Wednesday, January 30, 2008

Executive Order on Financial Literacy

Given all the mayhem surrounding the mini-puke and elevated volatility in markets, rising inflation, the impending recession, largest emergency Fed rate cuts in 25 years , the large emergency fiscal stimulus package, falling housing prices, and the huge write-offs by core financial market participants, you will glad to know that Administration is on the ball, and in response to all the mayhem, the President has signed an Executive Order on January 22, 2008 Establishing an Advisory Council on Financial Literacy. No I am not making this up. This is NOT an executive order to promote Financial Literacy. No, it's essentially setting up a breakfast club to find out precisely how financially illiterate The People are, and to discuss and advise the Executive on how to redress whatever deficiencies in financial education are found. Hmmmm.
At first glance, this seems like a stupid AND REDUNDANT undertaking if ever there were one. OF COURSE AMERICA IS CHALLENGED IN TERMS OF FINANCIAL LITERACY! JUST LOOK AT THE STATE OF THE NATION! On the other hand, it might be a worthwhile exercise to find out PRECISELY HOW FINANCIALLY ILLITERATE American actually is.

The first place that might be worthy of investigation is the White House itself, for this be a primary font of partisan economic "Eat your cake and have it too-ism". Congress surely is worthy of a survey to find out just how competent in fact our lawmakers are in matters of money and finance (outside their pay packets) though anecdotal assessment of policies during the past eight years would certainly cast doubt upon any assertions that they are in any way more adept with numbers than the rest of polity. And what of The Fed itself? Should the panel consider whether the Chairman himself, despite advanced degrees and tenured faculty position at Princeton, is perhaps financially challenged given his support of "The Savings Glut" Theory for imbalances, and his somewhat peculiar and contentious hair-trigger notions that dropping money from Helicopters might be the best answer to certain financial woes facing the nation, or whose past Chairman not only dared, but positively encouraged homeowners to swap their already low and certain 30yr fixed-rate mortgages for ARMs set at absurdly-low (albeit temporary) teaser rates when he himself was on the verge of raising the rates upon which the teasers were set?? And then we have The People themselves, who by comparison, look to be the most financially literate of the lot, many of whom saw a free-lunch, and seized upon it to "take-the-money" and run, leaving the bag-holders with the problem of considering whether the shitbox upon which they lent profusively and without due-diligence was worth anywhere near what was lent, or whether said borrows even existed. They also seem to be the sdharper of the sticks insofar as they intuitively understand that saving is way sub-optimal under an official regime of monetary debasement. This most certainly explains why savings rates are negative: only a fool would save when real rates are so obviously negative, and American's, call them what you like, are no fools....(I think). I am certain you will be as keen to see who is appointed to the panel , as well as the results of their findings, for numbers will, as they say, speak volumes....if of course they ask the right questions!

The Actual Executive Order (linked above is spelled out below):

Executive Order: Establishing the President's Advisory Council on Financial Literacy

White House News

By the authority vested in me as President by the Constitution and the laws of the United States of America and to promote and enhance financial literacy among the American people, it is hereby ordered as follows:

Section 1. Policy. To help keep America competitive and assist the American people in understanding and addressing financial matters, it is the policy of the Federal Government to encourage financial literacy among the American people.

Sec. 2. Establishment of the Council. There is established within the Department of the Treasury the President's Advisory Council on Financial Literacy (Council).

Sec. 3. Membership and Operation of the Council. (a) The Council shall consist of 19 members appointed by the President from among individuals not employed by the Federal Government, consistent with subsection (b) of this section.

(b) In selecting individuals for appointment to the Council, appropriate consideration should be given to selection of individuals with backgrounds as providers of, consumers of, promoters of access to, and educators with respect to financial education and financial services. Each individual member of the Council will serve as a representative of his or her industry, trade group, public interest group, or other organization or group. The composition of the Council will reflect the views of diverse stakeholders.

(c) The President shall designate a Chair and a Vice Chair from among the members of the Council.

(d) Subject to the direction of the Secretary of the Treasury (Secretary), the Chair shall convene and preside at meetings of the Council, determine its agenda, direct its work, and, as appropriate to deal with particular subject matters, establish and direct the work of subgroups of the Council that shall consist exclusively of members of the Council.

(e) The Vice Chair shall perform:

(i) the duties of the Chair when the position of Chair is vacant; and

(ii) such other functions as the Chair may from time to time assign.

Sec. 4. Functions of the Council. To assist in implementing the policy set forth in section 1 of this order, the Council shall:

(a) obtain information and advice concerning financial literacy as appropriate in the course of its work from:

(i) officers and employees of executive departments and agencies (including members of the Financial Literacy and Education Commission), unless otherwise directed by the head of the department or agency;

(ii) State, local, territorial, and tribal officials;

(iii) providers of, consumers of, promoters of access to, and educators with respect to financial services;

(iv) experts on matters relating to the policy set forth in section 1; and

(v) such other individuals as the Secretary may direct;

(b) advise the President and the Secretary consistent with this order on means to implement effectively the policy set forth in section 1, including by providing advice on means to:

(i) improve financial education efforts for youth in school and for adults in the workplace;

(ii) promote effective access to financial services, especially for those without access to such services;

(iii) establish effective measures of national financial literacy;

(iv) conduct research on financial knowledge, including the collection of data on the extent of financial knowledge of individuals; and

(v) strengthen and coordinate public and private sector financial education programs; and

(c) periodically report to the President, through the Secretary, on:

(i) the status of financial literacy in the United States;

(ii) progress made in implementing the policy set forth in section 1 of this order; and

(iii) recommendations on means to further implement the policy set forth in section 1 of this order, including with respect to the matters set forth in subsection (b)(i) through (v) of this section.

Sec. 5. Administration of the Council. (a) To the extent permitted by law, the Department of the Treasury shall provide funding and administrative support for the Council, as determined by the Secretary, to implement this order.

(b) The heads of executive departments and agencies shall provide, as appropriate and to the extent permitted by law, such assistance and information to the Council as the Secretary may request to implement this order.

(c) Members of the Council:

(i) shall serve without any compensation for their work on the Council; and

(ii) while engaged in the work of the Council, may be allowed travel expenses, including per diem in lieu of subsistence, as authorized by law for persons serving intermittently in the Government (5 U.S.C. 5701-5707), consistent with the availability of funds.

(d) The Secretary shall designate an officer or employee of the United States within the Department of the Treasury to serve as an Executive Director to supervise the administrative support for the Council.

Sec. 6. Termination of the Council. Unless extended by the President, the Council shall terminate 2 years from the date of this order.

Sec. 7. General Provisions. (a) Insofar as the Federal Advisory Committee Act, as amended (5 U.S.C. App.) (Act), may apply to the Council, any functions of the President under the Act, except for those in section 6 of the Act, shall be performed by the Secretary in accordance with the guidelines issued by the Administrator of General Services.

(b) Nothing in this order shall be construed to impair or otherwise affect:

(i) authority granted by law to a department or agency or the head thereof; or

(ii) functions of the Director of the Office of Management and Budget relating to budget, administrative, or legislative proposals.

(c) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(d) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity, by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.


January 22, 2008.
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Tuesday, January 29, 2008

Learning to Be A Central Banker in 10 Easy Steps

Start with one policy - for example - interest rates. Place the policy ball in your right hand and begin by lowering rates. which causes the ball be tossed-up into the air, in an arc, and land in your left hand. Note how, when the policy ball is in your left hand and you raise rates, the ball returns in an arc to your right hand. Repeat several times to get the feel. (Note this doesn't work if you are left-handed)

Now with he first policy ball in your left hand, take a second policy ball in your right hand, say the value of the US dollar. Notice how when you lower interest rates while the PBoC, and other official buyers in BRICs and GCC countries buy Long Bonds, the 2nd policy ball, the Dollar, feels heavy as if it wants to fall to the ground. Exerting appropriate pressure, you must force it up to arc, after which it should fall back down landing in the left hand.

