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Wednesday, December 20, 2006

scattered thoughts

Holiday greetings from the slim one. Professor mcnabb stuck me with that nickname a few years ago and I have perpetuated it as I prefer it some of the others I have picked up. Around the island for some reason virtually everyone has me in his or her cell phone as harry potter. An unfortunate nickname thrown out one night during a lengthy session at the jetty that has stuck like glue. I am convinced there will be guys at my funeral many years from now, saying, Damn that harry P.sure gonna miss him. This does make finding a Halloween costume easier as I just simply show up as myself and announce that I am a middle aged gray haired harry potter.The latest was thrown out by one of my younger co-workers when I was spouting and pontificating on some subject…Who wound up father Time? I ramble, onto more important topics

The stock market continues to just confuse me. I do not see the catalyst for the continued run. Given the current economic situation which appears to be showing slowing activity, weakening real estate (I had actually been considering buying a place but after listening to some folks who know a lot more on the real estate market than I do decided that holding off until later in 07 makes more sense), yet there are still inflation concerns, as well as the geopolitical scene, a nasty war in Iraq that we appear to be losing, pressure from the Saudis to continue fighting there, north Korea, the current Thailand situation I can give you no reasonable explanation for a vix of 10. Makes no sense to me. I find that the fact that Birinyi and associate blogger poll finds leading pundits to be bullish on stocks, yet bearish on the dollar and housing. They are also bullish on bonds. I find that position indefensible. I realize that private equity and M&A activity provide some sort of floor as these enormous pools of cash are vociferously looking for a home and buying everything in their path. But straight up for 5 months with a declining risk premium? Makes no sense to me.

Of course I have been skeptical about the market all year. If it was more than an intellectual exercise for me and I actually traded this way I would be living in a tent below a freeway underpass. Fortunately the only market timing I do is increasing positions when prices fall. My style of investing in the very cheap tends to lead to me finding more bargains in down markets and less as prices rise. Hasn’t always worked that way but it has this year. I have been able to find more than enough kinky, twisted and just flat weird securities to have had a very good year in the market. I am not really adding any new stuff right now but staying with the horses I have been riding for several months. Nice screwed companies with high uncertainty and low balance sheet risk. FRN, OPMR, FINL, TRPS (okay this is actually a new one, a liquidation trading in the 70 cents area where I think the payout is closer to a dollar), PBY,BZL,HAWK,SCUR,WLT,MWA I still love the SPAC warrant game and the warrants in esa and aqr are my favorite plays at the moment. 80cents for the aqr warrants and 50 for the esa. To get a handle on the potential, the aqr warrants have a 5 dollar strike. Now consider this report from think equity
THINK ACTION:Preliminary asset valuation estimates of Jazz Semiconductor ahead of theirmerger with Acquicor resulted in a significant increase of estimates fortangible and intangible assets. While increased asset valuations will resultin higher D&A, lower gross margins, and lower EPS estimates, our revenue andEBITDA estimates remain unchanged. We view the re-valuation of assets as apositive development and our thesis remains intact. In addition, AQR announcedthat its $145 million convertible issue has closed. Reiterate Buy rating and$8 PT.


That’s a one-year price target. If hit, the warrants are now 3 and change. With 3 years to run. Anybody with any touch of speculation in their soul and a few years to wait it out should own a basket of these. Some won’t work. You ll lose 50 cents or so. Some will. You ll make several dollars. Works for me.

Early this year I had success selling puts as an entry point for a lot of value situations. It has become very difficult to do with the vix at these levels but I continue to look for situations where it will.MWA and AMAT in particular are stocks where I might want toll one or two month near the money options on any sort of overall market setback.

Random Musings as we approach the end of the year

Here we are. The Holidays are upon us and at last I am getting a touch..just a touch mind of you of holiday spirit. I look at the week ahead and realize that I have so much to do its ridiculous. I am not sure what happened but somehow from a quiet family dinner it has blown up to 15 or so people at my house Christmas Eve. SO I have all weekend taken doing the cooking cleaning and all that goes with that many people in my tiny little condo. Which means tonight is the only time to wrap presents. So the plan is to blast rat Pack Christmas music as well as some rock and roll holiday cds, uncork a bottle of wine and get it done. Those whose presents are wrapped last will just have to deal with the mess. As I have shopped this year I find myself wondering the same thing one of my very sharp co-workers asked yesterday “ Why are they lowering prices so quickly. Everyone is out and shopping and there doesn’t seem to be a lot of attention paid to price. I can only reach the conclusion that retailers are scared to death of an inventory overhang going into the first quarter and just simply want the stuff off the shelves.

Although long term I am very bullish on coal prices (it’s the only energy resource we have plenty off and coal to liquid technology is progressing nicely) short term it may be tough sledding. From today’s journal:
After a warm winter and a cool summer, the nation has amassed a Surplus of coal, causing a price slide that some analysts think has yet to hit Bottom. If demand doesn't pick up significantly this winter, it could mean trouble In 2007 for producers who've already endured a tough year. January was one of the warmest on record, and the summer was relatively cool. That lowered electricity demand for heating and cooling, reducing the amount of coal consumed by power plants. Coal stockpiles at power plants in the beginning of 2006 were precariously low. By summer, they were back to normal. By the end of the year, they could reach 138 million tons nationwide, or more than 14% above normal levels, according to John Hanou, vice president at the energy consulting firm Hill & Associates.
I like the group and follow it. I have done well selling puts on names like CNX and MEE but its also home of my single worst pick of the year ICO. I ll follow it as the year progresses.

Last night I had the most amazing dinner with my daughter. We sat and talked like adults and friends for the first time I can recall. We talked about books, her love of f Scott Fitzgerald and Hemmingway (this is huge for me. It took forever to get her to fall in love with reading and it didn’t happen until she was in her late teens. I had an able assist from haryy Potter and all those long hospital stays but I love it); we talked about ancient roman history and how she wanted to learn more about it; we talked about her career and school plans (she wants to teach and perhaps go as far as a literature professor); we talked about why men in their twenties as she so eloquently put it, suck (all they want to do is get drunk and have sex. I resisted the urge that this continues unabated pretty much forever. We just get a little more subtle about it); we talked pretty openly about while I m still single (hard to find good women who aren’t already involved after a certain age. That and the fact that I am somewhat of a handful to deal with). We talked and I realized that daddy’s little girl was no more. Although I will always carry the memories, she is now a woman in her own right. I saw for the first time a lot of the influence I have had on her over they years and thought to myself that if I have done nothing else right in this life, I had a big part of helping her grow into a great young woman. It was an awesome feeling.


I also had cause last night to reflect on how seemingly random events can have such a significant impact on our lives. Several years back I chanced across Victor Neiderhoffers column on the Internet. As Education of a Speculator was instantly my all time favorite investment book, I bookmarked his site and followed it for several weeks. One week I disagreed with something he wrote and emailed to say so. We had a most pleasant conversation and I was invited to something called “ the speclist”. A life-changing event. Not only has it vastly improved my trading and investing, taught me about statistics, introduced me to new books and opened up more intellectual avenues for me than you can imagine, consider this : first phone call of the night David Hillman to discuss how thoroughly I whupped him in Fantasy Football. Hillman and I have become close and talk often. Met him through the list. Traded a few Im’s with Ed Gross. Ed and I talk almost every day about markets,poker,sports and women. I stay with him in New York often. Met him through the spec list. Talked to a wonderful woman from the horse racing state. Met her because on my first visit to Chicago to visit my spec list friend Fred crossman we went, as we are wont to do, barhopping in the cold Chicago night and met her. I have made so many friends and gained so much knowledge as a result of that one simple email it is incredible. You just never know but it pays to look for opportunity in everything.

I had one other call last night. An old friend from back in my Jaycee days. He and I had spent a lot of nights in back rooms playing organizational politics, a lot of nights in hotel bars during conventions sharing scotch and stories. He fell out of touch after his wife died last year following a long bitter fight with cancer. Every once a while I tried to call him and just let him know I was around. Last night he answered we had a great conversation and plan to try and meet next week for drinks in Florida. It brings sharply to focus that we should never forget old friends or let people who have been important to us to walk too easily out of our lives. Not talking lost loves here..those are usually best kept far away I think, but those people with whom we have shared time, thoughts, goals and dreams. In this day and age time and distance are no real obstacle and it would be a shame to look back and say to yourself “ man I was really close to that guy. Wonder what ever happened to him. The old childhood song make new friends but keep the old/one is silver the other god seems somewhat apropos.

So now into the Christmas backstretch we go. I have wrapping to do. I need to go to the grocery store and get ready for the herd that descends on me Christmas Eve. I will spend the day cooking and griping about it as my kids their friends, my mom and sister come to the house. Frank and dean will be on the stereo, I ll be bitching, complaining about everything to hide the fact that I love every damn minute of it. Typical Melvin Christmas.

After the holidays I am off for Florida to start work on a new book project and then spend new years with friends. Looking forward to the good Florida sunshine and hopefully some soft Kentucky smiles. I will be back after the first as confused as ever about the market and eternally searching for weird little idea that just might makes us some money.

Happy Holidays

Friday, December 08, 2006

a holiday tradition..a dimal one perhaps but a tradition

Here we are, Early December. That can only mean one thing. That’s right dear readers it is time for Tim's annual holiday classic. Each year, for some twisted reason know only to myself..Well to be honest I don’t even know why I do it, I bastardize, plagiarize as just generally rip off some well known beloved Holiday yarn giving it a speculative, capitalist, libertarian and just plain weird spin. I of course insert characters from the spec world and sometimes from the real world to make it entertaining to all..or just because I think its funny. I like to do this early in the month so everyone has time to print it off in time for holiday bedtime reading. Surely even Mr., brooks needs a holiday classic to read this time of year eschewing those classics his kids love, the NRA manual and Bambi-He's What's for Dinner. The quest for a new story gets harder every year..We have done Yes, Virginia, It’s a Wonderful Life, naturally the night before Christmas and my all time favorite of them all, last years immortal yet easily forgettable rewrite of the grinch who stole Christmas. This year, I shall tackle the Granddaddy Christmas tale of them all..A Christmas Carol. And stand it firmly on its head

Our hero, Ebenezer Speculator sits at the end of the trading day, marking to mark his current positions. Good day for his egg nogg crack spread (long one, long one milk, short two bourbons) broke even on his march candy Cane short but as always the long Fruitcake trade settled heavily on his p and l. It seemed to him that he had been doing this forever and the watching of green and red blips fall across the screen seemed to be a non productive way to spend his days. I should be ding something productive with my life, something that adds value to the world, he thought to himself.” Feeding the poor, promoting world peace, teaching white men to dance, something that would add real and permanent value to the world. Sure, I am making money and all that and I employ a few people and helped others learn the tricks of the trade and make money. But what real value do I add to the universe sitting here greedily racking up profits for my own benefit while others fail and starve around the world. Surely, I could be a more productive member of society is some way.” At that point his nephew Fred burst through the door in his Cleveland Indians baseball cap, excited with the sprit of the season. “Quick, Uncle” he cried, “ housing starts are down, mortgage defaults are up and the world is awash in debt. We must short, we need to sell calls. Tis the season for economic collapse and profits all around!” Ebenezer look at his nephew and chided him for thinking only of profit for himself and not the plight of the poor around the world.”Bah Humbug. I am tired of all this buying and selling, selling and buying for no purpose other than to fill my own purse.”

The thoughts stayed with our hero as he made his way through the streets. He noted the homeless with their dire condition. He gave generously to the faux Santa’s ringing bells over little kettles, giving freely of his cash so they could continue the good work of forcing winos and degenerates of all forms to sing hymns to get a chicken supper and providing child care so the crack mamas could get to the corner and not worry about the fate of their little ones. He noted all the dregs and depressing things of the human condition. Of course had he lifted his eyes from the gutter he might have seen the towers of steel and glass that provided jobs for literally millions, the apartments full of people who earned their living through productive effort and cared for their families and raised their children to understand the value of education and hard work. He didn’t see the procession of cabs, buses and trains that provided cheap transportation to the public at a profit, or the store windows full of consumer goods, clothes, electronics and appliances that were sold at a profit to give us entertainment sustenance and make out lives easier while providing jobs for millions around the planet. That of course would negate the need for the rest of the story so he trudged homeward, eyes cast down not seeing the triumph of efforts and capital spread before him.

