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...)

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...

An Old Cliche

Every horror movie includes a scene where the hero (or heroine) has the villain in his (or her) sights. Finally!, we think. A [happy?] resolution and retribution is nigh, such as Nicole Kidman seen here in "Dead Calm" (1989). But then, we see the villain's (or market's) smirk. Perhaps a shiny filling is revealed. Is he taunting her? Further incensed, if such a thing is possible, the heroine pulls the trigger. Click! Nothing happens. Confusion. Panic. CLICK! CLICK! CLICK! Boo hoo. No Ammo. And so, we must wait through yet another torturous interlude of pain, shock, and horror before the heroine once again can manoeuvre herself into a position where she stands a chance of ending her ordeal.

Ho Chi Minh Sandals Indeed!!

Though not short of opinions generally, and rarely without a view on most things financial, I try my best to remain decidedly humble should they, in the fullness of time, be proved true, for despite my wishful thinking to the contrary, I realize that it is more likely to be luck than any measurable prowess in the prophecy department.

That said, I do appreciate when someone notices that an old prognostication has sufficiently ripened that there can be little doubt it should be harvested. Unfortunately, my in-box is empty, and so today, I will, before going for a long, leisurely jog, pat myself on the back in regards to my musings on Ho Chi Minh Sandals, which has seen its rating dramatically compress from an implied forward PE of more than 25x to a current estimated PE of 6x. Note that with 2009 ests ranging from 1.40 to 2.40/shr (mean of 1.85), that most of the wealth destruction is NOT attributable to actual changes in estimated earnings (down from a peak of $3.00), but a reversal of expectations that impacts what investors will pay for those earnings.

That, at least, is one way to look at it. On the other hand it might be that short-sellers (now short close to 40% of the float), unencumbered by reg-SHO, and possibly possessing material non-public information about the future prospects of earnings, have mercilessly pounded the stock making sure that they puke each and every growth, momo, and speculative long. (Nearly) priceless!

BCA: "...Commodity Equities are "Bullet Proof"

When the Bank Credit Analyst proclaims something, contrarians should take note. And so, today, as the BCA said "Buy, buy, buy..." just before the entire complex of commodity-correlated risky-asset plays was getting shallacked. This includes Gold , which, as I write this is sitting at a four-month low, enroute to what appears to be a somewhat larger correction, presumably spurred by the worse-than-expected decline in US home prices and yesterday's continuing rise in the stock of unsold homes to rather alarming levels. Ooops. To be entirely fair to their junior analysts, they were particularly highlighting the spread opportunities between spot prices and performance of underlying related equities and long-dated futures, the latter presumably reflecting still-skeptical investors that are discounting underlying demand erosion once the housing shit, currently encountering the fan-blades in the USA, Spain, and Great Britain, reverses course and disperses globally. The beauty of "futures" is that no one need make any difficult decisions so long as prices are moving in one direction: The Right One! However, when prices move in the opposite direction (technical term: The Wrong Way), both, investors' convictions (if they have any), and their credit-lines (if they also have any) are put to the test. What happens when price-action causes conviction to collide head-on with margin-call in the game of buy-sell-hold rock-paper-scissors?? Speculative liquidation is rarely far behind...

HBoS: It was the Market (Structure)

Sure, sure, 'The Crisis' is over, right? Even the once-venerable American investment bank, Goldman Sachs, went so far as to suggest that bruised Scottish banks probably don't need a capital top-up, despite that it only seems like yesterday when some other Scotsmen were heard yelling animatedly "Captain, Ahh doon't think ahhh kin keep 'er together much longer..." (See left), and he wasn't talking about the USS Enterprise. Dilithium capital is apparently as precious and scarce as dilithium crystals. Yet despite the subsidence of the market's worst fears, and the blassing of the annointed ones, HBoS will attempt to tap the market for 8 billion more. "Ahh nid moore power, Cap'n..." was never more apt.

Last week, Ultimi Barborum waxed critically about a recent academic examination of short-selling, lambasting the doctoral candidates for their uvenile and naive understanding of the practicalities of plunging. But it wasn't just the academics who believe dark, perhaps collusive, forces move markets to the downside as even writers closer to the trenches at FT Alphaville mocked the FSA's quick defense of hedge funds in the HBoS 'bear-raid' accusations. They also snidely dismissed the AIMA's hair-trigger absolving of the Hedge Fund Industry as a whole. The FTs cynicism is, if nothing else, likely to be statistically correct even before one examines whether their claims are defensible, if only because both have proven themselves as objective as Radio Pyongyang in their role as what are effectively trade associations. Here, I will admit that I am viscerally sympathetic to the FTs view, despite its cynical simplicity.

