Tuesday, March 31, 2009

Death Nell

If there is any doubt that the high-end of conspicuous consumption is stinging, just come and visit Aspen or Snowmass. Local Pitkin county radio this morning was discussing the closure of several well-known high-end retail stores - not for the season, but permanently. The reason cited: many of their clients, they said, had were reeling from being "Bernied". The slopes are eerily quiet. Kids who'd we' had booked into group lessons were nearly private. Chatting with a local high-end builder, he was quick to tell me that he has no backlog with current work ending in July. Yes he said he's been through three of these before and something has always come up. But this time, the something has yet to materialize.

Most ridiculous is the real estate porn infusing local glossy mags, still sporting prices beyond the realm of the absurd. Despite the confidence of local cognoscenti made wealthy from peddling slopeside or barren building lots with a view, this shoe has yet to drop, sure as Danny Bonaduce had freckles and a numbingly expensive cocaine habit, it will drop with a resounding THUD! If one needs any evidence on top of the increasing number of building sites abandoned by homeowners made skittish or insolvent, they need only look to the headline news today of the abandonment of Little Nell's Snowmass project due to inability to sell forward OR find adequate financing. Not surprising perhaps at a mind-numbing $3,000 per square foot. This leaves a rotting carcass in the center of Snowmass - an eyesore to other local residents who've recently overpaid, or worse, put a deposit on a project that will likely fall into receivership.

Like many a bull-market project and their champions, Little Nell and their partners undoubtedly committed the cardinal investment sin of extrapolating forward, that which should never have been - at least not if one is dependent (or will be dependent) upon munificent external finance at some time before completion, or the stupidity of strangers. Such fallibility is nevertheless human, and before this cycle is over, they will not be alone in having assumed they could borrow required sums to complete, and subsequently shift astronomically over-priced leisure housing to the yet-to-be-identified even more stupid would-be purchaser. But requiring more scrutiny perhaps is the description of the project itself ("luxury", "five-star", "exclusive", "gourmet", "world-class"), for such adjectives appear increasingly suspect, with their redemption more elusive than anytime in living memory.

Tuesday, March 24, 2009

Pause for Thought

I have very few problems with the authorities attempts to triage the patient (using Dr Roubini's analogy). I do of course have some more restrained opinions with respect to the nuances, but nothing (as a critic) that hasn't been more articulately or exhaustively covered by those more intelligent and cogent than I.

But as a trader/investor I will admit to being a little bit skittish at the thought of the P&L consequences of posting a trillion dollar purchase of US Govt Bonds, here...and now ...at these prices and yields. For if "price" IS any indication of market distress, and forward-looking expected return is (acknowledging the exception of a decade-and-a-half of JGB yields with a 1-single-digit handle) related to value, then by deductive analogy, one might posit that Treasury Bonds are not the part of the patient that requires such attention in the emergency room.

Yes, I understand it is a tool, in a larger policy context. And that there are perceived positive externalities (like causing long rates to artificially hover at lower levels than they might otherwise thermodynamically tend). But given the length and breadth of distress in the markets, and it would seem, on financial institution (and household!) balance sheets, if one were to post trillion-dollar tickets, there are far more attractive opportunities elsewhere.

Umm al-Fahm

I have TARP Tiredness; AIG-Overload; PPIP-Exhaustion; TALF & TSLF -weariness; and Bonus-Outrage Burnout, not to mention a bout of Pozni-Lassitude. It will undoubtedly fade with the goodness of time, but in the meanwhile, with nearly every critic, blogger, strategist, economist and commentator all over it, any musings I might have, seem more or less irrelevant at best, and a waste of time at worst.

Yet, such outrageousness is not monopolized by financial forces as evidenced by zealots marching in Umm al-Fahm, who are depicted (rather poorly and without aesthetic formation) in the adjacent photo capture taken yesterday:

And while attempting restraint in stirring the hornet's nest, I will suggest that pictures DO very often speak louder than words, the former image conjuring my memories of those most assininely-Patriotic-of-folk, The Orangemen, in all of their Portadown-glory as more elegantly,but just as ridiculously captured here. Need one say more...?!?!

