TheAcsMan's blog

Achilles and his Heel



Whether you favor classic Greek mythology or gool old fashioned American superhero fantasy, there's a heel or a piece of Kryptonite that's bound to spell doom and spoil all of your hopes for mankind..

KryptoniteWas there ever a single episode or comic book story about Superman that didn't contain some kind of Kryptonite or at least its metaphorical equivalent? It was so predictable. There was always something to stand in the way of justice reaching its just destination.

For me, the image conjured up by the designation "super-committee" has to be on par with the mythical heroes of generations past and generations lost.

Just imagine. A collection of seemingly normal people, collected together forming their very own band of super-heroes. As if one super-hero wasn't enough, surely only good things can come when the many are united as one.

This august group of super-patriots assembled to save our way of life from the predatory grip of a growing and deadly deficit.

Surely, we weren't Greece and we weren't the Weimer Republic.

The task ahead of this Deficit League was no less than that of Superman faced with saving the world from impending doom as an earthly sized asteroid with our name on it hurtled through the vacuum of space in our direction.

A couple of months ago the expression "kicking the can down the road" got quite hackneyed, but that's just what the not so super super committee has done. The only question left for our imaginations is how long and winding the road will turn out to be.

There are lots of jokes about committees and their outcome products. A camel has been described as the design work of a committee of experts. Those jokes are the corporate variant of the "How many X does it take to do Y" joke.

Those jokes never get old, but this one did and on top of that, it was never very funny in the first place.

Question: "How many super-committee members does it take to get nothing done?"

Answer: "Twelve."

See? I told you it wasn't very funny.

And there was no product, to boot.

Instead there was the hope that there was a possibility that a solution to the deficit issue might be found sometime in the future.

Now that's funny.

Seems like the super-committee took a lesson from the European Union and the European Central Bank and tantalized us with the possibility that there might be a plan for a plan sometime in the future.

That kind of certainty sure spells "this is the right time to invest in stocks" to me. Where do I throw my money and how much will you take off my hands?

But like all super hero stories, there was a need for drama. No one wants a story where good wins against a trivial challenger.

The super-committe members suffered the effects of their own unique brand of Kryptonite. Their mortal enemy was the very thing that gave them strength,

Their ego and politics itself.

Given the hype and the belief that the super committee would come through with a judiciously arrived deficit reduction package, the market should probably have discounted the high probability of failure.

It doesn't take much of a leap of faith into contrarian territory to know that there was no way that the super committee could molt out of its own skin.

I mean, just how do you stand up to ego and the politics of the moment?

In a world where Newt Gingrich is the candidate with momentum, at least at the moment, anything should be possible. But whereas there may have been an antidote to the Kryptonite that sucked the life out of Superman, there doesn't appear to be any antidote to the butt sucking that "Realpolitik" demands.

While some super committee members can't see a way to extricate themselves from the Norquist "No Tax Pledge" their committee objectives were bound to be unmet.

Yet the market, despite the conventional wisdom, didn't see this one coming from even a few feet away as the deadline neared.

Despite the big market move to the downside today, I wasn't overly distressed.

With assignmenrts of some shares of Green Mountain Coffee Roasters and Riverbed Technology and all of my Sallie Mae holdings, today was a good day to pick up bargains.

It's entirely possible that they'll be even greater bargains tomorrow, but I couldn't resist pulling the trigger today.

In fact, I could barely wait a minute after seeing the inital 190 point drop.

Part of my eagerness was because I had a 9:45 AM flight Monday morning on yet another Southwest Airline flight without a Wi-Fi connection. I've been on 6 flights in the past 2 weeks, each one teasing me with the rollout of W-Fi to the fleet, yet none had seemed to make it to my air chariot.

So I made quick trades before they closed the cabin doors and I would be shut off from the sweet flow of data for 90 minutes.

As it turned out there were more shoes to drop, but I repurchased my Riverbed Technology shares at a lower price, added to my Freeport McMoRan and Textron holdings and re-established a position in Caterpillar, at a much lower price than the $95 assignment that I took just a week ago.

Not bad for 15 minutes on the less than intuitive E*Trade iinterface on my Droid telephone.

By the time the plane landed, any angst over the 300 point drop was eased by silver's fall and the ProShares UltraSilver's rise.

Huh?

Before my scheduled meeting, at which I thought it might be rude to whip out the smartphone or netbook, I had a chance to sell options on the new Textron shares and about 20% of the ProShares piece.

