Wednesday, November 12, 2008

"The End of Wall Street's Boom"

Hat tip to Aaron Edelheit for linking to this essay in Portfolio by Michael Lewis, "The End of Wall Street's Boom". The essay is worth reading in full, and is an entertaining read, as Lewis's essays usually are, but below are a couple of brief excerpts. To set the stage: Lewis had asked the ubiquitous analyst Meredith Whitney if she knew of anyone that anticipated the subprime collapse and managed to profit from it; the first name Whitney gave him was that of her former mentor, Steve Eisman.

Lewis on Eisman as a securities analyst in the early 1990s:

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style.

In 2007, Eisman was managing a hedge fund called FrontPoint. Lewis on Eisman's decision to short Merrill Lynch then:

...FrontPoint had a visit from Sanford C. Bernstein’s Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. “We just shorted Merrill Lynch,” Eisman told him.

“Why?” asked Hintz.

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

The clever photo illustration above is from the article and was credited to Ji Lee. It is of course based on the iconic statue on Lower Broadway in Manhattan's Financial District.


Daniel's Biggest Fan said...

Daniel Wahl's losses have caused him to abandon wrtiting his blog.

He ranted about others not taking personal responsibility for their actions and for not understanding risk but refused to own up to his own failings.

If he had serious money in his picks like SRZ, EPM, POT, HEM, PNWIF, and VRS then he's probably too busy trying to find a job to keep writing.

Just remember, though, that even as SRZ went to zero- the thought process was absolutely valid.

Daniel's biggest fan said...

Everybody has seen their stocks go down in this environment but defending a pick that goes to zero is beyond comprehension.

DaveinHackensack said...

Dr. Price:

I'm still not sure why you insist on posting under pseudonyms here. As I've told you before, I won't delete your comments, as long as you keep them clean. Regarding your comments:

1) I saw that Daniel is stopping the blog.

2) None of us is perfect, and we all make mistakes. Sometimes when we don't make mistakes, we lose money anyway. The poker analogy is useful here, in that you can play a hand the right way and still lose. That doesn't mean you don't stop trying to learn how to play your hands right.

3) Regarding you, Daniel, and SRZ, see my post from a couple of months ago, "M&Ms for Investing". I don't know if dentists have M&Ms too, but you ought to get the analogy. Bear in mind, too, that anyone who bought a base metal miner this year got crushed. I'm down two thirds on Hudbay Minerals, despite its rock-solid balance sheet.

4) Regarding risk, Daniel's point to you last year -- that the discount between a stock's current price and its previous high tells you nothing about its risk -- was absolutely right. That someone half your age would correct you on this seems to have angered you and sparked your fixation with him.

5) That said, Daniel has seemed somewhat defensive when I've asked questions about his investments recently. I have two general critiques about his method that I've been wary of mentioning because of that.

6) I've noticed that you have stopped writing about your investments as well (on GuruFocus and Seeking Alpha). So it's odd that you fault Daniel for stopping his blog.

7) As I mentioned to Daniel in a comment on his blog (before I saw your comments here), he would probably agree with some of your recent political posts on GuruFocus. Daniel seems like someone you'd probably get along with if he hadn't had the temerity to correct you on an Internet forum last year. Maybe someday you'll forgive him for that and move on.

DaveinHackensack said...

I meant to include this excerpt in the original post, but forgot. On the complexity of CDOs:

Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ‘I can’t figure this thing out.’ And I said, ‘I think we have our story.’ ”

ravinsu said...

Hey Dave, nice post.

Wanted to let you know you are doing a great job with this blog. I understand this requires discipline more than anything else. Keep up the good work.

ravinsu said...

I own HEM & PNWIF among Daniel's picks, I believe those along with POT will recover in 2009. While the brutal market caught everyone with their pants down, I believe these stocks will do well.

One thing I like about Daniel is the way he applies good research to his picks and the thought process there. While I never had the guts to put my money in an obscure Zinc miner, I still liked his analysis on it - but as Dave said aptly, even Hudbay had their heads handed over to them. All the estimates on Zinc floor prices proved too optimistic.

It must be painful to see a ten bagger like POT come down to just break-even - forgetting to ring the cash register sucks!.

T Boone Pickens said...


With oil touching under $55 today, and gold etc. way down since July, can the bull market in commodities still be intact?

A drop of 62% since July in oil pricing seems more than just a near-term correction.

t boone pickens said...

Come visit next time you're in Tulsa.

I've got a guest room all ready for you.

DaveinHackensack said...

Thanks, Ravinsu.

Hudbay at least is strong enough to be in business when zinc prices recover, whenever that may be. We have PNWIF and HEM in common. Re POT, I think Daniel did ring the register on the way up, but I don't know what he did with the proceeds -- he may have reinvested them back into new options. You can ask him if you like.

DaveinHackensack said...

T. Boone Pickens,

You still seem quite sharp for someone in his 80s, but you appear to have forgotten what you said yesterday at the Edison Electric Institute Financial Conference. To refresh your memory, you predicted that oil would be over $100 in a year and could hit $300 per barrel by 2018.

Thanks for your invitation, btw.