Timing

Woo hoo!

I feel smart!

I just decided to coast on over to WSJ.com just in time, it so happens, to find this little gem from Brent Arends in the R.O.I. column, suggesting just the move I made this morning. Although I didn't pick up a BlackRock closed end muni fund, a closed end muni fund I did purchase. I think I'll compare mine to his and see which one looks better. If I take a haircut on mine while I hold it, I probably won't bother with the wash sale. Its really not that big a deal for me.

Now I just wish bonds were a wee bit easier to trade for small investors like me. There might be some real treasures out there in the municipal market waiting to get discovered!

Oh well.

Rebalancing Day is here!!

This one has a been quite a bit overdue, but I've been massively procrastinating with my health issue. Fuck, that even sounds like a cop out to me!

Since it has been a quiet night at the office, I decided to go through my investment holdings. I know that the Pimco funds have been racing ahead as the subprime, mortgage, credit market, whatever-the-hell-you-wanna-call-it crisis has been oozing through the financial system. Given their extensive holdings in US Treasuries, it was time to harvest some profits on those funds, and pick up some of the weaker players in the old 401(k). The new 401(k) is pretty crappy, so I haven't quite matched their investment options against real bloody funds.

Damn you, employer, damn you!!!

Once markets open, I'll be able to put in 3 buy orders for some funds to round out my bond exposure outside the retirement accounts. I found a nice closed end muni fund that I think I'm going to pick up some shares in, and 2 international and emerging market bond funds. My fixed income exposure has been weaker than I'd like. Also, international rates will probably be slower to fall than in the US, so those holdings still have some time to benefit from declining rates overseas. Its a longer term play, probably about where the Pimco fund holdings were a year or so ago.

In a soon-to-be-written post, I'll discuss my actual method of rebalancing. I haven't automated it yet, but I should look into doing so. A computer could probably do a much better job of figuring this stuff out, or at least a faster one.

Until next time...

A Victory for the Credit Rating Market

Just a few days ago I wrote this, and now the WSJ surprises me with this piece (sub req'd). I recalled hearing that Egan-Jones had become a "nationally recognized statistical rating organization" or NR-SRO. This is the pass that Moody's, S&P and Fitch alone had until recently. My understanding is that if you are an NR-SRO designated credit rating firm, you effectively cannot be sued for providing inaccurate ratings because the act of providing your ratings is considered a public service.

This is joyous news! It would be ideal if at least 1 new NR-SRO were chosen. The more competition in the space, the better, as I previously stated. Egan-Jones' business model is much less controversial, since they are retained by their clients to rate credits. They do not get paid by the issuer, as the Big 3 do, so there is no conflict of interest or "ratings shopping" when dealing with them. Also, Egan-Jones just provides their rating - which as Moody's and S&P have stated throughout the subprime debacle, is just an opinion - without having a vested interest in their client's use of that rating. Whether the client is going long or short on the credit that they hire Egan-Jones to rate is unimportant.

So now maybe we'll see some real competition in this market. It won't be easy, but Egan-Jones has been fighting to obtain NR-SRO status for years. Their business model is different and there will be some adjustment required by the market. However, it should be clear that this is a positive development. Look at what happened when the market relied only on ratings from 3 firms, all of whom take payment for their ratings from the issuers of the debt they are rating. While not being the only culprit in this financial calamity, the Big 3 played a central role due to the laziness of investors and the blind faith put into their ratings. Hopefully, now things will start to shift back in the direction of meaningful, trustworthy ratings.

Three is Not Enough

I'm all for personal and corporate responsibility, with regard to investments. If you don't know what you're buying, you shouldn't be buying it. Thus, if you take a loss, you deserve it for getting in over your head.

However, seeing something like this lets you know that the oligarchy of S&P, Moody's and Fitch must be broken. It amazes me that these corporate treasurers would be allowed to keep their jobs. However, I think so many companies are going to end up writing off investments which are backed by RMBS, CMBS and derived structures that they'll all be able to keep their jobs since everyone will be guilty. Lawson or Sun or Ciena or Bristol-Myers -- all of them would end up hiring from the same pool of treasurer candidates who all put their previous firms' cash into these mortgage backed investments which had better yields than Treasuries and "are almost as good as cash".

Ha!

So really, I don't get why FASB doesn't take responsibility for this issue. We need more credit rating firms than this troika. There needs to be more competition in this market. (Just as there needs to be more competition in the market for auditors; they need to take up that argument as well IMO.) Too many people, at too many levels, have gotten away with "well, it carried a AAA rating from...", and personally, they deserve the losses they are facing for basically doing no research. However, if these 3 companies actually had to earn their keep, instead of it being given to them by Federal government mandate, maybe the ratings would mean something right now and fewer poor schlubs would be staring down losses on the back of such a pathetic excuse.

Hmmm. This topic leads me to another question. Where are the HFs? We know distressed debt is attracting lots of capital these days. I wonder if any funds are slipping into the treasurer's office to negotiate away some of these packages of auction-rate securities, at steep discounts of course? Or at the companies just holding on to them after writing them off (off, not just down) and looking for the recovery? Just curious!

Citadel, anyone?

Until next time...

2008 Goals

Here it is, a bit behind schedule and long overdue, but I finally did it! Woo hoo!

This year, I see my goals as being a lot more personal. I know that I'm in a much different place, and I'm a different person from who I was a year ago. Hugely different. I really want my goals to reflect that, which I think they will just by virtue of the fact that the "new" me has crafted them. I also commit to updating my progress on working toward completion of these goals over the course of the year. Doing so in this public forum will help keep me accountable

Regular Goals --

Personal: Learn to snowboard with enough proficiency that I can tackle a green trail by 31 Dec 2008.
Personal: Accumulate $20,000 in emergency funds by 31 Dec 2008.
Personal: Achieve $150,000 in net worth by 31 Dec 2008.
Personal: Save $15,000 for a house down payment by 31 Dec 2008.
Personal: To find and accept an offer on a new, rewarding and fulfilling job by 29 Feb 2008.
Business: Unwind my real estate investing partnership by 30 Jun 2008, including all asset sales.
Business: Hand off my consulting customers to responsible, attentive, competent person with high integrity by 30 Apr 2008.
Business: To ship a prototype of our application running on Windows Mobile and the iPhone by 30 Sep 2008.

Stretch Goals --

Personal: Read 50 books by 31 Dec 2008.
Personal: Accumulate $30,000 in emergency funds by 31 Dec 2008.
Business: To have a beta release of our application running on Windows Mobile and the iPhone by 31 Dec 2008.

You'll notice some carryover from the 2007 goals, as the goals which came across are very important to me from a quality of life standpoint. This year, I want to seriously look at acquiring a piece of real estate to make my home. While I plan to keep an eye out for real estate investments, my interest has waned due to the problems I've had with this existing partnership as well as a desire to focus on building my software startup. I had to make some major changes there, parting ways with my partner, and I'm looking to really rev that project with input from a group of advisers that I trust and respect. That can be considered fallout from the year that was.

You'll also notice that several of these goals are what might considered "negative" or "inverse" goals. Unwinding my partnership and handing off consulting clients are efforts to really focus my energy into those areas that are the most rewarding and supportive of my overall life goals. I have made them goals here because I want to be free and clear of these obligations as quickly as possible, as all time spent addressing these areas means time that is not available to work on mobile software development, networking, or building my new career.

If anyone knows a competent, underemployed Windows expert who might be interested in taking on some side consulting work, by all means, have them contact me. They must be local to the Washington, DC area, as my clients are located in the DC metropolitan area and Baltimore. I will conduct a test (or possibly a series of tests) to determine competence and integrity. Since I consider all of my clients to be friends, I have to be comfortable with whomever I recommend to take over my duties. This person will be entrusted with the "keys to the kingdom" with regard to each of these businesses.

Finally, anyone who is interested in purchasing investment property in Baltimore should contact me. These are all rentals in the standard Baltimore mold - 3 bed, 1 bath rowhouses. You can get a good deal on pricing because we have equity in all three, but honestly, we're looking to get out of them as quickly as possible. All 3 can be purchased as portfolio, or individually, although clearly the best room for negotiating a deal will be in buying multiple properties. I am also accepting referrals to other interested, serious investors as well. This is the real albatross around my neck, and the most urgent pain point in my life right now.

Anyway, let me press publish on this. If you're interested in either offer, let me know. Until next time, good people...

Investing in Death Redux

Death bonds. Mmmm. Yummy!

Now, some may consider that tacky and tasteless, and its possible that it is. But this is my blog, dammit.

I'm really in love with the idea of securitization and finding different cash flows to securitize, so this article on Bloomberg.com caught my eye.

