Toxic Waste 2/22/09
25 April 2007: DJIA 13,089
This market has cojones. New Century filed for Chapter 11 just three weeks ago, and the party goes on. The Dow is up 700 points for April and has gone over 13,000. Its a good day to be having our monthly ALCO meeting.
In theory, everyone has one the asset and liability committee. Were meant to worry about our balance sheet and the mismatches between what we owe and what were owed. A vast package of information arrives from our finance department two days before each meeting, which were expected to read, mark and inwardly digest. ALCO is serious stuff.
The committee wants to know what I think of our positions. Basically, Im comfortable with just about everything. Were tracking the Dow and see no reason to stop. Were long commodities and probably going longer (suck it up, Amaranth). We are short financials and we dont like the dollar much, especially against the euro (the Thai Baht is an exceptional exception were already up 9pct. Thank you, Stanleys buddy). We have used the carry trade for finance but no one is thrilled about it, on the basis that anything this easy is bound to have some unintended consequences, i.e. dropping a ton of (client) money. Were running down all our Yen and Swissy loans.
Just about everything. I feel were missing a trick somewhere. You see all these big guys like Soros, Paulson, Falcone and Griffin making market-changing bets, paying themselves billions of dollars and no one batting an eyelid. Look at Bernie Madoff. He is sucking in money left, right and center, even turning down investors (isnt my money good enough for you, Bernie?), which all adds to the mystique.
Thats where we should be. Right now, we are little more than bottom-feeders. We get the crumbs that drop from the top table and its not enough. We have about five billion under management, which is good, but not life-changing. Truth to be told, I could go back to Wall Street and probably make as much money as I do now. That wasnt the plan. We need to have higher aspirations.
And, maybe, just maybe, I have the answer.
We run some money through a couple of guys who have a commodities and resources shop. Theyre not the sort of guys you want to have dinner with cutlery deployment might be a challenge but they know commodities. Theyve been talking to me about a really neat concept that could change the whole market paradigm. Really, its that big. If it works.
Trouble is, Im not sure about my partners and their long-term goals. They seem to be happy with where we are now. I dont want to take this idea to them, have it voted out and then be left to look on as some smarter, hungrier firm picks up the ball and runs with it.
If they dont like it, I may just have to go solo on the deal. Without me, Curveball is dead anyway and they know it.
Back to ALCO, and one of the things we all agree on is that sub-prime is going to claim a lot of victims. Forget about the homeowners mostly redneck trailer park trash anyway its fund managers who are beginning to look really dumb. Some of them are even buying into sub-prime lenders. Yes, buying! Those allegedly smart folk at Blackstone and Citadel are buying em up, while others are lending them huge lumps of cash. Even my buddies at Bear are allegedly getting in on the act. Could be time for a rethink of our relationship if thats really true.
And all this after some gal at the Fed (Ed: Susan Bies, Federal Reserve Governor 2001-2007) said that sub-prime defaults are the beginning of a wave. The Fed is not normally given to flights of hyperbole, yet the hedge funds think they know better. Us? Were not touching it. I can guarantee you that toxic will become the most used verb on the Street next year.
A Bear Market 3/25/09
03 May 2007: DJIA 13,241
Time for a partners meeting. The news about UBS closing down Dillon Read has a double edge: great, because no one here likes them, but also not so great, because they dropped a bundle on sub-prime, which shows how contagious this problem is. If the Swiss banks can get it so wrong, what hope is there for the immensely less intelligent and risk-savvy American financials?
Speaking of which, we are also hearing truly worrying reports about two Bear Stearns funds. Now, we have lots of buddies at Bear including Stanley and what they do in the asset management business is none of our concern until and unless it looks like theyre going to crash and burn.
And thats exactly how it looks to us (and quite a few other people in cocktail bars, massage parlors and chatrooms). Quite a few other people, that is, except those who work at 100 F Street, Washington, HQ of the SEC. You only have to look at the name of one of the Bear funds the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, for Christs sake to realize that it is going to need some very close attention. Talk about oxymoronic.
And so it is proving. Were hearing that this fund is going to have its April month-end valuation cut hugely, and Bear is going to have to start throwing a lot of its own money into the pot. As soon as that happens, we get worried. After all, they lend us money and we lend them money. I may love Stanley to death but business is business: the Bear relationship is under scrutiny.
Trouble is, I hate all the other prime brokers even more than Bear. The Swiss and the Germans need laxatives; the French are chronically lazy; and the Americans havent yet got the message that were the clients. Ill say that much for Bear: they know how to look after us (and Im not just referring to the on-tap access to top-drawer companions, such as the lovely private dancer Sticky Vicky, or my current favorite, Delta Redd).
