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What's In A Name?


Does what ails Main Street eventually affect Wall Street? Do these roads ever cross in a cosmos of ever expanding planetary derivatives?


"You know my name, look up the number."
-The Beatles (You Know My Name, Look Up My Number)

What's in a name? What's in a number? Perhaps plenty, when the names are High Grade Structured Credit Strategies Fund and High Grade Structured Credit Enhanced Leverage Fund.

Apparently Hoofy is having trouble sleeping at night, and who wouldn't if they're branding cattle with names like those above?

After snorting to 14000 DJIA and kissing the old S&P March 2000 high of 1553, Hoofy went limp going into the weekend.

It seems Hoofy just can't shake off the dour action and antics in the financials.

Rumor has it Hoofy's had a few nightmares about the Enhanced Leverage Fund being renamed the Enhanced Loss Fund.

Boo came up with a few of his own: Contaminated Darlings of Obfuscation, Capitalist Drunken Orgies, Coolio's Dali-esque' Odds-makers and finally Residential Mularky Boom-Chakalaka Salmons (RMBS). But what's in an enticing name? What's in an unpriced number?

Two things happened early this century when yields were nuked to lows not seen in over 60 years: A veracious appetite for yields by investors across various spectrums backed by an armada of this growing liquidity, and investors chasing those yields.

That appetite and that race were fostered by the folks that cook up and serve what looks like traditional fare in Nouveau Riskless Cafes.

In the aftermath of the bursting of the technology bubble, 9-11, and a still-stagnant Japan, the specters of disinflation and deflation were pacified. Were the spigots left open too long, leaving the all-too-ready-for-prime-time players ready to reap the whirlwinds of the easy money? This is a question for another day. That's not what this is about. The point is the hobgoblins of liquidity hopped on their broomsticks to scare up higher yields. Money flows where money goes.

Bring in the financial engineers, the gilded paper pushers and the pinstriped alchemists of finance promising to turn lead into gold.

It was a cute little dance step of yesteryear called "Ballin' the Jack".

"First you take your subprime close up tight... You swing it to the left, you swing it to the right... You step around the floor kinda' nice and light, then you twist around and twist around with all your might".

It's an arcane little number where investment banks bought high-yield subprime loans and bundled them into what is called a Residential Mortgage Backed Security.

Only on Wall Street does one plus one equal three. It's a place where you take ectoplasm and cut it up and create crustaceans. Then the investment banks slice and dice some more into another pool of protozoan life waiting to spring forth equaling – you guessed it – CDOs.

But let's not forget for a minute that all this is for the good of a more liquid real estate market and for the good of investors who are looking to absorb additional risk. At least that's the punchbowl line.

Problem is, there are a lot of assumptions made when risk is assumed. For example, who would have ever assumed as little as eighteen months ago, with interest rates historically low, that defaults would skyrocket?

The funny thing is no one has ever really identified the culprit, the catalyst that pinned the real estate bubble to this currently stubborn donkey tail of a downturn it is experiencing.

That's the funny thing about markets – they seem to have their own internal clock and their innate logic.

However, how does supply and demand work, for starters? How about excess liquidity and affordability?

Which brings forth the question, does what ails Main Street eventually affect Wall Street? Do these roads ever cross in a cosmos of ever expanding planetary derivatives where managing earnings expectations and managing earnings with buybacks substitutes for taking care of business?

Honey, perhaps Cap-Ex shrunk because there is nothing better to do with the money. Just askin'.

Maybe Wall Street will find something better to do with the money, such as getting into the housing market. I understand Bear Stearns (BSC) and its affiliates have been shown as buyers of as many as 150 houses so far this year. This was not by design, guaranteed. JP Morgan (JPM) and its subsidiary Chase Home Lending "acquired" nearly 200 homes through foreclosures while Mother Merrill (MER) has taken possession of nearly 100 homes this year.

So where is the problem? Maybe the subprime mess is just a speak-easy in an alley off Wall Street. Maybe there will be no spillover. Maybe it will be Amaranth Absorbable. Miraculous! But it seems to me there is more collusion of names and numbers, more potential for derivative collision and more potential for credit crunching here then we have seen in nearly a decade.

Moreover, the mortgage mess shines a spotlight on derivatives in as much as if you can't know the price of something, then you can't assess the risk. If you can't truly know the risk, you can't price it.

But hey, what's in a number, what's in a name?

No positions in stocks mentioned.

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