tag:blogger.com,1999:blog-105462272024-03-13T12:31:42.417-04:00Alpha GuyInvesting, <a href="http://www.savingadvice.com">personal finance</a>, and other ramblings.Unknownnoreply@blogger.comBlogger626125tag:blogger.com,1999:blog-10546227.post-43337301691410489682011-12-01T14:23:00.000-05:002011-12-01T19:50:33.711-05:00A Review of "Wall Street" - Part II<span style="font-family:lucida grande;">This is part II of the series I began with <a href="http://alphaguy.blogspot.com/2009/02/my-response-to-crooked-timbers-analysis.html">this post</a>. In this review, we'll look at the drivers of the character of Gordon Gekko. While I am not in complete agreement with Daniel from crookedtimber.org regarding Gekko being a sympathetic character, he does point out several things about Gekko which clearly played a role in his development. He does have some admirable and sympathetic qualities, which I think will become clearer as you read this (if you disagree initially). All I ask is that you keep an open mind.<br /><br />There seems to be a bit of controversy around Oliver Stone creating films in which the protagonist is torn between different "fathers". He mentions this in the director's commentary in the 20th anniversary edition DVD. In "Wall Street", those fathers are Bud's biological father Carl (played by Martin Sheen, Charlie Sheen's biological father) and Gordon Gekko, who takes young Fox under his wing. However, this father theme extends even further into the film, and is critical to understanding Gordon Gekko as a person.<br /><br />In the scene "Business Philosophy" (<a href="http://www.amazon.com/gp/product/B000RW3VD4?ie=UTF8&tag=alph01-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=B000RW3VD4">20th anniversary edition DVD</a>), Gekko says the following to Bud while they ride in the back of Gekko's limo:<br /><br />"My father, he worked like an elephant pushing electrical supplies til he dropped dead at 49 with a heart attack and tax bills."<br /><br />Now, why is this important? Well, we don't know how old Gekko was when this happened, but presumably it was when he was quite young, possibly less than 10 years old.<br /><br />As it so happens, there was a <a href="http://bit.ly/1CxBUE">profile of Sir James Dyson</a>, inventor of the Dyson bagless vacuum cleaner, in the Telegraph UK in August 2008. In that profile, Dyson mentions the impact of his father dying when he was young. He also notes that 75% of British Prime Ministers lost their fathers before age 10. This loss, Dyson reckons, instills within the sons a feeling of individualism, of being alone in the world, and thus being forced to succeed because they know there is no one else out there to help them. (Never mind other family such as siblings or a surviving mother.)<br /><br />Now, if we compare the descriptions of these men whose fathers died before their 10th birthdays, we see a lot of traits that map back to Gordon Gekko. Individualism, even arrogantly so. A selfishness and self-centered orientation personality, derived from the feeling (whether accurate or inaccurate) that Gekko was left alone to figure out the world after his father's death. Focus and determinism. This is evidenced by his rise within the financial world even as a "City College boy".<br /><br />The other thing you'll notice, if you look past the coarse tone of voice he uses while saying it, is Gekko's disappointment at his father's death from overwork. He clearly believes that his father worked hard and never truly benefited from his labor, so he sees no need to do hard work if another (easier) avenue to his goal exists.<br /><br />The other major sympathetic moment we have with Gekko, and one I think was majorly overlooked by most, occurs in the scene "A Safe Distance". This is the scene where Bud is at Gekko's beach house signing power of attorney forms to distance himself from Gekko. Now, this whole process inherently violates the notion of Gekko being victimized by Bud. The whole explanation of the process by is clearly saying that you (Bud) will be performing actions which expose Gekko to legal risks he does not want to assume. Thus, this is another point of disagreement for me with crookedtimber.org's analysis; why would Gekko go through this legal maneuvering if he didn't at least believe there was a risk exposure? Gekko, like all great investors, has to understand the idea of <a href="http://alphaguy.blogspot.com/search/label/Risk%20Management">risk management</a>. Legally distancing himself from Bud is such a tactic.<br /><br />Getting back to my original point, the key to this scene is when Gekko's son Rudy is brought poolside by his nanny (au pair?). As soon as Gekko sees his son, he turns into a typical blubbering parent, runs to meet his son, and picks him up. While holding him, he has his son say "hello" to Bud in french. Gekko then takes his seat back at the table, while still holding his son and gloating about how Rudy had "the highest score on his I.Q. test". Looking through the absurdity (an I.Q. test for a 3 year old) and arrogance in that statement, Gekko can be seen as a loving father boasting about his son's achievements. Later, after handing Rudy a raspberry which he immediately pelts across the table, Gekko licks Rudy's fingers clean.<br /><br />Adding all of this up, we are presented with the picture of Gekko as a doting father who is able and more than willing to give his son all the things his father was unable to give him (Gekko) due to his untimely death.<br /><br />Returning to the father theme, and the humanity of Gordon Gekko for a last time, we see it on display in the next to last scene on the 20th anniversary edition DVD. In "The Abyss", Bud faces Gordon in Central Park while wearing a wire, unbeknown to Gekko. After using Bud as a punching bag while reciting another great soliloquy, Gekko says these words to the bleeding Fox: "You could have been one of the great ones, Buddy. I look at you, and I see myself. Why?" Gordon, for all of his exploitation of Bud, has developed a true affinity for the younger man and here it is on fully display. After the 2 part, and Bud begins walking toward Tavern on the Green, we're left to linger on Gordon as he walks in the opposite direction. If you watch closely, you'll see in Gordon's eyes the hurt that he feels at the betrayal by someone he allowed to get closer than any other. He carries a somewhat dazed look, as well as the hint of wanting to cry. While his anger is real, Gordon's anger is also a mask </span><span style="font-family:lucida grande;">(as anger usually is)</span><span style="font-family:lucida grande;">, a cover for the feeling of hurt, loss and disappointment. Anyone who has ever truly and deeply felt those feelings has had a look on their face much like Gordon's at some point, even if they didn't know it.<br /><br />Personally, I believe these largely overlooked aspects of Michael Douglas' performance were the biggest contributors to his winning the Oscar for Best Actor in 1988. It is easy to overlook the softer side of the character. Oliver Stone intentionally wants us to dislike Gordon for his role in Bud's downfall, and generally how he uses people. However, Gordon is not without emotions. He's human, even if he doesn't want to appear to be.<br /><br />Should Gordon Gekko be idolized? That is debatable. However, I do think he has as many "good" qualities as "bad" ones, and that needs to be recognized and accepted. We don't have to like the person to see them as they truly are, not as their ego thinks they are or wants them to be. You don't have to like the person, or the person's actions, to transcend your own personal biases and realize that, at our cores, we are all, in some way, just hurt, afraid, scared and vulnerable 8 year olds who have never EVER truly grown up. Even Gordon Gekko.<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-77600478198476764702011-11-25T18:34:00.000-05:002011-12-01T19:50:59.406-05:00Probabilities<span style="font-family:lucida grande;">That's what risk management comes down to. Probabilties.<br /><br />The CEO of <a href="http://www.wegelin.ch/">Wegelin & Co.</a> clearly understands this. In <a href="http://www.bloomberg.com/apps/news?pid=20603037&sid=aguVgp1QqgEU">this article</a>, I think he makes the best quote I've heard in a while on the topic of managing risk.<br /><br />It's conceptually simple, yet difficult in practice. You have to constantly calculate and re-calculate the probability of a favorable outcome, and when you have the advantage, press it HARD. When you've lost the advantage, then you don't bet. You will not always win using this system, but you'll win significantly more than you lose (based on outcome). That's what is doing here. They've lost the advantage, so they refuse to make the bet.<br /><br />Will this affect some of their customers? Of course. However, they are clearly on the side of bank secrecy and that's fine. They are forward and upfront about that. The risk of having to expose their customers with US holdings is now greater than it had previously been. As Mr. Hummler noted, </span><span style="font-family: lucida grande;">"My responsibility toward clients has to include any kind of probability, and if I see a real threat then we have to act." This is the kind of thinking we should all get from our fiduciaries! The risk may be small, but it is non-zero. The penalties are very real, and the overall exposure is incalculable, as well as the increased reputational risk of giving up your customers like UBS. I'd say the advantage has been, or will be, lost!!<br /><br />Something to think about. Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-67982704006264480022011-11-21T02:52:00.000-05:002011-12-01T19:51:19.540-05:00Investing in Cloud Computing and Automated Infrastructure<span style="font-family:lucida grande;">Welcome to part two of what started out as a simple exposition about cloud computing and has turned into...this. I apologize for the delay in getting this out, but life caught up with me. Plus, I had a lot I wanted to say and organizing my thoughts took a bit of time.