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Paper Apocalypse


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#1 wndysrf

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Posted 04 February 2003 - 04:52 PM

Mark’s Market Commentary – February 4, 2003

Imagine being Mariah Carey after being paid $50 million to exit a record contract shortly after a nervous breakdown. Imagine being any one of these Hollywood celebrities rewarded handsomely for spectacular failures, scratching your head, wondering what to do with the windfall of cash.

“Maybe I should build a homeless shelter.”

“Maybe I should finance a caravan of human shield anti-war protesters’ trip to Iraq.”

“Maybe I should invest in more plastic surgery.”

“Maybe I should buy some specialty retail stores on Rodeo Drive so I wouldn’t have to shoplift so often.”

“Naw. I think I’ll leverage this mountain of green to earn even more money. I’ll invest in a Hedge Fund. But which one?”

Last Weekend’s Barron’s featured the performance stats of over 690 hedge funds with over $20 million in assets. Needless to say, the performance was very volatile, some funds hitting home runs in one year and bombing the next. I wonder what kind of strategy these funds employ? Here are some speculations:

“The Titan Volatility Fund”

The Titan Volatility Fund trades exclusively at market extremes, using the Alice and Wonderland “Black is White” strategy. Our research has determined that hope hysteria continues to rule the bear market. Our managers use a contrarian approach to swing trading. The fund takes a long position in broken stocks after a chart failure, immediately preceding a “beat by a penny” after-hours earnings announcement out of CSCO, DELL, or AMAT.

“The Shaker Heights Investment Fund”

The Shaker Fund uses an event driven trading strategy, focusing on the activity of the New York Fed’s Open Market Operations or jimmied up economic data. Our managers take aggressive positions in high beta stocks on the days when the Fed decides to Repo Blast the overnights, betting that market makers will use the proceeds to jam the tape and “shake out” the short sellers.

“The New Star Asia Renaissance Hedge Fund”

New Star focuses exclusively on Asian stock markets, where 8% daily moves are commonplace. Our managers believe that the U.S. markets move entirely too slow, and trade the faster action usually found in the Far East. We employ the fastest gamers and use .025 second execution by greasing the palms of the marketmakers.

“The Structured Servicing Holdings Fund”

Structured Servicing invests exclusively in asset-backed securities, by borrowing from the Bank of Japan at negative interest rates and spread trading into high yield securitizations originated by The Beverly Hills Breast Augmentation Center. Our managers routinely engage in collateral inspections to make sure they will “hold up” under market stress.

And if 3000 mutual funds aren’t enough, or 680 hedge funds, you also have the opportunity to invest in 240 “Fund of Funds” which do nothing but daytrade other mutual funds or hedge funds.

“Crestline Diversified Managers Fund”

Diversified surveys the top HeatMappers and overweights its portfolio into the top 3 momentum funds of the month. All positions are subject to change at a moment’s notice, sometimes on an hourly basis. Positions are taken in funds whose lead stock traders are under 21 years of age, and are managed by market strategists under 29 years of age. Diversified believes that funds who hire older employees may have their judgment impaired due to adverse experiences with the 1998 market correction. The fund prefers to invest in other funds which have a positive outlook only, particularly with the immediate market direction.

As we have illustrated, the Greenspan Service Economy Productivity Miracle has done nothing but create a Paper Pyramid of speculation, spawned by liquidity and permanently pegged interest rates, to be leveraged 10:1, guarded by myriad options strategies.

No money has left the market yet, because the Liquidity Bubble is still in full swing. But now more cracks are showing up.

Speaking of hedge funds and options, what happened to AIG, the second largest hedge fund on the planet? Stung by some unexpected losses? What happened to the hedges designed to “mitigate” the risks of that business model? Couldn’t the CBOE come up with some Directors and Officers Liability Puts? Where was Kopin Tan? Certainly there had to be some type of straddle, swaption, collar, or strangle which would have operated correctly as a hedge. And what about MBI and ABK? Where were their guarantees? I thought that those untimely risks were offloaded into Outer Space?

Here’s last night’s conversation in AIG’s Risk Management Department:

“Who wrote that D & O policy on Bernie ‘O Canada’ Ebbers?”

