Game NOT Over

I'm always a big fan of waiting until the buzzer, but since I'm not advising Team Chicago, I digress. Let's hope this doesn't blow up in their face.

From Where I Sit

It looks like McCain is set on spending the last few days in what I like refer to as the default loser, "I'm not him" position. I explain and then finish up after the jump.

-Todd and James are two guys that have a HUGE crush on Sarah
-They both decide to pursue her because...well, because she is a serious hottie!
-Sarah decides to give both James and Todd a chance to woo her
-Todd spends his time telling Sarah why she shouldn't date James
-James spends his time telling Sarah why she should

I personally don't click with leaders who take this type of default position. Why? Because they're not offering anything on their own merit. In the example above Todd is essentially telling Sarah to choose him because he is not the other guy...who the heck would want that?

1 Person 1 Vote

I'm sure you already know this but living in a clearly red or blue state means that your presidential vote is not equal to that of a voter in Florida in 2000, Ohio in 2004 or what is seems like is a slew of swing states this year including CO, PA, VA, et al.

I'm a huge fan of 1 person, 1 vote, for the life of me I cannot figure out why our government hasn't changed this yet. I can only guess that one party thinks that replacing the electoral college with 1 person 1 vote would increase turnout which is not in their best interest.

Matt Ygleias talks more about the national vote here

My Top Issues...Going Forward

I love that term "going forward" so many consultants use that, as if clients actually want to go backwards. It's hilarious everytime I hear it, I mock it without remorse, but I digress.....

As the election nears, and the excitement builds to a crescendo, I thought I would put together a list of the top things that concern me regarding our (not my, but our…as in all of us…together) future as Americans.

Education: I definitely would like to see our pols at the local, state and national level make a concerted effort to encourage a stronger educational structure from K through university. We are not producing enough mathematicians and scientist, period. This is important because math and science nerds (jk) create and invent combustible engines, computers, algorithms, processors and a lot of other good things that move our society forward. America competitiveness on the world stage is directly related to us being able to invent and EXPORT technology that keeps us ahead of the curve…we can be a major producer again, but we can’t keep looking backwards and trying to support sagging industries.

Security: I don’t like the term Defense, because it’s myopic in that it reduces our National Security to war and intelligence, which are very important but should also be tied closely to diplomacy and not the perfunctory kind. I know there is a small subset of our populous that has been marketed to over the last 8 years and thus likens diplomacy to being a sissy. I actually disagree and like the tone of former Undersecretary for Defense Dick Armitage when it comes to security. He essentially said that we should do everything in our power to avoid using force, but when it is needed it is going to be strong, decisive and quick. This is done so that your enemy, and everyone else watching, never makes the mistake of thinking they can challenge you.

Taxes: I was lucky enough to go to a pretty good university and then catch on with a Top Tier consultancy. I was trained well, had exposure to top flight executives and directors and learned a lot very quickly. This allowed for me to draw a pretty decent salary starting at a relatively young age. Couple that with my investments and I’ve done pretty well, I’ve undoubtedly been blessed. The easy thing for me to do would be to complain about paying more in taxes. Or how I’m gonna get soaked on new cap gains or how we should just have a flat tax so I can keep more of my money. IMO those arguments are bull. Very few people “pull themselves up by their bootstraps” in a vacuum, there is always help whether you know it or not, direct or indirect. And most of the time that help comes from the taxpayers.

Energy (Technology): This kinda sorta goes hand in hand with Education, but I isolate it because I think there is an opportunity (and now impetus) for us to focus private and public dollars on developing technology that will lessen our dependence on foreign oil. As a part wonk, one of my biggest concerns is that oil producing nations have the ability to literally bring our nation and other developed nations to a screeching halt by simply deciding to withhold oil; I want to lessen the upside of that card, should it ever be played.

Immigration: For the life of me I cannot figure out how Mexican or other Latino immigration should be viewed any differently than that of western Europeans during the past 200 years. NO immigrant group ever comes over educated, wealthy and nationalized. All immigrants typically come over poor, clinging to old mores and undereducated, but they all have one trait I like they’re hungry…metaphorically speaking. They are hungry for education, hungry to make a contribution and while the earlier generations usually cling to familiar cultural customs the American born generations desperately want to acclimate and like Europeans see themselves as AMERICANS with foreign roots. I think illegal immigration as the law is written should be enforced, but I think we should think revisit policy that deals with Mexican immigration apart from that. I have heard forward thinking counter arguments that parts of the southwest US could become too highly populated legitimately putting secession on the table, and that this wasn’t a problem with Europeans vis-à-vis the Atlantic. We would need to THINK CRITICALLY about this, but theories (dressed up as xenophobia) aren’t a good enough reason to not address it.

