Wednesday, October 31, 2007

One Comment

Cassandra was mythologically granted the inauspicious ability to "see" things before they might happen, and thus make prophecies. This Cassandra, by no means as gifted as the one whom Apollo bestowed his gifts, has nonetheless seen this particular story clearly unfolding since the Fed first began its nearZIRP experiment. Looking deep deep into the future at that time four years passed, it was clear that, in the absence of fiscal tightening, implementation of a comprehensive energy policy replete with taxes and alternative incentives, and a release of the US bond market's manhood from the little box in Beijing where it resided since 2004 or so, that an eventual Fed Chairman, would be faced with an eventual decision - a most key and crucial decision upon which everything would hinge and which the markets would interpret as seminal - between inflation and hence the foreign exchange value of an already weak dollar, and the pursuit of some Shangra-la-like objective called Full-Employment, suffering as it has been from diminishing marginal returns to a dollar spent to that effect, but costing ever-more in terms of whatever shards of prudential credibility remained.

That moment has come. Here we are, presently, in what was the future. And none of what was so desperately needed was done. if American policymakers were, en masse gripped by some conspiratorial cabal to undertake THE OPPOSITE! But, the Fed has made its choice, which is evident to all, and slowly as the news travels and the ripples ricochet upon all dependencies we will see the effects. The Fed is biased. It is spineless. And in so doing, it will reinforce all beliefs that a system that rescues, encourages and asymmetrically subsidises leveraged specs is patently unfair to the ones who actually work for a living.

Yet, I had hope, waning as it was, that Fisher or Geithner might influence the others. Argue the case for moral hazard, carry the flame for the FRBs role as savior of common sense, arbitor, and not co-conspiritor with the fiscal whores their K-Street pimps. That hope has now been extinguished, and, like Robert Johnson, I've got the a bad case of the blues. Because when when I look out, it is ugly for the USD, America, and the international monetary system. And we will [almost all of us] be poorer for it.
I went down to the crossroads,
Fell down on my knees.
I went down to the crossroads,
Fell down on my knees.
Asked the Lord above for mercy,
"Save me if you please."

I went down to the crossroads,
Tried to flag a ride.
I went down to the crossroads,
Tried to flag a ride.
Nobody seemed to know me,
Everybody passed me by.

I'm going down to Rosedale,
Take my rider by my side.
I'm going down to Rosedale,
Take my rider by my side.
You can still barrelhouse, baby,
On the riverside.

You can run, you can run,
Tell my friend-boy Willie Brown.
You can run, you can run,
Tell my friend-boy Willie Brown.
And I'm standing at the crossroads,
Believe I'm sinking down.

Pope Says: "I am Worried About Liquidty "

Even the Pope, it turns out is concerned about the spawning of excess global liquidity, for he too has a business to run. And though the most important inputs are ephemeral, he still has a meaningful infrastructure to maintain, and payroll to meet that BINGO! alone cannot fulfill.

Though as with traditional contraception, he (or is it "He"?) certainly has some definitive preferences as to how it should be controlled. I was fascinated by the Pontiff's interest, to say the least, though perhaps not entirely surprised given his Germanic lineage. Upon closer scrutiny, I discovered that the similarities between traditional birth control and monetary contraception are remarkable indeed.

Take the Pope's favored method: Abstinence.. This is of course easier said than than done. We are, after all, only human. But it is problemmatical to watch your friends drinking, having fun and getting laid and not want to experience a bit of the fun. Even the Pope's only clergy has frequent lapses. And the longer the party goes on, the more that those with noses-pressed upon the glass, even with the most prudent of monetary intentions, will not desire experience the thrill of...

Voluntary Early Withdrawal, known technically as coitus interruptus is Church-approved (so long as occurring in a sanctioned union), and was for the past two hundred years or so, the traditional accepted method by which Authorities balanced the taming of animal spirits with the unnecessary impoverishment of the working man (through tight-money or too many offspring). But while it is entirely effective when properly exercised, the flaw with this method is that in the heat and enjoyment of the moment, when both passion and economic activity are errrr ummm elevated, proper execution despite the best laid-plans, is by no means assured, and often discarded. Yes there is some hand wringing, finger-pointing and regrets later, but at the most important moment, nothing is assured.

The Rhythm Method has its merits from a both theological and macroeconomic points of view. It's natural and unadulterated and therefore ecclesiatically friendly, and has been THE throttle of choice, historically, warts and all. But in modernity, The Polity feels humanity has advanced to levels where we no longer need to experience the ups and downs of the business cycle, irrespective of the diminishing marginal returns accruing to further interventions to stem the cyclical tides. And as practitioners of this method understand, knowing where you are in the cycle is of utmost importance!! Equally, if not more problemmatical in practice is that some participants simple do not
care where in the cycle we are, or try to use their wealth, might, ingenuity, and poor sense of financial engineering to neuter the very market forces and cycles that make it effective in the first instance.

Birth-Control Pills and Condoms are both condemned by the Pope as unnatural barriers to conception, just as taxes, tariffs and NTBs are dismissed by free-market economists. But what's a girl to do? My feeling always has been that theoretically, one would preferably not employ such methods, but in the practical here and now of the real world they actually do have a place, and potentially important one, to stem undesired children and inflation at the micro (for multitudes of reasons), and both population and liquidity growth in the macro. It's all well and good for the high and mighty to say what is "right" and what is "better", but they are mostly not the ones struggling with unwanted kids and living month-to-month under conditions of stagnant real wage growth and rollicking experienced inflation. So in the absence of other directly effective means and methods, I say pills & prophylactics all around!

Surgery, such as vasectomy or tubal ligation has always been a popular preventative measure amongst the middle-class in America, and I can only presume that the Church's fence sitting position on this is the reason, even though it seems to be a form of theological loophole. In economics, the analogy is something like wage & price controls, which achieves the superficial result by decree, but in a dishonest way, and with numerous side affects, the most obvious being cheating and infidelity, which may or may not be problemmatical depending upon one's point of view, but in either event is dishonest and less desirable than more direct means of resolution.

The Morning-After Pill, better known as "Plan-B" has its merits, despite the Church's vocal opposition. OK, so you made a mistake (as the film Knocked-Up you were drunk, he was a creep, or your central bank lowered interest rates just when huge tax cuts were approved. No big deal, just pop a pink-pilled financial dose of RU-486, jack-up rates (and as it happens, increase financial supervision of the asset-backed markets) and presto!, problem solved. I really do not understand the problem with flip-flopping, which to me, makes eminent Darwinian sense when not pursued pathologically, for when one is driving in one's car, and one sees a dead-end directly ahead, most folks would stop, admit they've made an error, and correct their course. Why is macroeconomics seemingly so different?!?!

Finally, there is abortion. Let me tell you at without pretense (at the risk of being hit by massive DNS attacks from Right-To-Lifers), that Abortion is OK in my book, and most certainly preferable to risking a mothers life, future parental financial destitution, being raised by parents who don't want you, or growing up in an abusive household (note for any kids reading this: An abusive household is NOT one where the parents coerce their children into practicing their Violin or revising Maths and Latin). Abortion is the economic equivalent of institutional change. It might be impeachment. Or it might be the final separation of FRBs mandated Siamese-Twin objectives of promoting growth AND price stability, or merely transforming a whipped CB into a fully-fledged, independent central bank. The problem with the Right-To-Life movement is that they, while typically optimistic, are always focusing on the negative aspects of abortion. I, on the hand, who's typically pessimistic, conjures up the positive possibilities, such as what might have happened is Rove's & Cheney's Brittany Spears' mamas had all decided that what they really wanted to pursue was a life under the bright lights of Hollywood, and that accidental children, while cute, would just get in the way of the pursuit of their inner desires...

