Sep

18

Accustomed as we are to huge moves in the right direction before big announcements like those before the French bank inside trading activity, where there were two huge 25 point declines on Thursday and Friday, then a big decline in Japan before the official report of selling began, we should take into consideration how many people must be involved in such deals as the Fed's taking over AIG. Barclays for example said that they had 15 board meetings themselves about Lehman, and think of the executives that must be contacted to be CEO of the new company, the signoffs from the government officials, the lawyers who must perfect the agreement, the officials in all capacities, the press who are alerted to pending announcments and stories, the other potential buyers who must be given one last shot, the two rival candidates and officials to make sure they don't put foot in mouth or give blessing. The requests for aid from various parties that must be negotiated in the light of other shoes to drop. It's mind boggling. But the big difference is that in the past all these machinations and squalls served the purpose of relieving the weak from their positions so that the strong infrastructure could buy and pay for and support their overplus. But now there are no likely big buyers who have much money to profit from this weakness, as apparently one of the chief criticisms of the squash-playing, fist-fighting executive of the failed firm was that he bought his own stock on the way down. The dynamics have changed, and the 50 and 60 point ranges that we are seeing should not be meted against the usual.


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12 Comments so far

  1. Anton on September 18, 2008 8:26 am

    So it is different this time, really?

  2. douglas roberts dimick on September 18, 2008 8:55 am

    From A Beijing Airport Hotel Valet to The Mantle of Blowups

    Herein is the current draft of my preface to…

    Foreign Capital Investment Banking for China — The Art of Conversion — A Workbook: Outbound and Inbound Methodologies for
    China’s State Planners and Chinese Firms Considering Foreign Markets and Foreign Firms Considering China’s Technology Sectors

    Wuhan University Press asked to publish the book, so I am presently in Wuhan for editing work.

    Given market events of recent weeks, I have become cognizant of how speculators and hotel valets share a plateau from which individual and institutional fortunes rise and fall based on the Art of Conversion. Again, the issue of interest here as during these past seven years is quantitative relativity, whereby one’s math (be it that of a program trader or a luggage carrier) thereby dictates or is governed by relative considerations either formulated or relegated to numeric patterns — see the movie, Pi, specifically the juxtaposition between mathematics and numeracy.

    The trader “blows up” his or her own hedge fund. The airport valet directs his client into a police roadblock.

    What is the relativity of any quantification here by each actor converting opportunity into values gained, lost, and hedged?

    Quants will dismiss this inquiry, I suspect.

    The idea (yes, and theories, general and specific) of relativity, though, offer us a definitive schematic for analysis.

    Think of patterning as with electronic circuitry. Both of my scenarios display models of energy convergence and divergence, which, each in their respective schemes of directional and nondirectional patterning, may be determinative for real-time progression analysis.

    Due to the open/close nature of energy patterns, real-time becomes synonymous with prospective to the degree that those patterns (as defined by laws not quantification) convert, thereby delineating beginnings and endings of each energy transference (and nontransference for that matter).

    Therefore, relatively speaking given a 1930’s timeline, Lehman is and has been the only blowup, technically, given the nature and structure of its filing.

    Upon reflection, my hotel valet in Beijing could have seen that…

    dr

    Preface – Two Sides of a One Party Transaction?

    My concept of the Art of Conversion: the process of transference (or transcendence) of the nature and structure of capital – financial, corporate, political even social, or a combination thereof – of which is attainable and, therefore, to be gained, lost, or hedged, whereby value is created (or transformed) from an opportunity based on supply and demand of a product or a service into a net gain, to include an exchange process unto itself.

    Reflecting this idea of value creation (or transference), here I offer the first entry of my diary, following departure from Houston and upon arrival in Beijing…

    March 30, 2006

    There is 30% battery remaining on my laptop. Near 7pm, Thursday.

    I am at Gate25C awaiting my connecting flight from Beijing to Wuhan.

    Arrival from Houston at 2:40 to Beijing Airport and the subsequent five hour stopover has been exhilarating. Though I lived in Korea for two one-year tours during my military service, here, now in China is a foreign awakening, and so began…

    Upon clearing customs, I walked out into the public lobby of the two-story terminal. Immediately, directly ahead, I spot an escalator with signs indicating taxis, hotels, and food. There I meet Wang Tai.