Now, securitization is getting a bum rap lately due to the so-called Subprime Mortgage Crisis. I find that bum rap to be unwarranted, especially when you consider that an entire line of people in the chain made really bad decisions for which they mostly do not want to be held accountable for. Yes, fraud was a factor in a great many cases, but at the end, people chose to sign on the dotted line for a number of reasons and in many of those cases, they were bad reasons. However, if the lives of you or your family were not at stake, then you really have no excuse for the decision you made. Suck it up. Yeah, it hurts, but pain is one of the universe's way of letting you know that you did something detrimental, and hopefully you'll learn from the experience.

Anyway, getting off my soapbox and back into this conversation, I really wonder what the models look like. As the point was raised in the article, there hasn't been an extreme mortality event in a very long time. While the chances of such an even would appear to be rather low, even controllable to some degree (as much as the whims of humans can be managed), natural disasters look much more difficult to model from a risk perspective. I would think that anyone participating in the cat bond market would be looking very closely at death bonds. Of course, that human psychology factor probably scares off a lot of the potential investors, since psychology cannot be modeled well, if at all. Isn't the mark of a prudent investor that they know what they don't know?

So what untapped securitization markets are there? Catastrophe and death are covered. You have to wonder where the greenfields of securitization are. Hmmmm.

Until next time, friends. Look for 2008 goals soon, as I made a promise to a friend to get that up by 5:00 PM EST this coming Monday.

2007 Goal Review

Well, to keep it simple, I completely failed on 2007's goals. I completed not a single one. I'm not going to make any excuses. For all the stuff that was going on with me last year, there was nothing that rendered me physically incapable of completing those goals. Even the reading goal, if nothing else, I should have been able to make more progress with than I did.

Such is life.

Well, that definitely makes for a short post. In my upcoming 2008 list of goals, I'll see how many I carry over, how many I drop entirely and how many new goals I can conceive of.

The funniest part is that I put in more time and energy pursuing the first 3 stretch personal goals than all of the others combined.

Anyway, until next time...

The Definition of Welfare

How very fitting!

I thought it was hilarious, personally. Thanks to JLP @ AllFinancialMatters for this.

Non-institutional Prime Brokerage

Looks like I was spot on about this concept. I guess a bit more digging is in order. If there is one, there are probably more. Kind of like cockroaches.

This whole arena seems ripe for competition, given the typical hedge fund concerns about front running by their primes. Also seems like the kind of area a technology oriented investor like Silver Lake, or even the PE or venture arms of some of the bulge brackets, would be looking to get into. They could always take the venture public, sell it off or spin it off it was successful. Hell, I could even see Citadel setting up an arm to do this, although, how many hedge funds would run trades through them?

Anyway, until next time...

Life is an Optimization Function

Wednesday morning, I got out of a meeting with an older gentleman that I consider an informal mentor (but that will be changing soon). I have never felt so inspired to write a blog post as I did after that meeting.

That's when I began writing this.

In the 40 minutes or so that we spoke, he told me about his experience with a small-ish tech company that he joined after leaving the bureaucratic, sclerotic company we both used to work for (and that I still work for). I asked him what he learned from his experience, at which point he described, with an accompanying drawing, his experience over the last few years. It would be an understatement to say that I was blown away! Although I knew the stuff he told me, and I've heard it before, I've never heard it presented the way he did.

During the conversation, my will-be mentor drew 3 horizontally oriented boxes, side by side, with a line of progression through the first 2 leading into the last. In the first he wrote "Workers", although the word "Labor" would fit just as well. 80% of people fall into this group - those who go to their jobs, make payments on a mortgage or rent, raise their children and generally are blissfully unaware of the other 2 groups.

In the middle box, he wrote "Wealthy". This group makes up approximately 15% of those involved in economic activity - corporate managers and the like. They have some money, and have generally enough to live the kind of life they want to live. Nothing wrong with that, or with the "Workers" for that matter. However, the third box is where he and I both aspire to end up - "Investors". Calculating their percentage of the population is left as an exercise to the reader.

From there, we discussed some of the things he saw while with this small-ish tech company as a member of the management team. Lessons learned. Relationships formed. How money works. How this opportunity has allowed him to move from the "Workers" group into the ranks of the "Wealthy"; unfortunately, it has taken him a far longer amount of time than he would have liked had he been aware of these distinctions sooner.

Its just staggering, in a beautiful way. I literally had flashbacks to "Wall Street" after walking out of his office.

As I made my way back to my car to leave, I realized that life is an optimization function. It really is about maximizing every opportunity, every moment, every minute, and that, as Bud Fox told us in Wall Street, "Well, life all comes down to a few moments. This is one of them." Optimizing every single opportunity that presents itself should be your goal. That's what I'll be working on in 2008. I have 2.5 years to accomplish my biggest goal. Playtime is over. I get it now.

"Money never sleeps." Neither will I.

Saw This Coming

Dammit!

I knew this would happen and I didn't write about it here!!! Damn damn damn!

I remember thinking about a week ago that Berkshire was in perfect position to move into the municipal bond insurance segment. It only made sense. Here's a company with $45B in cash that is looking for more cash generating businesses. Its primary line of business is insurance, specifically direct insurance on easily modeled quantities - autos (and now rental insurance, according to the Geico ads I heard on the radio recently), re-insurance, and probably some other things. No lives, no health, nothing with too many variables, as if there products Berkshire insures currently don't have enough variables already. So the question for me became when does Berkshire start insuring munis. The monolines are getting their asses kicked, he's got cash and is looking to both put what he has to use and generate more, and he already has the big brains on staff to model the products. It was a natural product line extension.

And here it is.

And you didn't hear it here first.

*sigh*

Lessons from "Wall Street"

Wow!

I apologize to all of my readers for not posting at all in the last month. I have no excuse for it. I failed to honor my word. In the future, starting 1 January 2008, I will have blogging formally integrated into my weekly schedule. I am planning 2, maybe 3, 90 minute sessions per week where I only work on getting caught up on my blog writing and reading.

So in the last month, I went out and picked up the twentieth anniversary edition DVD of Wall Street. The more I watch this movie (again), the more I love it. The special features really tie it all together and are great in their own right. However, at the core, the movie is still pure perfection, even 20 years later. (While I was 12 when it came out and first saw it on cable when I was 13, I was already into investing and finance as a hobby by the time I did.)

"And if you need a friend, get a dog." -- Gordon Gekko, Wall Street

I don't like dogs, but I have seriously been considering getting one. The urge gets stronger every time I hear that line. Why? Because I have a vision in my mind that grows clearer daily, a vision of where I plan to take my life. Every time I watch Wall Street, and that has been almost every day since 17 December, the vision solidifies a bit more. And it looks like it may require me to ditch some of the people in my life, which I don't really want to do, but they're no longer supportive of me or my goals. I do like friends and my inner circle will remain, I'm sure, but there will be a clearing for a pet (much like the WASPs Gekko mentions to Bud Fox in the sauna). I can feel it in my bones.

Now, I'm very clear that Gordon Gekko is "the bad guy". However, I think the movie is instructional in other ways, besides promoting unbridled greed. Commitment. Drive. Persistence. Pushing yourself beyond your perceived limits. Being prepared. Knowing exactly what your goal is. Basic ideas, but the very ideas I've been grappling with for the bulk of this calendar year. This is what I see when I watch this movie. These all transcend the notion of intent; how you direct this energy is your choice, but being successful in any arena requires directing that energy at some goal. This movie is a classic, and it gets better every time I watch it.

Anyway, its time for me to go. I'll have a new post tomorrow about a great meeting I had earlier today. This meeting re-inspired me with regard to my blogging. And like Wall Street, it has helped focus my mind on my goals. 2008 is right around the corner. Its time to get ready!

"Money never sleeps, pal." -- Gordon Gekko

Until next time...

An Insurance Man Builds a Lively Business in Death

So I just finished reading this piece in today's WSJ (online sub req'd). I've never followed the insurance industry that closely, except back in my Primerica Financial Services days (yes, yes) so I had no idea that viaticals had fallen off. This is an interesting concept, and it just goes to show that any stream of income -- no matter in which direction it moves -- can be securitized.

This does make me wonder how you assess the risk of a policy, or of a portfolio of policies. As the article states, the investor would prefer that the insured have a higher risk of immediate death. The closer the seller of the policy is to death, the more I could see the payout being. However, considering that the risk of death is likely based on health and well-being factors, I wonder how you get access to that information legally in this age of HIPAA, identity theft, and all the other perils associated with information access.

*shrug*

Still, it looks like just a matter of time until these things are packaged and re-sold, creating a secondary market for such policies. I guess you could tranche based on the likelihood of death, e.g. the type of illness, the organs affected, length of illness. I'm sure some math Ph.D.s somewhere will come up with models for all of that.

Financial innovation at its finest.

Personal Round-Up: November Edition Part II

Ahhh! Where were we?

Yes, I believe I was going to talk about real estate. Things have been markedly slow on the REI front, although I just got a lead on a nice deal around Baltimore that I have replied to. The price works, and I know I can get the financing even if I can't put any money down. Again, the importance of that clean credit cannot be stressed enough!

