End of the Year Musings

Clearly it's been a while since I've posted, but until recently there hasn't been much of interest to say. Work-wise, there are interesting developments, but until things are definitive I really can't mention them here. (Fear not, I'm not planning on switching jobs again anytime soon.) I'm technically barred from discussing anything related to my employer online as per the details of my employment contract, but I will at least mention that our corporate structure is likely to change significantly in the near future.

Otherwise, with the year drawing to a close, I feel it's a good time to take stock of what I've accomplished. I can't really say 2006 was a success, but it doesn't quite feel like a failure either. My brief foray into the world of hedge funds may appear to be a failure, but I don't think it really was in the end. I definitely learned a lot, despite the fund manager's insanity, and I definitely learned not to take the next opportunity that comes my way just because it's an opportunity. (The ability to negotiate my way to a higher pay-scale was also kind of nice.)

Trading-wise, this year has been a disappointment. While the results aren't final yet, I'm probably looking at about a 10% return overall. That's not bad, all things considered, but I felt very frustrated. A lot of my ideas that I acted on ended up not panning out, and many of the ones I passed on were big winners. I feel like I could have easily doubled my returns had I simply made just a few different decisions. Had I bought CLDN instead of VTSS, for example, or had I pulled the trigger on AAI under $10, it would have been a very different year. I guess the lesson is to be more confident in my ideas and stick with what I know.

In other news, I'll be forgoing the usual trip to DC for New Year's Eve this year. Rather, we'll all be flying out to Chicago to visit my friend Alan. For those who aren't in the know, Al was a friend of mine from college who trained professionally to be a chef. He makes some pretty amazing food, including the world's best ice cream, bar none. (He sells containers of it for $50 a pop, and I completely believe that people would pay for it. It's simply extraordinary.) Anyway, Al is planning an 11-course meal for all of us on NYE, which I wouldn't miss for the world. I feel totally justified in going to Chicago in the dead of winter and shivering for 3 straight days if there's one of Al's meals involved.

10 Years

This past Friday was my 10 year high school reunion. I'll spare you the details - suffice it to say that some people were fatter and/or balder than they were 10 years ago, but there were no major shocks or surprises. A signicant number of my classmates were either doctors, lawyers, or bankers, with a few aspiring actors thrown into the mix.

The whole event though got me thinking again along the same lines that I've been mentally writing for the past year or so - I think my generation really dropped the ball. In particular, I'm thinking about the people who I grew up with - mostly priveleged, intelligent kids who went on to some of the best colleges and universities in the country. We should have been the cream of the crop. Yet, somehow, it didn't seem to turn out that way. I think that somewhere along the line we all collectively lost our drive. Maybe it's the fact that everything was always provided for us by our parents. Maybe it's because our elite secondary institutions coddled us too much, or let us slip through the cracks, finding half-assed work acceptable enough for a grade-inflated B. Whatever the reason, I'm disappointed, in my generation and in myself.

This is why I sometimes feel like I need a vacation from life for a while - not to escape, or to be lazy, but to regain that drive that I know I once had. I used to love to win; now I hardly feel like playing the game.

Decisions

Oh, yeah, about that news. Um, right. Well, I got my old job back. You see, the guy who was running that hedge fund I was at turned out to be a complete lunatic - it's no wonder that nobody wanted to work for him. At any rate, while returning to the sell side wasn't really part of my long-term strategy, my sanity and personal happiness have skyrocketed over the past few weeks as I've smoothly transitioned back into my old spot. Granted, there were a few changes at the old place, most notably a major personnel shift on the trading desk, but I'm overall happy to be back.