As he took his supper along with a generous glass of Irelands finest he read over the headlines of the evening papers. War here, war there, hunger, pestilence, disease. He knew that he must somehow find a way to make a difference in the world.


He awoke with a start to the clatter of chains and a soft moaning that grew increasingly louder. He recoiled in horror at the sight of a ghost, the ghost of his old trading partner when he first struck out on his own, the ghost before him was that of none other than Karl Lenin Marx Marly. They had separated after a few very profitable years when Jacob driven by the guilt of his wealth and desire to save the world. He had died in Outer Somalia when he was fried and eaten by a pack of savages who vastly preferred deep-fried ex day traders to the food presented by the various aid agencies. They were horrible fat(this was 2001. there was a excess of deep fried ex-day traders around) little men who dispatched of our crusader in quick order with a nice merlot on the side.“Karl,” cried our hero,” you have been dead now these many years. Why do you torment me at this hour? I must sleep as I have many fundraisers to attend this weekend for many liberal charities with heavy overheads and bizarre cost structures.”

“I am here Ebenezer to save form the mistake you are near making, the same fatal mistake of mistaking charity for a productive use of your time and effort..The type of mistake that leads to one being served up with a nice merlot deep in the darkest parts of the world.”

What chains are these you wear?

“The chains of every stupid do good welfare handout, government inspired relief programs that squelch the natural instinct of man to improve himself that I ever supported. The chains of every relief program that I ever collected money for only to have the cash sucked up in more fundraising drives and salaries for those who told us we were saving the world while what damn few supplies we ever sent to the poor were seized by roving warlords and midlevel bureaucrats. Tonight you shall be visited by three ghosts each with a lesson and warning for you. Take heed Ebenezer, take heed, lest you share my fate. The first shall be upon you at the stroke of midnight.”

As the ghost fade, or hero blinked in disbelief and swore he must be hallucinating. It must have been bad oysters or too much whiskey, a dream, nothing but a bad dream .Not as much of a nightmare of any his marriages, but still a bad dream. Back to bed, back to sleep he told himself.

At the stoke of midnight the first visitor did indeed arrive. Clad in pink slacks and a teal sports coat, he roused Ebenezer by smacking him firmly over the head with a copy of dimson marsh and stautons triumph of the Optimists, a most weighty tome capable of rousing one for sleep or knocking one back into it as the case demanded. “Come and see the past, of the profound impact on world history that speculators and investors have made.” With a flash they were gone into another time and another place. “But that’s me, as young man sitting at the ancient quotron cold-calling strangers to get business. Me, with no gray hair, no bifocals. Look at me so young and foolish thinking of nothing but making money.” And he watched himself as time and space compresses as I can do because its my story, watched himself in those first few years as a young salesman peddling stocks and bonds for companies no one had ever heard of, Golden Nugget, MCI, Microsoft, Amgen, Netscape. He watched as he helped raise money for companies that transformed the world with their technology and their medical devices and drugs. The specter whacked him now with Stigler Statistics on the table and they sped though days past seeing whole new industries, airlines, automobiles, computers created. Created with money raised in financial markets made possible by the liquidity provided by traders and speculated. Men who speculated to raise their standards of living and endowed educational institutions and libraries that made it possible for others to expand their knowledge, not with a hand out but an opportunity. He saw the million per cent a century return of the capital markets raise standards of living virtually around the globe and for the first time he began to realize that maybe, just maybe business and capitalism did far moregood than harm. Another smack to the head with a copy of Galtons Art of travel and he saw the history of other approaches, the complete and total failure of communist and socialist systems over the years and around the planet.

With a thump they land back in our hero’s apartment. “Why show me these things spirit. Surely in spite of these things I saw, I can still do more good acting out of charity than avarice.” With another smack of the optimist tome. Our spirit departs leaving Ebenezer crumpled to the floor.

As the clock strikes one, the second ghost, the ghost of speculative now shows. He looks disturbingly like Kenny Rogers and is wearing some sort of cheese apparatus as headgear with a twinkle in his eye like David Hillman might have if he ever did actually find someone incredible to actually agree to marry him..Oh wait that did happen and Hillmans been twinkling ever since. The spirit yanked Ebenezer from the floor, stuck a gin and tonic in his hand and off they went.

First to nephew Fred’s where he sat around with his boon companions and fellow traders Jason and Ryan. Jason sighed wearily: this market is killing me. After today’s trading debacle I m only up 913% for the year. I tell you I’m getting desperate..” Ryan was quick to agree ‘ If this keeps up next year I ll only be able to go to outer Mongolia and the north pole. I may actually have to skip paying a fortune to slip into communist dictatorships that are sworn enemies of the US. The horror of it all!”

“Guys”, said Fred, I am worried about Uncle Ebenezer. Why just yesterday I went into his office and showed him some great housing shorts and an ingenious way to be short stocks and long volatility at the same time. He didn’t pay any attention. He was too busy writing checks to the sierra club and the feed Sally Struthers s foundation! He’s losing his drive and mumbles all day of doing good.”

“Enough of the gloom” shouted Jason. “We shall go now to Melvin B’s and drink copious amounts of beer and then gather around a brightly decorated cell phone and call Chesapeake slim and berate him for his nefarious bad habits of drinking, smoking,and gambling, to say nothing of chasing women with Kentucky accents and only buying stocks under book value. It is after all, a holiday tradition.”

With the splash of a lime in a fresh G&T they were off again. They looked upon the voodoo prof and Elena living in Deltaville, va living a life of trading teaching and boating, said aforementioned Slim on his island, wring strange documents and perusing vague financial documents, mandatory glass of Famous grouse at his side enjoying the benefits of a capitalist society that allows a man to marry as many times as he likes and still figure out a way to pay for it, they saw the wiz and the Weston crew, trading and living lives, raising families, gaining knowledge as well as profits that enabled them to enjoy the fruits of their efforts, they passed over Hawaii where Mr. Sogi continues to trade and dabble in business enjoying the companionship of his incredible wife and the Pacific surf, Scott brooks , stalking profits all week and innocent fuzzy animals all weekend. All of them trading and investing in the markets, using the profits they reap for the betterment of themselves and the ones they love.


Thump back into the apartment, the spirit snatched way the gin and tonic mumbling about being in a hurry to get back and make dinner for Paula and departed. Before Ebenezer could compose himself the clock struck 2 and the last spirit appeared. With an I pod full of Cajun rock and roll tunes, a U of C bobcats sweatshirt and smelling of small town Chesapeake breezes he hurled Ebenezer into the future, a future where capital markets failed, there was no innovation. The poor die first and frequently as there are no innovators figuring ways to ever cheapen the cost of food and clothing, disease was rampant as the government stepped in and removed the access to capital markets and the profit incentive, no new drugs were discovered and those that remained were expensive. Energy costs were prohibitive as there was no capital to develop new alternative source or search for new discoveries of oil and gas. There were no new jobs created and the taxes collected to support the ever-declining system ensured that business could not expand and create new opportunites. It was a bleak world, one without the hope for improving the lives of ones self and loved ones. There were no traders or investors to put money into new ventures, no speculators to provide liquidity or generate profits that create jobs and support families. The only wealthy folks were those that worked at charities paying themselves fine salaries to collect what little money remained to dispense to those less fortunate..Which of course is everybody but you and I.

“This my friend”, spoke the spirit as he sipped a rare 30 year scotch from some obscure Scottish village” is what happens when there are no markets and no traders.” And he was off, back to fight the battle of the neighbors light pole.
“What a fool I have been” cried Ebenezer.” Thinking of my self as non-productive because all I did was trade an invest. How could I fail to notice that I have provided jobs for dozens of employees, taught many to make money in the market and support their families and put their children through school, or that the money I invested helped to create new technologies and industries, providing jobs and opportunities for literally thousands.”

He dashed to the window and cried to a young boy passing below.” You boy. What day is this” Saturday said the boy, Christmas eve” “Thank the gods I haven’t missed it..Boy do you know the newsstand around the corner. Take this 20 bucks and run round there and fetch me today’s Barron’s, FT and NY times. I must prepare for the next weeks trading.” Of course this being modern times and not dickensian London the kids was never seen again most likely spending the twenty on cheap booze and porno. We can only stretch our fiction so far. later our hero had to go to the newsstand himself to obtain copies and make his way over to starbucks to sip a large (grande,venti my butt. It’s a large coffee) coffee

An Ebenezer spent a nice Christmas with good friends and family, chatting with Jason, Fred, the voodoo prof and all the specs about trend and trades in the market, ready to return with a new zeal and new appreciation for the life of speculation.

“Heck,” he though to himself.” I may even call Slim and see if he’s got any of those weird little cheap stock ideas. It is after all the holidays.”

Best early wishes to all for a wonderful Holiday season and a may you trade well and learn much in the new year.

Wednesday, December 06, 2006

google swap

heres the list for this year. For the Google market cap of 149 billion, one could today buy in their entirety:
Walter Industries (wlt)
Peb Boys (pby)
Petrohawk (hawk)
Finish Line (finl)
Optimal group (opmr)
Nashua (nsha)
Precision Drilling (pds)
First data (Fdc)
Borders (bgp)
Friendlys (frn)
New York times (nyt)
Consolidated energy (cnx)
Fording coal (fdg)
Ipass (ipas)
Kingsway Fiinancial (kfs)
ADC telecom (adct)
United online (untd)
chesapeake energy (chk)
applied materials (amat)
Nabor drilling(nbr)
Patterson UTI (pten)
radio Shack (rsh)
Giffon (gff)
micron (mu)
Hudson city bank (hcbk)
cbs (cbs)
Genlyte (gy)
pacific sunwear (psun)
rosetta resources (rose)
Mirant (mir)

Google has about 3.5 billion in operating earnings. The portfolio sports 16.5 billion or so in same. If google can continue to grow at 30% a year for 7 years their operating cash flow will surpass that of the portfolio..providing of course that the portfolio rate of return remians stagnant and none of the excess 13 billion of operating cash flow is reinvested at any reasonable rate . should the portfolio rate grow at the 10 % level..not unrealistic considering the amount of excess avaible for reinvestment, it takes google 10 years to surpass in operating cash flow. again assuming that they can grow at 30% for the 10 years and no one comes along with better or new technology and reduces their competitive advantage. Of course we all know that in the stable world of technology that is unlikely to happen.

Tuesday, December 05, 2006

higher and higher

To the tune of the Jackie Wilson classic

your cash keeps lifting me
Higher and higher
Higher than I ve ever been before
So keep it up,quench my desire
To take the market higher and higher


Chorus

You know your cash(your cash keeps lifting me)
You know your cash(your cash lifting me)
Higher(lifting me,lifting me)higher and higher(lhigher)
I said your cash keeps lifting me(higher and higher)

Once I was down on the year
No performance fee in sight
But the your cash came in
And we’ll make so much it’s a sin..cause your cash keep lifting me

This market just wont go down. Bad economic numbers? Great, the fed will lower. Lets go higher. Good economic news? See..I told you things were okay..lets go higher.There are signs of inflation, deflation, we re losing a war to guys who ride camels and cant read, ttwo of the craziest men in the world have access to nukes, there is going to be gridlock with a lameduck president( okay..I ll grany that this may in fact be a good thing), housing prices are in disarray, we re seeing rising defauklts and late pays in the sub prime mortgage market and NO ONE CARES. Lets party, buy some stocks, bid em up. The market climbs a wall of worry my ass. Its climbibg a ladder of complacency right now. You might be able to sell me the fact that this market is fairly priced..providing I ve been drinking heavily.but undervalued. I can’t see it. The bond market and the dollar are telling you its just not that good out there right now.We have rallied alost 12% sonce August without a real pause of any length and anybody who is not cautious now pretty much deserves what they get.

So what to do now? Same things I ve been doing. I really like the Energy Services Acquistion warrants here. There are no institutional shareholders in this one at all as thi game out after the SPAC game had cooled down. Marshall Reynolds is the CEO here and has a reputation of being an astute buyer and seller of companies and running them profitably. Given that we can buy 4 and a half year 5 dollar warrants for less than .40 each it’s a good cheap call on him achieving success again. I am still long Walters (WLT)
and selling dec and jan 50 calls against it. A buyer of BXL although its hard to get more than a 100 shares at a crack , of Optimal (opmr), IPASS (IPAS), Nashua(NSHA) Secure computing(SCUR and petrohawk Energy(HAWK). Right now I am over applying the concept of margin of safwety and only buying stuff below book value with a stron catalyst, usually in the form of an activist or two in the deal.

