Sunday, June 29, 2008

Great Scott!!

Dear Past Me,
STC- September 28, 2007- 6:41pm

Don’t rip this letter up. It’s not a hoax. What I am about to tell you will come as a shock, but if you bear with me for a few moments, you will understand what’s going on. I am your future self. To be precise I am writing to you on July 1, 2008. Due to the oil boom in the Middle East, the Arabs have quickly moved up the technology food chain. It ‘s pretty impressive when you consider what a lot of oil money can accomplish. I am not going to get into the details as I don’t understand much about how the process works, but the jist of it is pretty simple…we can travel through time. Problem is so far the only thing we can send is letters to our past selves.

Impressive huh?

We don’t even have a mail system in UAE that will allow us to send letters from one Emirate to the next, but we can send letters through space-time. You can thank Sheik Mohamed and what you will later discover was an aptly named Dubai lifestyle magazine called Time Out Dubai that was a front for this super secret project. I think the goal was to figure out how to build buildings faster, and being the visionary that he is Sheik Mohamed decided to invest in a time travel project so that the Dubai government could retroactively correct any delays or design issues.
Anyway, enough about the science, I’m sure you have many questions. So…where to begin:
I know this may come as a shock to you…especially if you are reading this where I think you might be reading this….but you are now living in the desert. To be specific- Dubai. I can’t tell you what you do or who you are going to meet or what’s going to happen with your life (names like rocko, Achilles, and Kman may come into the fold-I’m being serious). Sorry, space-time is a monopoly and it’s not democratically run. (but it’s still pretty cool)

What I can tell you is that you were right about the markets. I know you know that already, but I just felt it might make you feel a little better as I know the September/October rally is killing you. (yes it runs into October) But as things stand today the credit crunch is still going on, and inflation is accelerating. Some advice for you- crox, lvs, sigma, bsc, mbia, and har will implode as you predicted…just not when….hope you can take this hint. As for rimm, stay out of its way it will do nothing but frustrate you. Don’t try and play both sides. Also, stick to your longs…oxy, btu, and gld are gems… can’t lose. Try and be a little more patient with your source of capital….you guys have the right idea…just not the best formula….work on it. Oh, btw, Cramer will be wrong on everything, and so will everybody on Fast Money. And the sell side is about to pull a 2000 repeat with respect to how off their price targets on stocks will be.

As for everything else, the family wedding will go off without a hitch. Yes, I know it seems like I am lying, but I am not. Sadly, you may miss a few of your best friends’ weddings, but as far as I can tell, they don’t hold it against you. A couple of your friends are about to have kids, so get ready to start feeling old. Btw your significant other will move to Paris in like 60 days. I know you don’t believe me, but its going to happen. Oh, your Law Professor will take at least another 2 months to submit your grade so keep on him or he will forget and you won't graduate.
It will be the year of Boston in professional sports, Obama will defeat Hillary, and Lebanon will plunge in and out of chaos. As for film, stay away from anything M Night makes from now and on, and also don’t watch the new Indy…just pretend like it all ended with the Last Crusade. Oh and I almost forgot….you won’t believe who dies on Lost…it’s *********(if you don’t see the name its because Abc has signed a deal with Dubai Holding and is probably in the process of protecting all its intellectual property throughout space/time)

Your friend in Time,
Dubaican(you'll get this eventually)

Wednesday, June 11, 2008

Shama Lama Ding Dong

Wow, I never thought M. Night Shamalamamama could sink any deeper into the depths of film purgatory. I mean his last flick was such a disaster that I thought there was no way his next work could be anything but an improvement. Boy was I wrong. When I see a film, I judge it by how often I find myself squirming in my chair and pondering what better ways I could have spent my time. If you register a zero on this scale, I can at least say I was entertained, and offer an opinion as to what I did or didn’t like about the film. However, if I find myself moving around too much, your film is doomed. At least in the abysmal Lady in the Water I survived an hour or so before I got restless. I can’t say the same for The Happening. The premise…humans gone inexplicably mad committing suicide in very graphic yet comical fashion…while potentially interesting….never really developed into a story. Moreover, the acting was horrific. Marky mark and john leqguizamo just looked so out of place in their roles….. so much so that they could have been replaced by extras and I wouldn’t even have cared.