After thinking about it a lot over the past few weeks, I've come to the conclusion that I wasn't quite ready to make the transition over to, essentially, running a hedge fund. I think I'm capable of working on the buy side, and one day I intend to be quite successful at it, but right now I need a bit more seasoning. Were there a situation where I could work on the buy side but in a more structured environment, where I would have a mentor and be guided and taught, things would be very different and I'd be able to make that transition now. However, without some more experience, I'm not ready yet to jump all the way to the top. Well, I don't think so at least. Who knows? Maybe I could have done it. I find often that trial-by-fire brings out the best in me. Still, my mental health is more important than that, and it wasn't worth what I had to put up with.

So, now that I've switched back, the more important question is: what do I do now so, when the next time comes around, I'll be ready? I figure I have at least 18 months to 2 years before I'll be making another move, so I should be making the most of this time. Maybe the CFA? Hell of a lot of work, but opens a lot of doors. Unless, of course, I decide to do b-school, in which case it's a waste of time. But, realistically, do I really want to go back to school and take myself out of the workforce for 2 years? A multi-year vacation sounds pretty nice, but so do big bonuses. Decisions, decisions...

Boom

Earlier this week, Amaranth, a major hedge fund, announced massive losses in the energy markets, effectively destroying about $6 billion of their investors' capital. If anyone wants the exact machinations behind the trade that went wrong, feel free to ask and I'll explain offline. The basic gist of it, though, was that one trader took one huge bet, and it went wrong.

What I find interesting about the whole situation is that while the name of the trader, Brain Hunter, has been all over the news, I haven't seen one mention yet of the name of the firm's chief compliance officer. There are sins of comission and sins of omission. Hunter is clearly guilty of the former, but Amaranth's complaince department is just as guilty of the latter. By letting Hunter put on a position of this size, compliance allowed Hunter to put the firm at risk of collapse. Any attempt to say that Hunter hid his position size from compliance is both naive and misguided - not only were Hunter's positions so big that it would have been nearly impossible for compliance not to know about them, but it's their job to make sure they know if anyone at the firm is taking risks like that. Any trading firm worth it's salt should have a policy that the trader never has the final say in how big the positions should get.

When a trading firm has a weak compliance department, traders take advantage of the situation. I saw it when I worked on the floor, and it looks like the Amaranth situation played out the same way. I knew options guys who would strap on a huge position and hope it would work out. If it did, they got paid. If not, they'd get fired. So what? There's always another job. It seems that the Amaranth situatuion is the same thing. Basically, the story I heard from some energy guys is as follows - last year Hunter took a huge position right around hurricane season that natural gas prices would spike if a big storm hit the gulf. Nobody stopped him, so why not take a shot? At risk of losing his job, a correct bet on the weather would make Hunter a wealthy man. And, as anyone in New Orleans could tell you, that's exactly what happened, and Hunter got paid out. Big. Around $100 million, from what I heard. So, this year, Hunter strapped on the same position again. Except, the weather didn't work out as planned, and the position got killed.

Keep in mind, I don't know this actually to be true. This is the story I've heard, and while most of the facts can be confirmed, I don't actually know what Hunter was thinking. I can say, though, that given a coin toss where heads you get $100 million and tails you blow up your firm and you're never working in finance again is a pretty good bet, especially when you've already made enough money to retire on. I also can say that I know plenty of traders who'd do the same thing.

Right now I'm sure that the compliance departments at every hedge fund in the nation are reviewing their procedures to make sure this doesn't happen again. I just hope that the media and the general population also are made aware of who all the guilty parties are here.

Nothing deep or philosophical here. Just that 5 years have passed, and I still don't recognize the skyline. They can put up new buildings, but there will always be something missing.

Eureka

I think I may have stumbled on a hell of a trade. It's obscure, and it involves a fairly diverse set of skills and market knowledge which, coincidentally, I happen to possess or have access to. It was just one of those moments that happens so infrequently, but you know it when you see it. I was looking at a trade that our portfolio currently has on, considering taking profits. It's a derivative, so I had to set up a quick little calculator on my Bloomberg to price it out. Just as I was about to start making some calls to the sell-side to get rid of the trade, I decided to stop for a second and check the price of a related security, just for the hell of it.