“We did, but it’s not our problem. We offloaded that skunk to MBIA, Inc.”

“Call MBIA. Tell them to pay up, so we can pay the policyholders.”

“We already did. But they said they can’t pay until they get paid by Commerzbank, who underwrote that derivative contract brokered by Citigroup.”

“But Commerzbank reports earnings tomorrow, and they are supposed to be a disaster.”

“Commerzbank says no problem. They hedged their bet by purchasing some risk insurance from XL Capital”

“But I heard that XL Capital may not pay, because they got some cash calls from Bermuda Capital Strategies, LLP, which is still tied up in Enron litigation because they claim that J.P. Morgan misled them about Mahonia and 147 other SPE’s.”

“What about Citibank? They sold us this cockamamie hedging strategy. Can’t we sue them for payment?”

“No, Citibank was just the intermediary.”

“So what do we do, sit and wait for a payday from the Chain Letter, or go ahead and take a charge against earnings?”

“We’d better take the hit now. I smell a rat. I have a feeling that a lot of these stupid Chain Letter contracts we signed are going to turn up to be no good.”

The Paper Apocalyse.

So many promises.

So much leverage.

So much hope on Structured Finance.

So many computer models number crunching.

So many bids and asks at the equity options desk.

Too few bids and asks at the Derivatives Black Hole OTC Desk.

So many speculators.

So many circuit cables, tied to thousands of trading desks worldwide.

So many eyeballs reading the same screens.

So many speculators thinking that they can get out first with a limit order, the best price.

So many FOMC, BOJ, ECB, IMF, and World Bank officials at the ready with the panic button wired to the printing presses.

Imagine the Hiroshima Salaryman, seeing his asset values decline relentlessly, tightly gripping his small hoard of cash. Imagine the horror of seeing the Downtown Tokyo BOJ fatcats going to the Hostess Club every night at $750 a pop. Imagine seeing the wild fluctuations on the Nikkei, a hairsbreadth from 20-year lows. Imagine reading about “massive intervention” once a week in the newspaper. Imagine having to pay these guys 1% to keep your money.

The Horror of The Paper Apocalypse.

No wonder there is a rush to gold on the TOCOM. Hitting new highs daily. Oblivious to any “Iraq War Premium” or lack thereof.

Once again, CSCO will come out with its announcment. Hundreds of billions of market cap is at stake. Up or down? Can they pull of a “ThreePeat” AH jam job? We’ll save that drama for tomorrow.

Position Summary:

No changes.

We are 56% short, 32% long, 12% cash.

Half Short:

MBI at $50
KLAC at $41
CYMI at $39
NVLS at $35
INTC at $18
MSFT at $56
WHR at $56
INTU at $49
AMGN at $53
CSCO at $14
ORCL at $12
DELL at $25
SBUX at $23

Quarter Short:

FRE at $68
LEN at $56
COCO at $40
NCEN at $28
CFC at $55

Half Long:

GG at $11
HL at $4.55
BGO at $1.31
PAAS at $5
DROOY at $3.35
GLG at $9
GSS at $1.72
WHT at $1.05
KGC at $2.35
HMY at $16
PigMen Proprietary Trading Desk

The Weimar Run: Bullphoria!!!!

#2 h2orush

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Posted 04 February 2003 - 05:27 PM

Mark,

My congratulations to you on one of your best posts ever! I can hear em grumbling now in the back room at Citigroup HQ on Greenwich St in NYC......Keep up the good work!

#3 wndysrf

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Posted 04 February 2003 - 05:33 PM

Gold going vertical
PigMen Proprietary Trading Desk

The Weimar Run: Bullphoria!!!!

#4 TheDeepBlueSea

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Posted 04 February 2003 - 05:34 PM

"... Downtown Tokyo BOJ fatcats going to the Hostess Club every night at $750 a pop."

$750? I hadn't realized that price destruction had hit the high-end "water business" that hard.

I remember two years ago a Japanese colleague of mine complaining how he he picked up the $5000 tab for three hours of entertaining a MOH (Ministry of Health) bureaucrat at an upscale Kobe hostess bar.

What I find very ironic when I'm in Japan is listening to the businessmen complain about how China is driving a hollowing-out of Japanese manufacturing. Just like the US in the 1970's . . .