Anyway, the deal is a duplex which is being rented out for a decent (not great) amount. It should cash flow however, which is most critical. Both units are 1 bedroom/1 bathroom. I'm still gathering information since this just slid across my inbox earlier today, but so far, I'm such a "YES!" on this deal. I've e-mailed my contact with some questions and we'll see what the owner comes back with. I do like this deal a lot, but like any other deal, I'm not in love with it and I won't allow myself to fall in love with it.

Its funny though because the real estate partnership I am part of has been more active in the weeks since we agreed to turn down the LLC than in the months prior. WTF??? Isn't it supposed to be the other way around? Had this much energy and effort gone into things before, we probably wouldn't have decided to shut the operation down in the first place.

*shrug*

I've also had some interest in some of the domain names I have available for sale. Its slight, so I won't go into a huge amount of detail, but it looks like I may have found a potential partner to help me get some of these either sold or leased. We'll see what comes of that next week. This is the reason I don't like holidays -- it slows down the flow of business.

My modeling efforts have come to a bit of standstill over the last few days, but I'll get back to work on them starting tonight. I borrowed a model from RedBrick Partners for rental real estate cash flows, and that's my primary model right now. The model I have been developing takes a lot of cues from RedBrick's model, but adds some personal twists. I'd go so far as to say that it is far more conservative than RedBrick's model. That only makes sense, because the numbers should expose a deal as being a win or a loss. I really don't want to have to visit a property to make that determination, and so far, I think the RedBrick model is the best I have seen. Once I mix their methodology with my personal experience, I think I'll be able to achieve the kind of reliable value estimates that will give me a real advantage.

As for my equity valuation model, I am seriously behind on constructing that. Right now, it has a deep value bent to it, but I want to add some growth factors. I really have to do some digging at this point, some hardcore research, because CAN SLIM and other well known factors are only going to yield alternative betas at this point. I'm hunting for real alpha, not beta in alpha clothing. So this will be a bit of a back burner issue for now, while I sort out some other things. I guess I'll finally get a chance to play with Trade Strategist now though, as I start backtesting some proprietary factors. Woo hoo!! (Aside: I REALLY should have gone to the AlgoTrading conference last month! Damn! That's what I get for being reasonable.)

So the recent market action has been pretty painful. We've seen a lot of "buy the dips" days after the swoons, but I really think those BTD folks are setting themselves up to get hurt. I think Bonddad has pretty much summed that up perfectly. As I said in part I of this missive, unless you've found some hidden store of value somewhere, its probably best to just accumulate cash right now. You really have to wonder how brainwashed people are to continue buying in the current environment. More power to 'em. God bless 'em. I just don't have the same conviction about US equities right now. Since I do have a few international bond funds in my sights, I think I'll spend some time tonight and tomorrow reviewing their holdings to see which ones look to benefit from rate lowering by foreign central banks.

As for me, I have to admit I had a pretty good day today. (Saturday, 24 November.) I was able to clean up the whole apartment pretty much, get out and buy some necessities, update this blog, and a whole bunch of other little things that were waiting to get completed. Now, I'm going to bed. I've got to be at work in a few hours.

Until next time, gentle readers...

Personal Round-Up: November Edition

I apologize to all of you, my readers, for the HUGE gap in posting. I've been a bit off the grid, which sounds odd, I know, considering I work in the Internet business. I've just not had the chance to catch up, read, study, synthesize and think as I usually don't have time to. I really do it all for you, all 3 of you. Without you, there would be no me.

So let's get caught up generally. As noted previously, there is progress on the debt reduction. In this environment, with the markets taking the drubbing they are, and the dollar becoming ever more toilet paper-ish, that's a good thing. A little deflation is probably in order. Just a little though. I don't want deflation on the scale of Japan from '89 until 2002/2003. (Some, including yours truly, might say Japan has yet to really escape it.) I definitely won't be mad about 10% or more price cuts in my local RE market. You won't hear me complaining about share prices taking some downward action either. I think, over the short to intermediate time frame, the US economy is dynamic and resilient enough to survive and thrive. Taking a longer term stance, I plan to diversify my holdings into non-dollar denominated assets like any risk-adjusted, absolute return mandated manager. I've like Japan for a number of years, and I have some dollars there now; I think that will be increasing. Otherwise, I have to bump up my international and emerging market fixed income exposure to 5% as my asset allocation dictates. An additional 3.5% of emerging market equity exposure is lacking as well, so we'll turn the spigot on in those directions. Maybe I'll hold off a bit on FI though, until we start seeing a wee bit more stabilization in rate increases from foreign central banks. Yeah, that's the ticket.

I think I'm back down to a balance of $7200 on my AmEx. The only reason it is so high is because I just put $4000 into my car to replace the transmission, head lights and catalytic converter. Thankfully, all of that came out of my emergency funds. (Well, except maybe the headlights.) If you don't have such a fund, you're doing yourself an immense disservice and quite honestly, you're not managing your risk at all. I mean, that's pure neglect. Life happens. Some liquid funds (hopefully not in a money market account, as things are going these days) are order of the day, because you never know when $4000 worth of expenses will show up on your doorstep mere weeks from winter. If anything, I feel confident that my trusty 8 year old Honda Accord will survive the coming season now.

Now, I really have to get my daily expenses under control, especially food and snacks. I've been tracking my monthly expenses in Excel since last month. I used to do this more regularly, but it fell to the wayside with all the personal circumstances I have been dealing with this year. I figure doing this for the 4th quarter will really give me visibility into my problem areas, however, I know instinctively that food is kicking my ass. There is no good reason I should spend as much as I do, not even the fact that I don't cook. I think I use food for comfort as much as nutrition. Thank God I'm always moving and my metabolism is still high, otherwise I'd be 30 pounds heavier. Since food is my biggest financial weak spot, I'm going to have to start cooking though, and I really don't relish the thought. As I like to say, that's why I have money, so someone else can do it. I do what I'm good at, they do what they're good at, and everyone gets a fair exchange. It had been working for me...until now. We'll see how December looks, as I have to acquire some ski gear for my planned snowboarding expeditions. For now, I'm just going to keep an eye on the expenses, purchase frozen meals for work, and just stay present to my spending. Once the 4th quarter tally is in, I'll look at putting in place measures to rein in the food spending. Unless November is particularly horrible.

I figure that by the end of the year, I can get my AmEx balance down to $5K, which is roughly 1/3 of the high water mark this year. Again, since I only use the AmEx, I really am not worried about this too much. My other card is only to be used in case of emergency, when all else fails. Until such time, it will sit in the freezer, entombed in ice, and helping me build up actual credit history. I figure all of this should get my credit scores back in the 750+ range. (Only one of them is above 770 right now, and 1 is actually below 700.)

On the business front, I'll file Form TX next week, once things start opening up again after Thanksgiving. Form TX is the copyright submission form from the US Copyright Office. My partner and I are submitting our source code to this process, for legal protection. There will be more of this in the future, undoubtedly. I also received the trade name application back from Maryland, along with the check. Seems they were missing a signature. It would have been very helpful if they had bothered to tell me a signature (or 2) was (were) missing the day I hauled myself up to Baltimore to file it. Sometimes I wonder... Anyway, there is slow progress on the software front. Not quite as dynamic as we'd like, but we're getting there. Once Santa Season really kicks in, my partner, student that she is, will have more time to really hack out some code. Being a student is a HUGE drain on one's productivity. In the meantime, I have a base Apache 2.x build in place for our website, and since my partner is a Ruby on Rails fanatic, I have some work to do setting up our application server. we plan to launch our public alpha on 1 January 2008, so there is a bunch of work to do!

Thanks to the recent market action, there hasn't been much (forward) progress in the net worth department. Such is life. This is why we stay liquid, or at least keep our credit ratings solid. When the time comes to buy, we should have some powder at the ready (or at least be able to negotiate it on reasonable terms).

I've been having some ideas for little businesses to generate cash flow recently. I hate it when this happens. While I'm all for "getting a bigger plate" as my Landmark Education coaches are fond of saying, I haven't quite mastered it as yet. I am making progress. I'm using my calendar regularly, and scheduling almost every moment of my day. Now if I can just execute on getting more sleep, I think I'd have a huge breakthrough in my overall effectiveness. In the meantime, anyone out there have any experience in the bumper sticker business? I have some ideas for stickers, and I think I'll have my roommate do some mock-ups after Thanksgiving. On second thought, I *do* have Photoshop installed, and the holiday is tomorrow. I think its clear what I'll be working on this Thanksgiving while I await the feast my mother is preparing. Now I need to get my head around the business of making money with bumper stickers. There has to be a way to do it!

Ok, I think that's it for this post. Anyone who is still awake, look for part 2 coming soon. I'll talk about the real estate investing and take a closer look at the recent markets and news. Maybe I'll get into a brief discussion of my modeling efforts too.

