I just finished reading an FT article stating that Merrill Lynch's Sandy O'Neil approached Wachovia bank regarding a proposed merger without the courtesy of discussing this beforehand with his board. Naughty!
For those of you who are youngsters, you many not remember the names of Michael Miliken and Ivan Boesky--but they were at the center of the firestorm in the 1980's junk bond debacle. MM worked for Drexel Burnham Lambert--the 5th largest investment bank in the US. They are no more.
You will remember distinctively how we were told in Mar/Apr and all of the ensuing months until August during the great credit meltdown (or credit freeze, you pick the temperature!), that there was nothing to fear. It was isolated.
This credit *stuff* is like a sticky booger. (1) You you flick it away--that in itself is not easy if it is a particularly obstinate booger. But assuming you are successful, you flick and mistakenly think that you are done with it. You're not. That booger only sticks to something else and causes problems. And because it is sticky it attracts all sort of things.
The sticky booger of the 1980's was junk bonds. The sticky booger of the 1990's was the Savings and Loan fiasco. And now the 2000's have the CDO and all of the derivatives to embrace and call their very own. Remember how benign this started out.
I know that it is difficult to know what is real fear and what is vague, brick-in-the-wall-of-worry you-should-forget-about-it- fear. In order to distinguish between the two, you must imagine a point in time in the future where you might be forced to say, "I should have known better."
And for the life of me, I have to question the precarious ETHICAL situation that Goldman Sachs is in. They profited from the issuance of much of this crap, yet they bet against it to make lots of money. I think that it is one thing to bet against the failure of something that you had NO hand in creating v. betting against your own creation that you sold to other investors. Admittedly, the prospectus is very clear on the risks, but I'd expect my investment banker who was taking the opposite side of the trade to steer my money elsewhere. You're not seeing any press on that, are you?
(1) I credit this metaphor to our IT geeks at a company that I worked for. They were hired guns. But they were really good. Two brothers. One of them was talking about computer viruses and called them like a sticky booger--
11 comments:
Refilled the shorts on this morning's pop. Need some good longs I can hedge this with. I am thinking about selling puts on Grantham's High Quality list.
Cat of Two Faces
Well-written post.
The issue for us peons is whether or not to be fully invested, and discount the credit problems to a major degree, or to be fully out of the market in anticipation of the market indexes either decaying or crashing.
From reading this and past posts, it appears (to me, anyway) that you are more inclined to be out of the market. As I recall in July you said you sent letters to your friends advising them to be cautious. I am wondering what you say to them today in light of the most recent events including the problems at Merrill and the other financial houses.
Related to Merrill's problems, I also think that its important to look at the effects of the housing bust on the markets. Housing has been in a severe decline since 7/05 (arguably the worst decline ever), yet the markets, consumer spending, employment, GDP, bond rates, etc., i.e., all the significant indicators of the relative health of the economy, have not been affected.
Oil has tripled in cost since 2003 and has not affected our economy, as measured by GDP growth and even by overall CPI.
My intuitive curiosity suggests that the situation may not be as severe as reported. Studying the data behind the headlines helps to clarify my opinions. I believe this "credit crisis" is in fact vaguely quantified and mis-understood by the media and thusly over-reported in a negative light.
To blame market manipulation by the Fed or the Treasury (as many bloggers do) shows little more than ignorance. The manipulators may have an effect on prices for a few days or couple of weeks at the most, but the underlying market fundamentals eventually take over.
Using your analogy, I would characterize this credit crisis as a bunch of boogers that bankers and hedge fund investors are trying to flick on each other. I do believe, for now, that most of this will not affect us, and have tailored my investing position accordingly.
Janus Cat: This market will be *funny* until the Fed meeting. Though, I truly thought that someone would be disappointed last time. They market's cup ranneth over!
Anon: Thanks for your nice comment. The letters that I sent to my friends was to look at their portfolios with their financial advisor. So many do not look and readjust. Monster performing stocks/sectors may need to be redistributed. From my friends, I hear that their advisors are not proactive in calling them and giving them advice on this sort of thing.