Now with interest rates in your left hand, and the FX value of the dollar in your right hand, try to toss the rates lower, and as they arc downwards, you will need to jettison the dollar. Be certain to avoid the common mistake of throwing up rates too high if the dollar is NOT falling.

After letting the dollar fall for a while (note the nice concave arcing pattern in the picture), you will need to catch it with your right hand firmly by attempting to pay some lip-service to a strong-dollar policy. This permits the official entities who are at once your friends and your enemies, to get off the hook by buying dollars under the premise that you do care about its value.

Warning: Under no circumstance should you allow the policy balls to collide by lowering rates AND letting the dollar fall. Or else you might ultimately have to raise rates, making the introduction of the 3rd policy ball very difficult.

Get the hang of things by practicing tossing the two balls, raising and lowering interest rates as required, and jawboning (and where necessary) letting the dollar fall to floor. See if you do this while reciting Humphrey-Hawkins-like testimony, and answering your wife's questions.

Now quickly, you will find a third ball in your hand whether your ready for it or not, for as rates have been raised to pay lip service to inflation and the falling dollar, the third ball, economic growth, needs to be tossed into the air. Be careful NOT to make the common mistake of walking in circles while juggling the balls.

Irrespective of how high you toss it, will begin arcing lower as the economy begins to falter. Just before you catch the falling economy with your left hand, you will have thrown the rates ball back your right, while the dollar accelerates its decline towards your left, such that you can start all over again. It is essential to avoid changing the policies in a staggered rhythm.

As the economy climbs back on its arc to your right, you will be catching interest interest rates with your left, having sent the dollar on a stronger trajectory with your right, before repeating the exercise. Be sure not to launch the interest rate ball too high or too far in front of you.

Congress at this point will be demanding that you pay the most attention to the economy ball, so you must learn to turn your back (on them), and see if you can juggle behind your back as in the diagram (right).

CONGRATULATIONS! You are now ready to set monetary policy for the largest economy in the world!!

NEXT WEEK: In your next lesson we'll introduce balls 4 and 5 in the form of a sub-prime crisis, and banking system solvency issues, just for fun!

The Nation of One

I lasted about seven minutes watching the State of The Union yesterday evening. One would have thought that our dear leaders might, with a 31% approval rating, near-zero global credibility, and an economy set to hemorrhage under the weight of housing collapse, consumer and government leverage and trade deficits, that they might have learned something, and tacked, if only for the sake of fellow republicans who will have to remain in congress and senate under Democratic control of all three bodies. But no. Sound bytes like "the future of American Prosperity is sound" (caution - not verbatim, but from memory) is simply delusional wishful thinking. It is NOT sound. It is NOT even "okay". It is absolutely disastrous, with even the normally sanguine IMF ringing the alarm bells. What are they thinking? Do they believe their bullshit? Say it enough times, loudly and with conviction, and the debt and the inflation will simply go away? DO they believe that, just as America helped the allies in D-Day invasion, Divine Intervention will soon arrive with buckets-of-bullion to service (not even contemplating paying down) our debts? Perhaps an Angel with come to earth (America, that it is) and deliver the blueprints for a cheap, working cold nuclear fusion device. That Americans will wake up tomorrow and say: " Ahhh reckonize that aahh've bin livin' wastefully-like, drivin' aroun' in ma' Dodge at 13mpg highway, an' today ahhhm'-a-gonna git me a Hondar. Yup..." of their own accord (not pun intended) is a pipe dream. Of fucking course people don't WANT too pay high taxes, but there are costs of running the State, and they are factual and beyond dispute. The role of leadership is NOT to encourage and assist your adolescent children to subsist on a breakfast of NestleCrunch Bars and Potato CHips, a lunch of Coca-cola and M&Ms, and dinner of deepfried potatoes and ketchup (with ice cream). Leadership is about using wisdom to argue, convince, cajole neighbors and fellow citizens to make the better and more sustainable choices - both for the present and future, and if necessary, use the force of law or parental coercion as the case may be, to further encourage fellow citizens to make the "better" decision, and discourage those those with meaningfully negative externalities. Stupid quips by the Leader-in-Chief like:
"Others have said they would personally be happy to pay higher taxes. I welcome their enthusiasm. I'm pleased to report that the IRS accepts both checks and money orders. (Laughter and applause.)"
The President (and all lawmakers who laughed along with him) should be embarassed by this derision and dismissal of the concept of a shared public interest and shared responsibility for fiscal finance. Ohh the shame!

Monday, January 28, 2008

Blame Game

I am going to go way out on a limb here, at the risk of stumbling into territory about which I know little. To my defense I will say only that occasionally, some of the observations with the most perspective, happen from afar. The subject is credit-card processor Alliance Data Systems (ADS) seen here left having shed approx 35% last week, before dropping another third today. Ouch. Fear of Blackstone not completing, followed by their actual walking prompted the horror show for those (presumably arbs) still long of the stock.

Like Harman before them, there is now a bit of pissing match over who did what to whom and when, with Blackstone citing onerous regulatory issues, while Alliance management (wealth now halved, Champagne now back on ice) retorted by calling Blackstone "pussies" (ok, they didn't actually say that). To the casual observer from afar, however, it looks decidedly as if not only was the arrangement of financing difficult, expensive and on terms that were less attractive than what the average Smartest Guy in The Room would countenance (for surely IF Blackstone has really wanted they could get the money if they met the terms), but that the recent market indigestion and their competitors' "runaway groom" tricks leaving targets feeling abused at the altar, has perhaps caused Blackstone to catch what is known as "contact vomiting". Any parent with children can tell you that there is a reasonably high probability that if one of your children up-chucks in the back seat of the car, that one of the others will involuntarily puke too from the mess and associated odor. Of course I don't have the details, but if Blackstone can avoid penalties by wagging fingers at regulators, they would be foolish to do otherwise.

But looking at the chart of Alliance Data Systems, I remain troubled (like HAR and SLM before) by what it might mean. Does it mean that ADS is VERY cheap now? Does it mean that the previous price was stupid? Does it mean that others who've not been so fortunate as to either NOT consummate their deals, or find a legally defensible excuse in order to walk away unscathed, are like the ADS risk-arbs, and management holders of stock options sitting upon 50% (or more) losses? Should we care that the cost of refinancing for the deals that have been consummated over the past 18mo will likely be meaningfully higher, or with substantially more restrictive covenants attached? If it was such a desired leveraged transaction at $80 share, why were there so few apparent buyers of stock between $80 and current levels? But the biggest irony is: Why is there such a tremendous notional wealth creation when something goes from the private VC market to the public markets, YET when the PE boys get cold feet and walk away from a deal the typical "private market discount" begins to invert and look like a 50% discount for remaining in the public market. I am trying to think of the type of investor or deal continuum that would yield these apparent non-singularities, but cannot. Anyone with some answers, please reply.

Friday, January 25, 2008

The Bernanke Rule - A Reality-Based Modified Taylor Approach

We are witnessing an historical evolution in US financial and monetary policy in the form of "The Bernanke Rule" which is a stock-market market-based modification of the Taylor Rule for setting Monetary Policy. The Taylor Rule was developed as an attempt to create a systematic approach to the correct setting of Monetary policy, in order to attempt to remove more arbitrary components and so ensure better transparency and convergence between market expectations and actual future policy moves.

The Taylor rule, proposed by (who's buried in Grant's tomb??!?) Stanford economist Dr. John B. Taylor stipulates how much the central bank should change the nominal interest rate in response to divergences of actual GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation, nicely summarized by Wikipedia.

The Bernanke Rule, by contrast, stipulates how much the Central Bank should change the nominal interest in response to nominal divergences of the stock market indices from levels that cause those that own lots of stocks - whether leveraged or unleveraged - to hoot, howl, cry-foul, (and this is most important distinction) irrespective of what these changes in interest rates will do to the actual rates of inflation, inflationary expectations, in comparison to any reasonable target rates of inflation.