The only upside- no cameo from the narcissistic writer, producer, and director. Maybe shamalama is making some progress with respect to his infatuation with himself. Honestly, after watching this film I started to think that maybe M Night’s body has been hijacked by aliens or something along those lines. Because there is no way this is the same guy who made Unbreakable and the Sixth Sense. Maybe he should just stick to making movies with Bruce Willis. Either way…my recommendation is avoid at all costs. Nothing Happening Here!!

LandMark Properties, Rich Foreigners, and American Know How

Rumors are circulating that Abu Dhabi Investment Council is looking to buy the Chrysler building, and they are not alone, as rumors have circulated the Macklowe purchase of the GM building included silent partners from Kuwait and Qatar wealth funds. I have but one piece of advice to ADIC….learn your history before you go shopping in America. Landmark American properties and foreign owners mix like oil and water. These investments have a record of bleeding foreigners dry before they end up back in American hands.

I can’t help but recall Mitsubishi estate’s disastrous purchase of the Rockefeller center in October of 1989. At the time it seemed like a great idea, but after 2 billion dollar in losses and a bankruptcy filling the property found its way back into American hands…all the while enriching the Rockefellers in the process. Moreover, let’s not forget another Japanese disaster…namely the 1990 acquisition of pebble beach by Minoro Isutani for $841 million. A decade later the property was sold to a group led by Peter Ueberroth and Clint Eastwood for slightly less than that amount.(Isutani was long gone as he filed for bankruptcy almost immediately after the purchase)

And for those keeping track the Japanese stock market peaked at 38,915.87 points on December 29, 1989. It still has not recovered. Now, I am not predicting the same fate for Arab markets, but I do firmly believe that those who don’t know their history are often destined to repeat it. If I had to wager, I’d guess that these acquisitions will end up doing more harm than good for these Arab countries.

See, capitalism is an American game. They have it down to a science. The rest of the world just doesn’t have what it takes to compete. I compare it to a retail investor trying to trade the US equity markets who naively thinks he’s going to outsmart the professionals. It’s just not going to happen. You may get lucky a few times, but in the long run the pros will clean you out. This may eventually change, but judging by what’s been transpiring of late….I doubt it. Whether you are buying internet stocks, real estate backed securities, us investment banks, American automakers, private equity funds, homebuilders, or landmark properties….the Americans seem to always end up on top. The Arabs, Chinese, Japanese, and to a lesser extent the Europeans all make the same mistakes. Don’t these people ever wonder why American investment arms are not snapping up their landmark properties?

At the end of the day, this is good news for America as the rest of the world looks like it has no intention of wising up anytime soon. In my opinion, these people need to get a good financial planner…and start thinking about more creative ways to spend their money. Trying to outsmart Steve Schwartzman or the Rockefeller Family is a sure fire way to go broke. My advice…stick to what you know…David Ricardo knew what he was talking about when he came up with the law of comparative advantage. And if you have concluded you don’t know much, keep your money under your mattress . There is no shame in that.

Monday, June 9, 2008

"The Exclusive R"

So, I was back in the states for a week. The occasion: my brother's wedding. However, most of my time was spent chaperoning my cousins and extended family around Baltimore’s malls. Not exactly how I intended to spend my week off, but as the grooms oldest brother I had no choice. Though I will have to say that this trip provided me with firsthand account of what's going on with the global economy. My relatives came to America to do one thing: Shop!! Seeing as most of them live in Europe or the Middle East, they were quite enthused about having the opportunity to throw their global purchasing power weight around. To quote one of my cousins, “I am going to tear it up."(KJ for those who know him well)

So, where to begin. My favorite story has to do with denim, and the ongoing designer jean craze. I went to a store with one of my cousins to look at Rock and Republic jeans. After about ten minutes of shopping my cousin had narrowed his selection down to three pairs. Two very expensive pairs of jeans, and one super expensive pair. And I will have to say the clerk in this store did his part to sell these jeans. As my cousin was struggling to make his up his mind, the clerk informed him that the super expensive pair was the way to go because they had an "exclusive R". Now, I had been quietly watching my cousin shop until I heard this. At which point I couldn't resist asking the clerk a few questions. "What's an exclusive R", I asked. "Well, sir I am referring to the design of the R on the back of rock and republic jeans", he replied. He then proceeded to explain to me that the R on Rock and Republic jeans is quite unique and that certain versions of the design of the R are rare and coveted by denim lovers. You learn something new every day. I guess jeans branding has reached new levels, because at this point even I wanted an exclusive R on my butt. Btw the store we were in was called Metropark. Which the clerk described to me as a boutique lifestyle chain with a fashion forward edge. More impressive branding. Basically, these guys bring Los Angeles living to non Californians. Anyway my cousin got a good deal on the jeans, that is if you can consider $330 jeans a deal.(Guess they are more expensive in Europe)

