Thursday, October 30, 2008

Negative Crack Spread

The FT Alphaville has a piece on the negative crack spread. I'm not going to get into explaining what the crack spread is here, since the article does a much better job. However, it does make me wonder what trade might be available in the next 3 - 6 months in the energy futures market. Buy the RBOB, while going short WTI?

Just sayin'.

Wednesday, October 29, 2008


I have no idea how I missed this originally, but I think it was because I was in Las Vegas when this was published by David Merkel.

Simply put, this is the best definition of how Capitalism SHOULD work that I've seen in written form. (I don't like using the word "should" in any context, but it seems appropriate in this case.)

Granted, it does not always work like that. Maybe not even most of the time, at least in this period of world history. However, I don't think Capitalism is dead. On life support maybe, but not dead. The greedy, self-centered and selfish bastards took over and have been running the show for far too long. However, there are still people out there interested in creating the most value for others -- providing service -- in exchange for the money those people are willing to part with.

Pricing is a great measure of the service you're providing people. By definition, if you are lowering your prices, it is because you are not offering enough value to your customers to garner the higher price. Instead of racing to the bottom, you need to figure out how to move up the value chain. No, its not easy, but nothing worth doing is. (And when something is easy or perceived to be easy, too many people start doing it, looking to get rich. See the dot com boom and real estate investing/speculation in the last 10 years. THAT's the definitive contrarian indicator, when everyone is trying to make money in a given arena.)

So I have to hand it to David Merkel with this well timed post. Too bad I'm finding it a month after its original publication.

Now back to creating some value, somehow, for someone...

Monday, October 27, 2008

Oh Well

I was so looking forward to making a rebalancing buy in my trading account today, but my cash balance conspired against it. No matter. Next week will give me an opportunity to rebalance for November.

I did pick up some additional PMF at $12.30 per share. I'll be slowly buying into that over the coming weeks as well.

I know I've been delinquent for the last week, but I'll be updating over the course of the week. There's a lot of catching up to do regarding the last 2 months, and lots of stuff to share with you all.


Friday, October 17, 2008

Deleveraging Academia

The WSJ has an article about the impact of the credit crunch on colleges. It appears that the effects are being felt all through the academic complex.


Higher education has been one of the most mis-priced and overvalued products
in this country. The rate of increase in college costs has been flatly absurd. Why? Too much money.

For the longest time, colleges and universities have been overpriced. The price inflation we've seen for college education was completely ridiculous, fueled by easy government grants, loans and other spending. Isn't that the kind of government spending that leads to inflation - spending that creates no marginal increase in value? Sure seems like it. We're not talking Weimar Germany yet, but still, the entire college financing market has been able to increase in cost at insane rates of growth on the back of cheap money, mostly in the form of debt.

It had to come to an end. Good riddance.

I think there is a lot more to come - a lot more layoffs, more construction to be postponed, and other crazy spending by universities to reign in costs. No longer will they be able to finance this madness with 6% annual tuition increases, because shortly there will be few (if any) with the capacity to pay. Definitely not from the "middle class".

And socioeconomic stratification will get worse.

I feel sorry for anyone who was counting on getting loans to pay for any kind of higher education. Its going to be ugly, but it is long overdue.

Wednesday, October 15, 2008

Is Anyone In Charge Here?

THIS ( sub req'd) is abso-fucking-lutely absurd!

Doesn't anybody realize that artificial demand is what caused this problem in the first bloody place? The whole point is that real, market clearing prices need to be found for houses. This is so simple even I get it! WTF?

People need to start saving for the things they want to buy, and that includes houses. That means getting your 20% or greater down payment, and having a way to cover not just PI (principal + interest) but TI (taxes + insurance) as well, and maintenance costs, furniture, utilities, landscaping or yard work, and all the other associated expenses that no one ever seems to take into account. And don't forget to factor in inflation and increasing tax rates as well.

Get over it already!

Tuesday, October 14, 2008

Beware the Second Order Effects!

A nice piece, several days old, by John Dizard over at the Financial Times. Not sure where I picked this one up, but thanks to whomever supplied it!

If nothing else, the moral of this story is "beware those second-order effects". It seriously takes conscious thought to catch this stuff, and I figure 99.99% of the planet is technically unconscious so...we should be surprised that we get the results we do.

Beware those second order effects!

Monday, October 06, 2008

An Old Market Hand Speaks

Nice interview with Seth Glickenhaus here ( sub req'd). Definitely worth a few minutes to read. I'd say it was spot on, but then I'd probably be gushing.

Saturday, October 04, 2008


This has been floating around in my mind for a while, but it all just came together right now as I finished reading the Bloomberg article referenced in my last post.

Whenever you hear someone make an analogy between almost any advanced derivative or structured product and some simpler product, the simpler product is almost always a call option. There is almost a 100% chance that the simpler product will be an option of some sort, but usually, it is a call option. If THAT doesn't convince you to just trade the underlying options directly, I don't know what does.