Tuesday, October 30, 2007

Cast Your Vote for a New BoJ Governor

Takehiro Sato of Morgan Stanley in an Oct, 27th research piece (Hat Tip to JapanInvest) contemplated a scenario in which the domestic political situation in Japan might delay the appointment of a new Governor of the Bank of Japan, and result in perhaps several 2008 MPMs without a sitting Governor at the helm. Bitter and jaded as I've become in regards to any internationally socially responsible monetary policy outcome EVER occurring, the news will cause neither ululating crowds of protest, or hordes of Mrs. Watanabe's to stand before the hallowed headquarters clicking their tongues.

But it does give readers an absolutely fabulous opportunity to help the LDP (and DPJ) select from a short-list of potential candidates.

Here are my choices, and I encourage all participants to e-mail your favourite lobbyist with your selection:

Toyotaro Yuki (結城 豊太郎), Yuki Toyotaro,(1877 - 1951) was a Japanese banker. He was Governor of the Bank of Japan from 1937 to 1944. He also served as Japanese Minister of Finance for a short time in 1937. Asides from serving both the MoF and BoJ, and having a rather thankless task as Chief Money Guy when the war shit hit the imperial fan, he was apparently quite a guy in his own right visiting Europe, admiring their public Libraries and clean drinking water. He even has his own museum!!. But his biggest and best qualification for the Governorship of the BoJ is that he is deceased, for if lack of policy action is any measure of success, then as the only dead man on the short list, remains strongly qualified for the job, with the added bonus that, with his limited dietary and entertaining requirements, will keep a lid upon ministerial budgets.

Mr. Satoshi Sumita (BoJ Gov from 1984.12.17 - 1989.12.16) Will forever be know in History as Mr Bubble, eclipsing perhaps even the great AG. His easing of Japanese monetary policy, ostensibly to help stabilize the dollar after a nearly 50% plunge against the yen in the previous two years makes him well-qualified to return for another stint. During his tenure, the BoJ did its job with a zest never-before seen in the post war era when he lowered the discount rate from 6 percent to 2 1/2 percent. The money supply soared to well-into double digit rates *though this hardly qualifies him as even remotely eager by today's comparison). Normally, in pre-PBoC days, such monetary expansion would have been inflationary. But the Yen appreciation following the Plaza Accord of 1985 hampered attempts by Japanese producers to raise prices. CPI rose only slightly, from 100 in 1985 to 101.4 in 1988. Wholesale prices actually fell from 100 to 91.8 thanks to the strong yen and falling oil prices. So instead of raising the prices of goods and services, the excess liquidity instead caused the mother of all land-price and equity bubbles.

Interest rates became negative in real terms (something not only common today, but necessary to get elected. Credit was virtually free - sparking an unprecedented liquidity boom that beat all others (until the post millennial USD credit bubble). The Nikkei average rose at an annual rate of 45 percent per year from 1987 to 1989, and by Dec 1989 it had risen to almost 40,000 from a little over 10,000 in 1985. Tokyo land prices more than tripled sparking valuation comparisons between The Imperial Palace and the entire state of California.

No Face (カオナシ), - A central character in Hayao Miyazaki's "Spirited Away", Wikipedia best summarizes the enigmatic "No Face" as
an odd spirit that takes an interest in [the heroine]Chihiro . Chihiro lets No Face into the bathhouse through a side door. At first, he is a strange, cloaked, masked wraith that merely breathes and smiles. No Face is a lonely being who seems to sustain itself on the emotions of those he encounters, particularly their emotional reception to his gifts. He is helpful to Chihiro because she helped him, whereas after observing the bathhouse staff's reaction to gold and his own attempts to win them over with more gold, he reacts to their greed by becoming a grotesque monster which eats lots of food and some of the staff. He calms down and reverts to his former state after he leaves the bathhouse's influence. At the end, he stays with Zeniba as a helper.
It is easy to see why he would be so well qualified to take the reins, for really, all the new Governor needs to do is breathe and smile, and even the former qualification is not essential. His disregard for wealth and gold, and penchant for throwing it away would make one think he had spent his pre-spirit days working his way up the BoJ bureaucracy. And if in any doubt to No Face's suitability, just imagine the grandmotherly Zeniba, whose service he has entered into at the end of the film as The MoF!!

Hisamoto Masami (久本雅美 Osaka, 1960- ) In voting for Miss Hisamoto, one would be sanctioning change, but in a most apt way. For Hisamoto Masami (known as Matchami is not only one of the most popular female comediennes, but perhaps one of the most popular female personalities in all Japan. Skinny, and buck-toothed she is best known for her lack of shame when it comes to slapstick, and indeed this would be a most useful qualification for any BoJ Governor. And she can get down and dirty with the most raucous male counterparts (e.g Beat Takeshi or London Boots) and is often seen doing armpit or crotch jokes on variety shows. In the hard-hitting male-dominated world of Japanese finance, such skills are essential, with the added benefit of bringing new-found levity to G-7 and other international financial events. Moreover, Hisamoto would be an excellent role-model as her popularity with Japanese women has grown over the years as they've become more liberated and able to speak their minds. Polishing off her qualifications, she lists "drinking" as a hobby, and "the ability to have blackouts" as one of her skills. Undoubtedly they will be required of any new governor.

ASIMO! - Not wanting to bias any readers in their selection, I will tell you that I am partial to Asimo, for he is indeed most perfect for the job: He can be programmed by the MoF to do exactly as he's told; is unlikely to be susceptible to bribes; will never make a public gaffe, already has experience in meeting foreign dignitaries (seen here with the Czech Prime Minister); nor has any secret or dark family history such relatives who were Class-A war criminals. Go Asimo!

And a late addition courtesy of Macro-Man, who nominates
Zhou Xiaochuan, current Governor of the People's Bank of China. As MM points in the comment section of this post, Mr Zhou has been a world-leader at forcing domestic rates well into negative territory, though by precisely how much remains a mystery since there are no reliable fogures on inflation other than the Shanghai Stock Exchange, local real estate prices, the CRB Index, the price of a ton-o-steel or a metric ton of soya. With Japan itself continuing a slow, but inexorable process of industrial hollowing, and outsourcing the more labour intensive manufacturing processes, why not outsource monetary policy to the PBoC? Indeed, it is my opinion that the Prime Directive of BoJ policy is to insure the Yen sticks the RmB like a remora adheres to a shark (a whatever it can).

Monday, October 29, 2007

Nothing Could be Finer Than to Be In Carolina....

I've been whining and bitching about official (mostly Chinese and Japanese) defacto intervention in markets since I first ascended on this soapbox, railing about the perils of liquidity growth, the moral hazard and mis-allocation of resources it thus spawns, not to mention the undesirable externalities attendant with the path of [American] least resistance and most diminished effort. But what a royal waste of time and effort this has been! And what tedious drivel I've could anyone have persisted in reading it, let alone spending the time to leave a comment. Even I, as authoress, cannot even bear to proof-read it. Doesn't anyone have a life?

