The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The WSJ’s Greg Zuckerman has a new book out titled, The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.

Here is an excerpt from his recent WSJ column on lessons on the subject:

1 Don’t Rely on the Experts

Many investors lost big in 2007 and 2008 as housing crumbled and the stock market tumbled. But no one lost more than commercial and investment banks caught with toxic mortgage-related securities. These bankers were the very same ones who created these investments, and Wall Street’s top analysts had vouched for their safety, even as Mr. Paulson and others bet against the investments.

Lesson: When Wall Street is wheeling out its latest can’t-miss product, be skeptical.

2 Bubble Trouble

Some academics argue that financial markets have become more efficient. But a rash of financial bubbles in recent years — including housing, energy, technology and Asian currencies — suggests that markets are becoming harder to navigate, and are more prone to overshooting. Today, investors of all sizes read the same articles, watch the same business-television programs and chase the same hot tips. They invariably head for the exits at the same time.

Lesson: Have an exit strategy — and cash to cushion any tumble.

3 Focus on Debt Markets

Most investors track the ups and downs of the stock market but have only a vague sense of moves in debt markets. That’s a mistake. Early signs of trouble were seen in sophisticated markets that don’t get much limelight, like the subprime-mortgage bond market. These problems eventually felled the housing and stock markets, and the overall economy, a set of falling dominos that Mr. Paulson and his team correctly anticipated.

Lesson: Debt markets can do a better job predicting problems than stock markets.

4 Master New Investments

Mr. Paulson scored huge profits by buying credit-default swaps, a derivative investment that serves as insurance on debt. When risky mortgage bonds tumbled in value, Mr. Paulson’s insurance soared. But many experts were flummoxed by CDS contracts or shied away from educating themselves about these relatively new investments.

Mr. Paulson and his team had no experience with CDS contracts. But they put the time into learning about them.

Lesson: Educate yourself about the range of exchange-traded funds being introduced, some of which can play a valuable role in a portfolio.

5 Insurance Pays

A number of investors worried about a bursting of the housing market, but few did much about it, even though insurance, such as CDS contracts, at the time were selling at dirt-cheap prices. Out-of-the-money put contracts — options that pay off only if the market tumbles — also were trading at reasonable levels. As cheap as this insurance was, many pros ignored it.

Lesson: Don’t underestimate the value of a safety net, such as put options.

6 Experience Counts

Some of the biggest winners in the meltdown were middle-aged investors dismissed by some as past their prime. But they had experienced past market downturns, while some of the bankers and analysts caught flat-footed knew only good times.

Lesson: A historical perspective can be a valuable tool.

7 Don’t Fall in Love

With an Investment

In early 2009, Mr. Paulson became more bullish about the banks and financial companies that he had wagered against in 2008, after determining that these companies had improved their balance sheets. The moves resulted in profits this year.

Lesson: Even the greatest trade doesn’t last forever.

8 Luck Helps

In early 2006, Mr. Paulson determined that housing was in trouble and set out to profit from the impending fall. But some housing experts already had determined that real estate was overpriced; others had wagered against housing but could no longer stomach their losses. Just months after Mr. Paulson placed his historic trade, U.S. housing prices began to fall.

Lesson: Don’t risk too much in any one trade, even one that seems like a sure thing.

Good stuff, Greg.

Best of luck with the book promotion slog ahead of you!

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Source:
‘Greatest Trade’: How You Can Make $20 Billion
GREGORY ZUCKERMAN
WSJ, NOVEMBER 15, 2009
http://online.wsj.com/article/SB125823321386948789.html

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His next book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, will be published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans. He wrote the monthly Market Outlook and Quarterly Market Review for clients from 1990 to 2001. He has written several guest articles in Marc Faber’s Gloom, Boom & Doom Report. He has more recently contributed to Whiskey & Gunpowder and the Prudent Bear website, among others.

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Q. What was Alan Greenspan’s greatest influence on the United States?