Greed, Excess and Government – Government Edition

Dylan Ratigan, a CNBC personality who has easily been one of the best financial reporters since the crisis began, is fond of saying “greed and excess” meaning blame for our current situation rest with greed on Wall Street and excess on Main Street. I agree with that but would also add a third entity to that triumvirate…Government.

Like Crassus, Pompeii and Caesar these three are responsible for the health, direction, security and financial well being of a country with each playing a primary role, Wall Street the financier, Main Street the doer and Government the leader. Everyone’s important but some are more important than others, to borrow from Orwell. I think Ratigan, in his peerless objectivity misses this point. While everyone had a hand in this mess, it wasn’t an equal hand. Think of it like 3 criminals robbing a bank. You’ve got the stickup guy (dude with the gun), the code breaker, and the driver. The guy pistol whipping customers and shooting security guards is a lot more culpable than the getaway dude or the nerd brought in to crack the vault safe. As such, we begin this Greed, Excess and Government series with an examination of the latter…the most culpable.

60 Minutes just ran a piece on the current financial crisis detailing Credit Default Swaps (CDS) and the role they played in creating this global mess. As a reminder a CDS is just an insurance policy for a mortgage. In essence people who buy and sell CDS’s are simply gambling on whether or not you will pay your mortgage. 60 Minutes analogized this perfectly to legalized gambling, which is exactly what it is. The piece also mentioned that 100 years ago our government, in all its wisdom, deemed this type of derivative investment was too risky to the stability of the financial system as a whole and outlawed them. I’ll say that again, back in 1907 politicians recognized this was a problem and MADE IT ILLEGAL. Fast forward to 2000…our senators, President and congress decided that these types of derivatives no longer posed any threat to our financial system and legalized them with no regulation. So the beast that was originally put down because it was found too intractable for the traveling circus, was not only woke up but also allowed to roam uncaged and unguarded…that makes sense.

What did this legalization mean in non sardonic terms? That the financiers, who some could argue were just doing their job, could now leverage the system and push the financial envelope because the leaders gave them permission. What our leaders failed to realize in this construct is that while the financiers play an important role, by and large they operate by one tenet which is the Smithian theory of the invisible hand. This theory posits that a person (or entity in this case) should simply do what is in their best interest, because your best interest ultimately serves to better society at large. So as an example, if a broker were to find that he could legally make $10B on deal that would bankrupt several small regional banks and destabilize a local economy he would still make the deal because it’s in HIS best interest to get the money, local economies be darned. Now I’m not ready to cast off Smith, I like his work, he was obviously prescient in his analyses and I’m a capitalist. But our Leaders are not in a position to be smitten with ideology or 18th century treatise’s. They, like all good leaders, should be committed to practicality, critical thinking, unemotionalism, forethought and above all committed to the ultimate protection of the most vulnerable participants in this structure…Main Street. In this structure when Govt and Wall Street start playing footsie instead of keeping each other on their toes then it’s no longer a structure it’s collusion to the detriment of the doer’s.

I’m looking for Dow Jones…

The thing about day trading is that you can easily make $10,000 in a single day. The other thing about day trading is that you can easily LOSE $10,000 in a single day, as witnessed firsthand today. I guess Dow Jones, who had become a really good friend over the last two weeks, felt our relationship was too one sided and wanted some reciprocity. I think I’m gonna ask him to step outside if his selfish, recalcitrant behavior continues next week. In all seriousness though my colleague told me that in order to be a good day trader you have to remain unemotional about losses and gains, and in the end I'm still up so it's not so bad...bring on next week.

Decoupled? Really???

When this financial crisis began in earnest in early September there was much talk about how Brazil, Russia, India and China (BRIC countries) wouldn’t feel much effect because their economies were decoupled from the US, meaning that they just weren’t as dependent on America as they had been in the past. It sounded good then and still sounds good as an academic argument when I hear the talking heads espouse this view. The problem is that in practicality it makes no sense to continue to beat this drum and a person with a brain or an MBA (either one will do) can easily see why. I finish up after the jump.