I jumped out of my chair.

Can there really be a mis-pricing so blatant and so obvious? I checked my numbers 6 times to be sure. Each time, it was the same as before. Staring me in the face was the thing every trader hopes for - the sure thing.

After sleeping on it, I went back to check my numbers again. There must be something I'm missing. It can't really be that easy, can it? So far, everything I've seen confirms what I'm looking at. I checked out some similar situations, and about half of them were also mis-priced. That's actually good - the fact that half of them are trading properly indicates that the relationship does exist, and that if I trade these mis-pricings, they'll hopefully come back into line eventually, creating profits.

The boss is on vacation next week, so I'll have time to do some serious research and make sure this thing is viable. If it works, I'm hoping to be testing the strategy on paper by the middle of September, with a relatively short period, maybe 2-3 months, before commitment of capital.

Sometimes you have to explain things to other people before you truly understand them yourself. I was talking on the phone to a friend just now, telling him about the new job. He asked me why the former trader quit before I started, rather than stay on a few months to train me, as we had originally planned.

My initial explanation was that he had just become fed up with the fund manager, and decided that he couldn't take it anymore and wanted out. Certainly plausible, given what I've had to deal with over the past 2 weeks, but not likely. The trader had been there for 15 months - if you don't quit on this place after 6 weeks, you're probably in for the long haul.

My second thought was that he felt he got too small of a bonus relative to his returns. The trader had mentioned to me that I would have to fight for my bonus, so this seemed pretty plausible. However, a bit of sleuthing on my part turned up a significant withdrawal of cash from the main trading account right around when the trader left. The figure, at around 10% of the fund's profits for the year, was hefty, to say the least.

Other speculation on my part included an unwillingness of the fund manager to seek additional capital, desire for more stability, or any number of other things which, while theoretically possible, didn't seem like quite a good enough explanation on their own. Even the combination of all these factors just didn't seem like quite enough of a reason, especially since the trader is now starting a new job as a sell-side analyst. Not a likely career move for a successful buy-side trader.

Then, while on the phone just now, it hit me. The fund manager isn't making the effort to find a new PM!

Now, I've said in passing to other people that the Portfolio Manager quit a few months ago, and that I'd be trying to fill in for that role as well as trading until a new PM could be found. Howver, it's pretty tough to do both those jobs at once, even if you have a lot of experience. The old trader, while very smart, still never worked as a true researcher, and probably didn't have time to manage both jobs at once. In fact, trying to be head trader and PM at the same probably was cutting into his returns! I've seen the numbers for the past few months, and there definitely was a drop-off over the past few months. I attributed that mainly to shut-down costs and a decaying market conditions, but what if it's simply the lack of a PM that's causing the problems?

This also explains another thing - why did the trader decide to become an analyst instead of pursue opening his own shop, like he had mentioned to me in the past? Again - the answer becomes apparent. To open your own fund, you need to be able to manage the portfolio as well as trade. By doing research for a year or so, he'll get the experience he needs on someone else's payroll, and keep his performance numbers from the old shop intact! It's such a simple plan, yet it should work remarkably well.

So, now that the reasons for the old trader leaving so soon have become apparent, so too does my dilemma. Without a PM, will I have the ability to both be head trader and generate ideas? It's daunting, to say the least. However, it also provides me with a backdoor out of the firm earlier than I may have planned. Leaving a firm after 6 months or less doesn't look particularly good on a resume. However, leaving a hedge fund because the manager isn't serious about finding a PM is the logical thing to do. Not to mention, poor returns at a fund that has no PM are quite easily explained. While I may not be thrilled about resorting to a quick exit, I feel it's a lot less damaging than it could otherwise be.

And if we get a PM after all, most of my problems will rapidly disappear...

Big Changes

As I hinted at in my most recent post, (God has it really been that long?) there have been some big changes around here. It's been a hell of a time the past few weeks.

