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The Brokers Broke Their Own Best Plays


Risk is never defined by the asset, but by the price and crowd.


I had the great fortune of tempering my market analysis with a solid bottle of Tempranillo last night with three partners. My ten years at Citigroup (C) came up, which included some opinions about what I believed were poor decisions balanced by genuine gratitude for even being in this business along with a tremendous interest in the vast array of talent that remains. Yet it could not be a more different culture than when I started. Blaming Prince, they were surprised to hear, was not the solution nor was he the problem, in my view. A photo of a management committee of over one hundred people just doesn't fit as neatly into a little box on TV though, so it goes.

I have thought for some time that Citigroup was the U.S. Each had big problems with secular headwinds, but included exceptional operating units. I wouldn't buy either as a whole but think there are tremendous businesses sitting inside.

The deeply painful irony is that the business that the big brokerage firms were so afraid they could no longer profit from – good ole fashioned trading – is exploding higher, while the business they chose to grow instead – loans – is just…well...exploding.

Look at InterContinental Exchange (ICE), Chicago Merc (CME), International Securities Exchange Holdings (ISE) which is being taken out. Look at exchange profits and volume around the world. Those three stocks are up an average of 44% in '07 alone based on increasing appetites from more players to trade more things in more places. The experience which scared these brokerage firms away from trading and advice the most, the Nasdaq Bubble, inspired the bubble they deal with now instead. Meanwhile Nasdaq (NDAQ) shares are up 55% so far in 2007. Cycles tend to cycle.

Too Risky?

A friend emailed me recently, wondering if Merrill Lynch (MER) still thinks the commodity business is too risky (it shut down operations in Feb 2000). And it was not alone. Yet another operation Wall Street firms could be dominating instead of nominating it as a cutback to make more loans instead.

As it and many others sort through their new problems ("lower risk" loans) it's a great reminder that risk is never defined by the asset, but by the price and crowd.

Investing in commodities like Oil and Gold were described as the Wild West when my career began. Now they are often described as safe havens during a storm caused by formerly conservative U.S. banks and brokers that even cowboys think are too risky in quite a role reversal. Haven't we seen this movie before?

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Position in NDAQ.
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