Example: Christina is a seamstress, Rick is a Farmer, Pat is a carpenter and The Taylor Family is incredibly rich through centuries of inheritance. Originally Christina, Rick and Pat derived most of their income from selling their goods and services directly to The Taylor’s. However, as time went on Rick’s farm grew and he was able to buy MORE from Pat and Christina, meaning they could now sell LESS to The Taylor’s and therefore they were less dependent on them, or so they thought.

It turns out that Rick’s farm was growing only because The Taylor’s (the ones with all the money in this scenario) were buying MORE from him and he in turn was buying MORE from Chris and Pat. Once The Taylor’s decided to start buying LESS from Rick, what do you think Rick did with Pat and Chris bought more or less? So it turns out that they weren’t less dependent they were just getting The Taylor’s money from Rick instead of directly from The Taylor’s.

So while Russia may be selling more of their petro to China, China is paying for that petro by selling MORE goods to the US. And when the US stops buying MORE then Russia starts selling LESS…ergo coupling.

Socialism v Taxes

I’m all for winning; you don’t get to run for president an infinite amount of times, so when you get there you and your supporters have to be willing to go all in. I respect that and I totally understand it, I’m a competitor. What I don’t understand are the, LITERALLY, hundreds of thousands of people who LITERALLY have no idea what socialist means. LITERALLY. You get the feeling that their nexus for the term is LITERALLY drawn as such:

Nazis-Cold War-Communism-Soviets-Castro ergo Socialism ergo ‘Spread the Wealth’

So the way I see it for some socialism isn’t really a term they want to define or contextualize because that would require them being wrong about two things, one how they understand it and two how they apply it. In it's current usage in the campaign it’s seems to be just a synonym for ‘bad’, arrived at as a marketing ploy by the purveyor but understood through a distorted application of the transitive property by the masses.

I can’t help but wonder how many espousing this meme stand to have their wealth redistributed? I also wonder how many know about the Earned Income Tax Credit, in effect since 1975, which…SURPRISE…takes money from people who made and gives it to people who made less? Which again…surprise…most taxes do in some form or fashion.

I think the socialist rejoinder to Obama’s spread the wealth comment is pure hyperbole, I think the better term for him to use on Obama would be

k

He’s a supporter of the Unites States of America’s IRS Earned Income Tax Credit, just like every president who has cut or raised taxes since 1975…ist

or

He's a want's to roll back the Bush tax cuts...ist

Neither have that same abhorrent euphemistic punch as socialist do they?

The 3:15 to Real America

Hey do I need my passport to get into Real America? I’m going to my college homecoming this weekend and I don’t know if I will need my passport. Maybe I should call the Real America Embassy…yeah I’ll do that.

Pop Quiz

There are three people, Sally, Jim and Mack who all share a hoopty used car. Mack is eager to go sightseeing downtown and Sally doesn’t mind tagging along. Jim tells Sally and Mack that there is really nothing to see downtown and that the weather is impermissible which could result in them sliding into a ditch. Sally and Mack go ahead anyway…and find themselves in the middle of ditch! Then Sally insists on a tow truck, but the tow truck can only pull the wreckage halfway up the ditch and besides the mechanic says “…the car is severely damaged and even if it can be fixed it will be in worse condition than it was before.”

Quiz: Please note that all questions are multiple choice. Please use #2 pencil.

1. Who showed better judgment in the fictional scenario outlined above?
A. Jim
B. Sally
C. Mack

2. Does Sally’s insistence on calling a tow truck trump Jim’s insistence on avoiding the situation altogether?
A. Yes
B. No, and no logical person would be so crazy as to insist or believe otherwise.

The Decider

‘How does a man get to the point where he can throw away human life so easily.’

The above quote is attributed to JFK via the movie 13 Days (Netflix it if you haven't seen it), which is an account of the Cuban Missile Crisis, in which the Soviet Union sought to place nuclear missiles in Cuba circa 1962. As I recall JFK, his brother Bobby and an advisor were sitting around discussing the very real and very necessary need for military force to prevent the Soviets from placing missiles on the island. JFK, who was frustrated with Khrushchev (the Soviet leader) and his own military council, echoes the phrase rhetorically while trying to make sense of thousands of years of the human condition.