It's a good thing all that work of Dr Bernanke towards his BSc., MA, PhD in economics and all that professorial research didn't go to waste!!!! The Chart below highlights the impact upon monetary policy of changes in Stock Market Prices as implied by the Bernanke Rule:

Thursday, January 24, 2008

Want Some Cake With That Icing?

Attention investors: I understand you are feeling a bit dazed and confused by the recent volatility, warnings of imminent apocalypse by eminent persons, but please comprehend that you cannot have it every which way. Stagflation is decidedly BAD for equities. Stagflation is BAD for bonds, and even worse for bondholders who buy and hold bonds at HIGH prices. SO...please make up your mind: return equities to their path of converging towards equilibrium in deeply-recessionary environment, OR sell the shit out of the bonds to correct their panic spike over fears that said deep recession would cause them NEVER to see a "five" handle ever again.

Low Fidelity

Somewhere, back in the USofA, I have a fantastic collection of music - pretty complete coverage of rock&roll's Golden Years of the 60s and 70s, and a pretty deep catalog of of jazz beginning with Charlie Christian, through Wes, Art Blakey, the Bird, Trane, Dolphy, straight through to 70s fusion and ending with Miles post-heroin days and the virtuousic Wynton Marsalis. Unfortunately, it is all on vinyl. On top of the racks LPs sits my hi-fi (pre-amp, amp, turntable, speakers, 100lb of sub-woofer and gold-plated cables). The electronics have come vary far, but the gear was all top-of-the-line Harmon-Kardon, preferred by many-an-audiophile for its representation as the best quality-to-price ratio outside the bespoke workshops of the odd Scottish-based nut-job.

But this post, while evoking memories of the many college late nights lost in the wonders of "Shakti", or the narcotic noodlings of "Blue Train", is neither about music nor wistful thoughts of timepermanently past. But it does intersect my kit, and Harman-Kardon, in particular. You see, there was a time in the 80s when an American company profitably making stereophonic gear was an anomaly. Technological change was rapid, and obsolencence and inventory write-offs a real problem. And the Japanese!!! Not only were they innovating at remarkable paces, but they were virtually giving it away. And in the late 80s, with the Japanese bubble, capital was "free" as their rates of financing were negative, allowing them to spend even more on R&D and mmanufacturing capex. Harman, miraculously survived, even as cassettes and turntables wen the way of the steam-engine. For Sidney Harman was an engineer at heart - a seeming rarity amongst company chiefs who rise to power from finance or legal backkgrounds. He treated his employees well, and they worked for him. Hard, allowing the company to weather hard times, and more importantly evolve. You're probably asking yourself: Was this in America, a CEO who cares about something more than this quarter's bopttom line, his gross-ups and the size of his errrrr ummm Golden Parachute?? He introduced high-end automobile systems that carried higher margins, and then, in a surfers' dream, caught the computer wave and became the minature PC speaker of choice with its sleek, modern designs and fine sound. Sales and profits rocketed in the late 90s and through the bubble burst.

Sales, profits, and more importantly, expectations, really took off in late 2002, carrying the stock price over the next few years to dizzying heights, and ever higher ratings, much to the chagrin my large-ish short position in the stock. Here was a company, in a business in which ratings historically were in the single diigits, where Japanese competitors - Pioneer, Nippon Columbia, Sanyo, Marantz, Yamaha, Matsushita, had all terminally wounded themselves in their audio business, but in Japanese fashion continuing out of some bizarre sense of pride and obligation, rather detached from reality. So while vultures (even Hong-Kong based Chinese ones) picked over what was left in Japan, Harman (and its stock) was valued at 25x future earnings and Sidney made the cover of just about every business magazine for the very same reasons Randians would vilify and mock him. Quelle histoire, n'est ce pas?

Well one day, earnings expectations were lowered, and a bit of the fluff went out of the share price, and at the same time every newly minted MBA who didn't want to get his hands dirty with such things as capacitors and resistors, wanted to be David Bonderman, or Henry Kravis. More importantly, the well-spring of lliquidity had a sprung a massive leak, one so large that if seen by a Saharan desert tribesman, he would think that "God Must Have Gone Crazy" or perhaps that it was a sign of the Devil's work, such an offense to his sensibilities. Yet, "Cov-Lite" DID exist, in prodigious quantities, again causing mayhem to those who dare short stocks, for each morning three more fine enterprises would find themselves the object of The Self-Annointed One's" attentions, spinning tall-tales of justification about "efficiency gains", "benefits to employment", "competitiveness" and other increduluous rubbish not seen since the days of Drexel Burnham Lambert, or, more recently, Henry Blodget.

Then, in a serendipitious event that one day might be captured on the silver screen, the Annointed Ones, replete with the foolishly provided capital, decided that Harman-Kardon would make a fine addition to their portfolio. $120 per share or so, it was agreed would be adequate compensation to turn the finest workplace in America, and most forward-looking management over to the bucaneers who would shred it to pieces and slash R&D in order to meet debt payments. Then, however, came July 2007. The buyers (Goldman Sachs Private Equity Group), got cold feet. Perhaps they could see the coming of The Great Unraveling". Or perhaps they jjust woke up on the wrong side of the bed. In any event, they used a disclosure loop-hole to walk away, without payhing the break-up fee. Harman fropped to from $120 to $75. And then, as the The Great Unraveling" began, and , well, unraveled, it dropped to $40,, levels not seen since long before I began shorting it (and getting toasted).

So what IS my point. Well I got to thinking: There were LOTS of deals that DID get done, and got done at prices as stupid,. if not MORE STUPID, foir companies of far-less pedigree and mettle than Harman-Kardon! IF Harman is now - according to the wisdom of market voting - worth $40, what, pray-tell, does that mean for the oodles of other, perhaps less-fortunate deals already consummated?? IF Harman is trading 33 cents of the proverbial dollar from the bid price, should their equity other investments perhaps be marked at something other than "Cost"? And what of the debt? Using a broken pencil and a coffee-stained back of the envelope, might such a move wreak havoc to the Annointed One's exit plan models? IF marked-to-market, mightn't such a move have wiped out the 15% equity put up by the Annointed Ones, blowing clear through to the Cov-lite loans, probably marked to "par" on the books of the erstwhile lender (i.e. The Sucker)??? IF the whole enterprise were deemed to be worth 33 cents on the dollar, and assuming valuations' sake that the debtholders are the new owners, and the market is willing to pay $40 for the debt-free enterprise, doesn't that leave the PE loans looking like they might be worth 50% of "par", instead of par? These are perhaps important questions worth contemplating.

Of course, I am NOT an annointed one, and am rather a simple soul, and there may be some very good answers as to why the PE boys should be marking their deals to "cost", and the lenders, should be marking their loans to "par", for IF the the Harman deal were done, and they were able to meet their interest payments, all is ok, no?? I have my doubts. It is the financial equivalent of Clinton's military "don;t ask- don't tell" policy. And it wasn't OK in the land of sub-prime, and it's unlikely to be OK in the land of credit card and auto receivables.

I miss my LPs, especially the ballads from all of Miles' quintet "Prestige" recordings, with the Monk, Garland, Chambers, Philly Joe Jones, just as I reckon lenders will wistfully hope for a return to the days when loans made at "par" were, generally worth "par" in reality.

Wednesday, January 23, 2008

Fire In The Theatre (of Crowded Trades)

Such a funny old day in the USA. It would seem its the day that, if you find yourself in the crowded traded, you are kicking yourself for NOT taking some of the chips off of the table. Homebuilders are UP. REITs are UP! Banks, IBs, Regionals, all are UP! Highly Leveraged Mortgage REITs are UP. If I asked YOU any day EXCEPT today, you'd (or the Average Hedge Fund Manager) would have called these things detritus, or worse. Short Interest reflects this widely held (perhaps too widely-held view.