Just a thought.

Laziness Insurance

So I'm finally catching up on some reading, post-vacation. After getting about halfway through this piece of reporting at, I'm once again led to wonder who the hell would buy a principal protected note. Ever. From anyone.

The Japanese and Chinese investors, apparently, and as usual. Somehow they seem to embrace a product just as it is getting ready to implode.

Think about this shite. After some term, you are guaranteed - GUARANTEED - to get back your principal. Return of principal versus return on principal. Fair enough. However, did no one calculate the loss due to inflation?

No laughing!

If you're that inclined to lose money, why not just get a regular bank account (in the US)? I don't know what the HK folks had at their disposal, but somehow I imagine there were safer products, plain vanilla products, available for purchase. The whole notion of principal protection, while it sounds good, should more accurately be considered an insurance policy against doing one's research. We see how well that works out. Doing the research improves your odds.

(It made sense in my head. Hopefully it makes sense when you read it. If not, that's what the comments are for.)

So what have we learned, if nothing else, childrens?

1. To hell with the bells and whistles. If you don't understand the product, and most importantly, the risks attendant with investing in the product, you don't purchase it. Salient advice for all time.

2. The game IS risk management. This is a world of probability. While it could be said I am re-stating #1, I don't fully agree. You must always be present to the risks around you, because EVERYTHING, even the safest of activities, have some level of risk. Look at the swap spreads on US Treasuries to see what I mean - even the "risk-free" investment has risk. Can you live with the risk? Can you hedge it? Because you can't eliminate it.

3. Beware asset gathering. Any firm which has rumors swirling around it that introduces a high return product is probably trolling for funds. So consider this, and be sure about where you land in the capital structure if said firm goes tits up. Basically, see #1. If BSC had already been chewed through, and you're an unsecured investor in Lehman Brothers, the #4 investment bank, you're next in line to be chewed through. So if you MUST buy, buy quality, and that means buy Goldman unsecured products. Duh!

4. Don't bet what you can't afford to lose. This goes for the $100 I blew in Vegas playing craps this past week, and it goes for the $2B US that those suc...investors in Hong Kong will be blessed to recover. (I'd say lucky, but you create your own luck.)

5. Do your homework. Swap spreads and the death of BSC should have told people to avoid Lehman structured debt products.

6. Homie don't play dat!

Oh, and if you ever feel the need to be separated from your money that badly, just give it to me. I accept PayPal donations. At least that way, you know its going to a good cause - liquor and women, although not necessarily in that order.


G'night, all!

Friday, October 03, 2008

Thinking about CDS

Not like this is due to happen anytime soon, but I do have to wonder when shorting CDS becomes a viable strategy?

Just a thought...

Or how about a company shorting its own CDS, maybe through a shell or subsidiary?

Wednesday, October 01, 2008

Natural Progression?

As a bit of a follow up to my last post, I leave you all with this. I guess I'm cautiously pessimistic, overall.

Oh My God

I'm angry.

Sitting in my room in the Monte Carlo hotel on the Las Vegas strip, I've been watching the absurdity of the last few days. Needless to say, I'm disgusted. However, that's not why I'm writing this. I'm writing this because for some reason, the elected officials in DC are getting on my nerves with all of the political pandering we've seen. However, its not their fault. They're doing what they were chosen to do, with a bit of criminality thrown in for good measure.

(Thank you, America, for voting in these cocksuckers! Just had to throw that in. YOU got the politicians YOU DESERVE. I hope you're proud of yourselves, American public, you fucktards!)

Moving on, everyone wants to know what should be done. I think its pretty obvious that there is no "right" answer. Shit is fucked. All of that said, here's what makes sense to me given that we live in a world of probability. (Nothing makes that clearer than walking around the casinos in this town.)

First, the bills hitting the congress need to be simplified. I don't honestly care about the numbers being bandied about. We long ago passed the point of those being relevant. Plenty of people have already noted that the $700B is a ROLLING number. Once $700B is burned, a next $700B is up. The $700B is the amount outstanding that Treasury could put to work at any given moment. THAT'S ALL. So I wish people would get off that one. Just make it a cool trillion even. The amount is somewhat irrelevant. Its a question of what happens to it - how is it used - that matters the most.

Second, the notion that Treasury should not have oversight is patently absurd. Paulson had a better chance of getting a blowjob from an electrical socket than getting that one through. If it somehow has crept back in...well, see paragraph 3 above. No, he wasn't elected, but his boss was. Utter bullshit that should be thrown out.