Monday, March 16, 2009

Don't Dish it Out If You Can't Take It

The wind was blowing 30 knots, whipping ice-crystals into exposed orifii. In the near white-out, looking down from perch on the lift I was able to make out a lone young female boarder who'd missed her drop and now had a most long and heinous traverse. She was putting on a brave face, and through the howling of the wind, and in-between her apparent tears and sniffles I could hear her repeating the mantra "Boarders don't cry...boarders don't cry...boarders don't cry...."

Similarly, there is more than a little irony in today's FT report, highlighted by Gwen Robinson at FT-Alphaville (Tokyo) that numerous Hedge Funds are planning to sue Porsche over the sports-car manufacturer's perfectly-executed Hunt-like squeeze of VW shares that snookered hedge funds and traders, large and small, the all world-over. Now before I am accused of mimicking Private Eye's Glenda Slagg, let me say that I don't believe Porsche's actions were particularly noble, and were at best in the murky grey nether-regions of financial legality. Having said that, despite my career as a professional arb, I do (from a purely technical standpoint) admire Porsche's patient setting of the trap before springing it's blitzkrieg with Rommel-like precision over-running any and all VW shorts misfortunate in their timing, leverage or position-sizing.

I should indentify and empathize with the squeezed for I often root for the underdog and have always played The Game by the rules, and dislike when dishonesty and malfeasance triumphs (even temporarily), gaming the system, arguably at the expense of more virtuous or long-term investors (or HFMs own investors). I realize this sounds sanctimonious, but I too have been at the game long enough to have been on the other side - occasionally too early like the VW shorts - of virtually every type of shenanigan ever plotted. conjured, or imagined. And a meaningfully large percentage of these have been nudged, cheered, lead, architected, sculpted, orchestrated, and cajoled, by hedge funds - quite likely the very same ones now suing Porsche. Whether the predation of shorts, trading on material non-public information, tape-painting, end-of-day/week/month/quarter/year window-dressing, stop-fishing, front-running, option-leans, illegal short-sales, collusion with other like-minded similarly-interested investors, using OTCs or other paper-smoke-and-mirrors, options to avoid SEC filings, sponsoring bogus research, buying early release of research, worming clinical-trial results, cornering stocks, ambushing and killing entire hedge funds, front-running new-issues, death-spiraling Reg-d issues, mutual-fund timing, all these are just the run-of-the-mill man-made (often hedge-fund made) market-hazards one must contend with.

Yet, despite the aforementioned, the cautious and skeptical contrarian (if I be an example) can successfully overcome them. Diversification, prudent position sizing, keen observance of the structure of crowded trades, conservative leverage, understanding as precisely as possible when and why something is not doing what one expects or forecasts it to do, who (or whom) is responsible for a position NOT doing what one expects all can contribute to preventing the horror of being checkmated whether by an HF or a would-be Porsche. Lose a pawn? Sure! Maybe even sacrifice a knight. But live on, and learn. So, if I, an honest plier of the trade can withstand the humiliation of having my stock called back after some unscrupulous fund has ramped-and-lent and ramped-and-lent, or suckered into buying a dip in-front of an earnings torpedo, and still live to fight another day, because it is the nature of The Game, then surely those playing The Game with greater abandon adhering to fewer rules should take their lumps like men, and admit that from time-to-time Alekhine will somewhat epicly have them for lunch.

Cheney: "Rush is a good guy"

In his typical charismatic fashion, Dick Cheney let it be known in a national TV interview that he has no doubts "Rush" Limbaugh is a "good guy".

One might expect that the late Generalissimo Francisco Franco also ranks fairly high on the Cheney-scale of "Good-Guy-ed-ness".

Tuesday, March 10, 2009

USD$ -50,000,000,000,000.00 - The Horror

Blackstone's Stephen Schwarzman was commenting on The Horror of wealth destruction. So one should rightly ask: How much "wealth" has been obliterated? Ashamedly, I often seek the path of least resistance, though I've been more recently preoccupied, both of which are excuses for taking the easy route and referring to the FT quoting the Asian Development Bank's number suggesting $50 trillion has been smoked, vaporized, hacked-off,roto-rootered or otherwise removed from the mark-to-market asset side of the global balance sheet.

