Alpha Guy

A Review of "Wall Street" - Part II

2011-12-01T14:23:00.000-05:00

This is part II of the series I began with this post. 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.

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.

In the scene "Business Philosophy" (20th anniversary edition DVD), Gekko says the following to Bud while they ride in the back of Gekko's limo:

"My father, he worked like an elephant pushing electrical supplies til he dropped dead at 49 with a heart attack and tax bills."

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.

As it so happens, there was a profile of Sir James Dyson, 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.)

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".

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.

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 risk management. Legally distancing himself from Bud is such a tactic.

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.

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.

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 (as anger usually is), 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.

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.

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.

Probabilities

2011-11-25T18:34:00.000-05:00

That's what risk management comes down to. Probabilties.

The CEO of Wegelin & Co. clearly understands this. In this article, I think he makes the best quote I've heard in a while on the topic of managing risk.

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.

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, "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!!

Something to think about. Until next time...

Investing in Cloud Computing and Automated Infrastructure

2011-11-21T02:52:00.000-05:00

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.

If you read part one, 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 not investment advice. If you even conceive of investing based on anything said here, you're an idiot, and as Gordon Gekko once said, "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).

In my last post, I discussed the idea of automated infrastructure. 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 SmugMug achieves these outcomes.

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.

Creating an API is like creating a software development kit (SDK). 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 (Symantec) provides an SDK for enabling my application to work with Veritas Cluster Server. Not only does this lock me into the Veritas HA solution, but it gives me control and flexibility to really manage MY 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.

As for investing, I'm not sure what the best route is. Who knows if a company like Joyent will ever go public? I doubt it, as it seems the team over there is building a long term business. I'm sure Jason et. al 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. AWS 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.

What IS clear is that automated infrastructure and system/network operations is truly becoming a competitive advantage and force multiplier 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.

Investing in Amazon or Google 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.) Rackspace 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.

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 Juniper has done with this, but they need to be promoting it HARD HARD HARD!!! 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 Cisco 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.

Smaller vendors such as Vyatta, Extreme Networks, Force 10 and others might stand to benefit from providing programmatic access to their networking software, however. Arista Networks is another obvious name for this too, and they have the technology chops 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.

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 Brocade doing in this space to compete with Cisco? Think about it. Programmable storage infrastructure will be next in line.

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!

Until next time...

Cloud Computing and Programmable Infrastructure (Part I)

2011-11-18T02:25:00.000-05:00

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).

A few weeks ago, I attended the Structure 09 Conference put on by GigaOm Media 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 "Man" Jose.) I did get more technical meat from O'Reilly Media's Velocity 2009 conference the previous 3 days, so it was all good. Besides, I met Paul Kedrosky of Infectious Greed fame and had a nice, though brief, conversation with Jonathan Heiliger, who was my personal hero for a great many years at the start of my career.

During the conference, I shot off this tweet 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.

For ages, the supremely competent engineers and sysadmins 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 expect/TCL, Perl, and shell. The reason is simple - most device operating systems were not accessible programmatically, e.g. via an API. 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.

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 SLOOOOWLY 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 Sun was right and "the network IS the computer". The network infrastructure has taken on a level of criticality that was reserved only for servers for a long time.

Finally, the rise of cloud computing and the idea of automated infrastructure 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. Amazon Web Services, Joyent, RightScale, Mosso a.k.a. The Rackspace Cloud, Enomaly, 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.

There's also a certain level of difficulty in implementing APIs correctly and efficiently that vendors were probably 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.

However, with the exception of Juniper Networks, 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.)

However, I see this changing. I don't know if a company like Vyatta 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 innovation 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.

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.

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.

Until next time, gentle readers...

The Future of US Innovation

2011-11-15T03:48:00.000-05:00

In my last post, 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.

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).

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.

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. I'm cautiously pessimistic.

*sigh*

Maybe it's time for a drink now. Until next time...

The Future of US Employment

2011-11-11T05:03:00.000-05:00

While reading this 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.

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 Steve Jobs of Apple once said. They will have to solve real world problems at a huge level of value add/creation.

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 here, this and this. 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.

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!).

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 NOT about dogma, protectionism and nationalism but it is simple truth.

For those products where American companies and workers can create huge amounts of VALUE, 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.

That's just a thought. Let me know what you think. For now, I'm going to bed.

Until next time...

Happy

2009-07-23T12:59:00.003-04:00

Yaaaay!!! Yay!

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.

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.)

This makes me happy, sort of! Yay!

P.S.: The Federal Reserve should still be audited. Even if this effort is successful, it doesn't change the need to audit and hopefully dismantle the Fed.

Second Order Effects Redux

2009-07-17T15:26:00.003-04:00

What was that I once said about second order effects? As my friend Equity Private might say, "Finem Respice".

They Went Thataway!

2009-07-17T12:43:00.002-04:00

So CBRE says there is effectively no AAA paper in the CMBS market. The TALF program is only accepting AAA paper 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.

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.

While I originally meant to publish this piece a few weeks ago, the thoughts still stand. Here's a Bloomberg.com article 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.

"Timberrr!" That could be the sound of the US economy taking another fall, and in very short order. SRS, as a short, looks promising, but what I really need is an unlevered fund. I'll be spending some quality time with ETFConnect to find one.

Until next time, peeps!

Back in the Game

2009-07-01T06:06:00.005-04:00

Wow!

It seems like forever since I posted. I know my readers probably feel similarly.

What happened, you ask?

The short answers is that both Velocity 2009 and Structure 09 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 very nice rental car I gave myself, and my hotel room.

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.

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 Andrew Shafer of Reductive Labs and the great Paul Kredrosky himself. For some reason, this kind of experience only seems likely in Silicon Valley.

While I was gone, my positions in UCO and UNG 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.

While I'm at it, if anyone 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.

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.

Stay tuned, and thanks for sticking with me!

Selling Out

2009-06-16T08:03:00.002-04:00

Yep, I did it.

I sold 60% of my position in UCO 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.

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!

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*

:)

Until next time...

Too Big to Fail or Unwind

2009-06-08T16:15:00.001-04:00

Short US Treasuries and Long US Treasury CDS FTW!

Okie, I go now...

How Dasan Is Investing Now

2009-06-08T09:49:00.003-04:00

Those of you who follow the hardcore investors and finance types on Twitter will recognize the name Dasan. 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. Check it out!

Stopped Short

2009-05-28T16:31:00.001-04:00

I mentioned in my last post that I was stopped out on UGA. Total bummer really, but that's also the point. While the loss would have been temporary, I now have capital to re-deploy elsewhere.

So what happened, you say?

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.

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.

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.

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.

Until next time...

Ooops!

2009-05-24T04:03:00.003-04:00

Actually, it was more like "damn!!" but you get the picture.

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 UCO were gone at a price of $10.54 per share.

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.

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!

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.

NOTE: We'll discuss getting stopped out of UGA the following day in a later post.

Happy trading!

Exogenous Price Shocks

2009-05-24T01:18:00.004-04:00

It could just be me, but what I found to be most interesting in the 20 May post 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!

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.

That's all for now. Until next time...

Canary Red

2009-05-11T16:18:00.003-04:00

This quick blurb 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.

Could that be the stench of death around the financials, yet again? Hmmm. I know my choice for leading contender to die.

Until next time, good people, stay safe...

Peter Thiel on Financial Markets and The Singularity

2009-05-05T02:04:00.005-04:00

I will definitely watch this again, but a few things struck me about this presentation by Peter Thiel. (For the unaware, Thiel was the CEO of PayPal who sold the company to eBay. He runs Clarium Capital Management LLC, a global macro hedge fund, and does early stage investing, mostly through The Founder's Fund. He was one of the first investors in Facebook and a bunch of other well known Web 2.0 companies.)

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.

Second, I think Thiel has misunderstood Warren Buffett's investing strategy. Maybe Buffett, and by extension Berkshire Hathaway, 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.

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.

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).

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.

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.

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.

Until next time...

Eric Rosenfeld Lecture about LTCM

2009-04-29T05:58:00.003-04:00

If you haven't yet caught it, you should run - don't walk - over to Zero Hedge and check out this approximately 90 minute video 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.

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.

I think the leverage factor, which has been widely associated with the LTCM implosion, bears added consideration. Recently, Accrued Interest made the point 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.

Finally, we're all familiar with the idea of prime brokerages frontrunning their hedge fund clients. As I think I have previously mentioned, 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, I believe.

Anyway, go check it out. Good stuff for us finance geeks, anyway.

Until next time...

The Hidden Risks of a Central Counterparty in CDSland

2009-04-23T14:30:00.004-04:00

If you didn't catch it yesterday, FT.com's Alphaville had a great piece 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.

The piece also raises the point that CDS account for only 11% of the OTC (over the counter, or dealer-to-dealer) derivatives market.

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 previously mentioned). 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.

Trading Report: Risk Management

2009-04-13T01:44:00.001-04:00

This report will describe the lessons learned from my experience trading DXO, 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.

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 @marketfolly remarked "a call option on oil". Nice!

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 Market Folly blog, there was a guest post by @tradefast 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!

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.

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. 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. 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.

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.

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.

So, all of that said, what practices can be put into place to prevent these mistakes from recurring?

First, creating a trading journal is a must. Dr. Brett Steenbarger talks about this here. There's really nothing more for me to say on the topic.

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.

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.

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.

Until next time...

Goal Status and Updates - 1Q2009

2009-04-10T00:54:00.004-04:00

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.

Business: Finish writing e-book by 9 Jan 2009. Publish by 16 Jan 2009. FAIL.
~~Business: Make 3 contacts during Money:Tech 2009 (6 Feb 2009).~~
Personal: Ride a blue trail by 31 March 2009. FAIL.
Professional: Find and accept an offer for an awesome new career opportunity by 31 March 2009 (end of 1Q2009). FAIL.
Fitness: Achieve 10% body fat by 31 Mar 2009 (end of 1Q2009). SURPASSED.
Fitness: 25 dips, full extension, full body weight by 31 Mar 2009 (end of 1Q2009). FAIL.

So let's break these down quickly. Money:Tech 2009 was canceled, somewhat unceremoniously, by O'Reilly. 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.

I am moving my "ride a blue trail" goal to the end of the year. I thought I'd ridden a blue trail at Whitetail 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. :\

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.

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.

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, IIRC. It definitely was measured before the end of February. If you look at my original 2009 goals list, 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 sixpack coming into focus, and I haven't even gotten serious about sculpting my body yet. Talk about inspiring!

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.

*sigh*

Time to get to work!

Here's my updated list of goals for the remainder of this year:

Personal: Cook 1 meal per week by 30 Jun 2009 (end of 2Q2009).
Business: Finish unwinding my real estate partnership by 30 Jun 2009 (end of 2Q2009).
Fitness: 1 hr of cardio on the Precor EFX 556 in interval mode by 30 Jun 2009 (end of 2Q2009).
Fitness: 10 wide grip pull ups, full body weight, by 30 Jun 2009 (end of 2Q2009).
Fitness: 25 dips, full extension, full body weight by 31 Mar 2009 (end of 2Q2009).
Personal: Save $15,000 for house down payment by 30 Sep 2009 (end of 3Q2009).
Personal: Read 1 book per month (12 total) by 31 Dec 2009.
Personal: Accumulate $30,000 in emergency funds by 31 Dec 2009.
Personal: Achieve $90,000 in net worth by 31 Dec 2009.
Personal: Pay AmEx down to $0.00 by 31 Dec 2009.
Personal: Ride a blue trail by 31 March 2009.

Stretch:

Fitness: Achieve a visible sixpack by 30 Sep 2009 (end of 3Q2009).
Personal: Achieve $150,000 in net worth by 31 Dec 2009.
Personal: Read 1 book per week (52 total) by 31 Dec 2009.
Fitness: Achieve 8% body fat by 31 Dec 2009.
Fitness: Chest press 200 lbs for 15 reps by 31 Dec 2009.
Fitness: 1 hr of cardio on Precor EFX 556 in hill climb mode by 31 Dec 2009.
Personal: Accumulate $50,000 in emergency funds by 31 Dec 2009.

