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Capacity Restraints

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We're all in this together.

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And if the dam breaks open many years too soon
And if there is no room upon the hill
And if your head explodes with dark forebodings too
I'll see you on the dark side of the moon.


(Pink Floyd)



Good morning and welcome back to the to crowded shack. Between earnings, Elmer and Dubya, there is plenty to chew on as we tee up for the back nine of our trading week. While the fundamentals, technicals, psychological and structural metrics find their respective weightings in our metric mix, I wanna take this morning's column in a slightly different direction. The Buzz & Banter will focus on the dynamic decision making process--it's geared that way--so I can scribe this vibe without feeling that we've strayed from our mission of fiscal literacy.

The genesis of this discussion was seeded late yesterday as I was catching up with an old friend who works as a sales trader at a top tier broker. When asked how he was doing, he simply replied "we've seen better days." That seems to be a consistent theme on the Street as our once noble profession grinds through the years. Indeed, when I started at Morgan Stanley 15 years ago, folks genuinely appeared to enjoy what they did. That mood now is obligatory--almost bitter--as hungry pros try to slice up an ever-shrinking pie.

In many ways, the financials were the building blocks of my career. My "defining moment" arrived when Chase and Chemical got married and I was "position limit" long for the honeymoon. There were horror stories the other way--I have a hard time thinking of First Interstate without breaking into a sweat--but I've always had an affinity for the group. When you work on Wall Street, you tend to pay attention to how your brothers and sisters are faring. And while we all want to see each other succeed, the sad reality is that not everyone will.

There is a certain irony in the fact that the XBD (brokers) are within spittin' distance of an all-time high. The combination of renewed merger mania and easy money has buoyed the banks and made life miserable for Boo's crew. Still, it's hard to ignore the historical migration of sector weightings--I have little doubt that energy will eventually dwarf the financials as the top dawg in the S&P--or the anecdotal evidence that surrounds us daily. A simple stroll through midtown Manhattan will find a snazzy new bank branch on almost every corner.

The implications are clear although difficult to stomach and tough to time. The overcapacity is obvious to anyone who has been in this game and earned some stripes. Spreads have collapsed, technology has made labor expendable and volatility is a fraction of what it once was. I opined in 2000 that the "great weed out" would be a long, hard road and the earning curve continues to steepen. Phase one was the migration of talent from the broker/dealer community to the buy side. Phase two has left a lot of those same traders standing in a circle shooting at each other.

Jeff Saut once told me that where you stand is a function of where you sit. The same can be said of how you prepare for what's to come. I field numerous emails each day from those in a dilemma. What to do? Where to do it? Is it worth doing at all? There will always be a market and opportunities for those who are good at what they do. I will only ask that you are honest with yourself and map out contingencies for the probability spectrum. The best trades are always proactive and the same can be said for career decisions.

The more important issue is one of time. We're all gonna wake up one morning and look back at our life choices. We clearly won't be happy with some of our decisions but the goal is to have no regrets. Wealth isn't a bank account--it's a knowledge that you're living in a manner consistent with who you believe you are. Just because we trade the ticks doesn't mean that we have to measure ourselves the same way.

It's easy to forget that but never too late to learn.

Good luck today.

R.P.

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