Porsches are not only fast, they're really sneaky...

So I was reading this blog post about how Porsche screwed the hedge fund market and unintentionally led one man to take his own life.  This is probably up Wild Willie's area of expertise, so I'll direct the question to him:  I know the financial market should be able to have some freedom in how it conducts it's business, but how is short-selling still a legal way of making money?  It just seems about the equivalent of a card counter in Vegas--essentially gambling with knowing a few insider things to give you an edge.  

How to kill a bull...

The global financial market has gotten way to complicated for me too understand. Granted, I didn't major in economics in college, but I still consider myself a relatively intelligent guy who should be able to sort of get some semblance of how Wall Street works. This scares me given the fact that we all rely on financial investments to insure we aren't living in a tent eating Spaghettios for dinner when we retire, especially with the gloom and doom reports that I hear on the news everyday.

It used to be, that this didn't worry me so much. Heck, I'm no Warren Buffet genius, so I figured, it's best to leave the mental work of the market to the experts. But as I think about it more, I have to wonder where this unearned confidence in the investment community ever came from. I used to recall a banner in the commons at some college once that said something to the effect of, "Want a BMW when you grow up? Get an MBA."  This was the kind of people they were recruiting into business school.  Not anyone with a social consience, just guys whose goal in life was to make lots and lots of money.  Now typically there is the occassional wiz kid that really wants to understand  economic theory, but I always got the feeling that most of the guys going into finance and business weren't always the brightest guys in the world.  I had this stereotypical image that the smartest students became engineers, doctors, scientists, and maybe even lawyers while the others were a bunch of frat boys just extending their party to Wall Street, with some bullshitting their way to the very top.  So instead of the best and the brightest in the world overseeing essentially our future livelihood, we've got clueless guys playing a game of high stakes poker and making poor bets with our money.  Based on this article by Michael Lewis about what led to the current economic collapse, maybe I wasn't so far off:

Here's where financial technology became suddenly, urgently relevant. The typical mortgage bond was still structured in much the same way it had been when I worked at Salomon Brothers. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts' BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return. Eisman wanted to bet that some subprime borrowers would default, causing the trust to suffer losses. The way to express this view was to short the BBB tranche. The trouble was that the BBB tranche was only a tiny slice of the deal.

But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be to and asking him to sell short. "What Lippman did, to his credit, was he came around several times to me and said, 'Short this market,' " Eisman says. "In my entire life, I never saw a sell-side guy come in and say, 'Short my market.' "

And short Eisman did—then he tried to get his mind around what he'd just done so he could do it better. He'd call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They'd be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. "The price was absurd, and they were giving her a low-down-payment option-ARM," says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he'd hired back in 1997 to take care of his newborn twin daughters phoned him. "She was this lovely woman from Jamaica," he says. "One day she calls me and says she and her sister own five townhouses in Queens. I said, 'How did that happen?' " It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. "By the time they were done," Eisman says, "they owned five of them, the market was falling, and they couldn't make any of the payments."

The entire article is a bit of a lengthy read, but kind of fascinating to see exactly how either clueless or evil these guys are.  Maybe that's where the symbol of the bull for a growing market came from--it's all just based on bullshit.

F yeah!

It's all funny money...

Random thought I had as I was reading about how every financial market around the world is tanking:  If stocks are dropping so precipitously everywhere, where is all this money going?  It seems that if there was all this "value" in the stock market, that somehow means that actual cash is somehow being redistributed.  If the stock market is falling, shouldn't that financial worth be making someone rich?

I don't know if I'm making any sense at all, but the bottom line is that it shows you just how imaginary all of this money is we're talking about.  I think we should do what Fandango proposed many years ago--let's go back to the barter system!

That's just plain depressing...

A Quick Thought

I caught a blurb on the news tonight about whether or not oil companies should be investing in more alternative energy. This is is the prevalent thought heard on the news lately. I have felt like the motivation behind such talk from the American public is one of punishment because of all the money they are making. I have to say to everyone out there ... be careful what you ask for. Isn't asking oil companies to invest in alternative energy (aka energy of the future) just going to shove even more money in their pockets in the future?

I am all about investing in alternative energy for the future, and I don't care who does it. Heck I don't care if oil companies get even more filthy rich if they do it, but then I don't care if they are filthy rich now. The media and some political candidates seem to think that getting filthy rich is wrong. If they want to punish the oil companies for making so much money, don't allow them to invest in alternative energy. You think companies like Exxon, BP, or Conoco Phillips think oil is going to last forever. They know its not. They are probably loving the fact that people are asking them to invest in something they were already thinking about anyway.

Maybe money really does grow on trees...

Not that I'm complaining if I happen to get a rebate check, but I don't quite understand how this new economic stimulus package is good for the United States in the long run.  It seems like the economy is in a rut because too many people are living on credit and spending money they don't have.  So the answer is for the government to essentially give us money they don't have?  Shouldn't everyone be paying down their debt?  It's not like I would take my $600 to pay off my credit cards.  Why do that when I've got all this "free" money to buy an iPhone?  