    He sports a dark red hotel uniform and says he is a “hotel officer” of the Blue Sky Hotel. When I told him that I wanted a hotel room for a few hours to shower and change after my 16 hour trip from Houston, Texas, he said “OK” and to follow him.

    “What kind of hotel do you want,” he asked? “Top, medium?”

    I send a signal – “How much?”

    We went to a motel some ten minutes from the airport. I got a room. We bought 5 cans of his favorite Chinese beer from a local store. We called Fen. I took a shower, changed, and then we headed back to the airport.

    He and a hometown friend, who also works at the airport for Blue Sky, accompany me to a restaurant on the balcony, second level of the terminal. Having an hour until my connecting flight, I insist that I buy them a drink for their kindness, so we each enjoy a margarita and a Chinese beer. We smoked a couple of W’s friend’s Chinese cigarettes and listened to my self-produced CD mix of music on my Gateway notebook (made in China) – first my top country-western favorites then a sampling of my Miami-to-New York club mix.

    On the plane now, awaiting take-off to Wuhan Airport. Only 22% battery remaining.

    There, reflecting, I think how humorous… I am in the country for 30 minutes and have already had my first run-in with the traffic police – surprise, surprise…

    W and I had embarked in a taxi for his company’s motel. The taxi driver exits the airport ramp. Suddenly, twenty seconds into our ride, a police road block appears around the bend at the opening of the terminal’s underground exit ramp.

    Our driver slows almost to a dead stop, only to then accelerate in an attempt to pass the police. It appears that he is running their blockade.

    A policeman jumps in front of us. Still our driver maintains his improbable evasion.

    The officer then stomps his left foot onto the front bumper of our car. Four other officers immediate swoop over to surround the taxi.

    We are stopped. The police are shouting at us, causing our driver to turn off his motor just before he is yanked out of the car.

    Everyone is barking at an elevated pitch, everyone except my new friend W and me. It is at this point, sitting in the back seat with W riding shotgun, that I recognized a street-wise respect for my new acquaintance.

    When I decided to come to China some months prior to actually arriving, I made a deal with myself for what I wanted to accomplish by living here. Two years since arriving, I can now say that I have gained far more from my original, self-dealing bargain. To the extent that markets are measured by time and money, from a personal standpoint, time has become the real windfall from my investment of both (time and money) here.

    For I have developed a profound understanding as an America of the times in which my grandparents lived; they survived the Great Depression. My parents, Donald L. and Patricia E. Dimick, sacrificed and contributed during World War II as my grandparents had done this as well as during the “first” Great War.

    I, as the product of these two generations, have had no such comparative, real world experience as to the suffering and struggle to be found in (when not directly presented with) this world of humanity. Prior to living in China, perhaps the only comparative instance when I sacrificed for a greater good (other than family) was four years of voluntary military service with two one-year tours in the Republic of Korea during the 1980’s.

    Now with two years of teaching, consulting, and traveling in China, I may attest to at least having had a front-row seat to a post-game show of a critical phase of nation building, being social and economic reconstruction (i.e., post Cultural Revolution). Sure, I had witnessed the struggle of life and death during my two years stationed in Korea; a little different, though, as I was stationed with nearly 100,000 fellow allied troops.

    No American military here. Only Red Army soldiers and police who may be seen practically everywhere… on street corners, in the stores, pictured on billboards and in the newspapers, even formationed before, during, and after certain television programs.

    Prior to March 30, 2006, I had not lived in a communist country. Enough said…

    Thus, what I have learned since my arrival is that China today may be partially characterized as reflecting some of America’s yesteryears. Without entering here into a social-economic analysis (as such treatment requires its own book), I surmise that this parallel of time and distance between the two nations is that of a human phenomenon… what we may label as being the establishment of social order to achieve economic development.

    As an American, as a political scientist with a juris doctorate, I find it all too easy to recite the litany of contemporary issues at hand which “we” cite in offense with the emergence of China as a developing nation. Note: some of these charges so alleged are made not in contempt for this centralized collage of provincial governments so managing some 56 ethnic minorities.

