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The Market for Good News: Introducing the Butter Side Up Theory


Numerous examples of lessons learned and value gained from crises of the recent past.


Did you ever drop a piece of toast and hope that it landed butter side up? We have. If toast lands dry side down you pick it up, five second rule, check for schmutz, and start eating. Butter Side Up means crises averted.

A Butter Side Up landing also allows you to improve your toast with a little jam or honey. So dropping the toast offers a moment to appreciate the food you are about to eat and think about how to make it better. It's right out of the silver linings playbook.

We see the many crises listed above as dropped toast, and the resulting positive real world outcomes already occuring as the Butter Side Up. We are in the market for good news, and have found numerous examples of lessons learned and value gained from crises of the recent past. We're like a guidance counselor with the "When life gives you lemons, make lemonade" poster hanging on his wall.
"Meteor Dead Ahead!"

Here's an example of our way of thinking. The other day in Siberia, the sky literally fell. A meteor weighing more than the Eifel Tower entered earth's atmosphere, blew out a whole town's windows, and gave the rest of us one more reason to despair. If the fiscal crisis doesn't get us, a random chunk of star-fall will.

Fortunately for the citizens of Chelyabinsk, nobody was killed. And in the days that followed, the Butter Side Up reports came in. A group of Silicon Valley entrepreneurs who have long sought capital for the development of instruments capable of predicting impending meteor strikes believes they will finally get traction. Estimates of the fair value for chunks of meteor dug from the snow by enterprising Chelybinskians reached 40 times the price of gold.

Ok? That's our model. Bad stuff happens in predictable and unpredictable ways. When it does, we, the big collective we, face the choice of shrieking over another example of our impending doom (wait, did the Mayan calendar run out or not?), or learning from mistakes and profiting from losses. Let's look at three troubled areas of American enterprise in which the toast is landing Butter Side Up.
Fairer Markets

The Toast – The Stock Market Flash Crash May 6, 2010
The BSU – The "MIDAS" Touch Has Arrived

No one would ever shop at a market where racks of merchandise were being knocked over and thrown around by a group of rowdy customers. Imagine if those customers had their own price guns and were manipulating the environment so a few people could profit from the chaos.

In our opinion, this is precisely what happened on May 6, 2010 when the Dow Jones Industrial Average (INDEXDJX:DJI) dove 998.5 points or 9.0%. The majority of the fortune-crushing decline happened in a seven-minute time period from 2:40 p.m. to 2:47 p.m. – The Flash Crash.

The Flash Crash was the last straw for a retail investor who had endured the dot-com bust and the 2008 crash. People lost faith in the fairness of the market and got out, taking financial services jobs and bonuses down with them. Fortunately, while the toast landed hard, it did land Butter Side Up.

"MIDAS" is here to protect us. MIDAS (Market Information Data Analytics System) is a software system that tracks and short-circuits high-speed and irregular trading before it gets out of control. Since MIDAS is being designed by former high frequency traders, naysayers are sounding the "fox guarding the hen house" alarm. Cynicism is deserved. But a valuable history lesson lurks here.

In 1934, amidst the ruins of the stock market crash, the SEC was created. Its first Chairman, Joseph P. Kennedy a.k.a. President John F. Kennedy's pop, was widely known as one of the savviest traders of his day. Simply put, he was the 1920s equivalent of a highly successful, high frequency trader. Kennedy knew all the angles and used his extensive knowledge of markets to help stabilize them. Here we are again.

There is no guarantee that the SEC's MIDAS touch will be perfectly golden. In time, the uptick rule or a transaction tax may be put in place to calm or slow the financial markets. But, for now, The Cavalry -- industry parlance for the US government -- has arrived and is already bringing fairness back to the markets.
Housing Market

The Toast – Housing Bubble Burst 2008
The BSU – A House Is a Home Again

The mortgage crisis is a whole loaf of dropped toast. Blame for this economy-crashing debacle is plentiful enough to spread around. But there is also enough jelly, as recent housing numbers tell us, to sweeten the pieces that landed Butter Side Up.

Need we look back on the mess that kept on messing? In the name of learning from our mistakes, let's do it.

Remember these weird ideas? We tried to fight the bursting of one bubble (dot-com), with the inflating of another (housing). Our government abetted this bubble-blowing bonanza by fostering the post-9/11 attitude that consuming without concern for consequences was not only possible, but downright patriotic.

Fannie (OTC:FNMA) and Freddie (OTC:FMCC) figured mightily in this exercise in self-deception. Private banks used Fannie and Freddie's Government Sponsored Entity status to make lax loaning practices seem safe and sanctioned, while forcing the publicly traded wonder twins to make mortgages happen at all costs or lose share value. In this deliciously delusional business climate we and our bankers shook hands over interest-only adjustable rate mortgages, the late Bear Sterns 100% loan-to-value offerings, and a host of less spectacularly stupid but still pretty stupid arrangements. And when the toast fell, we revealed that our fingers had been crossed behind our backs.