<br /><br />If you read <a href="http://alphaguy.blogspot.com/2009/07/cloud-computing-and-programmable.html">part one</a>, then you have some context for the remainder of this discussion. I plan to cover cloud providers, some thoughts on what may or may not be competitive advantages of various providers (or maybe an ideal provider), and what some of the investing implications may be in this space. This should ALL be considered a giant thought experiment. It sure as hell is <span style="font-weight: bold;">not</span> investment advice. If you even conceive of investing based on anything said here, you're an idiot, and as Gordon Gekko <a href="http://www.imdb.com/title/tt0094291/quotes">once said</a>, "A fool and his money are lucky enough to get together in the first place". You might as well send me that money (or you could commission me to do a research report for you, to make it feel like less of a waste).<br /><br />In my last post, I discussed the idea of <a href="http://blogs.smugmug.com/don/2008/12/09/on-why-auto-scaling-in-the-cloud-rocks/">automated</a> <a href="http://blogs.smugmug.com/don/2008/06/03/skynet-lives-aka-ec2-smugmug/">infrastructure</a>. The basic idea is that you can scale your infrastructure, systems and network, dynamically and programmatically based upon capacity planning rules you define for your architecture. That whole sentence sounds pretty high level, but I'm not sure how to break it down further right now. Follow the links above for an example of how <a href="http://www.smugmug.com/">SmugMug</a> achieves these outcomes.<br /><br />That said, a lot of the effort that goes into creating systems that can automatically scale themselves up AND down is in building the tools. THAT effort is what is slowed down by the lack of programmability of network elements such as switches, routers, firewalls and others. Making these devices programmable would allow the creation of tools which can scale based on input from monitoring systems (again, following predetermined rules and at predetermined thresholds). Scaling could occur with less latency, increasing responsiveness in both directions. Sysadmins could spend their time building these tools, developing the rules driving them, and managing the metrics which are fed as input to the tools (among other, higher level tasks). This is the ideal. While this is achievable now, it is not easy, which is why it is so rare to find it. It also takes a lot of time and infrastructure and software development investment to make this reality given the inherent inaccessibility of these devices.<br /><br />Creating an API is like creating a <a href="http://en.wikipedia.org/wiki/Software_development_kit">software development kit (SDK)</a>. It provides a means for customers to control their products, and make them work the way they need them to. If I run an in-house application development group and want to add some HA functionality to the application, then Veritas (<a href="http://www.bloomberg.com/apps/quote?ticker=SYMC%3AUS">Symantec</a>) provides an SDK for enabling my application to work with Veritas <a href="http://www.symantec.com/business/cluster-server">Cluster Server</a>. Not only does this lock me into the Veritas HA solution, but it gives me control and flexibility to really manage <span style="font-weight: bold;">MY</span> application the way I want/need to, if I'm willing to invest in the time and resources. If I'm not willing to make that investment, then provided the proper security precautions have been taken when the device ships from the vendor, there is no downside to the API being made available.<br /><br />As for investing, I'm not sure what the best route is. Who knows if a company like <a href="http://www.joyent.com/">Joyent</a> will ever go public? I doubt it, as it seems the team over there is building a long term business. I'm sure <a href="http://www.joyent.com/products/about/management-team/">Jason et. al</a> have a price though. I'm sure there will be cloud providers who do decide, eventually, to enter the public markets. Some will be snapped up by HP, IBM or other providers of technology services. <a href="http://aws.amazon.com/">AWS</a> makes up a growing part of Amazon's business and revenue mix, and it wouldn't surprise me to see it spun off eventually (in say 3 or more years). Of course, Jeff Bezos isn't the type of founder to let go of such a growth engine, so maybe Amazon is the easiest play on cloud computing after all. If I recall correctly, AWS may actually be as large as the retail business now, and it is definitely growing faster.<br /><br />What IS clear is that <a href="http://radar.oreilly.com/2006/07/operations-the-new-secret-sauc.html">automated infrastructure and system/network operations is truly becoming a competitive advantage and</a> <a href="http://en.wikipedia.org/wiki/Force_multiplication">force multiplier</a> for many companies. This is not just the case for online companies such as Google, Yahoo!, Microsoft, Amazon, Apple or many of the cloud providers that I mentioned. This will more and more become the case for anyone of any reasonable size, whether they are online or not. And let's face it, anyone of any reasonable size (1000+ employees) will be online in SOME fashion, either selling products and services directly, or supporting their customers with online knowledge bases, documentation archives, software downloads and updates, customer relationship management (CRM) and technical support/trouble ticketing, mobile device (e.g. cell phone) services, etc.<br /><br />Investing in <a href="http://www.bloomberg.com/apps/quote?ticker=AMZN">Amazon</a> or <a href="http://www.bloomberg.com/apps/quote?ticker=GOOG">Google</a> is A way to play public automated infrastructure. IBM doesn't seem to make a good bet, as they suffer from the conglomerate problem -- they do everything, so anything they do may have a lot of growth potential but it will not be substantially accretive to the bottom line. (In fact, expect for most large companies that automated infrastructure and systems/network operations products and services may be loss leading for a while, if not permanently.) <a href="http://www.bloomberg.com/apps/quote?ticker=RAX%3AUS">Rackspace</a> could be interesting from the cloud service provider angle, given that they are small compared to most of their competitors and publicly traded. However, there have been some other rumblings in certain forums I follow, so that one definitely requires some in-depth homework. If you're looking to invest in providers, RAX is public, well known and (generally) well regarded even though they've had some hiccups in the recent past. (But who hasn't? This whole space is all new.) The biggest problem with RAX may be the commodity hardware business they are attached to. Definitely proceed with caution, but if you like the Joyent angle, the best currently available investment in that space is Rackspace. They are direct competitors.<br /><br />I definitely think that network equipment vendors adding APIs to their devices is powerful. This is the "picks and shovels" way of thinking about this space. I'm not sure how well <a href="http://www.juniper.net/">Juniper</a> has done with this, but they need to be promoting it <span style="font-weight: bold;">HARD HARD HARD!!!</span> JunOS is known, or at least marketed, as being scalable across the entire line of Juniper products so there's only one software release to manage. That in itself is a win, but if I can now program my routers (and switches! Please Juniper!) to adjust to inputs from my monitoring system or as part of the process of spinning up overload servers/infrastructure, that becomes extremely useful for the cloud services providers. Again, many already do this but it's not easy, it's not built into the fabric, it's subject to subtle changes in the vendor software, user management issues (password changes, account deletion, etc.) and a raft of other problems. Of course, if <a href="http://www.bloomberg.com/apps/quote?ticker=CSCO">Cisco</a> did this, it would be HUGE but it wouldn't lead to much product uptake, I don't think. It would be more of a lock-in move for CSCO.<br /><br />Smaller vendors such as <a href="http://www.vyatta.com/">Vyatta</a>, <a href="http://www.extremenetworks.com/">Extreme Networks</a>, <a href="http://www.force10networks.com/">Force 10</a> and others might stand to benefit from providing programmatic access to their networking software, however. <a href="http://www.aristanetworks.com/">Arista Networks</a> is another obvious name for this too, and they have the <a href="http://www.aristanetworks.com/en/Management_Team">technology chops</a> to do it easily PLUS they target this high density server space as their core market. Programmatic infrastructure would appear to be a natural direction for Arista, but of course, they're still private.<br /><br />The best way to invest in some of these companies and the future of automated infrastructure and cloud computing is probably to USE them. Any benefit that accrues to the providers is gravy, but if you can use these products, and it fits your product or service offering from a value perspective, then by all means do it! The problem with trying to invest in this space is that you want to prefer the smaller vendors who have little to nothing to lose. That counts some of the smaller hardware vendors like Extreme Networks and Force 10 Networks, but it also includes companies that are not yet public. The large, incumbent vendors aren't going to see enough of a move from investing in programmability, which is exactly why they will be slow to do it and the smaller vendors should embrace it completely. The field is so wide open it's sick. I didn't even mention other infrastructure that needs to be automated, like storage systems and storage networking. What the hell is <a href="http://www.brocade.com/">Brocade</a> doing in this space to compete with Cisco? Think about it. Programmable storage infrastructure will be next in line.<br /><br />Programmability is a key enabler to the operations secret sauce, and will have to become important as operations grows in importance. It will be interesting to watch, and even more interesting to participate. Yaaay!<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-58041538092580539992011-11-18T02:25:00.000-05:002011-12-01T19:55:17.459-05:00Cloud Computing and Programmable Infrastructure (Part I)<span style="font-family:lucida grande;">This post will be a bit different, but if you bear with me, I plan to relate it back to investing. This will be part I of a series (as I found out earlier today).