For me that tableau has come to symbolize the necessary weight, gravitas and seriousness decision makers must have and more importantly highlights that not all of us are decision makers nor should we be and that’s okay. I know what you’re thinking “I make decisions everyday” and that’s true, if only semantically. For me we all make choices everyday, but decisions are defined by two things:

1. They are made ALONE
2. They are IMPACTFUL

On point one we know that any good decision maker has trusted council, but any good decision maker also realizes and willingly OWNS the responsibility of his/her decision alone. On point two I highlight impact because whether it’s a clear +/+ or +/- a decision has real impact.

Why am I talking about this? Because for worse or worse we have been marketed to and led to believe that somehow it was admirable for decision makers to be average. That somehow being intellectually incurious and disinterested was a plus for a decision maker. That being just as unprepared, unfit and unready as the people you will make decisions for makes you qualified to make decisions (huh?). If recent history has taught us anything, it has taught us the extreme fallacy of this type of average joe as decision maker thinking.

Get Shorty...

I was going to write a debate analysis, but Fallows over at The Atlantic sums up my feelings pretty well….so instead I will write about something else like shorts!

I added shorts to my day trading strategy today and made out pretty well. For those of you who may not know, day trading is the practice of buying and selling a stock in a single day for a quick profit. Your typical investor wants to buy low and sell high, this is known as being long. Being short, is the exact opposite, you sell high and buy low. Well you actually borrow someone else’s stock at a higher price, sell it and then buy it back when the price is lower, pocketing the difference. Example follows:

-I borrow stock ABC at $3.00 and sell it
-I pocket the $3.00
-When stock ABC goes down to $1.00 I buy it
-I give back stock ABC to its owner and pocket $2.00 in profit

It requires that you prefer a stock to go down instead of up, it's like cheering for your team to LOSE, because you have bet against them, even though they are still your team. It felt weird up until I pocketed my bread, then it wasn't that bad!!! There are a ton of other cool derivative instruments out there that allow you to make money during slower, unpredictable markets the key is learning how to use them effectively.

Are You Greatly Depressed?

No doubt you've heard the Great Depression mentioned lately. I summarize my thoughts on the depression vis-a-vis our current environment.

The depression was a severe global economic slowdown that was characterized by massive unemployment and decreased consumer spending, corporate profits and tax receipts. Essentially this meant that the 3 most important pillars of any economy -the consumer, the corporation and the govt- were each spending and receiving much less than before. For most people the blame for the depression rest with the stock market crash of 1929 aka Black Tuesday, for enabling panic and fear which caused a massive run on the banks (people withdrawing their savings because the no longer trusted banks) which caused numerous banks to go belly up. As you can imagine this panic begat more panic and fear and created a vicious cycle. THIS vicious cycle of fear, not the solvency or liquidity of the banks is precisely what had world and financial leaders on edge over the last ten days.

I think we’ve avoided the vicious cycle that caused the depression but we’re already about 6-8 months into a recession and while we won’t see a depression I do think we will see increased layoffs and a sharp drop off in corporate earnings in 2009 and maybe into 2010 as the world markets reset from all of the “credit dollars” that juiced our economy over the last 5 years.

There are two ways we will come out of this downturn post 2009, either rich people will slowly decide that they are ready to take on increased risk and begin investing again in everything from startups to emerging markets to established industry. Or local, state and federal governments will enact public works projects meant to inject money into the system through gainful employment.

Just think of the 3 major components -consumer, govt, business- where business = rich people. In order for the recession to cease 1 of the 3 has to take their money off the sidelines and put it into the game, which will in turn create jobs which leads to growth in business profits and increased govt tax base. Since consumers generally DON'T have the magnititude of wealth needed (trillions and trillions of dollars) it falls to either the business or the govt.

Don't worry business or govt will do it at some point and we'll all be fine but since they're just leaving the club after the most awesome night out ever they're going to bed (2009) and may sleep it off (2010) before they get ready to go out again.

What the heck is the G7?