July 28th I skipped out of work a little early, hopped the subway to JFK International, and dug in for 22 hours of flight time which deposited me, completely jet-lagged, in beautiful Sydney, Australia. And, yes, in case you were wondering, I did take about 3 dozen pictures of the Opera House beacuse, quite honestly, it really is that spectacular. While 1 week really isn't enough time to spend in a place like Australia, I managed to get in a lot. I'm still trying to put together a whole travel-essay page, replete with photos and all, but until then, I'll just mention a few highlights:

• Seeing an opera at the Opera House was very interesting, and culturally edifying. Australians pronounce Turandot as if it's not a French word, and really stress the "t" in the "dot."
• Dinner at Tetsuya's, possibly the finest restaurant on the continent. Worth every penny, especially with the wine pairings.
• 
  Bondi Beach. Too bad August is winter in Australia. (Winter in Sydney, by the way, means it's 55 degrees and sunny.)
• Hiking through the eucalyptus forests of the Blue Mountains. Totally amazing.

Before I knew it, the week was over, and it was time to return home.

Tuesday, August 8th, at 8:30 AM, I walked into the president's office at work and quit my job. By 9:00 I'd shaken hands with all my coworkers, walked out of the building, headed across town, and installed myself at my new desk, as head trader of a small NY hedge fund.

Yes, that's right. Hedge fund. Head trader.

While it's not exactly as glamorous as it may sound - I'm the only trader there. Hell, I'm the only employee there besides the secretary, I am referred to as the head trader by both my employer and our various sell-side accounts. And, while we're managing a pretty insignificant amount of money, it is a buy-side gig.

I have to admit I'm a little wary of this move. It's a big change, and a lot of work. Further, I'm potentially walking away from a lot of money, given the speculation of my former coworkers regarding what my bonus should have been had I stayed out the year at the old shop. But, like I said to my old boss when I left, this job is about opportunity, not money. And while mid-six-figures is always nice, even in NYC, I don't need to tell you what real hedge funds pay, and that's where I hope to be in a year or two. I'd been spending the past year or so trying to figure out how to get over to the buy-side, and now my opportunity has been handed to me. Granted, it comes with a cantankerous old man who's chewed through 2 traders, a PM, 2 accountants, and at least 3 secretaries in the past year or so, but nobody said this was easy. If I wanted easy, I'd have stayed at the sell-side shop, surfed the web all day, collected my $200k, and probably made VP at the end of this year.

What the hell have I done???

4th Round

I am this close to making something happen. More tomorrow...

Timely

So far, the options trade I put on the other day hasn't worked out that well. I managed to find the only semiconductor company in the entire world that didn't miss earnings. Oh well, I still have 2 more expiration cycles - no point in trading out of it now, and I still think my thesis is correct.

On the positive side, I just barely avoided taking a loss on Friday. I'd been looking at some upside calls on SkyWest due to an upcoming event. Continental Airlines was looking to replace ExpressJet as their subcontractor for short-hop flights. The contract had orignially gone to RJET but, due to a series of complicated events involving subleases and availability of planes, the contract needed to be re-awarded. I recently spoke to an industry analyst, who said that since RJET didn't have the planes, it was almost a given that the contract would go to SKYW.

Since the contract was due to be awarded any day now, I figured some upside calls in SKYW would be a good idea. With the stock around 23.5, maybe some cheap 25 calls would be worth a shot. Unfortunately, Friday was expiration. The Julys were trading as if worthless, and I really didn't want to pay up 0.35 for the Augs. If we only got a small move in the stock, vol would collapse and I'd barely make any money. Not worth it. If I could pay 0.20 or 0.25, I'd probably try to buy 100 calls.

Just as I was cursing the timing of the whole trade, and debating whether dropping a 0.25 bid for the Augs would get hit out or just scare away the offers, one of our salesguys called out "CAL on the tape!" "Shit," I thought, "I just missed it." I pulled up the story on my newswire.

