Or, really, more of a clarification. I tend to draw a distinction between currency debasement and interest rates rising...well, because they are actually two different trades. The former can happen whether or not you see the latter. QE and other similar programs are akin to the revaluation of gold from $20 to $35 under FDR, which turned deflation into inflation within the month and had the most obvious impact on the value of the dollar.
So, given that much of the money created as part of QE is used to buy up federal debt, why should we be at all surprised that rates have stayed low? Treasuries are a rigged game, and anything that I've done to get short has been more a test case with little capital at stake, recognizing that the time might not be right yet. My move into gold, with conviction, several years back is much more about the risks of fiat currency. And that trade has worked out very well.
Monday, July 30, 2012
Marathon, Not a Sprint
Over at Steve Keen’s website, there is an article up about investment advice in the current environment. The point seems to be that because most advisors are operating with a flawed economic model, they end up offering bad advice. The most egregious mistakes stem from the belief that the various rounds of quantitative easing will lead to inflation and higher interest rates. One example cited (and it seems to get a lot of attention from all shades of Keynesian economist) is that of Bill Gross and PIMCO calling for a short of treasuries last year. The condemnation is for using the loanable funds theory, and assuming that the simple act of increasing base money will lead to inflation through the multiplier effect.
To a certain extent, in the universe where I still think economic theory is moderately interesting (and my interest has definitely been dwindling, even as I know that an understanding is useful for forecasting the inevitable mistakes of central planners), the Post Keynesians are probably right about endogenous money. Nevertheless, and I am repeating myself here, there is an inherent oversight in their model of how easy money facilitates speculation – and easy money is very much a consequence of Fed policy and having an automatic backstop in place for the financial sector. So, again, even though there is some merit to the explanation that they offer, I still think that they defer to a solution which leads to the same problematic outcomes (albeit only eventually and maybe not immediately).
As to the specific question of interest rates, even if treasuries stay where they are (or go higher), there really is no saving the dollar. Remember, these guys think deflation is the dirty word, and are incredibly dismissive of the risks of inflation. So, at the first signs of “trouble” (and they already seem to be here), the reaction will be to print a lot more dollars, euros, etc. All the while, keep in mind: while there has not been any strong empirical proof of inflation in the official numbers, the expected deflation that should have come with deleveraging has actually amounted to enough inflation to practically meet the Fed’s mandate (and I think that amount is understated, as it is). So, maybe inflation has not been out of control, but the steps taken sure have had an impact consistent with the belief that Fed policies will prove harmful to your savings and future standard of living.
To a certain extent, in the universe where I still think economic theory is moderately interesting (and my interest has definitely been dwindling, even as I know that an understanding is useful for forecasting the inevitable mistakes of central planners), the Post Keynesians are probably right about endogenous money. Nevertheless, and I am repeating myself here, there is an inherent oversight in their model of how easy money facilitates speculation – and easy money is very much a consequence of Fed policy and having an automatic backstop in place for the financial sector. So, again, even though there is some merit to the explanation that they offer, I still think that they defer to a solution which leads to the same problematic outcomes (albeit only eventually and maybe not immediately).
As to the specific question of interest rates, even if treasuries stay where they are (or go higher), there really is no saving the dollar. Remember, these guys think deflation is the dirty word, and are incredibly dismissive of the risks of inflation. So, at the first signs of “trouble” (and they already seem to be here), the reaction will be to print a lot more dollars, euros, etc. All the while, keep in mind: while there has not been any strong empirical proof of inflation in the official numbers, the expected deflation that should have come with deleveraging has actually amounted to enough inflation to practically meet the Fed’s mandate (and I think that amount is understated, as it is). So, maybe inflation has not been out of control, but the steps taken sure have had an impact consistent with the belief that Fed policies will prove harmful to your savings and future standard of living.
Friday, July 27, 2012
Asleep With My Eyes Open
To be honest, I've been a bit bored lately. Not on all fronts, but certainly as it relates to the investing universe. The market doesn't offer too much in my opinion. Gold continues to consolidate. The miners drop, pop and repeat. The Yen may have hit an important turning point. But, even there, I don't have enough skin in the game yet to get really worked up about it. Which leaves me thinking about an alternative framework for how to invest so that the blood begins to flow again.