    Does economic fracturing of social harmony (as some here in China and other developing and emerging nations so define it) appear as a natural progression of economic liberties?

    How may state planners balance coordination of central policies with corporate leaders while promoting value-creation within market sectors reliant upon foreign and domestic investment and production enterprises?

    For instance, the freedom to purchase an automobile: is it actually an economic liberty or a privilege such as an entitlement granted by the state? Moreover, may the privatization of a state-owned firm be the natural evolution of a socialist system of governance?

    In either case, given the purchase or sale of an automobile or the financing and or investment in the transfer of a corporate entity, a central issue appears to focus on the nature and structure relative to both transactions?

    Now some twenty-years as a student of investment banking, I posit that we arrive at the topic at hand… the Art of Conversion. “Sha-ma” (or my pinion word for the Chinese character meaning “What”) you may say?

    I cannot provide Chinese students any greater insight into China’s requirements now placed upon itself to develop management techniques and styles beyond that already proffered by Jack Welsh, former CEO of General Electric, in his book titled Winning. Here Mr. Welsh frames and addresses such issues most convincingly, as might any corporate officer so worthy when confronting “the big picture” with each balancesheet-like item of any contemporary issue of the day.

    Nor may I offer further assistance to the “lowei” (or pinion word for the Chinese character meaning “foreigner”) who comes to China seeking to invest in and profit from any allegedly “mutually beneficial relationship” so devised and constructed based on the schematics of this political economy. Authors to include George Zhibin Gu and Winston Ma provide both breadth and foresight into the biomechanics constituting China’s evolutionary world of investment banking.

    What I attempt here is what my adopted Chinese brother, Brother Tu, so accomplished when he first invited me to his family home in the town of Jhan Sha just outside the city limits of Wuhan in Hubei Province. Upon meeting his mother, now my adopted mother, and his family — to include his wife, Ms. Wu, whom he met when he made a bank deposit with her as the bank’s window teller. A recognized central China entrepreneur and private lender, Brother Tu impressed me with a desire to convert his cache of financial and social success into an exchange process with me as a foreign guest in his country. .

    Since, Brother Tu and I have invested more than time into understanding each other. We have invested in our own, individual, personal-belief systems. Moreover, by doing so, at least I have come to gain a better sense of my own (American) family’s history. So profiting, though, I thereby realized a loss of self, a sense of self that was rather ego centric as an American.

    Henceforth, I have converted my thinking, which in turn causes me to now often hedge my actions and reactions. Whereas, before I was sometimes linear, sometimes circular in my vesting of thoughts relative to any cause and effect, I no longer assume or presume to know the nature and structure of a given transaction – to include the sale or purchase of an automobile or the stock transfer of ownership in a corporate entity.

    Be it (a) conducting due diligence on a Chinese holding company seeking to target selective foreign markets or (b) considering potential transaction-operation alignment scenarios for a commercial investigation and security program, I seek to identify the threshold of a given transaction or investment. What does that mean exactly?

    For no particular reason of which I am aware, from time to time, I laugh to myself, reflecting upon those first minutes of my arrival here in China. That remembrance causes me to sometimes move, sometimes be motionless with the weighing of each contingency.

    What was the critical decision making process underlying the taxi driver’s attempted running of the police blockade? Was it based on “guanxi” (or the pinion word for Chinese character meaning “relationship”) in that the driver recognized the police officer? Did the policeman fail to recognize the driver by virtue of the fact that the officer’s superiors were present? Maybe they had never met before?

    Or was the driver hedging in that the fine for operating an unregistered taxi presented a greater cost of doing business than evading the actual charge itself upon citation – perhaps visa-a-versa presuming arrest, as the police did detain our driver in the back of a “paddywagon” (or what I learned as the word meaning “police vehicle for the detainment of suspects”)?

    And how did my new friend, the hotel valet, come to demonstrate greater capacity of corporate leadership than some company officers and directors whom I have had the occasion to meet?