Continental Airlines Selects Unit Of Republic Airways For Regional Jet Contract

Guess that's $2500 back in my pocket.

Odds and Ends

For a so-called derivatives trader, I've really been a spectator in the options market for quite a while. A lot of that has to do with my current job - I've been trading a lot of equity-based derivatives that are internally structured and which don't have any characteristics of traditional derivatives. It's also because, when I left the AMEX, I was very frustrated with the state of my trading. Some of it was because the AMEX was a giant black hole of spiralling depression where trading careers go to die. Some of it also was the realization that TASR was dead and was never coming back - no more $100,000 weeks ever again. And, maybe most importantly, some of it was because I felt like I had lost my edge. I wasn't excited about trading any more. I felt like I was going through the motions, like I didn't care whether I made or lost money.

To traders, this is the kiss of death. We love to win. No, really, we need to win. Ever play a board game with a trader? It's not fun, is it? We gloat when we're up, and refuse to admit defeat when we're down, even if the odds of a turnaround are so long we make the NY Knicks look like they have a good shot of winning the championship this year. We simply love winning so much at trading that it takes control of anything else competitive in our lives.

When I stopped caring about winning at trading, I knew I had to leave. I left the floor and got a job that I hoped would be intellectually stimulating and, maybe, rekindle that flame. While the job itself hasn't turned out to be as exciting as I'd hoped, some of the people I've worked with have reminded me about that competitive desire. I broke myself down, and started back at the beginning, with simple equity plays. I tried a few experiments, made a few mistakes, and got a little lucky.

But oh that feeling when I hit that first home run again. PWEI - I was in that name before Cramer had even heard of it. Long from $7.14 right before the run-up. I was back, dammit. It was like a drug - but better. I nailed on the head. My coworkers, who I'd told to get in on the name, were cheering me on for weeks after that one.

For the next year or so, my trading in my personal account picked up a lot. I had winners and losers, but overall I perfomed well. My confidence was back; I found my swagger. And today, for the first time since leaving the AMEX, I slapped on an options trade.

Nothing too exciting. Just bought a put spread in a name that I think is due for some disappointing earnings later this week. Still, it felt good. I could tell, though, that I'm a little rusty. I didn't check the vols before pulling the trigger, nor did I look at the earnings cycle to see how many shots I get. Still, it was a good feeling to be back in the game.

IPO Dude

This morning The NY Merc filed an S-1 with the SEC. The long-awaited IPO is finally moving forward. The stock is expected to trade on the NYSE, ticker symbol NMX. I have a more than passing interest in this particular name, as some of you know, and I've been waiting for this news for a while.

So what's this thing really worth? While it's still too early to talk pricing, NYMEX shares are already changing hands in the neighborhood of $40, so we have a decent starting point. Unfortunately, we don't know how many additional shares, if any, the Merc plans on issuing as part of the IPO. Thus, we can't really come up with a price target. We can, however, talk about multiples, to some extent. Comparing the NYMEX to its peers, (CME, BOT, ISE, NYX, NDAQ,) we get an average P/E ratio of 85.17 - pretty rich. The NYMEX shares are currently trading at about 44 times, so in theory, the exchange could double the shares outstanding on the IPO and still be in line with the average of its peers.

On the other hand, the peer average EV/EBITDA ratio is about 22.69 times - very high by any standard. Using a back-of-the envelope calculation, I get to a current value of about 21x for the NYMEX as is. Granted, this number will change dramatically, as the exchange will see a significant influx of cash after the IPO, but presumably also see its market cap soar.

The upshot of these quick calculations is primarily that exchanges in general have very rich valuations. Perhaps this is justified, since these companies have always been privately held up until now, and it's likely there will be significant improvements in margins as well as growth as the pressure of being public forces management to become more aggressive. Perhaps not.