But, imagining for a moment IF the Hedgies didn't do it (a possibility, despite their detractors, both public and private), the question remains who and what conspired to decimate the share price of HBoS? For sure as rain is wet, we didn't imagine the what-for-the-moment I will call "happenstance", that almost left The Taxpayers of Great Britain long of their second major financial institution, and prompted the Bank of England to flash equity traders a "yellow card", even if the "red" one was firmly put away in a locked cupboard, off-site. Apologists, will say it was simply "the market", coincident with extreme fear and pessimism that had already seen two large and prominent contrarian investors (SRM & RAB) impaled upon Northern Wreck, along with another gored by the Bear. Fair enough. But this too, is rather simplistic and sheds little light upon the mechanism of negatively cascading prices, and whether it combusted spontaneously, or had some help from a not-disinterested arsonist.

Leaving aside this possibility, one thing is clear to me: it is unlikely that in the short time before the FSA said "NOT GUILTY" that the FSA could have even begun to unravel the time&sales data to establish culpability, and they are unlikely to do so for fear of what they might find which could indict those they've already defended, and whose protection they seem to be charged. By comparison, the "Public Interest" is a distant second, unless "the Public Interest" is defined as insuring London remains the financial centre of Europe irrespective of overt or covert chicanery of market participants, contrapreurial activities of their masters, or shameless predatory tax and regulatory behaviour in regards of other EU nations bested only by Liechtenstein and Confederation of Helvetia. I am, of course, making a conjecture that might be "off base", for the sellers might have been bona fide "long only" holders (e.g. L&G, Standard Life etc.) fearful of another large portfolio holding biting the dust. Nonetheless, "Time & Sales" coupled with forensic analysis would have revealed all, and such details should be made public, in aggregate or digested form, at the very least to Elroy Dimson at LBS (or yours truly!) who could study the actual data and report upon them further in an unbiased manner. For if nothing else, it would be good to know whether they were long sales or short sales, and whether they originated from a single large investor, a group of colluding investors, brokers privileged to client order-flow, or, "the market" at large.

In the absence of veritable proof from the FSA or Bank of England, those curious must take a stab at understanding what happened, for simply calling it "the market" leaves one wanting. Here, I am not going to construct a mathematical model (mostly because I am incapable), but I am going to ask ruminate upon the market structure and the transmission mechanism and take a stab at deconstructing the chain of events. In the beginning, the HBoS was vulnerable. The decimation of anything mortgage-related in the US was nearly complete, but the UK banks were - excepting Northern Rock - still standing despite over-reliance upon the capital markets for current funding, lax lending standards and massive run-ups in capital values that should make any risk-manager wonder whether even a 20% initial margin is sufficient when you will have no chance in the future to ask for variation margin. That said with sentiment poor, someone thought it grand to sell some. Here is doesn't matter whether its a long or a short. The market buys the stock, marks it down, looking for a turn. Micro-structure traders sniffing for the flow smell the persistent offer and bid-side trade, and sell more. The market (liquidity providers) now long of stock look for buyers away. None to be found. Some big-swinging-three-letter-dick Hedge Fund, hearing the desperation in the voice of the sales trader, turns around and abuses this information to shoot some large borrowed lines of stock, wholly on spec, onto the market (though not executing through the one who called them to show them stock, for this would at once be both impolite and bad form). Three-letter HF manager calls some "friends" (acquaintances more appropriately) to tell them of the call he received from the unfortunate sales-trader, for he hopes to induce them to short some in aid of his new position. HFM#2 checks his book, sees a small long, blows it out, and sells some short for good measure. Market-makers and quantitative liquidity providers turn around and puke their accumulated position(s), back away bids from the market, and sell some more short for their own book. CTAs witnessing a real-time medium term Donchian Channel breakdown mimetically initiate new shorts on top of the old shorts initiated in short-frame horizons. Further stops are triggered. Options market makers too are short gamma on the put-side, must sell additional stock to to re-hedge. Now, external folk are looking for "a reason". Rumours fly, for people, i.e. salesmen and traders want to appear informed. And its pretty easy to conjure one. Heck I can conjure five highly plausible ones without any effort whatsoever, so imagine what a sales-trader or actual trader of UK stocks could do with a concerted motive! Bank analysts start fielding phone calls from ostensibly long-term portfolio managers. PM teams meet and discuss the falling price and its similarities to Northern Wreck, and in response decide to pare their positions. More stops (bigger and longer term) are triggered all around. Now Chief Investment Officers are on the Phone to The Bank's CEO and Chairman (who are at The Club) demanding explanation. Explanation of what?. Of WHAT??!?!? The rumours. The RUMOURS damnit! The rumours that you "...can't hold it together fer much longer..."