At the same time, the average Hedge Fund Manager's favorite (and perhaps too-favorite) trades are, to put it mildly, suffering from the effects of an episode of "GET ME OTTA HERE, NOW!". This is true of Oil, Oil services, especially true of Mining (RIO, CLF, FCX) buggeringly the case for speculative glamourous thematically popular high momentum growth stocks (AAPL, FSLR, DECK, GOOG) catastrophically true of agricultural-related things like Fertilizer or ag supply-related stuff (POT, AGU, LNN), all which have been the most loved (and humped) amongst the best and the brightest managers in 2007, and which accounted for most of the alpha (and performance fees which they will get to keep) earned in respect of 2007.

Something has triggered the reaction - be it a forced liqudiation, an intentional unwinding, a near-instantaneous mass-change of opinion amongst the best and broghtest of the long versus short equity community, but whatever it is, it appears quasi-systematic in nature, and as suggested in Japan a few days ago, is focused upon position reversal, evidenced by the tell-tales of the volume pick-ups and relative price-action on the presumed short-side of the Street's trades. Put this together with the reversal in the leveraged speculations in other assets - oil, both precious & base metals, and the ag complex, and one might surmise that it is the forces of de-leveraging in action, be they forced or voluntary, opportunistic, or self-preservationary (a new term I've just coined).

After the tech bubble, London Business School research attempted to dissect large HF contributions to the tail end of the bubble, and their subsequent positioning. They found that they continued to increase exposures (presumably contributing to bubble itself) right to the end, yet adeptly managed to liquidate (and reverse) speculative hi-momo tech positions so as not to get hurt, and then profit from the subsequent implosion. Since then, I would argue, that the same-position or crowded-trade risk has intensified, at the same time as the natural counter-trend liquidity providing mechanisms of the market (specialists, block-traders, market-makers) has subsided. This itself has reinforced the returns to say trend-following and other divergent strategies, and so increased the need for participants "to play" either to pursue profit or as a purely Darwinian survival method caused by the feedback loop, of which Jeremy Grantham's GMO is one such reluctant apologist. But one must wonder whether these combined changes won't ultimately prevent The Best and The Brightest from exiting, causing a more spectacular blow-up of "smart and clever" but all-too-common positions, and in the process exposes an excess of hubris and incinerates many overly confident young buccaneers.

Tuesday, January 22, 2008

News Nonsense

Bird & Fortune's sketch, Meeting the Advisor provides some hilarious insight into share-price gyrations, and is a must for anyone in need of a laugh, reflection upon participant behaviour. The Particpant, warranting examination in this instance, is the Media. Last evening I found myself unable to watch more than a few minutes of the BBC since the shock, horror, and seeming indignation about the falls by their reporters, analysts, news readers, and chosen talking heads all reflected the inherently bullish bias of human beings in general the media in particular.

There are, it must said, different views on precisely how to react to the Hang Seng shedding 10% in a night,particularly after it shed 5% the night before off of whatever it shed prior to that. Some would say "Fuck Fuck, Holy Fuck!!", and indeed view it at as some divine (or devilish) conspiracy against thy person, or the fault of illegal immigrants and married gays. Others, such as your truly hearing such news on the World Service delivered with said fear and indignation, though "Well what the fuck did you expect when the Hang Seng had rather recently mounted a Ducati and run up 50% in 40 trading days?" between Sept & Oct.

The rub, of course, is: Where was the righteous indignation or wholesome doubtful sobriety, when it was running up? Is it a "threshold" phenomena where the persistent upmoves are too small irrespective of their run or is it humanity's inability to keep the discomforting lognormal distribution that historically characterize equity prices (excepting perhaps the 2005 low-vol hiatus) in proper historical context? This explanation has merit for the amateur, but is somewhat inexcusable for the professional news organisation, de facto charged with shaping public opinion in regards to understanding such phenomena.

Auntie Beeb is certainly not alone in avoiding the casting of doubt or incredulity upon moves up, and fear and/or indignation on the way down Call it the failure of incremental processing or an unwillingness to suggest that the proverbial camel might be in the process of being overloaded. YET, in the realm of politics, the Beeb is more-than-willing to take editorial liberty and [rightfully IMHO] question for example the application of Collective Punishment of Gazans by Israeli's, or the asymmetrical application of retaliation by Israelis vis-a-vis Hamas mortar barrages. Why, then, do financial editors - even sophisticated ones - find it so difficult to cast doubt upon an unclothed emperor or otherwise reasonably obvious non-sequitir in financial markets? Why cannot a move down be treated with the same non-chalance as the up-move, irrespective of whether its compressed in time? Why does one never hear perhaps the most essential pearl of wisdom (after a rise or run of rises in excess of fundamental change): "other things the same, stocks offer a LOWER expected return now, than they did before.." or following a large fall that : "...stocks now offer a HIGHER expected return in the future than they did in the recent past..."

Monday, January 21, 2008

Out With The Tide

Change is nigh. There are many things, and much flotsam, that I (perhaps contentiously depending upon your values) will be pleased to see [permanently] wash back out to sea, as the unnaturally not to mention imprudent high tides in credit and leverage recede.

10. The Robb Report.
The virtues of a closet full of automatic watch-winding machines; How to avoid choosing a naff colour for your Bentley; Tips for in-air catering when flying private; Getting the most out of that "charritable" contribution"; Recruiting honest indentured servants; Please. It's publication cannot cease soon enough.

9. 2&20.
Everyone knows it's a stupid way of compensating people, that , it promotes asymmetric risk-taking and creates irreconciliable agent/principal dilemma. I can think of a hundred more clever ways to compensate talented people that aren't stupid.

8. Jim Cramer.
Ahem. The world is littered with talking heads of the past, who flamed into irrelevancy. People even tire of the great, such as HL Mencken, who spent his last days mostly unread, writing books for a small audience. You'll know the worst is over when CNBC cancels "Mad Money" in favor of "The Bill Gross Hour" dedicated to the preservation of [my] capital.

7. Momentum Investing.
It has worked in the past. We don't know why it works. There are few solid reasons why it should work, and plenty of reasons why it might NOT work in the future. YET it continues to work. I have a low conviction on this one, but would nonethless be pleased to see its back, if only because in general, it so-offends my sense of rationality, and in particular because so many good and honorable men have eventually been worn down and reduced to chasing momentum, itself recursively reinforcing the phenomena.

6. Leveraged Carry Trades
IF you were designing a global monetary system charged with something as important as the setting of prices to determine the efficient allocation of resources in the coming intervals, would you really give nearly infinite leverage to the most feckless and mindless of headless-chickens so that they make the system virtually unmanageable and who's sole purpose is seemingly to assist in the driving of market prices as divergently far from something resembling an intermediate-frame equilibrium that the system itself might be threatened?!?!? In my mind, it makes about as much sense as The advantaged ,monopoly position of "The Specialist" on the NYSE, which is only a notch more ethical than the tampered one-armed bandit.

5. Destruction of Pristine Wetlands for Shitty Timeshares
Yes, you too can own an island fraction-ownership share in The Comoro Islands, or get in on the ground floor of the next Dubai: Tristan da Cunha!. Never mind that there is only 2 scheduled flights a month. It's waterfront and it's yours! Well sort of. Along with 72 other suckers who buy it. IF it gets built. Perhaps there is some vig in """, a place where people can trade interests in half-finished developments that might, during the next bull-market in credit, (and when cold-nuclear fusion as an energy source is commercialized), get completed.

4. Hummers Hummers and Hummers.
Is there anything that says "I am a dick" more than a Hummer? Obama could get some easy mileage from a "Humvee Tax". Nuff said.