Lenders promptly parceled the dubious debt they held into asset-backed instruments that became the nails in our economy's coffin, and many so-called homeowners dishonored the terms of their mortgages by walking away from promises to pay that would cost them more money than they were worth. Think of trying to eat a piece of toast under water. That's what kind of mess we made.

The miracle of this madness is that we seem to have learned something from it.

The housing market is reviving. Corresponding economic activity (garden gnome sales, lemonade stand starts, picket fence futures) is heating up. Many of us now seem to understand that our homes are our castles, not our ATMs, and certainly not our poker chips. A new sobriety attends the ways in which homes are being built and financed. Conventional wisdom seems to have acquired the understanding that housing is a market, and markets go both up and down.

Raw data and new attitudes give us reason to believe. Foreclosure activity is leveling off. So are short sales. The National Association of Realtors reports that total home sales are up 9% from January 2012, with conventional sales likely rising 20% or more. Vanilla home buying, and building, is coming back in style. That's really tasty news.

But it's also good that not every bank is loaning and not every family is buying. Qualifying for a mortgage has been ridiculously hard since the crash. Some banks still won't make even the ironclad loan. But increasingly some will. This diversity of attitudes is a temperature regulator. A return of rampant speculation accompanying attractively low levels of inventory would signal another meltdown. But it's not happening. Lenders are being cautious, and renting is acquiring new social and economic legitimacy. The NHBA notes that multi-family construction is the first part of its business to regain vitality.

This all sounds like the American capitalism we learned about in high school. Banks are loaning money to people who demonstrate the ability and integrity to pay it back. Houses are being treated as places to live, not bets to make and hedge.

Maybe the housing climate will become so friendly that landlords and tenants will begin inviting each other over for tea, and toast.

The Toast – The Hanging Chad Presidential Election of 2000
The BSU – Voter Responsibility Rising

The belief that elected officials can only fail is a rare example of bipartisan, multicultural, gender-neutral thinking. And here's the really bad news about our gridlocked, bought-and-sold politicians: We voted for them.

That's also the good news. Americans have preserved healthy interest in elections despite all the dropped pieces of legislative and executive toast. Have you heard that widespread fraud and/or naked vote suppression, the Citizen's United decision, or a wicked hanging-chad hangover has ruined our appetite for election day? Not so.

Each of the last three elections has seen greater voter participation in the contests held between 1972 and 2000. Millennials in particular get a bad rap in some quarters but do their duty on Election Day in proportions significantly greater than Gen X did when we were kids. The percentage of youthful voters in 2012 (about 52) was basically unchanged from '08.

So much for the sour grapey prediction that teen election spirit was a one-time thing. It's the same story with those long lines and confusing ballots that were going to keep people-especially senior citizens-from bothering. Somehow people made it through the maze and withstood the wait.

Even if we aren't in a mood to celebrate our leaders, we still have faith in our system. To what end? The Butter Side of that view is that we have instructed our government not to veer too far toward either the left or the right. Have you ever been driving on an icy road and needed to correct your direction? If so, you know what happens when you rip the wheel too hard. We're betting that the new crop of leaders begins to take our guidance. And if they don't, hopefully the next batch will.
Not a Couple of Pollyannas

OK, sometimes bad begets bad, toast falls, the butter side hits the floor, and the result just can't be stomached. We accept that. We don't accept that it happens every time.

Sure, America is currently stuck in crisis mode. But the notion that all is lost grows more factually incorrect every day. The next big event in the US might not be a destructive one. It might be positive, a success. And when a fresh crisis does descend, we'll know to check the toast to see if it landed Butter Side Up.
Editor's note: This is the first in a three-part series on the Butter Side Up Theory, by Lloyd Khaner and Nick Smart. See the authors' bios below.

Lloyd Khaner is the General Partner of Khaner Capital, L.P, a long-short hedge fund. He selects stocks for the portfolio, sets the Fund's investment strategy, oversees the Fund's portfolio and directs its resources. Khaner Capital, L.P. has outperformed the S&P 500 for the last 15 years. He is also the author of "Lloyd's Wall of Worry," a weekly column published by

Nick Smart is Professor and Chair of English at the College of New Rochelle. He is co-editor of "Dylan at Play" (2011), a collection of essays investigating unconventional approaches to the life and work of Bob Dylan, and author of numerous articles on literature and teaching, including "On Not Knowing Virginia Woolf" (2009). He earned a B.S. at Lewis and Clark College and a Ph.D. at NYU, and looks on the bright side of life with his family in New York City.
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