Frontier markets. Nothing new in my writing that. But, more precisely, I want to start getting involved in the early stage, seed round financings of companies in remote countries that have promising futures. It's the way that I want to put my money to work, for the portion that does not currently have a job. It means building up a network of contacts and learning who the key players are in different places. I've started that process, but I plan to do it even more. Smaller bites at the apple, but greater diversification, and the realistic expectation that a home run doesn't just mean 2x on your money, but 10 or 20.
Now that could get me excited.
Frontier markets. Nothing new in my writing that. But, more precisely, I want to start getting involved in the early stage, seed round financings of companies in remote countries that have promising futures. It's the way that I want to put my money to work, for the portion that does not currently have a job. It means building up a network of contacts and learning who the key players are in different places. I've started that process, but I plan to do it even more. Smaller bites at the apple, but greater diversification, and the realistic expectation that a home run doesn't just mean 2x on your money, but 10 or 20.
Now that could get me excited.
Wednesday, July 25, 2012
Never Jump
As you may recall, I initiated my Yen short a few weeks back with a few longer-dated FXY put options. I was careful to mention that I was only dipping a toe, rather than going full throttle, because I had a sense that the near term would be uncertain. Well, at least I got that part right. Since putting on that position, the price action has only gone in one direction: against me. Nevertheless, the chart is currently at a point where you might expect price action to reverse, and hopefully start going my way. For the time being, I don't plan to follow that strategy by adding to the position. Nevertheless, I still offer a chart for your consideration (USD/JPY captured).
Tuesday, July 24, 2012
Bravo
In the rarest of feats, that is living up to the hype, The Dark Knight Rises delivers on all fronts. I saw it on Monday morning (and get this, it was sold out) and I can't wait to see it again. My wife thought it was too loud. I thought the 2 hours and 45 minutes was simply too short. Truly well done.
Wednesday, July 18, 2012
Technical Note
In today's rap, Bill Fleckenstein commented that Intel had beaten the number this quarter, but implied in part it was an accounting game where they used an inventory build to manage earnings. What that literally means (or so I would suppose) is that Intel is a LIFO firm with a high variable component in its production stage. In other words, the cost of inventory is lower now, versus the cost of inventory from last week, so they can match new inventory with sales to minimize COGS and therefore raise earnings.
Monday, July 16, 2012
One More Thing...
I have seen much on the internet today about whether the Jeremy Lin drama is grounds for Knicks fans to turn their back on the team and saddle up next to the new guys in Brooklyn. If you’re a casual fan, I invite you to enjoy the subway ride to the Barclays Center. For the rest of us, the ones who have followed this team for decades, for who it has been a source of bonding with a parent (then and now), well, I have one thing to say: fuggedaboutit.
Sports really are a silly thing. Seinfeld said it best, you are essentially rooting for laundry. But, in so many ways, sporting events can be trigger points for memories that you want to hold on to. I remember watching Game 6 of the ’86 Series with my parents, incredulous when Ray Knight crossed home plate. I remember the epic ’99 run to the NBA Finals, specifically the 4-point play, and going out that night in the City, only to have it come up in practically every conversation. Or, more recently, the enjoyment I had from the 2008 Super Bowl, watching the Giants beat the undefeated juggernaut in the apartment that I grew up in. And, even now, my Dad and I can always talk about the Knicks.
So, no, I won’t be switching. And if you’ve been in the struggle long enough with this team (and, to put it in perspective, their last title predates my birth, but not by a lot), you look forward to that moment when it finally happens one season. Just like the Rangers in 1994.
And, one more thing, letting Jeremy Lin leave (maybe) is far from the most egregious offense out of this ownership. Anybody remember Isiah Thomas? Now, that was painful.
Sports really are a silly thing. Seinfeld said it best, you are essentially rooting for laundry. But, in so many ways, sporting events can be trigger points for memories that you want to hold on to. I remember watching Game 6 of the ’86 Series with my parents, incredulous when Ray Knight crossed home plate. I remember the epic ’99 run to the NBA Finals, specifically the 4-point play, and going out that night in the City, only to have it come up in practically every conversation. Or, more recently, the enjoyment I had from the 2008 Super Bowl, watching the Giants beat the undefeated juggernaut in the apartment that I grew up in. And, even now, my Dad and I can always talk about the Knicks.