Well, today, I stand before you, humbled. For I am wrong and GAVEKAL is right. For the moment. For in my zeal to look ahead, I have been in denial over the simple basic fact of the-here-and-now that nothing nothing nothing could be better for non-fixed income assets (ex-Japan) in general and particularly for most equities (ex-Japan) than soaring inflation coupled with stable interest rates, tame wage-price inflation, and most importantly stable to rising currency values versus the largest surplus nations. My love of independent film and a well-written screenplay seemingly blinded me to the true and utter perfection of this saccharine Hollywood production.

Some in the media have mis-named it Goldilocks. But this is way off the real mark. For it's not a question of "too hot", or "too cold". We know its too hot (just look at "stuff" - gold, art etc., or Chinese and Hong Kong stocks in comparison to forward earnings estimates!). No. It more resembles the Kudlow-Economy as in "A place where it couldn't be better so long one doesn't think about tomorrow." It's a Kudlovian's utopian ideal where we needn't tax our minds (or conscience) with details like how and why we've got here. This is Global Financial Pleasantville , where Stepford Economics, prevail, and are the upside laws by which markets apparently abide.

Nonetheless, we are there (or is it here?!?). And ruminators are frustratingly helpless since, in this world, when one tries to yell or in any other way articulate that it's founded upon unsustainable policies all-around, no sound emerges. Or worse: one thinks that one is speaking English, yet everyone around else hears Gaelic, and everyone knows that not a soul comprehends it anymore.

And so the dollar continues weak against the currencies it perhaps no longer should, and gathers strength against those that it head-scratchingly shouldn't. Yet, the sense of crisis possibility still hasn't quite arrived in Washington, nor in Tokyo or Beijing for that matter. There is no talk of conservation, no urgency to ponder what might happen with a spike to $200 oil, or a gold-spiking loss of confidence. No contemplation of tax increases to begin to pay for the present war, nor of aligning our interests with Europeans to preserve the vestiges of an international monetary system predicated upon market forces in exchange and interest rates to discipline governments that push the envelope of fiscal and/or monetary sensibility, or of the destructive trade wars set to ensue when the system buckles under the neglect. Why does eveything still appear in the reversed contrast of an old, silver-halide negative? When will leadership emerge and scream: "Halt, engines full reverse or else we'll run aground?"

In the meantime, I am SO SO wrong and should fight it no longer. I must for sanity's and financial sake, embrace it, for I am a Capitalist and THIS world of THIS MOMENT is fantastic for capital and asset owners, large. Imagine: Inflationary pricing power yet falling interest rates, with little of the attendant cost-push (ohhh thank you denizens of $2-a-day-workers, and willing buyers of USDs - please may nothing happen to you or your munifidence!). The perfection of this moment just makes me want to break out in song, like Donaldson & Kahn's late 1920s ditty ...
Wishing is good time wasted,
Still it's a habit they say;
Wishing for sweets I've tasted,
That's all I do all day.
Maybe there's nothing in wishing,
But speaking of wishing I'll say:

Nothing could be finer than to be in Carolina in the morning,
No one could be sweeter than my sweetie when I meet her in the morning.
Where the morning glories
Twine around the door,
Whispering pretty stories
I long to hear once more.
Strolling with my girlie where the dew is pearly early in the morning,
Butterflies all flutter up and kiss each little buttercup at dawning,
If I had Aladdin's lamp for only a day,
I'd make a wish and here's what I'd say:
Nothing could be finer than to be in Carolina in the morning.

Dreaming was meant for nighttime,
I live in dreams all the day;
I know it's not the right time,
But still I dream away.
What could be sweeter than dreaming,
Just dreaming and drifting away.

Thursday, October 25, 2007

Double Dipping

Agricultural commodity prices hitting highs. And a new $282 billion 2007 Farm Bill in USA. Hmmmm. A quick review of the bill seems to have a bit for almost everyone, (for how else does one get to $282 billion?). Ummmm, one question though: may I have some, too, please? For I, also, am frequently victimized by the vicissitudes of the market and would clearly benefit from some income support, and some re-training assistance to learn how to cope with momentum-humping stock-jockeys, particularly during times of divergently speculative markets that cane the more value or reversion-oriented investor. And perhaps the US Govt could pay me to set-aside some of my less-successful investment strategies that have recently suffered from alpha decay?? Am I any less deserving than the noble cotton farmer or hard-working tobacco grower?? And like the USDA, Government can buy some of my other, unwanted or unneeded otherwise discarded strategies, for redistribution (in-kind) to those obviously less fortunate who have no investment strategies at all (not even bad ones!). Any troll through the internet employing the keyword "trading stocks" will show just many people must be so disadvantaged, lacking investment strategies of their own. Additionally, as in the farm bill, I could definitely benefit from some research assistance, for lord knows competing against the countless PhDs at Renaissance & DE Shaw, not to mention the Indians, Chinese and Russians, is quite a thankless task. Oh, and don't forget marketing assistance. As a small investment manager marketing is on a ongoing challenge, so I would be grateful please if you could appropriate some funds to help us small HFMs better reach our target market. Maybe the Feds ould even apply the pressure of the USTR to twist the arms of SAFE's SWF to let us little guys manage some of their gargantuan pot of money. But don't get the wrong idea. I don't begrudge farmers recent good fortune (indeed, some of my best friends are farmers!) for lord knows their terms of trade have, errrr, sucked for the last two decades. I just think that from a public-policy POV, we might benefit from a method of reducing the flow of the spigot, or milk descending from the Federal milk-teat, during times-o'-plenty, else simple souls like me will think some are double-dipping, and no-one likes a glutton - whether they are noble farmers, HFMs or PE-weenies.

Wednesday, October 24, 2007

Geppetto's Creations

I must be hitting raw nerves of late, for I have been the recipient of rather colourful death threats. The good news (depending upon how one views it) is that the perpetrator is known to me. And it turns out they've been coming from my spouse, expressing hostility for my blogging and commenting upon others - ostensibly at the expense of marital and familial attention. Oooops.

Such faux pas are not lost upon me on a day when the thundering herd, Merrill Lynch, has 'fessed up to write-down of $8billion. First The Bear, then Citi, now Merrill. For those who are a tad less observant, I will point out to you that there is clearly a pattern here. Merrill, for all its size and retail might, has from where this Cassandra sits always been Wall Street's Lennie (of Steinbeck's "Of Mice & Men" fame), whereas Goldman Sachs could perhaps be seen as George. In the heady growth days of the 1980s, both Goldman and Morgan Stanley sported thoughtful, and erudite Chairmen (Whitehead & Fisher), who could be wheeled in front of supranational or blue-chip corporate clients, and suavely impress. Merrill would wheel out Kamansky, notorious for his use of colourful bigoted stereotypes, and the "N" word. But Merrill's embarassment didn't stop there. Their Prime Brokerage unit always seemingly got left holding the bag (remember Guinness Peat Aviation??), and their repo and stock loan desks were controlled directly from Corleone, Sicilia. No integrated P&L here! Merrill always lost their smartest guys, so that management was the result of attrition rather than talent. They weren't bad guys. In fact they were probably more honest than their competition - the result of being the biggest and therefore more in the public spotlight , and the multi-culti board that held sway over the self-centered white guys that would, under other, circumstances steal from your sick grandmother and her Dead-Pet Trust. But, hey, we're talking about Wall Street, and honesty is never relied upon to get one anywhere.