Until next time...

The Missing Man

2009-03-24T05:23:00.003-04:00

So I was reading some of the commentary about the new Geithner plan, and the one thing that struck me (particularly as I read this) is that we still haven't see anything cogent about the valuation of these "troubled assets".

At the end of the day, I think the banks ARE currently insolvent BUT 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 said over at Interfluidity 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 Interfluidity post 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 Glass-Steagall needs to make a return, but that's a conversation for another day.

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 WFC.

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!

I already think this bounce is setting up a huge shorting opportunity. However, until this question is answered, we're still in what Upside 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.

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 REAL 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 liquidity problem is To Be Determined. All bets are off on any of the existing private banking institutions surviving once the leg down kicks in.

Until next time...

UPDATE: Looks like I spoke a bit too soon, but still, I personally want more detail.

Random Thought

2009-03-23T04:34:00.002-04:00

Sounds like portfolio insurance all over again, at least to me. This gave me a good laugh. Liquidations like this, across asset classes, are happening the world 'round.

*shrug*

Trading the 401(k)

2009-03-20T02:22:00.002-04:00

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.

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.

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.

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.

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%.

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.

Wish me luck!

Yielding to Logic

2009-03-20T01:39:00.002-04:00

That's what I have done with my latest transfer of funds.

How so?

Some of you will recall a plan I outlined almost exactly one year ago. That plan involved paying off my AmEx at a slower rate while I amassed my emergency savings. Now I am ending that plan and focusing on reducing the balance on my card.

So you may be asking what has changed since then?

First and foremost, I achieved my savings goal for 2008. I currently have $20,142 in emergency funds. While I will not completely terminate my Direct Deposit into that account, I am turning down the savings rate to about $150/month from $1000. The remaining funds will be divided among a savings account for travel expenses and for paying down my card.

Second, the return of principal I expected last year never materialized. Thus, due to fees, the AmEx balance has grown much faster than I originally expected or intended. That was a failure of management on my part. I needed to pay closer attention to this situation, and adjust my plan as soon as the payment clearly was not going to be made. This mistake is a learning experience and will not be repeated.

Third, as will soon be detailed, my trading adventures recently have been a less successful than expected. Thus, paying off the card has a higher ROI than shorting AXP or riding the volatility of FAZ. (I have been positive on my AXP shorts, but I haven't had the funds to control enough shares to make huge returns. FAZ, on the other hand, has stopped me out more times than I care to count.)

Fourth is the emotional and psychological component. In the year since that last blog post, the balance on the AmEx has grown pretty steadily. Even after I moved to my current apartment and stopped paying my rent on my card, I just have not been able to pay down the balance as quickly as originally anticipated. That outstanding balance is an albatross around my net worth. At this point, with other goals accomplished, it is now time to address this situation. As I previously mentioned, money is an emotional topic, and how each of us manages our finances is very personal. This charge card balance has finally reached a point of personal pain for me, and now is the time for salve.

By transferring out of my investment account so that I can use the funds to pay down the AmEx balance. While once upon a time, I had it under control, it has become abundantly clear that I am doing more harm than good but allowing this balance to continue living. The rate at which it is accumulating interest is overwhelming my ability to service the debt at a level I feel comfortable with. (To be sure, I could continue doing what I am doing, and technically it would not be hard, but I hate the feelings associated with it. Psychosomatic? Probably.)

Fifth, having a written goal to pay off the card has focused my mind. While it will not be a simple process, if I am going to achieve this goal by year end, I have to commit myself to it. That means doing everything I can to allocate the necessary funds. Some of that will likely come from additional income. Some of those funds will come from re-allocating income from my job, and part of it will come from reducing the balance against which fees are assessed. No matter how this comes together, I MUST perform activities which support this goal given its importance to me.

I have already transferred half of my cash balance from my trading account back into my checking account. From there, it will be applied against my AmEx balance; that transaction should complete today, Friday, 20 March 2009. Along with the coming shift to reduced savings, I estimate that I should have this card paid down before the end of August. I think I can probably be even more aggressive, but there's no sense in creating suffering just to serve a goal. This single payment will reduce my outstanding balance by 46%.

On top of re-arranging my income stream to pay down the card, there are a few places where "found money" comes into play. I have a 5 year, $1000 CD coming due this month. When it does, I will transfer those funds into my checking account and then make an additional payment to my AmEx. I also expect to be repaid about $1600 that I lent to a friend last year. That money can either augment the savings I am assembling for travel spending later this year or, depending on the potential cost of those trips, I may just apply the money to the AmEx.

A bonus to this entire scenario is that I will probably earn enough Membership Rewards points to pay for at least one of the flights I am preparing for. That takes some of the edge off of the pain of scraping together the almost $22,000 that I owe. That alone is a huge win.

Anyway, that's the plan which has been put into action. I'll keep you updated on the progress.

Until next time...

The Fall of CNBC

2009-03-12T03:27:00.004-04:00

So I've been catching up on this story about Bubblevision, since I don't have television service. (Only FiOS Internet access, but it's great so far.) It is truly entertaining, both to watch the video as well as reading some of the analysis to come out of it.

What can I say? I popped my cherry on CNBC. I've been watching them, to some degree, since the early 1990s. Even after discovering Bloomberg TV, and watching hopefully for CNNfn to grow into being somewhat entertaining (before its demise), I kept coming back to CNBC.

But then, last year, there was a shift. A large motivator for that shift had to do with the realization that CNBC guilty of propagating bad information in various ways. However, I also became clear about what I was seeking from CNBC, and how it no longer served a central role in providing that. What I was seeking was information. Specifically, I was trying to find ways into the knowledge flow.

You see, this entire world of finance is based on information. A friend of mine used to have the following quote as his e-mail signature:

"Information - the currency of the future."

This was around 1993, so long after the release of "Wall Street", wherein Gordon Gekko first expounds on the importance of information. For a neophyte such as myself, at that time, I could not appreciate the sheer brilliance and importance of Gekko's lines regarding information. Even after being exposed to the above quote, it never hit me, through all the intervening years, just how critical the right information is to success in this world. I'm not sure when it finally landed, but I felt amazingly stupid for not "getting it" sooner. (Rightfully so!)

CNBC has always represented the regular man's access to the information flow of the world of finance, and Wall Street in particular. The very embodiment of the concept of "democratization" of information. At least, so I and many others thought. We didn't know what we didn't know.

CNBC's role in my life has slowly been usurped by the Internet, in particular the many excellent resources I list along the right hand navigation bar, and most powerfully, By Twitter. Sometime since early last year, the light bulb came on. I got it. And since then, CNBC was no longer just wrong. It was pretty much irrelevant, becoming more entertainment than information. All Jon Stewart did was highlight this for regular people, and they probably still won't really get it. The power brokers, on the other hand, have clearly been aware of this for a long time.

I don't miss CNBC, because there was never enough substantive information to miss (unlike the devolution of the Wall Street Journal over the past 10 - 15 years). It's clear as day. CNBC doesn't matter. Whether it ever will again, or even should, if a wholly different question. Sure, it will always have its place on trading floors/desks, among the financial cognoscenti, and the regular man. It is a tool - a very blunt tool - but a tool with some uses. Without sound, it is a decent breaking news tool and ticker. (Bloomberg's colors make it far too difficult to read their ticker quickly, IMO.) Yet the prominence and stature will never return, at least not for me.

Such is life.

Net Worth Update - 07 March 2009

2009-03-07T05:11:00.000-05:00

I apologize for the delay in posting this, but life has a way of catching up with you. Ya know?

As of 7 March 2009, my net worth is $57276.53. In a word, it sucks. However, there has been progress on various fronts.

First, I've been able to build my emergency account back up to $20111.07 from close to $15000. Those funds were transferred into my brokerage account for trading purposes. Now that I'm back over 20K, I will redirect the $1000 that I currently Direct Deposit into that account toward my American Express debt. Paying down the AmEx to $0 is one of my goals for 2009. (And no, I was not extended the offer to cancel my card and pay off all of the debt in one shot.)

Second, if not for the need to put $999.37 worth of work into my almost 10 year old car, my balance would be less than $20K. Such is life! However, it is thrilling to really make some progress on cutting that balance down. Once I start moving funds away from the emergency savings account and toward that goal, the balance should decrease even faster. Just thinking about it is energizing (but that could also be the feeling of my body burning more fat *shrug*)!

Third, I'm getting back into the mode of reducing unnecessary expenses. My total food expenditures for February 2009 came to. I think I ate out twice, and both of those were with friends whom I hadn't caught up with in a while. (In one case, said friend is recently unemployed so I picked up the tab. In the other case, we split the bill.) I recently canceled my Zagat.com subscription because I hadn't used it since I signed up (again) in April 2008. I'm considering dropping my WSJ.com subscription and possibly my Barrons.com subscription. I love Barron's, even more than WSJ.com, but I read neither as much as I used to. I may keep Barron's and dump the WSJ since I despise the re-designed WSJ.com site. This is pretty much what I expected once Dow Jones was acquired by News Corp. I will also be canceling 2 domain name registrations with Network Solutions. These are names that I will no longer use for a business idea that I am no longer interested in pursuing. Thus, I'll let those expire at year end. Since the majority of the current calendar year is already accounted for, I hope to find another way to monetize those domain names via domain parking or some other means

Fourth, I underspent most of my targets, with the exception of food costs. (Quelle surprise!) I only spent $126.65 on gasoline against an expense target of $400; $56.01 on medical expenses, against a target of $75; $21.60 on entertainment (a lift ticket for snowboarding) against a target of $100; and $1315.84 on rent and housing costs, against a target of $1369. Food, on the other hand, hit me for $610.99, against a target of $500 per month.

In the coming months, I'll spend some time balancing my food expenses against all the other priorities I have. Key among them will be saving for both emergencies and fun, as well as food costs. Having food at home and cooking has been very kind to me, though. Once I get a acclimated to cooking, I expect that my food costs will moderate and possibly decrease. We will see.

I also anticipate moving back to the same city that I lived in prior to moving to my current apartment. In doing so, I look forward to a reduction in my insurance costs. All of my insurances increased noticeably - car, renter's and the personal articles insurance policy on my laptop. I guess that has to do with moving into a "less safe" county. Too bad it also happens to be the wealthiest (by income) predominantly Black county in the entire nation. So very sad. I hope, with the current state of the economy and the number of empty residential properties on the market, that I can find a reasonable rent in downtown Silver Spring. I think my historically good (and improving) credit, solid income, and increased supply of rental units and moderate to decreased demand for said units will work in my favor.

Overall, my goals are coming together. I attribute some of this to posting my goals around my apartment. The above blog post is taped to the wall above the head of my bed, on my refrigerator door, and on the mirror of my bathroom.

Anyway, that's a small peek into my current financial situation. I like how things are progressing. I'll keep you posted as the situation develops, so keep reading and commenting.

Until next time...

What's Missing in the Market: Panic

2009-03-06T18:57:00.000-05:00

You know, I could be short all day and not have a problem with it. Really. However, given the statistical history of the markets, there are so much better opportunities for making money being long in a rising market which has solid fundamentals AND technicals underpinning it. Everybody wants to be early, no one wants to be late. I, for one, can stand to be late, if it means probability is working in my favor. This is a war of attrition. Capital preservation is the order of the day, if you're not trading.

The one thing I am noticing, and I see it in today's closing, is the lack of absolute panic. There has been fear, true, but it seems like everyone is trying to call the bottom (except for the people I follow/listen to, who are just trading along). There's been a lot of knife catching, and I should know, as my trading report will show. But most of what I see is people just waiting - hoping? - for the turnaround to start "any day now" so they keep buying the dips, just to jump out later for a loss. It's such a Pavlovian response. It would be funny if it didn't indicate just how long and drawn out this tape will be.

