Gold, Vix, and the odd martini

27 July 2007: DJIA 13,265; C 46.97; MER 77.31So, just the small matter of a 5% 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.Theres actually a consensus within the smart money community. You dont hear the Wizard of Wharton - (my favorite analyst Jeremy Siegel) - telling people to sell stock and head for the hills. Far from it. Hes been consistently bullish and consistently right. In a note, hes said that the market is oversold and that it could be in line for a sharp bounce. Hes telling the great unwashed to get out there and buy some quality stocks, which are unaffected by any credit tightening. In the Wizards view, theres been an overreaction to the sub-prime issues.Were 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 theres 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, its a hands-on type of business and we dont do that. Basically, we dont care if a business does well or badly, as long as were either long or short of the stock. We dont 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. Were traders.My triple-barreled amigo from Lehman calls. Theyre 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 Im 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 hes carrying a piece of shrapnel in an important part of his anatomy.Anyway, I thought Id give Jules a little cardiac jolt by asking him if hed 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 Davids tank the windowless meeting room attached to his office where we hold the most sensitive discussions to talk over the days 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 hes 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 were 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. Ill have to come up with some fancy synthetic trades that get us the exposure we want at a price that gives us some flex. Thats why youre paid the big bucks, Larry!He doesnt 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 dont have a clue whats going to happen next, not because a fall is inevitable. I want us to be more forensic and go stock-by-stock if were 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. Hes got some PEq buddies who are going to share a bottle or two of triple-filtered mineral water tonight so hell ask them. Thanks chief: thats a real vote of confidence. Ill 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 its worth holding my tongue. If he needs to do that, fine. The market has traction and the PEq boys know it. Theyll confirm what I already know. This is nothing more than a nervy correction, driven by traders with no cojones.

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