Third, the purchases by Treasury should be at market price. I think Merrill put down a $0.05 price on its most recent sale. Hey, at $0.05, I'm a buyer of as much of that paper as possible. Hell, that's a 95% markdown or better. I doubt 95% of the mortgages in any securitized deal are going to hell. 50% - maybe. 30% - likely. 80% - oh please! If you want private buyers to come in with capital, the price has to be right. Getting these illiquid assets off the books of public commercial financing institutions is the order of the day. Allowing the Treasury to buy this crap from the banks at par - THAT is a monumental mistake which will accelerate the downfall of the American empire. I don't know who Hank was blowing (or being blown by) to put that fuckery into the measure, but THAT is my biggest problem. The folks sitting on this debt either need to put a bullet in their own heads and be done, or sell that shit for the best amount they can get. The writing is on the wall. Will their brains be as well? If the price is $0.05, then dammit, sell and move on.

Now, what the hell is with all of this partisan politics adding pork to these bills? Again, thank you America! You have no one to argue against about greed when clearly, by virtue of the fact that your elected officials are sticking in amendments and other dick sucking measures into this legislation. You know, this is one of those times (like, well, really, EVERY OTHER TIME) when legislators shouldn't be playing sides, state against state, pork against pork. These motherfuckers need to be doing the best for the ENTIRE NATION, not sucking their constituents' dicks on some bullshit. How come no one is calling in to make sure that shit doesn't pass? Because YOU, American public, are a greedy, selfish, self-centered motherfucker who doesn't honestly give a flying fuck about anyone else in this country except yourself. I guess we can nickname you Gordon Gekko. You want a better outcome? Get the legislators to remove all the bullshit and get the bill down to the basic, fundamentals to address this ONE ISSUE.

But where are you when it comes to making that call? Absent. As expected.

You know what is really upsetting about this whole thing isn't that the politicians are doing what they are doing. They're mostly pathetic cocksmokers pandering for votes anyway. Expecting more from them at this point is useless. However, the dicks they are trying to suck -- their constituents' -- aren't out there instructing them to do the BEST thing for the NATION. No, the constituents are out there saying that the pols should be fucking over the next American so that they can sleep well, have their cake and eat it too. The pols are just doing as they have been instructed.

I'm inclined to ask people how it feels to be greedy, evil bastard motherfucker willing throw your fellow American under the bus. But I don't even know that there's a point to that. If you people actually gave a shit about anyone other than yourselves, you'd be encouraging - nay, screaming for - your representatives and senators to cut out the bullshit and whittle down the bill to the simplest incarnation to address the short term credit market liquidity problem. PERIOD.

But considering there is no heart left among the populace, I don't see that happening. You people want it nice and easy. Fuck, if everything were meant to be easy, everyone would do it. If marriage were easy, no one would get divorced. If saving were easy, everyone would have 6 - 12 months of funds put away for an emergency and no credit card debt. (Not saying I'm perfect here. Just making the point, plain and simple.) If college were easy, more than 25% of the population would have college degrees. If being healthy and fit were easy, less of you people would be clinically obese, overweight, and about to drop dead due to your inability or unwillingness to be disciplined about exercise and eating in a healthy manner. Worthwhile shit is hard to do. That's the price of doing it. At the end, you're supposed to feel good about overcoming whatever you had to overcome to win the ring. That's how it works.

This is the most difficult economic problem to face this nation in a long fucking time, and the easy solutions were passed over decades ago. So get over it. You - yes, you, American public - chose this course with your willingness to be forgo difficulty, your willingness to throw your fellow man under the bus so you could get what you wanted, and your willingness to believe that the economic fundamentals of the last 300+ years of capitalism had been suspended in your favor.

I laugh when I hear people talk about the character of the American public. It sure hasn't been on display in my lifetime. If you people want to start claiming any sort of high ground, then the simple fact is that you need to take your medicine. The American public - everyone, myself included - created this problem. There is no easy way out. So just deal with it and get to the other side as quickly as possible. It won't be easy. That doesn't mean that good companies need to go to zero because of the over-emotional American investor. But the pain has to be felt, lifestyles have to be adjusted downward, and EVERYONE has to de-lever. That's all there is to it.

If you're really up to it, then do it! Fuck talking about it. BE ABOUT IT.

Or don't. It really is your choice. But if you're not going to take the pain; prepare for emergencies; cut your standard of living; eliminate your debt; put your foot on the neck of the politicians in Washington, DC; bust your ass adding or creating value at your employer or in your business; and otherwise tighten your belts, then realize that the shit only GETS WORSE from here.

What are you going to do?

Ahhh, I feel much better now. Time to see what's going on outside of my room.


I like Marc Faber, and his analysis seems to be generally good, but man does he like to hear himself talk. Just answer the damn question, Marc. 20% in US dividend paying shares. 10% in gold. The rest in Treasuries, presumably preferring TIPS. Got it.

See how simple that is, Marc?

Yes, this has nothing to do with anything. I'm definitely tired. But I'm back.

G'night, all.