So, no, I won’t be switching. And if you’ve been in the struggle long enough with this team (and, to put it in perspective, their last title predates my birth, but not by a lot), you look forward to that moment when it finally happens one season. Just like the Rangers in 1994.
And, one more thing, letting Jeremy Lin leave (maybe) is far from the most egregious offense out of this ownership. Anybody remember Isiah Thomas? Now, that was painful.
The Lin Saga
An interesting couple of days for the New York Knicks. By now you’re aware that Jeremy Lin is probably headed to the Houston Rockets. And, of course, I’m going to offer my take on it.
After a brief but well publicized run last season, the undrafted point guard out of Harvard is a free agent this summer. Because of a recent ruling pursued by the Players Association, Lin was granted early Bird rights, meaning that the Knicks were in a position to match any offer that he received, even though they couldn’t offer him the most money outright. So, as free agency approached, it became clear that the Knicks would let Lin seek out the best offer, and then they would be in a position to respond (with most expecting that he would end up back in New York). The Rockets became the clear primary suitor and agreed to a 4 year, $28 million deal with the neophyte, with only the first 3 years guaranteed.
Now, structure is important here, so let’s focus on it. Within those 3 guaranteed years, years 1 and 2 are for about $5 million, with the final year jumping to $10 million. In other words, a “poison pill” strategy. When dealing with a restricted free agent, where the old team is limited in its ability to go over the salary cap (and can only match) in order to keep the player, a highly punitive third year salary brings the luxury tax into play and might prevent the match from happening. In other words, because the Knicks are over the luxury tax threshold in that third year, they end up paying a dollar-for-dollar penalty to retain the player. Thus, the deal doesn’t cost the Knicks $10 million over that season, but $20 million.
Here’s where it gets interesting. After the initial terms of the deal circulated, it became clear that the Knicks would match. However, according to news reports, when contracts could officially be signed starting last Wednesday, Lin went back to the Rockets to try and get even more money in that third year with the information about what the Knicks planned to do. No sweat off the Rockets’ back, especially if it seemed unlikely that they were going to get the player. So $10 million in year 3 became more like $15 million, and the actual total cost jumped from $20 million to $30 million. And in an unexpected twist (as if there’s any other kind), the Knicks balked.
When thinking this whole scenario through, I deem that there are two possible methods to Lin’s madness. Either he wanted Houston all along, in which case, good for him, he got his team and more money. But, if he actually wanted to stay in New York (which seems to be the consensus view), then he was being penny wise and pound foolish. It’s hard to be a media darling on Madison Avenue…when you decide to leave Madison Avenue. It’s also worth noting that his story last season was as much about where he was doing it, as what he was doing. He is also dealing with an owner who is not a savvy business mind, and who if he feels scorned will bite his nose to spite his face. Moreover, I think I’ve been pretty clear about my doubts relating to his game. He is an out-of-control tweener who needs a veteran to help him learn the ropes…which the Knicks offer having brought in Jason Kidd (Houston currently lacks anything resembling a point guard to offer tutelage). But, the contract got pricier, Raymond Felton came back, and now Lin’s departure may be a fait accompli.
Still, in spite of all of those things, I think the Knicks should match. The contract actually is not that bad when put into context. At $5 million per in the first two years, it’s a pretty inexpensive option on his upside. And, even if he amounts to nothing, and the Knicks have to pay that huge salary in year 3, he is still a very tradable asset as a big expiring contract, and he does nothing to screw up the ability of management to press reset after the 2015 Finals.
So, they should keep him. Will they? Probably not.
Correction: According to ESPN, the actual cost of the Lin contract in year 3 could be as high as $43 million.
After a brief but well publicized run last season, the undrafted point guard out of Harvard is a free agent this summer. Because of a recent ruling pursued by the Players Association, Lin was granted early Bird rights, meaning that the Knicks were in a position to match any offer that he received, even though they couldn’t offer him the most money outright. So, as free agency approached, it became clear that the Knicks would let Lin seek out the best offer, and then they would be in a position to respond (with most expecting that he would end up back in New York). The Rockets became the clear primary suitor and agreed to a 4 year, $28 million deal with the neophyte, with only the first 3 years guaranteed.
