09 August 2007: DJIA 13,270; C 46.90; MER 76.25
Merde! Who would have thought that a boring old French bank could make such a complete mess of its hedge funds (that I didn’t realize anyone actually bought, apart from some overfed French farmers looking to invest all the subsidies they get for sitting around drinking wine and eating cheese all day). You just don’t expect a French bank to have such a major impact – a 387-point impact, to be precise – on our market. But the toxicity of those four words – ‘complete evaporation of liquidity’ – was enough to send us into meltdown. Merci beaucoup!
Which is a shame, just as we were coming off the back of a little rally, the resignation of Warren Spector, Bear’s co-president, notwithstanding. The bulls were back, helping us all to some serious gains just a couple of days ago. Then these damn Frenchies come and bust up the party. No wonder nobody likes them. I’m never eating French fries again.
When I think of Europe, I think of England. Over there it’s all positive. They’ve had Tony Blair doing a fine job, helping us to try and tame those terrorist towelheads, whilst Gordon Brown has been masterful at running the economy and letting the finance sector get on with its primary task of making money without too much interference. No wonder old Gordie said that this was the start of a ‘golden age’ for those boys in London. I envy them.
Thinking of Mr Brown reminds me that we’ve not made much progress with our London operation. There are plenty of frustrations, even though they reportedly speak the same language as us. We want some nice offices, but the realtors are asking too many questions, trying to make us disclose far too much about us and our business plans. Hey, I only want to sit at a desk, not be the father of your children! What’s all this caution about? We’re a good, decent, honest firm. Trust me.
We’re also hearing the first stirrings of doubt about whether UK pension plans really want to go any larger into alternatives. Consultants say that they are all pretty troubled by mortgage-backed securities, and this French news certainly won’t help any. They cannot see past this little blip to the bigger picture: volatility is good. We love it. You can only make truckloads of cash when there’s volatility. Stability is for politicians and economists. Give me boom and bust any day (which is where I part company with Gordon, who claims to have abolished it. Yeah right – not if old Larry has anything to do with it.)
I wish we had a Treasury Secretary with a much gravitas as Brown. Hank Paulson is so inarticulate he can hardly put one word in front of another. Add in the fact that nobody believes he does anything unless it’s going to benefit Goldman’s and you have a guy who is pretty much a joke from where I’m standing. Fortunately it doesn’t matter too much as he doesn’t really have a lot to do. He makes some speeches and issues reassuring statements about how strong the economy is, but the real power lies elsewhere. He just takes the flak when it all goes wrong.
The question we have to answer is: is it all going wrong? Paulson says no and, more importantly in my view, the Fed sounds confident. All the bets on it having to ease the Fed Funds rate turned out wrong. It said that it reckons the economy is likely ‘to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.’ Thanks, Mr Bernanke – I’m with you on that one.
That said, central bankers don’t sound too confident today. What I’m hearing is that all the big central banks are going to start pumping liquidity into the system. That’s good and bad, but not necessarily in that order. Paribas has got this whole market spooked, and what with Bear and Countrywide, people are starting to wonder if we aren’t reaching a tipping point.
I sure hope not. I haven’t exactly been meeting my job description as a hedge fund manager recently. I’m not too hedged on anything. I really would like this bull to run a little more, just until I can close, adjust, burn or lose some of my positions. In this business, they say that timing is everything. The people who say that don’t know how right they are. It’s not just about when you sell or buy – there’s also a real skill to knowing when to book the profit (or loss) to the clients’ accounts. That really can make all the difference. And a few more months of upward momentum would certainly help me to get the performance numbers looking just peachy. Knowing how to account for that performance is just as critical as the performance itself, if you want my opinion.
Take the Thai Baht position. As of today, that looks excellent. At 31.10, we’ve made 34 million and change. Now, you give that back to the clients – less, of course, our 20pct performance fee – and they are as happy as hogs in dirt. It therefore follows that so are we. But that’s not necessarily where it ends for us. Say we still felt bearish about the Baht. Clients have their profit booked, so they’re made up. But were we to run the position until year-end, and it got down to, say, 29 or so, we’re looking at additional profit of 16 mill. That’s for the firm. We close it out, net off the interest cost of the 250 mill we’ve had to borrow because we needed to give back the original client money that funded the transaction, and the rest is all ours. That’s the beauty of performance accounting. We manage it.
Compliance guys and other back-office lamebrains just don’t get it. For them, it’s all about process. But, as I keep on telling them, this is a dynamic business. If we are constantly worrying about the paperwork and the niceties of accounting conventions, we’ll never have any time to make money. At the end of the year, when we’ve earned that huge pot of money, we go hire some hotshot accountants to put all the right transactions into the right buckets. Everyone’s happy, and everyone’s richer than when we started. Do you really need an MBA to work that one out?