Now, don't get me wrong...there are a lot of pieces which need to come together for a sustainable rally to take hold. Most of those pieces are non-existent currently, which is why a bottom is really no closer. Given all the factors I've seen, and even with my respect for Jeremy Grantham and John Hussman, I'm staying out of the long side right now (with the exception of my primary thesis around commodities). Long is so, so wrong right now. Doesn't even feel right. We get closer to a bottom, true, but I think all of the knife catchers will find that the knife still has yet to reach the floor. THAT'S when I plan to pick it up.

I just don't see enough panic to say that all of the suckers have been cleared out. Yes, TLT is racking up gains (though it is off its highs), and TBT is getting its ass handed to it most days. Savings are up, but they can go up more. People don't even realize what else is coming down the pike, and insurance is SO fucked up I'm shocked and scared (just when I thought I had a good handle on the scope of our problems). But there's still too much hope out there. A lot more people need to get crushed to clear out the dead and create space for rebuilding. A LOT MORE.

That is all.

Selection Bias

2009-03-06T05:49:00.000-05:00

Just great!

This is one of the problems with hedge funds. They have a bad year and just stop reporting data to the few databases which exist to collect data about hedge fund returns.

All this does is make overall industry returns look better, because there are fewer negative data points among the data that is reported.

I would imagine most of the databases anonymize data at some point. If not, they should. However, managers need to be willing to step up and let their returns be known (even anonymously if that's the only way) for the sake of the industry. It won't stop the bloodletting, and as some seem to think, we could easily be on our way back to 5000 funds (50% attrition). No matter what, the integrity of the data is of utmost importance to re-establish trust in the industry and in managers. This is one of several market oriented, non-governmental reforms that the global (and especially US) hedge fund industry needs to undertake.

That is all for now. Later!

Trading Report: Setting the Scene

2009-02-27T16:06:00.001-05:00

Let me begin my setting the scene.

The Thesis: I believe that the best (only?) trade or even long term position right now is commodities. Yes, we're in an ungodly recession, depression, whatever kind of -ession you want to call it. Yes, it will get significantly worse. (Not going to talk my book, but believe that. Hell, residential RE and the attendant issues are not fully resolved.) However, there is a certain level of demand for commodities, especially oil, that will put a floor under their prices. It could be argued that in the high 30s, West Texas Intermediate crude oil is free. Not cheap - free! Even at the worst prices of summer 2008, oil was cheaper than water (another mis-priced natural resource).

The Security: The PowerShares DB Crude Oil Double Long ETN aka DXO.

Now that you have some background on my thinking and the stock I used to express my views, the next few posts will explain the mistakes that I see. If you happen to notice others, by all means, let me know in the comments. My goal is to both help my own understanding of my mistakes so I don't repeat them, and to share that experience with others, so that they avoid them (or at least correct them sooner).

Until next time...

Trading Report: Learning from Mistakes

2009-02-27T16:00:00.000-05:00

This will be a short series about the mistakes I made on my purchases of DXO through January. By the time it was all done and I was out, I lost about $6000 total. Very expensive tuition, indeed. I am completely responsible for the outcome. This is trading. We're not able to will the market to do what we think it should. We're here to make bets on certain outcomes, and exercise risk management for the situations where those outcomes do not come to fruition in the expected time frame.

I will break this series up into parts based on my experiences and the lessons learned from those mistakes. I hope that others learn something from them, but the best teacher IS experience. Sucks, don't it?

Watch for the hook...

My Letter to Steny Hoyer about H.R. 1068, the "Let Wall Street Pay for Wall Street’s Bailout Act of 2009"

2009-02-20T04:22:00.000-05:00

Below, you will find the text of the letter I just e-mailed to Steny Hoyer, the Democratic congressman from the Fifth Congressional District of Maryland. It is unedited. Amazingly, I managed not to curse. I will be following this up with phone calls.

If you haven't heard, H.R. 1068 can also be known as the "Let Wall Street Pay for Wall Street's Bailout Act of 2009". Of course, this legislation, like all the crap coming out of DC these days, lands squarely on regular investors like you and me. These fuckwits really deserve a bullet for their intentional destruction of this once great nation. And if this is how Oregon's congressman likes to treat investors and traders, that state should fall into the Pacific Ocean along with California. What a bunch of losers!

I don't normally talk about politics here because I honestly could care less about the subject. It's all legal crime and evidence of how Americans are handing over their Constitutional freedoms to the cock knocker with the best sob story. However, this horrible excuse for legislation will affect everyone, myself included, who hasn't yet escaped from this sinking ship of a nation. This legislation needs to be murdered outright, not modified, not amended, but simply killed. It is terrible for anyone who owns, or would own, any kind of security. And we all know that once a tax is levied, the government has no incentive to get rid of the revenue. (It took 108 years to PARTIALLY kill the Federal telephone excise tax which was originally levied to pay for the Spanish-American War!) Item 8 under Section 2 is a blatant lie!

Anyway, I hope you enjoy. Without further ado...

Representative Hoyer,

I am writing to lodge an official complaint about, and to implore you to do ANYTHING and EVERYTHING in your power to kill H.R. 1068., also known as the "Let Wall Street Pay for Wall Street’s Bailout Act of 2009".

As you must be well aware, the first rule of taxes is "whatever you want less of, tax". I'm sure higher cigarette taxes discourage casual smokers from engaging in an activity that is harmful to themselves. The hardcore, committed smokers are willing to trade the tax money for their fix. The government collects tax revenue on that transaction. But I would posit that much smoking has been ended or prevented due to the increase in cost associated with taxes on cigarettes. Probably way more success has been had by increasing the economic cost of smoking than by highlighting the physical damage done by smoking.

Clearly, by proffering such an absurd piece of legislation, your colleague Rep. Peter DeFazio [D-OR] seeks to discourage securities trading and investing in the United States. I'm sure there are other countries, other stock/options/commodities/futures exchanges outside of the United States which would proudly take up that business, since you and your colleagues seem so interested in giving it away. So please tell me, is killing the trading of securities what you and the Democratic Party want for this country? This is "change that disgusts me", quite honestly.

First, I am a small trader. I already pay significant commissions through my broker, and short term capital gains taxes on my trading earnings. Fine. Imposing a 0.25% tax on sales and purchases would greatly reduce my ability to conduct my business of trading. In fact, it would actively DISCOURAGE me from this activity. I know I am not alone, and many small traders would either stop trading or seek ways to avoid owning the tax to the US Federal Government at all.

Second, this act would DECREASE market liquidity. If buyers and sellers are DECREASED in number, prices of securities will reflect that by going DOWN. You and any other congressional representatives who vote for this act will be contributing to the death of American stock markets. Prices will fall, buyers will strike, and sellers will spend more time and effort seeking to devise clever ways around paying in order to exit a losing position. How are any of these desirable? Liquidity will move to other exchanges around the world. Private companies will have less motivation to become publicly traded.

Taxing transactions will, by definition, reduce the number of transactions. That means less commission revenue for broker/dealers, clearing and settlement companies, administrators, and others in the financial ecosystem. It will also create market distortions by increasing the bid/asked spread on securities and creating more arbitrage opportunities for the savviest and fastest entities. Basically, this act, if signed into law, will force small players out of the market, decrease liquidity and price discovery, and hand more advantage to large players who can exploit the information available. Instead of democratizing investing and trading, it will further stratify that world, handing even more advantage to the already privileged and powerful.

Third, if this tax is imposed, and as I read the current legislation, it will be assessed against transactions of all sorts, including against securities held in retirement accounts. This would violate the existing tax provisions on tax deferred accounts such as 401(k), IRA/Roth IRA and other retirement accounts. That is how the current legislation is worded - very broadly. Do the Congress and the President want to increase taxes on already battered retirement funds? Wouldn't that DIS-INCENTIVIZE saving? Is that something the Congress, the Democratic Party, and the President want to do - reduce long term savings, especially retirement saving, by individuals? What about Rep. Donna Edwards [D-MD].

Fourth, I voted Democratic in the past election. The Democratic Party is clearly showing why it neither deserves nor wants my support. If this act becomes law, I will do my best to prevent Democrats from ever serving in economically important roles within local, state or Federal government ever again, because clearly you, Rep. Edwards, and the party you both represent are our ENEMIES - enemies of the people you say you are serving, enemies of the citizens of this once great country.

Finally, let me say that this incident is making me very clear where Rep. DeFazio's, Rep. Edwards' and your interests lie, and it is not with people like me. Should the "Let Wall Street Pay for Wall Street’s Bailout Act of 2009" pass into law, another personal mission of mine will become to prevent you and your cohorts from ever "serving" US - we, the people - ever again.

P.S.: Do your pensions get assessed this tax? I'm sure you'll find some way to make sure your absurdly large pensions will be privileged and protected to, won't they? How is Congress any different from Wall Street, with similarly large golden parachutes? You make me sick!

Recessions & Recency Bias

2009-02-14T12:22:00.000-05:00

Over at Infectious Greed, Paul posted this interesting chart the other day. It illustrates how few people currently working in American society have any real experience with a severe recession. The number is pretty small indeed. Take a look.

Even someone 45 years old probably was not in the workforce, or barely in the workforce, in 1981 - 1982. There are going to be a lot of people unpleasantly surprised by the extent of this downturn, as if there haven't been enough already.

What I found most interesting is the comment from rdd regarding the best things he took away from the experience. (He mentions entering the workforce in 1981, just in time for the second half of the infamous early '80s double dip recession.) Needless to say, I agree completely with his lessons. The one that stands out most vividly is to develop skills that others don't have. One of the biggest - if not THE biggest - secrets to success I have encountered is being able to do that which other's can't, or even better, won't. If you are the one who will, you make yourself that much more indispensable. Use people's laziness to your benefit.

That is all.

Trading Report: First Swing Trade = WIN!

2009-02-13T00:47:00.000-05:00

Anyway, I *think* that's the correct term. And it was a success!

On Wednesday, I bought 100 shares of TBT, the ProShares UltraShort Lehman 20 Year Treasury ETF, as a short play on US Treasuries. (Over the longer term, I think the outlook for Treasuries is grim, so TBT might be a decent longer term hold.)

While I originally planned to make the trade a day trade, I was compelled by market factors to hold the position through the close. (Basically, it closed marginally above my entry at $45.00.) I placed an initial stop at $44.75 so that should the ETF drop, my loss was capped at $0.25 per share, or $25 total. If the opportunity presented itself, I would reset my stop to capture some of the upside while not tracking the market all day.

Well, opportunity REALLY presented itself on Thursday, 12 February. When I checked in around 12:15 PM EST, TBT was around $45.62. Thus, I reset my stop to $45.30. After checking in again around 12:30 PM, I reset the stop to $45.60 (with TBT trading in the $45.90 area). By 1:45 PM, my stop was executed and all 100 shares were sold for $45.60 as TBT made its way back to the $45.20 - $45.20 range. While it eventually closed at $45.96, I didn't re-trade it.

So, for the entire experiment, a $60 gross profit (not including commissions or taxes). While it's not a lot, I am still in the early stages of trading, and I don't have huge amounts of capital so I have to be prudent. But I am happy with the initial results.

(And remember boys and girls, this is not investment or trading advice. I'm just relaying to you what I did. You need to make your own decisions, based on your own research. Don't blame me if you try something I did and it blows up on you. That's your own situation to deal with. I take responsibility for my own successes and failures. Do you do the same for yours?)

Until the next trade, peace!

My Response to Crooked Timber's Analysis of "Wall Street"

2009-02-11T03:03:00.000-05:00

This one I have put off for a while, with no really good reason for doing so other than being busy. However, after buying the 20th anniversary edition of "Wall Street" (my 2nd favorite movie of all time!) on DVD and watching it over and over, I found this analysis on crookedtimber.org and felt compelled to respond to it. I think several components of the review seriously overlook basic facts established in the film. So let's start at the top.