I address some additional terms you may have heard in the news over the past week

Credit Default Swap (CDS): Thinks of these like insurance premiums for Mortgage Backed Securities. If you have a mortgage then it's more than likely that somewhere there is someone betting that you will default on your loan (a CDS buyer), there is a counterparty (CDS seller) betting you won’t. The buyer pays the seller the “premium” and if you default then the seller pays the buyer, if you don’t the seller keeps the premium.

Borrow Short-Lend Long: This is how all banks and financial institutions make their bread; they borrow your money for the short term and lend it out to other people for the long term. Again, the best example is in the context of mortgages. A bank sells you a 3, 6 or 9 month certificates of deposits (essentially borrowing your money short term) and then loans it to me for my 30 year mortgage (lending long). They make their money by taking advantage of the spread, which is the difference in the rates they pay you for your money (3.0%) and charge me to use it (6.5%).

Hedge Fund: A pooled investment fund that only really rich people can participate in. Often the limit to belong to this exclusive club is 1M USD, and you have to demonstrate that losing as much is inconsequential. Almost everyone of us is tied to a mutual fund through a 401k, in which an investment manager pools our retirement savings and invests them as a whole. A hedge fund is the same concept as a mutual fund except there are fewer regulations and much more money on the table. The risks and return are greater with hedge funds than with traditional mutual funds.

G7: A group of 7 industrialized countries lead finance officials. We refer to our lead finance official as the Treasury Secretary; most countries refer to them as the Minister of Finance or some derivative. The countries involved include Canada, UK, US, Italy, Germany, France, Japan. These guys meet at least once a year to discuss global finance initiatives and the state of regional and global economics.

Libor: London Interbanking Offer Rate, essentially the rate at which banks in the UK lend funds to each other. Hibor is a similar rate used in Asia, namely Hong Kong.

On another note, this financial crisis sure spiraled out of control globally really really fast didn't it? Although I knew the US was still the centerpiece of the world economy, all I have heard for the last 3 years from clients is how BRIC, emerging markets and to a lesser extent the EU were no longer as dependent on the US for economic health as they had been prior to 2000. I guess this disproves those overstated claims of insularity. And I'm calling bullocks now on those reports of how India, unlike China won't feel much effect of the recession. India's growth and economy is WHOLLY dependent on the technical services they provide to the west. They may be expanding into other services offerings and manufacturing internally, but their 'bread is still buttered' in the IT west.

This Just In: Chicago Bulls Win '92 Championship

Seriously IMF, you publish this today? A little late to the game no?

Oct 11, Washington: The International Monetary Fund warned Saturday that debt-ridden banks were pushing the global financial system to the brink of meltdown and wealthy nations had so far failed to restore confidence.

I'm super glad the IMF is on top of this.

Debate Analysis

My debate analysis in 4 points

1. Townhall: This was a townhall? Seriously? This had about as much townhall as a reality show has real. The scripted questions, limited follow-up and verbosity of the candidates overall made for a very uninteresting debate. I thought Brokaw and his letter of the law moderation really put a lid on two guys who were ready to give us some good moments of back and forth. I really miss Tim Russert, I am certain he would’ve loved to get a shot at moderating a real debate with these two.

2. McCain: He seems a little uncomfortable being onstage with Obama and it shows in his movement, body language and phrasing. I wondered out loud last night if the irascibility that America is seeing is due in no small part to his strong desire for the office. The guy withstood a barrage of crappy campaigning by Bush in 2000, when it was clear he was the best chose for the Republicans. He held his tongue and made nice for 8 years, passing up a chance to run with Kerry as veep…that’s eight years of waiting your turn and then out of nowhere this young dude shows up and has him flustered and on his heels. I have to think that situation would wear on anybody; I also have to think a professional pol, as McCain is, would have the skill to hide that.

3. Obama: I actually wasn’t very fond of his first debate performance and thought that he may be in trouble this time because Mac is a townhall pro, but from the outset it was clear he was here to play. I loved the AIG card he pulled out, one that I had just found out about hours earlier (that’s pretty ridiculous AIG execs if you’re reading). He seemed to connect with the audience in a way I thought McCain, due to his extensive townhall experience would do. The guy has demeanor about him that exudes both confidence and calmness. He looks like a winner and I'm not sure he knows what he’s in for over the next 3 weeks, but at this point sans political views it is pretty clear he is the best choice.