FS: Alan Greenspan was the kingpin in the impoverishment of the American people. The middle class barely exists today, though the barrage of government spending prolongs the illusion of stability. As Federal Reserve chairman, Alan Greenspan’s pronouncements were sacrosanct. He told the American people they were getting richer when they were becoming poorer. It is axiomatic that when savings are depleted and debts are rising the person, or company, or government is poorer.

Q. How did Greenspan create an illusion of recovery, based on complex math-designed products, rather than the creation of goods and real jobs?

FS: The American economy’s recovery from the early 1990s was financial. This was a first. The recovery was a product of banks borrowing, leveraging and lending to hedge funds. The banks were also creating and selling complicated and very profitable derivative products. Greenspan needed the banks to grow until they became too-big-to-fail. It was evident the ‘real’ economy – businesses that make tires and sell shoes – no longer drove the economy. Thus, finance was given every advantage to expand, no matter how badly it performed. Financial firms that should have died were revived with large injections of money pumped by the Federal Reserve into the banking system.

The change in the American economy can be seen in how profits shifted from manufacturing to finance. In 1950, 59% of U.S. corporate profits were from manufacturing; 9% from financial activities. During the past decade (2000 -2008), 18% of profits were from manufacturing and 34% from finance.

Middle management, a staple of the middle class, had lost considerable ground during the early-1990s. Companies hollowed out middle management to cut costs. A large portion of those who were laid off never recovered financially. The same was true after the recession that followed the stock market bubble that popped in 2000, particularly among technology workers. Many have never recovered.

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Yesterday, I am at NPR, waiting to tape a segment on foreclosures. There is a pile of books and magazines a coffee table. I spy the title Satisfaction by Chris Denove and J.D. Power IV.

As someone who has been blurbed and who gives blurbs, the above the title blurb by Lee Iacocca catches my eye:

“If you can find a better book on customer satisfaction, buy it.”

That Lee is a freakin‘ genius . . .

I am both grateful and humbled by the selection of Bailout Nation as Stock Traders Almanac Investment Book of the Year.

Below is the PDF page from the 2010 edition, written by Jeff Hirsch:

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2010 Best Book

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And at Amazon.com

Dan Gross, of Slate and Newsweek, got interested in the curious wrinkle presented by the publishers of Sarah Palin’s forthcoming book and Ted Kennedy’s True Compass: both publishers didn’t want an ebook available during the first few weeks on sale.

In response, I wrote a piece for TheBigMoney.com because it dawned on me that we’ve all forgotten what book publishers are still really good at, the big personality. Palin’s book–which displaced Dan Brown from the number one spot at Amazon two days after it was announced and weeks before it would be available–is clearly going to be one of those books. And, if it is, her publisher might even make a dollar or two after it earns back the $7 million they paid her. To do that they’ll need a lot of sales velocity:

Velocity comes from ubiquity, and ubiquity is what the modern publishing business is best at. Most people won’t buy Palin’s book in a bookstore; most of her buyers probably don’t have a bookstore they visit regularly. Instead, the bulk of sales will be in Wal-Marts, Krogers, Costcos, and newsstand chains like Hudson News. The first week or two—when most of those sales will take place—it won’t be hard for consumers to come across a copy of Going Rogue, so there’s no reason to divert from the big show even the small percentage of sales that e-books represent.

If the Palin book works—and it is beginning to look like she can make herself the key anti-Obama rallying point—it will be a reminder of the political power books can wield. Each sale will be a vote for Palin—though without the consequences of actually electing her; each book will also become a little campaign poster stoking her base and impressing her skeptics. Politics is media, and the publicity tour as trial campaign looks to be the last best hope of the publishing business.