3. Ubiquity of Private Equity.
What do YOU want to be when YOU grow up? I want to be a Private Equity Buyout Specialist!" "You do? Well, as long as we're dreaming, I want to be King!!" The assumptions for IT to make sense on a nearly-mass, or simply crowded scale (London take note), themselves made no sense. What were they thinking? And what were the lenders, and their bosses, and their bosses' shareholders or trustees thinking? Was it mass "ergot" poisioning?!?!

2. Rising Inequality.
Stupid levels of inequality are economically disingenuous and socially destructive, as are stupid levels of equality. There is a huge range in-between in which to experiment. Near-exponential returns to leveraged asset owners, at the expense of ordinary savers and pensioners, was cruel in the extreme. As my five year-old so poignantly taunts: "See ya! Wouldn't wanna be ya'..."

1. Extremely Stupid Macroeconomic Policies.
OK, guys, when the worst of the tempest has passed, let's get down to business and agree on a couple of things: IF we're going to have an open exchange rates system determined by floating rates, no more accumulation of foreign reserves for mercantile advantage; no more setting of domestic monetary policies without consider of, and some respect for, the impacts upon the ROW; Guys (mostly suck-ass elected officials), please keep your fiscal policies in check - especially military spending which is a bit passe; General harmonisation of say, social and consumption taxes helps prevent the most abusive of arbitrage; Carbon taxes all around; And, rich peoples, will you please figure a way to pay for the negative externalities you;'ve shifted to the poor places; bio-fuels? Nope, not from food crops please. And poor people: emulating the western "Les Groseilles" or the consumption-oriented noveau riche may seem like the ticket to keeping your peoples docile, but its really a ticket to nowhere and oblivion; And rich have to lead by that? Like with children, Parents must lead forst and foremost by setting and living a good example! We have a word for those who fail in this regard, and He (and its usually a He) is called "a hypcrite".

Leverage (part deux)

There'll be some stiff-scotches poured tonight! Indeed, leverage is like:

- a cute smiling weepy-eyed dachsund WITH RAGING RABID DISTEMPER!


- Sesame's Street's COOKIE MONSTER!

- Luxurious satiating sex FROM WHICH ONE EMERGES WITH CRAB LICE!

- changing your adorable giggling newborn's diaper BEFORE HE SPRAYS ONE IN THE FACE WITH HIS WEE!!

- an IRS tax-refund checque ACCOMPANIED BY AN AUDIT NOTICE!

- a tastefully-done warm-weather country-club wedding TO DISCOVER COURTNEY LOVE IS OPPOSITE ONE UNDER THE VEIL!!

- a sunny summer drive in a DB6 on a Wiltshire country lane BROADSIDED BY A DRUNK FARMER IN A VERY GREEN IMPOSSIBLY-LARGE JOHN DEERE COMBINE!!


- a nice night out with friends AND A BUNCH OF RUSSIANS AT A VODKA BAR!!

- the warm fuzzy-feeling of sitting by a roaring fire in the fireplace WHILE ONE'S ENTIRE HOUSE IS BEING CONSUMED AROUND YOU BY FLAMES!

Friday, January 18, 2008

Credit Insurance For 2009 And Beyond...

Credit Guaranty and Insurance solutions for the next decade.....

There are many ways to insure yourself (and perhaps investors) against the potential inability to make good upon interst payments. Luck-'o'-the-Irish is one of them and nothing is more Irish than your very own Leprechuan, reputedly blessed with strange yet wonderful powers. Undoubtedly, as demand them grows, well see some inflation in their remuneration, so better secure your's early!

Another popular and time-honored method employed by generations of entrepreneurs, speculators and insurers alike for "making good" under conditions of uncertainty is religion and prayer. Whether by securing relics or icons, or the construction and decoration of Houses of Worship with prior profits, appealing to more powerful deities could be just the ticket to make sure those interest payments and principal re-payments find their way back to their intended source, and not siphoned off by someone named Mia B. Robbin through a no-doc HELOC or Refi on a vastly overvalued POS 2x4 shitbox abutting I-95.

Be forewarned, even as a kid I was always grossed out by the thought of carrying a bunny's foot for good luck, but, nonetheless, many people seemed to place their faith in it. Undoubtedly there are many-a-hare hobbling around, or hopping upon three, all for some superstitious not to mention desperate folks' attempts to bolster their fortunes. I include it here, without sanctioning it, for the LAST thing I would desire is to incur the wrath of PETA.

Say what you will about Nancy Reagan (I certainly have gotten lots of mileage out of her anorexic astrological ridiculousness), but the idea of abstention must surely be considered as viable option for those feeling some masochistic need to extend loans to those who have a rotten chance of returning what they've borrowed.

However, IF you absolutely MUST partake (and free-will gives the Male Human in a democratic nation lots of latitude), then one of the most prudent insurances against lame-credit extension and subsequent contagion might very-well be this Full Body Prophylactic (available in all sizes). It's thickness might prevent you from making loans that otherwise might go sour, but then, that's the point, isn't it?

But perhaps the BEST insurance is to get some muscle or some quite villainous-looking and acting heavies cut in the mold of.....ummm....say.....Vinny Jones??!? What better insurance can there possibly be than a loan taken in good faith under pain of grievous bodily harm upon non-repayment?

Thursday, January 17, 2008

Leverage is.... (part 1)

leverage is
as leverage does
increasing the fizz
as well as the buzz

it has no emotion
keeping no friends
its not magic potion
just what a bank lends

treat it with caution
do treat it with care
else abusing its fractions
might cause you to swear

'course when in a bull
it will certainly yield
buckets more full
wiv wotever you've stealed

but...if in a bear
be you levered and long
the loss that you'll wear
makes you ev'r more wrong

Wednesday, January 16, 2008


Oh dear. Someone has been hurt. Perhaps mortally so. I don't know "who" or "why", but what I do know is that someone is puking or being forcibly puked in Japan, and they are selling assets with little respect to price. It is likely that it is a large long vs. short portfolio since the volume pick-ups - which have been significant on both the likely longs (value biased under-performers) and outperformance of likely shorts (poorer value out-performers with tinges of higher short interest) in a replay of late summer action. It could be a hedge fund for such sub-strategies have been pedestrian performers at best, or, with the capital calls going round the IBs, and universal banks, the marginal utility of balance sheet usage and warm highly-paid bodies may have been given over to cost-cutting endeavors that in turn may have led one or some to shutter an operation with a reasonably sizable position. More interesting is - like August - is not so much the marginal increase in volume, but rather the evaporation of liquidity on the other side (talking mostly bids here), which leads me to believe that this someone was a significant liquidity provider, or reversion-oriented pseudo-market-maker, which - as we saw in August - turns into a rout when such a participant turns and retreats from the undertaking in favor of demanding liquidity to exit.

This is NOT to be confused with the puking of stock-specific consumer-discretionary and earnings disappointments in the USA (TIF, WSM, CPKI, DKS). These are event-driven moves, that are exacerbated by the number of traders and quantitative strategies pursuing similar return. While these (call them divergent strategies) have been small rays of hope in otherwise lame quantitatively-based pursuits, they, too, face the same problem [as August] of overcrowding trades at a time when valuation dispersion is rather elevated on the tails.

As for what it means for Japan, I will note there are an increasing number of investable and real companies (albeit of lesser size that are being caught in the global small-cap slaughter) with real businesses which are victims of recent moves and trading at depression -implied levels of large discounts to book, very low (less than 5x) ev/ebitda, and a reasonable chance of continued earnings stability. At least for those on the vanguard of share-price destruction, they are probably nearer to their intermediate term bottoms than not.