At some point we will get a sell off. When we do I ll be looking to ramp up and get big long. But right now, being cautious is paying and paying well. Buying below book and in some cases selling options around the position has been very profitable this year and has kept the over all risk profile fairly low. I d like to be aggressive here but I just cant get complacent enough.

Thursday, November 30, 2006

game time

So we move now into that truly glorious time of year. No Im not talking about Christmas or Saturnalia or whatever you call this ridiculous holiday designed to force me to spend time around family members I m not that fond of, or buy gifts for folks I don’t particularly like. God ,no not christmas with all the forced cheer and twinkling damn lights and tinsel that gets caught in the vacuum cleaner until sometime in march,Christamas, with mistletoe suspended over the head of some chick with string warts who hasn’t been kissed since Nixon was trying to figure out how to get out of his messy little war, Christmas with all the trimmings that I have grown so not fond of over the years. Nope, Not Christmas, but that wonderful time of year when college football is winding into conference championships and bowl games, college hoops are just starting and pro football is heading down the stretch into the playoffs. A glorious time of year. Keep your deck the hall and fa-la-la. Give me a tumbler of Irelands finest and tv’s set to football and college hoops. My idea of a carol is the Notre dame fight song or the sound of Marylands well known rowdy fans chanting verbal nasties at Duke.

We re off to a good start tonight. The ravens of Baltimore(does it occur to anyone else that Poe would roll in his grave at the idea of being the symbol for a football team?He lived in Baltimore less than two years total and was dead drunk in the Horse You Came in On Saloon for most of that. His greatest ties to Baltimore come from dying in the street drunk and frothing at the mouth) have a chance to clinch the division and slap down the trash talkers from Cincinnati who despite repeatedly losing to us claim that they are the better team. Perhaps but that’s not the message that has been on the scoreboard of late. I am pretty sure that the team with the most points at the end of 60 minutes is the winner. Hopefully the result will the same tonight.The ravens have been much better than expected this year with a teeth rattling defense and once Brian Billick realized he could, in fact, be fired, the offensive side has really come on strong. Although the road through Indy, new England and the rest is a tough one, this team has the potential to go to the big one.That comes later, however. Tonight is fried food, cold beer and good football.

College hoops are off to a great start if you re a terps fan. 8-0 playing some pretty good teams for non conference play.They are finally showing the aggressive defense that has long been a hall mark of Gary Williams coached teams. When asked what sparked the sharp improvement over the span of a year, one of the players simply answered “Two years of going to the NIT.” I think this year the team finally gets it. They play in the ACC, arguably the toughest conference in basketball and if you want to go to the dance you have to be very,very good and play your best game, every game. So far, so good.We play Notre dame on Saturday and the ACC division games loom ahead full of Duke, Wake and Carolina—who looked incredible last night knocking off Ohio State. Hopefully my new friends in Kentucky can knock them down a peg or two on Saturday.We re ranked 19th, the womans team is number one and all is good in the land of the roundball.

Saturday brings us an incredible array of college games. Nebrask-Oklahoma in a revival of a historic rivalry for the Big 12 title game. Rutgers against West Virginia in what should be an offensive extravaganza for the Big East Crown. USC against UCLA with all hopes for justice in college football rest on the Bruins knocking off the hated Trojans(by me anyway. Where the hell do they get off beating Notre Dame like that?), Arkansas attempts to return to glory against Florida in the SEC grudgefest. Maryland doesn’t play having lost the chance to play for the ACC football championship. But we are going to a bowl this year coming in with a wining season for the first time in 3 years.

There’s another game Saturday. The 107th meeting of the midshipman of Annapolis against the Long Grey Line of West Point. Hardly a battle of football titans, neither team is ranked although Navy has been a pretty good team the last few years. This matchup is more than a football game for those playing and the middies and cadets in attendance. This is the game, This is the whole year. Navy is 8 and 3 and going to a bowl game again. The team will feel like they failed should the fail to beat Army. Likewise Army has been woeful again this year but will count the year as a triumph should they knock off Navy. The game is the highlight of these player’s football careers. Indeed the seniors on both sides will likely never don pads again after this. More likely the will be clad in Kevlar and body armor in the streets of Iraq than ever play again.

It always strikes me when I watch these games, that everyone on both sides of the ball, and in the stands as well, each and every one of these young men and women were among the best and brightest of our nations youth. Their achievements earned them the congressional appointment to the service academies. Most likely they would have had scholarships available at the Ivy League Schools, Notre Dame, Stanford, anywhere they wanted to go. Yet, in one of the more dangerous times in our countries history, actively at war, with two of enemies rattling nuclear sabers, well aware that what followed school was not entry level I-bank positions or Silicon valley tech positions but service in a nation at war. Wall Street? More likely the corpse strewn streets of Baquba or Baghdad. They will man cockpits and gun decks, flight lines and gun turrets. For the cool starting pay of about 30 grand a year, they will walk patrols in cities undergoing violent civil war and where much of the populace wishes them harm. They will fight, fly, train and lead troops for at least the next five years. Many of them, if not most, much longer than that. They knew this when they raised their hand as a plebe or new cadet and they gave their oath anyway. Because they believed in their country and wanted to serve hoping to make a difference. From their ranks will come military and political leaders and many of those who will shape the future of this country will be in the stands Saturday cheering their respective school to victory.

This more than a game. Saturday, marines and soldiers in sweaty blood stained uniforms will take time from patrol in exotic locations like fallujah and sadr city, will watch over the armed services network, forgetting the bloody conflict that is their lives to watch the one on the field. US troops stationed on nervous duty along the DMZ in Korea will cheer their team and forget the madman across the border and the threat he offers the world. Pilots will walk from the flight deck to the rec room to cheer the navy blue and gold, a respite of the sorties and missions that must seem endless. On battleships, cruisers, bases and camps around the world the focus will be, for a brief period of time the clash of these teams, warriors on the field headed for a career as warriors in service of their nation.

Annapolis is draped in blue and gold. Tecumseh is painted to his full glory outside Bancroft hall. The brigade and the corp are leaving Annapolis and West Point headed for the friendly confines of the city of Brotherly love. Its time. Army-Navy. I am not one of those who feel that no matter who wins, it’s the game that counts. I hope Navy once again pounds the Army team into the turf of Lincoln Park. This time next year they will young LTs and Ensigns calling each other for air support, ground fire and other inter service battlefield assistance. But today they battle each other in one of the games grandest traditions. As you watch keep in mind the sacrifice these young men and women have made entering into the armed services of their country in a time of war. They had a choice. They chose to serve. That choice, regardless of your feelings on the war, should be honored and respected. It’s a game but so much more than that..
Oh yeah, I almost forgot

GO NAVY BEAT ARMY.

Tee it up

Wednesday, November 29, 2006

current market thoughts

Most of my attempts to trade the short-term direction of the market over the years have pretty closely resembled my various relationships with those of the female gender. Flashes of brilliance, some short term success but it’s usually just a loud, flashy process that costs me money. Having said that, much as I can’t give up the eternal; search for the perfect woman, I do have an opinion on the market. I am firmly in the camp that says that the steady advance of the past several months has no basis in economic reality and is entirely liquidity fueled. At some point it should reverse back to more sane levels..Perhaps as far back over time as the 1200-1220 area. That seems obvious to me given an economy that is throwing very mixed signals with some signs of inflationary pressure. That’s how the bond and force markets seem to evaluate matters as well. It is my considered opinion that those two markets are much smarter than the stock market t over time. So, it would seem obvious.

Of course there are three other trades on the board that seem obvious and have seemed so for some time. Being long volatility from these levels makes sense. However it has made sense for about two years now and vol sellers keep making money and buyers are going broke. Credit spreads have to widen at some point. B rated corporate paper and sovereigns of tin shack nations should trade higher than 100bps over t-bonds. However emerging market and junk funds keep clipping 7% coupons and anyone with the credit spread on has long since been measured for a body bag. The yield curve cant stay inverted forever. But the hillsides are scattered with the body parts of those who have had the trade on since the original inversion. So, as obvious as it is that stock prices should decline, many of those who have shorted it find themselves on stretchers and sucking oxygen from a bag.

When I examine all the obvious trades that are killing people all over the financial landscape, and hear the continued blither and blather about small cap, large cap, allocations shifts, industry weightings and other such that pass for thoughtful analysis of the current markets, I like to review where I have been able to make some money over the years. Its out on the edges. I cannot ad value to the merits and worth of an IBM, or an Altria. 29 dozen guys and gals already cover the company down to the number of flushes in the executive washroom. Out on the edges, out among the cigar butts and trolls however I can find some things that work. Stocks like Biloxi Marsh and Lands or Telos Pfd stock have yielded decent gains. Same with fun little things like Trico marine and Foster Wheeler warrants. Out on the edges where its pretty just me and one or two other vultures digging around, where market direction is pretty much irrelevant, earnings forecast are considered to be exactly the useless SWAGS that they are and it is your ability to decipher a balance sheet that makes money.

So what’s out there on the edges now? A few things catch my eye. I still like Optimal group with a sparkling balance sheet and a business that was eliminated by the ban on Internet gambling( I hate this thing..with no internet poker I may have to consider getting married again just so there’s something to do at night). However they still have an okay payment processing business and there are several activists agitating for sale or a special dividend. Very little downside, lots of potential up. Canada’s bone headed move to start taxing companies set up as income trust makes stocks like rogers Sugar Income and precision Drilling very interesting. Rogers yield 11% cash and is buying back shares. PDS yields over 13%(for the options junkies among you, PDS has options and they are fairly juiced as volatility rose on the tax law changes) and has a very good business that is likely to grow at a good clip over the next five years. Lots of turmoil and angst here, but good upside and an attractive payment while you wait. Finish Line, the mall based shoe retailer has had problems of late but management is making the changes needed to restore the business. The stock is dead on cheap on the numbers, trading a little over book with a solid balance sheet. Lots of company here as FPA, Olstein and Thaler all own large stakes in the company. There are activists here pushing for value to be unlocked as well. A solid holding out here on the edge(again, it is optionable as well. Walter industries is interesting with its upcoming spin off of Mueller Water. The parts here appear to add up to over 70 bucks on a 44-dollar stock. How abut thinly trade bexil, which is 39 dollars in cash and t-bills trading for 30? The question here is what do they buy with the dough? No way to know in advance but the company has been around awhile and made some very good deals in the past. If they buy anything worth what they pay for it, the $ discount goes away. For those with a longer time frame and the ability to handle the volatility of it, a small position scattered across the SPAC warrant landscape appears smart as well. With built in 10 to 1 leverage if just one or two of the deals work over the next 4 years you walk away with a more than adequate return on your money.

I’m just not smart enough to figure out which sector is going to dominate, or calculate when the market will go the direction I think it should. I can’t tell you when the yield curve will steepen, volatility will spike or credit spreads will widen. I can tell you that hanging out here on the edge, buying things for less than they are worth, following the footsteps of graham/schloss et al seems to be paying off for me. As it has for years. I ll continue to attempt to figure out the market of course, and examine all those obvious trades, and join crossman and Thompson etc in wondering when and what will crack the market or trying to figure out just where in the hell consumer got all this money, but for day to day practice, the action is out on the edge of things, far from the thundering herd and babbling commentators. Now, I f I could just find a girl out here maybe I can make that work as well.