    And what of me, the foreigner, who happily transferred to my “new friend” the sum of $100 (US) – then valued in exchange of approximately 800 RMB, which is about what the average income (non taxable) that a construction laborer in Wuhan may receive. I viewed the exchange for a profitable learning experience, yet many of my Chinese and foreign friends still criticize me for committing such subprime-like excess liquidization of Beijing hotel valets?

    And, finally, there is the state… Of all the given hours of any of the given days, why then? Was airport security so armed with profiling criteria determining when a road blockade was most likely to help rid society of offending transport-service-sector personnel so violating applicable laws and regulations?

    In retrospect, … I was inbound,… the taxi driver was outbound,… the government took its share,… and my new friend, the hotel valet, whom directed me to the preferred vehicle for the ensuing transaction in the first place, whereby after I gladly paid — no, actually insisted that I pay him – more than eight-times the fee for which he asked, well… my new friend, W, the hotel valet, now he would make a fine investment banker, whose skillful transformation of opportunity into value as described herein provides a testament to the art of conversion.

  3. Mark Isbic on September 18, 2008 1:17 pm

    The chair was correct a few weeks ago with the pope must have given his blessing phrase to the broker report of possible BK of various firms.
    I certainly wish that i was smart enough to have listened as it would have saved me some flesh.
    You make an interesting point with the observation that there is not the big money available for buying on weakness. Is this a problem that will be corrected over a short or long period of time? Is the big money usually the brokers/ bankers or the hedge funds.
    And finally i was just in T____d in pattaya. They had new buildings as far as one could see along the beach and rentals were plentiful and very inexpensive. It was very slow and the locals say tourism is down 40% or so.

  4. Craig Bowles on September 18, 2008 4:39 pm

    Nice ranges in gold too. The global stock index was even oversold.

  5. David Whitesel on September 18, 2008 8:34 pm

    The boss says; But now there are no likely big buyers who have much money to profit from this weakness.

    fractional deconstruction for the purpose of accumulation works!

    transfer some number of X at a higher price into 1,ooo’s of some other entities L M N O P unfairly treated, and we all know it.

    time to work according to free float metrics…..maybe

  6. Ted Fusa on September 19, 2008 2:33 am

    1st read…Can you have your daughter translate this, I have a hard time understanding this.

    2nd read…you are the same author who wrote, "The Education of a Speculator", right? (This is a cheap ploy to ask you to read your own book and give us a follow up of what you think 10 years later. Chapter by chapter of course.)

    3rd read. I would presume that we are entering a classic text book scenario,(that is if your book was used in a class room setting), a full moon has just passed, hurricanes in Asia and Caribbean, markets index's breaking whole numbers, and the fear and panic I see in the media. Please tell me the elephants are nearby for an epic run!

  7. steve leslie on September 19, 2008 7:13 am

    to Ted Fusa:

    your comments are offensive and without merit. This is not a bloggers paradise if you dont have something insightful or instructive to post then dont bother. Things like "Huh? and "Duh!" contribute nothing to the collective consciousness. Immature little whitticisms like "can you have your daughter translate this" are excoriated.

    If you don't like what you read fine offer an alternate strategy or analogy with some meat behind it.

    This sight has never been used to promote book sales from anyone. My copy of The Education of a Speculator was sent from Dr. Niederhoffer as a gift. As he has graciously done many other things for many others. I will not mention such so as to not embarass the man. Nor will I sit idly by while some take cheap shots at my friend and this fine website that he sponsors by the way.

    Therefore in summary, show some class and decorum in your proceedings. You and everyone else is a guest therefore act accordingly.

  8. Daniel on September 19, 2008 7:30 am

    Ted Fusa, this is not a traditional scenario and an RTC2 will not work. It is nothing more than an arbitrage fund. The banks are not bailed out unless the Treasury Arb fund overpays for the assets. If the Treasury Arb fund overpays for the assets who is going to buy the debt for the Treasury Arb fund knowing the collateral is tainted? The system is nearing it's deflationary collapse. What comes next is anyone's guess.