Wednesday, 24 June 2009
Wednesday, 3 June 2009
GOLD, VIX AND THE ODD MARTINI
27 July 2007: DJIA 13,265; C 46.97; MER 77.31
So, just the small matter of a 5pct drop-off in the Dow in the space of eight days. All those margin players, closing their books and taking their profits – they disgust me. That is not how we look at things. This is nothing more than a blip. The tide is rising and the SS Curveball will be cresting it. People who worry about inflation, durable goods or the price of oil are simply ignoring the fundamental fact that this market still has a way to go before it peaks. This is a buying opportunity.
There’s actually a consensus within the smart money community. You don’t hear the Wizard of Wharton - (my favorite analyst Jeremy Siegel) - telling people to sell stock and head for the hills. Far from it. He’s been consistently bullish and consistently right. In a note, he’s said that the market is oversold and that it could be in line for a sharp bounce. He’s telling the great unwashed to get out there and buy some quality stocks, which are unaffected by any credit tightening. In the Wizard’s view, there’s been an overreaction to the sub-prime issues.
We’re in tune on this. I still see the market going north. But where I disagree with him a little is that I think PEq is a big driver behind market strength. These PEq firms are trying to buy up anything and everything, so prices go up (though not necessarily values). Sure, there will be setbacks when these firms get too greedy – Chrysler and Alliance Boots – but there’s still a huge appetite for deals.
We looked at becoming a PEq player. Plenty of our rivals have gotten into the space and made money. Problem is, it’s a hands-on type of business and we don’t do that. Basically, we don’t care if a business does well or badly, as long as we’re either long or short of the stock. We don’t want to be in there on only one side of the deal, worrying about inventory and human capital (whatever that is) and all that stuff. We’re traders.
My triple-barreled amigo from Lehman calls. They’re taking some heat on account of a rather heavy exposure to CDOs. Bear has already taken its beating – the BSC stock has dropped by 24pct since June (and I’m still short) – and now Lehman seems to be taking up where Bear left off. Jules is all sweetness and light, pointing out the differences between the two firms and assuring me that all shall be well and all shall be well and all manner of things shall be well. Like I care. But I need to get Art into gear and establish just how many prime brokerage relationships we could have, because Lehman is beginning to scare the hell out of me just as much as Bear. Sometimes you look at pictures of Dick Fuld and wonder if he’s carrying a piece of shrapnel in an important part of his anatomy.
Anyway, I thought I’d give Jules a little cardiac jolt by asking him if he’d got any Lehman stock I could borrow. Like every good broker, he was torn between the prospect of making some money out of the deal, or defending the honor of his employer and saying that they felt unable to lend their own stock. Jules took less than half a beat to square that one. “How much were you looking for?” he asked. That kid could go far.
After that, it was into David’s tank – the windowless meeting room attached to his office where we hold the most sensitive discussions – to talk over the day’s events. Otherwise intelligent people have been selling off gold, such is the panic about this temporary correction. But it has spooked David and he needs to be stroked and humored. If he’s not, we might have to liquidate some positions that would be very painful, both to me and clients (although not necessarily in that order).
“Is this the start of the meltdown?” he asks. Where can you go from there? The guy has clearly been watching the wrong channel. So, to keep him off my back, I agree to go through all our positions and explain their logic. Macro stuff, nothing too detailed – there are some things that, for now, need to remain in my locker. For each asset class there are questions, challenges, and an uncomfortable debate about the cost of unwinding trades or, ironically I guess, hedging our exposures, which is kind of what we’re meant to be doing in any case.
I have to give in on some bets, but I manage to hold on to the key elements of the Special Fund, which is bearing up pretty well. The good news is that David encourages me to take more short positions in certain sectors; the bad news is that those sectors – like construction and financials – have already been shorted to hell. I’ll have to come up with some fancy synthetic trades that get us the exposure we want at a price that gives us some flex. That’s why you’re paid the big bucks, Larry!
He doesn’t like the upside potential of the market. He thinks that we should be following some others who are buying index puts to hedge against a market decline. We have a bit of a discussion about this one. Puts are expensive, blunt instruments. The VIX is high precisely because people don’t have a clue what’s going to happen next, not because a fall is inevitable. I want us to be more forensic and go stock-by-stock if we’re going short. A lot of S&P firms are long of cash on the balance sheet which makes them attractive to PEq firms, so this baby has got a way to go yet.
David wants to think about it. He’s got some PEq buddies who are going to share a bottle or two of triple-filtered mineral water tonight so he’ll ask them. Thanks chief: that’s a real vote of confidence. I’ll be chewing my way through the martini list at The Lenox while David checks out my theories with a bunch of overpaid asset strippers. But it’s worth holding my tongue. If he needs to do that, fine. The market has traction and the PEq boys know it. They’ll confirm what I already know. This is nothing more than a nervy correction, driven by traders with no cojones.