Tuesday, November 21, 2006

thanksgiving again

okay I admit it. I rewrote an article from a few years ago changing for the passage of time..but it hits the spirit I had in mind. happy thanksgiving

Over the woods and through the hills to grandmothers house we go..actually grandma is coming to me this year having talked me into cooking after a several year hiatus( we will not even talk about last years frozen turkey incident)...in fact mom is not allowed to cook holiday dinners as her idea of cooking is to take expensive meats and poultry and cook them until they are serviceable as arctic footwear, vegetables not cooked to the consistency of porridge are considered underdone and mashed potatoes come from a box....if her cooking was indicative of southern women, there wouldn’t be a fat man south of the mason dixon line......mom never quite enjoyed cooking it seems ..she does like eating however so its time to make the stuffing, cook the bird and all the assorted side dishes.Mom was one of those women, who although cooking eluded her, felt the need to arise on the anointed day and begin cooking at daybreak,serving the meal in the fine old southern tradition of 1:00 sharp. She looked puzzled when told that dinner was at 4 until my sister gently explained that there was more chance of the turkey escaping from the freezer and flying to cleveland than there was of me getting up at sunrise to cook.I had to stop at three separate stores last night to gather all the fixing but I finally got all the needed ingredients and will start Wednesday night to prepare the feast.It’s a task I secretly enjoy especially since all of my recipes start the same way. Open wine and pour carefully into the cook. all the same the thanksgiving holiday is upon us and as we’ll all pack up for the lovely drive, maybe a couple of lifetimes on the jersey turnpike or a rugby scrum through an airport to travel to far destinations to see people we are still pissed off at for tearing the head of our kung fu grip GI Joe 40 years ago, as we stand in the middle of the airport parking lot with the broken suitcase spilling on the tarmac, our significant other giving us that that quiet, thin lipped “I told you we needed new luggage” look, or in a car with children arguing at approximately the decibel level of an f16 fly over and the radio stations blaring christmas music over the din of 5000 hopelessly gridlocked cars, it is time to reflect up the year gone by and the moments and things we are thankful for, the things that make life the special wonder that it is.....

For starters I am grateful for a holiday that does not involve me having to purchase gifts for anyone, attend a mass that lasts just slightly less time than the middle ages, or do anything but eat enormous amounts of food and watch football whilst sipping and swigging wine....I have never figured out exactly how eating and drinking to excess while watching steroid fueled behemoths bat hell out of each other chasing a pigskin around a field is a sign of gratitude..but who am I to argue with such a fine tradition? I have much to be grateful for so I ll have an extra piece of pie, more wine than is good for me and watch every damn game that comes on the tube.....for living in a land and in a time where I can screw up, blow up, start, fail and do it all over again, to be part of a culture and society that allows me get up after a disaster and start back up the stairs,where the only real limits I encounter are those I put on myself....for my family, even if my extended family is truly the bunch that puts the fun in dysfunctional, for my kids, my daughter, 22,health problems seemingly behind her now and only an occasional attack.Shes working now, fitting in classes around her busy life.Shes been through a lot with the gastro condition , but through all of it she was still able to smile and laugh, to muddle through school and work, enjoying her friends, her books and at long last after a decade and a half of dads cajoling and begging, her books....my son, the eternal class clown..... out of high school now, attending college as well although he is still somewhat mystified about the concept of paying to go to school.Hes still the jokester and cut up but between work and school theres a little less time to be the funny man.worst thing ever happened to that boy was seeing a jim carrey movie...naturally all the little girls think he is hysterical and cute, therefore dads warnings to straighten up fall on deaf ears,,,my joke cracking snake raising son. He lives with me now, along with the traveling menagerie, a six foot ball python whom he occasionally lets out to crawl around the house( After the bookcase incident it was explained to him that this wasn’t going to hasppen if the old man was home.) a smaller mean tempered corn snake and a turtle who prefers to dine on ham and strawberries.. Every so ofter a caravan of his friends or his sisters gaggle descend on my place like a pack of locusts, consuming enough mountain dew code red to keep a small nation jacked up on a sugar caffeine rush and devour enough to keep several take out joints in the area in business and driving Cadillac’s for years to come( I ve actually come home to see them lined up three deep at the door delivering various pizzas, chicken, subs) listening to that horrid music and watching truly idiotic movies .....they re noisy, eat constantly , stay up until insane hours and I love every minute.....

For friends of course, because what is life without friends..people to talk with, laugh with, cry with, drink with, people with whom we share our thoughts, our ideas, pieces o our souls...people who put up with us not because of some birth related accident but because they choose to...the ones who answer their phone at midnight when we have some great idea or major crisis, who call on Sunday mornings to wake us up with their latest great idea or crisis....for those whose companionship as walk the road of life makes the journey all so much more enjoyable.....for the spec list, which has been a source of so many new friends ( in scattered time zones so you never know when the phone will ring), a source of ideas, of incredible conversations, intelligent arguments, new philosophies and ways of looking at life, a simple email list that has allowed me to meet some of the most incredible( to say nothing of a few of the strangest) people I have ever been blessed enough to call friend.....the wiz, the oregonian, the irishman, the crazed tank driving day trading floridian, the bombastic genius of mr e, the chicago crew,the chemist ,my sun baked friend, the columnist, the authors and the editor( this year especially the editor. She has opened up a lot of doors for me and helped make a couple of dreams come true. Blessings upon you and all your oversize dogs)..and of course the thrice blessed voodooprof..theres too many to name them all but each has had a positive impact on my life over the past few years,and of course as we look over our life on thursday and raise a glass, I think we all have to include the chair in our toast as it was his idea and drive that created a very unique, inspiring and worthwhile community of minds and souls.....

For the island crowd, that group of friends that has come to mean so much to me over the past few years. For all the island guys who have been broken up with by a parade of girl friends because we spend too much time with our friends in an assortment of waterfront distilled spirits establishments. For all the boat rides, thirsty Thursdays,long summer afternoons at red eyes, and winter weekends full of ravens and terps.The surfer dude and co-worker,the tic-tac kid(the cab is to take you home not to another bar)the logistics guy, Beach Club man, the tire guy,rip-rap man, the dallas cowboy cheerleader( that’s a story for another day. But trust me, look away if he bends over), the poker player, the entire group that makes up the Kent Island crowd,I don’t have the time or space to name them all here. They are incredible friends and very high up on the list of things for which I am grateful this year. I am not sure if they keep me sane or insane but whichever it is, it’s a good thing.

Of course, me being me I am thankful to whatever benign creator created the fairer sex, ah yes women...they have inspired me, they have comforted me, excited me, enraged me, engaged me, and on two occasions damn near bankrupted me. They are the most frustrating creatures that god, with his infinite sense of humor, could have ever designed...without them, I would be rich enough to retire young, still have brown hair instead of this grey stuff growing over my Grey matter, I would get more sleep at night, be more productive, and have more time to spend working and studying. But I would rather be a gray-haired property settlement paying insomniac than lived in a world where there were none....

For the other temptress in my life, the markets, with her siren song of changing notes, a constant daily challenge to get ahead and stay ahead of her dance, for the intellectual challenge of figuring her song, endless variations, price to book, high correleations,low z scores, new knowledge gained, free cash flow,arbitrage, liquidations..an endless dance and flow of ideas and strategies to test and trade.....I can imagine a more challenging or frustrating way to make a living...I cant imagine doing anything else......

Thankful just for this dance called life, to live, experience to learn, to fail, to succeed, to read the poetry, drink the wine, to kiss the girl...so carve up the bird, pour a little more bubbly stuff over here...hey whats the score....it s a life,,,up, down, sideways, its a hell of a lot of fun and each of you on this list has made more interesting and enjoyable....so I raise my glass to you and say Happy thanksgiving...

Monday, November 20, 2006

Now that the weather has begun its turn towards the inevitable all around crappieness of winter and already I see Christmas stuff everywhere, the weekends become much harder to plan and predict. Primarily they have revolved around daytime reading and football and drinks/dinner/whatever in the evenings. So as I found myself sitting on the couch the other night, half reading making notes for my latest project while half way watching House on the idiot box, all the while simultaneously exchanging text messages with a certain young lady form the Great State of Kentucky with the most incredible eyes and irresistible little Kentucky draw to her voice (the after dark bunch have met her on our degenerate bourbon fueled gambling trips to the Keeneland Horse Park), the subject of what’s up for the weekend arose. About half kidding I suggested I would drive down there if she could get out for the evening. She could. So I did.

Unable to find a flight, I checked Yahoo maps. Piece of cake, 450 miles, they estimated 7 hours, I figured six tops. So after delivering some crucial documents on a trust account I manage to our Silver Spring, Maryland office, I ht 7-11 for the mandatory large coffee, two packs of cigarettes with a diet Dr. Pepper in reserve and set my sights up 270 towards Frederick and the mountains beyond.

Some observations from my journey:

I love to drive fast. I know its against the law and unsafe and all that other ca-ca, but I love it. I was managing a steady 80 through the mountains all the way to Morgantown, WV, and then had a pack of cars flash by doing an easy 100 mph..Nothing else to do. Swig down the coffee, put out the cigarette, get up on the wheel and join them. I got in the middle of the pack and we ran single file all 150 miles to Charleston without ever really slowing. I have written of this automotive phenomenon before as it always occurs on Interstate 95 allowing one to blast through the Deep South at Nascar type speeds. I did not expect, however, to be so blessed on this trip. But there it was. Foot on the accelerator, up tight on the wheel through the Mountains, the switchbacks and turns up and down the hills. To put it simply, it was a blast. I t always amazes me how these breakaway packs of gonzoid drivers seem to instinctively act and react, with an established order of progression for changing lanes and protecting each others space on the road. More interesting, in an early pass I determined one of the other drivers was a genuine NFE. In way of explanation the term was coined on a drive back from Myrtle beach when our breakaway was led by a beautiful blonde in a convertible, pony tail flying, chain smoking while blasting up 95 at 100+mph. I remarked to my traveling companion that was my kind of a woman, a real girl, the epitome of the perfect woman, nothing fake, no façade to her if she could hang with the big boys at these speeds. He concurred dubbing her the original Non-Facadel Epitome. Dana Patrick for example is a perfect example of a true NFE. Fridays NFE was a brunette in a trans am with long wavy locks and a pack of marlboros on the dash.But I digress. Of course I usually do.

The Interstate Highway System in this country is an under appreciated marvel and a true testament to the ingenuity, determination and engineering capability of the United States. It is a wondrous enough accomplishment to just consider the roads that run along the coasts or through the plains. But my journey from the point of Frederick on into Ashland Kentucky was a series of climbs and descents of mountains form 1 to almost 4000 feet, with grades ranging from 3 to 6 %. At some point during the original construction the equipment must have been almost vertical on the mountainside. The roads have been chopped and blasted and simply willed out of the terrain. They are well-maintained and safe to drive. Even by idiots like me.

The area around Morgantown, West Virginia is booming with technology projects. There are technology parks and new construction everywhere. Rt 79 through the area is referred to as the High Tech parkway. This is of course fueled by the proximity of WVU but it is good to see the expansion of the tech industry somewhere away from the coast.

West Virginia is an amazing state. Parts of it appear to be have been simply hacked out of slate gray hillside by an angry deity with a blunt ax. Run down shacks and the ubiquitous doublewide hunker down in the little hollows and clutch almost desperately to hillsides. Other parts are simply awe inspiringly beautiful with although I am loath to use clichés, awe inspiring vistas and sweeping mountain grandeur. If it this wondrous at 90+ mph I wonder what it looks like at lesser speeds.

I am aware that some statistics show a weakening in the economy. It is hard to believe when you are on the interstate and see the US GDP rolling by 18 wheels at a time. Wal-mart, Food Lion, Dixie Trucking, trans-am trucking. The roadways are packed with Commerce on the move headed to various distribution and retail centers. Unless there is a hideous inventory buildup somewhere that I am unaware of, we are still buying and selling an enormous amount of goods in this here great country of ours.

Anecdotally, West Virginia is very religious state. On my drive back Sunday there were very few cars on the road in the early part of Sunday afternoon. Most of these had out of state plates. I hypothesize that they were all at church. No state troopers either. No a one for 200 miles. So I suspect even the gendarmes of the highways were busy praying singing and snake handling at Little Holler Baptist and Stinking Creek Church of God on Sunday. Much like the deep south it is on of the few states where you see a billboard urging you read your bible on the opposite side of the road from one advertising the twin pleasures of an Adult Superstore and Oriental massage parlor. Very open-minded. All types of spirituality embraced apparently.

Charleston West Virginia seems to be having some sort of renaissance. The skyline shows sleek mini-scapers and large corporate campuses. The train yards were full and the city from the interstate (from a more sedate 60mph) seemed to be bustling. There was even a little rush hour back up at 5:30 on Friday. Huntingdon, WV where I stayed also seems to be growing on the back of Marshall University with shopping and retail complexes being developed downtown.

It was so tempting to stop a throw rocks at the international coal building. ICO (NYSE 4.74) is easily my worst stock of the year. Not, of course as bad as that unmentionable donut stock a few years back but still a stinker so far. Of course, this would lead to broken windows and another asset write down in the next quarterly. So I abstained form this cheap juvenile show of frustration. But it was tempting.