First, I don't disagree with the ultimate hypothesis of this review -- that Gordon Gekko was ultimately acquitted on all charges of securities fraud. Bud Fox, on the other hand, I'm not so sure about. While I see the author's point, I think some of Bud's actions were clearly illegal.

In the second part of this review, I plan to examine some things about Gekko that are critical to my understanding of the man and his motivations. Part II will encompass more of what is considered a movie review.

The first 2 points as laid out by our author only minimally trouble me. The first big problem is with the 3rd of the 6 "general areas" of charges against Gordon Gekko -- trading in Fairchild Foods, Rorker Electronics and Morningstar. Bud Fox does not bribe the owner of Marsala Maintenance to get a job which allows him to wander through the offices of Roger Barnes' firm late at night. In fact, he proposes to Mr. Panos, the aforementioned owner, an arrangement in which he would make an equity investment into Marsala. His exact words, at 57:10 (20th Anniversary Edition on DVD), are "Let me ask you something - what would you say to some working capital and a partner?" He then goes on to lay out his idea, noting that Panos' business is so good that he doesn't have the resources to keep up with his current book of business, not to mention the business that Bud can bring in. You'll also note that Bud walks through the site with clipboard and pen, appearing to evaluate various facets of the business and performance of its employees. At no time does he even deign to pretend to be cleaning. He's an investor monitoring and managing his investment, or at least, that's the image he seeks to portray.

Clearly, Bud has broken the law by reproducing files of Marsala Maintenance's client. There can be no doubt about that. But his gaining access to the offices cleaned by Marsala Maintenance, Roger Barnes' included, are legal under the arrangement he proposes to Panos. Whether that is the actual deal, or some variant thereof, which Panos agreed to, we cannot know. However, you can even call it a bribe. But it was not a bribe just to become an employee. He had the money to at least backup some of his claims, and Panos, being an intelligent businessman, made a business deal to expand his operation.

The 4th general area that this review covers is the conduct (or lack thereof?) surrounding Teldar Paper. This is on Gekko's radar long before he encounters Bud Fox, so there is no impact. Bud is an observer to these proceedings. I will note the mention that Teldar Paper being "leveraged to the hilt, like some piss-poor Latin American country" also has nothing to do with Gekko. In fact, it is probably a large reason that Teldar is position to be raided by Gekko. This is the fault of the then-current management, Cromwell (played by Richard Dysart of "L.A. Law" fame) and his staff. How he could even use this point to implore the current shareholders in Teldar to turn down Gekko's tender is beyond me. It's really an indictment of his poor management. So I agree generally with our author regarding this point.

The 5th general area is Gekko's conduct regarding a buyout of Bluestar. Our author seems to have missed the conversation that Bud and Carl (his father) have around the 1:00:00 mark where Carl informs Bud that the "damn fare wars are killing us" and that he's losing 5 of his men to layoffs. The FAA decision is just one of many affecting the outcome for Blue Star. All it did was increase the airline's chances for success. The author (Daniel) also presupposes that Gekko's intentions at the outset were less than honorable. However, I think we can discount that theory based on the outcome of the meeting at Bud's apartment. Gekko is more than willing to let Bud carry the ball in courting the unions. He also proposes a buyout with employee stock ownership provisions and other incentives for success. Only after Carl lambastes the idea do we see the change in Gekko's enthusiasm. He is obviously crestfallen. Now, none of this is to say that Gekko did not have the breakup idea in his back pocket the whole time, but I think the breakup was not how he intended to enter into the deal. Instead, it became his way of making lemonade from the situation.

Daniel's thesis that Bud committed fraud in his dealings with Gekko regarding Bluestar is plausible. Since I am not a securities lawyer (especially in the late 80s, as I was 12 when the movie was released), I can't say.

I won't address the 6th general area, as my feelings are generally in line with Daniel's.

So that's it. Bud Fox, an ambitious young stockbroker breaks several laws in order to curry favor with the high powered financier he idolizes, until his own world is threatened by his ambitions. He then has a change of heart and turns on his mentor. While ethically, Gekko's actions are questionable, I think they are far from being illegal overall, while Bud Fox has quite clearly crossed the line into illegality.

If you made it this far, you're probably wondering why I wrote this. Honestly, when I found the crookedtimber.org analysis, I was searching generally for information about the movie and stumbled upon it. However, if you watch the movie closely, as I have innumerable times, the points I make above stand out like a sort thumb compared to our reviewer's analysis. This was my attempt at setting the record straight.

In part II, I'll delve into what I think is the motivation behind Gekko. Until then...

Trading Report: Preamble

2009-02-09T07:51:00.000-05:00

I'm going to discuss the first few trades I've made, both paper and real, as an exercise in metacognition. Along with actually generating real income via trading now, I want to improve my abilities and generate more income in the future. Hopefully, this process will further my trading education and support that goal (for starters).

First of all, I am now clear that I seek to enter any trading day on which I actually trade (with real money) with a goal to net at least $1000 from my trading. Otherwise, not only is it uninteresting, but it really isn't worth my time to risk the capital. This may mean I don't enter into the market with as much frequency as I might otherwise, but it does 2 other things which I think are critical. First, it gives me a specific goal to keep in mind whenever I do enter the market. Second, it gives me more time to practice my evaluation skills and paper trading without feeling like I have to risk capital.

My first successful trade (and really my first trade ever) was 2000 shares of the PowerShares DB Crude Oil Double Long Exchange Traded Note (ETN) -- known as DXO -- which I bought a few days before the end of 2008 and sold about 2 weeks later, for a pre-tax net of about $960. Not bad for a first trade, especially one that was completely unplanned. I wanted to start accumulating DXO and figured that my entry at $2.20 per share was fairly good. (The day that purchase occurred, I had a limit order at $2.10 which was totally missed because DXO gapped up about $0.13 at the open.)

Since that first trade, I've made a few smaller trades, mostly buying DXO at prices ranging from about $2.40 to $2.82, and even a short sale on IYR (if I recall correctly) which netted approximately $60. Currently, I've fairly inactive, just holding back and observing. I've a few theses which I'm tracking and just getting comfortable with trading. I welcome any ideas, suggestions, or tips (such as brokers and tools, as I am looking to change to a new broker with better tools - primarily real time charts - soon).

You can follow my trades (and other musings) by following me via Twitter, as that's where they tend to get announced first.

Until next time...

Change of Direction

2009-01-31T15:46:00.000-05:00

This move is probably overdue by several weeks, if not months. Now is as good a time as any, so...

I am in the process of converting my brokerage account into a pure trading vehicle. All investment activities will occur in either my employer 401(k) OR in my self-directed Roth IRA. I plan to migrate all of my existing investment allocations to InvivoAnalytics' Satellite Portfolio into my Roth IRA over the course of the year. It will be a slow process of rebuilding in the Roth, but it's for the best.

I have liquidated all holdings in my brokerage account that are long term investment oriented holdings. I won't be switching to another broker (for now).

I am doing this because mixing the 2 objectives in a single account had become...messy. I have found it difficult to maintain focus, which has distracted me and slowed my decision making. Slow decision making has led to missed opportunities.

Converting the brokerage account for purely trading will also allow me to take more concentrated positions than I can currently. I believe this will allow me to grow my brokerage account faster. I am to the point where the balance in my brokerage account, while not huge, is large enough to actually do something "useful". In a sense, my account finally has some weight.

Finally, the long horizon investment holdings will sit in a tax advantaged retirement account. I've had this account open for a while, but it has been dormant. Increasing the activity in this account will lead to tax diversification, which is always a plus. The investment holdings will also be allowed to grow unencumbered by my need/desire to raise trading funds, not that I was sacrificing them anyway. However, now that the split is physical and not just logical, I no longer suffer from temptation to touch those long term holdings.

For the next few trading sessions, I will be essentially "paper trading" - researching and studying trades ahead of trading sessions, but not actually executing them. Instead, I will watch how my proposed trades perform and how I can adapt my trading system(s) before I start risking capital. Even though I have had more success than failures on the few trades I've made, and I do want to start trading to earn money for various purposes, I've decided to spend a bit of time on my education by doing this. It sucks, but losing real money would suck more.

Until next time...

Quick Scalp

2009-01-07T13:04:00.000-05:00

Well, that was short-lived.

Remember that energy play I talked about recently? Well, I sold out my position in DXO just now after 2 weeks since entry. Not as large of a profit as I could have made, but definitely positive by $963 according to my calculations. I'll do the final numbers and let you know.

And if you're wondering why I never mentioned the ticker before now, its so that no one can accuse me of talking my book. I trade (and win or lose thusly) based on my own thinking and instincts. You should do the same.

Cheers!

Quickie

2009-01-06T15:30:00.000-05:00

Re-balanced the hell out of my 401(k) in the last 2 weeks. That would appear to be the best time to sell out of all the vested employer stock that the employer contribution took the form of. All of the excess is going into the money market option for the time being, so I will have some dry powder available after I finish re-allocating most of the cash.

:)

Also started building a small position in an energy ETN. Will start looking for a (roughly) equivalent ETF but so far, this is position is rocking! Up approximately 20% in 2 weeks. It's actually a bit more than that, but I haven't calculated the exact amount since I purchased at 2 different entry points. Funniest part is that I bought this with a time frame of 12 - 18 months, even though it is a bit aggressive as an investment. I never thought I'd see this kind of performance this quickly though!

2009 Goals

2009-01-01T11:38:00.000-05:00

Well, that was an interesting year! No matter what happened, 2008 was the best year of my life ever. Now it's time for 2009 to claim that title.

I fell down on my 2008 goals. September 2008 came around, put its foot in my ass, and I just stopped dead in my tracks. I stopped tracking my spending to the penny. Everything stopped.

It's really not important what happened. I'm fairly clear on what happened and what I need to do to breakthrough that block. (This post at MuscleHack.com gives a bit of insight on what that process looks like.) The first order of business is to post my 2009 goals here, for the world to see. Next, I plan to post them everywhere within my daily life, so that I remain present to them. Then I'll share them with people close to me, as I already have with my coaching partner, so that the people I most care about, and who most care about me, can hold me accountable to those goals.

Needless to say, I'm feeling some stress around some of these, in particular the first goal on the list of regular goals. Oh man, what have I gotten myself into!

Regular --

Business: Finish writing e-book by 9 Jan 2009. Publish by 16 Jan 2009.
Business: Make 3 contacts during Money:Tech 2009 (6 Feb 2009).
Personal: Ride a blue trail by 31 March 2009.
Professional: Find and accept an offer for an awesome new career opportunity by 31 March 2009 (end of 1Q2009).
Fitness: Achieve 10% body fat by 31 Mar 2009 (end of 1Q2009).
Fitness: 25 dips, full extension, full body weight by 31 Mar 2009 (end of 1Q2009).
Personal: Cook 1 meal per week by 30 Jun 2009 (end of 2Q2009).
Business: Finish unwinding my real estate partnership by 30 Jun 2009 (end of 2Q2009).
Fitness: 1 hr of cardio on the Precor EFX 556 in interval mode by 30 Jun 2009 (end of 2Q2009).
Fitness: 10 wide grip pull ups, full body weight, by 30 Jun 2009 (end of 2Q2009).
Personal: Save $15,000 for house down payment by 30 Sep 2009 (end of 3Q2009).
Personal: Read 1 book per month (12 total) by 31 Dec 2009.
Personal: Accumulate $30,000 in emergency funds by 31 Dec 2009.
Personal: Achieve $90,000 in net worth by 31 Dec 2009.
Personal: Pay AmEx down to $0.00 by 31 Dec 2009.