My partners suggest a compromise. We wait for Q2 results from the investment banks, then decide what to do next. I keep my counsel. What my partners do not know is that I am already planning to short Bear stock. Even as the rest of the market heads north, Bear is going south. June 14, when it reports Q2 numbers, will be an interesting day.
The Tactical Strategy 3/25/09
14 June 2007: DJIA 13,553
I have begun shorting Bear. This is not as easy as it sounds. Bear is my prime broker. They should be lending me their stock so that I can then short it. Thats not the sort of trade that would get Stanley too excited, however much bro he made out of it. So Ive had to go elsewhere for the Bear stock. Fortunately, we have a relationship with Lehman (retarded, but my options were limited), so Ive opened some lines with them. They didnt even see the irony of it all perhaps theyll get it when I start shorting them.
Actually, the Bear numbers werent so bad. Revenues down 10 per cent, but how reassuring to see that they can still rely on hedge funds to prop things up. Our friendly PB has managed to skin us for another 10 per cent, a highlight of the earnings statement. Funnily enough, Stanley did not call to discuss the numbers. I wouldnt have answered anyway. I was with the partners discussing tactics (there is no such thing as a strategy in these markets). They agree with my negative view on US financials, and my call that we could see a 15,000 Dow by year-end. I also want to load up on commodities. Oil, especially, is a one-way bet. The Chinese appear to be drinking the stuff.
We havent yet come to a decision about opening in London. It looked essential, but now Im not so sure. Theres so much money to be made here and, despite the fact that its Boston, things could be worse I could be based in Chicago. Ideally wed be in New York, where my family is, but that brings its own complications. Living with your family wife, kids and all that stuff isnt all its cracked up to be, especially when youve got used to a bachelor existence. Boston suits me fine.
That doesnt mean we shouldnt be alert to opportunities in the UK. I like the look of Royal Bank of Scotland (I dont know whether the Queen actually banks there, but it still has a certain cachet), especially after their recent trading update. They are wisely staying away from the sub-prime market. Prudent guys, those Scots. I may just take a small position.
There are plenty of other things to worry about. The market is all over the place and nobody seems too concerned. A swing of 150 points in a day doesnt ring any alarm bells anywhere.
Granted, were doing well from all the volatility, but something tells me that we should be more worried about all this stuff. Were not too far away from a 14,000 Dow and that is pretty scary. Thats why we keep on getting these little corrections looks like some guys just cant sustain their belief and take their profits before it all comes tumbling down. But its a one-way deal: we dropped 200 points last Thursday, made it all back and more by today. The 10-year Treasury yield is up to 5.25, but nobody cares. Were all making money, arent we?
Enough market philosophy. Much more importantly, I had some good news on the personal front. I have a delivery date for the Aquarama. If I had Charlizes number, Id call her right away.
Instead, I think I shall pay for a few hours of the delightful Delta Redds company, on personal account. If I ask Stanley to pay, hell insist on coming too, which is not my idea of fun.
Who needs a back office? 4/15/09
28 June 2007: DJIA 13,422
So the Fed took two days to decide to do nothing pretty much sums them up. At first I thought that no change in the Fed Funds rate was bad, then good, then bad, so after all that I stopped worrying and just got on with real life. Stanley says everyone else is equally confused. Its a great market. If in doubt, ignore fundamentals and just buy stock. Oil is moving up nicely too. Ideally we need those grease monkeys at OPEC to turn the taps down a little, just to squeeze supply. Bad news for a few people, perhaps, but it would make a hell of a difference to my performance numbers. If it goes the right way, Im looking at a very serious compensation shot at year-end.
At home today. I live pretty close to the office, in the Carlton House building. The firm rented the apartment for me when I moved up from NYC. Its neat, although I dont spend a lot of time there. But Ive had the maid clean up specially for today, as Martina Brimm is paying a visit. Ms Brimm is a ball-buster of the first order and I am lucky to have her as my lawyer. She doesnt come cheap and she doesnt come to the office. What we discuss needs to be taken offsite and offline.
Basically, Brimm and I have to solve a problem. My partners have raised some totally invalid concerns about the way I run the desks. They say that theres no structure, no controls, no process all the stuff we wanted to get away from when we quit our jobs to set up this firm. Freedom to act was meant to be part of the deal. You fancy selling some Thai Baht? Hey, Larry, go right ahead. Shorting Bear? Be my guest.