Regarding being fully in or fully out, I would suggest that there is a middle ground. That we have the floating of a SIV vehicle suggests to me that the problem is bad and will continue. But who really knows? I do know this, those that know will not fully disclose until there is a remedy in place. In fact, if I were in that position, I would likely decide that course of action as well. To talk about a problem without having a fix (whether in your work or personal life) is not terribly constructive.
I do not think the effects of housing etc have been felt. Why? Because construction was still being completed...so much was in process you have to build the house to get the financing. New jobs were not created, and job loss was contained. I would expect to see that pick up with the financial institutions scaling back.
I'm not in the camp that the credit crisis has been over reported in a negative light. Based on my own study, I believe that it has been underreported. If it had been reported correctly, mid August would not have caught so many by surprise. Is the worst over? Look at a chart for MTG--one would have thought that all of the news had bee factored in. YOu'll see that they took a few whacks at that one.
The market always over-reacts one way or the other. The trouble is, real time, you don't know where you are at on the pendulum path.
What makes this *stuff* so dangerous it that it is fixed income arbitrage which requires lots of leverage. The news that surprises me is that we've not heard of more hedge funds blown up. I'd feel more comfortable if I saw some of that--but that may very well be one of the problems that the banks are having with these SIV's. They've loaned to HF's and the HF's cannot price or offload it to meet margin calls.
Washington Mutual was the first reported case that I heard of where the producer of loans was betting against their own loan portfolio. The WSJ reported that some time ago (at least a year - maybe more).
I have done my sayonara at BC's blog. That likely is my last meow anywhere. It's time to just let the Black Box run. It is doing well. (Much better than I!)
I tried to help some people. I think (and hope)I did. I pissed off some people. I live with my mistakes. I own them and they are mine.
Thanks for taking me in for a short awhile while I worked a few things out.
Best of luck,
MarkM
MarkM...you will be much missed. But the door is always open here, and you have my email. Please keep in touch and take good care! Thanks for your contributions.
MarkM, we hardly met!
Don't go away! Please!
MarkM:
I am so sorry you are checking out...my belief is that you are one 'wise guy'.
I will continue to watch for you.
Regards
joey
mark-
you made a well-timed call on the gold sector august 16. only need to be right once or twice a year. the bear will play out. the really good traders just sit and let their projections play out. will miss your posts, hope you change your mind. good luck, my friend...
2nd_ave
MarkM,
I know you and BC had some misunderstandings over some comments, I hope that is not the reason for you leaving.
Yes you may have pissed off some people, but that's not your mistake IMO.
What about all this mystery, why not tell us why you do not want to post.
I bought WAG after your comments and it's doing good!
Hope you will come back.
JogyP
Yes Bill and I did have our issues. Those were never resolved to my satisfaction, true. It is one of my biggest disappointments.
Yes I did make some calls for his readership. The July top,the impending gold stock rally, last year's top as well. I hope some people benefitted. That would assuage the cut.
So I appreciate everyone's concerns. This is NOT some PERFORMANCE hang-up like someone suggested. Good Lord. I could almost care less. This is about good use of my time, a fair return on it, and feeling good about what I have accomplished at the end of the day.
So if anyone cares here is what I am going to do. I am going to spend even more time with my girls. I am joining a committee at my church. I am doing pro bono work for my hometown in the area of economic development and I am going to ramp up my exercise program. I have this wish/dream that I can be more fit at 50 than I was at 28. I think I can do it. What I am NOT going to do is obsess over the markets. I have my Black Box. It is running and doing well. I am going to keep my hands off of it.
Now, with that I am off. Thanks everyone who wrote. Thanks Leisa for the shout out. You are a good person. It shows through in your writing. Don't let the detritus of Wall Street foul your propeller my dear.
And sweep out The Woodshed from time to time, would you? You never know who may drop by for a visit.
Best,
MarkM
Post a Comment