Odds of US Depression

As we close out 2008 and head into 2009, I thought this was an interesting little tidbit:



Depression, according to Intrade, is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters. With many economists looking for -5% to -6% GDP reading for 4Q08, its not that crazy. My how far we have come.

I will honestly try to do more postings in the new year. Happy New Year.

Why Not

A little pre-holiday humor, read the first headline:

Fractional Reserve Banking

In case you weren't already bearish on the markets, the economy, or the entire financial system...this video should do the trick:

Free Fallin

Here are lyrics from two of my favorite Tom Petty songs:

• "Yeah I'm free, free-fallin" - Free Fallin
• "I'm learning to fly but I ain't got wings, Comin down is the hardest thing, I'm learning to fly around the clouds, But what goes up must come down." - Learning to Fly

Another day and another horrible housing number. This morning S&P/Case-Shiller realeased housing data for the month of September. The Composite 20 index is now off 21.8% from the peak and there are no signs that this epic fall will end anytime soon. The bubble markets (Las Vegas, Phoenix, Miami) look like they are in a race toward zero. Although markets such as Dallas and Charlotte are holding up much better, they are also down (no one can escape the great housing collapse).

Any recovery in home prices is many months if not years away and when we do reach the bottom the "rebound" will leave many wanting. I expect housing prices will return to annual appreciations we saw before th bubble, specifically home prices will rise roughly in line with incomes...something along the lines of 3%-5% annually.

Father Guido Sarducci?

Anyone watching CNBC yesterday afternoon was treated to a one-on-one interview between Maria "Money Honey" Bartiromo and His Royal Highness Prince Al-Walid bin Talal bin Abdul Aziz Al Saud (what do you think his nickname was as a kid?). The interview came complete with sunglasses, tan colored scarf and vest, prayer beads, and cane against a backdrop of camels, donkeys, goats and horses.

The interview is worth watching for entertainment purposes alone but I found myself thinking the entire time that I was watching Father Guido Sarducci explaining his investment in Citi. Tell me these two aren't long lost brothers.

The Super Rich are Vulnerable Afterall

Sorry I haven't been able to post anything in the past few weeks. If you don't already know, the markets have been quite hectic, probably the biggest under statement ever.

I think the world may finally be coming to the realization that we are, how do you say, f**cked. It looks the the floor in the art market has finally dropped out and even the celebrity playground and oasis in the desert Dubai is feeling the effects of the global financial meltdown.

I think it is just the beginning and we will definitely see more stories of pain across the globe. Stay tuned.

Time to go Long Platinum/Short Gold

I will be looking at initiating a relative value trade between gold and platinum. I would buy platinum and short gold. I believe this trade has relatively "limited" amount of downside (obviously in this market nothing is limited). I think if precious metals continue to fall, gold will sell-off more than platinum or in the situation that we have a reversal, I think platinum will perform better to the upside. I don’t have opinion or handle on timing for this trade and would be open to suggestions.

Numbers:

• Platinum is down -48% YTD and is down -65% from its recent highs vs. Gold only down -12% YTD


• Spot platinum is currently trading at only an 8.5% premium to spot gold


• Since 1987, platinum has traded at an average premium to gold of 47%


• It traded at a 139% premium as recently as May of this year


• Platinum did trade very close to gold between 1991-1996 but still average a 5% during that time period


• The outlier occurred in 1992 when platinum traded at a 7% discount
  Since 1987 there have been 2 periods where it has traded at a discount: 08/06/91-09/11/91 and 12/18/91-02/05/92

Fundamentals:

• Platinum is 30x more rare than gold
• South Africa has 80% of the world’s platinum supply with the balance mainly coming from Russia, USA, Canada, and Zimbabwe
• Gold is much more common and is found on every continent: South Africa=12%, Australia=11%, US=10%, China=9%, Russia=7%, Indonesia=6%, Canada=5%
• Platinum demand is as follows: 50% jewelry, 20% auto catalysts, with the balance coming from HDD coating, fiber optic cables, explosives, spark plugs, etc
• Gold demand is as follows: 65% jewelry, 16% industrial and dental, 10% bars & coins, and 10% ETFs
• Its takes 10 tons of mined ore to produce 1oz of pure platinum…this process takes 5 months to do

Sign of the Times

I saw this article come across Bloomberg today and I couldn't help but laugh. I think it speaks volumes about not only the current state of the financial industry but also the future outlook. Gone are the private jets, weekend trips across the globe...gone are even first class and business class tickets for legions of bankers (at least the ones that will be left). Welcome the days of the investment banker flying coach. Sign of the times indeed.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aIft9KyDUso0&refer=home

Merrill Lynch & Co., UBS AG and JPMorgan & Chase Co. are telling senior bankers in Asia to fly coach on short-haul flights and reduce non-essential travel as they step up cost cuts, officials at the firms said.

UBS advised bankers this month to travel economy class for flights of up to five hours, two officials at the biggest Swiss bank said, asking not to be identified because it's an internal policy. Merrill employees have been told to travel economy for flights of as much as three hours since mid-September, two executives at the firm said.

The world's largest banks and securities firms are trimming costs to survive the credit-market meltdown that toppled Lehman Brothers Holdings Inc. and forced Merrill Lynch to sell itself to Bank of America Corp. The financial-services industry has cut more than 140,000 jobs since a surge in subprime mortgage delinquencies began to roil global debt markets in 2007.

``Investment banking has almost disappeared in this market, and with revenue shrinking severely, it's sensible to cut every single type of cost they can,'' said Renault Kam, a senior portfolio manager at Atlantis Investment Management in Hong Kong, which oversees $5 billion. ``We haven't seen the worst yet.''

JPMorgan, the biggest U.S. bank, has requested senior bankers fly economy on flights of less than three hours since late August, said an official who declined to be identified.
Fly Cheaper, Less

Royal Bank of Scotland Plc, which ceded majority control to the U.K. government this month, in an Oct. 16 memo asked workers worldwide to fly economy on regional routes and to cut back on travel, said an RBS banker who's seen the document. RBS spokeswoman Hui Yukmin declined to comment.

HSBC Holdings Plc's Asia unit asked its Hong Kong department heads and branch managers to cut travel expenses by 15 percent to 20 percent next year, two officials at the bank said, citing a Sept. 23 memo sent by Chief Operating Officer Jon Addis.

.....

London-based HSBC has asked bankers to use video conferencing to replace business trips when possible. Travelers for corporate training or internal meetings are required to book economy seats, spokesman Gareth Hewett said.

YTD Returns for Large Hedge Funds

Here are returns for some very large hedge funds YTD. Clearly it has been a bloodbath for many of them, including top tier institutions. There are however some funds who have been able to weather the storm and will no doubt eat the lunch of weaker funds and garner "top" people as well as assets. The rich get richer.

Fund Name, AUM (billions), YTD Performance
US Convertible Arbitrage
Waterstone Market Neutral Offshore Fund, Ltd $1.17 +24.86%

US Equity Arbitrage
Kingate Global Fund, Ltd $2.78 +6.20%
Fairfield Sentry, Ltd – A $7.35 +4.59%

Global Fixed Income Arbitrage
Capula Global Relative Value Fund, Ltd $4.24 +7.44%
Drake Global Opportunities Fund $2.62 -17.69%
London Diversified Fund, Ltd – D $3.00 -19.26%
Platinum Grove Contingent Capital Fund $5.23 -0.51%

Global Mortgage Backed Arbitrage
Ellington Overseas Partners, Ltd B/1 $2.07 -1.60%