<br /><br />A few weeks ago, I attended the <a href="http://events.gigaom.com/structure/09/">Structure 09 Conference</a> put on by <a href="http://gigaom.com/">GigaOm Media</a> in San Francisco, CA. Not a bad little conference. While I'm glad I attended, and I had a great time in the later sessions and the "meet and greet" held by Canaan Partners after, it wasn't quite as technical as I was hoping. Either that, or I missed the best parts. (I arrived about 3 hours late since I was driving through rush hour traffic on the 101 from <a href="http://tr.im/uaza">"Man" Jose</a>.) I did get more technical meat from <a href="http://oreilly.com/">O'Reilly Media</a>'s <a href="http://en.oreilly.com/velocity2009">Velocity 2009</a> conference the previous 3 days, so it was all good. Besides, I met <a href="http://events.gigaom.com/structure/09/Speakers/#paul_kedrosky">Paul Kedrosky</a> of <a href="http://paul.kedrosky.com/">Infectious Greed</a> fame and had a nice, though brief, conversation with <a href="http://en.oreilly.com/velocity2009/public/schedule/speaker/19250">Jonathan Heiliger</a>, who was my personal hero for a great many years at the start of my career.<br /><br />During the conference, I shot off <a href="http://twitter.com/khyron4eva/status/2332043081">this tweet</a> about cloud computing. (Much of Structure seemed to revolve around this topic.) It seemed such a simple thing to say, and so disgustingly obvious that it wasn't even worth saying, but apparently it struck a chord with some folks. So I want to expand on this idea.<br /><br />For ages, the <a href="http://vijaygill.wordpress.com/2009/05/18/lack-of-smart-engineers-considered-harmful/">supremely competent engineers and sysadmins</a> out there have been developing custom tools to allow them to manage their systems and networks. Most of these tools have probably revolved around some combination of <a href="http://expect.nist.gov/">expect</a>/TCL, <a href="http://www.perl.org/">Perl</a>, and shell. The reason is simple - most device operating systems were not accessible programmatically, e.g. via an <a href="http://en.wikipedia.org/wiki/Application_programming_interface">API</a>. Most still are not. I attribute this to vendor lock-in. If the only way to interface with the device is by the vendor's prescribed methods (web based, software application, or command line), then you are forced to learn the vendor's products. As you become accustomed to how a given vendor's products work, you're going to be reluctant to invest the time and energy to learn a competing vendor's products. Voila! This is the biggest reason that so many networking products have command line interface syntaxes similar to Cisco's IOS and CatOS. This has been a huge contributor to Cisco's financial success over the past 20 years. Cisco's command line syntax has become de facto standard in the networking world.<br /><br />Vendors would probably say there are other reasons for not exposing their devices to be inspected or controlled programmatically. One would be security. Most network devices are pretty insecure, in terms of default passwords and configuration settings (although this has been changing <span style="font-weight: bold;">SLOOOOWLY</span> over time). I imagine a great many customers didn't particularly care to create tools and programs to manage network devices, servers, and other systems. They just wanted to configure the device and go on with their lives. Only in the last decade has it become apparent to people that <a href="http://www.sun.com/">Sun</a> was right and "<a href="http://channelsun.sun.com/video/the+network+is+the+computer/1672070810">the network IS the computer</a>". The network infrastructure has taken on a level of criticality that was reserved only for servers for a long time.<br /><br />Finally, the rise of <a href="http://www.cloudbook.net/">cloud computing</a> and the idea of <a href="http://www.kitchensoap.com/2009/07/18/extreme-automated-infrastructure/">automated infrastructure</a> has changed people's thinking about the flexibility of their systems. On-demand computing can now be realistically accomplished with commodity hardware and open systems, provided the infrastructure supports it. Many companies have been born to make this flexibility and elasticity a reality for the masses who would rather not deal with the intricacies of building their own. <a href="http://aws.amazon.com/">Amazon Web Services</a>, <a href="http://www.joyent.com/">Joyent</a>, <a href="http://www.rightscale.com/">RightScale</a>, <a href="http://www.rackspacecloud.com/">Mosso a.k.a. The Rackspace Cloud</a>, <a href="http://www.enomaly.com/">Enomaly</a>, and countless others come to my mind immediately. They've taken on the challenge of providing this infrastructure for regular people. Not everyone is Google, Amazon, Yahoo! or Microsoft, with both the resources to devote to building these tools from scratch, never mind the inclination or need.<br /><br />There's also a certain level of difficulty in implementing APIs correctly and efficiently that vendors were </span><span style="font-family:lucida grande;">probably </span><span style="font-family:lucida grande;">unwilling or unable to address. Market dynamics being what they are, the demand probably wasn't there for APIs as much as for new features, better performance, and lower costs. Even security was a higher priority! Finally (and this is largely related to the concept of lock-in), vendors probably didn't want to expose their devices to hacking and other tampering, or reverse engineering (via black box testing, etc.) by their competitors. If you're forced to deal with a command line, software application GUI (Java or Windows-based, many times these days) or web GUI, you were inherently limited in how much information about the internal workings of the device you could derive/describe.<br /><br />However, with the <a href="http://www.juniper.net/us/en/products-services/nos/junos/psdp/">exception of Juniper Networks</a>, most systems and network devices still do not offer the programmatic option for people who are willing to build their own. Thus we have the menagerie of scripts and other homegrown tools which have to make do with clunky workarounds, scraping output from text commands or collecting SNMP data. Yes, it works, but it can hardly be considered optimal. These tools become somewhat second class citizens from a performance perspective, only able to issue so many commands in a given time quantum, and limited by the range of functionality exposed. Most of these scripts don't run with the highest levels of privilege, again for security reasons. (That is, a configuration management script for a Cisco Catalyst switch may run as a regular user as opposed to having "enable" privileges, and cannot change configuration settings on the switch, but I'm sure this varies too.)<br /><br />However, I see this changing. I don't know if a company like <a href="http://www.vyatta.com/">Vyatta</a> will lead the charge, but there's no reason for them not to. The question will be who follows (or leads, if not Vyatta)? Again, Juniper has already allowed a certain amount of access, which is a good start. However, I don't think the dominoes have really fallen as yet. In time, I believe more vendors will offer programmatic access to their devices through custom APIs. The ones who start this trend will do it as a differentiator, the way most <a href="http://alphaguy.blogspot.com/2009/07/future-of-us-innovation.html">innovation</a> shows up commercially. Eventually, more vendors will offer this ability, at least for network devices (routers, switches, firewalls, IDS/IPS devices, etc.). Servers may not need programmatic access as much, although it would not surprise me to see a vendor, possibly an open source vendor, come up with a cross platform management layer that exposed a single, consistent API for multiple operating systems. Again, maybe this already exists but I can't think of who offers it.<br /><br />What does all of this mean? It means, simply, that the ability to program your network will be within the reach of the average "man" and "woman" (or rather, system administrator and network engineer). This won't remove the business case for the cloud providers named previously, such as AWS or Joyent, but it will enable automated infrastructure for the masses. This will be a good thing, I believe.<br /><br />Whew! That ended up being a lot longer than I thought it would, so I'm going to pause right here. In part 2 of this series, I'll go a bit deeper the investing implications of automated infrastructure and cloud computing, as I see them. Hopefully I haven't bored anyone to tears, but if I have, I apologize. I think a bit of context is required for this discussion, and there were some things that I wanted to make sure were said.<br /><br />Until next time, gentle readers...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-16775542671441350202011-11-15T03:48:00.000-05:002011-12-01T19:55:31.897-05:00The Future of US Innovation<span style="font-family:lucida grande;">In my <a href="http://alphaguy.blogspot.com/2009/07/future-of-us-employment.html">last post</a>, I wanted to make a point about this, but I think I went in a slightly different direction and forgot to come back. However, I think you'll see these 2 issues as being directly related.<br /><br />As I said previously, the US will actually have to re-learn how to produce things - actual, physical products - that people want to buy because those products add value to their lives. Intellectual property - designs, plans, business models, brands - and software are all good and fine, and we need to continue producing those things. However, real physical, manufactured items will employee way more people at levels of income that support a "living wage". A service economy cannot provide jobs required to rebuild the middle class as most politicians seem intent on doing (or at least say they are intent on doing).