Stretch:

Fitness: Achieve a visible sixpack by 30 Sep 2009 (end of 3Q2009).
Personal: Achieve $150,000 in net worth by 31 Dec 2009.
Personal: Read 1 book per week (52 total) by 31 Dec 2009.
Fitness: Achieve 8% body fat by 31 Dec 2009.
Fitness: Chest press 200 lbs for 15 reps by 31 Dec 2009.
Fitness: 1 hr of cardio on Precor EFX 556 in hill climb mode by 31 Dec 2009.
Personal: Accumulate $50,000 in emergency funds by 31 Dec 2009.

Looking at the list of stretch goals, in particular, scares me. I mean, I feel tension and fear around those and my chances of achieving them. That lets me know that they are well chosen and will push me. I'm thinking that I should spend more time pursuing the stretch goals, and by doing so, I will likely achieve many of my regular goals as a matter of course.

So there you go. It's time to get started!

Happy New Year!

2009-01-01T10:46:00.000-05:00

Wow!

It is both amazing and disheartening that the last time I posted was on 7 December 2008. Not quite how I envisioned the final weeks of the recently passed year progressing. Not at all.

Oh well.

I'm in the midst of preparing some long awaited (by me, anyway) posts that I hope you too will enjoy. So I hope you'll join me for the trip as I start out making this year the best ever as Alpha Guy.

Cheers!

Understanding the Fed

2008-12-07T13:02:00.000-05:00

A VERY nice, but brief, piece of work over on the Trading Goddess' blog about how the Federal Reserve of the US works. A must read!

I Call B.S.!!!!

2008-12-07T10:12:00.000-05:00

Why do people insist that Goldman Sachs and Morgan Stanley will fall under the "tougher regulatory scrutiny" of the Federal Reserve when the Fed hasn't been tough or shown evidence of having a spine since Volcker was the chairman? I just don't get the unbridled inanity of these remarks. Is it only professional journalists that say such stupid things?

That is all.

PE Liquidations among Endowments

2008-12-06T12:18:00.000-05:00

I'm wondering if any non-Ivy schools are taking advantage of this opportunity to acquire stakes in private equity funds on the secondary market. This isn't the first that we've heard of this story, and it likely won't be the last. However, if any endowments were sitting on some liquidity, this is sounds like a decent entry point with some well respected PE names.

*cough* Howard U.? *cough*

Of course, what is more likely is that these non-Ivy or non-first tier endowments are probably trying to liquidate their portfolios too. So sad.

These first tier endowments are getting hit by MTM accounting rules too? If smaller endowments can't get at least 50% off, then something is terribly wrong! At 50% or greater discounts, some of the LBOs of the last few years sound fairly reasonable. But its going to take even greater discounting to squeeze $120B in assets into $40B of investable capital.

When I originally started writing this post, Harvard had not yet reported their latest results. Down 22% (WSJ.com sub req'd) since the start of the fiscal year. Wow!

I contend that there is plenty of alpha out there to be gained, but it will take creativity, negotiation skills, and iron will to earn it. The days of easy alpha (more accurately, alternative beta) are over for the near future. Is this one way some of the second tier endowments can catapult their results into the stratosphere? Hell if I know! But I can fell the abundance of opportunity, and it gets more pronounced with every leg down. The question is who will take advantage of it?

Inflation FTW!

2008-12-01T04:45:00.000-05:00

I don't know why so many people think the Fed actually cares about preventing/stopping inflation when the Fed's primary role over the course of the last 95 years has been to manufacture inflation. I mean, come on, what would have you think the Fed is seeking to fight inflation? It can't be the last 26 or more years of credit creation led by the Fed (mostly on Greenspan's watch). With the dollar worth 5% of its value in 1913, the year of the Fed's founding, it can't be that either.

Am I missing something? Why do people still think the Fed has a mandate to fight inflation? If they did, they are horribly incompetent and inept at that job and thus should be taken out and shot. I am a firm believer in Hanlon's Razor, but even this level of stupidity doesn't make sense. I can't see how 95 years worth of ineptitude can be justified unless...its not ineptitude at work but intention.

Capitalism at Work

2008-11-30T09:26:00.000-05:00

THIS is what capitalism looks like. Not the pseudo-capitalism, Gordon Gekko wanna-be greed driven shite that has overtaken the Western world for the last few decades.

I honestly believe that if more company owners and managers behaved in the fashion described in this article, unions would not have the kind of traction that they do (did?). Capitalism shouldn't be about maximizing profit at any and all costs. It should be about creating a win for everyone - employees (probably more so employees than anyone), customers (strong second), management, and the community (indirectly through the already named constituencies as well as through direct involvement of the corporation).

I have nothing against unions, personally, but I don't believe in them. I also get that unions derive their leverage from their role as self-appointed defenders of the common man. Unions would largely be unnecessary if the "leaders" of corporations weren't always trying to fuck over their employees (among others). Management creates an adversarial environment and then wonders why the unions are so hostile toward them. How stupid do you have to be? If managements spent more time attempting to share the company's success with all involved in creating that success -- serving the employees, customers, vendors and families -- they'd probably not have to worry about unionization creeping into their workforces. If they spent as much time and energy on enriching those same customers, employees, vendors, et. al, I think a lot of wasted time and energy could be directed into profitable ventures.

(I admit to oversimplifying a bit, but probably not too much. "Getting over" is a human trait. It transcends cultures, nationalities, race, gender, and every other division you can think of. However, it doesn't work, as Nas reminds us. So why bother trying to "get over on someone" if its not a long term strategy for real success?)

Historically, tech companies have been the embodiment of this ideal (more so than old line industrials, anyway). The technology industry has a reputation as a meritocracy, which encourages people to give their all in the (deserved) expectation that they will be compensated commensurately with their contribution. That ideal IS the very definition of service. While the tech industry doesn't get it perfect, they are still much closer than more established industries. This probably explains the lack of presence of unions within technology companies to a large degree (although not exclusively).

Anyway, just something for all of you to think about. I'm feeling the spirit of Earl Nightingale wash over me these days, but the more I think about "The Strangest Secret", the more I see that Earl was spot on. Take care of others, and you will be taken care of. Universal, karmic law.

Just too bad that Ken Lay and the rest of those Enron cocksuckers didn't get their just desserts -- violent anal rape -- in prison. Well, you can't win 'em all!

Saving and Investing Seminar at Howard University on Wednesday

2008-11-26T17:55:00.000-05:00

Yours truly has been invited to speak at Howard University next week. Specifically, for the Saving and Investing Seminar being presented by the Student Council of the College of Engineering, Architecture and Computer Sciences (CEACS). (Don't blame me. I didn't make up the name.) The president of the student council is one of my former "students" from my technical advisory days, so I guess he trusts me with the minds of his peers.

*grin*

I have to admit to having a very palpable feeling of fear at the thought of speaking before a group of college students. This is a bit weird, as I have done these types of engagements in the past (just with smaller groups). I guess the fear has to do with being tapped as some sort of "expert" on finance topics. While I appreciate that, I am just feeling a bit nervous about the whole thing, as this is the first time that I have been asked to speak.

Don't misunderstand. I love sharing what I do know. I like helping people prepare for all of the potential issues that may arise. I want to help people move to a position where they don't have to worry about money. Simple math shows that speaking to a group is way more effective at spreading my message (me - message?) than individual consultations. So this would seem to be a natural progression for me. Still, I am (slightly) worried.

I do look forward to this event though. Personally, I take the fear as a signal that I should do this, that it is to be embraced and not avoided. That mantra has been serving me well this year. We'll see how it works out in this instance as well. So if you happen to be in the DC metro area next Wednesday around 7:00 PM, drop by the Lewis K. Downing School of Engineering building at Howard University to hear what I have to say. There will be a special guest as well, in the form of the estimable Ginger from Girls Just Wanna Have Funds. So if saving, investing, (personal) finance, and other such subjects appeal to you, you are welcome to come hear what we have to say. Make sure to introduce yourself as well. I know I personally like to know who is deriving benefit from this blog, and what I can do to increase its value to everyone.

Peace!

The 51% Solution

2008-11-26T17:12:00.000-05:00

This is what it comes down to in investing -- being right just a bit more often than being wrong, and when we're right, pressing our advantage. Easy in theory, but extremely complex and nuanced in practice.

A big point that many professional traders emphasize is that the greater your advantage (and we're talking in basis points here, realistically - 5+ bps - against your opponents), the more you need to press. Even Charlie Munger will tell you that when an opportunity comes along, you need to put as much weight behind that trade as possible. (See #6 from the following list of his rules for investment success, about asset allocation.)

Ask John Paulson.

Ratings Agencies: A New Model

2008-11-26T15:10:00.001-05:00

One of the fundamental breakdowns of this credit crisis was in the ratings agencies (technically, the Nationally Recognized Statistical Rating Organizations - NRSROs).

This article over on the Financial Times gives a nice overview of the growth of Moody's and the NRSROs, especially in the structured finance arena. You should check it out, twice if you're not really a follower of the market.

The big takeaway from this whole crisis, on the NRSRO side, is that the appropriate compensation model for the NRSROs is for their customers to be the buyers of bonds and other credit products. Additionally, they should probably be private versus public organizations, much like SC Johnson. Many firms are public that have no good reason to be. I am all for public markets, but when a firm serves such a large public role, being publicly traded is probably a handicap as opposed to a benefit. Adding a touch of the Google internal stock market is probably a good idea for these private firms, but their shares do not need to trade on public markets. I really don't get this desire for firms to be public, except if they are struggling. Maybe all those LBO targets are on to something? (About being private, anyway. It sure isn't their business processes.)

As for the point of credit buyers paying the ratings firms, this is ideal because they are the ones who ultimately will benefit from the research. The current structure invites severe moral hazard. The FT articles mentions that the complexity of rated products forced growth in the size of Moody's in order to rate these large entities and the esoteric products coming into the credit market. Well, maybe scale was required, but the flip side of the subscription model is that if a corporation will not allow the NRSRO to rate its product -- if the corporation willfully decreases transparency into its credit quality -- then a suitable discount must be applied in the market to compensate for the lack of information. This is the ONLY model that makes sense. Without the information, the opacity should force the market to discount the bonds, commercial paper, convertibles, or structured product being sold (or underwritten) by the corporation. That's not fair -- its just plain good sense and good business!

The final concern becomes the models themselves. As has been widely noted, the NY Times covered this recently. The models are just mathematical equations. They have no position on this subject; they are merely tools, and like any tool, they can be misused or misunderstood by those wielding them. Human frailty (and that damn good sense) come into play here again. The Times piece looks at how quickly humans were willing to set aside their reason in the pursuit of compensation, or assume that the real world was accurately reflected by the models.

The models were not then, and are not now, the problem. The problem is the gatekeepers wielding the models. Once a flaw - a programming bug, or worse, a design flaw - was found, anything rated with that software should have been re-rated. The decision to NOT re-rate those issues should be considered an act of negligence, possibly willful and criminal negligence. Models will evolve if their creators update them. Secondly, if any product has little to no history, then you cannot reasonably rate it based on historical performance of any other product.

So if you're out there in the credit market in any way, you owe it to yourself to do SOME credit analysis on any product you might buy. Whether we're talking bond funds, or direct investment in credit products, you have to understand what you're buying on some level. Credit analysis is more difficult than equity analysis. Such is life.

So to wrap this (very late) missive up, the ratings agencies can serve a useful function. However, their role of being public watchdogs, a la the press, must be honored. Otherwise, that role is better subsumed within a unified regulator (whenever the SEC and CFTC merge), and let's face it - we don't want that. This is something that is probably better suited to government functionally than most other tasks it takes on, but it still should be a market function. Government could provide credit research and publish it, for free even, but would that research be very good? Could it be subverted? A market system for credit research will go a longer way to promoting the transparency and lack of conflict that investors deserve. Adding that value should come with a price.

