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Minyan Mailbag: Seeing All Sides of the Market's Themes


The Street isn't evil. As with every profession, there are good folks and bad seeds.



I realize this may be a little lengthy, but, your Russian Roulette article inspired me to write. While I have been associated with "Wall Street" for almost 20 years now, I am not related directly to any of the hedge fund, private equity, or other hot funds so popular now. I am one of the managing directors of a $10 billion money management firm that has three primary products: high quality large cap and mid cap, and taxable investment grade fixed income. We are located in Madison, Wisconsin… which is obviously away from the main stream located at Wall Street (and we like it like that).

Anyway, being in this business means you are supposed to be optimistic, a.k.a. bullish all the time, or as we say, cautiously optimistic. There was a quote in Al Gore's documentary on Global Warming by Upton Sinclair "It is difficult to get someone to understand something, when their salary is dependent on them not understanding it." I firmly believe this should be Wall Street's motto. Traveling the country as the National Sales Manager over the last few months, I am amazed at how the financial community as defined by advisors is not aware of the risk that is out in the investment world currently. The "buy the dips" mentality, and the follow the Fed mentality permeates widely, and I am afraid for the unawareness that many investors are currently facing.

I have read and followed you for quite some time now, remembering how you used to write for Real Money, and have always valued your insight. Quite frankly, there is always a bear and bull side, but I fall into the camp that the bear side has a lot more merit than the bull side, in fact a lot more merit. Not too many people want to hear my side of the story though. I digress.

I would consider myself upper middle class, and your comment that the middle class will slowly fade away intrigues me. The one thing that I do believe is that there is a "black swan" type opportunity forthcoming over the next couple of years, and I want to capture this opportunity as much as possible. I would prefer not to trade, but rather structure a portfolio to take advantage of this. I have been short the homebuilders the past three months, and am looking for ways to play the debt bubble unwind (China has to be a bubble too, although one of our senior portfolio managers reminds me constantly about the Olympics…so we should wait to go against that bubble). Most middle class investors don't have access to commodities or currency transactions, so are there other suggestions you have that offer the big bang for the buck.

It sounds to me that your are in the camp, like I am, that something big, bad, and profitable is out there… the devil we don't know. I am just looking for ways to hedge myself for this event. And as an added benefit, it would be good for my firm, as high quality in both stocks and bonds would come back in favor!

Keep up the good work.
Minyan Mike


I wanted to share your mailbag as it touches on a few themes currently in play on the Street and across the US.

Higher prices have a way of conditioning behavior. We saw it on the front end of the tech bubble (remember the new paradigm?), witnessed it in housing (which continues to manifest) and, from my perch, remain in the early innings of an entirely more disturbing debt unwind.

The dollar decline, for all the press it's currently receiving, has been a stealth bear. I'm not just talking about mainstream America, I'm also referring to many professionals on Wall Street. I talk to some rather large gorillas-folks that run multi-billion dollar funds-and most disregard the dollar as a potential culprit or catalyst.

While many-dare I say most-of them are much smarter than I am, I disagree on their greenback apathy. No, it doesn't matter in terms of "apples to apples," be it "earning, spending and saving" for the consumer or performance in the professional realm. Where I think it manifests, and why I think the rate cut matters, is in how foreigners react to the deteriorating basis of investment.

To your rather apt quote by Upton Sinclair, I completely agree. This is something that John Succo and I discuss quite often. Both of us worked at major broker-dealers and ran large hedge funds so we're pretty "up to speed" on the way the Street works. It should be said that we have no agenda other than providing honest and forthright insight for Minyans.

The Street isn't evil. As with every profession, there are good folks and bad seeds. Still, by and large, Wall Street makes money by selling advice, offering services and repackaging risk. It's a topic we've touched on often and one that remains very much in play. In an educated financial system, the relative value add of a full service broker diminishes.

The genesis of Hoofy and Boo was to create metaphorical representations of the bull and bear case. The residual grist is what you'll read the next morning but to fully understand the market machination, you need to see both sides. To the earlier point, there are plenty of agendas in play that benefit from green screens and little, if any, motivation to paint the risks.

Ironically, when risk manifests-after prices fall-they'll find their way to the front page when it's too late to proactively position.

Will the structural imbalances one day matter? There are two central tenets in that discussion. "How," which is to ask whether it'll be a cancer (such as the dollar drip) or a car crash (self explanatory) and "when." With regard to the latter matter, the FOMC (and other central banks), by accepting riskier collateral at the discount window, effectively pushed risk out on the curve.

How far out remains to be seen but the effect-and this is where it gets a bit scary-will be cumulative.

I am trying to see all sides, including the potential that China "holds it together" through the Olympics. And I do think that, on a relative basis, stuff we need to feed, educate and power the world will outperform subjective valuations and financials. When push comes to shove, however, through the lens of "asset class deflation vs. dollar devaluation," the same tide that lifted all boats could serve to swallow soybeans to Cisco to Citibank.

While we "can't run scared," we must certainly respect and manage risk. In my view, this dynamic has been percolating since the back of the tech bubble when massive stimulus was injected into the system. It was masked by the dollar decline but that, now, seems to be reaching a point of contention. So, rather than asking how far the DJIA can rally, we should instead be asking ourselves how far foreigners will let the dollar fall.

It is, in many ways, the same question.

There are certain safeguards that we can employ, including debt reduction, risk-management, dry powder and emotional lucidity. We wanna make hay while the sun shines-that's likely why you're reading this column-but the onus is on us to understand that for every action, there is an equal and opposite reaction.

And after years of central bank maneuvering, the collective reaction, when it finally arrives, will catch most folks by surprise.

Be the ball. Be a Minyan.


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