In the meantime, there was just a bit of angst over Amazon, which was getting whacked yet again.

This time, the Twitter stream was filled with negative comments about the new Kindle Flame, even coming from those that ordinarily spout Bezos messiah-like chants, the kind that used to be reserved for Steve Jobs.

One 140 space story had anectdotal evidence of a USPS employee saying that he never so so many product returns when Apple released a new product.

That sort of thing can't be good for a stock's price. That's the kind of hard data and fundamental analysis that's so desperately needed.

Whoever thought that Amazon's heel would turn out to be Apple? But Amazon will recover, it just may need to remind people that its core business is immune to Kryptonite.

The equivalent would have been if someone actually came out and said that Green Mountain Coffee was insipid, if made properly and even worse, if not. If you thought that Starbucks was Green Mountain's Kryptonite, you'd be on the wrong track on the basis of product competition. No one compares the products. They just wonder what will be left when Starbucks pulls the rug out from under its agreement with Green Mountain.

That one would be hard to recover from.

But the same thing was said after the first round of accounting improprieties was alleged. Green Mountain recovered and then some and lived to see another day and another round of allegations.

Heels heal and Kryptonite, like all radioactive elements has a half life.

The same can't be said about the egos of our politicians and the need to perpetuate their elections, at all costs. There doesn't seem to be any resolution and there's not enough spin to counter the dizziness and disgust.

Maybe we should just let that asteroid do its worst and move on. 




Game Theory or Schizophrenia.com



I was always a fan of Game Theory and especially of its derivative game, The Prisoner's Dilemma, since I'm an avowed believer in Zero Sum kinetics.

Game TheoryIf you don't know what any of that means, you'll have to decide whether to admit it, based on what your alter-ego will decide to do, knowing that your reward or punishment will be based on what you both decide, in the seclusion of the recesses of your warped mind(s).

In the event you have more than one alter ego it gets just a bit more complex.

Welcome to my world.

Game theory is much easier when your alter ego is perfectly in sync with your true self. It's also easier in totalitarian situations, because in such cases people are afraid to go counter to authority.

Assuming that you possess some level of sanity and don't have to take into consideration the needs of your alter ego, investing decisions, especially buy and sell ones, should be pretty easy.

"Should be" is the operative phrase.

I've long known that I'm incapable of selecting a good stock.

When I appeared on Bloomberg Rewind a couple of weeks ago, the guest panelist asked me the worst stock decision that I had made.

My first thought was "why is this a**hole asking me that question?" Besides, how do you trust a guy who's not trying to grow a mustache during MoVember, as the host, Matt Miller was bravely doing, without going on a 3 week vacation to do so.

It didn't take me long, though, to dredge up a near quarter century decision to purchase shares of L.F. Rothschild, a one time venerated name in investment banking. That particular year, it had the distinction of being the largest percentage loser of any company on the NYSE.

II may be a lot of things, but no one can accuse me of not learning from my mistakes.

At least the big ones.

Instead, I stick to my list of "Old Reliables" and rarely venture outside that comfort zone.

When I do venture, my timing seems to be highly correlated to short term unwanted price movements.

About a month ago, just as earnings season was getting underway I bought shares in Green Mountain Coffee Roasters, Amazon and Netflix. Of those, I'd never owned Netflix before.

I don't know what made me purchase those. It was an uncharacteristic move for me to do so.

What that triad had in common was great options premiums in advance of earnings. Maybe a little price momentum, as well. Amazon stood alone in that group by not having any black clouds hovering nearby.

While Green Mountain delayed its earnings report by a couple of weeks, I had the opportunity to get three weeks of great premiums, but then came the news.

Green Mountain was already suffering from more doubts about its financials and Crazy Eddie like inventory issues.

Prior to the live broadcast of Bloomberg Rewind the news came. Green Mountain's disappointing earnings resulted in a $25 after hours decline.

Of course, I had the lack of good sense to mention that I held shares on the program that evening, but I also mentioned that I didn't buy into the Bernard Baruch axiom of cutting your losses at the 10% level.

Besides, with a cost basis of about $67, I'd already pocketed about $14 in premiums in that 3 week period. Still, Green Mountain opened at what would have been a 20% loss even when based on the net cost basis. I could feel Bernard rolling in his crypt.

What I said on air was that I was going to stay the course and let emotions revert to the mean, just as prices do. The highs and the lows don't last, except in the case of L.F. Rothschild and depression leading to suicide.

