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Tuesday, October 26, 2004

Monday, October 18, 2004

scer mars and venus

Screw mars and venus. As usual the psuedo pundits have the game all wrong. The planets have little or nothing to do with eternal situation.The truth of it is are stocks. Women are bonds. A simple look at the evidence will prove the correctness of this statement. Stocks represent a claim on the current earnings power of a corporation and the possibility of future earnings as well, but for the most part a stocks price reflects its current situation. What determines a bonds value…sort of depends on what hour of what day of what week during which phase of the lunar cycle doesn’t it?

When we talk about stocks, we talk about earnings, cash flow, assets, book value, current ratios…all fairly straightforward stuff. We have blue chip stocks, like your grandfather, a little stodgy, smelling of old pipe tobacco and mildew, driving safe cars, old fashioned but damned good to have around in a crisis…we have the sold middle class guy, REIT stocks, construction stocks, the countless solid companies that do not ever achieve the spectacular but deliver results over time, we have the flash in the pain guys, the dotcomers with nothing to offer but a song and a flash, the kind you spend 18 years trying to teach your daughter not to date and your clients not to buy…the aggressive merger companies looking to acquire their way to success, the real lounge lizards of the equities world. There are of course, many types of stocks as there are many types of men..domestic stocks, international stocks, growth stocks and value stocks…but one measures the underlying value by the same metrics…independent of outside variables, stock prices care about earnings, assets and future potential of each with the relative importance of the criteria shifting in importance relative to the current operating environment….as men, absent of outside variables care about food, beer and sex with the relative importance of each shifting based on the current operating environment.

Now bonds and women…harken back to older, less interesting days…bonds were the easier safer investments that prudent men held to provide safe, stable returns. Women were objects that prudent men held to bear ones children and keep ones house. Safe, stable objects that were held peaceably for long periods of time. Now, add a free-floating currency and a sexual revolution and the picture begins to cloud a bit. Once can calculate a stocks intrinsic value with a handheld calculator of the simplest variety. With bonds however we must think about things like convexity and duration, things calculated only with a deep understanding of algebra and perhaps even a little physics wouldn’t hurt. There are of course many types of bonds as well..The seemingly safety of a government obligation with its guaranteed payouts…complicated by maddening almost impossible price swings. As Henry Kaufman once pointed out no one can determine the direction of interest rates over a long period of time. Any male walking who claims to understand the thoughts of even this steadiest of types is simply a liar. There’s the girl next door bond, high grade corporates,as with govies usually steady but subject to wild swings based on the movements of rates and rising or falling credit ratings. There’s junk bonds, the wild dance all night in the local bar redneck chick, a type of bond that either delivers beyond your wildest dreams or leaves you hung over in the gutter with the worst hangover of your life, and of course the siren allure of the femme fatale of the bond world, defaulted bonds…all types of bonds and each needing its own special form of higher math to calculate risks ,rewards and values, each with payoffs altered and diluted by a maddening range of possibilities….

The moods, motivation and mental condition of your average man can be learned in less than 10 minutes over a drink. The mood, motivations and mental condition of a woman may never be properly learned as they change constantly on an ever-widening range of conditions. There are two major determinates in valuing a stock. Their current condition vis a vis earnings and assets multiplied by the appropriate multiple. This multiple of course is determined entirely by the behavior of the bond market. There are those who say that men are the captain of their own souls, that more matters in the course of a mans life than a woman. Like wise there are those who claim that stock prices are determined by economic growth. Lovely thoughts both but entirely incorrect over the long run. Growth in GDP has a negative correlation over long periods of time with stock prices. Interest rates however have almost perfect correlation. If rates fall, prices rise.(thanks to the always astute Mr. Crossman for first pointing out the fallacy of gdp,rates and stock prices).It is not a perfect correlation on a day-to-day basis but does hold true over the longer term. Equity markets will occasionally decouple from bond prices and go on a wild ride regardless of rate direction. A man may go to Vegas with his buddies for a month long blow out and never once think of what a woman thinks of his actions…but at the end of a cycle, rising rates will kill a rally, falling rates will stop a decline and when the plane has landed and our hung over hero is home, he will again begin to care about the presence or absence of a woman in his life. The converse however is not true. It is a very rare event that stock prices determine any long term movement in interest rates…Bonds measure a myriad of influences and the buying patterns of a remote Chinese industrialist may well be a bigger factor in the movement than any action of the stock market. Many times we don’t have a clue what drove the bond markets movement until well after the fact. A chance comment by a co-worker may well have a lot more to do with a woman’s mood than the rose you did or didn’t buy her. Extreme movements over the short term in the crashes..may influence the bond market as appallingly bad behavior may change how a woman’s reaction to you over the course of a few days. In the aftermath however they both go back to measuring innumerable variables before deciding whether to aid or annihilate the equities market. When the bond market changes direction, the direction is changed until new variables enter the equation. When bond prices plunge, they stay plunged. Equity markets plunge and will almost always attempt to rally time and time again before falling further. Many of us making a living trading this almost inevitable attempt to return to glory. A man is never truly over an ex..we carry some trace of each of them with us for all times and there is not a man alive who has not made some variation of the you mean miserable**** you ruined my life, please take me back” 2 am phone call. When a woman decides she is done, after ingesting all the variables and global conditions…the man for all intents and purposes ceases to exist( of course if we had engaged in any spin off activity there will be continual margin calls).

Of course derivative have been introduced to try and measure and lessen the volatility of both markets. This works until it doesn’t. It stops working because stocks are stocks, bonds are bonds. Interestingly the formulas for deriving stock derivative prices include a bond component. Bond derivative models have no equity component. As always, the mood, direction and tone of the equity markets, including all derivatives must include a bond function. It doesn’t work without. Whatever influence equity prices have on economic conditions is but one of many variables on bond derivative structures. Most of complete and total wipeouts in the hedge fund world have been the result of bond derivatives. Many of the colossal mistakes of human history have been the result of a woman’s influence over a man. As of course have many of the achievements. It is not mistake the spectacular equity market records of lynch, Robertson, the lamentable sage, have been recorded during a period of generally declining interest rates.

Mars and Venus? I don’t think so. Stocks and bonds. We complement each other when all is done correctly and it is difficult for one to exist without the other, although there could be a bond market without a stock market but I doubt the reverse is true. Bonds have more influence over stocks than stocks ever will over bonds. Don’t like it? Neither does I. take it up with god. But one has to admit, that having the interest payments hit the ledger help an awful lot when stock prices are falling and don’t hurt even when they re rising…much as good woman can carry man through the worst of times and add in the best…. whereas when bond prices are falling, so are stocks and are little helped and when bond prices are rising, so are stocks. I all assume you can draw your own correlations from the preceding system and excuse me as I have to go buy some bonds…. maybe a nice junk bond with long blonde hair and dancing green eyes this time……