<br /><br />A big part of this issue is innovation, the process of building upon existing tools, processes, products, designs, software, etc. to create new products. I fully believe that invention -- the absolute creation of new products where none existed previously -- is crucial, but innovation creates a base from which new industries are launched. Once the fundamental pieces have been invented, there is an iterative process of innovation which must occur on top of those components (building blocks, if you will) to advance an industry. Out of that process, new companies will be formed and grow. New products, hopefully offering value to customers, both domestic and foreign, will be created and launched. Invention, and most critically, innovation, are requirements of a strong economy. These 2 processes have to be RUTHLESSLY SUPPORTED by the US, at all levels of investment -- educational, financial, sociological, economic -- in order for this to work. Without these processes, there will be no new products, serving the needs of customers worldwide, being created by American workers.<br /><br />Now, I don't get why this realization seems to escape so many people, but it's a simple logical extension. The bankrupt retail and service based model has proven to be empty (and it didn't help that it was built on a mountain of debt). This nation needs to to create new stuff that is useful and valuable to people around the world, not just marketing and selling vapid, useless, unimportant, trite services, brands and ideas. The willingness of the citizenry of this nation to attack this will determine the economic future of the US more than anything else. </span><span style="font-family:lucida grande;">I'm cautiously pessimistic.</span><br /><span style="font-family:lucida grande;"><br />*sigh*<br /><br />Maybe it's time for a drink now. Until next time...<br /><br /><br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-8500807904094883162011-11-11T05:03:00.000-05:002011-12-01T19:55:49.305-05:00The Future of US Employment<span style="font-family:lucida grande;">While reading <a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-18.html">this</a> at the San Francisco Fed web site, a few things struck me that I wanted to share. I've thought about these issues before, but never in such a comprehensive manner.<br /><br />The first consideration is that, for the US economy to have the kind of hiring that is required to rebuild (recreate?) the middle class, American companies are going to have to produce GOOD, if not AMAZING, products. Products that sell not only in the US but also to foreigners. In fact, I'd venture to say that foreign buyers will be more important to an economic recovery in the US than American buyers. A service based economy, serving only a domestic market at that, cannot support the level of GDP that will be required to employ as many people as required to resurrect the "middle class". Americans will have to make stuff - not just design stuff, not just create marketing and ideas, but actually implement and build physical products. Even if the products that US companies start producing are virtual goods - intellectual property, designs, etc. - the buyers will have to be overseas. That means whatever the products of the future are, they will need to be mindblowingly amazing! "Insanely great!" as <a href="http://www.apple.com/pr/bios/jobs.html">Steve Jobs</a> of <a href="http://www.apple.com/">Apple</a> once said. They will have to solve real world problems at a huge level of value add/creation.<br /><br />Second, for Americans to be employed by these companies in the numbers required by the population level, Americans will have to get used to higher prices. Why? Because if products are to be sold to American consumers, the prices will have to be high enough to allow people to make a so-called "living wage". Now, I personally have no problem paying more for a product if it provides value for me. (See Myth #5 <a href="http://www.iwillteachyoutoberich.com/blog/5-myths-of-personal-finance-plus-stupid-advice/">here</a>, <a href="http://www.iwillteachyoutoberich.com/blog/cost-vs-value-why-i-bought-a-new-car/">this</a> and <a href="http://www.iwillteachyoutoberich.com/blog/tip-29-stop-being-a-loser-and-pay-money-to-save-money/">this</a>. Thanks Ramit!) However, as mentioned above, American products will need to be excellent values. Price is a lesser factor in considering the value that a product offers you, but the simple fact is that overall, Americans cannot be employed if they can't make enough to support themselves and their families.<br /><br />For the last 2 decades, the emphasis has been on acquiring more stuff. That stuff became easier to acquire because manufacturing moved overseas, to Mexico, Central America, China, Vietnam or wherever. Now that conspicuous consumption is on life support, Americans will have to go back to living within their means, which is largely determined by income. So at both ends, the issue will need to be addressed. Consumers will need to save more and spend less overall, which they have started doing (but whether this will be permanent is to be determined). However, incomes have to be able to support a certain standard of living as well. For now, in the deflationary economic environment we have, that standard of living WILL decrease. Whether it stays that way over time will depend on whether American consumers have the intestinal fortitude to spend more on American made products to employ other Americans (that - *gasp* - they don't already know!).<br /><br />Not all products consumed by Americans will need to be made by Americans. However, I contend that a hell of a lot more products than are currently purchased by American consumers will have to be American in origin. If the value vs. cost comparison favors an imported product, so be it. This is <span style="font-weight: bold;">NOT</span> about dogma, protectionism and nationalism but it is simple truth.<br /><br />For those products where American companies and workers can create huge amounts of <span style="font-weight: bold;">VALUE</span>, then American consumers owe it to themselves to pay the higher price (in exchange for that value). This is what will lead to rising incomes, rebuilding the hollowed out middle class, and along with other political and economic efforts, prevent the US from becoming the UK.<br /><br />That's just a thought. Let me know what you think. For now, I'm going to bed.<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-17066893486766538122009-07-23T12:59:00.003-04:002009-07-23T13:06:48.732-04:00Happy<span style="font-family:lucida grande;"><a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=a_H7XBO4IEB8">Yaaaay!!! Yay!</a><br /><br />While it's not the best outcome, compared to what the President is proposing about giving the Federal Reserve more powers to not use (or use incorrectly and/or unevenly), this is a much better outcome.<br /><br />It's similar to the concept of the 3 branches of government. Absolute power corrupts absolutely, and the Fed has had too much power for too long as it is. Dividing responsibilities among different organizations will prevent this concentration of power among people who don't give a goddamn about the needs of the citizenry. (Greenspan didn't and Bernanke sure as hell doesn't.) It will also force those other regulatory bodies to build their strengths. The FDIC, CFTC, SEC, OTS, OCC and whomever else gains powers through this legislation have been long neglected in the financial regulatory framework (especially the SEC), with too few strong players on bench to execute their missions. Hopefully, this is the beginning of balancing the Fed's evil powers with less evil powers elsewhere. (Whether there will be good coming out of these other agencies is TBD.)<br /><br />This makes me happy, sort of! Yay!<br /><br />P.S.: The Federal Reserve should still be audited. Even if <span style="font-weight: bold;">this</span> effort is successful, it doesn't change the need to audit and hopefully dismantle the Fed.<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-13297369403983801952009-07-17T15:26:00.003-04:002009-07-17T15:31:32.721-04:00Second Order Effects Redux<span style="font-family:lucida grande;">What was that <a href="http://alphaguy.blogspot.com/2008/10/beware-second-order-effects.html">I once said</a> about <a href="http://www.bloomberg.com/apps/news?pid=20601213&sid=a6kuLOY.MRMc">second order effects</a>? As my friend <a href="http://equityprivate.typepad.com/about.html">Equity Private</a> might say, "<a href="http://www.finemrespice.com/">Finem Respice</a>".<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-9558204505027494112009-07-17T12:43:00.002-04:002009-07-17T12:58:37.211-04:00They Went Thataway!<span style="font-family:lucida grande;">So CBRE says there is effectively no AAA paper in the CMBS market. The TALF program is <a href="http://www.bloomberg.com/apps/news?pid=20601069&sid=anQhJYJAs3qA&refer=fedwatch">only accepting AAA paper</a> to be sold to investors. Did I miss something or does anyone else see a problem here? Seems to me there is a disconnect here.<br /><br />It also doesn't help that the delays in the TALF implementation will mean a few more months of deterioration in the CMBS market before any paper is moved.<br /><br />While I originally meant to publish this piece a few weeks ago, the thoughts still stand. Here's a <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=anxy8QqwlxSQ">Bloomberg.com article</a> that I noticed just a few minutes ago. Everyone should think long and hard about this, but I don't see people giving this the consideration it deserves.<br /><br />"Timberrr!" That could be the sound of the US economy taking another fall, and in very short order. <a href="http://www.bloomberg.com/apps/quote?ticker=SRS">SRS</a>, as a short, looks promising, but what I really need is an unlevered fund. I'll be spending some quality time with <a href="http://www.etfconnect.com/">ETFConnect</a> to find one.<br /><br />Until next time, peeps!<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-64016569258728750192009-07-01T06:06:00.005-04:002009-07-01T17:52:58.145-04:00Back in the Game<span style="font-family:lucida grande;">Wow!<br /><br />It seems like forever since I posted. I know my readers probably feel similarly.<br /><br />What happened, you ask?<br /><br />The short answers is that both <a href="http://en.oreilly.com/velocity2009/">Velocity 2009</a> and <a href="http://events.gigaom.com/structure/09/">Structure 09</a> happened. Both of these conferences, geared toward the Internet industry, occurred back to back last week in San Jose and San Francisco, respectively. Being employed in this industry, and extremely interested in the issues these conferences cover, it was imperative that I attend both. Along with, I spent some time working in my company's facility in San Jose, CA, which means that I can now officially claim a tax deduction for the airline flight to San Francisco, partial usage of the <a href="http://www.volvocars.com/us/models/c70/Pages/default.aspx">very nice rental car</a> I gave myself, and my hotel room.