Unmalleable Breakfast

The icon of The Great American Wall Street Trader is routinely glorified, demonized, envied, castigated, heralded, and morally cast down. Journalistic tee-ball pieces detailing exorbitant year-end bonuses and the splurges of charity and luxury that ensue are becoming more commonplace as the 2008 political dissension of Wall Street vs. Main Street escalates. But how many of these angered Main Street Americans, who routinely elevate these stories to "Yahoo most emailed" status, really understand the capitalist combine that threshes seemingly random numbers into gold? Maybe if people realized how demanding these jobs REALLY were they'd be more lenient on what might only SEEM like oversized paydays. The note below, distributed by a senior Wall Street trader inside their institution during market hours, affords us a tiny glimpse into high level conversations taking place behind the gilded gates of a top tier investment bank. I challenge anyone to find an anecdote that more accurately summarizes the intellectual rigors that power our economy.

Real names and locations have been omitted.

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OKAY, HERE IS THE DEAL:

EVERY DAY JOHNNY OFFERSIDE ORDERS BREAKFAST FOR A COUPLE GUYS ON THE DESK. RIGHT NOW I AM ONE OF THOSE GUYS. I WOULD LIKE TO STOP RECIEVING MY BREAKFAST ORDER, BUT JOHNNY ALLOWS NO CHANGES TILL THE END OF THE YEAR. EITHER HE, OR THE DELI COULD NOT HANDLE EVEN THE MOST MINOR OF CHANGES. THAT SAID, I AM ALLOWED TO FIND A REPLACEMENT. THIS IS MY DAILY ORDER: EGG WHITES, BACON, WHEAT TOAST AND A BANANA. MY SHARE IS $20 A WEEK. IS ANYONE ON THE 5TH FLOOR, SOUTH SIDE OF 666 WALL STREET, INTERESTED IN TAKING MY SPOT? IT IS GOOD TILL THE END OF THE YEAR, AND I WILL SUBSIDIZE WITH A ONE TIME $20 CASH PAYMENT.

STEVE BIDDLEBACK
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Stop Asking Me What I Think About The Economy...

I've already told you, it's about to suck.

Oh, and look at this CHART.

Mops 'R Us,
KH

Gawker's Smear Campain Against Me

This morning my photo mysteriously appeared in a Gawker article outlining a political development proposed to slow the hedge fund rich from getting richer. The photo harmlessly/accidentally implies that I am one of these "tax avoiding" hedge funders (the term "funder" appears when you roll your cursor over my photo). Though I do not work for a hedge fund I will pretend to while I write this note.

Those of you that know me will have no difficulty spotting the abundance of hilarious irony. Could there possibly be another person who has shorted* Manhattan's cultural trajectory with more fervor? The vicious cycle of more tasteless money, higher rents, higher prices for everything, and less diverse inhabitants desiring less unique arts/food/services has turned Manhattan into New York's cultural bowl of smashed peanut shells. Go ahead and tax hedge fund performance fees by 20%, 30%, or 50% - Like that's gonna make any difference! Performance fees are only half the hedge fund payout equation. If you happen to be one who is somehow supported by the spume of these abundant capitalist treasures don't be worried. And even if DC does decide to raise taxes, don't believe that it will prevent a new deluxe high rise from towering over a neighborhood near you!

Your salary to the Nth power,
T. Boone Pickens

* 'Shorting' is hedge fund speak for betting that the price of a security will decline.
You might overhear a witty hedge funder utilizing this term in various non-financial contexts:
"Man, Marquee really sucks these days, I'm max short that place."
"You think she's hot? Where's your bid, I'm looking to put on a colossal short!"
"You live uptown? Man, downtown is totally where it's at, I'd short the hell out of above 14th street."

Investing in A Company I Hate to Love *

The recent "acquisition" of American Apparel will result in the ability to buy/sell its company's stock...

I'm typically not one to chuck money at something i don't completely understand but this is deja vu all over again (yes, it's happened three times total). A few years back i remember thinking that the newly listed Urban Outfitters stock wouldn't fare so well. "Who needs all that kitchy clothing anyway" I thought. Well, you can probably guess what didn't happen to that non-investment (it proceeded not to quintuple in the following three years). The same goes for my non-followed hunch on H&M.