I also spent a lot of time in Abercrombie and Fitch, which to my surprise is developing a big international following.(It knew it as a store for north eastern preps when I was in high school) The shopping experience there is insane. You'd think you were in a lounge or club. The lights are barely on and the music is bumping. I guess ANF has been applying Vegas practices to shopping. Maybe they are pumping oxygen into their stores.

Oh and how can I forget the J-Crew red phone. It turns out if you can't find something in a J-crew store they have an emergency red phone with a direct line to a Jcrew operator who will find it for you. It’s considered a premium service, and as one of my cousins used it, I can say it works.

Can't beat shopping in America. And for you US consumer stock aficionados keeping track....the stores that my family and friends did the most damage at were ANF, Apple, and Nordstrom.

As for me, my venti vanilla cappuccino and croissant from sbux cost me 5.99. In Dubai, I pay 8.40. Not exactly the Big Mac index, but definitely worth noting. While this isn’t a perfect comparison, my purchasing power in Baltimore’s towson town center mall as measured by starbux is 40% better than it is in Burj Dubai.

Wednesday, June 4, 2008

Talking Tough

So, Big Ben finally decided to defend himself. The speech he delivered today arguably provided the world with the first candid discussion by the Fed Chairmen on the global credit crunch. He lays things out pretty clearly by breaking the speech down into three parts 1)what’s happened 2)outlook 3)how we’ve acted and why. In my opinion, the outlook and policy response sections reveal a lot about the challenges facing policy makers today.

Some interesting quotes from the chairman;

“However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth.”

Loose translation- We are still very concerned about consumption and output risks in general. Monetary Policy should remain accommodative.

“Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.”

Loose translation- We are concerned about inflation, and the risk that we may have permanently let the inflation monster out of the bag. Monetary policy may need to shift in a more restrictive direction

The market’s interpretation of this mixed message: Fed is done cutting. Dollar rallies, commodities fall, and equities catch a slight bounce because of the dollar. The problem with this interpretation is that nothing has really changed, and if the fed has really shifted into neutral; equity markets will run into some very strong headwinds in the future now that the prospects for further easings have diminished. There really is nothing for the fed to do but to keep talking tough while simultaneously being as accommodative as they can be without absolutely killing the dollar. In this situation, the dual mandate cannot be fulfilled. The fed made a decision a few months ago to save financial markets and asset prices from a sharp and painful correction. To accomplish this they sacrificed price stability. It’s really pretty simple. See, a decade of imported deflation from Asia and increased productivity provided them with some breathing room to bail out the markets. But markets are ruthless, and as a result the breathing room is now gone. Big Ben can keep talking, but he’s already showed his hand. The whole world knows he suffers from deflation phobia, and thus will do whatever it takes to prop up asset prices.

In my opinion, this fed can’t fight inflation without administering a lethal injection to asset prices. So, how will this all play out? Well, I think heightened inflation expectations are here to stay. Eventually higher prices will eat into corporate profitability and force equity multiples down. During this adjustment period economic growth will remain well below trend, and this will eventually lead to stability in commodity prices as demand will come under pressure. This economic scenario will play out over a few years and not at the hyper speed that wall street operates at. The fed has succeeded to the extent that the economy slows as gradually as current reported data indicates. But make no mistake…if we get some nasty employment number or gdp data….everyone will be calling for more rate cuts…and the fed will give them what they want.

As for the moral hazard debate, here is what Big Ben had to say

“The Federal Reserve's mandate is to foster maximum sustainable employment and price stability. To achieve these goals, we must also support the return of financial markets to more normal functioning.”

I have but one question for Big Ben- What is normal functioning in financial markets?

Rampant credit creation, irresponsible lending, inadequate risk controls, insane compensation, and activity that borders on the criminal. These things happen because financial markets can count on your support.