So, just the small matter of a 5pct drop-off in the Dow in the space of eight days. All those margin players, closing their books and taking their profits – they disgust me. That is not how we look at things. This is nothing more than a blip. The tide is rising and the SS Curveball will be cresting it. People who worry about inflation, durable goods or the price of oil are simply ignoring the fundamental fact that this market still has a way to go before it peaks. This is a buying opportunity.
There’s actually a consensus within the smart money community. You don’t hear the Wizard of Wharton - (my favorite analyst Jeremy Siegel) - telling people to sell stock and head for the hills. Far from it. He’s been consistently bullish and consistently right. In a note, he’s said that the market is oversold and that it could be in line for a sharp bounce. He’s telling the great unwashed to get out there and buy some quality stocks, which are unaffected by any credit tightening. In the Wizard’s view, there’s been an overreaction to the sub-prime issues.
We’re in tune on this. I still see the market going north. But where I disagree with him a little is that I think PEq is a big driver behind market strength. These PEq firms are trying to buy up anything and everything, so prices go up (though not necessarily values). Sure, there will be setbacks when these firms get too greedy – Chrysler and Alliance Boots – but there’s still a huge appetite for deals.
We looked at becoming a PEq player. Plenty of our rivals have gotten into the space and made money. Problem is, it’s a hands-on type of business and we don’t do that. Basically, we don’t care if a business does well or badly, as long as we’re either long or short of the stock. We don’t want to be in there on only one side of the deal, worrying about inventory and human capital (whatever that is) and all that stuff. We’re traders.
My triple-barreled amigo from Lehman calls. They’re taking some heat on account of a rather heavy exposure to CDOs. Bear has already taken its beating – the BSC stock has dropped by 24pct since June (and I’m still short) – and now Lehman seems to be taking up where Bear left off. Jules is all sweetness and light, pointing out the differences between the two firms and assuring me that all shall be well and all shall be well and all manner of things shall be well. Like I care. But I need to get Art into gear and establish just how many prime brokerage relationships we could have, because Lehman is beginning to scare the hell out of me just as much as Bear. Sometimes you look at pictures of Dick Fuld and wonder if he’s carrying a piece of shrapnel in an important part of his anatomy.
Anyway, I thought I’d give Jules a little cardiac jolt by asking him if he’d got any Lehman stock I could borrow. Like every good broker, he was torn between the prospect of making some money out of the deal, or defending the honor of his employer and saying that they felt unable to lend their own stock. Jules took less than half a beat to square that one. “How much were you looking for?” he asked. That kid could go far.
After that, it was into David’s tank – the windowless meeting room attached to his office where we hold the most sensitive discussions – to talk over the day’s events. Otherwise intelligent people have been selling off gold, such is the panic about this temporary correction. But it has spooked David and he needs to be stroked and humored. If he’s not, we might have to liquidate some positions that would be very painful, both to me and clients (although not necessarily in that order).
“Is this the start of the meltdown?” he asks. Where can you go from there? The guy has clearly been watching the wrong channel. So, to keep him off my back, I agree to go through all our positions and explain their logic. Macro stuff, nothing too detailed – there are some things that, for now, need to remain in my locker. For each asset class there are questions, challenges, and an uncomfortable debate about the cost of unwinding trades or, ironically I guess, hedging our exposures, which is kind of what we’re meant to be doing in any case.
I have to give in on some bets, but I manage to hold on to the key elements of the Special Fund, which is bearing up pretty well. The good news is that David encourages me to take more short positions in certain sectors; the bad news is that those sectors – like construction and financials – have already been shorted to hell. I’ll have to come up with some fancy synthetic trades that get us the exposure we want at a price that gives us some flex. That’s why you’re paid the big bucks, Larry!
He doesn’t like the upside potential of the market. He thinks that we should be following some others who are buying index puts to hedge against a market decline. We have a bit of a discussion about this one. Puts are expensive, blunt instruments. The VIX is high precisely because people don’t have a clue what’s going to happen next, not because a fall is inevitable. I want us to be more forensic and go stock-by-stock if we’re going short. A lot of S&P firms are long of cash on the balance sheet which makes them attractive to PEq firms, so this baby has got a way to go yet.
David wants to think about it. He’s got some PEq buddies who are going to share a bottle or two of triple-filtered mineral water tonight so he’ll ask them. Thanks chief: that’s a real vote of confidence. I’ll be chewing my way through the martini list at The Lenox while David checks out my theories with a bunch of overpaid asset strippers. But it’s worth holding my tongue. If he needs to do that, fine. The market has traction and the PEq boys know it. They’ll confirm what I already know. This is nothing more than a nervy correction, driven by traders with no cojones.
Subscribe to:
Posts (Atom)