Tomorrow: Part II: All is forgiven....

Please... No C*#t in the Oval Office

Before you think this offensive, let me say that theoretically, I am perfectly fine with almost any living, breathing sentient being holding office on Pennsylvania Ave. - be they female, Asian, homosexual, hispanic, handicapped, black, blind, Jewish, obese, muslim, Bahai, atheist, even Dolphin, or any combination of the preceding, you name it, provided their persuasion hasn't given them anm unmanageable chip on their shoulder, and that they do not place their personal identities above that of the Public'sInterest. In this sense, many might call me "liberal". However, amongst the few things I cannot countenance in a leader of the United States of America - apart from ignorant, corrupt, demagogic, evangelical and parochially selfish at the expense of the public interest - is a cunt. Ouch. Yes as I write it, the word is at once abrasive and potentially abusive, and I rarely speak it out of manners, politness and decorum. But watching Mrs Clinton these past few weeks, I reckon she is presently enroute to proving herself the epitome of the vulgar label.

Much is at stake in this election as America finds itself nearly bankrupt - financially and well as politically, both domestically and internationally. Virtually any Democrat that is not seen torturing baby kittens and puppies should win in November, after which leaders must....well.....lead.... in order to reverse nearly twenty-five years of quite lazily borrowing from the future and sweeping rather important social political decisions under the proverbial carpet, rather than soberly tackling them in a mature fashion the way olther OECD democracies - countries the average voter rather erroneously though nonetheless triumphally, believe inferior - have done. Mrs Clinton, rather annoyingly to all who wish America to get to work on the former, has been beavering away on undermining this possibility for what seems like obsessive wanton self-interest, or some delusional belief in HER personal destiny, and doing it in a particularly bitchy, passive-aggressive way that is at once disingenuous, divisive, destructive to the cause of change and the political party and coalition of interests that she ostensibly bleats that she is serving. I do not have an issue with a candidate stating I do not think my opponent is up to the job. But the particularly unattractive female way in which she is accomplishing this, by innuendo and NOT saying what she means though it's clear to all what she wants to say but isn't, while simultaneously disavowing animosity and bestowing hollow and entirely disingenuous respect upon her opponent, is unwelcome, and unbecoming of a President, in my book at least.

It is at once bad theatre, a less-than 'b'-movie and very low political manouevring that is, increasingly to this detached observer, an ill-advised and repulsive act of political desperation, akin to a most unbecoming temper-tantrum of someone-who-should-know-better, NOT getting their way. In the end, America will get what it deserves (or is it "deserves what it gets" ??), though my sincere hope is that they are NOT fooled by such Rovish tactics. Shame indeed!

No More Secrets

It used to be fun, and exciting being the biggest swinging dick in the the commodity world. But with soaring prices, causing riots and unpheaval, and death, and with speculators (and their investors) laughing to the bank, the gist of the latest article about commodity markets gone awry in the English version of Der Spiegel is that we need a discussion of the ethics in speculation on foodstuffs.

They begin with how jovial ex-Tiger, alpha-male, hedgie, wundersomething Dwight Anderson used to talk about his exploits, travels and the market opportunity inherent in softs. Now, according to Der Spiegel, Anderson is so concerned and frightened for his personal safety that he is buying-up all the rights to his photographs and images. Of course you can still see him here on Bloomberg, or here in he New York Social Diary, or here in a thumbnail from a Credit Suisse conference on commodity markets. But after these, (at least on Google image search) they get thin on the ground.

The Indian government has raised the issue of speculation's effect upon prices at the highest of levels. Many other emerging governments, as well as China, have seconded the concern though have responded somewhat bone-headedly by imposing price controls, and other coercive potentially supply-throttling measures. In America, however, it is the soaring prices themselves that are capturing the imagination of the people and news organisations. Yet there, unlike Der Spiegel, few are viewing it through the ethical lens. And even fewer see the connection between stupidly inefficient and wasteful American energy use (that, by the way, they can not afford without sovereign assistance of reserve accumulators), and rising agricultural prices.

Mark my words, this issue will have legs, particularly its ethical dimensions. And Dwight Anderson is quite right to be concerned just as Paul Singer - Elliot Associates boogeyman of third-world debtors, and Warren Liechtenstein, a destroyer of enterprises and jobs, have scrubbed the web of any and all likenesses of themselves. For no one wants to be the next Eddie Lampert, kidnapped by Josey Bovey, PETA or Greenpeace activists.