Talking Trading: New ETFs

There's been a lot of buzz on the street recently about a series of new ETFs from ProFunds Group. These new Proshares allow the investor to take a leveraged bet on the major indecies on either the long or short side. Very interesting stuff. I can tell already that the portfolio theorist in me is going to have an absolute ball with these puppies. Aside the obvious ramifications of being able to be short the market as well as to generate leverage in an IRA for the first time in history, there are several hypotheses I'm hoping to play around with. While there is still nowhere near enough data to work with, I am planning on quite a bit of number-crunching. Some hypotheses include:

• Taking advantage of outlier days - if the UltraQQQ, for example, really produces double the return of the regular QQQ on a consistent basis, can one buy the UltraQQQ and short the regular QQQ in order to take advantage of higher volatility? Should one hedge with 2 QQQ contracts for every one UltraQQQ? Is there a correlation with the VIX?
• If, as many retail brokerages like to claim, the market historically returns 9-10% annually, shouldn't we all just throw 100% of our portfolio into the UltraQQQ and, in the long run, earn a rate of return that is significantly higher than the rate of inflation, allowing us to retire quite comfortably on our own private islands somewhere?
• Are there arbitrage opportunities between the Ultra long and Ultra short ETFs?
• If the market has a huge runup, similar to the Nasdaq circa 1999-2000, does the UltraShortQQQ go to zero?

A lot of these questions would be easy enough to answer via Monte Carlo Engine if we knew the exact methodology that ProFunds uses to price these ETFs. For now, all I've seen is that the pricing is determined through the use of various derivative products that may include futures, swaps, and other instruments, and that there is no guarantee that the actual value of the ETF will really be equal to what it should be. Acting on the assumption that the Ultra ETFs will behave exactly as they should can give me a decent idea of what to expect, but I'd rather be able to back-test with actual data. (I am well aware that backtesting can often turn into "backfitting" the data, but I am also a very firm believer that markets are neither perfectly rational nor perfectly efficient, and these mysterious derivatives that ProFunds is using to reach the expected levels for its Ultra funds sounds exactly like the sort of thing that will make spreads get all sorts of funky because actual values and theoretical values don't quite add up.)

Anyway, these new ProShares look pretty interesting, and not just from an academic standpoint. If business is as slow tomorrow as it has been all month, I should have plenty of time to mess around with these things.

Doomed

As it becomes more and more apparent that the manufacturing industry in America is becoming a thing of the past, various political and economic pundits have lamented the coming woes of our nation. "Not to worry" say some of these experts. We will merely shift from a manufacturing to a service-based economy. To these so-called experts, I ask: have you actually attempted to use any of these services? Have you actually spoken to a customer service representative in the past decade? Have you even tried to deal with any so-called service providers recently? Tried to, say, cancel your AOL account or, maybe, fix your cable? The survival of our country depends on a shift to a service-based economy? We're doomed.

In other news, today's interview was re-scheduled yet again. Interesting how, last time, I was lectured on the timeliness of merger-arbitrage, and how the window of opportunity for such trades is usually no more than a few days. By the time I actually get in there for the next round, the deal in question will probably have closed.

Another Follow Up

I finally got in touch with the hedge fund guy. Even though he wanted the project done a week ago Monday, he won't be able to actually meet with me again until a week from this coming Wednesday. It is apparent to me that either: a) he's not really interested in hiring me, because if he were, he'd be a lot more motivated about getting me back into the office; or b) he's so disorganized and scatterbrained that I don't want to work for him. Right now I'm thinking it's a little of both, but probably leaning more towards column a). However, at this point, I don't think I'm particularly interested in working for him either. If he were to give me an offer, which I'm really not expecting right now, I'd have to think long and hard about it before accepting.

In a totally unrelated point, 2Q is officially over. Performance of the equity markets for the year has been pretty lackluster, with a few standout areas. I'll have a full breakdown up here in a day or two, but so far it looks like if you weren't in oil stocks, gold stocks, or tranportation, you probably didn't have much success as an indexer. As my father said to me last night, this is a stock picker's market. If you're good at finding hidden value, (or just plain lucky,) you could have had a decent start to the year. If not, well, there's still 6 more months to go.