<br /><br />Unfortunately, my company did not see fit to send me to California to learn how to better serve our customers. Well, because, customers aren't that important anyway when you're a monopoly. You're going to get your pound of flesh one way or another, and 2 pounds on a good day. The tax deductibility of the 2 days I did work takes some of the edge off the fact that I was not fully able to enjoy my trip as a "vacation". I think I'll be returning some time in the near future, and I won't be working when I do.<br /><br />I was in the Silicon Valley/Bay Area from 18 June until 25 June before taking off to Atlanta for a cousin's wedding. I have to admit, spending time in the Bay Area after such a long time away really made me consider moving back to California. There's just something about the thinking, the ecosystem, the infrastructure which has already been put in place and the people who are part of it. I don't generally like most Californians, but that could have a lot to do with spending so much time in southern California. NoCal and SoCal really are 2 separate states. For example, after Structure 09 concluded, Canaan Partners sponsored the post-event cocktail reception at which I met several very interesting people including <a href="http://twitter.com/littleidea">Andrew Shafer</a> of Reductive Labs and the great <a href="http://paul.kedrosky.com/">Paul Kredrosky</a> himself. For some reason, this kind of experience only seems likely in Silicon Valley.<br /><br />While I was gone, my positions in <a href="http://www.bloomberg.com/apps/quote?ticker=UCO">UCO</a> and <a href="http://www.bloomberg.com/apps/quote?ticker=UNG">UNG</a> didn't do too much, but they didn't move against me, which was welcome. I'm still monitoring them closely, probably even more closely now than I had been. The time is approaching when I have to unwind some of these positions. I still like the long term potential for natural gas, and I think oil is an obvious play long term. However, I also think short term technical factors may begin moving against both of these positions shortly.<br /><br />While I'm at it, if <span style="font-weight: bold;">anyone</span> has suggestions for an oil ETF besides UCO, please chime in via the comments. I don't like the fact that UCO is an ultra (2x) ETF, for well known reasons. I want something with better characteristics and less inherent risk.<br /><br />Anyway, that's what I did on my summer vacation. In the coming days, I plan to write a bit about some of what I did, as well as give my quarterly recap on my personal finances and goal achievement. 2Q2009 wasn't too bad on either front, and with a few tweaks to my debt payment plan, I think I'll be able to achieve my ultimate debt goal for the year.<br /><br />Stay tuned, and thanks for sticking with me!<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-38581257479333627092009-06-16T08:03:00.002-04:002009-06-16T08:14:02.017-04:00Selling Out<span style="font-family:lucida grande;">Yep, I did it.<br /><br />I sold 60% of my position in <a href="http://www.bloomberg.com/apps/quote?ticker=UCO">UCO</a> to lock in my gains. With the exception of $500, I've taken out my entire investment of $5500 (approximately). My remaining position would have to see UCO hit $2.50 in order to wipe me out. From here on, it's all profit. Having a smaller position in UCO is reassuring, as I now have some capital to deploy in other interesting ways, including possibly buying back into UCO or other oil related investments.<br /><br />I still think the overall direction for the markets is down, at least from this point. How much further down and for how long are questions I don't have answers to. So getting out during yesterday's downdraft was fine by me. I really should have had a selling plan together, but I've been preparing for a trip to San Francisco and have been distracted by the details. Watching the European and pre-market US action yesterday was a wake up call!<br /><br />So what's next? I have no idea. This money is my original investment, so the search is on for a worthy vehicle. My broker will be lifting day trading and margin restrictions on my account next Wednesday (hopefully) so that is very welcome. For now though, I feel like trading on a 3 - 12 month timeframe. I guess it's time to do some research. I really wish I could do equity options trading though. Certain things would be so much easier. Oh well. *shrug*<br /><br />:)<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-58883380773344686802009-06-08T16:15:00.001-04:002009-06-08T16:16:48.948-04:00Too Big to Fail or Unwind<span style="font-family:lucida grande;"><a href="http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=364">Short US Treasuries and Long US Treasury CDS FTW!</a><br /><br />Okie, I go now...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-27533331848252452722009-06-08T09:49:00.003-04:002009-06-08T09:58:03.903-04:00How Dasan Is Investing Now<span style="font-family:lucida grande;">Those of you who follow the hardcore investors and finance types on Twitter will recognize the name <a href="http://twitter.com/dasan">Dasan</a>. A very sharp and witty guy who manages a portfolio at an unnamed hedge fund, Dasan recently published an analysis of how he is currently investing and how his investment process works. Fascinating reading from an investment professional. <a href="http://dasan888.blogspot.com/2009/05/how-im-investing-now.html">Check it out!</a><br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-49267706396508962322009-05-28T16:31:00.001-04:002009-05-28T16:32:51.730-04:00Stopped Short<span style="font-family:lucida grande;">I mentioned in my last post that I was stopped out on <a href="http://www.bloomberg.com/apps/quote?ticker=UGA">UGA</a>. Total bummer really, but that's also the point. While the loss would have been temporary, I now have capital to re-deploy elsewhere.<br /><br />So what happened, you say?<br /><br />I entered this 100 share position at on 19 March 2009 at $24.82. I went light because I didn't have a lot of capital to deploy, and I really haven't like the price point on UGA. Basically, for investing in the oil patch, I get more value elsewhere.<br /><br />My stop was filled at $29.26, for a per share price, after commission, of $29.19. My stop was placed at $29.25, which I thought was loose enough to prevent all but the most egregious of downdrafts based on UGA's trading history. Clearly, it should have been a bit looser.<br /><br />Profit, after commission, came to 17.6%. Not too bad for a 2 month holding period. While I would have loved to continue holding UGA, I have been able to pursue some other ideas with the freed capital. So things eventually work out. I have no interest in chasing UGA on the way up, even though I think it has a bit further to run. I'd rather deploy capital in more efficient ways and focus on getting a 2 or 3 bagger, if not more.<br /><br />Remember, cut those losses short. But there is nothing wrong with taking a profit. Just don't take them too aggressively. Always let your winners run if you can.<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-15803061717801144512009-05-24T04:03:00.003-04:002009-05-24T05:56:52.177-04:00Ooops!<span style="font-family:lucida grande;">Actually, it was more like "damn!!" but you get the picture.<br /><br />That's what I said on Wednesday when I pulled the trigger on a trade. Why did I curse my trade? Because I'd selected a limit order instead of a stop, and in short order, 1/6th of my holdings of <a href="http://www.bloomberg.com/apps/quote?ticker=UCO">UCO</a> were gone at a price of $10.54 per share.<br /><br />Let me clear. I'm not upset because I made a profit. It's kind of hard (and stupid) to be mad about that outcome. I am mad because my profit was only $1.99 per share, with an entry of $8.40 for those shares (on margin). So, if we do the math and subtract $14.00 in commissions, my gross profit was 23.67%. Not bad for a position entered on 31 March. Of course, none of this includes tax calculations, but I have enough previous losses to offset the small amount of taxes here. I've also not subtracted margin expenses, and if I can get clarity on that point, I'll update this post or post anew.<br /><br />Still, my net profit works out to be about 14 - 15% over 7 weeks, or 104 - 111% annualized. Not too shabby. Now to wash, rinse and repeat!<br /><br />So in the future, I warn everyone to make sure that you set the trade type appropriately with your online brokers! Don't be like me. Don't give up profits early with stupid mistakes.<br /><br />NOTE: We'll discuss getting stopped out of UGA the following day in a later post.<br /><br />Happy trading!<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-58162737629418457932009-05-24T01:18:00.004-04:002009-05-24T02:42:56.391-04:00Exogenous Price Shocks<span style="font-family:lucida grande;">It could just be me, but what I found to be most interesting in the <a href="http://www.cumber.com/commentary.aspx?file=052009.asp&n=l_mc">20 May post</a> from David Kotok of Cumberland Advisors was the story about corn ethanol and its effect on "food insecurity" in Zambia (and by extension, around the world). 2,500,000,000 affected by bad US policy on corn ethanol. Brilliant!<br /><br />My only question is how can I benefit without trading in corn on the CME? Trading grain futures and options on them handed me my own head once. There may not be a clear path to profitability for the small speculator, but I plan to keep looking. I'm all for capitalizing on bad public policy.<br /><br />That's all for now. Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-53822774189133329682009-05-11T16:18:00.003-04:002009-05-11T16:25:28.529-04:00Canary Red<span style="font-family:lucida grande;">This <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=adCP3MLCizHA&refer=home">quick blurb</a> about HSBC over at Bloomberg.com caught my eye. Why? Because for those who recall early 2007, HSBC was the first major bank to admit any problems with its subprime portfolio. We know how the rest of that year progressed. I have to wonder if they are leading the pack again. I guess only time will tell, but it is definitely something to keep an eye on.