Until part II...

Managing Risk I

You see how risk has become this objet de l'attention for me. It has been permeating all my discussions of investing, whether in capital markets or real estate. What are the risks? How do you model them? How do you price them? What potential blind spots are there?

For a while I've had an idea to model real estate risk, from an investor's perspective. I started working on the model - identifying factors, working to create initial values for them based on the limited data available from the few deals my partners and I had done, etc. It is still far from being complete, but it is coming along.

While thinking about this problem - modeling real estate investment risks - I started thinking about information markets and basic value investing. Essentially, you have to discount your price or present value (PV, for all the DCF wonks) by some (hopefully) standard amount for each factor where you have incomplete information. The amount of the discount should be roughly proportional to the completeness of the information you have about that factor.

In an information market, prices should (will?) be discounted by some amount based on the completeness of the information about the product. Real estate is no different from the stock market in this regard. We see this in the pricing of financial stocks, especially the bulge bracket IBs (Goldman, Morgan Stanley, etc.). The argument goes that since their operations and holdings are so opaque, the market applies a discount to their share prices for the uncertainty about how they make money, assets they carry on (and off) their books, etc. It makes total sense. If I can't tell what's going on with a house structurally (say, I purchased at an auction of some sort and was not allowed to have an inspection done, or there was no time for the inspection), then there should be some discount applied to the price due to that information shortfall.

Anyway, that's just a taste of an ongoing project of mine. I am working on learning how to model risk in various markets. If anyone has any suggestions, whether they are articles, books, or authors to read, classes to take, or any other ways to learn how to model, please let me know. I know that over time, my modeling will improve, but I am not above accelerating the process.

Until next time, because I think I have more to say on this and I just needed to get this one out the door...

Pricing Risk

I don't know who, among my readers, saw this article in the NY Times a few months ago. Most likely, all 3 of you. (What's up, G?!?!) I have to admit to being fascinated by this one. I haven't let it out of my browser since originally reading it, and I'm going to finish reading it now before I go to sleep. Risk management would appear to be the theme in my investing right now.

Driving & Investing Part II

I've previously written about this before, but it occurred to me recently, as I was weaving through traffic in Washington, DC, that I should elaborate on the similarities between good driving and good investing/trading. I've been working on this one, on and off, for months.

The key idea is probabilities.

Every maneuver I make, every lane change, everything is based on the probability of that maneuver benefiting me. Often (I would estimate 60 - 70% of the time), it does. The remainder of the time -- well, that's just the cost of doing business.

For example, we've got 4 lanes of road with 2 lanes in each direction. If I'm in the left lane with 5 people in front of me, there is at least a 1 in 5 chance (20%) chance that one of those people is turning left and will end up blocking the lane. That sucks. So I start looking for the tells - the brake lights, slowing traffic, people merging out to the right - that indicate that the probability has occurred or is occurring. Now, since I only have 2 lanes to work with, I have to also watch the right lane. The idea is that the right lane could have problems too, but are they as severe as the left lane's? If the right lane has a bus in it with an upcoming stop, there is a good chance (which I have no idea how to calculate) that the bus will stop. So now I am looking at the oncoming traffic, because if there is little or none, that guy turning left has a good chance of making his turn with little impact to me. Also, I'm looking for how much room that bus has to get out of the way (a shoulder or bus lane) giving me and others enough room to get around him when he stops.

Basically, I'm constantly calculating the probability of an event which impedes my forward progress. (Funny, just as I had started working on this piece again a few months ago, I noticed this post over at Accrued Interest. He then followed it up with this one which has more good stuff.) It all comes down to the probabilities of a given event occurring.

The markets generate enough data to make somewhat better (more accurate) predictions, but nothing is EVER identical so we have to discern patterns from the data to help estimate probabilities of various outcomes. It can be done, even on an ad hoc basis, I think, much like navigating road traffic.

I'll have more on this topic in the future, and I plan to get into specific scenarios and their "market equivalents". I need to start thinking like a trader in my trading; I already do it in my driving.

A Few Good Reads

While I know that most of my fanbase (ha!) has probably already dissected these pieces every which way already, I have to admit that they make for interesting reads and re-reads. I've kept them up in my browser persistently since stumbling upon them, and flip back to them regularly to look something up or just remind myself about the tendency of markets to strike when least expected. Minsky moments and all that.

First up is the Malcolm Gladwell piece on Nassim Nicholas Taleb entitled "Blowing Up". I know I don't need to introduce him to most of you. For the rest, well, that's what Google excels at. Start with his website.

Next we have the New Yorker's big spread on Victor Niederhoffer's return to and subsequent dismissal by the markets. Fascinating, in more ways than one. The Gladwell piece looks at Niederhoffer briefly as well, and if I can find it, I'll post the other article I read about him recently. Talk about overexposure.

Finally, The American's Hunt for Black October, seeking to expose the reasons for Black Monday, 1987. An interesting, if speculative, read. I love this kind of history stuff, and I'd rather learn from someone else's mistakes than make my own. I've got enough of those.

Honestly, while I like Taleb's approach to the market, and I respect his vigilance in preparing for a Black Swan event, there's something missing. It actually reminds me of how I drive, and I'll get another post up on how good driving and good investing rhyme in the near future. While we don't want to pick up nickles - or God forbid, pennies - in front of steamrollers, you can't just sit around waiting for Doomsday either. This, in the simplest of terms, is what I imagine doomed Empirica. Whether things are different now with his newest venture, we'll have to see. There has got to be some participation in the market besides collecting premiums on options, because the stability that would allow that to be a viable past-time can disappear in mere moments. Stability breeds instability, right? Or that stability may not generate enough returns to allow your capital base to last until the return of volatility. And what's plan B when instability rears its head?

Of course, you could probably make the argument that by operating in this way, Taleb is playing his intended course perfectly. In stability, clip your coupon (aka option premiums). When volatility returns, hopefully you're on the right side of the trade and that's where the strategy shines -- if you're nimble enough.

*shrug*

Net Worth Update

So I'm only up to USD $110,000 (rounding) once you factor in my now $11,000 of CC debt. Yeah, yeah, yeah, please spare the lectures on CC debt. Its been a long year. I won't be traveling anywhere -- not St. Thomas, not Trinidad, or anywhere else -- anytime soon. Nor will I be buying gifts of travel for anyone anytime soon either, as I did 3 times this year. To paraphrase myself, the CC debt has canceled Christmas. Oh well, I did it to myself and I'll have to dig myself out from under it. At least I can pay my rent with my card now, so I earn points for it. By the end of the week, I'll cover the November rent payment plus I'm adding about $2000 on top of it, maybe more. I should be down to less than $9000 on my card by this time next week. Progress IS being made.

I'm definitely not on track to meet the goal of 150K in net worth by year's end. I'll be higher than I was at the start of the year (win), but not at all close to where I want to be. While I could just pay off the entire balance by wiping out my online savings account, something tells me that's not a good idea. Since I'm in the same boat as Single Ma, getting 3 paychecks in November, I figure I'll get it down to at least $6000 by year end. I'm so glad to see myself write that since it will have fairly immediate impact on my credit scores. The last tri-merge I pulled had an Experian boot firmly up my ass, just when I was expecting all of my scores to be > 750. *sigh*

Anyway, just a bit of a follow up. I've been avoiding this post for a while, but fuck it, here it is. You can't say I didn't follow full disclosure.

Anyway, until next time...

Impending Doom

So there's all this coverage now about the next FOMC (that's Fed Open Mouth Committee) meeting this week and the expected rate cut.

Sheesh!

FWIW, I think the Fed will cut. Look at who the chairman is. 25 bps. But that's just a guess, not even a forecast. To paraphrase a friend of mine, when it comes to economics, I'm not even a dilettante.

However, what will this cut (and God forbid if it turns out to be a 50 bps cut), do to the USD? OMFG! I think we see oil at $100 if that happens, quite honestly. Not for any actual, real, fundamental reason. It really becomes a psychological move at that point, but I think it happens. At that point, things get ugly. I think you face the imminent move away from the greenback by everyone tired of paying more dollars for the same resources. Look, Kuwait already made the move. You know the Chinese have to be looking for the exit, and how to get out of it before anyone notices they left the party. Fuck, I'm trying to as well, quite honestly. The question really becomes who is the next to fall if we touch $100/barrel oil?

While there are arguments against this (WSJ.com sub req'd), and again, they involve psychology, they argue for an optimistic view versus a pessimistic one. In my experience, people are far more negative than positive, and I think the negative psychology on oil is becoming sticky. Look, real inflation is in the 6% - 7% range anyway, right? So how hard is it to believe that oil bounds up past $95 and continues, especially on a 25 bps rate cut? Sounds perfectly reasonable to me.

Until next time...