America The Buggered

I was going to write a satirical post on the Mitchell Report on steroid use by professional baseball players, tying it to financial markets. However, I have changed my mind and really want to say what I want to say directly. "America is f*cked because it is neither ready nor able to face up to the very real and serious economic and social issues and challenges that face the nation and its people. These are fundamental issues of governance, public finance, inequality, personal consumption, national resource & energy usage, education, and foreign policy. That congressional lawmakers are even bothering to discuss HGH in baseball players, gay marriage, prayer in schools, abortion, personal faith or democracatizing the world are simply telltales that America, still doesn;t recognize the severity of the issues and challenges that face it, and will likely take a most severe and traumatic drubbing to realize what must be done. Former President Carter faced up to such similar challenges when he delivered what become known as The Malaise Speech, and I encourage you all top read it. He described in no uncertain terms what ailed the nation, and proscribed remedies that included further hard work, perseverance and most importantly, sacrifice. The American people responded by telling him to 'go suck an egg', and handed him the most resounding landslide defeat in history. So much for honesty and sacrifice. Yet, it was precisely what was needed then, as today. Politican's learned important lessons from that: Never talk about sacrifice and never raise taxes IF you want to get elected. Today, there is much talk from candidates running for President in 2008, and for all the iinsppiring "change": and "new era" banter by Obama, and all manner of stump speech by the other candidates, no one still dares to tackle them head-on. This is America's fundamental problem, both of leader,, and of citizens in denial and ignorance. I wish it weren't so."

Now, you can go back to watching your regularly scheduled program.....

Monday, January 14, 2008

Cassandra On....

I have, on occasion, been accused by friends and detractors alike of being overly verbose, and all too often unnaturally awkward or contorted in my turns of phrase. Paradoxical as it is for an economist to be so apparently uneconomical with words (perhaps because they are "free"?), I must admit to being partial towards self-improvement. So, today, here-and-now, I begin a new journey into the land of parsimonious expression. No further introduction is required.

On Prof Jonathan Allum's 2007 Nikkei Call: 'You ARE a 'God!'
On Scott Maclellan's PlameGate Revelations: 'Was there EVER any doubt?'
On Nomura's FIG Stake: Ha! Ha! Ha! RCP & Pebble Beach encore.
On CIC's Blackstone Stake: "Hmmm, wonder who got the best of that one..??!!"
On GS's Global Alpha Fund: ;-(
On Japan's new PM: "Japan has a new PM??! What happened to the guy with the Class-A family baggage?
On Gold: 'May you never walk alone....'On the Equity Risk Premium: Few USA traders or PMs have known stocks when "it" was elevated.
On US Gasoline Prices: Coming soon: the return of hitch-hiking.
On Hillary Clinton: Makes one wonder whether the Repub's might actually have a chance.
On Why John Mack is 'The Man': "WE can pay bonuses AND raise equity...!!"
On Mitt Romney: You believe in WHAT??!?!
On John McCain: "can you spell Konstantin C-h-e-r-n-e-n-k-o?"
On China Stocks: "..................THUD!"
On The Rock & Hard Place of USA Fincl Woe: 'tis a shame that American's voted with their feet rather with their ballots.
On SIVs, CDOs, & Dodgy Structured Finance: Alchemical potions
On Marshall-Wace-Type "Systems": 'Front-running' by any other name.
On FRB Chmn Bernanke: Methadone for the leveraged specs
On Macro-Man: Should be running money for Bruce Kovner
On American Energy Policy: There is none.
On American Education Policy: "Like, um, like, totally gnarly dude!"
On American Health-care Policy: There is none.
On American Fiscal Policy: Worse than none.
On The American Public Interest: What is THTA??

Sunday, January 13, 2008

Whithering Rights

Yves Smith at Naked Capitalism ruminates upon FT reports of another al-Waleed rescue of Citicorp in this post. Perhaps this is, as it should be, since pegged GCC currencies and petrodollar surpluses are primary enablers (not to discount Asian mercantilist, nor US FRB and fiscal policy's role) of encouraging the so-called savings glut of capital uphill to the US to finance yet another round of drinks for the pickled and overextended revelers.

But something else struck me as curious: the disappearance of the most humble and ordinary "rights issue"?? Has economic concentration made it simply a waste of time to canvass ordinary existing shareholders, when a single call to Temasek, ADIA or CIC does the same thing? Does the lack of rights of first refusal upon existing shareholder dilution mean that - like the American political system - finance and markets is becoming less democratic? So while American activists are harassing Japanese management about "shareholder rights", a large disabuse might be unfolding in their backyard. On the other hand, maybe, like the financing of America's CAD, there are no private buyers (of sufficient size) to recapitalize the myriad of financial institutions requiring top-ups. A look at the share price performance of the US financial sector suggests that this may have some merit. Perhaps the avoidance of market-based capital raising has do to with with structural considerations of markets as any issuer of equity, or convertible-linked equity has found. For even a whiff-of-rumour of further issuance brings with it a veritable avalanche of secondary market stock from hedge funds hitting bids and decimating values with newly initiated short positions setting up and arbitrage to buy at the secondary, or cover via rights bought in. This admittedly serves no one's interests (except the underwriter and the arbs) , but raises important questions about investor-type concentration, faux-"arbitrage" strategy pari-passu risk, and a market structure that both allows and encourages it.

I don't have any answers, but diminishing democracy reflected in rights of, and to, shareholders along with increasing power ond concentration of surplus holders - whether mercantile or resource-based seems to reflect a sign of the times. The case of financials may be special, for much rests upon their shoulders, but I'd be interested to hear whether other observers find this curious, and if so whether they view it as benign or something more nefarious.

Friday, January 11, 2008

Holy Rolling

Casinos were very recently (next to tobacco) the darlings of sin, for they had everything an investor could desire: growth, demographics, real estate, entertainment, deterministic odds, and cash flow. It was deemed, by optimists to be somewhat recession proof to boot.

Yesterday we saw Atlantic City's latest year on year revenue figures as reported here in NJs largest paper the the Star Ledger, yesterday, which showed a 5.7% drop - the first time EVER that gross revenues have sagged. Bloomberg broke out the individual gaming win figures for in Dec, YoY for each house which are rather more illustrative:

Hilton -15.9%
Bally's -15.8%
Borgata +1.7%
Caesar's -6.7%
Harrah's -10%
Resorts: -21.5%
Showboat: -14.3%
Tropicana: -20.9%
Trump Marina -6.8%
Trump Plaza: -4.3%
Taj Mahal: -11%

Industry Totals -10.5%
USD$ 371mm vs. USD$415mm in 2006

Two things are particularly noteworthy, on top of Cassandra's unsolicited opinion that Atlantic City is one of the true armpits of not just New Jersey, but America. The first is that competition (from PA slots and local pony tracks) was cited as the reasons - not the economy. But the erosion in December takes are particularly grim, and are likely to reflect more than secular competition.

The second point of interest is that The Borgata - the swankest, swishest of destinations (if such a description is actually possible in AC) eeked out a small gain, while the most plebeian of casinos (Resorts, Tropicana, Bally's) clocked up the largest drops. Clearly, the economy. real estate prices, inflation in energy and food are hitting some punters at a certain end of the inequality spectrum harder than others.

But like restaurants, and retail, casinos will prove to be squarely in the realm of consumer Discretionary (note the upper-case "D"), and seem on the path of being clusterf*cked by rising costs and falling revenues. Atlantic City is, of course, NOT Las Vegas. But one would be forgiven for questioning in what ways do they really differ, and will this be sufficient to overcome the domestic drag and cost-push pressures?

They have a rather special saying in Atlantic City, from the more optimistic hey-days of the Steel Pier: "You can lead a horse to water, but if you want to make it dive, you have to push it...hard"

Thursday, January 10, 2008

Everybody Knows...

Dark music for dark times. Novelist, poet, Canadian songwriter-singer Leonard Cohen's first album was so dark it was only truly appreciated by 119 people, 112 of which were Canadian. OK, that's not true, but brilliantly brooding and contemplative as it was, he and his art remain enigmatic and less appreciated than deserved. But dark is how I feel, as I, along with all that is good in financial markets, are dragged out to sea by an official undertow, the grips of which won't let us back to shore. Must we wait for systemic destruction before we (as nations and people) make even the most modest attempt to alter that which is unsustainable? Fear not, however, for Cassandra: the pills are safe in the medicine chest, and the knives remain sheathed. But Cohen had a way of distilling an archetypical melancholy, that somehow seems especially appropriate here and now.

Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died

Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows

Everybody knows that you love me baby
Everybody knows that you really do
Everybody knows that you've been faithful
Ah give or take a night or two
Everybody knows you've been discreet
But there were so many people you just had to meet
Without your clothes
And everybody knows

Everybody knows, everybody knows
That's how it goes
Everybody knows

And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows that you live forever
Ah when you've done a line or two
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows

And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows

And everybody knows that you're in trouble
Everybody knows what you've been through
From the bloody cross on top of Calvary
To the beach of Malibu
Everybody knows it's coming apart
Take one last look at this Sacred Heart
Before it blows
And everybody knows

Everybody knows, everybody knows
That's how it goes
Everybody knows

Just Desserts

Thanks again, Mr Bernanke! I do so hope that when you retire, you might be so fortunate as to find yourself in a Rest Home, a quite spartan and seedy one in fact, perhaps physically incapacitated (not that I wish harm upon you), perhaps not entirely in control of your mental faculties or continence, and that you might be surrounded by other OAPs of the finest moral integrity and charcter - ordinary folks who've done everything "right", in respect of work ethic and financial prudence, not succumbing to the temptation to draw upon HELOCs, who otherwise saved what prevailing models suggested would be sufficient resources for their waning years. Sufficient, except for a monetary experiment that was certain to destroy the real value of their savings, to pacify precisely those who shouldn't be rewarded for lack of judgment and or foresight. And, mild-mannered as their deliberate, silver-haired, gently-wrinkled appearances might be, I oh-so-hope that they will have unimaginably clear and long memories, will recognize precisely who you are, and understand with great clarity that it was YOU, personally, who was charged with the protection of the real value of their savings, and who abnegated any and all such responsibility, leaving them, rather uncharitably, to their debased fate. I will not entertain, here, what possible penance they might impose upon you, but, in the same way that they didn't deserve what they got, I hope that you get what THEY think you deserve...

Wednesday, January 09, 2008

Blue-Light Specials

As many readers will understand, the cost of living well has - for the past six years - far outstripped the cost of simply living, certainly that as measured by the Hedonized, Boskinized CPI, but even that of the more real Carter or Shadow CPI. Be it a case of Veueve NV, or first growth Bordeaux, a day on a 100' sailboat or a night at the Ritz, an ounce Gold, or an ounce of caviar, a year's rent in a Park Ave apartment, or a year at a fancy private boarding school - be US or UK domiciled, a pair of nice Italian shoes, a pair of Italian supercars, or a pair of surgically-enhanced ummm...errr... However calculated the cost of living "well" has been skyrocketing.

Finally, however, The Rich or merely well-heeled are getting some respite. Asset prices (excepting precious metals, oil, and certain softs), are being hit harder and harder, as credit in all forms becomes more parsimoniously available as a result of tightening standards, more rational pricing, and restraints upon quantities on offer. American and British (oh and Australian) shopping centers are 40 to 50%-off! BBB reinsurance preferred shares are 30%-off offering yields 200bps better than a few months before. Industrial equities are off perhaps 20%, USA retail and restaurants have been marked down 50%, (all in nominal terms) and if you want to buy a portfolio of unsold suburban homes/condos in the hope of becoming a genteel landlord, just spin the wheel and make a bid.

Japanese asset prices, too, are on-sale. TOPIX is more than 20% off recent highs Japanese REITS have been cut in half, has my favorite little Osaka commercial landlord, Keihanshin (#8818) also more than 50% off from its highs where I sold it mid-year 2007, (though also 20% below where I bought it back in Q4!), now at an undemanding 0.5x book and a mere 10x next year's earnings. Relative values too are wackily disperse, depending upon the bias of recent revision changes. For example, undiscriminating specs and less-than-salubrious MFs have, in 2007, ramped the shares of MEMC (WFR US Equity) to more than 10x book and more than 20x forward earnings, whilst poor old SUMCO Tech IX (5977) fabricating similar silicon wafers can be had for a mere 1x revs and 8x forward earnings, leaving it rated on a paltry 3x ev/ebitda. Dispersion indeed, precisely the kind that has haunted quant and value managers through the 2H of 2007!! Moreover, small caps the world over are getting crushed, on the vanguard of discounting in time-honoured fashion the hard-times-a-head. While this undoubtedly provides the un- and underinvested with an opportunity to buy some of investment asset things cheaper than before, remaining bulls on both equities and the economy should stop and take note of some these goings-on for they be tell-tales, whatever the likely bear-bounce we'll see from present over-sold values.

For the problem - even for the rich - is that they (and the system in general) is already invested, if not over-invested, and already (if hedge-fund participation is any guide, leveraged, whether directly or indirectly. A simple gander at outstanding USA debt-to-GDP puts the present into an historical context, "dark matter" notwithstanding. Yes, the assets have already been bought, they are already long multiple residences, (or timeshares for the life-style aspiring), boats, planes, art, and collectible cars. And this IS the crux of problem: the price of almost everything is correlated to credit and leverage, which many increasingly believe is unwinding. This begs the question, who has dry powder and who, in an increasingly momo-world, if any, will buy today when tomorrow is likely to offer an even better price??!?

Tuesday, January 08, 2008

130/30 Specutrage

The Economist recently published a piece on Alpha, and upon reflection, I find it both fascinating and somewhat ironic that as leverage systemically drains from the parallel dimension banking structures as a result of sub-prime bullet-wounds, institutional equity investors, typically late to the party in the best of times, not to mention, rarely-right, are in the process of piling into 130/30 funds on the rationale that leverage is (contrary to current sentiment in the credit markets) NOT poison, but downright useful. So useful, in fact, that proponents apparently believe that it [the leveraged long vs. short portion] should be institutionalized, and set at fixed ratio atop an outright long portfolio, and we should call this "a product" in its own right.

*Blink*-*Blink* (eyes flutter open and shut quizically !!)

So, who's right? Should equity investors be maintaining 100% long exposure and be systematically employing leverage in an ATTEMPT to siphon some alpha from long vs. short specutrage, where the spec vs. benchmark is limited to a single asset class (e.g. cheap vs. dear equity spread)?? Or, IF leverage is, in fact NOT poison, perhaps the investor shouldn't be so limiting in his application of leverage to a corner of a single asset class.

There are some plausible, if not valid arguments for why coordination between long-only beta and relative-value alpha might not be a bad thing, such as avoiding position duplication (long in one portfolio and short in another), transactions costs minimisation, possible fee optimisation, reduction of stock-borrowing and financing costs, in addition to some I might not have thought of. But do these outweigh the institutionalization of leverage in the hands of someone, or more importantly some pseudo-asset-class (call it: equity value spread) who or which might not be providing the best risk-adjusted alpha per unit of leverage in comparison to the total opportunity set?

Counter-arguments please, for I know I sound curmudgeonly here, but looking at the big picture, it seems that 130/30 is the financial equivalent of using an OTC cough syrup to treat a serious bacterial infection where a scrip of higher-octane antibiotics are perhaps the more-correct prescription. Or perhaps its akin to Lite Beer or Oleo-Margarine, both of which are wholly inferior to the real ideal upon which they are modeled, and provide such little benefit relative to their pathetic quality, it makes one suspicious of ultimate motives behind their existence. To me, leverage is binary: either it makes sense or it doesn't. IF leverage makes sense, then, why constrain oneself to employing it parsimoniously and sub-optimally? IF on the other hand it doesn't...