Selling Online Real Estate

2008-11-19T15:23:00.001-05:00

Since my grandiose plans from about a year ago to turn some of the domains I own into businesses never came to fruition, I have decided to re-park them. Given the (somewhat) amazing response that has been generated with the currently parked domains, and the fact that the 4 domains I just listed were generating no income, it would be absurd to continue keeping them in reserve.

I currently have 7 domains listed, including one semi-premium domain (a .net) and a truly premium domain (a choice .com). We'll see how these do being parked. They performed fairly well up until de-listing them last summer, so I think this could be promising. Not lucrative, but at least they should cover their registration and other holding costs.

Until next time...

Woo Hoo!

2008-11-13T18:35:00.000-05:00

I just made $22.01 for July - October from parking some domains with Sedo. Very nice.

The Effective End of an Industry

2008-11-12T14:05:00.001-05:00

It occurred to me yesterday that, as we approach the the $1,000,000,000,000 mark in losses from this mortgage induced economic and credit crisis, the size of the global hedge fund industry is estimated at somewhere between $1.5T and $2T in assets under management. (Or at least, it was prior to this crisis.)

So, if we really do hit $1.5T in losses as some of the extreme estimates have stated, we will have effectively wiped out the ENTIRE hedge fund industry. The ensuing liquidation will drive down prices on many financial assets, and drive quite a few people out of jobs.

Politicians really need to be careful what they wish for.

Quote of the Week

2008-11-11T03:55:00.000-05:00

From Felix Salmon at Portfolio:

"If you want to save money, save money. Don't place too much trust in the market to make your money grow, since there's a good chance the market will end up moving in entirely the wrong direction."

Paying Yourself First

2008-11-06T07:01:00.001-05:00

So I finally received my Federal tax refund earlier this week. I think it actually came yesterday, IIRC. $2484. Not bad. So I deposited it along with $15 that I have saved in the last week.

(On an unrelated note, my personal saving has really declined recently. I haven't carried as much cash in the last few months, and in the interest of fitness, I have stopped eating as much junk food, especially from vending machines. So I guess the drop in cash saving is a positive sign. I did increase my automated saving recently, however, to $700 per pay period. That's effectively 30% of my monthly net income.)

Anyway, I decided to take a bit of time this morning to do some saving. Of the almost $2500 I deposited on Wednesday, $1250 was transferred to my brokerage account so that I can re-balance my Satellite Portfolio. Another $500 was transferred to my emergency savings account, which replaces $500 I transferred out a few weeks ago as an insurance policy on some upcoming spending. Depending on how my automated payments on my secondary credit card go, I may transfer another $500 over there and really be $500, not just at break even.

*shrug*

So $1750 has been allocated to savings of some sort out of almost $2500. I think that's respectable. The additional $500 may be icing or, even more likely, I will put it against my accumulated debt on my primary card. (The secondary card is now encased in ice. More on that in my October update.)

Whatever is left from the $2500 will be used to fund my snowboard. I estimate about $249 left over, all told.

The whole point here is that you must pay yourself first. It feels great, and that should be enough reason for anyone to do it. Second, you can't help others (if you are so inclined) if you yourself need help. Eliminating your debt, having your retirement saving locked up, having an investment program, and emergency savings is all about positioning yourself to do with your time - your life - that which is important to YOU. Money is the tool to that end. Whatever is left, and there should be something left, do with as you please. That's the payoff for successfully completing the other phases. Indeed, you need to build that into the overall picture so that you have a bit of motivation.

Its like working out. I work out to improve and show respect for my body. Your body is a loaner that is taken if you don't treat it right. However, we all have something we like which is diametrically opposed to a fitness goal. It may be food in general, or a specific cuisine, beer or other alcoholic beverages, or laziness. So you have to build your program to take these factors into account. Your financial program should never feel like punishment, otherwise you will subvert yourself in rebellion. That serves NO ONE, least of all YOU. Build in the slack. You should enjoy everything, both the act of saving and investing, accumulating and growing your wealth, along with the act of spending what you have accumulated on those things that are important to you. (Things that are NOT important to you should ruthlessly and efficiently be cut out of your life, with extreme prejudice.)

Also, every victory should be celebrated. Why? Because it represents CHOICE. A choice to do something that supports the achievement of your goal. (You do have written goals, with deadlines and implementation plans, right?) You have chosen your goal over other available options. Celebrate the process of moving closer to your goals all the time!

So how are you paying yourself first? And how are you rewarding yourself for doing so?

Money Clubs

2008-11-01T06:32:00.001-04:00

While I don't like the name (just a personal thing), this is a great idea for anyone having problems with their finances.

In order to achieve any goal, you must first gain clarity around that goal. That means the goal must be well defined, succinctly, measurable (e.g. quantifiable), achievable, and all that other good SMART stuff. As Napoleon Hill said, "A goal is a dream with a deadline". How important are your dreams to you?

You have to create an environment conducive to achieving the goal. That means creating support structures, as we like to say at Landmark Education. In the arena of money, creating a group like this is an ideal structure for the achievement of a financial goal (or goals). While the article does not go into heavy detail, the basics are there along with pointers to specific resources.

Those who follow me on Twitter know that I have an intense workout schedule, Monday through Friday, usually starting at 10:00 AM for an hour to 90 minutes. I also hired a personal trainer through my gym, to coach me on matters that I was unfamiliar with, and generally push me harder than I am inclined to push myself. (Even better, he has taught me HOW to push myself harder - safely - so I don't absolutely have to depend on him in perpetuity for that role.) These are all parts of the support structure I have created to achieve the fitness goals I have for the rest of my life.

The final piece, and the piece that this article is suggesting and encouraging, is creating a group of like minded individuals with similar goals. With these people, you share your successes and failures, coach each other, congratulate each other, and help each other grow toward the goal. My group takes the form of an e-mail list with about 9 of my really good friends around the country. And it works. By creating this group, not only have I enhanced my overall fitness, but I have people who will hold me accountable (along with my trainer) for doing so on an ongoing basis. I learn from these guys, I let them know how close I am to my 5 clearly defined goals (which I shared with them), and I share what I have found with them so they might benefit from my experience. I think we've created a supportive environment for all, and I love that. The same can be done with your financial goals, if you really want it.

The same concept applies in personal finance. If you're not where you want to be, and you're honestly committed to achieving a goal, then you NEED to do this! Period. It is one piece of the puzzle.

My only request is that you don't lie to yourself. In order to lie to others, you have to start by lying to yourself. Now, lying is a sign of disrespect for the person in its own right. (I'm not making judgments about anyone for doing so, but just consider that by itself.) However, by lying to yourself, you are showing your disrespect for YOURSELF (just as working in a job you hate and not working to create a job you love is disrespectful to your mind, or not exercising and eating poorly is disrespectful to your body). If you won't show yourself the respect of honesty -- no matter how bad it "looks" or "feels" to do so -- then no one else will, and rightfully so. You aren't deserving of respect from others beyond basic human respect for your existence.

The final consideration is that lying to yourself typically leads to wasting your time. There is no resource on this planet of more value than your time. EVERYONE gets the same 24 hours in a day, and what you create with that time is your choice. However, lying to yourself, for any and all reasons, will lead you down the path of pursuing activities that waste your time. Treasure your time, because it is the one resource you can NEVER get back.

So, on that note, go create your support structures. Start with a "money club". Please!? What's the worst that could happen?

NOTE: Whatever the voice in your head is saying in response to that question, I call BULLSHIT! Most bad things only happen in our minds, and we spend our lives avoiding theoretical bad shit. Go get a real world problem which exists in physical time and space, THEN we can talk.

I can't wait to hear about more of these popping up all over. Its so very overdue.

Okie, I go to sleep now. G'night all, and until next time...

Negative Crack Spread

2008-10-30T15:19:00.000-04:00

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'.

Amen!

2008-10-29T04:24:00.000-04:00

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...

Oh Well

2008-10-27T12:57:00.000-04:00

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.

Later.

Deleveraging Academia

2008-10-17T09:46:00.000-04:00

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.

Good!

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.

Is Anyone In Charge Here?

2008-10-15T03:45:00.000-04:00

THIS (WSJ.com 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!

Beware the Second Order Effects!

2008-10-14T23:47:00.000-04:00

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!

An Old Market Hand Speaks

2008-10-06T13:22:00.000-04:00

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

Clicked

2008-10-04T04:22:00.000-04:00

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

2008-10-04T03:33:00.000-04:00

So I'm finally catching up on some reading, post-vacation. After getting about halfway through this piece of reporting at Bloomberg.com, 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!

Thinking about CDS

2008-10-03T23:10:00.000-04:00

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?

Natural Progression?

2008-10-01T22:56:00.001-04:00

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

2008-10-01T22:13:00.000-04:00

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.

Randomness

2008-10-01T06:46:00.001-04:00

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.

Woo Hoo!

2008-09-30T22:25:00.000-04:00

Yes, I did just post. I've been on vacation in Las Vegas for the last week. I thought I said that, but maybe not.

Anyway, I've got some thoughts on some of the things we've been seeing out there in the markets and the economy generally. Not very original thoughts really. Maybe that's the liquor. Or the women. Or the lack of sleep.

Eh.

Anyway, I haven't forgotten you all. I'm getting back into the swing of things. Stay with me.

Damn!

2008-09-30T22:18:00.000-04:00

Its really time to get out of this country. That's really all that I can think of now.

Thanks to P. Kedrosky for this one.

The Story of LIBOR

2008-09-23T06:33:00.000-04:00

I am fascinated by the inputs to, machinations of, and outputs from the global financial system. That's why I love this kind of behind the scenes, in depth coverage of something as arcane as LIBOR. (Well, I guess its not arcane in this world, but among "normal" people, a group I've never been accused of belonging to, it is.) It gives you a sense of what really goes on in calculating LIBOR, dollar LIBOR in particular. And FINALLY, an explanation of "eurodollar"! Very cool indeed.

New FDIC Insurance Calculator

2008-09-22T15:41:00.000-04:00

Very nice! Hat tip to Bob Brinker.

Buffett's Latest Buy

2008-09-19T14:07:00.000-04:00

This is really just a stream of consciousness post.

A friend of mine sent along a recent Market Mover's post by Felix Salmon over at Portfolio. Anyway, in reading this, especially the comments, it occurred to me that Buffett will probably ditch the trading operation. Now, I'm not sure who the buyer might be, but considering that trading likely had something to do with making Constellation Energy the target it became, weakening it and increasing the collateral requirements, I can't see MidAmerican holding on. It seems a bit too volatile for Berkshire.

I think about the General Re acquisition some years ago. It took a long time, but Buffett unwound a bunch of contracts that Ge Re had entered into which increased the overall corporate risk exposure. I'll go dig up that story if I have some time. The same forces would appear to come into play now with CEG. Buffett will keep the parts that generate free cash and sell off the bits that detract more than they add, slowly if necessary but quickly otherwise. At least, that's the first thing that comes to my mind.

Thoughts?

Its all about risk management, baby. I think that, if nothing else, is the lesson of the week.

General Blog Updates

2008-09-10T05:52:00.000-04:00

You'll notice quite a few additions to the right hand navigation here. I've added a few blogs that really are must-reads, and moved around a few other sites. DealBreaker and FINalternatives really needed to go under the News heading. Instead of just Investing, we now have Trading and Investing. Too much specialization is a dangerous thing.

Yes, this site really is an aggregator for me. Instead of trying to remember all these sites, or even using deli.cio.us or another social bookmarking site, I just use this blog. It just seems easier and contextually appropriate.

Anyway, hopefully I'll have some connectivity at home tonight, for the first time in about 3 weeks, so I can post more frequently AND comfortably. As always, there is more to come...

Investing in Endowments - The Dream that Will Never Be

2008-09-03T12:50:00.000-04:00

I LOVE this idea from Felix Salmon about alumni being able to invest in their alma mater's endowments. Its innovative, its different, and it will never happen in our lifetimes. However, I love it.

