Tuesday, March 18th, 2008...1:13 am
The summer after my freshman year of college I had an internship in finance at Neuberger Berman. A few weeks into the internship I was pretty sure I had figured out the market so I opened an Ameritrade account and put a few thousand dollars into play (savings from my high school job). The first stock I bought was 10 shares of Red Hat. I was high on the idea of linux and the stock was cheap. Amazingly, it went up about 15% the first week. My greed and inexperience got the best of me. I upgraded to a margin account so I could trade option contracts with the goal of turning my 2K into ten grand by the end of the summer. Within four months I was broke. I had wiped out all of my money on risky out of the money contracts. This was the summer of 2000. I wasn’t the only one losing money that year. I chalked it up to a lesson learned. Soon after I lost a great deal of my interest in finance as I realized there wasn’t such a thing as easy money.
The bad taste never really went away. It seemed to me that the market was kind of frivolous and is just a gentlemen’s excuse to gamble. I realize it is much more than that but I can never seem to get past those feelings. It’s hard for me to connect with a business that’s mission statement is the same as its only business objective: making money.
Don’t get me wrong. This concept is also the financial industry’s greatest strength. The brightest minds are attracted to Wall Street with one specific goal — to figure out how to make the most money. They are usually very successful and therefore very rich. My goal at Sportsvite is to leverage new media to make it easier for people to play sports. If all goes exactly right we’ll be able to sell advertising and create a commerce opportunity for our members. You don’t have to be a quant to tell me who is going to make more money.
Wall Street always figures out new and creative ways to create tremendous value. There are just too many geniuses working too hard at it. If the US worked as hard at philanthropy and science as we do at creating new derivitives and financial vehicles we would have solved the ansewr to life by now. I’ve read about the junk bonds and leveraged buyouts of the 80′s, watched the dot com boom and IPO’s of the 90′s and have tried to understand the hedge fund and private equity markets during this most recent boom.
I’ve watched over the last few years as the market went bananas. I saw friends collecting bonus checks that were higher than most corporate CEO’s salaries. I watched hedge funds take over the best office space in New York City and private equity firms raid industries and financially engineer incredible profits. I saw low-lifes show off how well they were doing in “mortgages” with flashy watches and wads of cash. People were getting filthy rich. It seemed like there really was easy money to be had.
But every once in a while shit gets F****D up and it seems to me like we’re in the middle of a shit storm that is only going to get much worse. Like most people I was in denial that we’re now in a recession. I was hoping the credit crunch was confined to real estate and financial institution. I have a friend at UBS who works in real estate finance. He has had a front row seat to witness a disastrous free fall in his industry (real estate loan generation, lending and financing). He’s been telling me that it’s going to get bad but I refused to believe it. But today I had my “Aha” moment. Bear Stearns, one of the most prestigious investment banks of the last century, went belly up in just a matter of days without much provocation. Another friend, who is a trader at a hedge fund, wrote to me that
“Bear’s stock is the most disturbing chart I have ever seen, from $158 a year ago to $4 today. Employees lost their shirts with this company. INV banks usually pay bonuses in stock options, now the options are worthless. I heard of one guy who was worth 15mm in stock at beginning of the month (stock trading at $77), now he is only worth 500k. It is very sad.”
I read this and I’m worried. There was no catastrophic event at the firm or humungous trading scandal. Bear just had lots of bad credit and the street started whispering that Bear was in trouble. Before anybody knew what to do there was a run at the Bank as everybody rushed to withdraw their money and refused to trade with Bear. This wasn’t a conspiracy. This is exactly what happens when a Bank goes belly up.
It seems to me like there are lots of other financial institutions with similar predicaments and similar shitty assets and it’s only a matter of days before those banks go belly up. Yeah, the Fed is trying to save the economy but it doesn’t seem like their actions have been doing much good lately. The Fed isn’t a miracle worker. I admit that most of this monetary policy is beyond me but when the Fed starts doing highly unusual and unprecedented action it doesn’t seem all that comforting.