Arriving in Huntington on Friday I anticipated checking into the downtown Radisson and finding some food and a bar in which to watch the terps on ESPN2 play in the final of the Coaches against cancer basketball tournament. They were playing a Michigan State Squad who upset #3 Texas the night before. To my surprise, she of the ever-amazing eyes asked of I wanted her to join me. For those who knew me well, this is a seriously silly question. She suggested a place for dinner. Leading us to

Rocco’s in Ceredo (http://www.roccosristorante.com/contact.html), located between Huntington And Ashland, Ky is a treasure. The food is as good as any I have had anywhere.

The University of Maryland, also known, as the beloved and much maligned Terps appear to be better than the preseason pundits thought. They beat MSU to win Friday (helped by a missed time clock violation but a win is a win) and trounced a very good St. Johns team the night before. Still not in the top 25 and the ACC is a bear as always but I look for a return to the NCAA after two years in the backwaters of the NIT.

A woman who knows and understands college BB is a treasure. Even is she has the poor taste to root for the Wildcats of Kentucky.

Driving by a coke plant at night is a lot like driving past the inner circle of hell. Belching smoke and leaping flames abound. Somewhat surreal if you asked me.

If you know of a better way to spend a Saturday afternoon than watching the #1 college football team play the number 2 while rubbing the back of a beautiful woman while she sleeps, please do not tell me. I don’t want to know. I prefer my version.

That game was everything it was built up to be. Great college football. Next up, Notre Dame-USC next Saturday with Army-navy looming on the horizon.

Jeff Shaara is as good, if not better writer than hs father. His contiunation of his fathers cvilw war work was wonderful stuff. To the last man about WWI was as good and so was the revolutionary war Glorious cause.Add the rising tide, a look at the early part of WWII. Most accurate historical fiction writer I have read in a long time. Sticks to the facts and adds dialogue appropsraite for the temperment and personalties of those involved. Highyl recomended

We are now in sports junkie paradise. College Conference title games, rivalry matches and bowl season just around the bend. The pro-game is heating up, the ravens are winning and college hoops are under way. God Bless ESPN.

Tim Wilson (http://www.cmt.com/artists/az/wilson_tim/bio.jhtml) is one seriously funny redneck comedian. Vulgar and a long way from PC (sounds a little like a certain slim Chesapeake bay are value guy doesn’t it?) but funny.

On My drive back I saw snow. I hate snow. I have friends that love snow. They talk about ski trips and such. Skiing is one of those things that make no sense to me. Strap waxed boards on your feet and slide down the mountain. Its cold and its wet. Don’t they know that the lodge has heat, a fireplace AND a bar? Or that for about the same money they could fly to Aruba and spend the day on the nice warm beach and the nights frolicking and gambling in the casino? I refer you to my earlier comments on snow from this time last year.

About 11 I decided that a nightcap was the just the thing and off to bed. Pouring a tumbler of Irelands finest single malt I stepped out on the deck to see what changes the weather had wrought. The snow was falling fast and furious, racing through the lights on the edge of the grounds, dashing to and fro in a jumble of flakes, the flaky confusion resembling an airborne version of the original mosh pit at a grateful dead concert. The ground now was covered, each fallen morsel piling on the other, flake by flake, stitch by stitch, weaving a soft white blanket over the earth, the mundane parking spaces now a snow covered playground. The trees off in the distance, those stark, bare branches that usually cut the sky with slashes of winter grey ugliness, now almost majestic in appearance, branches bending into intricate patterns, ice sculptures carved by a maniac snow queen for a winter celebration. Over the frozen waters of the creek off to my right, the snow continued to fall, swirling patterns of ice shaved off some celestial diamond bouncing and skipping with the wind as they covered the icy layers of Thompson creek. The watermans work boats, usually hulking industrial looking crafts covered in netting and cages, now rose like snow covered hills off some surrealistic arctic landscape, these white masses rising from the ice, the harsh workday edges rounded off by the falling snow.The piers extended over the water ways of ice, fingers of whiteness untouched as yet by footprints, just suspension bridges of snowy symmetry and perfection over the ice.
I paused and sipped my glass looking at the newly formed wonderland of wintry excellence, listened to that unique lack of sound that comes on snowy evenings, as the snow covers and muffles the earth and the clouds hang low to earth, disgorging sound baffling clouds of wintry wetness over the earth.

As I stood there, beholding the changes upon the earth, the mundane everyday turned into a painting by some heavenly currier and ives, breathing in the quiet and dampness quality of suspended noise from the world, regarding all that had happened to the world with just the arrival of one small winter storm, I had but one thought at regarding such sights

MAN, I HATE THE FREAKING SNOW.......I GOTTA MOVE SOUTH

The drive home took a little longer as there was no breakaway, but six houras dootr to door wasn’t bad.Lots of times to ruminate on the great questions of life, value versus growth, men versus women, loves lost, loves still to come and all the other eternal and unsolvable, and of course essentially meaningless drivel one tends to reflect upon whilst driving. While listening to the ravens beat up Atlanta on the Morgantown radio station I luckily found at game time. I arrived in time to see the Cowboys upset the Colts and catch up on the island goings on of the weekend. Glad I went away after the update.

At last!!!..a new liquidation on the tape..back to work.

Wednesday, October 18, 2006

what works

We re always looking for that new fancy way to beat the stock market, running reams of spreadsheet data, looking for new ways to pick stocks etc,et all forever and ever amen.Looking for that new edge. I am the worst of the bunch in all likelihood. The worst part here is I know better, Ive written about what does work in the market extensively and sat at the big table with the grownups who practice this method all the time. What wonderous thing is it that I refer to? Buying stocks below book value in companies with little or no debt or strong credit ratings on small amount of debt..a debt to equity ratio less than .5 lets say. The best stocks I have ever bought in my life have been those that met these criteria. Yet I continue to look for new methods and date blondes. Neither has worked out so good for me.

The track records of the big guys who practice book value investing, seth klarman and Marty Whitman come to mind, have long term track records that are beat even most of the big time hedge funds. I look at guys like tudor jones, simon and the ilk and realize that buying stocks below book cannot compete with their sophisticated methods. Unless of course we applied the same 8 to 1 leverage these guys ue. Then Martys unlevered 17% a year for 20 yrs and seths 20%..or the schloss brothers 22%.. and they are right there in the league.

All my own testing has confirmed it. Stocks below book value with good balance sheets outperform.Net-nets and liquidations may be hard to find but they average something on the order of 40% a year return. Combine below book with the occasional net-net and you should beat just about everybody out there.No rocket science here, just a little basic accounting. The academics have proved the point over and over. No need to figure out which new super widget is the best. Just buy assets cheap. From now on, I buy assets and date brunettes that wear glasses exclusively.With a little common sense market timing and using options in some cases to enter,exit and protect positions and there is a built in edge.When you find one of these names that has other smart guys in it like klarman, brnades, Whitman et all(in truth I often steal the ideas from their filings) or an activist such as shamrock, pirate or barrington involved I am even more confident about putting the trade on.Insider buying is another great confirmation tool.

Some of the things I am looking at now include jakk pacific the game maker trading below book with 20% of the stock price in cash, CALL, a small telecom vendor with a stock price of 2.60 and almost 3 a share in cash net of debt, the reinsurance company PAMCA, a 9.65 stock at .8 of book and 3 a share in cash,WON, the radio empire at 7.54 stock with a 5%+ dividend yield trading at .95 of book,electonic payment processor OPMR, hard hit by the internet gaming bill trading now at 9 with 7 in cash and still capable of generating a fair amount of free cash from non gaming business’. I also like TSCC, the it consulting firm trading at 8 with 5 in cash.The larger names include such gems as insuresr ANAT,KCLI, department stores DDS and telephone company S.

I still think the market is heavy after the extended run so I am not in a hurry to throw the positions on. In the case of opmr,dds,s ,jakk and won, they are optionable so I like selling oct and nov puts one strike down to gain my entry.With CALL, the net, net, I am just in the stock. Net-netds are rare and should be bought when discovered.

Wednesday, October 11, 2006

hunter thompson,stock markets and net-net stocks

I just finished reading Ralph Steadmans, The Joke is Over a great telling of his many year friendship with the good and great D gonzo, the late Hunter S Thompson. It should come as no surprise to those that know me that I am a huge Thompson fan sharing his love of sports, anything and everything political, writing and of course imbibing. I shall never be at his level without dying an ugly twisted death of regurgitated liver tissue and copious internal bleeding and leakage by mid afternoon, but I am a fan none the less. So with an effort to channel the good Doctors spirit , a look at where we are…

Lets review shall we? The most irresponsible dictator in the world is testing nuclear bombs. With what degree of success it is uncertain but the twisted bastard blew something up the other day. Home prices continue to fall, and the National Association of Realtors estimates that home sales will fall by close to 10% in 2006. However, in yet another sign that he became closely acquainted with a crack pipe since retirement, our good friend the BIG G insists that the worst is over for US housing markets. So, a bear mkt in housing lasts about 6 months and declines about 3% after a multi year run up with average gains in of 20% a year. Damn it, I knew I should have joined the Kiwanis and gone into Real Estate. Some alarming percentage of outstanding mortgages is at low or no interest rates and due to adjust to the norm over the next 12 months. Countrywide tells us today that their mortgage fundings dropped by over 30% in the third quarter. This of course had a huge impact on their stock price. It dropped 37 cents. The dollar is up, the bond market is up as those bottom feeding pain eaters over there seem to think that the world is indeed ending soon and it will be a profitable trade. The two best looking trades on the planet are long vol and the curve steepening trade. This has however been true for months and those that put it on early are now reading their car salesman manuals or serving drinks in some seedy roadside gin joint to dubious characters of questionable moral fortitude and their haggard desperate eyed companions. Consumer credit and confidence are both rising along at a merry little clip. The war in Iraq continues to be an absolute nightmare at best, quagmire II the sandy sequel at worst, Iran continues to posture. There are signs of the economy picking up slowing down, inflation, deflation and talk of stagflation. Our first peek at third qtr earnings is not that pretty. This of course is a lot like saying Paris Hilton is not a good model for temperance and virginity..or much a role model for decent television Alcoa missed, as did Legg and gannet. So in these times of general economic uncertainty and geo political unrest…it is only natural that .So stock prices are of course going higher, volatility is going down faster than a congressional intern and the curve remains inverted. Apparently the market mistress is on a screaming acid trip and ignores reality in favor of savage hallucinations of the mid 90s. That is the only explanation I can come with for the current ridiculous price of risk. There doesn’t have to be a crash but as it was pointed out to me the other day it has been over 60 days without a 1% decline in the Spooz and I m pretty sure Howard Stern was still spouting his perverse rants on free radio the last time we had a 10% monthly decline. Bad it seems, is the new good. And good is even better.

I see a few things around worth buying but I am VERY hesitant to make a large commitment. Buying large here feels like it has the potential to empty pockets quicker than a snarling cadre of ex-wives with a fierce alimony jones. I am going to go ahead and just buy some CALL. I find a 2.92 a share stock with over 3 dollars a share in net cash impossible not to buy. Net-nets are rare as hell these days so I just buy them when I find them. Of course, Ive gotten married that way a few times as well with shall we say mixed results? HAMP, the largest sweater manufacturer in the country has a share price that is almost entirely backed by cash as well, but there are some SEC issues and CEO theft that need to be dealt with so its doubtful the stock moves higher too soon so I can wait for a good general pullback. OPMR is tantalizing as well after crashing the wake of the misguided anti internet gambling legislation caused them to tumble over 50%. Even there it trades below book and at an 8 multiple of the slashed earnings estimates, and a lot of the share price backed by cold hard cash. I’m sure we all feel safer knowing that American ports are now protected by the lack of online poker. One can only hope that Bill Frist is soon discovered in the Senate men’s room with assorted underage naked pages and two shaved goats drawing dead to the goats aces full of kings. I am tempted to load up on this one but really need a down day to do so.

This stoned, evil and twisted market bitch continues to remain smiling and optimistic now matter what occurs here in the real world, the colorful drug induced visions of low rates high profits and free wheeling consumer spending erasing net worth from rational traders at an alarming pace. Meanwhile the cash flows freely to the buy today, everyday,the trend is your friend crowd and their champagne is served by out of work value guys and pattern traders. Hopefully this reverses at some point and returns us to more rational levels of pricing, pricing not only of equities themselves but the price of risk itself. Then these buy high sell higher geeks will get the thorough ass ripping that is justifiably theirs and go back into the filthy caves and sordid grottos of outer suburbia where they belong.