Death by Style

WP Stewart was the poster-child for buying and holding "good" "solid" large cap growth on behalf of wealthy families and a select number of policy investors. Fees were high, relatively speaking, but loyalty was (for a while) requited by performance. Mr Stewart became a very wealthy man (on paper) in the process, and was revered in both buy-and-hold circles and by trustees of his investors. Unarguably, he (and by this I mean both him and his investment style) had a good mighty run in the mid-to late 90s and further wonderful acceleration out into post-bubble ashes, a result of expanding globalization and unprecedented good times for large-cap growth - both at home and abroad. And though economic historians might look back and in hindsight see this period as having been artifically driven (in large part) by never-theretofore-seen-growth in credit, to the owner of the equity of companies whose earnings grew rapidly and more importantly, whose market valuations grew even more rapidly as a result of expanded "ratings" (i.e. diminished equity risk premia on this style of equity), the result was the same. Mr Stewart was in the catbird seat, as he and affiliated trusts with majority ownership, sat atop a company with a billion-dollar-plus market-cap ($1.4 billion at peak valuation), making him a very wealthy man indeed.

One thing you couldn't call WP Stewart was a style whore. As a firm they were monogamous to finding, buying, and subsequently holding (emphasis on the latter) large cap growth with a zeal bordering on the fanatical. This worked wondrously through the heady days of the 90s when companies like Coke, P&G, Disney, Walgreen, Cisco, Intel, AIG , and big pharma were the rage, as new markets opened, inflation was contained, and fmr President Clinton was sharing cigars with his favorite intern in the oval office. But underneath this veneer of apparent success lies the chilling objective reality: there comes a point where the very success of an investment style sows the seeds of its own future failure, and perhaps none is more emblematic of this than when over-valuation is supremely evident in a style following persistent and unprecedented diminishment in equity risk premia that has alreadyaccrued via price appreciation in excess of associated changes in sustainable growth rates.

Under such circumstance, what is such a one-trick pony to do? In WP Stewarts case, the answer was resoundingly: "nothing, much like the proverbial "deer in the headlights". This response may have been result of their blinding zeal, or their hubris. No one is talking for the moment. Either way, as a result, they (or their customers to be more precise) gaveth back, what the bountiful lord had giveneth prior, in terms of excess return to their "benchmark". So much did they evidently give back that their US Growth strategies were (as evidenced by their listed MF's performance - see adjacent inset) in the bottom decile over five year horizons to their peer group. And while investors will give successful managers and strategies a little rope after a good run there are limits to investors' patience. Even the trustees of "Dead Pet Trusts" will eventually redeem and allocate to, errrrr ummmm Citadel?!?

But worse was still to come in WP Stewart's case of fanatical style devotion, for not only did the market decide that large cap growth (of the particular flavour they favored) was overvalued, (thereby compressing the ratings from their dizzying and inflated heights), but in many instances, growth in member portfolio companies faltered, causing liquidation by purists, and further multiple contraction, all which hurt performance. In such instances, the buy-and-hold investor looks like the mug, for with abysmal performance comes redemption, and associated with redemption are forced sales of stock on portfolio companies further hampering share-price recovery and relative performance, causing further redemption and reallocation to, yes, Citadel (or Capital Research).

Of course, such transpiring events cannot but cause the value of one's own enterprise to rapidly descend along with AUM, since fee income drops like a stone, without associated cuts in staffing, an evenuality seen pictured in the weekly graph of WP Stewart's share performance (adjacent). And along with this, so went the paper net net worth of Mr Stewart's WPL Holdings, falling from more USD$700million at peak valuation, to little more than $35 million - a crucial point at which (so I am told) one is barely comfortable "flying private". Tragic.

Perhaps even more fascinating and telling when one is attempting to forensically evaluate whether their prior success was "skill-based" or "luck-based" (i.e. riding the outperformance of their parochial but immutable style) is their (Mr Stewart, the Board of Directors, the zealots etc.) eventual response, which more than five years AFTER THE FACT, and AFTER their share price is more than 95 percent complete in its route to Zero, is to hire a new chief investment officer in order to (as detailed in their official press release), yes, you guessed it, evaluate and modify their investment process. How long before the religious, smitten too much and too often stop believing?

Much return - both alpha and beta - has resulted from the bull market in commodity and related stocks. The story was and, has been , a good one, encompassing value with momentum and powerful cyclical forces combined with slow-burning secular trends. It too may likely continue in the long term given the strength of the forces at work. But it IS at present extended, rife with speculative representation, despite there being a variety of forces potentially conspiring against it, (in the shorter term). As such allocating investors would be well-served to evaluate their managers' concentrations here, for like "large cap growth" before it, there is at present almost universal agreement amongst investors about BOTH the compelling nature of the story and its increasing representation in their portfolios. This is not a prediction of this ultimate trade's demise. But rather it is a word of caution to those investors in awe of returns generated by those trading upon their singular devotion to the style.