Woland's Variety Theatre Black Magic Show

The Master & Margarita - Bulgakov's wondrous masterpiece-of-a-novel thick with allegory - ties together three separate plots: the first being the return of Satan to 1930s Moscow (in the guise of a witty and sarcastic gentleman known as Woland) and his mischief-making entourage (including a huge Cheshire-like cat) ostensibly to organize a Reunion Midnight Ball to be attended by all of history's great miscreants fresh from the Gates of Hell; the second consisting of the mental travails of an embittered young writer and unlikely hero (The Master") and amorous affair with his inspiration and only champion, Margarita; whilst the third sub-plot takes place in the Jerusalem of Pontius Pilate, where we are a privileged fly-on-the-wall observer to Mr Pilate's meetings with Jesus, and his subsequent ruminations about the man, and the people conspiring against him, which, is woven together with the first two since this [Pilate & Jesus] incidentally is the subject of The Master's tortured literary work.


Sounds convoluted, but it is utterly mesmerizing, and survives the test of time incredibly well. This is a particular achievement for an allegory lampooning something as remote as the early post-revolutionary USSR, but it certainly stands up on its own as an insightful an entertaining read.

It's continued relevance may have as much to with the universality of man's follies, or the ability of good satire to transcend time. But perhaps, it may be because the bizarreness of 1920s USSR (idiosyncracies aside) may not be that remote from the absurdities of our own modernity, albeit on the opposite tail of political and financial possibility.

I must admit that it has been some years since I had the pleasure of reading the book, but one reader was kind enough to recently remind me of a chapter that he/she thought particularly germane to the unfolding of current day financial events. In it, Woland, who most would find an eminently likable fellow, and his retinue (who also possess an assortment of captivating qualities), have arrived and begun making plans for their Reunion Ball, under the cover of putting on a series of Black Magic Performances at The Variety Theatre, in order to alledgedly expose its "machinations". But that's not the way the Show turns turns out, as you will see from the eNotes synopsis of the Chapter below:

(from eNotes)
The show begins with Koroviev [Woland's assistant who looks like a choirmaster] and the cat [called Behemoth] flipping a deck of cards back and forth, and Koroviev swallowing the cards as they are returned to him by the cat. The deck is then found on a citizen named Parchevsky, after which a heckler claims the deck was planted on Parchevsky. Koroviev tells the heckler he now has the deck. This heckler finds ten-ruble bills in his pocket instead of the deck, and when a fat man in the stalls asks "to play with the same kind of deck," Koroviev shoots his pistol up at the ceiling, and money begins raining down. The audience starts grabbing the bills, but Koroviev stops the rain of money by blowing into the air. Bengalsky steps in to declare that the rain of cash was merely a trick of mass hypnosis and asks Woland to make the notes disappear, but Koroviev and the audience do not like this idea. Someone in the gallery calls for tearing Bengalsky's head off. Koroviev says he likes this idea, and the cat jumps upon Bengalsky and tears his head off with two twists of his paws. An outraged audience asks for the head to be put back on Bengalsky, and the cat puts it back. A crowd rushes to help Bengalsky after he starts moaning, and he is taken away by ambulance. Meanwhile, Woland disappears, and as he does, Koroviev displays ladies' dresses, hats, shoes, and accessories from Paris. After he offers the women in the audience the chance to exchange their dresses and shoes for the Parisian dresses and shoes, one brunette takes up the offer. After she receives a pair of shoes and a dress, women rush the stage to get their new dresses and shoes. When Sempleyarov, the chairman of the Acoustics Commission of the Moscow theatres, calls for the trickery to end, Koroviev exposes his affair with his mistress, "an actress from a traveling theatre. Sempleyarov's wife defends him and, amidst the continuing chaos, Koroviev and the cat, now called Behemoth, vanish from the stage...

Sounding familiar?

Thursday, January 03, 2008

USA Retail's Perfect Storm

There was a time but a few years ago when the US consumer was, as the saying goes, "flush" - largely a result of rising home values, themselves a result of nearZIRP in Ameica and Japan, yet still with a strong dollar, unfathomably cheap energy & commodity prices (in both USD and non-dollar terms), and lots and lots of cheap stuff flowing in from China. Wealth was further buoyed by deflationary effect of all manner of factories exiting the US in favor of Chinese elve-dom - some of which was passed on to the consumer. This was wondrous unless of course you were a worker at one of the factories now-shuttered, in which case there was no reason to worry for there was a job for you building houses, selling kitchens, brokering real-estate, or greeting at Walmart, Target, Beebe, Chico's, or if you were the granola-chomping kind of slacker, Whole-Foods Market.

These times were bountiful for retailers as well. Demand was increasing, wage-bills were in check due to munificent forces of globalisation, corporate taxes were cut, sourcing from China meant COGS were actually falling or at worst stable, distribution costs too were stable, low energy costs meant one could be wasteful-beyond-thought without it ticking the bottom line, yet miraculously, as if in a Disney fairy-tale, consumers
seemed to have more-than sufficient disposable income. And if the consumer balked for a moment, a rising stock-market or another round of refi would refresh the well with what felt like an inexhaustible supply of freshly conjured money. Some called it Goldilocks. Some termed it a virtuous circle. But, perhaps most importantly to observers, the basis for this prosperity was NOT the rewards derived from the sustainable production of goods and services, but the rather somewhat fictional and almost-certainly unsustainable production of promises.

Many a skeptical investment manager - particularly those of foreign persuasion - were handily spanked in 2004 and 2005, and again in 2006 for doubting the sustainability of this entente cordial between lenders and borrowers. Growth, it seemed had no limits, and very soon (so the story went) ordinary Chinese would be adorning themselves with URBN & BEBE designs, shopping at WFMI, or laughably eating at PNRA, CAKE, or PFCB (a horrendous upscale Chinese eatery mushrooming across America). The second half of 2007 however, saw the market wake up to the reality of what these things might be worth in the event the circle was less virtuous in the future than in the past. What might happen to sales and profits IF sourcing COGS rose as a result of a weak dollar and inflation, distribution and energy costs vaulted, wages and benefits ticked higher despite wage-depressing impacts of globalisation, real estate prices and stock prices FELL as energy and food costs ROSE leaving the average consumer squeezed BOTH on both their income statements AND balance sheets?? Ohhh it wouldn't be a pretty picture at all. No it would not. Only food retailers (and not the WFMI Whole-Paycheck Market tail of the market) would be spared and maybe even prosper, or not be subject to the wealth destruction preying upon discretionary purchases.

How would American's respond? First, by denial. The clouds may be dark, and the air pregnant with moisture, but it will pass. Then by cosmetically rearranging purchases. But as the storm unfolds, they will understand what it means to be hit from ALL sides. Higher unemployment, higher basic costs for food & energy, higher import prices for goods, diminishing wealth efects and a renewed effort to save which will feed back into lower consumption, and then, perhaps only then will lower prices will follow.

Retail and restaurant indicies have been crushed in the second half of the year, with only a few being spared, but they are still factoring in some growth, and perhaps are not factoring yet further margin erosion from - in the case of restaurants - higher input costs and lower demand, and in the case of retail, higher distribution and sourcing costs coupled with diminishing demand. Dark days are ahead as investors (and management) discover that retail is, in fact cyclical, with enormous macro-economic sensitivity. There was, perhaps a reason why retail historically traded upon single-digit ratings, for over the course of the cycle, this perhaps equated to an average equity risk-premium in-line with the rest of the market.

Wednesday, January 02, 2008

Inflation Bites?!?

Please choose your favorite caption for the photograph (left), or in the event you're feeling creative, submit your own. Kewpie doll to the best entry....

(a) Inflation Bites...

(b) A Goldman Sachs Banker congratulates a client on a well-struck deal

(c) What's left of the Merrill Lynch Super-Senior CDO Tranche.

(d) Chinese Commerce Minister Bo Xilai (left) shakes hands wiith USTR Ambassador Susan Schwab

(e) Ken Livingston's latest "Congestion Charge" Proposal

(f) "That'll teach the bastard to STOP DUMPING SO MUCH SHIT into my river"

(g) "Anyone have any Tabasco..?"

(h) "Doncha just lurve strict application of shari'a law?