Tuesday, September 19, 2006

whither goest the market?

Damned if I know. A look around shows me that stocks, although off slightly today, have been moving up continuously since July, oil is down well of its highs, gold has started moving down, bonds are up, the economy show signs of weakening (which according to the sadistic bastards in the now imaginary bond pit is a GOOD thing), the dollar is flat, the times predicts strong retail sales ahead, while the journal predicts weak, there is a coup in Thailand, Iraq continues to be the same type of raging success experienced in Indochina while North Korea and Iran make nuclear postures. All this of course is reflected in the VIX which even after a 6%+ move today stands at the ridiculously low level of 12.Having thoroughly tapped out his home equity the consumer seems to be relying on the change found in his couch to drive spending. The SP 500 is only at 16 times earning points out pundit a. Ah-ha retorts pundit B, but profit margins are twice the historical norm. So it we revert to the mean, we are at 32 times actual earnings potential. Unless of course the shift to less capital-intensive technology and service industries away from heavy industry means the profit margin metric is changed forever. Confusing times at best. My best guess is that with signs of the economy slowing and a market that hasn’t had a 10% decline since Maryland had a good football team, there is more risk to the downside that opportunity to the upside in the broad market.I of course don’t trade the broad market but spend most of my time looking for bargain stocks ala Ben graham and his ilk. Ordinarily the only Buffet I pay attention to is Jimmy as I am more in agreement with the concepts of life is just a tire swing and ousters and beer for supper every night of the year than those espoused by the super lefty from Omaha, but cousin Warren was quite correct when he said those running something less than 50 billion could be doing very well with the type of bargain stocks he was seeing but couldn’t buy. The more people buy into indexing, and the semi indexing of the mutual fund industry, the more opportunities are created for vultures and special situation guys like myself. Right now the coal industry for example seems to be stupidly priced. It is true that right at the moment we are producing more coal than we burn but as the drop in prices to a multi year low forces marginal mines to shut down, this situation could change quickly. This along with a more normal northeastern winter and the potential for goal to liquid and coal to gas projects create a more promising long-term picture for coal producers. We re seeing single digit multiples here, cash flow generation that has slowed but not stopped, stock buybacks, insider buying and private equity and activist hedge fund industry in the group. As a falling ship could well sink all boats including my coal barge, I prefer selling slightly out of the money puts a month out on these names. The fact that the current weak outlook from the street has pumped vol in these names helps. I like ICO, JRCC, MEE and CNX in here as candidates for cash secured put writing.Speaking of barges a name that really catches my eye is Aldabra Acquisition. ALBA is a SPAC, a blank check deal. Routinely in these deals management has somewhere around a 20% interest in the form of warrants which are virtually free. Why would insiders be buying shares in the company for cash money? This is real money not options and could be spent on more meaningful stuff like bar tabs, green fees or gas for the boat, important stuff. So when the company showed up my insiders list I got real interested. Heres what I found. They are reverse merging into Great Lakes dredging. There will be about 37 million shares out when the deal is done and ALBA holders will have about 27% of the deal. The rest belongs to PE firm Madison Dearborn. Great Lakes as restructured will have an enterprise value of about 450 million. They will do in the area of 60 million ebidta. The fleet of dredging ships has a replacement value of a billion bucks. They have a40% market share and are the largest dredging firm in the country. While they have overseas work including Bahrain’s enormous projects, US dredging markets are protected from foreign competitors. I come up with at the 500 million mark, a little over enterprise value and about 8.5 times ebidta and 38 million shares outstanding, a value of about 13 bucks. The stock is 5.55 giving me an enormous margin of error. More interesting, the warrants sell for 76 cents, are due in 09 and .55 since in the money with 3 and ½ years to run. There are no guarantees and I may well be missing something but the insider and hedge fund activity in this stock make me think not. There is a pretty good market in the warrants.Two other stocks that are cheap and have strong activist funds pushing for action, including the possible sale of the company are athletic footwear retailer FINL and family restaurant FRN. My guess that both are worth picking up a pullback of any sort. FRN does not have options but FINL does and again, Volatility is up after recent weakness.It was trader extraordinaire and wife lottery winner Jason Thompson who last month firmly declared that being long volatility was the way to go. Given the state of the world, more than a touch of economic uncertainty and very low volatility markets I tend to agree. I have been trying to construct the trade by buying long dated very cheap puts on etfs such as xly, consumer discretionary and xlp, the financials spdr and selling short dated high volatility put premium in the value and special situation stock I like. In addition to the coal stocks I have been using names like SIX, TRN, MIR,CHk,S,WON and NYT to stitch the trade together. We ve been fighting the tape a little bit with the long puts but the premium taken in on the value names keeps us well in the game. The only downside that I see here is being out shares of stocks we don’t min owning in the first palce. Of course the market could keep going up between now and next march with no rise in volatility or significant declines. I ll put that right up there with a Green Bay vs. Houston super bowl in probability.The world turns on. Navy is winning, Notre Dame is more vulnerable than we thought, and the Ravens defense is off the chart again this year. Summer is over and we are headed into fall, that glorious season of football, the world series with the biggest drawback being the women go back to slacks and sweater packing up the halter tops and shorts for another year. Leaves fall, boats come out and we settle in anticipation of the winter ahead. The market is calm and unafraid; no one is worried which of course worries the hell out of me.

nascar in the market

I have had occasion over the past few weeks to spend much time thinking on models of success in life as well as markets. As I continue my voyage into the 4th decade of life, my original plan of marching to the sounds of a swing band playing in the mood straight from adolescence into retirement seems to need some minor modifications...dont get me wrong, I ll keep the band playing and the day the dancing stops so do I, but some of the things I planned out a few years now need some tweaking. I had ample opportunity for reflecting, first driving to NYC for the junto and back, a long walk along the backroads of CT with a wise friend and advisor, all in the past week. After a long weekend back home, I hit the couch on a dreary Sunday, grey, overcast and nothing much to do kind of day. True to my quasi, urban yuppie redneck roots, I flipped the channels around until I heard the familiar tones of good old darrell waltrip,”boogity, boogity , boogity, lets go racing.....and therein I found a model for much of what it takes to succeed in life and in markets.....

Full out competition......a constant effort, all the time with everything on the line the whole race. There are no 3 martini lunches at 200 mph. Drivers on a nascar track run pedal to the metal for the full 4 or 500 miles every Sunday. Brakes are applied only for throwing the car through the corners and to avoid accidents. The engines are designed and built to withstand the constant high rpm running and to win, you must extract every ounce of horsepower not just for a qtr mile but for hours of continued running...focus is everything. Barreling into a turn at 190mph with 42 other cars around you, and the guy next to you close enough that you re sharing paint, its no time to be wondering whats on the happy hour menu at the dew drop inn. We all have day to day concerns but when the market opens or your daughter has her first broken heart its no time to dwell on them. When something goes wrong and you find yourself going backwards at incredible speeds or you SO wants to know how come you dont talk anymore its probably not the time to be wondering what time the orioles game starts tonight.....

Constant adjustment...its not enough to just to build a great car and throw it on the track. During the day the suspension is going to change, the track is going to heat up, tire pressure will change, annoying little stuff will go wrong....an understanding of whats changing(the switches) and the ability to change it in less than 15 seconds in the pits is critical to winning. We can all build decent models that trade great on paper and even run well for the first few laps around the market track. Or start relationships that in the first bloom of like and lust run like JR in the last 10 laps at talledega , but everything life changes. Pressures build up, assumptions are challenged and sometimes in life and markets we cut a tire in turn 3. The ability to adjust, refine and get back on the track is critical to winning. And note that without a pit crew, the average stop would take an hour or so instead of 15 seconds...the support people, friends, assistants, relatives etc who surround us and help keep us on the track are critical to success in any venture. And choose them wisely..like a tire changer who cant figure out how to turn on an air wrench, the wrong people around us can cause up to lose a wheel at 200 mph.......select the support people wisely because in the heat of the moment, you will have to depend on them.

Testing on Friday wins on Sunday..how many times on the list have we heard test and count? Far from being just a bunch of unenlightened rednecks with souped up chevrolets, the drivers today spend a lot of time in wind tunnels and on test tracks with sophisticated monitoring equipment testing their ideas, their cars and themselves long before they take the green flag at Daytona to start the season. Every spare moment is spent testing and refining new set ups and combinations to wring extra speed out of the motor. Everything is measured and tested to the finest possible degree to give the greatest chance to win.The chair and others exhort us to test and count, not just once but always. If you can it,think you can test it.

You must adapt. Every day will not be the same, and all the tracks are different. There are superspeedways, short tracks,road courses,flat tracks, banked tracks. Rockingham chews up tires, California has no banking, dover is concrete, richmond is asphalt, bristol has difficult pits, pocono looks like a 4 lane highway coming down the lane. You have to have a book on each track each week because conditions will be different.markets, marriages, careers, kids, there are cycles to it all. The tracks will be different every week,every month every year. I f all you know how to do is day trade tech stocks or drive superspeedways, you ll spend a lot more time, you ll spend a lot of time driving around At the back of the pack when conditions dont suit you.If all you know how to do is drive left or you re only good at the pickup stage of a relationship, road courses and day to day life will spin you off into the sand pits
You will make both friends and enemies. Friends are more important.Your enemies may not like you or speak highly of you..there is really very little they can do to hurt you without damaging themselves. Feuds between nascar drivers are legendary ..waltrip and earnhardt, gordon and wallace,pearson and petty. These guys have tangled up on the track and are really not that fond of each other but theres no way to take vengeance in a meaningful way without wrecking your car as well or suffering a stiff penalty from the regulators

life is a gamble

Life is a gamble. I d like to take credit for that statement, but its been said many times by many much brighter and articulate than I.As far back as 1780. Edmund burke in a speech before the house of commons states "Gambling is a principle inherent in nature”. It does seem that the taking of risks in order to reap rewards is not only inherent to mans nature, but the source of much f human progress over the years. My handy websters defines gambling as betting on the outcome of an uncertain contest, to expose to risk or venture. I would propose that the earliest life forms crawling from the primordial ooze were in fact betting that there was a better life, richer food beyond the ooze..and that they could actually breathe away from the slimy pool that gave festering birth to them. Columbus setting sail for what many believed was the edge of the world, cortez burning his ships on the beaches of mexico,Marco Polo setting forth for the unknown eat were basically betting on themselves and their compnaions in a quest for fortune and glory.Edison bet his future and reputation on the success of his lab tinkerings, leading to television,,light bulbs,henry ford’s bet on himself in auto race was the foundation of the ford motor company and the modern amercian automotive indistry. The list in intelligent,spectacular bets of not only money but minds and reputations is too lengthy to attempt and list them all...but they form the cornerstone of much of human progress.Indeed the author Mario puze said it best” It can be argued that man's instinct to gamble is the only reason he is still not a monkey up in the trees”

Military history is filled with dramatic gambles by great leaders..some such as D-Day and farragutt at new orleans paid off leading to great victories, others such as napoleins ill fated invasion of russia or picketts charge lead to equaly spectacular defeats.The history of warfare is filled with examples of commanders taking calculated risks to advance their position ,win battles and wars.The daring raid on trenton by an ourmanned our gunned and underfed infant american army under george washington did much to boost the sagging morlae of our fledgling nation and aloow tht e fight to continue on the road to eventual independence.george apttons mad dash across europe to reinforce the 101st airborne at the battle of the bulge pushed back the last germna attack of the war and shortened the war in europe by some many months.Erwin rommels calculated mad dashes across the desert earned respect as a military genius and the title odf desert fox.Rommell addressed the issue thusly in his writings “A gamble, on the other hand, is an operation which lead either to victory or to the complete destruction of one's force. Situations can arise where even a gamble may be justified ..."

