Monday, December 22, 2008

Little Crumbs?

President-Elect Obama has now upped his stimulus plan to be 3 million jobs, to which I would respond, why stop there? What about shock and awe? Why not have 5 million jobs. Why bother with cumbersome details like how, or how much lets just talk big. How disappointing. More big bold stimulus he says. I like, Rick Santelli, continue to look for the hammer and sickle to appear shortly on our flag.

There is still lots of talk and chatter surrounding the infamous Bernie Madoff. Karl Denniger over at Market Ticker had an excellent piece over the weekend entitled, "We're All Madoff" which you absolutely must read. I caution you the piece is not for the 'it's somebody elses' fault crowd' and could turn your stomach, as it most probably will serve as a mirror for many who continue to wallow in self deception.

Regarding Madoff, the focus has now seemed to turn to the feeder funds or fund of funds as they are called on the street. For the uninitiated a fund of funds basically takes your money for a fee and places it with another manager who actually manages the funds and then takes another fee in addition to a performance fee. Got that!

Please note they do not manage it rather they they hand it over to a manager, like Madoff, who then charges you another fee and most probably another performance fee on top. Kinda like paying your maid 1.5-3% of the value of your cheque for taking it over to the bank for transaction but I digress.

Now these fund of funds will tell you how hard they work, how vital their function as they expend much painstaking time and research in this effort, scouring the globe ferreting out the good from the bad funds in justification of the fees. Skilled labor to be sure.

At this point you might be asking what the heck does a fund of funds, so-called skilled labor do that a room temp IQ teenager cannot?

Good question!

The answer is.... ZERO, NADA, ZILCH.

But don't take my word for it. Judy McCoy (played by the fabulous Kim Cattrall) the lovely bride of Sherman McCoy in Tom Wolfe's The Bonfire of the Vanities so aptly explained to her daughter Campbell what exactly her father, Sherman, the bond salesman, does:

"Daddy doesn't build roads or hospitals, and he doesn't help build them, but he does handle the bonds for the people who raise the money."


"Yes. Just imagine that a bond is a slice of cake, and you didn't bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that."

Judy was smiling, and so was Campbell who seemed to realize that this was a joke, a kind of fairy tale based on what her daddy did.

"Little crumbs?" she said encouragingly.

"Yes," said Judy. "Or you have to imagine little crumbs, but a lot of little crumbs. If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake."

So the pension funds, endowments, and institutions relied on Sherman McCoy for their bond due diligence, just like Orange County and Bob Citron relied on Merrill Lynch and Michael Stamenson for theirs, just like Calpers relied on Goldman Sachs, Lehman et al in place of their own due diligence regarding their real estate portfolio.

You need to understand, you can do your own due diligence or you can let Wall St. do it for you. Just remember Gordon Gekko's admonition if you choose the second route, that "a fool and his money are soon parted, now that's assuming they were lucky enough to get together in the first place."

I am going to start my Christmas holidays tomorrow so I will be away from my post but will be monitoring events and will post on any items or charts I find of relevance. I want to take this opportunity to wish all of my readers and their loved ones a safe and very Merry Christmas.

Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:

Long 1 unit Ultrashort Real Estate ticker SRS @ $54.10 stop @ $51.10
Long 1 unit Ultrashort Financials ticker SKF @ $103.20 stop @ $98.90
Long 1 unit Ultrashort S&P500 ticker SDS @ $80.40 stop @ $78.12

1 comment:

Mike said...

Merry Christmas to you too HD!