God Delusion

Younger children rarely see their parents "as they are". For most (young boys anyway), Dad is God, and Mom is a combination of Julie Andrews meets The Good Witch of East meets. But there is moment in every child's life where that image is shattered - often violently. For me, it was the day my father got fleeced buying (or attempting to buy) a colour TV off "the back of the truck" in a deal that in hindsight was indeed too good to be true. It was a lot of money (for him and US) to get stung with nothing to show for it and as a result he was at once visibly shaken, embarrassed, sullen and oh-so-ashamed. How could this happen to "God"? I thought Superman was invincible?!!? What gives?!? And so the myth of invincibility is shattered, and thereafter, the worshiped and theretofore invincible ones are never seen in the same light ever again.

So it was with a flash of deja-vu that I read yesterday's Wall Street Journal interactive article describing how the mighty seemingly invincible Och-Ziff Management was also fleeced out of [substantially more] money (USD$77mm) by some Japanese contrapreneurs trading upon the good Marubeni name, in a bridge-loan scheme that, in hindsight, was also "too-good-to-be-true". Now this was a termed a "fraud" which technically-speaking, one might suppose, it was. But in thinking back to my seemingly invincible father, who accepted the blame and despite his fall from grace, learned a valuable lesson, contrasts with OZ who placed this event in the "alledged fraud deparrtment" perpetrated upon themselves, which served to absolve them of culpability when in reality it would seem to more appropriately fall into the "trying to get something for nothing" bucket. As such, and as a highly-paid investment manager and fiduciary, one would have expected God or Superman to have been a bit more skepitcal, undertaken a bit more due-diligence before writing out a $77mm cheque to the bad-guy scamsters. Pedestal-worshippers take note: mortality reigns.

American Mobility in 2010

From the title, you might think that I am talking about social mobility which, despite Horatio Alger's prodigious manufacture of rags-to-riches pulp, is increasingly remote in the new millennium, not because mobility is more or less likely than the prevailing class stability borne out by recent economic and sociological research. Rather, because Alger was NOT typically writing about the migration of mythical Daniel Plainview's to uber-wealth, but chronicling the working man's graduation to the comfort of middle class-dom. And as anyone can plainly see, the American Middle Class is being mowed down like the 29th infantry at Omaha Beach.

The mobility that is my subject is literal mobility, as in, "how will America get around in an age or triple-digit (and rising in real terms) oil prices, coupled with declining real incomes??" I've looked around the world to other nations where energy has, in the past, out of necessity, been used more parsimoniously, in addition to thinking laterally for some suggestions on how America might be getting around in the near future...

Americans have an aversion to The Bus, and for the life of me I cannot figure out precisely "why"? Other peoples have mastered the art of optimising the available real estate on a bus in order to maximise available space, so why not America? Necessity, as they say, is the mother of invention.


Hitchhiking is an obviously better use of resources all around than everyone driving underutilized cars. There are some convenience drawbacks in the more rural regions, and unfortunately the more attractive-looking amongst us (both males and females) must fend off unwanted advances by creeps and perps alike. Despite these inconveniences, we'll likely see a sharp rise in the use of the thumb.


Everyone in Paris under the age of 20 gets around on the trusty and hyper-reliable Trotinette. Even hot BCBG Mommies in Sarkoville-sur-Seine can be seen zipping back and forth on them. My offspring also have them and I will admit that they are both and economical, though one must be careful not to "Smoke & Trot" at the same time.


Americans aren't very big on compromise, but the Indian Rickshaw is precisely that: private livery in a small, but beautifully-decorated highly fuel-efficient motorised transport vehicle. For insight into rickshaw-life and some beautiful pictures of India, go See G. Bharat's independent 2004 work, "Hari Om"


Indians have also mastered the art of using their trains very efficiently. Of course there is also the shinkansen, and TGV as models of why the Train is better than either flying or driving, but admittedly, with America's vast spaces, and under-investment in everything public and everything transport, (ex-roads), the Indian example (seen left) just might be a more appropriate picture of what to expect when America does embrace rail transport.

Underground, metros, subways are all examples of infrastructure investment with substantial longevity and communal benefit. Americans take note: The Paris' Metro, under public ownership is far more pleasant than the semi-public abomination across the channel. Keep fares low and simple, and subsidise deficits if you really want to get people off of the road, and use public transport. There are numerous positive externalities for non-users that disgrace arguments in favor of requiring public transport to parochially pay for itself.


Horses might make a comeback, given their pre-eminence for several thousand years. However. I might suggest that with current urbanisation trends, and high feed prices, in the event of a re-emergence, we will likely more economical models such as the pony pictured left.