I was actually quite pleased to see this number - not because of schaudenfraude or a sadistic desire to inflict ill-will upon others, but rather because it confirmed the number I had (of my own lazy accord) roughly estimated of what Americans had seen their net asset values diminish which was twenty-trillion (20,000,000,000,000). This, relative to the ADBs estimate, also roughly jives with America's share of global GDP, (not wanting to quibble over a trillion here or a trillion there). This still leaves Americans with $20 to $25 trillion of net asset value by my very rough back-of-the-envelope calculations (though please don't ask me to show my work).

There are those who adopt a glass-half-full view of this, and hope we'll return back soon to the warm and fuzzy place of high asset values. Or one might take a glass-half-empty view and dismiss peak values and more!!) as never having actually existed or, been realizable, and see where we are presently as being still enroute to where Global NAV will ultimately bottom. For the moment, I'll take the middle ground and venture that having shed an awful lot of aggregate value (an entire year of global GDP according to the ADB!), we're a lot closer to where we're going than we were. Some limb, I've climbed out on, huh? But it in fact matters. It matters to the inflation vs. deflation debate. It matters to the keeping of one's head in regards to the scale of the problem and the potential resources that can rallied, marshaled (or sequestered and confiscated for the more authoritarian amongst us).

I know this is a facile way to look at it. I know it is not a matter of simply passing the hat to each and every for their contributions since the assets are mal-distributed beyond mosts' comprehension. But it seems fair to ask the question: Precisely how big is the problem (the eventual total hole in financial system's balance sheet) in relation to everything, in the US and globally. A further two trillion? three trillion? perhaps five trillion in the USA?? Mind boggle-ingly large numbers indeed. What is this as a percent of GDP? What is it as a percent of GDP spread over 10 years? What is it as a percent of Aggregate Net Worth? Ten percent? Fifteen percent? Can we translate this into a facile figure that allows us to contemplate how much poorer it makes America, in aggregate? Would it be another ten (or fifteen? or five?) percent poorer than it currently believes and, if so, is it possible we can apply our credit accordingly, and start again?? Would you trade 10% of what you thought you had (savings, pension, net home equity) for an end to the uncertainty, and a reasonable assurance it shan't happen again (in addition to warrants on the excised pot of shite)? IF the answer is categorically no, does this mean we are in for the mother of all political battles while the real economy burns? Will this battle be generational? Does it pit the ends of the mal-distribution against each other? How else can we parse the question?

I am not dismissing the validity of the debate over official action, and it's reasoned moral implications and differences over optimal implementation. But it seems such is the vehemence and vitriol of the debate over the mechanics - however valid - that it has run roughshod over the very broad and simple questions that include phrases such as The Long-Term Public Interest, sustainability, and fairness.

Needless to say, I don't have the answers. But I wonder if the descent into technical jabberwocky hasn't prevented public buy-in, instead, fracturing the polity into factions defending parochial interest, rather than asking, and attempting to non-partisanly answer the question: What is best for the vast majority of American people - not simply this month, or this tax-year, but in the context a generation, and their children. The risk, is the image conjured by that of Pontius Pilate arguing and accusing his legion,in the life of Brian, while Brian, ostensibly held prisoner, escapes due to the recrimination. If not apt, perhaps it should nonetheless replenish diminishing reservoirs of amusement.

Friday, March 06, 2009

The Perfection (of sorts) of Quantitative Easing

The Brits are now offically obsessed with quantitative easing, first not comprehending it, then wryly examining it, finally yielding to a stoic skepticism about it's parochial impacts. There is a certain anodine perfection to the phrase, quantitative easing, unlike anything else in the entire rather utilitarian financial or economic lexicon. It sounds wonderful, functionally-useful tonic, though certainly not dangerous or hazardous to our well-being. Yet it remains sufficiently innocuous so as to escape scrutiny and with it, the associated public examination that prying eyes bear. It is entirely Madison Avenue rather than inflated Goebbels-like propaganda or overly-wooden Soviet or Pyongyang slogans.