Now compare the aforementioned cast of characters and Merrill's behaviour during the "tech bubble". Morgan Stanley, underwriting Avanex (AVNX), and then touting it as "a buy" at $250/shr as the next JDSU (and they weren't wrong!). Unfortunately, they didn't mean that IT TOO would be worth 2-cents on the lightwave dollar. Oh well.
O.P.M., and mostly HNW. And Salomon-Citi was so conflicted with the whole WorldCon/Jack Grubman thing, they had to bring in an outsider AND a conservative blonde WOMAN (holy wow!) from the buy-side to prove their new-found religion and integrity to the suckers who bot WCOM shares and paper. And Goldman was right up there with the best of them. They were so conflicted, they were forced to stop making any recommendations in a way that a lawyer could fault them for, yielding to a dually-sanitized sector "view" and stock "view" that often meant: we hate the sector relative to the market, but like the stock relative to the other that we hate in the rest of sector, in the process erasing all traces of trying to establish a financial value, price targets, or even a simple "Buy", or "Sell" recommendations. This was brilliant as only the legal minds of Goldman might conceive!! Now even those measuring the performance of the analysts couldn't ferret out whether they were doing anything of any value. Merrill, of course got busted, and we know. Henry Blodgett was touting what he was told, or what he needed in order to goose IB and underwriting revs. And for their size, and lack of care, honesty (or perhaps legal advice given the undeniability of being caught red-handed, or stupidity, depending upon through which lens you view it) made them, confess, comply with investigators, and pay large. Citigroup, with the Grubman ball-and-chain around their proverbial necks, too, had no leg to stand on, and had to 'fess-up and pay. Interestingly however, Goldman and Morgan managed to lose the back-up tapes of their emails. ALL OF THEM!!! Didn't Nixon & Haldeman pull that one??!? But the culture of omerta and hush-money-bonuses runs deep and there was never a whistle-blower, or turncoat who came forward and said: That's just plain rubbish! The tapes are sitting in a vault in Jersey City (or Zurich, or Lichtenstein, or in a briefcase at the bottom of the East River). Miraculously, they paid a fine for non-compliance of record -keeping regulations amounting to an evening's Limo bill, never admitting or denying guilt in any regard, to conflict of interest, or knowingly purveying tainted research. I do not morally judge them (here at least), as it supports my point that, if they were not more "honest" (whatever that means), they were much smarter. Much.

And today, once again, we see Citi and Merrill in the limelight. Again they are 'fessing up to large losses of one inventory variety or another, likely reflections of an accumulation of greed, mis-deeds, stupidity, and poor management and risk control. The post-Enron era however makes a medium-security cell with Bubba a real possibility, so Mr O'Neal might enjoy his freedom and, anyway as CEO let's not take things too seriously since it IS other people's money, right, and management and revenue generators are just mere agents with wildly asymmetrical upside? "Fake it 'til you make it"

But fascinatingly we hear silence from the smart and annointed ones at Goldman and Morgan. Morgan might be forgiven for its fixed and mortgage businesses was never as big as GS. Yes the GS whiz kids could be masters of the universe (lord knows they recruit well!! and reward handsomely) and of course might have unloaded "it", or hedged "it", or done whatever a firm with such a gargantuan business and balance sheet does with such embarrassing things such as lowest-rated tranches of a CDO, or other ABS and the like, for instance: categorize them as Level 2 or Level 3 securities? But like the Japanese phalanx-like pursuit of opportunity, where there is money to made, it would be rare rare indeed that America's brightest and most avaricious boys would eschew it. Perhaps, the difference lies only in the honesty and integrity - either in marking the book, or in the BS sales pitch that it took to move the masses of rubbish off their books to the poor Taiwanese farmer's bank or Landesbank SIV.

Monday, October 22, 2007

Blackwater Denies Hedge Fund Murders

Blackwater USA's Founder and Chief Patriot Erik Prince has emerged from characteristic low-profile and gone public in a media blitz to vehemently deny any responsibility for the killings of the now-ignominious Bear Stearns-managed highly-leveraged Mortgage Hedge Funds, the recent market slaying of London-based Cheyne Capital's SIV in a gangland-style savaging late last week. Both market witnesses and forensic experts said "it was awful, bloody, and bloody-awful! It was certainly no accident as they were clearly tortured before being killed. You could see it in the marks..." Some have also implicated Prince in the bizarre and mysterious expiration of hedgie talking-head, Seth Tobias.

Blackwater's Prince, in both private interviews and Congressional testimony, didn't deny that the victim's were in fact dead, (as in longer viably breathing & independently financed) nor did he say that his employees were uninvolved. But he nonetheless went on the offensive saying "Blackwater should be seen as patriot's Patriot as they were doing a job no one else could or wanted to do", and that "America was better off for it". He said he trusted his men, and that "both the Bear Stearns funds and Cheyne SIVs must have been doing something wrong" for his mercenaries to unload and cause such carnage. "Maybe they [Bear & Cheyne] were too leveraged and panicked" he said, "...or maybe they got ambushed by basis-risk, or were caught in the crossfire of "borrowing short to lend long", or perhaps they just held securities whose value diminished with the fall in the prices of collateral assets, but I know my men and my troops wouldn't slaughter innocents, so they [Bear and Cheyne] must have been guilty....". "My guys protect "high value targets", and they are encouraged to do their job irrespective of collateral damage, or damaged collateral. "You can't make an omlette without breaking some heads", he said seriously.

"General" Prince, the youngest such officer in America's newly privatized army, a "lucky" billionaire through inheritance thanks to dad's foresight to jump the domestic US auto-making ship before it sunk, is an avowed Libertarian and and Republican campaign contributor, who worked as an in tern in the Bush-I Administration, before resigning due (according to Wikipedia) because
"I saw a lot of things I didn't agree with -- homosexual groups being invited in, the budget agreement, the Clean Air Act, those kinds of bills."
While coy about his future plans to capture yet more of the newly-privatized market for Covert Ops, Hedge-Fund assassination, Intelligence Gathering, Leveraged-Fund Torture, and and Dirty Tricks, he did say "Nothing is out of the question. Government is lame. Even I, a Navy Seal with little understanding of competitive Economics could do a better job than The Fed at Banking Market Oversight and everything else. In fact, maybe I will pursue the contract for such outsourcing..."

Tuesday, October 16, 2007


A recent post, Seoul Brother, following the pointy-bit in the upper-left of the adjacent graph, imagined both negative alpha, on top of negative beta for what was apparently (until today) the world's favorite steel stock. A meeting with the company's CFO doused overheated expectations that had previously catapaulted the Korean firm's share price into the stratosphere. The result in the prevailing mimetic world of "Do What the Other Guy Is Doing" is the financial equivalent of being food-poisoned or Pyongyanged by a bad bulgogi, an experience that that this Cassandra has unfortuntately experienced at an un-named Korean establishment in London. In a world of followers and leaders, POSCO has undoubtedly been a liquidity-sensitive leader. Once investors' stomachs have been purged of that which made them yak, I am interested to see its related impact upon its peers and brethren inhabiting this brave new world of unmitigated feedback trading.