As humans, we come equipped at the factory with our very own zero-cost machinery for locomotion, despite the apparent reticence to use it. I, personally, almost always walk to and from the West End from my Chelsky base when in London. And indeed, despite humanity's aversion to walking (or running) great distances CAN be quickly covered as shown in the picture inset (right).

Those desiring more exotic animal-assisted transport might find the Llama both more accomodating and enjoyable given the superior vantage point and added use as a conversation-starter. Apparently, they are attractive since they are less finicky eaters than our equine servants.


"Non-motorized personal transport devices" (such as those pictured) should be encouraged in suburbia and urban areas. Special lanes could be created on the roads or sidewalks, with the added benefit of encouraging American couch potatoes to get off their derrieres and burn some of those 6400 calories in that Big Gulp of Coca-Cola or Mountain Dew just disapparated down one's gullet.


Another potential mode of transport, perfect for the widening income inequality of our time is "The Shield" (and attendant Shield Bearers) seen here as employed by Chief Vitalstatistix, of the rebellious Gaul village where Asterix and Obelix once mythically dwelled. America, has always had lower capital-to-labour ratios than Europeans, given its alledgedly more flexible labour markets, here expressed in its basest form.

Transportation methods come and go according to whim, fashion and necessity. None are more emblematic than the airship (The Good Year Blimp to my American friends, "The Hindenburg" to my European readers). The need for fuel efficient, non-fossil fuel transport may cause the airship to make an explosive comeback, though hopefully less dramatic than the last time.


Can something be both invigorating and, at the same time relaxing? Yes, and it's called The Canoe, a staple of native north american people (Hi Charles!). There is nothing as relaxing as the gentle momentum and silence of being on the water sans internal combustion engine. In England recently, they've apparently discovered the joys of the canoe, swapping their crowded roads for practical self-locomoted pleasure-craft to get around. With rising sea-levels, we will certainly more of this soon in a coastal town near you!



American peoples are oh-so-clever! And they are innovative too! Consider "the Drive-Thru Drugstore", the "Drive-by Shooting" or the now-standard installation of multi-sizing drink-cup holders in our soon-to-be obsolete cars manufactured by any of the Big-Three that adjust to fit McDonald's Super Size or Seven-Eleven's "Big Gulp" (64oz or Super Big Gulp 128oz, latter available on in Pick-Ups) . Simply wondrous! For the lazier but still-green amongst us, American ingenuity offers the Solar Powered Canoe. On second thought, maybe it's a Canadian invention..


But the most popular energy-efficient mode of transport in an age of dear oil, weak dollar and recession, and the simply "must-have" amongst Wall Street and City-types is BTTF DeLorean with the flux capacitor and the fusion generator that runs off garbage. For if there is one thing that America produces an excess of, it's garbage.


Here we see Doc Brown "fueling-up" the BTTF Delorean with a bit of beer and garbage. Of course, if the price of hops keeps rising one might find they've swapped one bonnie situation for another...

Collateral Damage

I was born stateside, and somewhere during the 1980s felt an irrespressible urge to get the fuck out. Maybe it was Reagan or 3-Mile island. Or perhaps it was the lure of the more exotic . Maybe it was just the shitty beer before the dawn of the micro-brewery. Two decades then passed between between attendance at a live American sporting event. During the interim, I will confirm that I managed some visits to the terraces at White Hart Lane to watch the Argie Ossie Ardiles and almost-England manager, Glenn ("Crippled People Deserve It") Hoddle. (errr any readers who can shed light on this most mysterious of beliefs along with what Scientologists might be thinking would be greatly appreciated). I would be surprised if I paid more for that than I did for a pullman seat for an arthouse flick at the Chelsea Cinema, albeit for the right to stand,sway and sing communally. My last baseball ticket (for a Phila. Phillies game c.Larry Bowa & Greg Luzinski) couldn't have cost more than $5, while my last "Sixers" tix went for little more than $10, which at the time would have paid for reining in the "afros" for their entire backcourt that were fashionable at the time, so many miles away from the tattooed gangsta look of Iverson and ilk. As for the Flyers, even then these were the dearest at $12.50-a-pop. Bernie Parent was still getting used to his mask, while the novelty [for hockey] at the time was Gerry Cheevers utilitarian facial adornment picture above left, which if I am not mistaken was borrowed by the villain in "Friday The 13th" or "Halloween". I doubt either Cheevers or the Bruins were content with the misappropriation.

