The Haunted House

By Todd Harrison  OCT 31, 2007 8:09 AM

Tricks and treats. Misses and beats. Is it any wonder that investors are looking for the miracle of clarity?


“ We’re all confused with what’s to lose. You can call this song the United States Blues.”
Grateful Dead

There was always something extremely cathartic about attending Grateful Dead shows. Regardless of the disparate socioeconomic backgrounds or financial standing, we all danced to the same beat. And if we got confused, we just closed our eyes and listened to the music play.

Such is the theme on Wall Street these days as credit concerns and structural missteps have morphed into a colorful collection of positive energy. As investors dance and shake their bones with the politicians throwing stones, the bears have been left to wonder if the ashes, ashes will fall down.

Despite massive misses and multi-billion dollar write-downs from Citigroup (C), Merrill Lynch (MER), UBS (UBS) and a slew of other financial heavyweights, we’ve gotten encouraging news from tech titans such as Microsoft (MSFT), Google (GOOG), Apple (AAPL) and Intel (INTC).

Tricks and treats. Misses and beats. Is it any wonder that investors are looking for the miracle of clarity?

Perhaps it’s apropos that the FOMC is meeting as ghosts and goblins gather for Halloween. Skeletons are scattered throughout the Street but investors seem far more focused on the potential year-end sugar rush. And fund managers? They’re looking to dress up their portfolios and bury losers deep into the night.

One of the first lessons I learned in this business was that reaction to news is more important than the news itself. The market is a discounting mechanism where headlines are best at the top and the worst at the bottom. It’s the fatal flaw of fundamental analysis and why trading is more of an art than an exact science.

It is also why so many smart folks are spun around right now. The credit front is pretty spooky with looming unknowns but the averages remain near all-time highs. Typically when news is scary, as it was in 2003, stocks are deeply discounted and there’s nary a buyer in sight. This cycle, for lack of a better word, has snubbed historical precedence as it twists and turns through the path of maximum frustration.

I was schooled to believe that the financials are leading indicators of the mainstay market proxies, particularly in a finance-based, derivative-laden global market machination. Thus, it stands to reason that we’re either witnessing a historic divergence (as the banks and equities disconnect) or we’re in for a tricky year-end bender.

What’s clear is that changing the costume in the corner office won’t turn the trick. Stan O’Neal, Chuck Prince and Warren Specter are all smart guys that played the same game as everyone else. They just haven’t played it as well as their contemporaries and have been held to task in kind.

We saw similar stories manifest when the tech bubble burst and corporate malfeasance morphed into a modern-day witch-hunt. That's not to say these guys are Kozlowski or Ebbers or Lay. Their antics perpetuated fraud as opposed to a universally accepted, albeit misunderstood, systematic process.

But the structural imbalances, hidden risks, counter-party collateral exposure and embedded insecurities aren’t one-and-done write-downs. That’s not how the knitting is weaved with $500 trillion dollars of derivatives in play. In fact, one could argue that the inherent learning curve needed to unwind these interdependencies will allow the issues themselves to manifest.

The frightening part of these modern day sequels is that the same greed and reward-chasing behavior that was responsible for the universal acceptance of risk has again been so readily embraced. It is that story itself—the twisted tale of misguided agendas—that is the common thread of these seemingly disparate plots.

Trick or treat, my friends, and be wary of the bad apples. For when we bite into the forbidden fruit, we’re liable to find the pin that pricks collective psychology and leaves us all howling at the moon.

Holiday Festivus is here!  Come join us and support the Ruby Peck Foundation For Children's Education at an old-fashioned Southern-style hoe-down in the heart of New York City on December 7th.  Click the image below to learn more!

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

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