And the winner is…Inflation

Reviewing some charts, it is becoming very clear to me that Mr. Market is picking sides in the “deflation or inflation” debate. Mr. M is putting his money squarely behind inflation. Only time will tell but that’s my belief in mid July 2009.

Heads We Win

Heads we win

This Bernard Madoff ponzi scheme story sounds juicy. The story just broke yesterday so details are sketchy. But it appears Mr. Madoff confessed to his 2 sons that he’s run a years long ponzi scheme to the tune of up to $50 billion. There’s some leverage in there baby.

The fund’s trading strategy is known as “split-strike conversion,” buying a basket of stocks and options. Sounds esoteric, probably enough so to keep most investors from digging deep enough to figure out what was really happening.

I searched the trading stategy and came upon a forum post from 2003. It appears a fellow named Arnie was doing his due diligence on the Madoff fund and was hitting a dead end as to how the fund actually turned a profit.

We can only hope Arnie1234 listened to his better judgment and didn’t give this joker a dime of his cash. Arnie, if you come across this post let us know what came of your research into the Madoff fund. Hope it has a happy ending.

As ever, if something looks too good to be true it probably isn’t. Reminds me of another flame out I’m familiar with where the manager claimed, “Heads we win, tails we don’t lose.” You can figure out how that ended.

Arnie1234 (2 posts) wrote on 5/22/03 7:13 AM

Hello !
My question regards the strategy of the fund described below:

Fairfield Sentry is a fund that employs a sophisticated statistical index arbitrage strategy known as a ‘zero-beta’ or a non-market dependent strategy. Profits are earned on inefficiencies in the pricing of highly liquid index options, in this case, the S&P 100. The strategy has three distinct components. First, the manager buys a basket of 25-35 individual stocks, providing a close proxy to an index (again in this case, the S&P 100). Next, he then hedges out the downward risk of the stock holdings by simultaneously selling out of the money index call options and then buying out of the money (or at the money) index put options. The sale of options also increases the return through premiums earned. Generally, this strategy does not make use of leverage.

Please, can somebody explain in detail how this strategy works or post some useful links. I have done some research on the web, but didn’t find any useful resources. The strategy consists of a long + a synthetic short position, but what I don’t understand is how it generates its profits.

Many thanks in advance
Arnie

The Oil/Commodity Bubble Is Well-Neigh Gone

Don’t believe the hype. The emergence of China, India and other countries is not something that plays out overnight. Despite the growth recently seen in these countries, the commodity bubble is gone. Gone for a good long time. Be sure to let Jim Rogers know all trees don’t grow to the sky.

I’m not arm-chair quarterbacking this because of the recent swift decline from the $140s to the $1teens. No, it’s stories like this that tell us the tide has turned – in a big way. I pass no judgment on what one does with one’s property. I’m firmly in the camp that believes if you do, in fact, want to go out back and burn your fortune you should have at it. The message of the market doesn’t come from the act itself, but rather what it reveals about human behavior.

Sure, you could say it’s just a handful of Russian oligarchs. Or you could raise an issue with how the wealth was acquired. Legitimate points but I don’t think alone or together they take away from the underlying message – “look what we can do.”

Jean Pierre, a high-end agent, said: “It’s completely surreal and we are really uneasy. We don’t dare any more to propose any price below €100 million for these clients. Anything below and they throw you out…and you should see how they do it,” he told Le Parisien. The Nice Matin newspaper said: “At this price tag, we are beyond luxury and even reality.”

Russian excess is feeding discontent among poorer people. Pierrette, a housekeeper for one Russian, said: “I attended a party where the guests had fun throwing burning €500 notes into the air while everyone split their sides laughing. The domestic staff were later told to collect the ashes. It was sickening.”

If you’re not too green, maybe it’s time to start shopping for the big SUV you’ve had your eye on.  I predict we’re going to see the oil / commodity cut in half or more.

Fill ‘er up!!

Dimon Wears the Crown

Vindication for the new King of Wall Street.   Kudos to a well played hand Mr. Dimon, a masterstroke.

Hearst Widow Estate Default, But It’s Only a Subprime Problem??