In fact, it seems like the Fed is doing all they can to prevent a total breakdown of the US economy. Here’s the reason why (according to gigaom.com they had to step in and are guarenteeing 30 billion dollers in liability.
Bear Stearns is the second-largest prime brokerage firm in the country, with a 21 percent market share. As part of the prime brokerage business, hedge funds would use their stock holdings and borrow money, many times the value of their stock from Bear Stearns, and then redeploy it in the markets. Bear Stearns, thanks to its stellar credit rating, could easily raise gobs of money that it in turn loaned to hedge funds. They had built up a portfolio of around $136 billion of these assets.
In the days leading up to the financial crisis, the hedge funds had started to get worried about the credit worthiness of Bear Stearns and decided to pull their money. Now had Bear Stearns gone bankrupt, there would be a lot of hedge funds out there being forced to dump their stocks into the market just to meet their obligations. In other words, the downward spiral that would have ensued would have become a vortex that would have sucked down entire financial markets.
This frightens me. They’ve cut the interest rates incredibly low and that can’t be good for inflation or the value of our crappy dollar. In Baseball, many pitchers suffer serious arm injuries after sustaining minor injuries to other parts of their body. A bad toe can alter a pitcher’s delivery and throw off their mechanics which ultimately results in extra strain on their arm until they blow out an elbow or a shoulder.
Even if the Fed can stave off the collapse of other financial institutions, the US economy won’t be able to hold up with all this pressure. Investment banks are at the core of the US economy and provide liquidity and credit to all industries. If they are damaged our economy is damaged. It’s that simple. Other global economies, that are flush with capital from oil profits and emerging markets, are looking at the US’s skittish financial system and have no interest in investment. How can it not get worse? How can our economy not tear? Does the Fed really have HGH?
I came home from work today and devoured as much information on the market as I could find. The traditional news media gave me the standard frustrating and un-insightful jargon. (The fact that I can’t read the wall street journal without a subscription is rediculous to start with). It’s as if they don’t see the ripple effect of this hokusi wave and are just focusing on Bear Sterns as an unfortunate outlier. The dow actually was up for the day! Is everybody really drinking the cool aid? So I headed for the blogs. I found a few interesting posts like these on informationarbitrage.com and on bigpicture.com. Overall, I was surprised at the overall lack of attention and panic these events have received.
I called my dad tonight who is my voice of reason when it comes to understanding world events, especially concerning politics and the market. I told him it’s time to sell sell sell. He’s has positions in oil and has been doing pretty well over the last few years as oil continues to rise to seemingly unsustainable prices. My dad just chuckled and seemed to think this was rock bottom, was confident in the Fed, and overall didn’t seem all that concerned. I am.
I work in digital media. For me not to think that this market will affect my industry is ridiculous. Less credit and no financial stimulation and media will become stagnant. Advertisers dry up. Valuations for attractive start-ups plummet as deflated stock prices make it harder to justify acquisitions. Some startups are already having trouble accessing the capital that they have recently raised because of faulty credit swaps. Please explain to me a scenario how this is not going to happen…in every industry.
A few months ago I put a small amount of money back into my Ameritrade account that has been inactive for eight years. I closely follow many of the major digital media companies and wanted to get some skin in the game. I have yet to make a trade as I just can’t seem to pull the trigger on a transaction. Whenever I’m close I just get an overwhelming feeling of doubt that I haven’t done enough research or understand the market well enough.
But I’m ready to pull the trigger tomorrow. I’m going to short the Dow, short Lehman Brothers and look into shorting every other bank that doesn’t have a commercial bank or extensive cash reserves. If you want to know where the speculators are betting check out the activity on put options. I’ll also start to look at other credit companies (cars, credit cards, etc.) and see if there are other disasters waiting to happen. Maybe, I’ll take it to the next step and figure out which industries are prone to disaster as soon as their credit lines dry up.
As I’m writing this I realize I’ll be one of the bear’s who isn’t doing the economy any favors by going short. But hey, if that’s the way I feel that I can make the most money… Maybe I have a career in finance after all!