Source:

Why Big Books Still Matter
Sarah Palin’s Book Demonstrates the Power of the Book as Talisman
MARION MANEKER
TheBigMoney.com
http://www.thebigmoney.com/features/kindle-chronicles/2009/10/04/why-big-books-still-matter

Terrific book review for Bailout Nation in Asia Times:

“For the past three decades, finance replaced doctor or lawyer as the smart career choice. The cleverest people gravitated to business schools and then to Wall Street, some detouring to Silicon Valley during the dot-com boom. So how did these masters of the universe create the worst global economic misery in 80 years?

It was stupidity and arrogance, pure and simple, fund manager and TheStreet.com columnist Barry Ritholtz contends in Bailout Nation, the same traits that led a previous generation of America’s best and brightest to the tragedy of Vietnam (and a group of more recent, less illustrious ideologues to the debacle in Iraq). At least Camelot’s villains thought they were doing good for the world. The modern bankers and traders and quants and arbs who acted so irresponsibly, almost exclusively with other people’s money, were simply trying to make themselves obscenely wealthy.

These “idiots”, as Ritholtz often calls them, richly deserve every ounce of approbation he musters. He repeatedly contends that rather than being bailed out, they deserve to have been bankrupted, exposed as charlatans, hooted out of their professions, tarred, feathered, and in some cases jailed. . .

In his very readable book that will delight general readers as well as finance buffs, Ritholtz traces the history of US bailouts.

When things fell apart in September last year, Ritholtz says, the government should have nationalized AIG, separating the giant’s solvent insurance business from its loopy financial funhouse. Instead, US taxpayers have doled out $173 billion and counting to repay not widows and orphans holding policies on dear departed dads, but a coterie of Wall Street tycoons and overseas banks escaping the consequences of their foolish risks. That’s not capitalism but socialism for the wealthy at taxpayer expense.

Bailout Nation’s straightforward, compelling account puts the crisis in context, explains why the US government responded so stupidly, offers solutions, and advises how to prevent a repeat. Ritholtz’s indictment of the financial and political establishment isn’t terribly unique, but it’s devastatingly accurate.”

Outstanding!

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Source:
Named and shamed
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy by Barry Ritholtz with Aaron Task
Reviewed by Muhammad Cohen
http://www.atimes.com/atimes/Global_Economy/KJ03Dj01.html

Bailout Nation gets reviewed in India!

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The Hindu : Faux capitalists look for the free lunch

The US President Barack Obama, despite being articulate, is allowing his team to sound like philosophers and researchers when they explain what is going on in the marketplace and what the business plan is to fix it, rues Barry Ritholtz in ‘Bailout Nation’ (www.wiley.com). “This is the first time we’ve had to handle this situation, and it’s incredibly complex and difficult. While it takes great minds to devise a solution, when it’s time to explain it to the typical family, it needs to be kept reasonably simple and clear.”

The author gives an analogy from the field of sports, thus: “If a football coach has a brilliant game plan on the blackboard but cannot simplify it so it is crystal clear to the players, that plan will not get executed properly. The probability for failure increases.”

Perhaps, Obama’s speech last week, in the Federal Hall on Wall Street, was to make amends for the absence of clear communication. He had then chastised the industry for still engaging in “reckless behaviour,” “quick kills,” “bloated bonuses,” and taking “exorbitant risks that were unsustainable for the system,” as www.bloomberg.com reported on September 15.

The book has a chapter titled ‘Casino capitalism,’ which suggests that a simple solution to banks’ problems is to identify the banks that are insolvent and temporarily nationalise them. “Appoint new management, and give them six months to spin out 10 per cent of each of the separate viable pieces, with the taxpayer retaining the rest as passive investors. Bank of America can spin out five major pieces: BoA, Merrill, Countrywide, a toxic holding company, and the rest of its holdings,” Ritholtz recommends.

The call for nationalisation, he reasons, is not a move toward socialism, but an attempt to prevent casino capitalism from bankrupting the country. “Real capitalists nationalise; faux capitalists look for the free lunch.”

An example of the latter is the backdoor bailout of major financial institutions with AIG serving as the middleman; for, it is actually a bailout of private speculators, the author fumes. “Not only are US taxpayers subsidising the bad decisions made by executives in the US, but we are also bailing out the poor judgment of the rest of the world.”