All this seems to do is perpetuate a sense of calm in this country that all this credit debt is OK and a little shopping therapy will do you good.  

Coffee makes a comeback...

Starbucks stock hasn't been doing so hot lately. According to a story on NPR, it's share price has been cut in half over the past year because of growing competition from the McDonalds experiment in the gourmet coffee realm and some overall cutbacks in household budgets due to the state of the economy. People just seem to be shying away from the four dollar venti lattes and frappucinos it seems. To get more people in the store and compete with Mickey D's, Starbucks will be introducing one dollar cups of coffee served up in those 8 ounce short-sized cups that used to be reserved by people in the know ordering off the menu.

This seems like a good idea from a profit perspective, but I can't help but think Starbucks is kind of deglamorizing it's own product.  It seems if they're truly going to lower their product to the level of a fast food chain standard by going the dollar menu route, why wouldn't I just go to McDonalds for my cup of joe?  Not that espresso and coffee was really that much of an art form at Starbucks to begin with, but at least they sort of gave you the impression that they were at least trying their hardest to pose as a serious coffee purveyor.  

The real deal is at these independent places where they treat coffee like fine wine with complexities that have to be cherished and appreciated from the time the bean is roasted and ground up to the moment it hits your mouth.  And this goes far beyond a fancy coffee press.  Specialized instruments that make coffee by the cup and tailored to your exact specifications are cropping up including this $20,000 gizmo as mentioned in The New York Times:

Called a siphon bar, it was imported from Japan at a total cost of more than $20,000. The cafe has the only halogen-powered model in the United States, and getting it here required years of elliptical discussions with its importer, Jay Egami of the Ueshima Coffee Company.

“If you just want equipment you’re not ready,” Mr. Egami said in an interview.

The siphon bar actually sounds pretty cool, and it almost seems like it would be fun just to watch one of these things in action.  The technique they employ to make coffee with these things is pretty obsessive though:

A siphon pot has two stacked glass globes, and works a little like a macchinetta, that stove-top gadget wrongly called an espresso maker by generations of graduate students. As water vapor forces water into the upper globe the coffee grounds are stirred by hand with a bamboo paddle. (In Japan, siphon coffee masters carve their own paddles to fit the shape of their palms.)

The goal is to create a deep whirlpool in no more than four turns without touching the glass. Posture is important. So is timing: siphon coffee has a brewing cycle of 45 to 90 seconds.

“The whirlpool, it messes with your mind,” said Mr. Freeman, the owner of the Blue Bottle. “There’s no way to rush it.”

Mr. Freeman said he practiced stirring plain water for months to develop muscle memory before he brewed his first cup of siphon coffee. Even now he starts every day with a five-minute warm-up. The evidence of good technique is in the sediment: the grounds should form a tight dome dotted with small bubbles, the sign of proper extraction.

I've heard about people being passionate about their caffeine, but this is nuts!

Maybe I should just convert my money into gold bullions...

Rappers tend to know what the finer things in life are based on the bling they flash in their videos. So it seems to be a sign of the times and a clear signal that the United States may be losing its "top dog" status in the world when even Jay-Z is forgoing the American dollar and using Euros instead as his money of choice in his latest rap video "Blue Magic":

Because soy milk and Tofutti just isn't the same...

Just like the price of oil going up due to increased consumption and demand for gasoline in China, the BBC warns that milk and other dairy products might start to rise, as well. This seems to be in part due to a new initiative spearheaded by the Chinese Premier Wen Jiabao and an overrriding perception amongst the Chinese peasant population that they must emulate western culture in order to match them in prosperity and strength. That, and the fact that ice cream just tastes damn good. Of course, a substantial number of Asians are lactose intolerant, which is probably partially why dairy products haven't taken off more quickly in Asia despite the proliferation of the global marketplace. As you're all well aware of, I can relate to the desire for all things dairy despite my genetically programmed intestinal inability to produce enough lactase. I've tried soy and rice milk with my cereal, eaten ice cream bars made out of tofu, put soy-based cheese in my sandwiches--yuck. It's like trying to pass off a veggie burger for real beef or making bacon out of turkey. Please, don't tease me. Luckily, supplemental lactose hydrolyzing enzymes in the form of over-the-counter Lactaid are available to allow me to enjoy a bit of ice cream and cheese without having to plan for a panicked run to the bathroom.

So as China increases their consumption of milk, I suggest investing in two things: Lactase enzyme manufacturers and toilet bowl makers. Once they discover Lactaid, they'll be flying off the shelves. And considering many people will either not use them or buy fake ones on the black market that don't work, diarrhea runs to the bathroom will likely increase and more toilets will be needed. How do you like that investor speculation?