As John Mauldin is one to point out, regular people should be allowed to invest in alternatives as a way of enhancing returns in their retirement portfolios (or whatever other funds they allocate to the alternatives space). You can find his 2003 congressional testimony on the subject here.

I imagine the biggest problems would be the administration of small(er) investor accounts and the accredited investor rules. You could attack the first problem by allowing minimum investments of greater than 6 figures, say $250K+. The second problem requires US government intervention, which makes it almost impossible to see how one would ever get past this limitation.

I also imagine many larger endowments would want to avoid the kind of incessant inquiries that small investors would bring with them. No matter how experienced those investors are, they are probably going to require or request some level of hand holding, and endowments likely aren't interested in such time sinks. The larger endowments (Harvard and Yale in particular) would not need to resort to this kind of asset gathering; it would purely be a "perk" offered to alumni. There are plenty of smaller institutions, with smaller endowments, that would probably seek to use this re-configuration of the landscape to draw assets and increase their management fees. The new laws would have to take this into account. It makes sense if this structure only imposes fees on profits when the investor withdraws, and reduces the management fees. Endowment investors shouldn't be paying standard hedge fund management fees, especially when the endowments are non-profit organizations and they employ their own managers. A range of 0.5% - 1.25% in fees seems appropriate, based on whether the endowment managers are in-house (lower) or outsourced (higher).

Even so, investing in your university's endowment, with the management fee going to your university, would be a nice way to contribute and still benefit from the expertise the university employs. (That is, if the endowment is large enough to employ in-house investment managers and strategists. If they outsource significant amounts of their endowment management, then this idea is probably unworkable.) Maybe all the drama which led to the founding of Convexity Capital by Jack Meyer could have been avoided if those vocal alumni had been able to invest alongside the endowment, instead of watching from the sidelines. Felix's idea has some obvious tax benefits as well, and if one did not need the money from the endowment, they could let it ride or donate it to the university easily. Brilliant!

Anyway, I had to comment on that idea. I'd love to see alumni offered this kind of investment opportunity. It would sure take a lot of work to make it happen though, which makes me cautiously pessimistic that it would ever occur. (Thanks to Paul Vixie for that phrase, one of my favorite quotes of all time, received from him in personal e-mail!)

Still, how awesome would this be if it became real! A man can dream, can't he?

Until next time, peeps!

Movin' On Up!

2008-09-03T11:10:00.001-04:00

When your largest provider of vendor financing starts pulling back, you have a problem. I think I've said this a few times recently. It was truly inevitable.

While mortgage rates have climbed recently, I think you've only seen the beginning. They have not yet begun to increase!

On another note, it totally makes sense for PIMCO to invest in agencies, no matter how Mish feels about it. PIMCO is in business to make money, for their clients, shareholders (vis-a-vis Allianz), and by extension, themselves. They are in a position to hold the bonds and get made whole (or at least a decent return on invested capital) when the US eventually nationalizes the GSEs. That's their job, right? To make money. I don't see why Bill Gross and PIMCO should be faulted for attempting to follow their mandate. Its a perfectly reasonable position for them given their business.

The part I find most interesting is that if foreign holders of agency debt are unloading, is the US Federal government going to be as interested in taking care of the debtholders, PIMCO among them? Hmmm. It makes me wonder. The Feds have to take care of the people who are holding US government debt of all stripes, even though I think eventually the damn will break and the Treasury rates will soar. For now, the Fed are just trying to maintain as much control as possible. Taking care of China and Japan is in order given the scenario, and anyone (such as PIMCO) can go along for the ride if they choose. I just wonder if Japan has also been selling out of its positions in agencies? In every trade, there's a buyer and seller, but its easier to screw over your populace than a foreign government that facilitates your shell games.

No matter how you slice it, rates are going up. I stand by that assertion.

Longing...

2008-09-03T05:33:00.000-04:00

I soooo need to get back to London! Fuggin' amazing are those photos! That's all that can be said.

The Four Horsemen of the Market

2008-09-02T03:00:00.000-04:00

Brief but nice profile over at MarketWatch of 4 investment personalities that are definitely non-mainstream. Hussman and Grantham, in particular, I find to be very solid thinkers and lucid writers. If you aren't reading Hussman's weekly commentary, you should click on the link in the right sidebar and do so. Now! As for Grantham, you have to register over at GMO but its free and they publish commentary and research from time to time. Managing the kind of money they do, its probably not high on their priority list to publish much of anything for non-paying customers.

Anyway, go check it out, and read Hussman and Grantham's writings when they come out!

Later.

Quick Apology

2008-08-27T23:16:00.001-04:00

Yes, I've been out of it. No, I have no excuse. Don't need one. Its called life. I can happily report that I have successfully moved most of my personal belongings into my new, $416/month cheaper, apartment. There will be more discussion of this in the near future, and its impact on my overall finances. I may also finish my July update, as a few surprises popped up recently which modified the picture but not in an overwhelming way. Or I may just continue forward with the August snapshot. Who knows!?!?

Anyway, I will write again soon. Now, its time to go home, where I have no Internet connectivity, to read documentation and source code for the FIX protocol and watch the end of "Wall Street". (There will be a review coming as well. I've seen the damn movie too many times to not analyze it on this blog.) Depending on how much this caffeine continues powering me, I may work on valuing some multi-unit properties I'm considering putting an offer in on. We'll see!

Cheers!

A Response to Teresa Lo

2008-08-27T23:12:00.000-04:00

If you've been following things around here for a while, you'll recall that back in April I wrote a post which was effusive in its praise for Teresa Lo's series on building your own investment portfolio. Little did I know that Teresa would comment on that very post. I was honored.

In her comment, she asked me

Now that you've decided to reduce the number of asset classes, I was wondering how you plan to allocate the funds? Do you use a certain formula?

to which I had no response at the time. There were some other matters that had my attention, so I never really gave the question extensive thought. What I did know was that I liked the satellite portfolio that Teresa describes in the series. So much so that I planned to copy it outright. (What was that about great artists stealing?) While I would imagine that any portfolio that InvivoAnalytics constructs for a client would have slightly different components, the overall idea and simplicity of this portfolio is ideal. I know that I have too many components to my current portfolio, and while I like them all, there has to be a better way.

First, I have liquidated all the holdings in my taxable account. As I've previously stated, I use the aggressive allocation from 401khelp.com for my 401(k). So this interpretation of the satellite portfolio will truly be the "explore" portion of my overall investment holdings, while the "core" remains in my 401(k).

So, to answer the question, I return to the original inquisitor...I have purchased a subscription to InvivoAnalytics.com's Portfolio Strategy service!

Now, this may seem like a cop out, but I considered the following factors. First, I was planning to use the same investments anyway. Two, Teresa and Pete have put in the time and effort to come up with the algos to perform the asset allocation, rebalancing, and other processes which I would otherwise have to implement manually, and their processes are targeted at the same ETFs. Third, I'm busy. I am working on several projects outside of my investing, some of which I've talked about on this blog. There is just not enough time, and consequently not enough value I could add with the time available, to make the investment pay off. The work has already been done, so I should use it. Fourth, I didn't have to pay directly out of my pocket; I was able to pay with blog earnings. Its a minor point, but anything that reduces the friction in this kind of decision is "A Good Thing".

So Teresa, I think you already know the answer to the question by now.

That said, here's the breakdown from Monday:

VXF - 16.88%
EEM - 14.18%
GSG - 9.92%
FXF - 28.13%
TLT - 30.89%

Now, some things to keep in mind before anyone rushes off to implement this allocation. First, these are the allocations from InvivoAnalytics.com's Strategic Performance Portfolio. They are designed to be implemented in a trading account, since they rebalance the allocations weekly. Thus, you'll want to reduce your friction as much as possible.

Also keep in mind that these are not core retirement portfolio holdings and allocations. InvivoAnalytics.com has services for a core portfolio which is designed to be implemented within your primary retirement account, primarily targeted at 401(k)s. As I have mentioned before, I use the aggressive asset allocation from 401khelp.com in my 401(k), with a few tweaks for a more defensive posture in this market (primarily, more international exposure for a greater risk/return profile, more cash, so I have some dry powder, and less real estate exposure for obvious reasons). If you're looking for a core 401(k) asset allocation from Invivo, the Strategic Performance Portfolio is NOT it.

Part 8 of Building You Investment Portfolio discusses some of the details of how the dynamic algorithm works (at a high level).

(Yes, those numbers change every week, so while you're getting a free ride for this past Monday, by next Monday the numbers will be different. You shouldn't buy in the middle of the week anyway, but wait until the next allocations come out next Monday. However, you have to be a subscriber to find out what those will be!)

So all of that said, thank you again Teresa for coming up with these model portfolios and giving me time back to generate alpha in other ways!

Until next time...

Crazy Random Thought

2008-08-13T16:29:00.000-04:00

Given that the stimulus checks have mostly flowed through the system, into people's gas tanks and back to the Middle East, AND that consumers are still hurting, it would be interesting to see what impact is had by the delay. I mean, how much time did those checks buy?

It would be interesting if the real contraction, put off by the stimulus package, starts close enough (but before) the November election to have an impact on the outcome. Will energy markets have calmed down enough by then to reduce the possible pain on the McCain camp (by virtue of his association, however loose, with the sitting President)? Will the run-up to winter combined with increasing unemployment, leading up to the election, favor Obama? Where is the Black Swan?

Just something that came to mind as I prepare to go to sleep for a few hours.

Later, my peoples!

Apologies

2008-08-13T09:06:00.000-04:00

I have to apologize to all of the readers of this blog. My connectivity at home has been crappy for the past few weeks, and I haven't had time to troubleshoot it. Considering that I am moving out of my current residence by the end of the month, it really hasn't been high on the priority list to do so. Finding connectivity outside of the home is also troublesome because I'm often on the move and for some reason, in places where I don't have connectivity or I'm not staying long enough to utilize it.

(Don't even get me started on the matter of using connectivity at work. That's more than enough trouble as-is.)

I'm actually preparing some posts about my final July net worth and financials, including my (so far) thwarted attempts at adding options trading to my brokerage account, and a few thoughts on the general economy. So I'm still here, but to paraphrase Gertrude Stein, there's no here here.

Thanks for hanging in there. I'll work on being more communicative about all issues in the future.

Beautiful Day

2008-07-31T20:37:00.000-04:00

So I just ran the preliminary numbers for July and things look good. Entertainment kicked me in the ass, but I saw more movies this month than in the entire rest of the year combined. Add in the costs for Projekt Revolution, and I took a big L in this category. However, not all is bad. My calculations are based on a rent payment of $2150 (even though my portion is only $1650; the rest is paid by my roommate). So if we consider that I spent $229.91 on entertainment this month, and subtract out the $500 difference between my rent charge on my credit card and my actual portion, we find that I am really up $270.09.

Not too shabby.

As well, running calculations for my food expenses (overshot my budget of $600 by $48.38 although some of that probably should fall under entertainment), medical expenses (only charged $14.10 against a budget of $75) and fuel expenses (charged $257.84 against a budget of $700) yields a savings of $454.68. That figure includes subtracting out the food overage from the medical and transportation budget savings. This amount has now been transferred to my emergency account, for use on my trip to Trinidad for Carnival next year. I think I've covered over 50% of the expected expenses for that trip in the last 2 months of savings. Its a very nice feeling.

I'll have more on this later, but right now, I'm off to the movies. :)

Cheers!

Regrettable Comments by Bank CEOs

2008-07-30T00:50:00.000-04:00

How rich! Pure comedy, I swear. I don't often link to Portfolio, but this one is worth a mention just for the humor factor.

New Private Racetrack in NY

2008-07-29T12:16:00.001-04:00

I saw this and almost started crying. Just to be able to spend a day racing at this club would be a phenomenal experience. Of course, I imagine its Bring Your Own Supercar (BYOS) even at a daily pass rate of $2500. Since I happen to be short of the supercar, I guess I'll just have to read the news coverage, if any.

