Wednesday, October 28, 2009

Chris Wood Gets The Vapors

Chris Wood of CLSA writes in the WSJ:

The reality of an increasingly command-driven economy in America means that government policy is likely to become the key determinant of where investors should place their money. For example, the near-term prospects for the housing market in the U.S. will be strongly influenced by whether the federal government extends its first-time home-buyer tax credit when it expires in November. Like cash for clunkers with autos, the risk is that such a program is simply buying demand from the future.

He's concerned that the increasingly hands-on intervention in industry by the US Governement will lead us into a liquidity trap a la Japan's Lost Decade. I'm not sure I totally agree with him; Japan's liquidity trap was due to a flight to quality - institutional investors ran to JGBs because Japanese corporations were way overleveraged. Today, it's the US Government that is stretched too thin. I wouldn't count out stagflation as a possible outcome rather than deflation.

Liquidity trap or not, I thought this was worth repeating:

This is why Wall Street should make the most of the rally in U.S. stocks while it lasts. The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.

Go read the whole thing - it's worth it.

And, for those of you out there who didn't get the title of the post:
The Vapors - Turning Japanese (Sorry, no embedding.)

Friday, October 16, 2009

Master Of The Rolodex

Raj Rajaratnam, the founder of hedge fund Galleon Group, was arrested this morning for insider trading. According to prosecutors, Rajaratnam received tips from other hedge fund managers, corporate executives including employees of IBM and Intel, a McKinsey consultant, and former employees of Bear Stearns. (What is it with these ex-Bear guys and insider trading?) Rajaratnam's fund is alleged to have profited to the tune of $17 million through these tips. I think there's a lot more to come. The size of the alleged scheme doesn't make sense relative to the rest of the facts.

Anyone who's worked on Wall Street is told, from the get-go, that insider trading is one of the deadliest of sins. If you are caught, and you WILL get caught, you will go to jail, and you will never work in the industry again. Ever. You will also have to pay back all the money you illicitly gained, plus hefty penalties. You're regularly reminded of this through stern lectures from your compliance officer, presentations made by outside counsel, and by the occasional front-page article like the one we saw today. The SEC is ever-vigilant, we are told. They investigate the slightest hiccup in trading volumes, and do not stop until they get their man.

The reality isn't so simple. Work on the street long enough, and you'll realize that insider trading is pretty easy to commit. People talk. They say things in elevators or in hallways when they think nobody is listening. They leave papers lying around all the time that contains sensitive information. (Bud Fox in Wall Street totally had the right idea, btw. The fact that the cleaning ladies in my office don't drive Bentleys says a lot about either the quality of their character or a significant language barrier.)

What deters most people from acting on this inside information isn't the fear of the SEC directly. Rather, it's a cost-benefit analysis. If I put on a huge position in a stock just days before it's taken over, my account would be red-flagged in an instant. There's no chance of getting away with it. The only chance of success, as it were, would be to put on a position that's small enough to fly under the SEC's radar. And here's where the system works - I'm just not going to bother. There's no point in risking my entire career over a profit of maybe $20k. Most people on the street earn ten times that in a year, often more. Even if you're 99% certain you'll never get caught, that 1% chance is still more costly than the PV of a successful Wall Street career.

Getting back to the day's news - this is what doesn't make sense to me. Why would Rajaratnam risk his reputation, his career, and his freedom, over such a small amount of money? The guy is a billionaire. $17 million doesn't move the needle for a guy like Rajaratnam. And, assuming he traded the stocks in question through is fund, rather than in a personal account, he'd personally take home only a fraction of that amount.

I suspect these insider trading profits are a lot larger than what Rajaratnam has thus-far been charged with. The prosecutor has already hinted at this according to Bloomberg: "The prosecutor said there’s additional evidence and may be more charges against him and that the case is “overwhelming.” " I'm also suspicious that Rajaratnam would be worried enough about a $17 million case that he would consider fleeing the country, as was implied in an earlier WSJ article:

In court documents, prosecutors said Mr. Rajaratnam had expressed to another individual that he believed a former Galleon Group employee was wearing a wire and that Mr. Rajaratnam had purchased a plane ticket to fly to London on Friday from New York's John F. Kennedy International Airport.