Yet we already have more committees than tropical fish, not to mention that compliance guy whose name temporarily escapes me. What do they want? Bottom line, Ive delivered for this firm, and that needs to be recognized. All the rest is just so much flute music. Clients dont care whether we have a hundred committees or none, as long we give them back more money than they started with.
Larry, they say, be reasonable. We have to have some structure. Problem is, I think we already have too much structure. At huge expense, we had a consultant come in and tell us what to do about administration and all the back-office plumbing. As he collected his fees, he told us that we needed independent this, that and the other, all of which eat into the fees pretty dramatically. On top of all the horrendous charges I pay to the prime brokers, I also have to give up more skin to an army of administrators, custodians, valuation agents, revaluation agents, auditors and, on a very regular basis, more consultants.
So, we pay all these people, and what do they do for us? For one, tell us what we can and cant do. Sorry, Larry, but that trade cant be settled, becauseblah, blah, blah. Who is the money manager here? Whats worse, my partners seem to like this. They like being pussy-whipped by a bunch of guys who are proud to call themselves administrators. I mean, honestly: how could you go home to your folks and say, Hey, Mom, Pop, I just got a new job as an administrator? Thats right up there with being an astronaut or a brain surgeon.
Thats where we are. The partners want layers of bureaucracy that will make our firm as turgid and flabby as the Wall Street firms and fat-assed New England money managers we are trying to beat. I am holding out for a bit of flair, entrepreneurship and the general American can-do attitude. If Id wanted regulation, Id have moved the operation to France, where you cant visit the bathroom without triplicated approval from some government fonctionnaire. Funny how entrepreneur is a French word.
Once only once they sent a guy from our custodian to see me. He was dressed neck-to-toe in Brooks Brothers. Couldve come straight out of the store window, and had about as much intelligence. Wanted to know what the hot issues were and what kept me awake at night. Where do they get these guys from? For this, I am paying multiple basis points? Just dont lose my stock, I told him. Thats what keeps me awake at night. Do you think you could do that?
Anyway, back to Brimm. She could have had a starring role in The Addams Family. The way I figure it, if she scares me this much, and Im paying her, what will she do to the people I really want scared? As always, she has a plan. It involves being given more equity in the firm, or leaving or threatening to leave, at the very least. From where Im sitting, there are a whole bunch of reasons why this isnt going to fly, but I am not Martina Brimm, and she exudes nothing but total confidence. Plan B is an alien concept to her.
I am not to worry, she says. She pushes a folder across the coffee table between us. Its all in here. I didnt want to e-mail it. Too sensitive. Holy crap! Do I want to know whats in the folder? Whats in the folder? I ask, nodding at it without looking at it.
Your insurance. Beat. And my bill. Good luck, Larry.
Ms Brimm sees herself out. I check Bloomberg, briefly look at the BlackBerry a high-priority mail from Haresh, signed Chief Compliance Officer, still on about some client trades then settle down with the folder.
Dancing with wolves 4/19/09
17 July 2007: DJIA 13,971; MER 89.23; C 52.46; BSC 139.91
Thank you Stan. Having bought Merrill stock at the end of 06 at an average of 90, I have been patiently waiting for the trade to get even close to being neutral, let alone positive. And Stan ONeal who is so unpopular that even his friends dont like him has come up with the goods. A storming second quarter has made my day. Granted, the chairman and CEO of Mother Merrill doesnt always sound convincing, but these numbers are hard to ignore. The guys have done well, much as it pains me to say it.
Unlike poor old UBS, who finally dumped Wuffli what kind of a bank hires a CEO with a name like a character out of the Gummi Bears? and brought in Rohner, his deputy, who I think also has quite a lot of blood on his hands. I would short his stock.
When I told ALCO that I was short financials, I probably overlooked the fact that I hold MER and one other: the Big C, Citi. Dont ask me why I did it. I bought a lump of stock at a not-very-smart price (55 even) on the day that HSBC announced its 2006 sub-prime problems. I figured that, if the market could take that in its stride, there wasnt much to worry about with a bank as big as Citi. But I did have one reservation about the trade: Chuck Prince ranks up there with some of the worst, most unconvincing CEOs ever. How he got the job is a mystery even to him, I suspect. Why do I get the feeling he has problems balancing his checking account?
Well, he just signed his own death warrant. I waited patiently and I have been rewarded. If you want to act like a complete fool, you could do no better than to look at what he said the other day about Citis position in the leveraged loans market. As long as the music is playing, youve got to get up and dance, he said, when asked about the health of the market. Were still dancing.