Gambling is part of our history, or heritage., there is something about gambling in general and poker in patricular that fascinates us..Gambling and poker show in our culture as well, with such film classics as the hustler, cool hand luke,californai split, the sting, rounders,oceans 11,casiono and the cinncinati kid. Many of the James Bond movies have at least a portion of the film set in a csino as the suave mr bond sip martinis and indulges in games of chance and romance.Songs as well with segers ramblin gamblin man, kenny rodgers(of course) the gambler, lint balck and good run of bad luck,sinatras luck be a lady,merle haggarsds kentucky gambler/..the list of songs associated with gambling cards is extensive.Two of the greatest broadways plays of all it me, showboat and guys and dolls feature gambling as the center of the story. L:iterature as well is filled with gambling stories including the classicThe Gambler by Fyoder dostoyevsky , as well as countless popular novels by such as jackie collins, harold robbins and mario puzo. Many of american historian and wit, mark twains novels and short stories featured gambling as well.
Poker images, from the card rooms of the wild west, wild bill hickocks aces and 8’s deadmand s hand, a host of riverboat gamblers and roving card sharks, the best known being doc holliday with a deck of cards and six gun at the ready, harry truman playing poker with reporters while making the decision of the useof the atom bomb, Richard nixon earning a stake playing cards in the service, the games of poker and its variations show up throughour our history and our legends. There is something about betting your stake on the cards and your ability to read and out fox the others at the table that captures our imagination.Poker is played in sparkling new casinos, grungy roadside cardrooms, living rooms ,barrooms and everywhere in between across the unite states and indeed the world.

The fascination with poker continues to grow. The recent advent of the world poker tour televison series on the travel channel has been a huge success and interest in the annual world series of poker continues to grow with more entries into the main event each year.Recent books such as positively 4th street by mcmanus have made the new york times beastseler list. Entering the word poker into the yahoo internet serch engine returns over 6,2000,000 hits.Searching amzon.com for poker books returns a list of over 350 titles in stock and ready to ship.Poker has spread into the electronic age with card rooms online, and indeed an online player just beat some of the worlds best to become the world series of poker champion for 2003.




All games have rules. Some are complex, such as risk or dungeons and dragons. Most, like checkers, candyland, even chess and poker have fairly basic, simple rules. The very simplicity of the rules (candyland excepted..the basic rule of thumb here is that it is virtually impossible for anyone over the age of 6 to win this game., I have many memories of my daughter as a little girl with that viscous mischievous grin taunting” I win again daddy..I guess you re just not very good at this”) allow for extremely complex strategies. even chess, widely considered to be the most complex challenging games in the history of the world has a fairly basic set of rules governing how pieces may be moved and how victory is achieved or lost.Im sure some of you think perhaps checkers belong on the candyland list(you re probably the same ones who buy mutual funds because you think stocks are too risky). I suggest you read the immortal tom wisewells Science of Checkers or Draughts or walk into one of the old fashioned barber shops where old men still play and offer to play for cash. the rules of texas hold em for instance are very simple:

The basic principle behind Texas Hold'em Poker is that each player gets only two cards (which only he can see). The winner is the one of the remaining players at the end who can put together the best five-card poker hand as a combination of his two cards and five open cards (so-called "community cards") on the table.

The rules of trading markets are also very simple. You can buy. You can sell. You can sell short. You can trade, stocks, bonds , futures options.The mechanics of opening accounts and entering orders is fairly simple and straightforward. Any idiot can do it and indeed as we saw in the late 1990s, many of them already have.

Most of these games, simple as the rules my be, have also developed complex playing strategies as well as proverbs and cautionary tales that govern the game and distinguish the weak and the strong players. Walk into the average book store and look in the games and gambling section. There are dozens of books on chess, poker,backgammon and virtually any other game you can think. Different authors suggest different strategies and tell different stories of famous games and the players therein. Now walk over to the investing section. Here we have hit the jackpot of contradictory opinion. There are thousands of books, each espousing a different method of playing a simple game. Everyone has an opinion, and they all seem to be different. Graham doesn’t agree with prechter who doesn’t agree with buffet who doesn’t agree with elder and Niederhoffer doesn’t agree with any of them.

Both poker and investing share some maxims in common and we think its important to delve into a few of these shared concepts and proverbs. First however I want to make clear as we move along that neither of the authors feel that trading and investing is gambling when defined as most do. When we sit down to play we are not betting on outcomes we believe to be uncertain or strictly up to the fates. Drawing heavily on theories of probabilities, the use of statistics and practical experience whether playing at the 10-20 table at the mirage or entering orders for S&P futures or small cap stocks, we expect to win over time. When walking into a casino,most of the games are stacked against the player and it is virtually y impossible to beat over time the games of craps, roulette, keno or baccarat over time. They are games of pure chance with a mathematical edge for the house. The edge,even when small will grind you into dust..dust with no cash at that, over time.It is amazing to me that books are sold on how to win a t roulette, at craps,(ever want a free room in Vegas, just tell them you re there to play your new roulette or crap system)even at such statistically challenged cash killers as keno(know the safest place to stand if a casino roof ever collapses while you re there? The keno parlor, nothing ever hits there).,slots(friendly slots only pay back 98 cents of every dollar bet..you do the math) and lotto when from a pure math point of view, all you can ever hope to do over time is minimize the bleeding. Only poker and blackjack create the possibility of an edge over time for the player. As one of us is barred from damn near every casino on the planet for counting cards and the other is too lazy to memorize all the possible card combinations and track the count, finding memorizing the top 10 or 15 hold em hands to be easier, we shall concentrate on poker.it is our firmly held belief..and we bet our livelihood and our lives on it pretty much on a daily basis that both poker and markets can be beaten consistently by a combination of math and psychology. Further we believe that with study and practice the skills needed can be learned and mastered, As much as this book is an attempt to educate you, the reader on some of the things we have discovered in card rooms and trading floors, it is also a continuing step in our educational process and continuing effort to improve our game.It is no accident that great traders and investors such as buffet ( simple homespun image be damned, the man is a mathematical genius and heavy trader of distressed and arbitrage situations. Apparently his 20 punch card for a lifetime homily doesn’t apply to him), soros,druckenmiller, both the niederhoffers, roy and victor,tudor jones, brett hull have much in common with great poker traders such as doyle brunson,david slansky,phil hellmuth,johhny moss,andAmarillo slim. It is a thorough understanding of the odds and how other participants in the game perceive the odds that has made them succesful.We are always aware that like tax laws, the laws of probability are very bendable and we will experience streaks that defy the numbers. There will be bad beats ,poor players will fill an impossible gut shot draw on the river, someone will hold pocket aces to our pocket kings, treasury secretaries will say regrettably and fed chairman will mention irrational exuberance and the Enron’s of the world will trap us at times. But we play with faith in our research and the basic concept of reversion to the mean, knowing that in the end knowing the game and the players, the odds will be in our favor.

The first maxim we want to look at it as it applies to trading and poker is one of the most important. NEVER GAMBLE THE RENT MONEY. This should be self explanatory. The only thing harder than dragging home at 2 am and explaining to the wife you lost the rent money or mortgage payment playing cards would be explaining that your brilliant combination of Enron, WorldCom and the internet fund has lost the kids college fund and most of your retirement as well(you might as well do this one at 2am as well. When she finds out she’s working the late shift at Denny until she’s 73 to pay tuition, you re a dead man anyway. Stopping at the bar for some liquid courage and preventative pain killers would be the only right choice here).It is highly suggested that some basic planning be done before trading or playing cards as a for profit enterprise.

Some will try to try to convince you that you need..drum roll please...a financial plan. Merrill Lynch, American express. Morgan Stanley and most other firms will be happy to sell you for 300 or so bucks a nice plan with charts,graphs, projections and strategies. Just because yours looks just like the family next doors and all the suggestion involve products manufactured and sold by the firm in question makes them, in their mind, no less valuable. I might however, beg to differ. 15 years experience on the sell side of the investment industry, including a stint as a financial planner in my misspent and uneducated youth,have taught me one universal truth about financial plans. They are sales tool, designed to relax the buyer, create an atmosphere of trust and gain access to complete information about where your money is so it can be relocated. One of the best defintiotn of the process I have ever seen was in aols dilbert crtoon in which ratbert describes financial planning as the transfer of useless assets to valuable commission dollars .The last few years should have taught us all that most projections based on current conditions are worthless and the long term future is unknowable.There are exceptions to this statement of course, but as a rule it holds up more often than not. We hate to be general in nature, but for most of us a good plan comes down to a few simple steps:

if you have a spouse, kids and a mortgage, for gods sake..or more accurately for theirs, but life insurance, lots of it. Enough to pay for college,pay off the house and replace your income at 5% interest. Its hard enough to loose a loved one and have to raise children alone in the world without worrying about how you re going to pay for it all. I f your divorced, have enough to give your kids the life they deserve even if you should pass early. It would be nice to deprive the ex of the income and support money but its not fair to the kids. Term Insurance is cheap so you buy lots of it.

I f you have kids, set aside a college fund and put money into it every month, There are many options for doing this on a tax favored basis. Don’t pay someone 100 bucks an hour to review them,. The internet is a wonderful place and has all the answers you need. You use low rate of return assumptions and invest them money religiously.

Have a budget. Keep in track of the money flowing in and out of the household. Your not always going to stick to it but be aware of where and why you deviate from. Keeping track of how much you spend and where, finding and eliminating wasteful spending is critical to long term financial success for most of us. Bill gates might not need a household budget, you do.

I f you have a 401k at work, put in the max allowed pre tax, This helps meet two major goals..lowering taxes and funding retirement. If you don’t, put as much into Roth IRAs and IRAs as you can afford. Retirement will happen some day, or at least we hope it will. The federal government has generously provided several tax favored way to save for this event. Use them

Also make use of any benefits offered by your employer for paying medical insurance, daycare and other expense on a pretax basis. Read the tax booklet they send you every January and take every deduction and credit you are eligible to take. Less tax is better, Always.

Establish a reserve fund.A few months expenses in the bank makes a good shield against the unexpected. Layoffs happen, roofs leak, cars breakdown, and medical emergencies may occur. Even worse they my happen to your spouse favorite siblings obnoxious spouse. Better you have few extra bucks to send them than they come live with you until the storm blows over..which of course is two days short of never. Save some money, put in a bank, get the best available but dont obsess about it. The goal here is liquidity and security.

.Tim’s immutable law of personal finance..Life is short. When doing your budget, overestimate leisure expense and include a line item for vacations every year, especially if you’re married.NO date nights, time together and no fun makes live a rather boring, dull affair..somehow I doubt the point of our existence.We need time to enjoy life and quality time with those we love To save like a squirrel and then drop dead before you can enjoy it is pointless.your widower or widower should not have more fun after you die than you did before. This happens to more of us than we like to think If you re single include money for dates. The month you do not include money for dates you will meet the person of your dreams and not have enough money to buy him or her a drink and she ll leave with the muscle bound with capped teeth, or the buxom blonde with too tight jeans and an extra twenty to spend .

There will be exceptions to the above. If you have inheritance issues, property transfer concerns, a large percentage of your net worth in a closely held business there are issues where you are going to need professional help. If the issue is too complex to understand, get help. If you re losing sleep over whether or not you ve done it right, get help. Interview the professionals you need, attorneys accountants, financial services providers, maybe even a life insurance agent. Just make sure the person on commission ( I can say this, I earn my living from commission. The salesperson should not drive the process) does not lead the process or formulate the plan. You my need their products or expertise to implement your plan but let the lawyers and accountants ..the hourly or flat rate guys...formulate the strategy.

2. ne The author nelson Algren penned the saying as one of his original rules for life... Never play cards with a man called Doc. Never eat at a place called Mom's. Never sleep with a woman whose troubles are worse than your own. It seems that in days of yore, the good doc always had a card or two up his sleeve or some other trick to separate you from your cash by less than totally honest means. The other axioms we shall leave alone for now, except to verify that the gastronomic damage done in a road side joint named Moms is the blue light special of stomach disorders. And as all the authors problems are usually generated by the fairer sex, we have never found one who has less troubles than ourslelves..not being infatuated by the celibate life, we choose to ignore that particular rule.
It will shock you to find out that their are people out there who want your money. They dont want to work for it, trade for it, or even gamble for it. They just want to take it by whatever means necessary. They will cheat, they will lie, they will withhold information, feed your greed, exploit your fear, and in the end they will steal your money if you are not ever vigilant.

For some reason, involving I am sure some strange twist of the american psyche, we tend to glamorize con artists. Films such as The Sting,catch me if you can, paper moon, the Hustler, and color of money show us the fast talking but basically good hearted operator. In the Music man, we celebrate the con artist who reforms in the name of love.there is something about the living by your wits, outsmarting the world character that appeals to us. It is however a lot less appealing when it is your money that disappears and skips out of town.