Now, structure is important here, so let’s focus on it. Within those 3 guaranteed years, years 1 and 2 are for about $5 million, with the final year jumping to $10 million. In other words, a “poison pill” strategy. When dealing with a restricted free agent, where the old team is limited in its ability to go over the salary cap (and can only match) in order to keep the player, a highly punitive third year salary brings the luxury tax into play and might prevent the match from happening. In other words, because the Knicks are over the luxury tax threshold in that third year, they end up paying a dollar-for-dollar penalty to retain the player. Thus, the deal doesn’t cost the Knicks $10 million over that season, but $20 million.
Here’s where it gets interesting. After the initial terms of the deal circulated, it became clear that the Knicks would match. However, according to news reports, when contracts could officially be signed starting last Wednesday, Lin went back to the Rockets to try and get even more money in that third year with the information about what the Knicks planned to do. No sweat off the Rockets’ back, especially if it seemed unlikely that they were going to get the player. So $10 million in year 3 became more like $15 million, and the actual total cost jumped from $20 million to $30 million. And in an unexpected twist (as if there’s any other kind), the Knicks balked.
When thinking this whole scenario through, I deem that there are two possible methods to Lin’s madness. Either he wanted Houston all along, in which case, good for him, he got his team and more money. But, if he actually wanted to stay in New York (which seems to be the consensus view), then he was being penny wise and pound foolish. It’s hard to be a media darling on Madison Avenue…when you decide to leave Madison Avenue. It’s also worth noting that his story last season was as much about where he was doing it, as what he was doing. He is also dealing with an owner who is not a savvy business mind, and who if he feels scorned will bite his nose to spite his face. Moreover, I think I’ve been pretty clear about my doubts relating to his game. He is an out-of-control tweener who needs a veteran to help him learn the ropes…which the Knicks offer having brought in Jason Kidd (Houston currently lacks anything resembling a point guard to offer tutelage). But, the contract got pricier, Raymond Felton came back, and now Lin’s departure may be a fait accompli.
Still, in spite of all of those things, I think the Knicks should match. The contract actually is not that bad when put into context. At $5 million per in the first two years, it’s a pretty inexpensive option on his upside. And, even if he amounts to nothing, and the Knicks have to pay that huge salary in year 3, he is still a very tradable asset as a big expiring contract, and he does nothing to screw up the ability of management to press reset after the 2015 Finals.
So, they should keep him. Will they? Probably not.
Correction: According to ESPN, the actual cost of the Lin contract in year 3 could be as high as $43 million.
Thursday, July 12, 2012
Buying
Only time will tell how smart I am, but I added to my GG 2014 LEAP position today. Couldn't nab what I wanted for EGO.
Wednesday, July 11, 2012
Pick Your Title
In the past I've harped on about the importance of getting the macro right when it comes to real estate investing. But, once you've figured out your market and why you should be there, you move to the next level. What are the more micro elements that distinguish properties within your chosen market and create the opportunities - the home runs versus the bond deals. And a few off the top of my head...
-proximity to transportation hubs
-lack of amenities in an area that calls for them
-complicated liability structures
-unique floor plans
-pending zoning changes to surrounding areas
-constraints on new development
-discounts to reproduction cost
-unique legal issues to resolve
-condo exit strategies
Etc, etc.
As to the macro again, specifically for multifamily, I have spent some time recently contemplating the opportunities that exist at home (I've said before that I like frontier markets, but I'm not up and moving to Myanmar). So where will the growth happen here? Well, a resource boom is taking place in North Dakota, but that's no secret. In a more under-the-radar sense, I think the other boom that will come is derived from the expansion of the Panama Canal. Face it, this country is stagnating, jobs are a precious commodity. The more goods coming into a port, the more economic activity likely to follow in its surrounding environs. So, between warm weather, more favorable tax rates, and growing populations, the key port cities on the Gulf and southeastern seaboard are probably a good place to look. And, at that, focus on the downtowns -- don't get cute out in the hinterlands.
The other thing on my mind lately is how to monetize all the reading that I do. Because, to be honest, some of the stuff I take on is pretty arcane. And the conclusion I've come to (and hopefully it's not just a rationalization for what would otherwise be deemed a waste of time) is that it can give me an insight into the prevailing trends. A lot of my reads are about the economic theory of the dominant school of thought. And if you have a clue about what they're planning to do, you can try and plan accordingly. More to the point, every slice of mainstream economist is pushing for some form of greater stimulus and inflation, through deficits, money-printing and the like. If you see that, then you know greater liquidity is eventually going to come and should naturally benefit hard assets.