Analyst Arbitrage

2008-07-25T01:31:00.000-04:00

Well, not exactly, but it sounded good. :)

Seriously though, I was reading this piece in the SJ Mercury News about Frank Quattrone's return to technology finance, and something that Frank was reported to have said caught my attention. Here's the paragraph from the article:

But the result has been that a large number of analysts have left investment banks to join hedge funds and private equity firms, Quattrone said. The remaining analysts have focused on covering bigger corporations, rather than small start-ups, because there's no money and little recognition in covering the smaller companies, he said.

At first blush, you may agree with Frank. However, that analysis is counter intuitive to me. While what Frank said here may be true (I don't know), it appears to me to offer an opportunity for someone to profit. See, if there is less analyst coverage of smaller tech firms (especially those with real businesses, revenues and profits), then a studious operator can use the lack of coverage to their advantage.

Every trader, portfolio manager, or even small investor, is looking for an edge. The analyst rules implemented in the wake of the Blodget and Grubman scandals create a vacuum of public information around small companies, according to Frank. So the operator who is peering into the cracks, doing the due diligence, and sniffing out the promising companies that have minimal or no analyst coverage, has a better chance of finding a "hit" before the market does. Its a perfect arbitrage play. Of course it takes courage to do, but isn't that the point? The successful operators feel fear like everyone else, but they don't let that fear stop them from making good, well reasoned investments (or trades). So the operator that steps into this information void, spends the time learning about the company, and generates an investment thesis for it is taking a huge risk. However, that risk is mitigated somewhat by the fact that s/he's got a larger margin of safety to work with while the stock is undiscovered.

None of this means that our hypothetical operator can't be wrong. The investment thesis could be bogus. The timing could be sub-optimal. Any number of things can go wrong; that is the risk of the market. However, finding an unloved gem is the kind of investment everyone wants to make. So analysts' failures to cover these small companies creates an opening for the intelligent and courageous operator to profit handsomely. Shouldn't we be glad that these information arbitrage opportunities are being created? If we are the competent and capable operator, we should be giving thanks and showing gratitude for such situations, so I would think.

I don't feel bad for the sell-side analysts. If their work is any good, they'll get known for it. Meredith Whitney and Dick Bove come to mind. The good analysts will have options. Hell, even the less-than-best analysts will probably land on their feet too, usually within a hedge fund or private equity firm, as Quattrone acknowledges, or some other buy-side entity. The analysts creating forgettable research will fade into obscurity within their firms, and the typical retail investor will probably place (misguided) value in/on their work. I don't see how life is so bad for our sell-side analyst. Will it be as easy as it was during the go-go 90s? No. Will it orders of magnitude harder for them to make a living? I doubt.

Its too easy to tag along on the words of the great Frank Quattrone, given his reputation and past success. I think Frank misses the mark on this one, though. However, Frank wasn't a trader. He was a banker. As such, he probably never had to consider this issue too closely. In Frank's world, the sell-side coverage was probably proof that he was doing his job (and well). It probably justified the expense that the IPOing startup went through to work with Quattrone and his gang at CSFB. All of this would serve to burnish Frank's reputation as the go-to banker, which made him more prized and valued by whichever firm employed him.

I don't know if he's just looking at this void through the eyes of a banker, or if he has really evaluated the pros and cons of the reduction in sell-side coverage for smaller stocks (across industries, but especially in technology). I hope he has, and that he saw something I missed. In that case, I would LOVE to know what I overlooked. However, I don't get the feeling, from reading this (very) short article, that he did that evaluation.

Until next time, good people...

Covered Bonds and Bank Failure

2008-07-22T08:03:00.000-04:00

So does anyone REALLY know what happens to covered bonds if their issuing bank defaults? I ask because based on the brief description from Bloomberg.com, Wikipedia, and the European Covered Bond Council, it sounds like a securitization that has to stay on the books of the issuer. Now, if the issuer fails, what happens to the bonds? I mean, it sounds like they are already overcollateralized, which is how they get the superior ratings, but I haven't seen any mention of the outcome of issuer failure. Maybe I just need to read a bit more.

However, these things sound pretty attractive so far, if you can look past the fact that a NRSRO had to issue the rating on the bond. As we know, until recently, the 2 NRSROs that the market listened to most closely were Moody's and Standard & Poor's. Their collective track record on ratings isn't exactly spotless. Still, these covered bonds that are already trading (not necessarily those of FNM and FRE, should they actually come into being) sound promising based on their yields. I sense a lot of fear around these things, just based on the the names of the issuers, and that indicates a potential opportunity to me.

At times like this, I wish I had access to a Bloomberg!

Financial IQ Test Score

2008-07-17T04:52:00.000-04:00

64.

That's including the bonus point. Not nearly as good as I thought, but it shows me what I need to work on. Credit/debt, shopping, and financial planning would appear to be my weak points. Time to get to work, it is.

I encourage everyone to roll on over to Moolanomy and take the test. I printed it out to make it easier to record my results next to each question. Do whatever works for you, but then turn that knowledge into action!

Until next time...

Trading Up

2008-07-16T13:16:00.000-04:00

Well, it took me forever and a bloody day, but I finally got my options application in to the mail today. Yay me! We'll see whether I get approved. Cross your fingers. Since I don't plan to write any options, and especially not puts, I think it should be ok.

I'm also looking to lighten up some of my funds today or tomorrow. We'll see how things look near the close. I plan to close out my TREMX, PRMSX and RPIBX, as I prepare to trade into Teresa Lo's satellite portfolio (with a few minor differences).

Anyway, more on this to come. I need to go sleep!

Thoughts of IndyMac

2008-07-14T05:39:00.000-04:00

This is exactly why I scoffed and avoided any bank offering a rate greater than the rate HSBC has been offering for their online savings accounts. It was pure asset gathering, as these institutions, in their race to the bottom, were trying to generate enough lendable capital to generate enough revenue to offset the risk of failure. As if there was enough time for such machinations to work! E*Trade Bank and Capital One come to mind as well, along with IndyMac.

Eurozone Birthrates

2008-07-09T12:40:00.000-04:00

I'm not an economist, and I'm thankful for that, but this just makes me think that the eurozone has MUCH bigger problems than the ECB's monetary policy. I mean, they're pretty fscked anyway with the collapse of credit and housing markets in their most dynamic economies (never mind what's happened to everyone else -- German banks?). I wonder if they can pull off the trick of getting their economies to slow down faster than their birthrates?

I guess I should just be glad I'm where I am. Barely.

Damn You Japan!

2008-07-08T11:56:00.000-04:00

Sold off SPXJX at $14 yesterday. Good riddance!

Preliminary June Analysis

2008-07-08T11:35:00.000-04:00

Since I had some time before going to sleep, I figured I'd try to throw together some quick and dirty reports about June's financial performance. So far, things look good. I spent $405.84 on food, when my budget allows for $600. I spent $201.04 on gas, which is WAY beneath my ceiling of $794.62. If not for the Misc category, which blew a complete hole in my numbers, things would look great. Add to that the fact that I will be moving next month, so by September my rent will drop from $1650 per month to $1234 for my own 2 bed/1 bath apartment, and I'd say things are in excellent shape.

Anyway, I plan to work with the numbers a bit more and get a better idea on what worked and what didn't. My new diet seems to have had a very positive impact on my finances, if I had to take a guess from these numbers. I front load carbohydrates and finish the day with a salad. Even with a pre-packaged salad, I'm not loading up on sugar-laden food which becomes fat while I sleep. Those pre-packaged salads cost only a few dollars as well, so I can buy a bunch of them for work and still leave room in my budget for eating out the rest of the week (if I choose). Sweet!

Anymore, more to come. Until next time...

Heads Up

2008-07-06T13:22:00.000-04:00

I know I've been off my game recently. However, I do have a new update coming soon. Now that the first half is done, its time for a quarterly wrap up and some other activities. Also, there is a big position sale in my future. Gotta love tax loss selling! I don't see Japan going anywhere significant anytime soon, so...

Stay tuned!

Separation of Powers

2008-06-27T20:19:00.000-04:00

I have started a new blog called "What De Rass?" This is where you'll be able to find my personal ramblings. All finance oriented chatter will stay here, but I'll move the bulk of my non-finance related postings over there. Things seem cleaner that way.

Those of you who come here probably don't give a damn about my life or what goes on inside my head beyond the conversations about finance, money and alpha (when they break out). Thats all good and fine, and this is the place that you'll stay. For those of you who harbor any interest in me beyond finance and my take on it, feel free to check out "What De Rass?" and even let me know what you think.

Have a good day, all!

Silver Lining

2008-06-25T06:36:00.001-04:00

It looks like Mexico might have some medication for the real estate woes in Texas.

You have to admit, that's pretty funny. Mexico, of all basket case economies, has enough liquidity flowing through its veins to stanch the bleeding here. There are so many things racing through my head -- humor among them -- as I think about this.

What I Want...

2008-06-22T01:41:00.000-04:00

...is a short play on social networking. How many fuggin' social networking sites do we need? I know I sure don't need that many, and I probably need more than the average human. (Not as many as Kedrosky, but more than average. THAT dude needs his own personal social network.)

I wish there were a nice index I could short, but none of these fuggin' sites is public (and most probably have no chance of ever being public). In fact, fugg a short. Just buy puts on the index. I need a derivative contract.

Hi5? Facebook? LinkedIn? Friendster? Ok, ok, ok. I'm good. I don't need Multiply or MyYearBook or whatever the hell other social networks are lurking out there. Fuggggg man, just leave it alone already!

One of my students asked me about his idea for a social network the other day. I went on a rant about the business, basically telling him that he'd be better off doing it as a hobby unless he had a clear business case and heartless, soulless dedication to that objective. (As Gekko said, if you need a friend, get a dog.) I sure hope he doesn't go through with it. Talk about a waste of talent and time.

Stop with the social networks, please, for the love of God and all that holy!

Does Not Compute

2008-06-16T13:12:00.000-04:00

Something about Felix's argument doesn't compute, but my brain is a bit too cloudy to take this on right now. I need some sleep.

Yes, credit enhancement has generally been the name of the game with muni issuers and monolines. The issuers were trying to get their issuance costs down (e.g. their yields), knowing full well that the primary buyers of their product were likely not going to spend a lot of time doing credit analysis. Even doing 1 issue would be problematic for a small investor, never mind the universe of muni credits in the marketplace. Guys like Tom make a lot of money (and spend a lot of time) doing that research. People like me, however? Not so much.

So what am I missing here? Yes, credit enhancement in an era of diminished trust in the ratings agencies is probably absurd. However, you have to play to your audience. The rating agency problem will, hopefully, start getting sorted out with new entrants to the market. I don't see this world changing drastically.

Of course its nuts that munis, with their historical default rates, were not being compared evenly with corporate credits. However, I think your state treasurer probably was working with a small budget, and any way to shave a few hundred thousand in coupon payments annually was (and is) significant. All of those costs (and savings) flow directly to the bottom line.

In the longer run, the market will likely morph. Higher quality credits will probably go without insurance. Lower quality issues will probably still seek it out. I doubt the market will disappear, but shrinkage seems highly likely to me. For these issuers, making those costs evaporate is probably the key reason for the demand for insurance. Now, I may be missing something from my limited vantage point. Please, someone, clue me in if I have missed something. Basically, I think Felix is being a bit too cynical on this one. Ratings arbitrage occurs, sure, but I think the primary motivator for many of these treasurers is keeping their costs low. For a relatively small outlay (especially for larger issuers), they could get that, with the higher rating being gravy (an effect rather than a cause).

Does that make sense to anyone other than me? I hope it does. Maybe I'll expound on this after I get some rest.

Until then, dear readers...insurance - don't leave home without it!

Inflation is Fuggin Bad when...

2008-06-16T11:24:00.000-04:00

...the Japanese start spending.

Need I say more?