Back to Old Habits

Startups are like socialism -- they take up a hell of a lot of evenings. I'm remembering this after staying up for the last 10 hours hacking at software on my web server. This isn't the kind of thing I would normally engage in on a Friday evening, but my partner and I had our first meeting in months on Wednesday. One of the outcomes was an agreement to spend Fridays hacking on our startup - coding, installing and configuring software, designing architecture, writing business documents, completing paperwork. We're targeting January 2008 for our public alpha, after re-tooling to a different mobile platform.

As an aside, writing software for cell phones in the US sucks ass. There's no gracious way to describe the way the vampires in the mobile telephony industry have sucked the very life from the market. All the stuff we originally planned to do can be done easily on a regular phone in pretty much any country other than the US. Here, we're relegated to the ghettos of smartphones. Granted, our spirits were lifted - slightly - when Apple finally announced a real SDK (software development kit) for the iPhone. But the entire original plan has to put on hold to focus on Windows Mobile for the time being, and the iPhone eventually. Hey, smartphones are the wave of the future and all, but right now, there are more regular Motorolas, Samsungs, and Nokias in circulation than Windows Mobile devices and iPhones. Just another reason to leave this country, in my opinion; it not quite up there with the declining dollar, but the more I think about it...

Anyway, let me get back to figuring out why Apache 2.2.6 fails to compile with SSL support. I will admit I've missed just doing geek shit for the hell of it. The last 2 nights have brought back some serious memories, and given me a psychic boost as well. However, I do need to get some sleep sometime today! Doh!

Until next time...

Test Drive III: BMW 650i

I finally did it.

After thinking about it all summer long, I test drove a BMW 650i. Man, I don't know why I waited so long!

I made the arrangements last Thursday, driving up to Tischer BMW and sitting down with a sales guy for a few minutes. I just wanted to get everything in order so that I could come in on the morning of Saturday 20 October, do my drive, and bail. So all of that got worked out. Then I called on Friday to confirm that everything was in order. Since my sales guy - Andy - wasn't available, I spoke to Rick, the sales manager. Nice enough guy. He confirmed that the black on black 650i coupe with automatic transmission and the Sport package was going to be ready for 10 am today. Check.

(Before you purists go off, I think I said somewhere that I am still learning to drive stick, and I didn't feel like doing my first paddle shifter on a test drive in a $75,000 automobile. Get over it.)

So I roll up to Tischer today at 5 minutes after 10:00 am, and find my sales guy again. Good guy. West Indian. I want to say Trinidadian, but that's not relevant here. Andy gets the car prepped, takes my license to make a copy, and gives me the quick tour of the vehicle controls. My roommate came along for the ride, because experiences like this should be shared in my opinion. She played with iDrive; I played with the V-8.

So we meander out of the parking lot, and I immediately gun it. Schweet! Power on demand is a beautiful thing. So we jump on Route 29 north, merge into traffic, and once I get some open road I hit it again. I love the responsiveness of this car! So after crossing into Howard County, I find some open road on 29 and hit it. In no time, we're doing 111, and it feels like the world is standing still. I mean, you don't even notice the acceleration due to the amount of power available. Hitting 85 in this car damn near makes you feel like the engine is off. But now its time to reign it in a bit, because I'm coming on a new speed trap, so I ease down, come over the hill and...nothing...so I hit it again to merge back toward the right.

Coming up next is MD Route 32, which I jump on heading east, and pull over in a parking lot to trade seats with my roommate. After playing with the seating controls for about 10 minutes, she gets everything positioned just so and we're on the road again. Being her first time behind the wheel of a car with this much power, she's a bit intimidated. The necessary touch to do anything - activate turn signals, give the engine burst of gas - is so demure that even she is surprised. So we get back on to 32 east and she promptly tries to run a Honda Accord off the road. Fuck! After we get past that situation, she navigates us on to 95 South and heads for the left lane.

So after a nice leisurely jaunt down 95 at about 85 or so (which positively feels like the engine is turned off if not for the trees and other cars being passed), we get back on 495 and come off at New Hampshire Avenue to trade spots again. I take over and head up NH to some back roads. Too bad that all morning the roads were crowded with people. The best part was the Toyota Highlander who kept trying to keep up with me. I love fuckin' with these guys. Reel him in a bit, then gun it and embarrass him. I could do that all day, I swear! The same thing happened the first time I helmed this ship earlier in the morning. When will these guys learn!?!? It was like everyone thinks they're driving a frickin' Maserati when they see you coming, and wants to race. Guys, either I'm chillaxin', not thinking about your dumb ass, or I'm going to (and did) smoke you like a Cuban cigar. There's no middle ground, so get over yourselves.

Anyway, we take the back roads back to Tischer then drop the car off and leave. On the last leg, I activated Sport mode and all I can say about that is "Whoa!" With Sport mode on, the road feel is much more eagerly transmitted back to the car and the acceleration is ridiculous. Jumping into traffic in Sport mode was the one time I felt that the car slightly got away from me, but I recovered control immediately and took us back in.

Overall, I think we were out for about 45 or 50 minutes. A short and simple yet hugely worthwhile experience in The Ultimate Driving Machine. I think that description can safely be applied to the 650i, no holds barred.

I'll admit that the 650i was a hugely enjoyable drive. Not only was the giddy up flatly amazing, but its an extremely comfortable car. It is definitely pure GT driving fantasy. I can definitely see the 6 series as my everyday ride, just as long as I don't have to move passengers from point A to point B. Unless those fools fit in the trunk, there's no room for them. I'd hate to be the poor bastard rising in the limited back seat, my knees in my throat as the countryside roared past. There are worst places on Earth to be, but not too many, I imagine.

Anyway, until next time...

Ooooh! Guns, guns, guns!!

Well, not quite, but that's what it felt like Wednesday night at the first face-to-face meeting I've had with my real estate investing partners in some months.

What was the cause of all the tension? We decided to unwind the operation. After 22 months, a lot of learning, but not nearly the level of progress we had originally committed to, we're shutting it down. Its always an emotional experience to shut down a business. However, the commitment to the original goals, or even modified goals, wasn't there, or at least wasn't distributed evenly.

So why now? Why after 22 months, $11200 invested per person, lots of meetings and gas expenses, 4 properties and the headaches of being landlords, why shut it down now, when we're on the brink? In my opinion, because we've been on the brink for a long time, and in 6 months, we'll still be on the brink.

Last Saturday, at the regular meeting of DC REIA, the leader of the group, Sherman Ragland, said something I wish I'd heard 2 years ago. He said partner, but don't create partnerships. Meaning, find a partner to get the deal done but don't create a structure which marries you to a partner or a group of partners (like an LLC) until you actually have a working relationship with them. If the first, then second, then third project with those partners all work out, then maybe its time to consider formalizing it. Our mistake, as a group, was rushing into marriage, all in the name of being "legal". We see how well that worked out.

So thankfully, with all the heat of the meeting, no one got hurt, no chairs or other furniture were thrown or anything like that. (Although I was tempted.) So now we wind down the operation and we'll find and close our deals in our own independent ways. Its definitely for the better. 5 guys, all with engineering backgrounds, trying to pull together deals regularly...man, it was like herding cats.

Oh well. Time to move on now.

Man, You're the Sickest!

I just had to interject with this one. Does it have anything to do with alpha? No. Still fuggin' cool tho!

Middle Eastern Plays in Western Markets

My biggest question is how are the sovereign wealth funds and other middle eastern investors reconciling their religious principles against the fact that private equity investments involve the application non-trivial amounts of leverage? Owning non-controlling stakes in Carlyle or any other PE firm isn't going to position them to remake the business along Islamic finance lines. I doubt they would want to anyway (hopefully) seeing as how they are investing on the basis of the returns the firms have generated using levered tactics. If a private equity firm can't lever, is it a private equity firm anymore? I think not; now its just a mutual fund with worse overhead.

Weekend Update

Whew! What a weekend! I spent the last Friday through Sunday in the DC REIA Super Meeting which was a very worthwhile experience, at least for a real estate investor in the DC metro area. Lots of good information shared, and I didn't shell out any money for any additional educational programs. I have enough to work with at the present time. However, I'm starting to really "get" this real estate investing thing, to really see it as a part of my being and my life. Now if I could just get this one bloody deal closed!

I apologize to all my readers for the neglect. Things should be more sane this week since I won't be working tonight as I usually am. That will give me some time to clear out a great many outstanding items I have on my to do list.

Prime Brokerage Disintermediation

This is what I am talking about! I'm not the smartest guy on the planet, but this area -- prime brokerage -- looks so susceptible to being broken up. First, I can see an increase in credible competition to Goldman Sachs, Bear Stearns and Morgan Stanley. The credit crunch has shown that, as the big commercial banks with big balance sheets - Citi, BofA - have made inroads in this area. The European banks will be next. However, it will eventually become an issue of service optimization. Plus, there are the competition issues like front running that hedge funds just don't want to deal with. Services will probably peel off into independent providers; that's what makes sense to me.