Once one begins to unwrap the phrase Quantitative Easing, it continues to enigmatically distract and intrigue, like Russian a Matryoshka dolls, opening one, only to find that it yields an empty shell, in which sits another nested figurine. Now make no mistake, I am talking about the phrase and not the substance. For those who perservere and look further, say (to continue our analogy) inside the first egg, one immediately encounters a measure of good feeling in the word "easing". One ignores quantitative at first, mostly because of some dormant maths-phobia. But the "easing" is offering tangible relief from something-left-unspecified, but, nonetheless something that must have been unpleasant. So far so good. After a deep breath, one re-approaches the imposing "quantitative". Ahhh, that's not so bad. It does have lots of letters, and "Q-words" are daunting - particularly those with twelve or more letters that are virtually impossible to construct upon a Scrabble board. But ignoring the feeling that it could just as easily inflate to fourteen or sixteen letters without impacting the meaning, the word actually confers a feeling that the subjects of its intention are getting more of something, and it's not costing them anything, - a bargain rarely seen in today's world, and one that defuses suspicion from all but the most cynical.

The architects of the phrase have been careful to avoid any suffixes with -tion, or -sion, thereby extinguishing unnecessary alarm or in the extreme causing the reader become panic-stricken. Inflation, deflation, recession, reflation, depression, castration, malnutrition, cessation, or the dreaded hyperinflation are nowhere in sight, their fearful suffixes kept as far away as phonetically possible. And for good reason.

When the disparate two parts are put together - "Quantitative....e-e-e-a-a-s-s-i-n-g" - one can imagine a free neck-massage by a friend or the relief one feels when winding down a manual jack to finally lower one's car after having worked hard and gotten filthy changing a tire. It recalls visions of opening a nicely chilled Laurent-Perrier 1998 Vintage Brut and slowly letting enough gas out to avoid a Tour-de-France celebratory ejection. Indeed, the two words "more" and "relief", (altogether now: "more relief"), indeed who could question or reject such a positively magnanimous offer?

Interestingly, I had a go at thinking of some alternatives of equal disarming grace and feel-good. And after more than thirty-minutes, I could not even begin to think of anything remotely as elegant. Complete defeat. Which begs the question: From where did it's coining precisely arise??!? Though first employed in Japan, and conceptually, wholly the child of rather utilitarian central-bankers, I am quite certain the term could not have been born in a government ministry, any branch of government or for that matter a financial institution. It's seduction and perfection can only be the brainchild of far more skillfully cunning Persuaders. It is time for them to step forward and accept credit where [no pun intended] credit is due.

Wednesday, March 04, 2009

What is Your Real Name?

I believe there is a problem with the lexicon describing our current sad state of economic affairs. Terms like "Bailout", and "Rescue" are simply inadequate, making it sound as if the collective "we" have somehow been gypped – now forced to shell out for something collectively we’ve never obtained. Even respectable media organizations are guilty of fanning the proverbial flames of linguistic indignation and its implied recriminations through mindless repetitive use. All which reminds me of a July afternoon in early 1980s when I was commiserating with one of my best mates at the LSE who had just obtained his examination results from the papers he sat for the first-year of his law degree. Head in his hands (when he wasn't shaking it to and fro'), he was utterly dejected, for he had failed each and every one, possibly obtaining the lowest aggregate score ever in the long history of the Law department. "I can't believe it!...I can't fucking believe it..." he kept repeating.

Now this particular year was a grim one economically and socially speaking in the UK. Toxeth and Brixton riots were still fresh in peoples minds; Arthur Scargill was agitating on behalf of the miners; almost everyone possessed a Billy Bragg LP, "gentrification" and "buy-to-let" were hitherto unknown phrases in the prevailing English dictionary, and there were, to the best of my knowledge, no celebrity chefs or Michelin-starred establishments on said shores. But they were glory years as a student evidenced by 20-pound-a-week rents and 35p-per-pint at "The Three Tuns" not to mention parity exchange rates for my USDs. My friend, armed with a keen wit and intellect and the gift of blarney, his guitar, strong voice and a long repertoire, was a sought-after bard at Pubs, bars, and parties both inside and outside student circles. He partied longer, harder, and more frequently effortlessly whiling away the hours, days, weeks and months with nary-a-thought of consequence. Until that sullen July.