(p.s. I am aware of the geographical inconsistency of the post's title with POSCO, but I simply liked its sense of onomatopoeia)

Monday, October 15, 2007

What Does a MLEC Look Like?

Lots of friends have been phoning me up asking precisely what does a "Master Liquidity Enhancement Conduit"(MLEC) actually look like in real life? Does it resemble "a bank vault"?, or a trading room? or a perhaps a Wal-Mart checkout counter where needy banks, IBs and potentially hedge funds wheel up with their respective shopping carts of SIVcrap(*) or CDOpoo(*)?

Actually, the correct answer is "none of these things. From confidential sources, I have obtained the first photographs of Secretary Paulson's MLECs, pictured above left and to the right. Let's hope that the MLECs are employing cyanide-based heep-leaching to distill the value from large amount of crap that will ostensibly fill the MLEC!

Pee-Wee To the Rescue

Naked Capitalism reports nicely on Hank Paulson's so-called Master Liquidity Enhancement Conduit (MLEC), better known in the trade as the "Let's Take Risk Without Taking Risk And Socialize It, L.P."

But just as quickly as Mr Paulson has finalized details on this wonderful and long-overdue invention, "Friends of The Street" (a not-for-[too obscene] profit, charitable lobbying organization, and Luncheon Club) are already one step ahead of the GS Manchurian Candidate in the Treasury. They have already proposed and structured a "Master Liquidity Enhancement Conduit of Master Liquidity Enhancement Conduits", better as a "MLEC-'O-MLEC" (which interestingly was alluded to during the S&L crisis by, of all people, the paedophile Pee-Wee Herman, as one of his signature inanities - "mlec-o-mlec-o-hi-mlec'-o-hidey-ho!!"). The significance of the MLEC and MLEC-'O'MLEC should not be lost on observers: To hoover-up any security that might expose the large, leveraged holders of risk to price fluctuations in their risk books at anything other than an officially sanctioned, tubereuse-smelling level, that insures no (unauthorized) assset impairment, capital loss, and thus no diminishment of potential bonus dosh. They are attempting to - in effect - brute-force away any and all non-officially sanctioned vagaries of the credit cycle, for any threat to The Street's wealth just cannot be countenanced. After all, what's good for The Street is good for America, right?

Embarking on a related tangent, this reminds me of the legendary Hank Greenberg's iron-fisted attempts to control and forestall any selling of AIG stock by any executive or employee at any price. If by some sad twist of fate you sold a 1,000 shares of your AIG stock to pay for your uninsured mother-in-law's prosthetic hip, you would (so the legend goes) be hailed to his office and grilled, lambasted, and humiliated about your petty sale. How did he know?? Who told him? Everyone was fearful, for if you sold, then come Xmas time it be "NO SOUP FOR YOU, JERRY!!", or worse, a transfer to the corporate travel office or perhaps even a pink slip. And until Spitzer torpedoed this operation in intimidation and maniacal control of stock, the shares of AIG traded at a large premium to every other like-for-like insurance stock in the USA and world, including the other insurance magicians, Markel, and Berkshire. Such is the power of controlling the float and the marginal sales of securities that dictate the prevailing market-price, and thus mark-to-market for all Shareholders. And this wasn't simply vanity: AIG was acquisitive and used this inflated scrip their advantage, time-and-time again. Is the MLECs relationship to The Street any different? Isn't the street hope to using the same smoke-and-mirrors parlour-trick to insure the advantages conferred upon them as a result of robust valuations of dubious assets continues apace?

All which raises question: who will be the MLEC's gatekeepr? Will it be a GS assignee, or small coterie such as prefvailed in the LTCM unwind? Does this mean, might this mean, the Bear or one outside the Circle of Trust can't pick off GS's mortgage or asset -backed desk in a fair-trade, or else Friends of GS will not step up and relieve The Bear of the Bear's dubiously marked-paper? So many questions, so little space and time. And though Pee-Wee invented the MLEC-'O-MLEC, it is worth contemplating the ignominious fate of Mr Herman, seen right, without his tennis shoes, flexible-flyer bicycle, Conky, or his characteristic grin.

Saturday, October 13, 2007

The Multi-Millionaire Next Door....

I've been conjuring a book. The kernel of the idea has been gestating for some time now. I will tell you in advance that I am not terribly proud of it, since it's a rather crass and mercenary idea. It is partly derivative of that great scene int he Farrelly Bros pic, There's Something About Mary, where the hero (played by Ben Stiller) picks up a crazed and murderous hitch-hiker who starts sounding off about his great idea for a mail order video entitled "Six-Minute Abs", which is bound to be a smash since the guy made such a killing with "Ten MIntue Abs", surely "Six-Mintue Abs" would be that much more irresistible. Applying this logic to the "can't fail" voyeurism of "The Millionaire Next Door", which it must be said is sorely in need of an update since inflation has made "The Millionaire Next-Door" not just completely pedestrian, but barely able to afford list price Business Class flights, or a nice Aryanly-engineered Vorschprung der technik automobile unless it be an Audi TT or heaven forbid, a Czech-made Volkswagen, let alone "fly private" or do a weeek at the Ritz in Aspen..

Indeed, as the end first decade of the new millenium approaches, the literary low-hanging fruit I am writing will be entitled "The Multi-Millionaire Next Door". This is vague enough that given the propensity of authorities to inflate, and their seeming unwillingness to countenance anything shy of a positive sign in the YoY growth rate, and Americans aversion to paying tax, my NEW version will have all-important shelf-life. Think about it: the seeming schmo next door to you. You thought he was "just a a mechanic" (not that thhere's anything wrong with that). But he bought that greasy garage (clearly not Germanic or Japanese one where you can eat off the floor) for $65,000 but a few years ago as the premises for his business. Today, thanks to Bush, Mssrs Greenspan, Bernanke, Zhou, and the BoJ, (and a shopping mall developed by William Simon across the street, the shack is worth $2mm (less the $40k mortgage)!! A multimillionaire! And YOU thought him PWT and wouldn't let your kids play theirs 'cause you sent your prats to private school, and because he drove a rusty '74 Dodge Pickup. Shame on you! So while you're leveraged to the hilt aspiring to the good life you deserve and are entitled to, your uneducated neighbour has just vaulted over your net-worth in the mere space of less than a decade!.

Chapter will discuss all your friends who you thought were crazy whimsically purchasing vacation flats in London, or on East Coast beach-front, or a slope-side condo when they so clearly couldn't afford it. Who's stupid now chump? Yup, anything more than two beds and purchased but a few years ago, and they are - yes, you guessed it - multimillionaires!! And chapter three? The frugal elderly widower, with her pension fund that her husband placed (against the advice of their doltish financial advisor) 100% into the Emerging Market Equity Fund just before he passed in 1999, and she's been too senile to do anything about it, not even opening the statements. When she kicks the bucket, PRESTO! a heart-warming story of her only son now a Multi-Millionaire. There's so many of them! Baseball, Basketball, football players! Insurance agents! Stockbrokers! not to mention Investment Bankers. And in the boardroom, the wealth has indeed been spread for no longer is it just the CEO, but the CFO, Marketiing Director, and heck, even the token female HR director is a multi-millionaire, whether through legal means or through back-handed backdating! Shit even Golfers and tennis players (my grandpa would have laughed if I'd told him THAT one when he was alive). And it doesn't end there! Even family-farmers, hispanics, Haitian immigrants, and blackpeople too (and you, who only thought that only Texans, Jews, and old WASP real estate families were multi-millionaires). How narrow-minded you are! Multimillionaire-ism has no racial, sex, industrial, nor even religious boundaries. It is the epitome of pervasive.

