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The Wood Shed


...a falling tree--or price, as the case may be--isn't firewood unless someone is there to chop it up and collect it.


"And a new day will dawn for those who stand long and the forests will echo with laughter."
Led Zeppelin

Hey Toddo,

Thanks again for a wonderful site. Just thinking out loud here. Leverage in a true market is one thing. But the subprime "space" is not a market. You have to be a member of the club to play at the club. Only until someone like Merrill (MER) comes around and shines light on it does it become a market.

I can't short this. Can you? If there is no market, the fundamental premise of investment is not valid. In fact, one could say that the bet that these participants are making is: it never becomes a market. The investment is premised on the club staying private.

Once the doors are open, the underlying investment thesis (regardless of the instrument) goes out the door. It's not just leverage – it's access. Or, at least that's how I'm viewing it.

Kind regards,
Minyan Andreas


You hit the nail on the head in that a falling tree--or price, as the case may be--isn't firewood unless someone is there to chop it up and collect it. And even so, it won't lead to a forest fire until someone lights the match.

The tricky aspect of this juncture is that everyone knows where the wood is now. And the wood dealers, who were quick to realize gains when the underlying assets were appreciating, are hoping that the spark in the dark (that is mark-to-market) doesn't come to Bear (pun intended).

I'm not smart enough to say whether this is the beginning of a big blaze. What I will say is that we've been discussing these conditional elements for a mighty long time.

In a finance based economy, one woven together by hundreds of trillions of dollars of derivatives, you don't need to be an investor in CDO's to get burnt. You simply need to be in a neighboring town.

And that could be a problem in our current era of globalization.

Random Thoughts…

  • We've been watching multiple tells over on the Buzz. The BKX (as go the piggies, so goes the poke), Blackstone (as a sentiment proxy), breadth (a stellar read when 2:1 either way) and S&P 1490 (the ripcord for alotta technicians). There's a lot more moving parts but, alas, that's why we've got the real-time Buzz & Banter.

  • Seems Like Old Times! The S&P futes took it on the chin post-close yesterday, getting waxed for an additional five handles after an already sloppy day. That'll skew the "fair value" equilibrium today, so keep that in mind if you watch futures vs. cash intra-day (as I do).

  • Ever hear of U.S Foodservice? Well, I have since my sister-in-law used to be a legal eagle there. But you should too, as their underwriters pulled the $1.55 billion LBO debt offering last night amid growing tension in the space. We touched on the emerging trend of investors demanding protective covenants yesterday. With a packed pipeline of deals ($12 billion before July 4th) waiting to come to market, this is something we should keep an eye on.

  • More and more people who are watching the LCDX spread, which is an index of 100 equally weighted single-name loan-only credit default swaps (say that ten times fast!). During the month ended Tuesday, June 26, the LCDX spread has widened by 57 basis points and the S&P has been tracking it (inversely).

  • Don't, Don't, Don't believe the Hype! President Fish, who was the founder and CEO of J. Walter Thompson's digital group before heading to the 'Ville, weighs in on the i-Hype. He's the sharpest digital media mind I've ever met and I trust his judgment implicitly.

  • Fort Bragg ? Not here, but we did weigh in on the inherent risks at Fortress (FIG) when it came to market. There are two sides to that trade (last bastion of liquidity vs. the risk in these investments) so it's worth revisiting as more hedge funds and private equity firms prepare to share. The chatter yesterday, so you know, was that a FIG has a huge chunk of assets priced through an "internal model."

  • Wassup with OPEC and oil prices? Check out Hoofy & Boo's take today on MVTV. It's pretty funny, as the critters are apt to be, and in the current state of affairs, a little levity goes a mighty long way!


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