Federal and local government spend millions of hours and dollars trying to educate the public and track down fraudulent operators. Yet, year in and year out billions re pilfered by tricksters who separate us from our cash with promises of high yields and fast profits. Its not trouble with a capital T that rhymes for P which stands for pool that they warn us of but coming global economic collapse and the need for precious metals, low bank yields when by using little known techniques of the rothschilds and Rockefellers we can get prime bank notes yielding 18%...sometimes a month. The claims are ludicrous and rarely hold up to investigation but the old twins of human psychology, fear and greed suspend our disbelief and send us to the mailbox checkbook in hand.For some reason, no matter how many articles are printed or how often the sixty minutes people show us the ins and outs of cons, investors still send their checks to modern day versions of Professor Harold Hill.

There are some basic things you can and should do to prevent being taken in by the professor and his friends...after all you cant count on Shirley Jones to always save us from our baser instincts. For starters..if it is too good to be true, its too good to be true. There is no free lunch, There is no super secret investment plan used by the rothschilds that is available to you for a low-low price. There is no trading methodology beyond blind luck that can turn your 2000 into 2 million in two weeks or less. The Us treasury does not have a secret trading room now magically available to you and your 3 grand. No one in Nigerai is going to share their 33 million dollars of oil money stolen form a corrupt and evil dictator with you. Its not going to happen and after you send in the money, robert redford going to clean up the fake blood and he and Paul newman are leaving town with your dough never to be heard from again..until the sequel in anew town with a new name.

The internet is the source and home of a lot of todays new scams. Using the anonymity of message boards and email, worthless shares are touted as the next microsoft.every day it seems I get several offers to teach me the secrets of investing, build unlimited wealth and increase my penis size overnight. One is as likely as the other to be a successful venture.

Use your common sense and do your homework. Investigate before you invest. Realize that you probably do not need to invest in cattle breeding, Guatemalan llama farms or secret energy sources.The SEC suggest that if you see an offer on the internet, it is best to assume it is a fraud..their guidelines reproduced here give excellent suggestions for avoiding high tech modern fraud:
Avoiding Internet Investment Scams: Tips for Investors
You should be skeptical of investment opportunities you learn about through the Internet. When you see an offering on the Internet – whether it's on a company's website, in an online newsletter, on a message board, or in a chat room – you should assume it's a scam until you've done your homework and proven otherwise.
Get the facts before you invest, and only invest money you can afford to lose. You can avoid online investment scams by asking – and getting answers to – these three simple questions:
Is the investment registered?
To find out, check the SEC's EDGAR database. Some smaller companies don't have to register their securities offerings with the SEC, so always check with your state securities regulator. You'll find that number in the government section of your phone book. Or call the North American Securities Administrators Association (NASAA) at (202) 737-0900 or visit NASAA's website.
Many online investment scams involve unregistered securities. But the fact that a company has registered and files reports with the SEC doesn't guarantee that the company will be a good investment. Likewise, the fact that a company hasn't registered and doesn't file reports with us doesn't mean the company is a fraud. You may be asking for serious losses if you invest in a small, thinly traded company that isn't widely known solely on the basis of what you read on a bulletin board posting or saw in an online newsletter. One simple phone call o your state regulator could prevent you from squandering your money on a scam.
Is the person licensed and law-abiding?
Find out if the person or firm selling the investment needs to be licensed. Call your state securities regulator and ask whether the person or firm is licensed to do business in your state and whether they have a record of complaints or fraud. You can also get this information by calling NASD's public disclosure hotline at (800) 289-9999 or visiting their website.
Does the investment sound too good to be true?
If it does, it probably is. High-yield investments tend to involve extremely high risk. Never invest in an opportunity that promises "guaranteed" or "risk-free" returns. Watch out for claims of astronomical yields in a short period of time. Be skeptical of "off-shore" or foreign investments. And beware of exotic or unusual sounding investments, especially those involving so-called "prime bank" securities. To learn more about "prime bank" securities, visit the Division of Enforcement's Prime Bank Fraud Information Center on our website.
Make sure you fully understand the investment before you part with your hard-earned money. Always ask for – and carefully read – the company's prospectus and latest financial statements.


In addition to the outright con, one must be ever diligent to avoid what I call the soft con. The legions of newsletter writers, gurus prophets and pundits who for 299 dollars a year will give you he secrets to investing as handed down by either WD gann or god his own self, use the stars to predict the paths of the markets or have some super successful technical approach with a 98% win rate..and if you subscribe now they ll throw in bonus volumes. Heroes a hint...if you posses a true edge in the markets you would never share it with anyone, much less at the bargain price of 299 a year. Just as Ed will never tell anyone where a table of full of rich fish play lest the table become full of well off card sharps thereby ruining the game offering widespread dissemination of a market edge would eliminate the edge.James Simon, George Soros, Luis bacon, Paul tudor Jones...they dont write newsletters, they dont advetrise and they wont tell you how they trade. The really good ones don’t.

Another soft con cons from the main say and white shoe houses of the street. No direct commission.trust me on this one, I ve worked as a broker for 14 years now. There is always a fee. It may be well hidden..and the deeper its hidden, the higher it is. Back end loaded mutual funds, or better yet annuities that require a doctorate in finance to figure out how much all those bells and whistles are costing to you, special reofferings of stock. They are not free. None of us on the street will come to work for free, Some of us are nice guys but we are not benevolent institutions. There is a commission. You just have to find it..or better yet if you hear the no direct fee claim..hang up, walk away and forget the whole deal.

Bot the Sec and US treasury department have excellent web sites full of thoughts and ideas for avoiding fraud. The treasury’s section on Prime bank Loans should be read by anyone whoever invests for income and is getting frustrated by todays low rates. Read the information on these sites carefully. But, in reality it comes down to common sense.

Investing on the ground floor with someone you ve never met is almost always a quick trip to the financial basement.

Nothing is guaranteed.

There is always a fee.

No one who really knows of an easy poker game or successful market trading technique is going to tell you for any amount of money

There is no safe way to earn 20% a year.

Banks that pay everyone else 3% a year are not going to pay you 15% in a special deal engineered by the trilateral commission or anyone else.

You probably cant quit your job and become an instant day trading millionaire.

There is no free Lunch...and never play poker with a man named doc.


never Play poker with a man named Doc





3. Have an Edge

Any time you sit down a t a poker table or put on a trade, you need to do so with a strong indication that you will come away with more money that you used to buy in. We re not talking about a gut feel that you re really gonna get them this time, but a practical well thought out advantaged, one developed by testing and by experience that you can beat this game, or that this trade has a high probability of success. There are a lot of traders and card players we have met over the years who trade and play on what they call instinct or gut feel. Most of them are broke.

You need to have a testable tradable edge to persevere in the markets over long periods of time. You need to be one of the best players at a poker table...and know it before you sit down and post a blind or ante...to win over time. It is worth keeping in mind that you probably cant beat every game or trade every market.We hear tales of the great macro traders and think we should be able to trade all markets all the time and win. The stories of soros,druckenmiller, robertson, et al leave out the fact that they have 50 to 100 people on staff to help with the voluminous analysis that goes into shaping their success. One of the best S&P traders we know will not go near the bond or currency markets. A good friend is an extraordinary trader of small illiquid bank stocks. He cant value or trade an option if his life depends on it. A couple of good nights at the local game playing follow the queen and stud with 2s and one eyed jacks wild is not the basis for entering the World series of Poker. A good hold em player may not the best choice to win at Omaha eight or better.

Deciding which markets to trade and how you are going to trade them, or which games you are going to play and in what style, are the biggest decisions one must make in developing a playable edge.The skill set to trade indexes interday is completely different from that to trade liquidation arbitrage. The education needed to trade currencies is not the same as needed to trade equities. Traders who use technical analysis need to concentrate their attentions on studies a world apart from the fundamental investor. Quantitative analysts need to stay up the latest mathematical approaches and be ever aware of disappearing anomalies. In poker, winning at limit games does not automatically make you a no limit champion. Stud and Omaha with their community cards are a different animal than stud and low ball. To have an edge, one must specialize. One must study. One must practice and be ever alert for the developing overlay.

There will be times when markets give you and edge. Or a particular poker game is so inviting you must play. Last June, Ed described in detail the concept of finding and playing the edge, or overlay as he prefers to call it:

Normally don't like to announce victories, at the risk of coming across as a bragger, but I just beat the biggest game at the biggest poker room in the world this weekend, at my best poker game, Texas Hold'em, limit, so I thought I'd share part of the lesson that I think got me there, as it applies to trading.
Overlay, play, no overlay, well....
To win it can help to have lost, and then to despise the feeling. I played in the big game before and lost. Why talk of poker overlay, and how does it apply to trading????
Well, when I used to trade stock options, there where times when the action was well almost gluttonously scrumptious, and then often these times would be followed by a painful drought. Some traders stood with strong resolve, adjusting the interest rates in their models, fine-tuning their assumptions on volatility in their model, and then on a dragging slow day might even whip out their sheets and double-check trades and position inputs.
Other traders chose to laugh and giggle, or play distracting games and pranks, some even said that they'd buy some of this option or that, or maybe even put on a “delta’ or a sports bet with a buddy to entertain themselves, heck some went and had a puff of cannabis or a drink.
I bet you can guess which traders stayed in business and which traders lost. Why? They chose to just play, didn't want or have the patience to wait for an overlay.
So, I recall the pro who asked me a couple weeks ago if I had a twin high-stakes brother, when he saw me at the smaller stakes table, and I just laughed and said how ya doin’??
That weekend I made the same amount that I did this weekend, why, because the overlay was huge in the smaller game that weekend, and I was close to break-even in the big game, maybe a slight favorite, but just as likely a slight dog, so I chose not to play. Edge times volume equals profit. It feels good to be the winner at the biggest stakes table, it even cheered me up (had a rough personal week) when strangers came up to me and said what a big game you guys are playing, wow! And, seeing people looking at the stack of chips that I had felt as I imagine a little Prozac might too, but next week if the top players in the world decide to join the big game you won't see me there, if the overlay is in the 5/10 table that's where I'll be, laugh if you want, but I am happy playing my way, if others wish to take a "stab at the moon," or “play ‘just for fun,’” that's their prerogative, and it is fun when a beautiful lady looks at you in amazement when you’re playing in the big game with the most chips at the table in front of you, but I am fine playing the way I like to play, heck, the shirt I am wearing that I bought from making a few small profits
feels good overlaying me and well after last weekend the shirt isn't the only thing that will subside the laughter, I think next time I might get a few more respectful nods even if I do chose to play in a smaller game.
Back to trading. There were times when there were only a few small trades that I knew had edge, and so I played, but then people laughed when sometimes I would pass on the biggest trade of the day. They'd even look at me as if to say, how much did you make last month, and since I know you did why the heck are you “pussin’ out” on this trade?? Well, I left with the chips that year, and when no one was looking, I thanked god for the strength to fight victoriously as I looked at the Statue of Liberty by the then-still-standing-triumphantly World Trade Center, thinking back on the moment it felt how I imagine scoring a big goal in a big soccer match might feel, and makes me want to scream O' LAY!!!!!

Developing an edge takes time and effort. You are not going to be able to watch a couple of episodes of World Poker Tour and use your knowledge base to turn pro. Nor can you check out mass market books by self proclaimed trading experts from the local library and trade your way to millions over the next couple of weeks.Nor is a quick perusal of Buffetology going to make you a corn pone overfed liberal billionaire before your 40th birthday. Both of us spend hours per week after working studying our games. Tim reads dozens of corporate documents and runs countless simulations and tests of market conditions and reactions every day of every week. He also plays a few hours of poker a week and reads a book or two a month on the subject. Ed’s primary game is poker. He plays 25 to 30 hours a week and spends twice that much time studying and reviewing the game. He also works in time to study and review the equity and options market.The top traders we know, many of them successful beyond most peoples wildest dreams still take the time to read any new academic reports that are published, they update, review and rigorously test and retest their assumptions and beliefs. Developing an edge that allows one to play consistently well, to win more than you lose, requires commitment and effort. Those not willing to put in the time, to do the homework and testing should probably stick to mutual funds and neighborhood wild card games for penny stakes.