    The matter-at-hand are trillions of dollars in commercial bank money (non-physical) that was created through debt origination to support non-producing assets (houses and credit card receivables). This money will be destroyed because that's what happens when you are not productive enough to support your debt. I have further commentary on my blog if you would like to read more of my perspective.

    It's not peak oil, it's peak debt.

  9. Matt Johnson on September 19, 2008 1:08 pm

    The dynamic hasn't changed — gov't will always try to control markets — this is no different than 100's of examples in history. I wonder if you have your gearheads backtesting equity markets with data of acquired and now defunct companies. This is no different.
    Lastly, what does 'usual' mean in the markets?

  10. Rocky on September 19, 2008 2:55 pm

    From Bloomberg:

    “John Bogle, who created the $106 Billion Vanguard 500 Index Fund in 1976, said the US Government is ‘punch drunk’ with proposals to rescue the financial system.
    “We’re playing a game of casino capitalism, interfering with the way the market is working,” Bogle, 79, said today….”The government seems punch drunk. It doesn’t seem systematic.”
    The S&P500 Index rallied as much as 4.8% after yesterday’s 4.3% rebound from the lowest level since 2005. The gains helped send the MSCI World Index … to the steepest two-day surge since records began in 1970.
    “I’m obviously in the minority,” Bogle said. “Believe me, the value of American business doesn’t change that much in a day,” said Bogle, named one of the industry’s four “Giants of the 20th Century” by Fortune Magazine in 1999.
    Bogle, who retired from Vanguard Group in 1999, said he hasn’t changed his personal asset-allocation — 35% in stocks and 65% in bonds — since 2000. Because of price fluctuations, he currently has about 30% in stocks and 70 percent in bonds.
    “We’re in the most speculative market I’ve seen,” said Bogle, who was born five months before the stock-market crash of 1929. “We seem to be in the depths of despair one moment, and the heights of optimism the next.”

    My comment and questions:
    1) Amen, John Bogle.
    2) How many “speculators” have an after-tax rate of return that exceeds Mr. Bogle’s portfolio return since 2000 … which I reckon to be around 8.5% compounded?
    3) Have we perhaps lost sight of the true purpose of the capital markets — which is to allocate capital from people who have excess capital to people who need incremental capital?
    4) Have the capital markets morphed into a futures market? That is, have capital markets morphed into some sort of bizarre price discovery (i.e. of level 3 assets) mechanism?

  11. George Parkanyi on September 19, 2008 6:51 pm

    My system is an allocation system, and entirely mechanical. I consider 8-9 re-allocation trades a month pretty good, and that’s the more aggressive version using some long/short commodity ETFs (my version of steroid juicing) in the portfolio.

    It has made 13 such trades in the past 4 DAYS, and this September I’m already at 20, with two more poised for Monday.

    Now THAT is some serious volatility.

  12. Mr T on September 20, 2008 12:27 am

    @ Steve Leslie: I thought about posting a comment after the Lon Evans debacle but reconsidered. This is the Internet, not a dinner party, trolls will appear at any time and Victor and Laurel have the opportunity to edit the comments if so inclined. The fact of the matter is there will always be cheap shots available to those who want to disparage Victor and Laurel or Nigel or whoever the target of the day is but I would expect that with the collective accomplishments of all the individuals here that a thicker skin would prevail — yet we have just the opposite. The thing that disappoints me most is that the contributors to this site have never hesitated to take the cheap shot when it has been available, from Warren Buffet to the Palindrome to Carly Fiorina, even Obama; giving the overall impression of a group that can dish it out but not take it. This last month in particular demanded that the regulars here step it up and not play to the lowest denominator, and yet what do we have? JT Holley coming down squarely in favor of bank stocks a month ago, yet no mea culpa to date? Is this ballyhoo deflation? I too as a layman try to understand Victor and Laurel's ideas but what are we to make of the statement lately that the moves are unprecedented? Perhaps these comments, as crudely worded as they might be, are simply a request for more from the contributors. Victor and Laurel have been in the markets for (thirty odd years?) and played alongside market legends — what is the context they would offer for current events? More Triumph of the Optimists? More failure of government? What would Victor and Laurel tell the retail investors that they have always said pay more than their fair share today?

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