Running in Place

I'm sure you noticed the little burst of activity there at the end of September. I assure you I wasn't painting the tape. (Ok, maybe a little bit.) I had a bunch of things I wanted to get out during September and I just sat down and forced them (or their remnants) out. Anyway, I hope they are at least enjoyable, given how dated they are. Still working on the CDS project, but I haven't had time to do the research I want to do on that one. (Or the real estate derivatives; I think there's more to explore there.)

Anyway, until next time...

Test Drive II: BMW 750iL

I'm not going to say much about the process this time. All that need be spoken about is the car.

But first...

I can understand why the sales guy wanted to stress the fact that the 750 would NOT be like the A8L. I'm sure he sees tons of people who are disappointed by the difference in feeling between the 750, the Mercedes S Class and the Audi A8. I notice that a lot of people don't really know what a BMW is supposed to be purchased for. So let me attempt to clue them in by saying that a BMW is meant to be DRIVEN! Yes, boys and girls, BMWs are for people who like to the thrill of driving. People who speed up in the twisties. People who drive fast and relish every bump in the road as an expression of their connectedness with the road.

These are the type of people BMWs are designed for. There is a reason that they call themselves the ultimate DRIVING machines. If you don't like the way the road feels, buy a Benz or an A8 or even, God forbid, a nouveau riche Lexus. BMW is not for you.

Now that I've said that...

I have to start by saying that it is a miracle of modern automotive engineering that a $90,000+ (2007 dollars) automobile can feel like a $30,000 auto (1999 dollars). I don't mean that disparagingly at all. It was a natural experience to get behind the wheel of the 750iL. Just as my 2000 Honda Accord allows me to feel the road (more than it should), the BMW really put me in touch with the driving experience and road feel (exactly as it should). It was a just a bigger vehicle to maneuver!

Let's get iDrive out of the way. It sucked ass -- totally. The A8L's controls were much more intuitive and easier to use. Whomever thought up iDrive should be executed like Buddhist monk in Myanmar. I can see some poor bastard dying in a horrible crash trying to change radio stations in any BMW with iDrive.

Anyway, the model I drove was snow white, with the most comfortable leather seats I've had the pleasure of sitting in in a while. Just a beautiful machine. While the car is big and heavy, it is not unwieldy. It sure looks like it could be, but the handling was superb. While taking it through some of the back roads of Montgomery County, MD, hitting some fairly tight turns at speeds that would turn my Honda into roadkill, the car was just taut and eminently controllable. Again, more modern engineering at work - traction and stability control are beautiful things. I loved how the sales guy kept pushing me to give it more power in the turns and soon that heart pounding fear starts pushing the adrenaline throughout your system. This car can make you feel like Superman, or at least Michael Schumacher. :)

Unfortunately, I did not leave the dealership with one. My Accord has years of life left in it, and I plan to drive it into the ground. But if Mercedes continues to mutilate the S Class as they have done, once my Accord keels over, BMW might well get my business.

The Subprime Crisis and Ratings Issues from the NY PRMIA Meeting

Here is a fascinating recount of some of the events at the Professional Risk Managers International Association meeting on 20 September. Unfortunately, I can't remember how I came across this. :(

From reading this, the first thing that comes to mind, for me, is "why doesn't Egan-Jones just start rating paper independently and let the market develop for their ratings on the basis of that competition?" Of course, I can see S&P and Moody's getting very litigious, based on the comments that came out of this. I could even see the SEC stepping in and trying to invalidate their work. And of course the issuers aren't going to come to Egan-Jones because they know they can go ratings shopping among Moody's, S&P and Fitch anyway. This whole situation stinks to high heaven.

The bits from Josh Rosner are well worth reading as well. Of course, these are meeting notes so they summarize what was said, but the thoughts are complete enough to see that things are seriously broken in the housing finance and securities ratings arenas.

Creative Accounting

Stuff like this (WSJ.com sub req'd) makes me wonder if the FASB is a group of dope addicts. Ummm, didn't they just make debt look more like equity, in terms of how it performs on the financial statements? I believe this is FAS 159, which I'll definitely be reading more about. However, between this and FAS 157, you have to think that the deck is stacked in the favor of the financials. While I'm not one to run around saying "its not fair", at the same time, these rules make the accounting quite a bit murkier.

Real Estate Derivatives

I know I would welcome a real estate derivatives market in the US for commercial real estate. That was a concern of mine prior to the recent credit market turmoil - how to profit from the market w/o being into the market as deeply as owning property requires. This would seem to be a nice solution.

I'd love to be able to take a short position on the commercial real estate market in my area, especially given some of the dubious projects I've seen going up over the last few months. I understand that there exist products based on the Case/Shiller index as well, but there will be newer products coming out against it too. I wonder if they have any futures (or options, or other products allowing short positions) on the DC area market. THAT would be handy!

Actually, from scouring the CME site (a site I have serious mixed feelings about), I see that there are contracts on Washington, DC. I'll have to dig a bit deeper to see what kind regional coverage those contracts represent. I would think the bids on the DC contract would be dropping a bit more precipitously over time, but I guess the pessimism isn't that strong for the DC area. Hmmm. While I don't think the DC area will be nearly as hard hit as others, there is no way this region gets away clean. Affordability is a total bitch here. It feels like what it must be like to live in Mayfair, except nothing is in walking distance. I'll definitely take a closer look at the products CME offers on housing, as they could potentially be very useful.

As for my CDS project, that'll require a trip to my local Bloomberg terminal. I'll keep you posted.

Oh Well

It really sucks to liquidate shares just prior (by a day!) to the biggest point gain on the DJIA in 4 years. Talk about bad timing. I definitely won't make that mistake again. I'm not going to even calculate how much I left on the table on that call.

Hell Yeah!

I really don't understand the US and our boneheaded anti-drug policy. Think of all the missed tax revenue! To me, everything else is gravy.

Hell, if Merck and Pfizer (and others) owned the market for producing recreational quantities of cannabis, they'd be growth stocks again. Then add coke and heroin to the mix...that's a buying opportunity on pharmaceuticals right there.

Friggin' moralistic politicians.

Keep in mind there's been major growth in the abuse rates of oxycontin, vicodin and other opioid analgesics in the last few years as well. These things have similar metabolic pathways and affect similar parts of the brain and heroin and other narcotics. I guess no one recognizes those similarities.

All Tied Up

Man, what do you do when most of your money is locked in retirement accounts.

That's what I'm facing now. I have 2 401(k) accounts that I can't do much re-balancing in, at least not as extensively as I would like. I just sold one quarter of my T. Rowe Price Emerging Markets Stock (PRMSX) fund in my regular brokerage account. But still, this is an annoyance. The only reason I left the funds in one of the 401(k)s is because the selections were pretty decent and a call to their support center a few months ago indicated that the 2 accounts were going to be merged. So much for that.

I guess its time to open that self-directed IRA and roll over the older 401(k). I'm on a deadline, and I want to take a large portion of my accounts to cash soon.

Such an annoyance.

Forward Motion

Whew!

Yeah, last week was rough. Still carrying over. However, it was also the most productive week I've had a loooong time, and for that I'm glad.

I finally handled some pressing issues, namely the LLC registration for the company. We had already formed as an S corp through BizFilings.com which was all good and fine. The problem was that the decision of an S corp was a bit hasty when we made it. After some consultation with a good corporate lawyer (who happens to be blood), we decided to dissolve the S corp and reincarnate as an LLC. I think this will offer a lot more flexibility with a lot less hassle. I've had to bury (or am in the process of burying) a few older companies and for a small operation, its just not worth it to go with a corporation.

I also handled the EIN for the company and DBA registration. All in all, it was a productive week. Now its just a matter of carrying all the momentum forward into the coming week. After I sleep, which I haven't done in far too long.

Until next time...

Oooohh!!!

Wow!

Need I say more?

Apologies for fading out recently. Long week.

Help with finding CDS pricing data

Can some benevolent reader out there help me by pointing me to a good source of pricing data for corporate CDS contracts? Not looking for anything esoteric, just the closest thing to CDS prices for standard corporate credits. No high yield, no loan only products, definitely not any asset backed paper, at least not right now. I'm doing a small, personal research project which hopefully will yield some interesting results I can publish here.

Why are there no independent prime brokers?

After seeing the recent Economist.com article on conflicts between hedge funds and prime brokers, I started thinking about what would be required to build an independent prime brokerage.

There's been a lot of noise about prime brokers front running their clients, hedge funds, and otherwise trading off information that funds would prefer was a secret. Considering that the prime brokers are just divisions of global investment banks, that shouldn't surprise anyone. There's also the competition between the trading desks at the banks and the fundamental business of many (most?) hedge funds -- trading. What kind of sense does it make to use someone who may be on the other side of a trade with you as your lender, clearing house and possibly an administrative services vendor. (Prop research has also been cited as a benefit for some of the larger primes.)