Asia Multi-Strategy
Artradis Barracuda Fund $1.76 +14.69%

Global Multi-Strategy
B G I – Multi-Strategy Fund, Ltd – Class A $2.55 -3.87%
Bluecrest Capital International, Ltd A USD $4.35 +6.74%
CQS Convertible & Quant Strategies Feeder Fund, Ltd 1A $4.32 -21.15%
Deephaven Global Multi-Strat Fund, Ltd Class A $1.33 -23.87%
Double Black Diamond, Ltd – Series A $2.79 -2.94%
Drake Absolute Return Fund, Ltd $1.35 -18.87%
Millennium International, Ltd C/01 A $12.10 -1.18%
QVT Overseas, Ltd – B/1 $6.13 -20.88%
Shepherd Investments, Ltd Class B $8.90 -10.85%

CTA
Clive Fund, Class A $2.40 +34.06%
Blenheim Global Markets, LP $3.03 -1.21%
Bluetrend Fund, Ltd – Class A $5.78 +31.08%
MAN AHL Diversified, PLC $3.89 +14.49%
Riff Fund International, LP – Class A $4.33 -19.48%
Tewksbury Investment Fund, Ltd – B $3.58 +4.51%
Winton Futures Fund – Class B $7.20 +11.27%

Distressed
Canyon Value Realization Fund, Ltd – Class A $4.92 -19.01%
Cerberus International, Ltd $6.45 +0.07%
Paulson Credit Opportunities II, Ltd $2.53 +15.84%
Paulson Credit Opportunities, Ltd $4.93 +18.63%
Strategic Value Restructuring Fund $3.47 -9.66%

Merger Arbitrage
Paulson Enhanced, Ltd $2.73 +6.90%
Paulson International, Ltd $2.17 +5.20%

Global Event Driven
Cheyne Special Situations Fund, Inc – B1 $2.40 -6.87%
Castlerigg International, Ltd – Class A/1 $5.00 -22.53%
Davidson Kempner International, Ltd – Class A $6.67 -8.58%
Harbinger Capital Partners Offshore Fund I $13.74 -5.38%
King Street Capital, Ltd – Class A/1 $13.74 -0.23%
Marathon Special Opportunities Fund, Ltd – A $1.99 -10.93%
Paulson Advantge, Ltd – A $4.86 +15.01%
Paulson Advantage Plus, Ltd $8.80 +24.55%
Perry Partners International, Inc – Class A $8.35 -9.58%
Satellite Overseas Fund $2.90 -18.19%
Third Point Offshore $2.83 -21.31%
York Investment, Ltd – Class A/1 $5.10 -19.43%

Credit
Marathon Overseas Fund, Ltd – A $1.20 -14.54%
JCAM Global Fund Limited $3.50 -2.31%
Palomino Fund, Ltd – Class B $4.13 -26.16%

Europe Equity Long/Short
Alphagen Capella Fund – A $3.05 -5.61%
Cantillon Europe Ltd – Class A/1 $2.46 -12.46%
Egerton European Dollar Class – A $2.27 -26.52%
Lansdowne Euo Equity Fund, Ltd – A (EUR) $2.15 -12.42%
Lansdowne UK Equity Fund, ltd $8.07 -1.57%
SVM Highlander Gund plc $10.18 +10.52%

Global Equity Long/Short
Altima Global Special Situations Fund, Ltd – A $2.29 -18.08%
Cantillion World, Ltd – Class A/1 $2.91 -9.53%
Galleon Diversified Fund, Ltd – Class CY S/1 $1.90 -13.20%
Horseman Global Fund USD $3.42 +24.03%
M. Kingdon Offshore NV – A/1 $4.20 -19.87%
Maverick Fund, Ltd – Class A/1 $1.41 -29.51%
SCP Ocean Fund, Ltd – Series AU/016 $4.45 -9.85%
SR Global Fund C – International $2.00 -11.12%
Tosca Fund, Ltd – Class A (Financials) $3.43 -60.60%
Viking Global Equities III, Ltd – A/1E $6.86 -6.20%