Now, you tell me, what would've been a clever title for this post?
-proximity to transportation hubs
-lack of amenities in an area that calls for them
-complicated liability structures
-unique floor plans
-pending zoning changes to surrounding areas
-constraints on new development
-discounts to reproduction cost
-unique legal issues to resolve
-condo exit strategies
Etc, etc.
As to the macro again, specifically for multifamily, I have spent some time recently contemplating the opportunities that exist at home (I've said before that I like frontier markets, but I'm not up and moving to Myanmar). So where will the growth happen here? Well, a resource boom is taking place in North Dakota, but that's no secret. In a more under-the-radar sense, I think the other boom that will come is derived from the expansion of the Panama Canal. Face it, this country is stagnating, jobs are a precious commodity. The more goods coming into a port, the more economic activity likely to follow in its surrounding environs. So, between warm weather, more favorable tax rates, and growing populations, the key port cities on the Gulf and southeastern seaboard are probably a good place to look. And, at that, focus on the downtowns -- don't get cute out in the hinterlands.
The other thing on my mind lately is how to monetize all the reading that I do. Because, to be honest, some of the stuff I take on is pretty arcane. And the conclusion I've come to (and hopefully it's not just a rationalization for what would otherwise be deemed a waste of time) is that it can give me an insight into the prevailing trends. A lot of my reads are about the economic theory of the dominant school of thought. And if you have a clue about what they're planning to do, you can try and plan accordingly. More to the point, every slice of mainstream economist is pushing for some form of greater stimulus and inflation, through deficits, money-printing and the like. If you see that, then you know greater liquidity is eventually going to come and should naturally benefit hard assets.
Now, you tell me, what would've been a clever title for this post?
Mid-Year Report Card
Back on the last trading day of 2011, I wrote the following. While technically a bit past the mid-point of the year, I wanted to take inventory of how I've done so far.
1) Passing grade. The sun has shown up each morning as expected.
2) Europe's central planners are not doing a great job of managing this situation and giving the market what it wants, which is more liquidity. But, at some point, I expect them to relent. In the most literal sense, it is coming to a head.
3) The Yen has held up pretty well, but my view is that the crack is starting to form, hence the new position that I took last week.
4) The gold market is not for the faint of heart. I don't think the bull market is over, but recent price action has made the call for $2,000 look very questionable.
5) While it might end being just barely, it appears the market will end the year higher than it started.
6) Treasuries have done well, like I thought. In fact, even better than I thought.
7) 2013 appears to be right on schedule.
1) Passing grade. The sun has shown up each morning as expected.
2) Europe's central planners are not doing a great job of managing this situation and giving the market what it wants, which is more liquidity. But, at some point, I expect them to relent. In the most literal sense, it is coming to a head.
3) The Yen has held up pretty well, but my view is that the crack is starting to form, hence the new position that I took last week.
4) The gold market is not for the faint of heart. I don't think the bull market is over, but recent price action has made the call for $2,000 look very questionable.
5) While it might end being just barely, it appears the market will end the year higher than it started.
6) Treasuries have done well, like I thought. In fact, even better than I thought.
7) 2013 appears to be right on schedule.
Tuesday, July 10, 2012
Offseason Update
The Knicks have been busy. I like the Kidd and Camby additions, both come cheap and fill holes (they probably need another 2-guard, with Fields likely going to Toronto and Shumpert still out for a bit, but that's not a huge problem going into the season). I'm glad that Novak and Smith got re-upped. I can handle matching the Lin contract, as it became a foregone conclusion after Nash went to the Lakers. Nevertheless, none of it addresses the existential problem that this team faces -- Carmelo and Stoudemire do not mesh very well.
Add to the mix, with Dwight Howard likely headed to Brooklyn, it's possible that the Knicks won't even be the best team in New York. A lot of it boils down to how the Anthony / Stoudemire project can work itself out. I expect Carmelo to be a much better player this year, as it sounds like he is using the summer to get into great shape (playing on Team USA probably helps a lot). I don't know what Amar'e has been up to, other than getting engaged, but he tends to be a workout warrior (that is, when his body isn't breaking down). Still, I am hesitant to put myself out there with a prediction again. At least, not yet.