I returned to the American Hemisphere in the new millennium to discover that, like my beloved Chateau Malarctic-La Graviere, or over-oaked Kistler, I could barely(*) afford the price of a professional sports ticket (note: I am taking artistic liberty here by exaggerating a wee bit). Even if I could afford it, I reckoned it represented one of the lamest value propositions known to mankind outside that of boat ownership. While Vet stadium is gone, Phils tix are ~$30 for comparable seats (cheap but not nosebleed); 76ers will run $40 for the cheapest and $60 for anything acceptable; while the Flyers are the First Growths of professional sports now into triple digits. One can't even park one's car for the price one used to be able to gain entry. Even the beer today (just as shitty and watery as the old days) surpasses the price of a cheap seat "back then". Yet its hardly more enjoyable - even on a an inflation-adjusted basis, and probably less if you ask curmudgeonly me.

But I wonder: isn't this inflation, and the CEO-like salary deals of players all the stuff of bull-markets? Maybe even one would go so far as to suggest that the business of professional sports is a soon-to-be popped bubble - collateral damage victim of the reversal of the great 25 year bull-market in credit and leverage itself. Since we haven't seen a recession in nearly 18 years, nor a serious one in 25, one would be forgiven for thinking due to the absence of a downturn, whether they [owners, media, etc.] have simply ceased to contemplate it in their cash-flow models, and contract assumptions. Indeed, turning the spotlight onto the economics of professional sports one might wonder aloud if this isn't a grand accident simply waiting to happen?!? Club Bankruptcies are becoming rather commonplace in UK football, and one must wonder whether in the event of severe recession (or worse) clubs would simply walk away from their contracts with players, OR media companies whose mega-deals have funded 9-digit multi-year contracts will default on their obligations with clubs, causing a cascade of knock-ons that would - in a word - deflate salaries, revenues, and so the lure and attraction of professional sport as a business pursuit.

When America really begins to retrench, one must wonder what reordering of priorities we will see. What will the first to go? (a) gasoline for commute (b) kids school lunches (c) $200/night family outing to the ballpark + outrageously expensive and bad beer + indecent parking?? Hmmmm. Yes while there are many than would encourage Junior to bully schoolmates into given him their lunch, on average, we know what is discretionary for most people. We see a growing awareness that something is awry, but the reality, the cold-shower, slap-in-the-face confrontation of limited income, unavailability of credit, meeting non-discretionary expenditure will be a sobering experience for corporate owners like Comcast, and enthusiasts like Mark Cuban alike. And then, Celebrity athletes, like that asshole Dennis Miller, will be reduced to doing gameshows, and flogging fast-food in print and TV. Ooops, sorry, I forgot, they already are....

The State of Quant Research c.2008

Savant.
Wunderkinder.
Prodigy.
Whiz Kid.
Brain.
Intellect.
Virtuoso.
Hedge Fund Quant.

All work,
no play
makes Jack
a dull boy....

The House of the Hill

Each day, on my way to town, I pass that house. Perched on a hill with commanding views, and perimeter walls possessing a naturally antique patina of a century of different paints that end at pillars guarding a lazy, untidy drive that seems to disappear into the verdant foilage on either side of the long entry to the property. There is a boathouse and dock at the edge of the sloping lawn that tapers neatly to the waters' edge with a wooden sloop moored nearby. I've been there for parties before: and while having everything one might desire, the property is far from prententious, in proportions and scale. No grand entry hall, nor 30 foot gallery ceilings. No sculture of questionable taste, or bad portaits in oil of their children. The pool is simple and natural icy-steel blue or sapphire, not one of these garrish florida-blue fakes so popular in California. There is a sturdy hammock stretched between two ancient firs adjacent to the path that winds towards the garage that by looking at, one simply knows it doesn't contain a rarely-drive collection of ferraris, or folly of other whimsical waste, but rather grandma's furniture covered in drapes and dust, piled untidily as if it were temporary, though upon, inspection, likely to have been there for a decade now, and itself nicer than most folks best bespoke pieces. It could be genteel southern, or coastal Maine. It has unspeakable charm, and therefore needn't try too hard, since it knows it occupies one of the finer spots.

It's been on the market now for a year. The owner - the spinster daughter of the old lady who finally died after a long bout of Alzheimers - has been advised by agents it's "worth" what used to be a lot of money, though which today by comaprison with Russian Oligarchs, those with leveraged anti-subprime bets, or a multi-billion-dollar systematic Macro fund, is peanuts. Nonetheless it sits unsold, it's owner not needing to sell, but desirous to do so at the perceived correct price, to someone who will not raze it to make room for a vulgar 20,000 square foot faux neo-classical french chateau, or 30-room Florentine palazzo.

But each time I pass it, and release my envy, I wonder the same thought: will the house subside in price to a level sympathetic with the real market, OR will the tide of nominal market prices eventually rise to a point where someone is comfortable lifting the offer?!? THIS is the question of our time, and fortunes will be made (and lost) on the answer's revelation...