My less cool and collected alter ego wanted to cut and run.

I still have a hard time reconciling the fact that the investing cautious me, let's call him "Louie", is willing to have unprotected sex in a crack house, whereas the "no worry" investor me, "Ricardo", would never think of doing such a thing.

Then the realization hit.

It was Ricardo that made those uncharacteristic piurchases and he now left me with the dilemma of what to do. Louis, on the other hand was smoking crack with the options premium money that Ricardo conjured up.

The dilemma was created by not knowing what ultimate price would be exacted on any decision because there was yet another alter ego in the mix.

This one was a nasty behemoth called the Stock Exchange.

Great. Now I had to worry about what the macro-economic oriented market would do, as well as what that short sighted micro-economic Louie would want to do. Louis wanted to smoke his crack and have his stock profits, too.

Compound that with the fact that the market was beginning to react in an unprecedented way to rumors, news of possible news and news of real news.

A purely rational person would have discounted the irrational market and made a decsion purely on the remaining alter ego, being intimately aware of its thought processes.

The investing cautious Louie would certainly look at the potential tax benefits of taking a strategic loss on Green Mountain shares and then take another long drag on that pipe, while taking care not to set his hair ablaze.

The care free Ricardo would believe that tax consequences were irrelevant. In fact, the more taxes you had to pay, the better. That only meant that you had that much more in capital gains.

"Laissez le bons temp rouler."

Did I mention that Ricardo actually had a Cajun alter ego, Ricardeux?

Ricardo, for all of his subset personalities understood the concept of authoritarian rule.

Khaddafi was on top of his game as long as he was ruthless. No one dared to question his decisions and he made them with impunity.

Then he decided he had to get into the good graces of the West.

We all know what happened then.

So did Ricardo.

As soon as his plane landed in Phoenix last Monday an additional lot of Green Mountain was purchased at $41.85 and weekly calls on that new lot were written at $42, while the original lot went unhedged. He assumed that Louie would be paralyzed by over analysis of the situation and would make no effort to counterbalance Ricardo.

Louie was apoplectic, because Ricardo was right. And now, it was too late for Louie to do anything or to change his mind. There was no second deal to be made.

At the very least Louie would have hedged the whole position, but that was now off the table, as well.

In this game you have to be quick and ready to deal.

In the meantime, that nasty Stock Exchange decided to go into a mid-week funk, dropping about 3%.

In the Prisoner Dilemma Game you also have to be ready for the unexpected.

But the real unexpected was that even with walls of support crashing, Green Mountain climbed up to $51.

And so RIcard and Louie were at odds again.

Ricardo felt good about at least garnering some more options premium on the split holdings, not hedging the remainder and felt no remorse for foregoing paper profits.

Louis was unapologetic.

He argued that the proceeds from selling the Green Mountain shares could have been plowed into the likes of Caterpillar, which was now trading below the $95 price at which shares were recently assigned. Besides the 2% weekly premium, theer were those tax advantages, too.

And so, they were both right, at least for last week. Both had rational thought processes and understood the other's positions and reasoning.

But come Monday, the whole tug of war starts again.

Both Louis and Ricardo will be aboard yet another plane when the Stock Market opens on Monday. In essence, they'll be held hostage to the irrational movements of their macro ego.

I wonder what would happen if I actually swallowed these green and white capsules?

 

 


Lysol. Kills 99% of ....



Despite spending the last eight years of my life living in Washington, DC, I’ve managed to stay clear of any and all political involvement.

I voluntarily went into work during the Obama Inauguration. I avoided every form of public transportation during the Glenn Beck “Restore America” rallies. I was in the bathroom for most of the Larry Craig scandal.

Recently when I was asked by a complete stranger on the bus if I thought Obama stood any real challenges in re-election, I immediately retorted that I had voted for George W. Bush in each of the last three elections. Based on the abrupt end to our conversation, I think it’s safe to say that Bush will have my support once again next year.

LysolAlthough I’ve been known as a bit of a hell raiser and a constant contrarian, I’ve always had very little tolerance for protestors in any form. My sophomore year of college the school hosted the “National Conference on Organized Resistance”, bringing over a thousand radical progressives from around the country for a week of discussing everything from authoritative veganism, homemade bomb making, and the evil of tampons. After being tired of the stench of over a thousand unbathed squatters spending a week inside of our building, I attempted to freshen the space with two dozen cans of Lysol. While I did not face any disciplinary action for assaulting the eyes of a few hundred occupiers, my actions were strongly condemned by the student newspaper as an act of ozone terrorism.