<br /><br />Could that be the stench of death around the financials, yet again? Hmmm. I know my choice for leading contender to die.<br /><br />Until next time, good people, stay safe...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-8189745644021099312009-05-05T02:04:00.005-04:002009-05-05T06:59:48.026-04:00Peter Thiel on Financial Markets and The Singularity<span style="font-family:lucida grande;">I will definitely watch this again, but a few things struck me about <a href="http://singinst.org/media/singularitysummit2007/peterthiel">this presentation by Peter Thiel</a>. (For the unaware, Thiel was the CEO of PayPal who sold the company to eBay. He runs <a href="http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=4976137">Clarium Capital Management LLC</a>, a global macro hedge fund, and does early stage investing, mostly through <a href="http://www.foundersfund.com/">The Founder's Fund</a>. He was one of the first investors in <a href="http://www.facebook.com/">Facebook</a> and a bunch of other well known Web 2.0 companies.)<br /><br />First, Thiel really is nerdier than I expected. I was hoping there was a suaveness to him, a relaxed confidence borne of his intelligence and success both as an entrepreneur, an academic and an investor. No. There really isn't. He's as nerdy looking and sounding as one would expect from reading about him. I'm not sure what to make of this, and it really means ABSOLUTELY NOTHING, but it caught me off guard. He's also a very unpolished speaker. Again, this is not a problem or a bad thing, but I always find it difficult to listen to people who overuse "ummm" and "uhhh" and "you know" in their speech. In Thiel's case, it is probably a matter of his thinking faster than he speaks, and his speech having to catch up with this (disorganized and chaotic) thoughts. However, it only serves to obfuscate his message and, to me personally, makes it almost painful to listen to him. He should probably spend more time preparing and organizing his thoughts when he is to speak to crowds.<br /><br />Second, I think Thiel has misunderstood Warren Buffett's investing strategy. Maybe Buffett, and by extension <a href="http://www.bloomberg.com/apps/quote?ticker=BRK%2FA%3AUS">Berkshire Hathaway</a>, has invested in The Singularity better than anyone else. However, I don't think that was his objective. Buffett and Berkshire have been doing the very logical thing - managing risks and probabilities. Insurance is the ultimate business of managing risks and probabilities. The insurance business is basically about probability, and this fits with Thiel's singularity thesis because it comes down to managing the fat tail risks.<br /><br />Thiel makes the point, several times, that there are all of these potential outcomes in a non-Gaussian distribution of risks, from -- for example -- an investment boom being the beginning of "The New New Thing" which will revolutionize life on Earth to just being an extended investment mania. He uses the Japan bubble of the 1980s, the Internet bubble of the late 1990s, the real estate bubble in the US in the early part of this decade and the pursuit of the control of space in the late 1960s as is representative cases. In most of these cases, there was a span of time during which great wealth (or "wealth") was created, followed by a spectacular collapse -- boom and bust.<br /><br />Thiel continues on to mention that Buffett, by way of Berkshire Hathaway, is investing in the The Singularity by writing insurance against catastrophic events -- the busts. However, I think Thiel has missed some things. First, Berkshire is not new to the insurance business. Second, insurance -- basically, writing puts against given outcomes, which I think of as the best description -- is a well known business with solid underpinnings. Buffett understands this, and uses this to his advantage. The Berkshire insurance businesses are cash generators, and Buffett has intentionally steered away from certain lines, or approached them carefully. For example, Geico only recently began writing renter's and home owner's insurance, after having been in the auto insurance business for a long time. Geico has also been known as the company that would only take on the best drivers (e.g. the lowest risk drivers) and dropping coverage for drivers after a single accident (cutting losses early). The cash thrown off by the Berkshire insurance businesses has fueled Berkshire's acquisitions of other lowly valued businesses (on a fundamental basis) as well as it's war chest, which in turn had driven it's AAA credit rating (until recently).<br /><br />Even Warren Buffett's mistimed (?) derivatives bets are nothing more than insurance plays. They are bets on the probability of certain outcomes, including the level of the S&P 500 equity index in almost 20 years. While the positions are underwater now, and Buffett can be considered hypocritical for calling derivatives of all stripes "financial weapons of mass destruction", he is fundamentally making similar bets as any of the insurance lines his companies write.<br /><br />I say all of this to say that Buffett doesn't invest in insurance businesses due to some recognition of or belief in The Singularity but simply because he recognizes that probability is on his side. Everything has risk, but insurance, such as it is (outside of the realm of catastrophe, for example), is well known and generally a cash cow due to the small payout in claims against the large revenue in premiums. Maybe Thiel knows this, but he seems to express a view that Buffett has some grandiose "black swan" perspective on investing. I, personally, think not.<br /><br />Anyway, it is an interesting presentation and not a bad way to spend 20 minutes of your time. Will you gain any new insight here? Probably not. But you never know. Maybe something he says will land with you in a way other talks have not. Check it out if you have the time.<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-68820008638930290982009-04-29T05:58:00.003-04:002009-04-29T07:41:35.732-04:00Eric Rosenfeld Lecture about LTCM<span style="font-family:lucida grande;">If you haven't yet caught it, you should run - don't walk - over to <a href="http://zerohedge.blogspot.com/">Zero Hedge</a> and check out <a href="http://zerohedge.blogspot.com/2009/04/lecture-by-eric-rosenfeld-of-ltcm.html">this approximately 90 minute video</a> of Eric Rosenfeld giving a lecture about the LTCM collapse back in 1998. Fascinating insider's view. The comments over at Zero Hedge, as expected, are acerbic but many are enlightening and worth a read.<br /><br />I know I will be revisiting this again shortly, as I found the entire lecture interesting. While I'm sure Rosenfeld mixes and mis-uses some vocabulary and concepts, all in all I think there are definite lessons here. The biggest, of course, as we've learned in the last 2 years, is that in times of stress, all correlations go to 1. However, I want to reconsider the endogenous risks that Tyler @ Zero Hedge mentions. I'll definitely watch this again soon, maybe after my nap this morning.<br /><br />I think the leverage factor, which has been widely associated with the LTCM implosion, bears added consideration. Recently, <a href="http://accruedint.blogspot.com/2009/04/leverage-doesnt-kill-investors-bad.html">Accrued Interest made the point</a> that leverage isn't what kills; bad investments kill. Clearly, this is true. However, leverage has the force multiplier effect and can transfer an innocuous loss into a catastrophe. Eric's lecture covers what he calls the 10 biggest myths and misconceptions about LTCM, and yes, they did hit 300x leverage at various points, according to him. However, it did not occur for the reasons you might have suspected. It adds a bit more color to the whole conversation. I know that, in my own mind, I vilified LTCM for such egregious use of leverage. Seems I was mistaken.<br /><br />Finally, we're all familiar with the idea of prime brokerages frontrunning their hedge fund clients. As I think I have <a href="http://alphaguy.blogspot.com/2008/01/non-institutional-prime-brokerage.html">previously</a> <a href="http://alphaguy.blogspot.com/2007/10/prime-brokerage-disintermediation.html">mentioned</a>, I think there may be an opportunity for a 3rd party prime brokerage business to emerge, or even for trustees and custodial banks to subtly move into the space. State Street and Bank of New York Mellon are the obvious candidates, as they already have large custodial and administration businesses, so why not move up the value chain and entrench yourself further with you customers (for additional fees, of course). However, there's a startup opportunity in there too, <a href="http://alphaguy.blogspot.com/2007/09/why-are-there-no-independent-prime.html">I believe</a>.<br /><br />Anyway, go check it out. Good stuff for us finance geeks, anyway.<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-36491003559841335802009-04-23T14:30:00.004-04:002009-04-23T14:39:43.420-04:00The Hidden Risks of a Central Counterparty in CDSland<span style="font-family:lucida grande;">If you didn't catch it yesterday, FT.com's Alphaville had a <a href="http://ftalphaville.ft.com/blog/2009/04/22/55014/central-counterparties-and-cds-risk-a-contrarian-argument/">great piece</a> about why a central CDS (credit default swap) counterparty (read: exchange or clearinghouse) might not work as well as everyone thinks it would. While I still think it necessary, it's obvious that the idea needs work. Specifically, it needs to be integrated with existing clearinghouses/central counterparties to make sure that cross-exposures are appropriately netted.<br /><br />The piece also raises the point that CDS account for only 11% of the OTC (over the counter, or dealer-to-dealer) derivatives market.<br /><br />Again, putting CDS trading on an exchange or other central counterparty is important, but at most only 40% of trades might move to such a central counterparty. CDS are not standardized, and standardization removes profit which is why B/Ds are loathe to do it. It needs to be done though, to bring as much of the shadow banking system into the light (along with many other moves, however, like re-splitting commercial and investment banks a la Glass-Steagall, as I <a href="http://alphaguy.blogspot.com/2009/03/missing-man.html">previously mentioned</a>). The more trades in a central location, the better. There will always be OTC trading, but it should be for the most esoteric and specialized -- and hopefully rare -- trades.