4. Policy: Nothing new here on either side except for the fact that McCain would have his Treasury Sec exercise the provisions in the TARP bill that allows for purchasing and reneg of the troubled mortgages to stabilize the housing market. However, since TARP is only authorized for up to 700B USD, it is inconceivable that we can do that AND buy the bad assets from the bank. I imagine the banking lobby that supports McCain can’t be too happy about that proposal since it would tie them to a segment of their customer base that they no longer want anything to do with. Since he was clearly looking for part of the economic issue he could make his own, I would have thought a better option would be to suggest a provision that allows for pushing the loans out 40 years and reset everyone’s interest rate, even those who are not delinquent or in danger. I understand what he was trying to do, his advisors and rightfully so have told him we need to find a bottom and then from that bottom a new healthy operating range (hint it won’t be the range of 2004-2006) but I’m not sure just reneging mortgages of delinquents does that.

Update - This Week in Finance

I answer some questions from a friend regarding my This Week in Finance posts.

What did you find through your analysis of the bailout plan?

The Ds didn’t get their way on all of the “Mainstreet” protections (mortgage reneg, unemployment, et al) but they had to capitulate in order to get it passed which in my opinion was necessary. Why? Because you had two options do something or do nothing and it was pretty clear that after Paulson hyperbolized the urgency of the plan the markets (which include anyone with a bank account or 401k) expected the former.


Do you think it’s a good idea?

I do. Again, for me it was do something or do nothing and in this case I was in favor of doing something. Some respondents mentioned that after two rounds of failing to secure passage the world had not come to an end, and congress was just grandstanding and hyperbolizing. The problem with that however is that the markets had come to expect something and like a spoiled child when it didn’t get what it wanted it had a fit. Barring continued doing nothing in the face of the markets fit you would have SERIOUSLY perpetuated increased lack of confidence, fear and ultimate run on the banks which is exactly what none of us want.

How do you think it will affect normal individuals (first time home buyers, middle income buyers, small time investors) in the long run?

I think it has already positively affected normal individuals by returning some relative level of confidence in our national and global financial system. Just think of your mindset 10 days ago, if you’re honest you probably bought in; however slight, to the end of the world, go buy gold and euro scenario. From what I gather the bill doesn’t include protections for those who are in trouble of foreclosure but the good news is that Countrywide and Justice settled independent of this bill and will begin allowing mortgage holders to renegotiate loans to more favorable terms. I like this move because it will stem coming foreclosures, stem falling home prices vis-à-vis foreclosures and the progressive in me would rather see those who are already in a home stay in their home regardless of the factors that got them in that position. The downside however is that banks maybe a lot more hesitant to make loans if they know they can simply be forgiven or re-written in a way that is unfavorable to their business model, which in theory could ensure that the market persist in its current funk.

More importantly, how will it affect existing home owners?

I think homeowners that live in their homes will be fine, or at least better off than the spec plays. The reason is that the boom in construction of condos, townhomes, new single family communities from 2003-2006/7ish was predicated on the existing financing structure of that time, namely giving money to people who wouldn’t otherwise get it. Since that ship has sailed and the banks WILL NOT be making that mistake again you will be left with a bunch of homes and no buyers. The steps taken and mentioned above may lessen that imbalance in supply/demand but I don’t see it going away because there are just too many properties that exist. So you know from your studies of Econ 101 that the only thing that will happen is for the price of the product (home in this case) to go down. This is where the homeowner may take a bath in terms of the value of their homes, since the value of their home will no doubt decrease in value along with the spec properties which will need to happen in order for the spec to sale. I also see how this may help the banks begin to lend (see above) because while they won’t give a 250k loan to Joe and Jen Six Pack with a household income of 70k they may be more inclined to give them a 100k loan. So to summarize, prices will fall to the level that banks will be willing to lend to purchase the outstanding properties.

SCORE - Me:1 Computer:Infinity

Finally! I get a huge and much needed win against the computer in Chess Titans (my computer program) as evidenced by the screen shot pictured. This is HUGE; I’ve lost to the computer continuously for the last 11 months at the highest level. The game literally took 4 hours and I think this makes my record 1-1,256 but I so what, I got the W and I’m pumped.