We’re beyond calling it a subprime mess right?  I read an article recently, forget where, that ultra high net worth folks were securing mortgage loans for 7 to 8 figures with nothing more than a signature.

What’ll 50 bps Get You?

Well, that was easy.  Hmm??

Anita Roddick’s Words of Wisdom

Photo courtesy of openDemocracy

Anita Roddick, Body Shop founder, died yesterday. At times controversial, she did offer a lot of business wisdom.  I don’t know enough about her to say if I agree with her overall business philosphy.  But you can probably take away an idea or two from some of her thinking.  Portfolio’s Daily Brief brings us a compendium of Roddick-isms:

“If I can’t do something for the public good, what the hell am I doing?”

“Wealth has never worried me, greed worries me.”

“I am still looking for the modern equivalent of those Quakers who ran successful businesses, made money because they offered honest products and treated their people decently … This business creed, sadly, seems long forgotten.”

“All through history, there have always been movements where business was not just about the accumulation of proceeds but also for the public good.”

“I want to work for a company that contributes to and is part of the community. I want something not just to invest in. I want something to believe in.”

“If I had learned more about business ahead of time, I would have been shaped into believing that it was only about finances and quality management.”

“If you do things well, do them better. Be daring, be first, be different, be just.”

“To succeed you have to believe in something with such a passion that it becomes a reality.”

“Consumers have not been told effectively enough that they have huge power and that purchasing and shopping involve a moral choice.”

“If you think you’re too small to have an impact, try going to bed with a mosquito.”

“There is no scientific answer for success. You can’t define it. You’ve simply got to live it and do it.”

“While many businesses have pursued what I call ‘business as usual,’ I have been part of a different, smaller business movement, one that tried to put idealism back on the agenda.”

“The market controls everything, but the market has no heart.”

“Since the governments are in the pockets of businesses, who’s going to control this most powerful institution? Business is more powerful than politics, and it’s more powerful than religion. So it’s going to have to be the vigilante consumer.”

“Nobody talks of entrepreneurship as survival, but that’s exactly what it is and what nurtures creative thinking.”

“When you run an entrepreneurial business, you have hurry sickness—you don’t look back, you advance and consolidate. But it is such fun.”

Party On Steve

Congress is holding hearings today covering the so called “Blackstone Bill.” Did Steve Schwarzman’s 60th birthday soiree in NYC back in February give rise to these hearings and this bill? Maybe, maybe not. In any event, everyone seems to be piling on Schwarzman – politicians, industry peers, the press. As with most things, when sentiment is this skewed I’ll tend to take the other side.

Nothing Mr. Schwarzman and his colleagues at Blackstone did broke any laws. He did not physically harm anyone during the course of his work. It appears to me he played by the rules – probably played tough, probably played close to the boundary lines – but by the rules nonetheless. And for this he amassed a tremendous amount of wealth for himself, his colleagues and presumably other investors in Blackstone (pre-IPO that is).

Guess what folks? It’s his money and he can do with it as he pleases. Hell, if Steve wants to take it out back of one of his homes, load it into a steel drum and burn it – burn it all – that’s his choice. Not yours or mine, and surely not anyone who plies a trade on Capitol Hill.

Did he kill the carried interest golden egg? Maybe. But he’s a big boy and should have thought through the fall out from hosting a party like this. As far as the other PE guys crying about it? Tough crap. Maybe they should have thrown a party for themselves first. Steve beat them to the party and the IPO.

What to do from here? BX??

What Does the Grave Dancer Know About the Internet?

Perhaps more than meets the eye.

Didn’t Globalism Nullify Inflation?

Blackstone is gobbling up real estate faster than you can shake a stick. A bunch of smart hedgies and others are laying out record setting prices for works of art. I know what I don’t know. This is just the tip of the iceberg of a lot of collective brainpower and they seem to be grabbing any and all physical asset around.

Paul Volker was on Charlie Rose a few weeks ago and he essentially said inflation is not gone and we should be on our toes because once it works its way into the system it is hell to get it out.

I believe inflation is very real and being kept a tightly guarded secret. Barry Ritholtz posted about M3, its disappearance, a now its reconstruction. If the reconstruct is close to being on target it ain’t a pretty picture.

We’ll see.