<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-61238240118035496012009-04-13T01:44:00.001-04:002009-04-13T01:45:56.696-04:00Trading Report: Risk Management<span style="font-family:lucida grande;">This report will describe the lessons learned from my experience trading <a href="http://www.etfconnect.com/select/fundpages/etf_funds.asp?MFID=187117">DXO</a>, the PowerShares DB Crude Oil Double Long ETN (exchange traded note). Hopefully my experiences will serve as a warning and a guideline to those of you reading this. We should always seek to learn from our mistakes, and to make new ones as opposed to making the same ones repeatedly.<br /><br />After my previous experience trading DXO, I figured I could use it as a vehicle for some trading gains. I believe in the long term thesis around commodities, and oil in particular. I think that $200 oil and $5 gasoline are eventualities in the US. I chose DXO as the vehicle because of its extremely low price and embedded leverage, making it, as <a href="http://twitter.com/marketfolly">@marketfolly</a> remarked "a call option on oil". Nice!<br /><br />The problems with this particular idea were manifold. First, DXO is an exchange traded note as opposed to being an exchange traded fund. If, for some reason, the sponsor were to go bankrupt or some other restructuring, the holder of DXO becomes an unsecured creditor of the sponsor. That adds counterparty and credit risk to the inherent market risk. Over on the <a href="http://www.marketfolly.com/">Market Folly blog</a>, there was a <a href="http://www.marketfolly.com/2009/01/how-to-play-crude-oil-using-etfs-etns.html">guest post</a> by <a href="http://twitter.com/tradefast">@tradefast</a> which covered some of the details of trading oil via ETFs and ETNs, including the counterparty risk issues. That guest post is a must read!<br /><br />The next problem is that DXO is a double long ETN. It seeks to replicate 2x the movement of its underlying index. For example, if the index moves 1% up on a given trading day, DXO should move 2%. Thankfully, in the case of DXO, this calculation is done on a monthly basis as opposed to daily, making DXO slightly less volatile than it could otherwise be.<br /><br />My first, and probably biggest, mistake in wielding DXO as a trading vehicle was to not use stops. I really have no excuse for such an egregiously stupid act, and the market punished me accordingly. </span><span style="font-family:lucida grande;">Generally, my stops on DXO ended up being far too tight, and I would get stopped out much sooner than I really had a tolerance for. Either that or I would get stopped out right before a bottom. </span><span style="font-family:lucida grande;">While setting proper stops on DXO is difficult due to the high volatility, at least having them in place would have (possibly) prevented the $6000 meltdown that I experienced.<br /><br />The second problem I introduced was using bad position sizing. This may be the most critical failure. Given the price range DXO was trading in at the time (January - mid February 2009), I accumulated a sizable block of shares, somewhere in the neighborhood of 6000. This represented at least 50% and probably closer to 60% of the assets in my brokerage account. What's even worse, I had this oversize position on a security which essentially acted as a call option! This increased the overall volatility of my portfolio and created more stress than anything. It was a completely irresponsible action on my part.<br /><br />My third problem was failing to construct a proper trading plan."Plan your work, work your plan." Simple, right? Not if you don't create the plan! I was trading DXO by the seat of my pants, and thus, by emotion instead of trading it in accordance with the plan I constructed. This caused me to buy at bad times, sell at bad times, and generally overtrade. Overtrading is the quickest way to deplete your funds, it seems to me. But the biggest issue with failing to construct a proper trading plan - and adhere to it - was being swept up in the daily volatility and gyrations of DXO. For a security that moves as violently as DXO, with built-in leverage to boot, you absolutely must have resolve in your idea. If the facts change enough to warrant getting out of the trade, then so be it. All of that is testable against your plan, however. If the market conditions, when compared to the plan, tell you not to do anything, then you don't. If they do, then you do. The trading plans adds clarity, focus and structure to what can easily spiral out of control into a emotional quagmire.<br /><br />So, all of that said, what practices can be put into place to prevent these mistakes from recurring?<br /><br />First, creating a trading journal is a must. Dr. Brett Steenbarger talks about <a href="http://traderfeed.blogspot.com/2008/03/formatting-your-trading-journal-for.html">this here</a>. There's really nothing more for me to say on the topic.<br /><br />Second, no day or swing trades will be undertaken without an accompanying trading plan. Long(er) term position trades or investments (12+ month time horizons) won't require this level of detail to enter the position. There would be nothing wrong with doing so, though. The trading plan is a tool to enforce discipline in the face of emotion. Since the emotion, for me, is a much stronger factor when dealing with the short term trades, I will focus on optimizing my routines for those cases first.<br /><br />Third, I have created a new rule that any trade, long or short, will be made with an accompanying stop/loss order set. Discipline is required to keep up with this one, at least until I change to a new broker. My current online broker (who shall remain nameless to protect the guilty) sucks but there's little I can do about that at the moment.<br /><br />I may delve further into this topic and the specific actions I took that led to this point. Deconstructing them may be instructional. But for now, I hope this analysis is interesting and useful to someone.<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-71002547737142170812009-04-10T00:54:00.004-04:002009-04-10T02:30:02.590-04:00Goal Status and Updates - 1Q2009<span style="font-family:lucida grande;">The first quarter was a bit of a mixed bag. On one goals, I exceeded anything I could have imagined possible. All of the others were failures, at varying levels. :( Anyway, now I have some things to refocus on for Q2.<br /></span><span style="font-family:lucida grande;"><br />Business: Finish writing e-book by 9 Jan 2009. Publish by 16 Jan 2009. <span style="color: rgb(255, 0, 0);">FAIL.</span><br /><del>Business: Make 3 contacts during Money:Tech 2009 (6 Feb 2009).</del><br />Personal: Ride a blue trail by 31 March 2009. <span style="color: rgb(255, 0, 0);">FAIL.</span><br />Professional: Find and accept an offer for an awesome new career opportunity by 31 March 2009 (end of 1Q2009). <span style="color: rgb(255, 0, 0);">FAIL.</span><br />Fitness: Achieve 10% body fat by 31 Mar 2009 (end of 1Q2009). <span style="color: rgb(0, 153, 0);">SURPASSED.</span><br />Fitness: 25 dips, full extension, full body weight by 31 Mar 2009 (end of 1Q2009). <span style="color: rgb(255, 0, 0);">FAIL.</span><br /><br />So let's break these down quickly. Money:Tech 2009 was canceled, somewhat unceremoniously, by <span class="blsp-spelling-error" id="SPELLING_ERROR_0">O'Reilly</span>. So there was no way I was going to accomplish that goal, even though I had my registration in order and was seeking a place to stay for those days when I was informed of the cancellation.<br /><br />I am moving my "ride a blue trail" goal to the end of the year. I thought I'd ridden a blue trail at <a href="http://www.skiwhitetail.com/">Whitetail</a> on my last trip there, but it turned out to be a green. So I decided to take a break to refresh before tackling a real blue. Well, like an idiot, I ended up riding another green 2 or 3 more times (because it was just so fun, and the conditions at season end were amazingly good). Those runs totally crushed my legs, though. I should have just ridden the blue first, but by riding the green, I totally subverted the achievement of my own goal. It just goes to show that most of the time, you just get in your own way in life. :\<br /><br />I'm still not sure if I will finish the e-book. The economic/financial crisis has been dissected to death, and there will be tons more in the future. This crisis is on its way to be becoming a Harvard Business School case study! So, although my e-book sought to be comprehensive in explaining the crisis as well as delving into practical solutions for real people to survive, thrive and prosper through it's aftermath, I don't know if I can do better than what has already come out. (Or will come out in the future.) I may still do it, just for my own personal edification, but I'm unsure at this point.<br /><br />With my goal of 25 dips, I came close but as my father is fond of saying, "close only counts in hand grenades and horseshoes". During my workout, I normally do sets of 15 reps of dips, but I was (until recently) doing 6 sets. That works out to 90 dips over the course of a session. So I thought the 25 in a row would be easy to do. Man, was I ever wrong! I failed at rep 17, then again at rep 22. Since I did not make it straight through, I am calling this a FAIL even though the definition of success is my own. I could rightfully call it a pass, since I did get all 25 dips. I'll move this goal to later in the year as well, and spend more time preparing.<br /><br />My 10% body fat goal was my only success, but given the rather aggressive fitness goals I set, it is amazing that I reached it when I did. Actually, I made it to 8.4% body fat before the end of January, <span class="blsp-spelling-error" id="SPELLING_ERROR_1">IIRC</span>. It definitely was measured before the end of February. If you look at my <a href="http://alphaguy.blogspot.com/2009/01/2009-goals.html">original 2009 goals list</a>, the date by which to achieve 8% body fat was 31 December. So I basically crushed this goal, and almost achieved my annual goal before the end of the Q1. I can see my <span class="blsp-spelling-error" id="SPELLING_ERROR_2">sixpack</span> coming into focus, and I haven't even gotten serious about sculpting my body yet. Talk about inspiring!