Another interesting reality to consider: Anthony, Stoudemire, Chandler, Lin, Kidd, and Camby will all be free agents following the 2015 Finals (and Shumpert will be a restricted free agent). In other words, this group has 3 years to get it done. If they don't, the front office will likely be pressing the reset button that summer.
Add to the mix, with Dwight Howard likely headed to Brooklyn, it's possible that the Knicks won't even be the best team in New York. A lot of it boils down to how the Anthony / Stoudemire project can work itself out. I expect Carmelo to be a much better player this year, as it sounds like he is using the summer to get into great shape (playing on Team USA probably helps a lot). I don't know what Amar'e has been up to, other than getting engaged, but he tends to be a workout warrior (that is, when his body isn't breaking down). Still, I am hesitant to put myself out there with a prediction again. At least, not yet.
Another interesting reality to consider: Anthony, Stoudemire, Chandler, Lin, Kidd, and Camby will all be free agents following the 2015 Finals (and Shumpert will be a restricted free agent). In other words, this group has 3 years to get it done. If they don't, the front office will likely be pressing the reset button that summer.
Monday, July 9, 2012
Leisure Reading
You may have picked up on the fact that I typically read books that hit on investing or economics. I’ve taken a break from that lately with the following...
Rigged by Ben Mezrich (2008). Based on true events. Specifically, about the twenty-something who went to work at the NY Merc out of HBS and spearheaded the creation of the oil trading market in Dubai. Very light and quick. I didn’t get the impression that the author was terribly well-versed on the oil markets, the trading that goes on at the Merc, or Dubai. Nevertheless, it was fun.
Sin in the Second City by Karen Abbott (2007). The story of the infamous Chicago madams of the early twentieth century, Ada and Minna Everleigh, and the cultural and political battle that took place with regards to the red light district in that city. Some interesting factoids: (1) Chicago’s name comes from the Native American word “Chicagoua”, meaning “striped skunk”, for the indigenous wild leek which is very smelly; (2) the “Windy City” nickname is not about the weather, but a journalistic creation in reference to the “blustery talk of civic leaders” in the late nineteenth century; and (3) the men who frequented the Everleighs’ brothel would say that they were “everleighed tonight”, a refrain that stuck around, but was eventually shortened to eliminate the first half of their name.
Rigged by Ben Mezrich (2008). Based on true events. Specifically, about the twenty-something who went to work at the NY Merc out of HBS and spearheaded the creation of the oil trading market in Dubai. Very light and quick. I didn’t get the impression that the author was terribly well-versed on the oil markets, the trading that goes on at the Merc, or Dubai. Nevertheless, it was fun.
Sin in the Second City by Karen Abbott (2007). The story of the infamous Chicago madams of the early twentieth century, Ada and Minna Everleigh, and the cultural and political battle that took place with regards to the red light district in that city. Some interesting factoids: (1) Chicago’s name comes from the Native American word “Chicagoua”, meaning “striped skunk”, for the indigenous wild leek which is very smelly; (2) the “Windy City” nickname is not about the weather, but a journalistic creation in reference to the “blustery talk of civic leaders” in the late nineteenth century; and (3) the men who frequented the Everleighs’ brothel would say that they were “everleighed tonight”, a refrain that stuck around, but was eventually shortened to eliminate the first half of their name.
Urban Appeal
I mentioned the Alan Ehrenhalt book a few months ago, which investigated the trend of a population move back to city centers, particularly for the younger generation. Well, the 2011 Census data seems to confirm that idea exactly. There are obviously reasons related to the recession that have contributed, but, at least part of it, is that people in their twenties and thirties want to be close to job centers and the amenities and conveniences that come from a more urban setting. I think there are implications for my business, one of which is not to create a justification for buying when the deal simply doesn't work.
Thursday, July 5, 2012
New Positions
Today I purchased some October '12 expiration call options for Goldcorp (GG). My belief is that the stock will be closer to $50 at that point, relative to its current position at $39.
In addition, I have an open order to buy some FXY put options with a January '13 expiration. I'm finally ready to dip that toe when it comes to shorting the Yen.
In addition, I have an open order to buy some FXY put options with a January '13 expiration. I'm finally ready to dip that toe when it comes to shorting the Yen.
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