So, it sounds like Rajaratnam was onto the Feds, and the prosecutor had to act with what he had before Rajaratnam could leave the country.

I'd keep an eye on this case - I think we may see some much bigger numbers, and potentially a few more hedge funds dragged into the mix.

Wednesday, October 14, 2009

Now That's Ballsy

Apparently, Saudi Arabia is trying to get compensated for lower oil consumption as a result of new global environmental initiatives. This pretty much sums up my opinion:

“It is like the tobacco industry asking for compensation for lost revenues as a part of a settlement to address the health risks of smoking,” said Jake Schmidt, the international climate policy director at the Natural Resources Defense Council. “The worst of this racket is that they have held up progress on supporting adaptation funding for the most vulnerable for years because of this demand.”

I'd actually be very interested to hear the Saudis' methodology for calculating "fair" compensation. It should be possible, given this model, to calculate the implied price of oil that Saudi Arabia considers to be justified. Armed with that data, the rest of the world should be able to ask some very interesting and potentially embarassing questions about Saudi oil production policies. I'm very curious...

Tuesday, October 6, 2009

Dollar Demise

This article from The Independent entitled The Demise of the Dollar has been circulating around the Asian trading desks tonight. The story, as best as I can tell, is that China, Japan, France, Russia, Brazil, and several Gulf States are secretly meeting to create a new currency basket with the intention of moving crude oil off of USD pricing. Such a move, as the article's headline dramatically implies, would be the end of the dollar's dominance as the premier currency of international trade.

I was a bit torn on whether or not to post anything about it. On one hand, it's getting a lot of traction, (at least in Japan and Hong Kong.) On the other hand, it's sensational journalism - long on alarmism and short on detail. And it's poorly written, to boot. In the end, I decided to outline a few salient points as to why I think this article is bogus.

To wit:

  • There should be no surprise that the major players in the global economy are considering an alternative to the dollar. I'd wager that even the US itself is working out contingency plans for Euro-denominated crude. Given the massive stimulus packages and Wall Street bailouts of 2008 and 2009, the possibility of a significant dollar devaluation is very real. I'd be more shocked if most countries weren't considering the alternatives.

  • China has a huge long USD position through its ownership of US Treasuries. Any drastic move to weaken the dollar is going to hurt China more than it will help.

  • Japan and France are both very strong allies of the US. Japan is not particularly close to China; Russia is not particularly close to France. The Gulf States don't always agree internally, and should not be considered a bloc. Putting together an agreement would not be easy.

  • It's one thing to have governments agree to create a currency basket. It's another thing entirely to get private corporations on board. I'd be a lot more concerned if this consortium included ExxonMobil, BP, and ChevronTexaco.

  • Buried at the end of the article, we learn that the current deadline for this program to be implemented is 2018. That's a long way off, and a lot can change in 9 years.

    I don't really believe that this is a prelude to "a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy." I do believe, though, that it's another compelling argument for the US to aim for completely renewable energy. Get us off of oil. and the US can let China deal with the Middle East and all its problems.

    It didn't take very long for some cold water to get thrown on this story:

    Japanese Finance Minister Hirohisa Fujii said at a news conference in Tokyo today that he “doesn’t know anything about it,” when he was asked about the newspaper report.
  • Friday, October 2, 2009


    When I traded on the floor of the AMEX, I knew a lot of traders who worked for Susquehanna. They were a sharp group of guys, and very secretive about what they were doing. Everyone knew they were big players, and everyone assumed they made a lot of money. Based on this article, it seems the assumptions were correct.

    They were also, unsurprisingly, universally good at poker.