Worth a read.

-D. MURALI

Here are the full run of reviews of the book:

Mainstream Media Reviews

New York Times:
Rescues Unlimited: Government as Wall Street’s Enabler
By DEVIN LEONARD
NYT, August 2, 2009
http://www.nytimes.com/2009/08/02/business/economy/02shelf.html

Wall Street Journal:
… And Dave Has His Book List
DAVE KANSAS
WSJ, July 26, 2009
http://online.wsj.com/article/SB124856712152681467.html

Bloomberg
Greenspan Flunks Test, Bush Falls Into $15 Trillion Pit: Books
Review by James Pressley
Bloomberg, May 27 2009
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amoZezYyYwFA

Forbes:
Book Review: Rescue Fatigue
Michael Maiello, 07.16.09, 12:01 AM EDT
Barry Ritholtz’s ”Bailout Nation.”
http://www.forbes.com/2009/07/15/bailout-nation-aig-chrysler-opinions-book-review-barry-ritholtz.html

Asia Times
Named and shamed
Reviewed by Muhammad Cohen
http://www.atimes.com/atimes/Global_Economy/KJ03Dj01.html

Marketwatch:
The roots of ‘Bailout Nation’
Commentary: Ritholtz book dissects crisis and Greenspan
By Howard Gold
http://www.marketwatch.com/story/ritholtz-gets-to-the-roots-of-bailout-nation-2009-08-04

Reuters
Bailout study widens the “Big Picture”
Thu Jun 11, 2009 3:47pm EDT
By Pedro Nicolaci da Costa
http://www.reuters.com/article/ousiv/idUSTRE55A6CK20090611

Miami Herald
Economics stories can be unexciting, but recent books try to keep their readers awake.
RICHARD PACHTER
Miami Herald, Monday, 06.01.09
HTTP://WWW.MIAMIHERALD.COM/BUSINESS/STORY/1074231.HTML

Las Vegas Business Press
Big bailouts a perversion of capitalism, author argues
MATTHEW CROWLEY
October 05, 2009
http://www.lvbusinesspress.com/articles/2009/10/05/news/iq_31501104.txt

The Hindu
Faux capitalists look for the free lunch
D. Murali
September 19, 2009
http://beta.thehindu.com/business/article22388.ece

ABC News
‘Self-Inflicted Damage’: Highlights From ‘Bailout Nation’
New Book From Bailout Critic Barry Ritholtz Takes on Citigroup, Chrysler and More
ALICE GOMSTYN
ABC NEWS Business Unit, May 27, 2009
http://abcnews.go.com/Business/Economy/story?id=7681437&page=1

See also First Amendment Award for Outstanding Journalism: Best Book Bailout Nation

Blog Reviews:
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Vitaliy Katsenelson, CFA, is the author of Active Value Investing.

This presentation/speech explains why we are likely suffering through a range-bound market. I updated the data; found a better way to explain old and new topics; changed my mind on some things; and answered questions that have been raised by readers.

I have to warn you this PDF is 20 pages long. However, a lot of space is consumed by charts and tables thus don’t let the size scare you.

Avi Presentation

I have to think this person is going to have their hands full for a few years . . .

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Help Wanted: Standard & Poor’s, a division of The McGraw-Hill Companies (NYSE:MHP), is the world’s foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research and data. With over 10,000 employees, including wholly owned affiliates, located in 21 countries, Standard & Poor’s is an essential part of the world’s financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit S&P.com

The Assistant General Counsel will be responsible for working on regulatory legal matters and rendering advice in multiple areas of S&P’s Ratings Services and will obtain significant professional development in a fast-paced high growth Financial Services company. This candidate must have substantial experience in a major financial services firm or law firm and be a highly motivated team player with superior legal ability, written and oral presentation skills and superior interpersonal and communication skills. Management experience and skills a plus.

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