The smaller funds don't have much choice with this arrangement, obviously. At the other end of the spectrum you have Citadel, which is reported to be pursuing a broker-dealer license and is known to make a pretty penny lending shares to other funds (for short sales). However, I imagine that even a player like Citadel would like to see more autonomy and less competition with its primes (until it can settle its own trades anyway).

Now, the crossing networks and dark pools probably take some of the edge off of these potentially volatile relationships, because there are multiple options (besides having 2+ primes) for trading, and with anonymity and less market impact to boot. However, the primes do provide some services that most hedge funds can use on some level, or so it appears. So my question is "why not?" What are the upsides or downsides of an independent prime brokerage operation that was not competitive with its clients? Does the potential exist for this to be a viable business model? Why hasn't it already been done? Is it because of the "need" for a balance sheet to support customers? Or is the reason that it hasn't been done merely along the lines of "its never been done like that"?

Inquiring minds want to know. Ok, maybe not really, but I do...dammit.

Too Much Money Out There

I was already planning to write this before I saw the most sickening thing I've seen in a while.

What is that, you ask?

I saw a Mercedes CL class being driven with a spare tire in place of the right rear tire. The driver seemed to be blissfully ignorant to the fact that she's driving an almost $100,000 vehicle but treating it with the respect afforded a $2,500 used car. (I say almost because I couldn't make out the exact year or model of the vehicle. The late model CL500s based over $100,000.) The impunity with which she was engaged in this act was utterly repulsive.

How disgusting!!!

How could someone dare to disrespect such a beautiful vehicle by treating it the way one treats a rental car, or a secondhand Hyundai.

Now, why am I so ashamed to witness such a vulgar and vile mistreatment of a beautiful automobile (besides the fact that a Brabus tuned 2001 - 2006 CL600 is my dream car)? I am so offended by this because it proves what has been apparent for a while. There is entirely too much money sloshing around. I imagine the driver of this CL (probably a CL500, since that seems to be what all the wannabes drive) was able to refinance her house and take out the $95,000 or so required to buy the car. I wonder if she considered the almost $10,000 per year required to insure it. (The CL is the most expensive non-exotic auto to insure in the US.) I wonder if she takes the car in for the massively expensive required maintenance, or if she's struggling to pay for the 93 octane fuel required by the car, which I've seen at $3.50/gallon in the recent past.

Basically, just as certain people who had no business buying a house, there were (are) people who have no business buying certain cars. The fact that CLs have become sooo popular speaks to the general debasement of the dollar that the last few years have borne witness to. I've seen CLs with all manners of body damage and other indications that the owners have no respect for those vehicles.

A lot of people are renters for a reason. They don't make enough to afford a house, or they don't know how to respect their property (both house and money). The same goes for an automobile.

Or maybe I'm just an elitist.

*shrug*

The fact remains that there is far too much money floating around out there. This is just one particular example of too much credit being available that irritates me. We've seen this in other markets; just a little bit of thought and I'm sure most of my readers will notice other areas in which they've said similar things. These things didn't and don't make sense because of the issue of moral hazard. This has been on my mind for a while, because for a long time I couldn't figure out why I was seeing so many CLs on the road. The same dynamics which created the housing boom (a credit boom, really) were behind the escalation in the number of CLs. The CL is not an easy vehicle to acquire or own, and with good reason; for that many to be in private hands, there had to be excess money available for purchasing them.

I wonder how long it will take to start seeing serious resales of CLs. I await, nervously, the day I see one with a "For Sale" sign in the windshield.

The End is Near

Closer than anyone thinks, definitely.

And yes, I fully believe that we will not be successful. That's why I'm looking for the exit.

Just One More Google Thing

Sorry, but from what I've seen, its never good when the finance guy leaves. Nope. No way. Not good. Maybe its just one more bad sign in a sea of good ones, but its still a bad sign.

Thoughts on the Quant Crunch

Ok, maybe that's a bit extreme, I don't know that recent events in quant land can or should be called a crisis. Problematic - sure, especially if you're an investor in a fund that recently got hit. However, that's how this game works, right? There is inherent risk, no matter how much we attempt to mitigate it. Otherwise, we'd be discussing buying US Treasuries of varying durations, right? (Hell, there's risk there too but I really don't feel like attempting to have that discussion now.)

There was an interesting post recently over at AllAboutAlpha including interviews with professors David Hsieh and William Fung. Now, the part that grabbed me was the bit about the wide dispersion of a strategy giving rise to a factor or alternative beta. That is to say that when you have a small group of operators successfully using a strategy, the result is alpha generation. However, once that strategy becomes popular, the returns become due to alternative beta as opposed to alpha. I'll buy that.

Now, all of this discussion was taking place within the realm of hedge fund replication. However, the implications are pretty interesting. A crowded trade leads to alternative beta, thus shrinking the average returns that the strategy is responsible for. The once proprietary component of the model thus becomes yet another factor which can be included in a replicator's model. So now we start generating alternative beta without the need for the compensation overhead standard in the HF world. Why pay 2 and 20 for beta of any kind?

The moral of the story would appear to be that you have to keep those proprietary factors fresh. There are only so many original ideas; most success comes down to the execution of the idea. The quant analysts will have to keep constantly on their toes in order to bring new strategies to the table which can successfully generate alpha.

As for the matter of hedge fund contagion which has come up recently in many venues, it appears to me that the NY Times is off the mark. The illiquidity of investments in hedge fund portfolios caused those funds to sell off liquid investments in order to cover redemptions and margin calls. At least, its a reasonable guess that seems to fit the observations of hedge fund professionals who have commented on the matter. Maybe I missed something, but it looked like they were a bit wide on that shot.

As for this piece over at the FT, we again see the need for refreshing the prop factor pool, and I'm sure people smarter than me are looking at how to model the perturbations caused by all of those operators crowding a strategy. The last thing any HF operator wants is his prop factor to lead to alt beta, right?

In the end, it looks like a lot of quants got caught for various reasons. Some were probably legitimately in the wrong place at the wrong time. Of course, aren't they paid to be elsewhere at the wrong time?

*shrug*

This reminds me of Finbar's recent note wherein he said:

The nearest rebellion I have seen is when one of my quants on 16 August told me he was switching all the long and short signals because he knew all the other models were tightly correlated. He made the fund 13% in one day and is now the proud owner of a Porsche (which he sold as he doesn't have a drivers license and bought at auction an early IBM 86 PC with box and instructions).

Others probably were swimming naked when the tide went out. I guess time will tell who falls into each category. But everyone takes a loss sometime. I should know.

Time to get to work on my trading model...

Disconnected

That would be me. I'm in the process of moving from one inexpensive place to one much more expensive place, and with an overlapping month of rent.

*sigh*

Since my cable modem and router have already made the move so that my roommate can get online, I find myself without Internet connectivity during the day. Given that I work at night, I sure sleep better, but finding moments to update this blog will be tough for a little while. Just FYI.

Anyway, I'm working on some things that I thought I'd have out before the end of August, but it doesn't seem like anyone is around to read so I don't consider it a loss. Watch for the hook...

Inside the Googleplex

Hmmm.

I admit, my Google interview was a bitch, and I didn't get the job. More and more, I'm glad I didn't, and I see that sentiment from other places as well. I first had a call from Google in 2002, one week after starting a new gig. I had a phone interview in fall 2005 when I had been awake for about 18 hours after working all night, so probably not the best conditions for high performance. But I blew it, plain and simple. The interview was fun, in a masochistic sort of way, but I digress...

I personally think Marc Andreessen's Law of Crappy People will eventually infect Google, if it hasn't already. The growth rate has just been sickening. The idea was that Google was minimizing its use of expensive humans by implementing cheap computing resources. 13,000+ employees and growing? Ha! (That's based on the Google recruiter e-mails I still get.) Would I short 'em? Not yet, but I haven't done any extensive research either. However, that time is coming.

Just a thought.

This post brought to you by Blogger, a Google company. The link to the Wired article is courtesy of Google's search engine. Oh, the irony!

Money Never Sleeps

I have to admit to being excited about this, as a follow up to the earlier news. I can't wait to watch this come together!

You may return to your Gekko-free lives. For now.

Blog Updates

You'll notice some updates in the recommended sites along the right margin of the blog. As I've been catching up on my reading, I've come across a gaggle of informative sites, including a bunch of real estate sites dealing with the Washington, DC area.

The first among the new sites is The Realinvestor, the blog of Sherman Ragland, a well known investor in the DC metro area. Sherman is also the head of the DC Real Estate Investors Association (REIA) of which I am a member, and he's generally a nice guy. His writing is and speaking is generally insightful and useful, even if its a bit inaccurate with some of the finer details of the financial machinery. We won't hold that against him. :-)

You'll also find the Baltimore Housing Bubble blog and Inside the DC Bubble as new additions. Both go into nice detail about their particular markets, clearly written from the perspective of residents of each city. "On the ground" analysis is always welcome. Patrick.Net contains a running tracker of major RE news stories from around the country along with commentary.