<br /><br />Finally, I did not find a new career opportunity. Not even close. I dither on whether to continue pursuing this goal at this time. I have other projects I would like to spend more time on, and my job suits my lifestyle perfectly well. While it often annoys the hell out of me, it's an easy job, with a solid company, decent benefits, amazing hours, and I work with people I generally like doing something I generally like. The only real problems are that I think the organization is misguided and confused, and management above my direct manager is ineffective and highly politicized.<br /><br />*sigh*<br /><br />Time to get to work!<br /><br />Here's my updated list of goals for the remainder of this year:<br /><br /></span><span style="font-family:lucida grande;">Personal: Cook 1 meal per week by 30 Jun 2009 (end of 2Q2009).<br />Business: Finish unwinding my real estate partnership by 30 Jun 2009 (end of 2Q2009).<br />Fitness: 1 hr of <span class="blsp-spelling-error" id="SPELLING_ERROR_3">cardio</span> on the <span class="blsp-spelling-error" id="SPELLING_ERROR_4">Precor</span> <span class="blsp-spelling-error" id="SPELLING_ERROR_5">EFX</span> 556 in interval mode by 30 Jun 2009 (end of 2Q2009).<br />Fitness: 10 wide grip pull ups, full body weight, by 30 Jun 2009 (end of 2Q2009).<br /></span><span style="font-family:lucida grande;">Fitness: 25 dips, full extension, full body weight by 31 Mar 2009 (end of 2Q2009).</span><br /><span style="font-family:lucida grande;">Personal: Save $15,000 for house down payment by 30 Sep 2009 (end of 3Q2009).<br />Personal: Read 1 book per month (12 total) by 31 Dec 2009.<br />Personal: Accumulate $30,000 in emergency funds by 31 Dec 2009.<br />Personal: Achieve $90,000 in net worth by 31 Dec 2009.<br />Personal: Pay <span class="blsp-spelling-error" id="SPELLING_ERROR_6">AmEx</span> down to $0.00 by 31 Dec 2009.<br /></span><span style="font-family:lucida grande;">Personal: Ride a blue trail by 31 March 2009.</span><br /><span style="font-family:lucida grande;"><br />Stretch:<br /><br />Fitness: Achieve a visible <span class="blsp-spelling-error" id="SPELLING_ERROR_7">sixpack</span> by 30 Sep 2009 (end of 3Q2009).<br />Personal: Achieve $150,000 in net worth by 31 Dec 2009.<br />Personal: Read 1 book per week (52 total) by 31 Dec 2009.<br />Fitness: Achieve 8% body fat by 31 Dec 2009.<br />Fitness: Chest press 200 lbs for 15 reps by 31 Dec 2009.<br />Fitness: 1 hr of <span class="blsp-spelling-error" id="SPELLING_ERROR_8">cardio</span> on <span class="blsp-spelling-error" id="SPELLING_ERROR_9">Precor</span> <span class="blsp-spelling-error" id="SPELLING_ERROR_10">EFX</span> 556 in hill climb mode by 31 Dec 2009.<br />Personal: Accumulate $50,000 in emergency funds by 31 Dec 2009.<br /><br />Until next time...<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-5929162314546941132009-03-24T05:23:00.003-04:002009-03-24T06:11:02.815-04:00The Missing Man<span style="font-family:lucida grande;">So I was reading some of the <a href="http://www.aleablog.com/geithners-plan-good-in-theory/">commentary</a> about the new Geithner plan, and the one thing that struck me (particularly as I read <a href="http://www.efinancialnews.com/investmentbanking/content/1053708525/26055/@token1089fr2g7a">this</a>) is that we still haven't see anything cogent about the valuation of these "troubled assets".<br /><br />At the end of the day, I think the banks <span style="font-weight: bold; color: rgb(0, 0, 0);">ARE</span> currently insolvent <span style="font-weight: bold; color: rgb(0, 0, 0);">BUT</span> I think they can survive this. The key will be getting those assets off their books. YES, they will be insolvent. Get over it. As Steve Randy Waldman <a href="http://www.interfluidity.com/posts/1237006024.shtml">said</a> over at <a href="http://www.interfluidity.com/">Interfluidity</a> the other day, they were insolvent before, during the S&L crisis. Insolvency isn't the issue. A few years of reasonable earnings w/o dividend payouts and public markets recapitalization -- as James Surowiecki has advocated (see the <a href="http://www.interfluidity.com/posts/1237006024.shtml">Interfluidity post</a> for the links to Surowiecki) -- and I think many (not all) of the current banks survive in some form. Obviously, the industry will see huge structural changes in other ways, but overall, I don't think we risk losing too many of the existing banks. Yes, the banking system needs to be fundamentally overhauled, and personally, I think <a href="http://en.wikipedia.org/wiki/Glass-Steagall_Act">Glass-Steagall</a> needs to make a return, but that's a conversation for another day.<br /><br />Aside: The ones I think we DO lose would appear to be interesting shorts. :) Figuring out those names is left as an exercise to the reader. That's what the comments are for! I'll start with <a href="http://www.bloomberg.com/apps/quote?ticker=WFC">WFC</a>.<br /><br />What worries me most is whether Geithner's new plan will attempt to do what Hank Paulson's original plan(s) attempted to do - bailout the banks with unrealistic valuations of these assets. I don't think too many private investors will be interested in overpaying to take these assets off the balance sheets of the banks. I know I wouldn't be interested in overpaying for distressed assets. The marks they carry are because they are distressed! So I am particularly curious to see when and how this question is answered. If anyone out there reading has anything to share, speculation or otherwise, please do share!<br /><br />I already think this bounce is setting up a huge shorting opportunity. However, until this question is answered, we're still in what <a href="http://upsidetrader.blogspot.com/">Upside</a> would call a Wile E. Coyote moment, not realizing there's no ground underfoot but still running. If this question isn't answered well AND soon, gravity kicks in with a vengeance! Of course, that's not to say that gravity won't kick in just because. It is "The Market" after all.<br /><br />Finally, realize that I am only speaking about this plan right now. So many people seem to have forgotten about the BIG elephant in the room, the <span style="font-weight: bold; color: rgb(0, 0, 0);">REAL</span> missing man. There will be a next leg down, I'm fairly certain. And the banks will continue to be insolvent. Whether that turns into a <a href="http://alephblog.com/2008/08/19/nonidentical-twins-solvency-and-liquidity/">liquidity problem</a> is To Be Determined. All bets are off on any of the existing private banking institutions surviving once the leg down kicks in.<br /><br />Until next time...<br /><br />UPDATE: Looks like I spoke <a href="http://www.aleablog.com/the-plan-as-expected/">a bit too soon</a>, but still, I personally want more detail.<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-58800531638578835332009-03-23T04:34:00.002-04:002009-03-23T04:36:30.546-04:00Random Thought<span style="font-family:lucida grande;">Sounds like portfolio insurance <a href="http://www.efinancialnews.com/assetmanagement/fundmanagement/content/1053693712/26037/@token1820ak8vd6">all over again</a>, at least to me. This gave me a good laugh. Liquidations like this, across asset classes, are happening the world 'round.<br /><br />*shrug*<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0tag:blogger.com,1999:blog-10546227.post-9489431253553037672009-03-20T02:22:00.002-04:002009-03-20T03:58:57.403-04:00Trading the 401(k)<span style="font-family: lucida grande;">There are plenty of reasons NOT to do this, but I would expect that many personal finance bloggers do so to some degree. Definitely not all, but the number is surely non-zero. Even respected professionals such as Teresa Lo advise against it for most people. However, the opportunity is just too good to pass up. This is the first of potentially many instances in which I plan to do this over the coming years.<br /><br />To start, due to the almost 20% bounce off recent market lows, my 401(k) is has gained slightly over $5000 in value. Not a huge amount, true, but hardly non-trivial. So it seemed like a good time to lock in some of these gains. I am a believe that we have not seem the bottom of this bear market, and this is simply a violent bear market rally. As well, the numbers I've seen in my 401(k) strongly suggest that to me.<br /><br />I started by rebalancing completely out of my employer's equity fund. I have been greatly disturbed that my employer pays 401(k) contributions as equity. I already draw my paycheck from this company. Being doubly long by holding such a significant amount of equity (about 6.37% of the total value of the account) on top of my income is a worrisome state. Thankfully, I was able to sell all of my current holdings, which are up 10.7% since the last time I updated my asset allocation spreadsheet. Future contributions will still be made in stock, but this I can't stop so there's no sense in worrying about it.<br /><br />Next, I liquidated all holdings, both equity and fixed income. With the exception of the bond funds, all of the holdings are up double digits in the last few weeks. (I last updated my spreadsheet earlier this month.) I think a decline is imminent across most equity markets worldwide, and I want to accumulate as much dry powder as possible for future deployment. Hopefully, I will lock in significant gains and more importantly, avoid the downside after this rally fizzles out.<br /><br />For the record, the holdings in my 401(k) were up as follows: US small cap equities up 16.66%; emerging market equities up 13.06%; international mid-cap equities up 12.38%; US large cap equities up 15.39%; US large cap equity index up 14.85%; international large cap equity index up 16.57%; US real estate up 20.27%.<br /><br />Anyway, we'll see how this works out. I don't anticipate significant upside movement on any of my holdings, and if I'm able to avoid the next leg down, then I'll have the resources to acquire even larger blocks of shares on the way back up. Mind you, I think it will be a long way back up, several years in the making, but I'd like to take a value investing approach to this, while exercising some downside risk mitigation.<br /><br />Wish me luck!<br /></span>Khyronhttp://www.blogger.com/profile/08040617292426246605noreply@blogger.com0