But by far, the greatest, most optimistic and uplifting message in this can't-miss, story-to-be about America, inflation, and it's most deserving and virtuous beneficiaries that you didn't even know existed, is that it is NOW possible, even PROBABLE, that EVERYONE can (and shortly will) be multi-millionaires, and I am going to be one who who introduced them all to you, and America, first!

Thursday, October 11, 2007

Inflationary Teflon?

As a Cassandra, I am in the business of making prognostications that others find unpleasant, but uncannily are proved worthy by the passage time. So straight to business: Should global asset prices and global commodity prices continue their romp as result of uber-easy global liquidty, Japan will finally experience the long-sought after magical tingling of inflation, and feel it they will! A weak Yen, roaring input, material and intermediate goods prices, money-a-plenty, and a weeny-less BoJ. Yes, you have heard the "D"-word for the last time. The result, until trade partners dance unmercifully upon the heads of their Japanese counterparts, may well be that Japan experiences some of the most negative real interest rates in living memory. If ever there was a time to gear-up to buy domestic Japanese assets, it would be prior to the unfolding of such a scenario. Be certain to hedge your currency risk until such time as Mrs Watanabe can resist no longer and trades her short Yen for long Nikkei....

Tuesday, October 09, 2007

Stupid Is As Stupid Does

Distinguishing oneself from the competition has always been the goal of successful entrpreneurs....except it would seem in finance and trading. As a case in point, OptionsXpress, the no-frills options broker 284,000 on-line accounts-strong, has an ummmm errrr brilliant (??!?) idea for those less-than-brilliant and not-so-original investors: Do what the other guy is doing.!!. Called "Trading Patterns" all the customer has to do is:
Simply enter a symbol and Trading Patterns will return an anonymous list of other trades popular with investors who recently traded that security. Discover the collective interests of other investors.

"Great Minds Trade Alike"(SM) is their laughable service-marked tagline. But if you thought empowering the masses was not all it might be (from the point of view of the wisdom of crowds) it gets even worse. As if their name OptionsXpress wasn't sufficiently insulting to good spellers, their alledgedly novel tool called "Xecute", which is supposed to take the ideas from Newsletter Writers that their customers couldn't or don't think of on their own, and implement them "automatically" using
...simplifies the way you trade your investment publisher's advisory newsletter. You subscribe to the investment publisher. You set the auto-trade parameters and trade amount. Xecute takes over from there and automatically trades your publisher's advisory newsletter as long as you have the available assets to cover the transaction.

Forgive me for consdidering the similarlies between this and the classical "Churn-'N'Burn", but I am gobsmacked by the simplicity and stupidity upon which this $1.8bn market cap business is based.

Smoking Dope With the Open Markets Committee

I've long wondered what the timbre of the Fed's Open Markets Committee meeting most resembled. Are they stern and authoritarian? Efficient and businesslike? Collegial and ummm errrr tweed&port? Or, perhaps, iconoclastically laid back, maybe even irreverent. But never in my wildest imagination (until yesterday) did I ever think it would resemble that which is accurately depicted in the picture (right) taken from a friendly mole's hidden camera inside the meeting room during the most recent mid-September FOMC meet.

Or at least it confirms my suspicions as to the most logical explanation for the FOMC's behaviour. For amongst other analyses, concerns, discussions and projections that could justify more or less any policy action, they seem to be suggesting that a morning toke (technical term for inhalation of Cannabis into one's lungs) is what is required to take the edge off of the effects of last night's session, which was itself a nest-loop of hangover & repair-response for the same (or for that matter the last decade-and-a-half of party-central):
Similarly, the impaired functioning of financial markets might persist for some time or possibly worsen, with negative implications for economic activity. In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action. Such a measure should not interfere with an adjustment to more realistic pricing of risk or with the gains and losses that implied for participants in financial markets.
Yes maybe I am cherry-picking, but the minutes themselves are all over the map. Why do other Central Banks from cultures not necessarily known for forthrightness appear to be able to present more cogent analysis and policy prescriptives whereas our own Fed from the land of NoBull-PlainSpeak hems haws and hedges before making a nitwitted conclusion and justifying it. Instead they are rife with the same seeming interminable indecisiveness that a pot-head encounters when trying to decide whether to quell the midnight munchies with a Big-Mac & Big Fries or Quarter-Pounder w/Medium Fries... or no wait, perhaps it'll be the McNuggets-6-pack with...

Monday, October 08, 2007

Farewell Vic (Again)


and most
squash player, (not
necessarily in
that order).

We won't
feel sorrow
because She
would've said:
"Pity is
for veaklings".

"The Trend
is your
was your

You (ooops!)
now have

(With apologies to EJ Thribb & P.E.)

Code Red

Market non-sequitirs are the most pregnant awe-inspiring things to behold. They are full of drama, twists and turns that intrigue, and deftly feign one direction and then the other, observers and participants often highly uncertain which premise will be proved unworthy. For in the end, undoubtedly, there will be a casualty. But which?

The denoument of "A Few Good Men", that fantastic and poetic screenplay so confidently written by Adam Sorkin where the accused's defense counsel Kaffee (Tom Cruise) has Col. Nathan Jessep (Jack Nicholson) on the witness stand and is trying (under penalty of penalty of his own downfall should he fail) to get the decorated Colonel to admit that he ordered the hazing (or "Code Red" in Marine parlance) that caused the [accidental] death of an innocent at the hands of two rank and file who were just following unwritten orders.

The trial to this point has progressed, and the soldiers, left hung to dry by the officers, look like they will be found guilty. Their sole hope for truth and justice is their passionate defense counsel, Lt. Commander Kaffee ....
KAFFEE - A moment ago said that you ordered Kendrick to order his men not to touch Santiago.

JESSEP - That's right.

KAFFEE - And Kendrick was clear on what you wanted?

JESSEP - Crystal.

KAFFEE - Any chance Kendrick ignored the order?

JESSEP - Ignored the order?

KAFFEE - Any chance he just forgot about it?


KAFFEE - Any chance Kendrick left your office and said, "The 'old man's wrong"?


KAFFEE - When Kendrick spoke to the platoon and ordered them not to touch Santiago, any
chance they ignored him?

JESSEP - Have you ever spent time in an infantry unit, son?

KAFFEE- no sir.

JESSEP - Ever served in a forward area?

KAFFEE - No sir.

JESSEP - Ever put your life in another man's hands, ask him to put his life in yours?

KAFFEE - No sir.

JESSEP - We follow orders, son. We follow orders or people die. It's that simple. Are we clear?

KAFFEE - Yes sir.

JESSEP - Are we clear?

KAFFEE - Crystal.

(KAFFEE speaks with the quiet confidence that comes from knowing you're about to drop your opponents)

KAFFEE - (continuing; beat) Colonel, I have just one more question before I call Airman O'Malley and Airman Perez: If you gave an order that Santiago wasn't to be touched, and your orders are
always followed, then why would he be in danger, why would it be necessary to transfer him off the base?

(And JESSEP has no answer. Nothing. He sits there, and for the first time, seems to be lost.)