I actually think more people should take up chess; Picture yourself in the one of the more stressful and tenuous positions you’ve been in over the last 24 months. Now imagine a rational, collected, forward looking person making the decision as opposed to what you were at the time (maybe erratic, frazzled, sky is falling)…get my point? Obviously, the game of chess is just that a game and is not analogous to every high stress situation we have in real life, but it builds patience, critical thinking, strategy and sacrifice which are MUST HAVE characterstics in high stress situations which often alter the course of our lives, however slight.

Maybe if we force our politicians to play more chess these attributes would begin to permeate their decision making process…or we could just elect the ones we these characteristics to start with…just a thought.

rc

Day Trading: Part 1 in a 35,652 Part Series

One of the things I decided to try while on sabbatical was day trading. As I learned during this past week, volatility is a day trader’s friend as some of my picks were up and down over 70% during the week. Most of these picks were related to the financial sector so this was to be expected as this was one of the worst weeks in the recent history of the market.

I did okay, not as well as I would have liked, but with the jobs numbers just out today (159k lost in September) everything is relative. Since it seems people are losing their jobs left and right, I appreciate any increase.

While I don’t feel sorry for stockbrokers or i-bankers who regularly get bonuses that are ten times the average American’s salary (32k), I can sympathize. I had two restless nights this week, worrying about some bank in Europe or Asia PAC going under while I slept and wiping out all of my investments. Both times I woke up on the end of significant gains, but I’m not sure it was worth my piece of mind. I also spent hour after hour watching CNBC while modeling scenarios and ticking news on my computer. I had no idea my brain could process that much information at once. I also had no idea your mood could correlate directly to the direction of the Dow but I digress.

I realized that in the end it’s a basic risk reward proposition, and you’ve gotta be in the game…more on my Buffet like exploits to come.



rc

This Week in Finance

(Circa Sep 21, 2008) Hey guys, I’ve had some interesting conversations with industry friends and colleagues over the last few days, and while we each foresaw trouble brewing as far back as 6 months ago, none of us predicted this…I honestly don’t think anyone from Bernanke to your average investor (me) did. This lack of clarity seems to have necessitated the following question:

“Dude how’d we get here?”

On the train, at lunch, and in the gym this phrase (alright omit the dude) seems to be on everyone’s mind. While I’m no expert I take a shot at a simple explanation starting with a laymen’s breakdown of Mortgage Backed Securities (MBS), the investment at the center of this storm:

MBS at a glance

1. Bank A (IndyMac, CountryWide, et al) books 100k loan for customer
2. Customer buys new 100k home
3. Investor (Lehman, Bear, et al) purchases loan from Bank A at a premium, let’s say 110k
4. Investor chops up loan and sells to Counterparty (AIG, FF, et al) or keeps it
5. Customer pays back a total of let’s say 180k (principal and interest) over time
6. Bank A profits (10k) immediately from selling the loan at a premium
7. Investor and/or Counterparty profit over time from the 180k in mortgage payments
8. Customer profits by “owning” a house that belongs to the Bank/Investor/Counterparty

This, ladies and gentleman, is what they call a mortgage backed security, an investment that is secured by a mortgage payment (cash).

On its face an MBS is a sound investment instrument when the lendee can afford their mortgage, when they can’t…then not so much, as evidenced this week.

So the pop explanation you’ve all heard by now - banks were loaning money to people who couldn’t pay it back – is right on target. All the talk about CDO’s, leverage, Fed Funds Rate and Eurodollars are definitely relevant, especially now, but are symptomatic of number 1 on the aforementioned list…a bad loan. So whenever you hear complexity about how we got here, just think “a bunch of crappy loans.”

Where do we go?

I wish I knew exactly, I think in 12-18 months we will have put this behind us. Like you I’ve heard about the bailout plan but admittedly I will have to research it more in order to form a cogent opinion. At first glance I’m not excited about the prospect of congress just handing over absolute control of $700B to further bailout financiers (Bank A, Investor and Counterparty) unless we are CERTAIN there are ADEQUATE protections for you and me as well as significant upside or return on the 700B investment.

The good thing is Hank Paulson and his team over at Treasury seems up to the task. He seems to be measuring the situation with the proper gravitas and weight expected of a leader which is reassuring especially at a time like this.

The other good thing is that in addition to all the first in this election, that have elicited record excitement among the populace at large, we are also engaging, discussing and basing our decisions on more than just which candidate “We would most like to have a beer with.”

R or D I’ll take that kind of real involvement anytime.

rc