spread" and the market herd's current preference for earnings stability and growth "at any price" rather than suffer the humiliation (and pain) of the long-side higher-probability earnings torpedoes. This is a secular preference of the market and will diminish only with evolution of new macro info.

10. SO: We've large dislocation. Large reversal. Some cuts, scrapes, and bruised egos. But being back where we started, I cannot help but think the conditions that led to "the event" remain: excessive leverage in a deteriorating credit and risk-appetite environment, high- pari-passu, shitty market structure, uncertain behaviour in respect to stomaching losses, and portfolio assymetries that have the potential to continue to yield negatively skewed risk vs. reward in the short-term. Look for some backfill as participants look to take advantage of the bounce to reduce leverage further.

11. Last but not least: Four-dollars of long position and four dollars of short position short per dollar of equity?!?! These guys really are either extremely stupid, or have a cigarette-smoking like death wish. I am not going to preach and moralize about it, but IF during "normal" times, one is carrying the kind of gearing, it simply leaves no margin for error in the event of the unforeseen, and as I have said before "Sometimes shit just happens...". I guess there are still somethings that a PhD at Stanford, MIT or UChicago cannot teach you....

7 Suspects

Lots of finger-pointing all around over the past two weeks as to who is responsible for the market turmoil. Here are some suggestions for everyone to mull over as we begin the new week:


7. The Tasmanian Devil?
Known for creating havoc in my favorite animated cartoons (and you thought this was highbrow commentary!), he is the ideal scapegoat because he is not real, and, from his dialect, an obvious foreigner. Ans Americans are pretty certain "damn foreigners" have something to do with it. And Congressmen - especially Dems - are as guilty as pandering to this fear as anyone else.

6. A Feather?
This has two potential meanings: the first is the classic Doonesbury reference to GHWB (better know Bush-the-First) as an invisible man, represented by a feather, foir it was this time that Mr Greenspan cut his central banking teeth, in what historians will view as the agent of near-omnipotent (unless your name was Lamont) Central Banker. Abyone who read David Marsh's book on the BuBa would concur. But the better metaphor (abd the one I am thinking of here) is the classical reference to the chaotic interconnected impact of a butterfly flutttering its wings in the moutnains over Tibet causing tornadoes in North America or unending torrential rains in Gloucestershire.

5. Aliens?
"The Great Gazoo?", "Q?". ET? The Sithe? Of course there is great explanatory power from the media's point of view in settling upon forces that are deemed plausible, but well-nigh impossible to prove (or disprove). I give this low probability as I really just wanted an exceuse to use this picture of Gazoo and see who, if anyone, remembers him. If it were "Q", having yet another laugh at humanity's expense, the volatility would be exacerbated, for he - like humans - requires instantly gratifying fun...


4. A Straw?
A straw...remember the "Krazy Straw" advertised on television in the late 60s and 70s? Everyone HAD to have one (despite there being no earthly way to actual wash them other than sucking detergent through them. Well this straw that might have caused the current mayhem is the straw that broke that camel's back...in this case that would be a realization by lenders that "The Bernanke Put" may be struck farther out of the money than "The Greenspan Put". Amen!


3. The Gipper.
Yes, the father of our current bubble in credit can be traced back to Mr Reagan, along with the laughable Laffer curve that encouraged deficits following a period of relative austerity under the Dems by ballooning government spending (mostly on defense) concurrent to chipping away at the higher marginal rates. Apart from an interlude of tight-money that followed a roaring late 80s bull-market in assets, temporarily removing their lustre, leveraging-up to buy real things has been a one-way bet, one that implicitly understands that elected officials will not voluntarily be seen to be fiscally sane. Of course, markets (the bond market in particular) used to play this role until a certain Dark Lord took the bond-market's manhood and put it safely into a lockbox.


2. Dr. Evil? - Macro-Man is known for coining "Voldemort" as the covert referrence of choice for the PBoC's market activities. The obvious metaphor for Hedge Funds, is Mike Myers stroke of genius, Dr. Evil (& Mini Me). There are of course some upstanding citizens out there, some of whom have even refunded performance fees earned prior to going nuclear. As for the more cynically Randian elements, YOU know who YOU are....



1. Pinball Al?
Oh I do not have space here, suffice to say, if it looks like a bubble, smells like a bubble, tastes like a bubble and is beginning to have rather rampant distributive effects upon the real economy, then it probably IS a bubble. I mean what was all this shite, hemming and hawing about not being able to tell, "maybe its not" , "productivity blah blah", state change yada yada..." Oh fer crying out loud EVERYONE even my elderly near-senile housekeeper could tell it was a bubble. OK, maybe not the sole cause, but I'd like to hear hear Mr greenspan say "mea culpa" just once, and say he regretted NOT telling the "W"-Bush admin to take their tax cuts and shove 'em else real rates would remain at levels that would insure "W" would never get re-elected in 2004. (Apologies to Prudent Bear for lifting their cariacature)