Did I hear that right? Even Ken Lewis at BofA another one whose IQ I suspect is not much above room temperature has started to have his doubts about leveraged loans. Not Chuck. Hes still dancing, just like Elton John. I think hell be dancing all the way to the exit, making way for someone smart preferably Jamie Dimon to come in and rescue the bank, and my investment.
Ideally, I need a few analysts to give him a vote of no confidence, watch the stock dip, lend what I have and buy some more to improve the average cost. Problem is, most analysts are right up the fundaments of the CEOs theyre meant to be covering. Independent analysis is a contradiction in terms. Oh Chuck, we love you and your bank now can we have that trip down to Hilton Head on the corporate yacht?
Meanwhile, my old buddies at Bear arent exactly joining in the mood of celebration and general market euphoria. After pumping more bad money into their terminally sick hedge funds, theyve had to fess up and say that they are essentially worthless. Anyone here shocked? Of course, there are a few of the living dead who put money in, but who cares about them? If they chose to invest with Bear, rather than my very own Special Opportunities Fund (up 39pct on the year, thank you), they can go hang.
The Dow continues on its inevitable flight path to 14,000. Its already at record levels, even though there are some serious worries about inflation oil is up to 74 bucks, and that doesnt help the cost of living. Looks like my friends at OPEC have done me a favor if only we could get a bad winter as well.
So things are looking sweet. Im lending MER, borrowing BSC, nursing a good profit on the old Thai Baht deal and oil is on the rise. All the other transactions that are going on are pretty much run-of-the-mill stuff that keep the clients happy and show that we can behave like responsible citizens and guardians of their assets. But the Curveball Special Opportunities Fund is my very own baby, the only pool of money I still actively manage. Its certainly a special opportunity for me, as I can pretty much throw anything I want into it. It was the deal I struck with my partners when we formed the company.
My partners. Have I been through a learning experience or what? There have always been just the four of us. We started with Revis LaTrobe as chairman, David Vitale as CEO, and Art Massolo chief administration officer (look Mom, I made CAO!). I was and am – chief investment officer. We hired a couple of other dudes, like Bohdan and Bengt, and we were in business.
Six years on, and we look like a regular firm. Offices in 111 Huntington Avenue, a receptionist, fish tanks, even a compliance officer (although he may soon be sleeping with the fishes if he doesnt get off my back). We have so many hangers-on, in the form of auditors, consultants, administrators, vendors and sundry advisors that it feels like we are fueling the New England economy single-handed.
The partners have never been great buddies. That was part of the deal. We didnt want friendships getting in the way of business. Just as well, as we pretty much hate each others guts. Revis has an education and isnt afraid to flaunt it. He went to school with a lot of the Boston Brahmins and lives near some of them in Hingham. I guess he couldnt quite pull enough strings to get a partnership at Brown Brothers.
David is very different. He is sharp, analytical, very personable and great with clients. He knows a little bit about money management, which can be dangerous. He tries to engage with me about investment strategy recently opining that sub-prime was an unpinned hand grenade was one of his notably dumb remarks but, most of the time, he minds his own business and gets on with schmoozing.
Art is probably the most boring guy I have ever met. He wears a bow tie, which is about as wild as it gets. In our meetings he is always the one who shakes his head, blows out his cheeks and offers a hundred reasons why it cant be done. Its in his JD. He deals with all the finance, admin and ops crap that flies at us on a daily basis. He seems to like it, so we consequently have little in common. I suspect hes behind this relentless pursuit of me by Haresh.
So these are the guys that want to tie my hands, and effectively let our not-so-little Matka do all the work. Or rather, wanted to tie my hands. Since reading the file from Brimm, I am much more confident about my standing vis-a-vis these boys. Each of them has little secrets that they probably dont want aired in the Globe or on Bloomberg, let alone slipped to the regulators or the Feds. Revis, in particular, needs to be very cautious, as I advised him during what was threatening to turn into a showdown a couple of weeks back.
Revis, old buddy, we should probably kill this discussion right there, I said, after hed all but accused me of rigging the performance numbers. I have my weaknesses and you have yours, but we want to keep the firm afloat, dont we? Why rock the boat?
He got it real quick and shut up. He knows I know. I asked Stanley, just for verification, if it was all true. I thought you mustve known, he said. Thats why I never mentioned it. Thanks for sharing.
But the real excitement comes in a couple of days time, when I am due to meet Brian and Brad, the dynamic duo who have been cooking up this fantastic commodities deal for me. I cant wait to see the look on Reviss face when I tell him that Curveball is going to be transformed into one of the worlds largest money managers. Fidelity, State Street, AXA, and all the rest of you bandits, watch out: Curveball is coming.