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A Walk on the Beach


As we step off the beach and eye our autumn wardrobe, the thirst for knowledge has never been greater.


Summer, summer, summertime
Time to sit back and unwind

DJ Jazzy Jeff and the Fresh Prince)

The final summer stretch is traditionally a time to kick back, fire up the grill, catch some rays and ready for the all-important fourth quarter push.

This Labor Day, however, investors are finding that the holiday is quickly earning its name.

As we wave goodbye to August, the flickering ticks are bickering quickly. Volatility has returned with a fury once reserved for steely-nerved traders, putting will and discipline to the test on a daily basis and ruining vacations across the land.

It's not enough to nail the direction, you've gotta be spot on with regard to timing. For if you're a half step slow, the exit ramp is crowded, confused and without mercy.

The onus is on each of us arrive at decisions that properly reflect our unique time horizon and risk appetite. Unfortunately, valuable insight and information is sometimes lost in the cacophony of noise.

Wall Street firms make money by selling advice.

Mainstream media agendas are often shaped by advertising revenue and sponsorship dollars.

Individual investors are left to fend for themselves, torn by variant opinions that reflect what was rather then what will, in many instances, be.

Someone once said that people are so thirsty that in the absence of water, they'll drink the sand. The retort was that people don't drink the sand because they're thirsty, they drink the sand because they don't know the difference.

As we step off the beach and eye our autumn wardrobe, the thirst for knowledge has never been greater.

The Writing on the Wall

We recently walked through a laundry list of high profile warnings from around the globe and wondered aloud if the downside disconnect had become a tad too obvious.

The sudden rush of negativity was perhaps the most bullish breeze in the crosscurrents of misdirection and true to the path of maximum frustration, equities rallied sharply and branded the bears modern day Cassandras.

Market psychology is a funny thing. When the screens are green, the bulls are quick to assert that we shouldn't fight the Fed and global growth will supersede the credit crunch.

When the red spreads, however, risk management begrudgingly arrives as an alternative to the long conditioned reward-chasing behavior.

That's always struck me as a bit backwards. The time to address risk is when the market is lofty and the time to examine reward is when the tape is on her heels.

Sell hope and buy despair. I believe a fellow named Warren Buffett subscribes to that very same philosophy.

Meanwhile, the "contained" credit contagion continues to spread as Carlyle, State Street Bank, Barclay's, DBS (Singapore's biggest bank and Cheyne Finance PLC all stress about potential messes.

That's the problem with a global financial fabric woven together by $500 trillion of derivatives. When the dominoes begin to topple, it's hard to tell when they're gonna stop.

The Blame Game

We've been waiting for the blame game to start and sure enough, on the heels of yesterday's DJIA decline, fingers have started to wag. Some folks are pointing to the removal of the downtick rule as a culprit, others are focusing on mortgage companies and still others are fingering hedge funds.

The fact that folks are looking to assign blind blame is endemic of the A.D.D. immediate gratification mindset that got us here in the first place.

Let's keep several tidbits in mind for the purpose of perspective:

  • The S&P is a mere 8% off an all-time high.

  • The DJIA remains 4% higher for the year.

  • The banks, the most critical sector, are 4% above the August lows.

  • The volatility index (VXO), up 20% yesterday, is 30% below August highs and less than half of where it was three times during contagions the last ten years.

  • There are still 30 days left before the 45-day redemption window closes for troubled funds around the Street.

  • If the credit bubble, twenty years in the making, has indeed popped, chances are that we're in the first inning of a very long game.

Financial intelligence is the only solution, my friends. The good news is that by reading this, you likely already know that.

Hot Potato!

One of the first things I learned on Wall Street is the humility to know that I know very little. Yesterday on Minyanville, we heard from a bird with a rather sharp view.

The former treasurer of a top-tier credit card company and one of the largest banks in the Midwest weighed in with his current take on the state of affairs.

He offered that the genesis of asset-backed commercial conduits was regulatory capital arbitrage. Banks would "lend" huge amounts off-balance sheet and collect fees on no-capital-required lines of credit.

No one, in his opinion, ever expected these conduits to move back to the balance sheet and therein lies the crux of the current credit conundrum. It's his belief that the market is just starting to sniff out the earnings, capital and liquidity impact of this migration.

I read his missive with great interest as it jibes with my long-held belief that Wall Street exists to create and recreate risk. And when that risk goes awry, the popular perception is that central banks will bail us out.

The discussion segued into the watershed shift we've seen at the Federal Reserve. As of last week, the Fed began accepting riskier assets, such as immature commercial paper, as collateral. That may indeed push ticking risk bombs further out on the curve, buying us time, but it comes at a cost.

As Mr. Practical wrote last week in Minyanville, "this is socialization of the markets with the Fed making decisions on credit and taking those decisions away from the investors that made those decisions. It is what some of us would call 'moral hazard."

Our friend brought his missive full circle by offering that credit card lenders have become the lenders of last resort. As consumers get shut out of the mortgage and home equity arenas, he believes that the last available credit line will be plastic. And with credit card balance growth outpacing retail sales, the obvious implication is that the consumer is stretched.

With total debt upwards of 300% of GDP, can you really blame them?

Random Thoughts

  • Have you ever looked at your "time of sales" and lamented that you pulled the trigger too early or not often enough? Well, don't. The more time you spend on wouldas, couldas and shouldas, the less you'll focus on the upcoming opportunities.

  • I've pared 70% of my short-side exposure (I was admittedly out-sized given the volatility) and I'm trading in my comfort zone. Typically, that means "room to buy lower, inventory to sell higher" but, when trading from the short side, that dynamic is reversed.

  • The other side of S&P 1457 is my new stop level on pure trading risk, down from BKX 111.50 (which is now over 5% in the rear-view). I'll revisit that level if and when (and likely lean against it) but defined risk only works when it's defined.

  • Volatility is the opposite of liquidity and that sword cuts both ways, exacerbating the overarching movement. Keep that in mind as the ranks continue to thin on either side of the holiday.

  • I called my bank to make sure that there were no hidden surprises nestled in my money market fund. Sure enough, 20% of my "nest egg" was allocated to commercial paper, which I promptly rectified. I reduced my annual return by roughly 50 basis points but that's a pill I'm willing to swallow as we digest current uncertainties.

  • Opportunities are made up easier than losses and the ability not to trade is as important as trading ability. Meatier markets will eventually emerge so leave the scraps to the chaps who have the deep pockets.

Fare ye well and on behalf of everyone in Minyanville, have a safe, prosperous and mindful holiday stretch. Tomorrow, as they say, is promised to nobody.


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Position in S&P

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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