What use are friends if not honest? So I cleared my throat, and said "Matey...yes it's a pain in the arse. You'll need to spend the summer revising and re-sit the papers in Autumn. But you've little reason for regret. You’ve objectively had a smashing year! You played with some of the best, met interesting people, slept with more-than-a-few attractive women, and made friends you'll have for life. I mean...it's not as if you studied and failed....THAT would be disappointing! THAT would be a more worrying failure!! You made choices, and have something to show for it, even if "that" proves ephemeral...no one can take it away" He thought about what I’d just said, and didn't fight me. He knew I was right, and his broad smile returned. "Fancy a pint?"...

Returning to the present, pejorative talk of "bailouts" and undeserved “rescues” just misses the point. Focusing upon bent bankers, snake-oil securities, or inept analysts, which were but symptoms, is somewhat misplaced since hey are not the root causes, and, as such, these facile recriminations however satisfying and apt, trivialize the breadth of culpability, and near-universal benefit of The People over the past two decades. For what we are witnessing is the arrival of the bill, getting around, as it were, to coming to fathoming the scale of it AFTER a long long long collective night out. We’ve HAD the fun (and I use the "we" in the broadest and most encompassing of terms). GDP, employment, consumption, wages, all were substantially higher than they otherwise would have been. Everyone earned more and everyone had work who desired it. Enjoyable trips were taken, and attractive shades periwinkle now adorn what might otherwise have been walls and ceilings of cracked and peeling fomerly-white paint. Purchasing power was buoyed by a dollar that was stronger than it ought to have been had nations lived on a balanced and current basis. Taxes too were collectively lower further buoying PCE. Yes, everyone benefited, though as is always the case, some more than others. Securitizations of cars, homes, CC receivables, Refi with equity withdrawal and HELOCs all were but more rounds on the tab to be (or not, as the may prove to be) paid for in the future. Homes were built, enlarged and landscaped. Offices multiplied like spring mushrooms. Nations were wired in fiber. Previously incurable diseases, cured by overly-flush investors. Yet other entire nations emerged (if only temporarily). A Wii now sits in every house, and a recent version of Windows on every desktop. Does anyone still use a CRT?? Everyone has several handsets despite the amusing antiquated cumbersomeness of those with a vintage of more than a few years. This happened not just in a year (or two) but over a decade, perhaps two, or even three so the comparison of the cost must surely be kept in perspective by comparing it to a decade (or more) of GDP - not the annual figure - to get a true sense of perspective. Yes, our binge was mostly about consumption, though this itself drove massive capex and investment (mostly elsewhere), by those wrongly extrapolating that our thirst would need to be quenched similarly and persistently, longer into the future than has been manifested by events.

So I propose that we need a new, more accurate linguistic to reflect what this is called since. “Bailout”, package, rescue, are inadequate insofar as they don't describe more precisely in its historical context what it is we are witnessing, and fail to address the universal nature of the benefits and, I would add, the culpability that descends throughout the polity. It IS a pity that thoughts of prudence, resilience, and sustainability were demagogically dismissed when these thoughts would have provided a tether to reality. But we can, at least being anew by calling it what it IS, and as such, I’d be happier with merely “The Bill”, “L’addition” "Il Conto", or more succinctly, "The Tab" - which for the sake of the avoidance of doubt, should include the more historical detail than less. But let’s stop the narrowly-focused pejoratives or value-charged labels (correct as they may parochially be) and take a moment to reflect on our past collective tangible and ephemeral revelries. Once there, understanding everyone has a piece if of political or economic shit on their shoe, one may begin to let go of the anger and accept that socialization of The Tab is not wholly unjust, and that the time for anger and incredulity in opposition (i.e. all those numerous political and economic forks to settle up before) has long since passed.

Tuesday, March 03, 2009

It's Official: Mrs Madoff is Delusional

Bloomberg reported that Ruth Madoff's lawyers are purporting that the USD$45mm in muni bonds and USD$17mm in cash on depo at Wachovia that she possesses are "unrelated" to the Grand Ponzi. In other circumstances, a wife's claim to have independent assets might be credible, particularly depending upon how long she's been beneficial owner, how they were acquired, what she did in her professional life (if any), and so one should at least entertain the claim. In this instance, it just demonstrates she is utterly unrepentant and delusional. If her kids won't take her in, perhaps justice would have her spend her waning days in a Jewish Retirement home populated with Madoff investors and spouses of Madoff investors.