Hedgeye: The Principled One

There is so much good material waiting in the cue on the subjects of Greece, sovereign debt, and currency speculation, but here's the piece I want to share with you today.

It comes from Keith McCullough at Hedgeye and his post takes on the idea that, once again, "evil speculators" are somehow to blame for the fundamental economic problems of a country's own making.

An excerpt from, "The Principled One":

"The other George (Papandreou) is the Prime Minister of Greece. Since the Chinese told him to go fly his levered-up bureaucratic kite, Papandreou has been on a PR tour since Friday when he visited Germany.

Along the way, somehow he convinced France’s Nicholas Sarkozy that “speculators are creating malicious rumors” about his country. With some political wind from the left at his back, he took it up a notch ahead of meeting with Geithner today in Washington and called whoever he can’t see “unprincipled speculators.” George, you have to be kidding me. You have no idea what you don’t know.

First of all, hearing politicians talk about markets is like watching a southern belle try to ice fish. So I won’t waste time on ripping this poor guy a new one for using the word “speculator.” That would be too easy.

It is this concept of “principles” that really has my arthritic hockey knuckles hammering on the keyboard this morning. What, almighty Principled One, in God’s good name is “principled” about levering-up your country’s balance sheet to 100% debt to GDP and a 12.4% deficit to GDP ratio?..."

Go read the whole thing.

And let's not hold our breath waiting for lying politicians to make these false accusations and verbal attacks in the presence of such "unprincipled speculators". In an honest society, you might get a sock to the face or a challenge from your opponent for soiling their honor in such an underhanded way.

Related articles and posts:

1. Jim Rogers: Greece bankruptcy good for Euro - Finance Trends.

2. Greece presses US to crack down on "speculators" - Bloomberg.

3. Sorry, Greece, your crisis not caused by speculators - Clusterstock.

Jim Rogers: Greece bankruptcy good for Euro

Jim Rogers tells Bloomberg TV that Greece should go bankrupt, and that this would be good for the euro and for Europe in the longer term.

As Jim points out, a Greek bankruptcy would show everyone that the euro is a serious and sound currency based on the strength of its financial commitments. Of course, he does not expect this level of discipline to prevail.

He also has some sharp words for those in the political sphere who have tried (as always) to blame speculators for "attacking" the currency and Greece's debt. Some much needed common sense and basic education on the nature of markets and economic fundamentals here (that you might want to share with others).

Check out the full interview and stop in tomorrow for more on the state of Greek and European finances. We've got a lot to talk about on this subject this week, so stay tuned.

Bloomberg profiles SAC's Steve Cohen

Bloomberg has published a lengthy profile of trader and SAC Capital founder, Steve Cohen. If you're not already familiar with the now-legendary hedge fund manager, you will be by the time you finish reading it.

Here's an excerpt from, "Steve Cohen's Trade Secrets".

"...Though Cohen attends more golf and other outings than he once did, most days the balding, blue-eyed, stocky investment manager does what he knows best: He trades. He has a perch in the middle of the Stamford floor, and his bets account for about 10 percent of profits -- down from more than 50 percent 10 years ago.

He doesn’t like noise, so the phones on the floor don’t ring; they light up. He prefers jeans and sweaters to suits and looks more like a tax accountant on casual Friday than a trading titan running a $12 billion hedge fund firm.

Near the trading floor hang pieces from Cohen’s extensive art collection, which includes works by Vincent Van Gogh, Pablo Picasso and Andy Warhol.

Cohen maintains the temperature on the trading floor at 69 degrees Fahrenheit (21 degrees Celsius) to make sure no one dozes. If a portfolio manager or analyst can’t answer a question about a stock, Cohen is likely to lash out. “Do you even know how to do this f---ing job?” is a standard barb, current and former employees say.

Portfolio managers make money, or they’re fired. They usually last about four years..."

Aside from this overview, I found the first half of the article to be largely weighted towards scandal (or hints of) and an account of how SAC weathered the rough seas of 2006-2008. I have to say that I was interested in hearing more about Cohen's background and his methods of stock trading, which the latter part of the article tries to address (a difficult task as Cohen would not comment for this piece).

If you want to get a fuller, more personal view (though possibly dated) of Cohen's trading style, check out his interview in Schwager's Stock Market Wizards and check out the related article links below.

Related articles and posts:

1. BusinessWeek profiles Steve Cohen (2003) - BW Online.

2. Steve Cohen interview w/ Jack Schwager (preview) - Google Books.

Michael Burry: Betting the Blind Side

Michael Lewis has a new book coming out called, The Big Short. It's supposed to be an account of the financial crisis and how the "US economy was driven off a cliff", thanks to the drive for cheap housing and the toxic investments Wall Street packaged around this goal.