JESSEP - Private Santiago was a sub-standard marine. He was being transferred off the
base because--

KAFFEE - But that's not what you said. You said he ws being transferred because he was in
grave danger.

JESSEP - (pause) Yes. That's correct, but—

KAFFEE - You said, "He was in danger". I said, “grave danger". You said--

JESSEP - Yes, I recall what--

KAFFEE - I can have the Court Reporter read back your….

JESSEP- I know what I said. I don't need it read back to me like I'm a damn--

KAFFEE - Then why the two orders? (beat)…Colonel? …(beat) Why did you …

JESSEP - Sometimes men take matters into their own hands.

KAFFEE - No sir. You made it clear just a moment ago that your men never take matters into their own hands. Your men follow orders or people die. So Santiago shouldn't have been in any danger at all, should he have, Colonel?

(Everyone's sweating now. Everyone but KAFFEE.)

JESSEP - You little bastard.

ROSS (Prosecutor) - Your Honor, I have to ask for a recess to--

KAFFEE - I'd like an answer to the question, Judge.

JUDGE RANDOLPH - The Court'll wait for answer.

KAFFEE - If Kendrick told his men that Santiago wasn't to be touched, then why did he have to be transferred?
(Jessep is looking at O'KALLEY and PEREZ.)

KAFFEE - (continuing) Colonel?

(JESSEP says nothing.)

KAFFEE (continuing) - Kendrick ordered the code red, didn't he? Because that's what you told Kendrick to do.

ROSS - Object!

RANDOLPH – Counsel! (KAFFEE will plow through the objections of ROSS and the admonishments of RANDOLPH)

KAFFEE - And when it went bad, you cut these guys loose.

ROSS - Your Honor--

RANDOLPH - That'll be all, counsel!

KAFFEE - You had Markinson sign a phony transfer order--

ROSS - Judge--

KAFFEE - You doctored the log books.

ROSS- Dammit Kaffee!!

KAFFEE - I'll ask for the forth time. You ordered--

JESSEP - You want answers?

KAFFEE - I think I'm entitled to them.

JESSEP - You want answers?!

KAFFEE - I want the truth.

JESSEP - You can't handle the truth!
(And nobody moves…)
Son, we live in a world that has walls. And those walls have to be guarded by men
with guns. Who's gonna do it? You? You, Lt. Weinberg? I have a greater responsibility than you can possibly fathom. You weep for Santiago and you curse the marines. You have that luxury. You have the luxury of not knowing what I know: That Santiago's death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives. You don't want the truth. Because deep down, in places you don't talk about at parties, you want me on that wall. You want me there (boasting) We use words like honor, code, loyalty...we use these words as the backbone to a life spent defending something. You use 'em as a punchline. (beat) I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom I provide, then questions the manner in which I provide it. I'd prefer you just said thank you and went on your way. Otherwise, I suggest you pick up a weapon and stand a post. Either way, I don't give a damn what you think you're entitled to.

KAFFEE - (quietly)- Did you order the code red?

JESSEP - (beat) I did the job you sent me to do.

KAFFEE - Did you order the code red?

JESSEP - (pause) - You're goddamn right I did.

WOW!!! I've seen this a dozen times and the drama never fails to enthrall me!

But in the market, we have an emerging drama: An equity market that doesn't want or hasn't been able to come to terms with the continuing dysfunction in the credit markets, the imminent recession in both US output and consequentially, US Corporate earnings, and the likelihood that the neutering of the US bond market is likely to be challenged by the combination of swelling petro-dollars and surpluses and diminishing real demand (and official!!) demand. And yet asset markets continue to levitate despite the likelihood that there is a large emerging market non-sequitir between asset prices and the benign conditions that have munificently caused their rip-roaring rally. But I reckon we are the point where Kaffee has just confronted Jessep with the logic flaw of his big lie. The market may go for the jugular as the resolution unfolds.
KAFFEE - Mr Bernanke, I want the truth!

BERNANKE - Yes yes, you're damn right I ordered the Code Red - it's NOT a savings glut, but excessively easy fiscal policy combined with not-so-benign monetary neglect, and the incessant kindness from foreign official institutions..."! I did what I needed to do, and I'd do it again...."
And only once the market decisively reveals its truth, will the pundits say: "Ah! I knew it all along..."

Saturday, October 06, 2007

Fed - Balco Shocker!

After years of denying culpability, in a tear-jerking press conference today, former US Federal Reserve Board Chairman Alan Greenspan finally admitted to using monetary steroids, during his long tenure at the helm of America's Central Bank. "I'm so very sorry, and I just hope the people can find it in their heart to forgive me". He went to say: "I knew it was wrong and I disappointed, myself, and the American people and everyone else" (except Wall Street).

America's economy finished first amongst OECD peers during the heady days of Barcelona and Sydney, and many observers suspected that the Fed was not playing fair. Supporters of Mr Greenspan however were prepared to overlook his indiscretions. "Kip" Fat-Bastard senior economist at Goldman Sachs said: "Everyone was using them, so even though he was technically guilty, it was a fair fight." "And look at the inflating tits on those Russian and Chinese athletes! There is plenty of guilt to go around."

The investigation continues with a few hold-out continuing to assert their innocence, including "Honest" Hank Paulson, "Spineless" Ben Bernanke. As recently as yesterday, he again asserted that "Neither I, our central bank, nor my country has ever resorted to illicit steroid use to boost performance. "It's the savings glut...honestly! I swear! It has nothing to do steroids..."

Friday, October 05, 2007

Sisyphusian Defiance

I would like to vent regarding a particular stock I have been short - save a few short intervals - for the past three years. That time horizon will itself raise some eyebrows. But it is a stubborn issue, that refuses against all natural forces of entropy, gravity, and shitty fundamentals (no growth, unattractive valuation, miserable future prospects) to return to the level from which it was speculatively launched into the Kuiper Belt back in 2004.

By sheer coincidence, it presently trades at the precisely the same price that it did two decades past, an ignominious distinction, to be certain. That is despite achieving no better than half of the peak operating profits they happened to achieve in their machinery niche during the boom times. Toyota Motor they clearly are not. One would be forgiven for asking why they remain in existence, the answer being some mixture of tradition, inertia and something peculiarly Japanese and irrationally uneconomic. Nevertheless, they do, and I do not begrudge their aging workforce continuing to assemble uninspiring, mediocre machinery for which the market itself is in terminal decline. But I am confounded by why someone (many ones in fact) speculatively return to the shares of this firm upon who the sun is undeniably setting.

Prices were highly elevated in the bubble. No doubt, their HQ sat upon tsubos that were imperially valued at that time, if nothing else they had this which provided justification to the specs. The stock shat for a decade and settled at the YEN200 level, languishing there for five years. In 2004, some specs came along and started lifting the share price, getting it up to nearly five-fold to YEN1100. Unwisely, I sold contra at closer to the YEN500 level as they were vaulting. But patience is one of my virtues, and though it was as pleasant as a hemorrhoid to watch it vault skywards, I kept my position and my conviction, finally [and only briefly] covering at the YEN350 level in a bout of rare, satisfying, and well-time prescience, which was just before it bounced to YEN500 whereupon I dropped it again, remaining short ever since.