Under alternative investments, I added The Aleph Blog which provides really awesome yet readable commentary on markets from the perspective of a professional investment analyst.

In the news site category, I added the International Herald Tribune. I like their website, especially the layout, which helps promote readability. IHT helps round out my international reading, along with some sites I have yet to add. Those are forthcoming. You'll also notice the addition of Here is The City to the news category. I just found this site courtesy of my friend Finbar Taggit, and again, it adds to the diversity of news sources.

Under business sites we have The Epicurean Dealmaker, an wonderfully entertaining and insightful blog from a seasoned M&A banker. I can tell I'm going to expand my vocabulary by reading this one.

So, those are the newly recommended sites, for anyone who hadn't noticed. I hope you find them as informative and enjoyable as I do.

Time to get back to work...

The Costs of Staffing a Mansion

Leave it to the WSJ to be all over this one! In case you were wondering, its bloody expensive. My question is when did 5,000 square feet of house become a mansion?

Legal Crime

Or is it?

I guess brainpower only goes so far, as the recent quant rout shows.

It Is Coming

Interesting perspective over at FinanceAsia.com from a credit risk management head at an investment bank. Not that any of this should be surprising, but it will be interesting to see just how accurate this prediction is. I personally don't think anyone will get away clean either.

Doubling Down?

Wow. I have to admit that when I read a story like this, my appreciation grows for the legal crime that now seems to masquerade as private equity.

An issue that pops up for me is this - if a PE firm acquires debt in the secondary market from one of its own acquisitions, isn't this doubling down on what is a clearly a weak investment. I mean, the ratios to EBITDA that deals have been done for over the last 12 - 18 months have been sick. 9x EBITDA? WTF? How does this make sense to anyone. I haven't lived through that many complete market cycles and I can say that it doesn't even pass a sniff test to me. If returns are going to be weak (or even horrible) on the latest vintage of PE deals, and a firm goes in and acquires the leveraged loans of one of its targets on the secondary market, they would seem to be dooming the IRR on that deal in the long run. (Of course, that depends on how cheap the debt gets and how much equity they put up originally.)

Still, I like this strategy overall. Its smart, if not ingenious. It maintains the PE firm's control over the target. It saves face with the investors, if they even know what's going on.

Anyone carrying a gun to commit theft is a rank amateur!

Until next time...

Quick REI Musings

Isn't it fun watching to see who was swimming naked when the tide goes out?

Man, real estate investing definitely got harder in some key ways over the past few weeks. No surprise there, even for someone like me who was in the hospital last week. However, there is opportunity here. I've been dealing with another investor for a number of weeks over some properties he wants to unload. I think these conditions will help him see that if he wants out of these investments, he's going to have to give up some of his ideas about the number he wanted/wants. Of course he could always sell to some out of state buyer who thinks they are getting a steal. (Damn New Yorkers and Californians! I hate those fuckers!) However, I don't see that happening. I deal with the man all the time and I can barely get an appointment with him. I have his cell phone number, and I'm certain he doesn't just give that out to anyone. We've got a multi-year relationship.

For those who read this blog and have seen me post on Baltimore real estate investing, all I have to say is "whoa!" That's it. Whoa! Man, so many people will take it in the ass in Baltimore that its going to look like a bad prison rape porn flick. I love it, because I won't be one of them. Yay! To be the last man standing, that's the plan. The credit rating is becoming immaculate. The cash is waiting and growing, albeit a bit more slowly than I'd like but it is still growing. Relationships are being forged. All I need to see is a bit more blood. Soon, I think it will be time to attack!

Whoa!

Quant Correlations

Sorry, but I found this one quite funny. Even though I was out of it last week, as I get caught up, this story stays on my mind.

So if all of these quant funds are sitting on proprietary models, where was the protection? Where were the hedges? How much leverage was/is in play? Liquidation obviously spread to other markets so that these funds could meet margin calls and generally de-leverage.

From my reading, the valuation factor was what kicked most of these in the ass. Stat arb plays got reversed, shorts had to be covered while longs got whacked. Beautiful! Now, I recall seeing an article that mentioned comments from someone at Goldman to the effect that they had too much weight on the valuation factor and not enough on their proprietary factors. So here's a stupid question - why? Aren't the proprietary factors what earn you your money? I mean, it doesn't take a genius to figure out that most of the quant funds were executing similar strategies and even similar models. How much originality can there really be? No idea is original, in my opinion. However, everyone can tweak their models in various ways, and that should be where the money is. So if Goldman had proprietary factors in their model(s) which were not being weighted as heavily as standard valuation models, you really have to wonder what you're paying for.

Don't get me wrong. This is not simply a Goldman issue. It looks like lots of quants got dinged on this one. Highbridge, AQR, Campbell & Company and Renaissance are just a few of the names I've seen reported. Clearly there were more, although some probably got out sooner, or have held on longer. (Even though I doubt that last one, because anyone who got whacked for a larger percentage than Goldman was going to be outed by an investor.)

Anyway, I have to admit that although I am taking a serious hit in my portfolio, I am enjoying watching this credit crunch and sell-off. Do I like losing money? Oh hell naw! However, the day of reckoning was long overdue. Thankfully I have some cash available to put to use. I've been waiting for this, particularly in the housing market, for years.

Until next time...

Update: I found one of the articles talking about these "crowded factors".

In Search of New Employment

I have finally decided to pursue the dream of finding employment in the world of alternative investments. It has not been easy to make this decision, since it is completely foreign to the world with which I am familiar (technology). However, I have felt myself stagnating in the technology realm since leaving California in 2002. Now I look up, 5 years have passed, and its all a blur.

I miss the excitement, the energy, the fear of working in a startup. As much as I would love to find something similar in the technology arena, I'm not sure such exists in the Washington, DC metro area. Pretty fuggin' sad, actually, but wholly unsurprising.

Finance has always been a personal interest of mine, literally since I was a kid. I mean, I had the audacity to attempt to calculate the value of the contents of Scrooge McDuck's money bin using the prevailing per-ounce price of gold in the mid 80s. Of course, I was guided into other arenas by well meaning but unfamiliar people in my life but such IS life. I've maintained my interest in markets, finance, and how money works through all of those changes and it has even grown significantly. The whole "game" (if I may use that word) is fascinating to me.

It has become clear that a new challenge is in order. I like what I do (whom I do it for, that is another story). However, among other things, writing this blog has shown me that I need to actually start playing full on w.r.t. to this "hobby". Consider this the first step.

I would love to find an analyst position within a hedge fund or PE firm, although after this past week, employment with the former may be a bit difficult to come by. I'd even consider a technology position within one of these entities, as a stepping stone to becoming an analyst and then into portfolio management. I'm completely open. What I do know is that my current situation isn't working. So, with that said, from time to time, don't be surprised if I use this space to document my trials and tribulations in searching for employment in the world of alternative investments.

Until next time...

Disappearing Act

I have to apologize to all my readers for my disappearance from last Tuesday, 7 August until today. I was hospitalized for a Sickle Cell crisis from Tuesday through Friday, 10 August. It was the first time I've had a crisis that bad in over 3 years. Of course, I missed all the fun in the markets, which really sucks ass. But I have to apologize to you all since I know that I'm supposed to be on the front lines, commenting on what I see. For that, I do hope you'll forgive me.

Domain Name Auction

The auction for one of my domains has started. I won't have an idea of the results until later in the week, as it is part of a silent auction. With any luck, I'll be 1 domain lighter and several thousand dollars richer by the time this auction ends. We'll see how it goes. In the meantime, I've been listing my domains with all the marketplaces I can find. Now to start actually developing my crown jewel to get more interest and possibly even some cash flow!

AHM Underwater

Boy, I'm glad I didn't buy that AHM (WSJ.com sub req'd) when I was thinking about it! I mean, I believe in my stop-loss orders and all, but the best way to prevent a loss is to avoid it outright.

Now, it will be interesting, purely as an observer, to watch what happens to AHM going forward. My partners and I have used AHM for the majority of our loans in Baltimore. While we're still performing, we'll definitely be looking for a new source of funding. That will be easier said than done.

90% haircut in one session. Its crazy to think that I was leery of them with a yield of 17%, ain't it? I liked the numbers, but given the expected (now realized) turmoil in real estate, I foresaw problems with their stock price even before this blowup. Now there aren't even earnings to calculate a P/E. Dot com, anyone?

The lesson to be taken away from this, if it wasn't already clear, is listen to your instincts.

Citadel Loves a Company in Misery

How interesting that this piece should run in today's Journal. (WSJ.com sub req'd)

From the sound of it, Citadel is definitely moving to become a market maker. You have to wonder when it will go for its broker-dealer license.