Vanity Fair has published an excerpt from Lewis' book called, "Betting on the Blind Side", which highlights the subprime-housing short trade of California hedge fund manager, Dr. Michael Burry.

"In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings.

He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P.

Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds."

We mentioned Burry in yesterday's post, highlighting a passage from Greg Zuckerman's book, The Greatest Trade Ever, which pinpoints the moment that Michael Burry and John Paulson's subprime short aspirations were realized in the creation of credit-default swaps (CDS) tied to mortgage bonds.

I'm halfway through Greatest Trade Ever now, and Lewis' account of Burry's subprime trade should prove to be an engrossing companion piece to Zuckerman's book. You may even want to print the VF article out, as it's a lengthy excerpt from Lewis' book.

John Carney: how AIG destroyed itself

I am checking out John Carney's recent Business Insider piece on the collapse of insurer AIG.

Here's an excerpt from Carney's description of "AIG as a buyer of risk" from, "The Untold Story of How AIG Destroyed Itself":

"AIG’s financial products division became what is known on Wall Street as a “synthetic buyer” of a variety of asset backed securities, including mortgages and infrastructure linked bonds. AIGFP would sell credit default swaps that performed for the company much like an ordinary bond would for a bond investor.

As long as the insured bonds were performing, AIG would receive a regular revenue stream from the buyer that mirrored the regular payments of interest and principle that a bond holder would receive. AIG was able investing in the bonds without actually having to buy them..."

Carney goes on to note that AIG had, in effect, taken a synthetic long position in these mortgage bonds by insuring the asset backed securities and writing CDS (credit-default swaps) against them. This gave AIG a regular stream of profits from CDS buyers, though it exposed the firm to huge financial risk (and we all know how that played out).

To further illustrate this point, here's a passage from Greg Zuckerman's new book on the short subprime trade, The Greatest Trade Ever (page 87):

"...Credit-default swaps were tied to actual mortgages - but the number of insurance bets on the subprime loans now were essentially unlimited.

Finally, Burry and other housing skeptics had a way to short the market, while those who were bullish, such as insurance giant AIG, could make extra money by selling the insurance, confident they would never have to pay out. Their acutaries produced sophisticated models that showed the chances of a housing meltdown were minimal".

Ever notice how often references to such "sophisticated models" spring up in the past decade-plus' chronicle of hubris and folly?

Beware the fabulous money machine

Spencer Jakab penned an interesting commentary for FT Weekend on the Federal Reserve's $52 billion profit (unaudited) for 2009. Here's an excerpt from that piece, "Beware the fabulous federal money machine":

"Unlike its New York brethren though, the Federal Reserve has a literal licence to print money, minting some $52bn in profit last year and paying $46bn in dividends to its shareholder, Uncle Sam...

“The man on the street doesn’t understand the $46bn earned by the Fed and given to the Treasury,” laments David Kotok, chairman of Cumberland Advisors.

Financial markets do, and it is making them increasingly skittish. The Fed’s profits stem largely from its purchase of mortgage securities, a programme that is slated to end in about a month at some $1,250bn. The first hurdle is weaning the market off this money-printing exercise. That alone could lead to an unwelcome rise in mortgage costs. More daunting will be soaking up the excess cash created before it sparks inflation in the real economy.

The most straightforward and obvious method, selling the securities, would be likely to crush the mortgage market while wiping out its “profits” from the operation to date. Instead, it will be likely to soak up the excess funding in the banking system – a delicate task that could lower inflationary expectations and cement a recovery if done right or spark deflation if botched..."

Jakab goes on to discuss the problems of the likely losing positions on the US Treasury's bailout portfolio, and the fear over what will happen when these artificial props to the economy are removed.

In a housing & lending market now dominated by Fannie Mae and Freddie Mac, what happens when you can no longer maintain that taxpayer-funded level of support?

Related articles and posts:

1. Fed profits: $52 billion in 2009 - Fortune.

2. How the Federal Reserve earned its profit - Econbrowser.

Alphatrends weekly market wrap

Brian Shannon of Alphatrends takes us through his Weekly Wrap on Stocktwits TV with a technical look at the major US market averages and a view to the trading week ahead.

Brian's technical analysis videos tend to highlight the action of leading stocks and the major averages in multiple timeframes (hourly, daily, & weekly charts).

While I'm not as familiar with his trading style as others might be, I do like to check out his videos on a regular basis, in addition to following Brian's trading notes and market thoughts on Twitter.

Take a look at Shannon's market wrap, and if you like what you see, you can find additional episodes (and a variety of additional trading and investing themed content) at the Stocktwits TV archives.