Now six years later, I tend to look at things a little bit more rationally. I’ve watched hundreds of inane causes bring people to my backyard, but after the weekend they always move on, leaving some trash on the ground but some dollars with local businesses. When the first tents started popping up next to my office as the Occupy Wall Street movement moved south to Washington, I assumed it would be as fleeting as every other movement and be over before it even really began. Each morning as I passed through McPherson Square (home of the larger of the two occupier camps, immediately north of the White House), I watched the infrastructure get more complex as their population grew. I couldn’t help but wonder if they knew how much Wall Street funding went to the manufacturers of the Eddie Bauer and Columbia brand tents that were popping up.

I became more and more uneasy with the entire situation and it showed increasing signs of permanence. This time however, I left the Lysol at home and took much more combative measures.

I invested every penny I had in Microsoft.

While occupiers have damned Wall Street for destroying wealth through mismanagement of assets and creating a “rich-get-richer” economy based on derivatives, Capitol Hill has struggled with companies like Microsoft bloating their balance sheets with cash that could otherwise be reinvested in job-creating activities.

At the recent shareholders meeting, Gates defended the $57B of cash on hand by claiming, “You want to retain enough (cash) so the company has the strength to be able to take big risks even in the face of some economic uncertainty”.

Microsoft? Risk? Big Risks? Unimaginable. Google Apps is quickly starting to eat into the MS Office suite. Apple’s OSX is growing in home computing and becoming the clear choice for executives, sales teams, and engineers. I’m far more likely to use a payphone and own a rotary phone than a Windows 7 phone.

Amazon Web Services owns the cloud and Google and Apple’s investments will be dominant long before Azure is even relevant. The difference between Amazon, Apple, Facebook, and Google is they respond to consumer demand and iterate daily. Microsoft updates its Office suite every four years.  The companies that actually take the risk to reiterate and reinvent have created enormous gains for shareholders.  Microsoft has traded between $20-30 for the last decade.

My father and I have a number of things in common, but the biggest one is our constant quest to make “easy money”. Since the day I started working, I’ve spent a ton of time scheming up different ways to stop working. When PNC Bank introduced ATM fee reimbursements I spent hours researching the logistics of owning my own ATM machines, charging myself exorbitant fees, and spending my days making $20 withdrawals and living off reimbursed fees. Several years ago as a borderline-suicidal Baltimore Orioles fan, I convinced my father to lend me $1,000 to screen print 200 “DUMP ANGELOS” t-shirts. After showing him that the profit from the first production run would be enough to buy six 1964 color televisions, he promptly funded the venture. We have a lot of shirts left. Four years later I have not repaid the loan, however in my defense I didn’t have time to research the definition of “negatively amortizing” when I signed the document. Why should I possibly repay a loan that is greater than the value of the shirts?

Despite the many past easy money failures (and likely even more in the future), Microsoft has been the closest consistent source. Two trading days before my first ever options-expiration-Friday, I’m sitting on the right side of $27 calls that I wrote less than three weeks ago with a 41 cent premium. Couple that with a 20 cent dividend payment from the $56B never-to-be-used rainy day fund and that’s a 2.3% return in less than three weeks.
Come Monday I’ll take my likely unassigned shares, rewrite a new set of contracts, collect my premiums, and start my work week. I’ll be confident that Microsoft won’t be able to innovate themselves above $30 or squash themselves below $20. Two months later I’ll enjoy the fact that Steve Ballmer truly believes that "We are in the Windows era. We were, we are, and we always will be,” by collecting my dividend payment in lieu of ever taking that big risk that they save every penny for.

One day the Windows era will be over, but at that point I’ll likely be far better for it, 2.3% at a time, every month, every time. Hopefully at that point PNC still reimburses ATM fees and Angelos still owns the Orioles.

Maybe I’ll stop tomorrow morning in McPherson Square and explain to the occupiers how they too can use derivatives and a dividend-capture strategy to safely increase their own personal worth at the expense of market-crashing speculators. I’ll probably just play it safe and stick with the Lysol.


“@malcolmacs is a former technology headhunter currently working within the e-commerce and social media industry in Washington, DC. He is a dual graduate drop-out in Quantitative Finance and Information Systems Management . His fund currently manages over $8,000 in assets. Do not follow him on Twitter.”


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