As a persistent value-destroyer, with few redeeming qualities outside the HQ they probably own in Chiyoda-ku, given their time-honoured history, I believe they are likely to trade back to where they came. Unfortunately, like a Tourette's patient, or someone undergoing violent seizures every few months, the shares lurch on such seemingly random occasions by 20% or so turning over another fifth of the float, in an apparent desperate speculative attempt to defy entropy and gravity. That they've done this six times during the preceding 14 months, in the process snatching away my expected return but YEN100 from my target is beginning to get me annoyed, and as a result, I am getting frustrated by my unrequited expected profit remaining in sight, though out of reach.

Though tempted to puke, I shall keep my resolve. I will, instead, kick the cat (not too hard for PETA readers), go for a run, take a really deep breath, and try to return to the happy, happy place in my head that existed during the mid 90s, when Japanese speculators were trading stocks [poorly at that] instead of punting in Short Yen Carry baskets, and happily contributing to my offsprings' college fund. Breathe-in....breathe out....breathe-in...breathe-out....

Wednesday, October 03, 2007

Seoul Brother

I have long been a fan of Korea's Pohang Iron and Steel (Code #005490) probably since I first visited Seoul in 1992. It was a many moons ago (no pun intended) and I was so naive, that when I accidentally walked down a street in Itaewon, and the girls shouted "Hey Joe!!, want some fun?", I actually looked over my shoulder wondering who they were talking to, and where Joe was, and this was despite having listened to Hendrix so many times I wore out more than several needles on my phonograph cartridge. Now I am sure some readers here never even owned a proper turntable, and I won't hold that against them, suffice to say, I've been sweet on Pohang for a long long time.

Sweet Pohang traded on a low single-digit PE rating for the better part of a decade. You could buy it a 5x and sell it a 8x forward earnings and you would have looked like genius. I could never quite figure out why it did this. Whether it was fear of this risk, or that risk, suspicious of the Moonies, or the fact that an insufficient number of US fund managers simply couldn't find Korea on the map, I don't know, but it just did. Despite its incessant climb towards achieving the distinction as the worlds lowest cost steel producer, and then the worlds largest steel producer, eclipsing Japanese behemoth Nippon, investors barely (and rarely at that) accorded it its due, even while Japanese competitors merged and slashed capacity, and the entire industry in America went bankrupt or as close as possible in order for new Private Equity owners to raid the pension fund. And then, after languishing for much of the 90s, investors really could have done themselves a favor and bought it when the KRW currency was obliterated in the fallout from the Asian crisis in 1998.

Earnings and sales continued to grow as the tumult of 1997-8 faded, but the stock's rating was stubbornly stuck between 5x & 9x forward earnings. And even though there are those that would call the esteemed James Grant perennially bearish, even he too favored the shares Pohang Iron and Steel Corporation as something to play on the long side, given their excellent balance sheet, chipper business outlook, depreciated currency, and unusual value they afforded purchasers. So 2003 and 2004 came and went, with little appreciable attention. The stock just got cheaper, in a Charlie Brown sort of way like whenLucy pulls away the football yet again, even as both earnings and sales were accelerating, and the signs that the 15 year bear market in steel not only over, but was giving way to a heady bull market as China ascended, carrying with it all things hard and/or shiny. Only following the May 2006 pullback in the liquidity complex did investors begin to rediscover Pohang and things Korean.

And discover it they did!! While earnings and future estimates thereof continued to grow, they couldn't keep up with investors' appetites for the shares. Between Sept 2006, and Sept 2007, investors tripled (yes 3x, thrice, three-bagged) the rating on the shares from a forward PE of 5x to a current forward PE of 15x. WOW!! Hot hot and horny can you be? I will admit that I lost my appetite in May 2007 at around 9.5x forward, only because I could buy PCU, AUR or FCX or any manner of other substitute surfing the anti-dollar commodity tidal wave.

But I today, I will exclaim to all silly enough to listen, that its now absurd at 15x forward and 3x forward sales. I can buy SMM (#5405) which dominates the seamless pipe market so essential to the oil patch for 14x forward and less than 2x sales, Kawasaki at less than half price to fwd sales, Nippon Steel for a third, or Kobe or Nisshin for 25 cents on a $1 of Pohang steel sales, and no other value give-away. And to boot, all the Japanese producers still are deemed by those who know to maintain technological edges vs. Pohang making them less exposed to the dumping which is bound to spew forth from Chinese producers in the commodity segment once domestic demand is satiated. Pictured here is the relative Price/CF of Pohang vs. Nucor, which amongst other things is reflecting primarily the massive speculative charge in Pohang and unprecedented change in ratings, since forecast CFs really haven't changed all that much during the past 6-months - certainly not anywhere near to the magnitude of the change in market ratings.

I respect the market, and have given it wide berth on this one, however, I cannot help but believe that investors now so super-bulled-up on Pohang are in for a vertitable Pyongyang-ing, or Kim-Chee-ing, on a relative, and perhaps even an absolute basis. This might not come to fruition until the end of the Calendar year, or when Drobny recommends reversing positions, as investors have invested themselves rather heavily in its fortunes and may attempt mop up excess at least until league-tables are calculated and/or performance fees are paid for the FY. But with market cap now at greater than $70billion USDs and rapidly approaching the USD$100bn mark, thoughtful investors would be wise to look for an exit and/or alternatives and related trades thereof.

Monday, October 01, 2007

Consumption or Investment?

Am visiting London once again and continue to be astounded. Astounded not just by the top-sliver of the St. Chelseaberg real estate market, not just by the confidence in future prices despite the most obvious signs supply running headlong to meet demand, not just by foul $6-dollar cup of motorway "coffee", but by the ability of the median to live and consume amidst breathtaking prices-relative-incomes. But more to the point, my spouse, too was aghast at the prices upon picking the latest catalogue from design-doyen Sir Terence Conran. With both sterling and Euro at records vs. Asian mercantilst currencies, why aren't prices for such offerings falling? After my spouse finished, I started leafing through it and raised an eyebrow or two at their audacity and sheer cheekiness to vaulting current prices outside the tether of all prior price sensibilities. Be it the Russians, insensitive as they seemingly are to the effects marginal price rendering a completely horizontal demand curve in relation to price, or City chaps aspiring to emulate good taste, the Shoppe is seemingly not for want of custom.

But what Cassandra found most interesting was the "Thank You" letter from Sir Terence to his customers where amongst other things he tersely recounted some of the firm's history and the joy (and fortune it brought him). He went on to say, attempting to justify the near-ludicrous numbers of digits in his current catalogue (and I apoligize for not quoteing him verbatim) something resembling:
...prices paid for modern furniture designs have been increasing at an incredible pace. There is a strong possibility that this ocurance is a result of changing perceptions of design in the eye of consumers, and perhaps their justified belief that such designs represent not just an increasing appreciation of design, but an excellent investment for future.
I must admit that I was somewhat surprised when I read this. Having multiple offspring, I know that the half-life of an GBP8000 sofa is almost certainly less than immortal, no matter how well-behaved one's brats are. And while I do not wholly dismiss the possibility of such an occurance (being the beneiciary of a smattering of objects d'art handed-down from prior generations), I tend to believe that the real reason is the most obvious one: high Common Inflation in anything other than Asian Mercantilist-sourced goods or services undertaken by low-wage immigrant labour, and that attempts to attribute it otherwise are the embodiment of mere behavioural finance flaws not to mention wishful thinking.