However, they seem less willing to settle for a US-style "service" economy. It will be interesting to see how they deal with it and their other problems.

#5 MrHanky

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Posted 04 February 2003 - 05:35 PM

you hit it right on the head mark....thanks!

people are so desparate for a rally that many techs are up afterhours even though crisco is down.the casino never closes.

Nothing


#6 Slothrop

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Posted 04 February 2003 - 05:41 PM

Possible gold scenario: Iraq campaign begins late Friday, NY time, after the markets have closed. By Saturday night, Saddam and his generals have surrendered.

What happens to gold Monday morning? Will you have the foresight to exit your mining positions on Friday -- or can you accept huge gaps down on Monday?

Have you thought about this?

#7 Major Bottom

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Posted 04 February 2003 - 05:45 PM

Thanks Mark,

CSCO is not taking off as it’s supposed to after “earnings”. This doesn’t bode well for AMGN. What?

#8 MrHanky

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Posted 04 February 2003 - 05:46 PM

listening to the crisco conf call...chambers said"this was the best quarter in our history"....then he said......."on items that we could control"



q's down about .18 after hours...csco @12.92...but I would not rule out an "upgrade" just for the hell of it tomorrow

Nothing


#9 machinehead

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Posted 04 February 2003 - 05:47 PM

"Structured Servicing invests exclusively in asset-backed securities, by borrowing from the Bank of Japan at negative interest rates and spread trading into high yield securitizations originated by The Beverly Hills Breast Augmentation Center. Our managers routinely engage in collateral inspections to make sure they will “hold up” under market stress."

Yes. And also to make sure the convexity doesn't get out of hand. Posted Image
"GOLD -- it's not just for misers anymore."

"Dollahs -- fire-starters for the K-wave winter." - Drano

"Three humps and a dump." - anotherone, 21 SEP 2004

"No gold was harmed in the making of this movie." - Bizarro Greenspan

[i]"Da Track. Da place where Morons bet on Animals Controlled by Criminals."
- our jickiss

#10 Ned38

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Posted 04 February 2003 - 05:50 PM

Sloth that IS a scary thought

But I might exit my miners anyway due to their lack of performance

#11

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Posted 04 February 2003 - 05:53 PM

Possible gold scenario: Iraq campaign begins late Friday, NY time, after the markets have closed. By Saturday night, Saddam and his generals have surrendered.

What happens to gold Monday morning? Will you have the foresight to exit your mining positions on Friday -- or can you accept huge gaps down on Monday?

Have you thought about this?

A two day war. Possible I guess, but unlikely.

#12

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Posted 04 February 2003 - 05:54 PM

Mark - what's your take on MBI and XL, do you have a price target for these guys? I've been looking at MBI for quite a while and hated myself for not pulling the trigger sooner. They are the ultimate bagholder for all structured finance disasters and muni finance blowups. Would appreciate you shed some light, especially on the technical side. With the recent decline, how much more downside there is? Many tanks!

#13 TheDeepBlueSea

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Posted 04 February 2003 - 06:02 PM

Possible gold scenario:  Iraq campaign begins late Friday, NY time, after the markets have closed.   By Saturday night, Saddam and his generals have surrendered.  

What happens to gold Monday morning?   Will you have the foresight to exit your mining positions on Friday -- or can you accept huge gaps down on Monday?

Have you thought about this?

A two day war. Possible I guess, but unlikely.

It's not the duration of the upcoming war,
but the subsequent ongoing occupation,
that's going to be the real test of US resolve.

And yes, a 2 day war does seem rather unlikely ;)

#14

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Posted 04 February 2003 - 06:02 PM

Excellent post Mark.

I hope you write a book one day.

#15 TheDeepBlueSea

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Posted 04 February 2003 - 06:05 PM

listening to the crisco conf call...chambers said"this was the best quarter in our history"....then he said......."on items that we could control"



q's down about .18 after hours...csco @12.92...but I would not rule out an "upgrade" just for the hell of it tomorrow

CSCO's history.

Huawei

is undercutting them around the world.

And they don't have CSCO's post-bubble acquisition indigestion.





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