US Equity Long/Short
Atlas Global Investments A2/05 $1.95 +3.72%
Cerulean Partners, Ltd (Financials) $5.17 -31.61%
Greenlight Capital Offshore, Ltd – Class A/1 $2.06 -14.44%
Ivory Capital, Ltd – Class A/1 $2.68 -12.69%
RIEF LP – B $3.33 -23.54%
Tremblant Partners, Ltd – Class A $2.10 -35.77%
Zweig-Dimenna International, Ltd – Class A $2.24 -7.75%

Global Macro
Brevan Howard Fund, Ltd – USD Class A $15.94 +14.14%
Bridgewater Pure Alpha Fund $6.37 +4.34%
Drawbridge Global Macro Fund, Ltd – A/1 $9.07 -18.05%
Moore Global Fixed Income Fund, Ltd $4.70 +4.19%
Moore Global Investment Fund, Ltd – Class A $9.30 -7.40%
Traxis Fund, LP $1.43 -17.91%
Tudor B.V.I. Global Fund, Ltd – A $5.93 -3.35%
Blue Mountain Credit Alternatives Fund $3.23 +2.90%

Farewell Remark's from Mr. Subprime

The following comes from Andrew Lahde of Lahde Capital. Many of you will remember him from his fund's returns last year of over 850% betting against the subprime market through the ABX indices. Lahde along with John Paulson and a few others made unimaginable returns by not drinking the koolaide of perpetual house price appreciation that many market observers were dishing out in 2006 and 2007. Here are some comments he made in late 2007:

• “We believe that all of these positions (ABX Indices) have further downside”
• The AA and A rated paper will “melt away into the history books
• expects AA and A paper will “take a while to disintegrate, but it is my belief that they too are worth zero”
• “The credit that America has been having an orgy with is going away”
• “Our banks are saddled with endless bad debt and our collective leadership is clueless”
• the collapse in value of subprime mortgage-linked securities will be repeated for bonds backed by commercial property loans
• “we will go into a deep, deep recession.”
• “Our entire banking system is a complete disaster”
• “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.”

Almost all of that has come to pass. After these returns, I guess that means he can pretty much do whatever the hell he feels like. Here is his fund's closing letter. Enjoy.

• Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
  Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
  There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
  I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
  So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.
  I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
  On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.
  Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.
  With that I say good-bye and good luck.
  All the best,
  Andrew Lahde

Laid Off By Lehman: One Broker's Story

Absolutely hilarious. My favorite line is "Today I actually gave myself my first rub n' tug." Instant classic.

Where Does It End?

Talk about ballooning! This is a chart created by David Rosenberg at Merrill Lynch.

• "Given the announced increase in the TAF program, unlimited swap lines and modest growth in other segments of the asset side of the Fed’s balance sheet we could see it hit $3 trillion over year end. This would represent an 84% increase on top of the growth in assets we have already seen in 2008."

He has been very good at calling the "big picture" correctly and I would actually say he may be proven conservative in his estimate. Thinking about the massive risk that both the Fed and the US Government are assuming is extremely disconcerting. I understand the need to unfreeze the credit markets and the implications the world faced if no action was taken (I am a 100% free-market capitalist so it is extremely difficult for me to say that, fyi) but in the longer term, after we pass through this mess, we are heading for probably an even larger crisis. The actions taken here and abroad is very inflationary in the long run. This is not good for the dollar or any fiat currency that has turned up the speed on the printing press. No wonder we have seen massive physical buying in precious metals over the past few weeks -- http://mintnewsblog.blogspot.com/2008/10/examining-unprecedented-demand-for-gold.html .

Can Anyone Say Cliff Diving?

This is a graph of the HFRX Convertible Arbitrage Index. Let me emphasize that: INDEX! It goes without saying that convert players aren't feeling very happy. It's down 41% this year and down 22.5% this month alone. Just another victim of the global financial and credit crisis.