Picture Speak

Another day-trader short of commodity-related stocks meets "El Toro muy ferroz".

Soros: Money and Credit Are NOT The Same Thing

George Soros is talking up a storm coincidental to his latest book, on Bloomberg, Charlie Rose, etc. Essential points are:

- He is not irrelevant.

- US is fucked. Fed mis-managed. CBs should target asset prices (duh!). BOTH Euro and Housing Prices are o/v.

- Money and Credit Are NOT The Same Thing! (remember he's talking to a wide non-financial audience...)

- Monetarist views of the world are insufficient insofar as simply throttling money supply, doesn't stop the market's potential expansion of credit liquidity.

- The 25-year "Superbubble" in Credit is ending. Admits he said this in '94, '98, and '02 but THIS time is really IS ending, and he's right.

- "Commodities" are the last manifestation of this, and are experiencing a bubble themselves as the result of investors' collective [temporary] flight from currencies to "things".

- The answer? In addition to money, the mechanisms of Credit itself must be limited. This means leverage must be throttled in what's granted by markets, non-banks, institutionally (Basel II), and in aggregate. Oh, yes, and governments should be proactive when confronted with [frequent] market failures.

- The current US Administration is LAME LAME LAME.

- Moreover, for it to be effective, such universal limitations must (in a globalized world) be coordinated and implemented internationally.

- All that said, authorities took correct action on Bear, should cut rates and should provide copious liquidity during until crunch subsides, and should use taxpayer funds to smooth adjustment of housing dislocation.

How is he positioned? Since his core portfolio investments are inherently "long", he says his macro positions - in an attempt to limit loss of/to capital - are decidedly "short"...

Dirty Laundry

The New York Times reported today that Linens-n-Things (formerly LIN), taken private in Feb 06 by Leon Black's Apollo, may soon file for Bankruptcy. He didn't buy it particularly cheaply, given top-of-cycle retail sales, likelihood of rising import prices for sourced merchandise, the increasingly tapped-out consumer, and the fact that LIN wasn't THE category killer. OK, we all make mistakes, and in any event, this is hardly a flesh wound for Mr Black, despite the fact that if LIN does file, it will be the largest leveraged implosion of an LBO to-date in this cycle.

However Apollo Management is attempting to go public with a reasonable percentage of the proceeds going NOT to the company but to the selling shareholders. Mr Black and Apollo's management (lower case "m") it would see, are decidedly less bullish than they were a mere 24 months ago.

All which makes me think back 24 months to the repetitive horror of each business morning, when some short-seller's tucchus was smarting as yet another listed company was removed from public ownership at premium prices and with outsized leverage that made sense only to the most Panglossian of investors, and most bone-headed of lenders, or those able to pass-the-parcel wholesale quickly and efficiently. Alas, we are, apparently, on the cusp of real-value discovery in yet another area of finance, and this won't be pretty for anyone, no-sirree. Private equity funds, private-market loans and debt will sting banks, IBs and, indeed some large hedge funds with class-three assets.

Public-market "junk", and various distressed debt, on the other hand that has already felt the burning eyes and gravitational effects of price discovery upon spreads and last-sales, is much better value, offering trade-able opportunities intra-market to the equity, and within the debt capital structure of the firm. Just be certain to hedge your IR exposure, for this remains a potential bottled cork in a fizzy-drink should printing presses get rolling in earnest.

Hello Goodbye v2.0

Yesterday, I was listening to the Beatles, Magical Mystery Tour, at the same time as I was hankering back to the days when economic policies were a tad more coordinated - both which show my age - whereupon the following lyrics to "Hello Goodbye" conjured themselves, striking me as apt:


HELLO GOOD-BYE v2.0 (With apologies to The Beatles)

Fed says "cut", ECB says "no".
Ben says its all "stop" and JC says it's "all Grow! Grow!, Not slow!!"
Fed says "too high!" and Trichet says "too low!"
"too low not slow?"
I don't know why Fed says "too high", when its sooo low
too high ?!? too high?!?
I don't know why Fed says "too high!" When it's so low...

Hank P. says "too high", Jim Grant says "too-low".
Is inflation nigh? 'cause real rates are be-low, ze-ro ??
The Fed says they're "too high", ECB says "too low"

(Too low! Not high!) Too low, not high! too low? too low!
(so low, so buy?) I don't know why you say to buy, when banks say "No!"
(Hello Good buy?) buy now? Right Now ?
(Too low?, too high?) I don't know why you say too high
(Too low? Too high?) with rates so low...

Why why why why why why do you say "good-bye" with real rates so low!