THIS time it's going to be different. I've pooled some pennies together and bought the stock of a company who's image I sorta can't stand. BUT as i've learned many (painful) times before, just because YOU don't like it doesn't mean that millions of midwestern mall traipsing children won't! What's the downside you ask? Well, losing all your money and directly supporting the kiddie porn industry to name two.

Dove Charney, MY CAPITALIST ANTI-CHRIST.

Confession: The only tshirt I will purchase is American Apparel size large (oops!).

Disclaimer: Don't go out and buy this stock then blame me when it plummets to zero. I am ABSOLUTELY NOT recommending that anyone make this investment.

Late December 2006 newstory / Two year chart of stock ticker APP

* Much credit to my friend JasonY for bringing this late December announcement to my attention

How I Made Some Easy Sheckle on Osama Bin Ladin

I've been asked to explain this SO many times that I've finally decided to write it down.

One by-product of society's current obsession with gambling and auction style commerce are "current event" markets. Just apply the protocols of sports betting to other uncertain topical outcomes like elections, judicial rulings, weather, or military incursions and you've got yourself a near endless supply of wagerable events!

Trading contracts are assigned to event that have binary outcomes due at a predefined expiration date. At expiration the contract is either worth $0 or $100, depending on the outcome. While the event is still uncertain the contract price will fluctuate according to the probability of that event occurring.

Let's take an example:

Bird Flu <> 31Mar06
This contract will be valued at $100 if by 31mar06 a confirmed case of bird flu is reported in the United States. If no cases are reported the contract will expire at $0.

Currently the market for this contract is 12.5 @ 15

This market is implying that there is a 13.75 percent chance that this event will occur (just average the 2 numbers above). The market above also tells you that someone is attempting to "buy" the contract @ 12.5 while someone else is trying to "sell" the contract @ 15. Just as in the stock market or any similar dutch style auction there are always buyers and sellers, and when a buyer and seller agree to a price there is a trade. Remember that in this type of market participants wager WITH EACH OTHER. There are no bookies, oddsmakers, or intermediaries involved here. The exchange makes money by charging a commission each time you roundtrip a contract.

Here's how it breaks out:
You can buy 1 contract @ 15 (there is someone attempting to sell a contract @ 15)
If no bird flu occurs you lose $15 (the contract expires @ $0)
If bird flu occurs you win $85 (the contract expires @ $100 so you've won $100 minus the initial price)

You can sell 1 contract @ 12.5. Note that you don't have to previously own a contract in order to "sell" or "go short" it.
If no bird flu occurs you win $12.5
If bird flu occurs you lose $87.5

Make sense?

Now to Osama Bin Ladin...

Osama Bin Ladin <> (assume that today is 20Mar03)
A. 31Jun03 37 @ 38
B. 31Dec03 38 @ 40
C. 31Jun04 39 @ 41

So what's wrong with this market? Remember that if at anytime Osama Bin Ladin is captured all of these contracts will be worth $100. But if he is not captured by each expiration that contract will expire at $0. The trade opportunity here was pretty obvious - sell contract A and buy contract C in equal amounts. Let's say today is 20Mar03 and you are able to sell $1000 worth of contract A and buy $1000 worth of contract C.

You sell $1000 of A @ 37 (risking $630 to win $370 if Osama is not captured)
You buy $1000 of C @ 41 (risking $410 to win $590 if Osama is captured)

As 31Jun03 approaches contract A will slowly leak towards zero if Osama is not captured while contract C will retain most of its value since expiry is still so far in the future.

So here is a snapshot of the market on 31Jun03...

Osama Bin Ladin <> (assume that today is 31Jun03)
A. 31Jun03 0 @ 0
B. 31Dec03 25 @ 27
C. 31Jun04 36 @ 38

So we've made $370 by betting that Osama would not be captured by 31Jun03 (by selling contract A @ 37). And on contract C that we bought @ 41... Well, it's now only worth 36 but we can sell it out @ 36 at a loss of only $50. You can repeat this trade by selling contract B and buying contract C, but it's no longer as attractive because the term structure has correctly "steepened" back out. Originally the term structure was too "flat" assigning too little probability for the same event but with more time until expiry.