Monday's follow-up to the latest series of interviews never materialized. Apparently, the guy had double-booked. After almost a week of phone tag, we rescheduled for a week from next Wednesday. I get the feeling there's no sense of urgency here, hmm? Well, perhaps for the best. At least I know where I stand. And, while things remain quiet at the primary workplace, I am still reminded that I am not in any way forced to make a move at this time. I guess the past few weeks will just be added to that big bin of unsuccessful ventures we tend to label "experience."

Lazy

So, I've recently been on a few interviews with a small (read: so microscopic it's not even on the map) hedge fund. The position I'm looking at is basically a kind of Jack-of-all-trades type of thing - part trader, part analyst, part portfolio manager, part arbitrageur. We've already discussed that my background is pretty much exclusively trading, and that I'd need to take some classes (probably the CFA) to get up to speed on the analysis side.

Despite that, the previous interview, as well as the upcoming one, basically involve me acting as an analyst and presenting a report on a particular M&A scenario. Now, I don't really mind doing this, as it's a very interesting learning exercise. But, I do get annoyed when, after reiterating that this is the first time I've put something like this together, I'm told that I'm a lazy analyst. Look, six months ago, if you'd said "free cash flow" to me, my eyes would glaze over and my mind would rapidly relocate itself to the nearest drinking establishment. The fact that I can now navigate a balance sheet and build a model is due 100% to initiative on my part. I can do this because I've made the effort to ask how to do it and, when the answers were not forthcoming from my own firm's research department, I just went off and figured it out myself.

I have no doubt that the report I wrote for my most recent interview was not as good a very good one. (In fact, I am now well aware of several critical mistakes, which have now been corrected.) But, I don't know why anyone would have expected me to put something together that was as good as a professional analyst could do. And here's the kicker - my conclusions were pretty much dead-on when compared with those of real analysts. And the questions that I was asked that I didn't know the answer to? Well, neither did the analyst at a major I-bank who I spoke to afterwards, who'd been working on that specific deal for some time.

It's very frustrating that I'm spending so much of my time on this project and getting so much negative feedback. After spending about half an hour storming around my apartment, debating whether to just say "the hell with it" and cancelling the next interview, I realized that I've actually learned a great deal about analysis and research. I sat back down and started churning out some corrections and additions. There's really no harm in giving this one last shot, but that's all. It's not like I'm in a position where I need this job - sure it'll be great for the resume and get me onto the right side of the telephone, as well as be a fantastic learning experience. But, I can probably get as good a job, if not better, at another time. No sense in giving myself stress over something I don't need.

Grups

New York Magazine has a recent article describing what they refer to as "grups," or 30-something (typically) New Yorkers who refuse to grow up. Wandering through adulthood in distressed jeans, hoodies, sneakers, and shoulder bags, they remind me of the people I see on St Marks, trying to blend in with the NYU kids despite having graduated from college long ago.

Or my roommate.

Talking Trading: Bear Market?

This past Friday saw the worst one-day drop in the markets in about 3 years. The Dow was down over 200 points, erasing all the gains of 2006 to date. Not a good way to start off the year.

What's interesting to me is the wide variety of reasons I've heard given for Friday's plunge. Most of the talk on Friday itself surrounded either concerns about Iran's possible nuclear weapons program, or the higher price of oil. (Granted, the Iran situation would naturally cause oil to rally, thus pressuring the equities markets, so these two concerns are more than casually related.) As the weekend progressed though, I started hearing more mention of things like the inverted yield curve again, or the big decline in housing starts, or even inflation. Others, like me, were more focused on the string of bad earnings reports from major companies like Intel, GE, Apple, Alcoa, et al.

What's striking isn't that people can't decide what's causing the selloff. No, what we should be worried about is that there are so many bearish indicators and events that are all popping up at the exact same time. While inflation or Iran alone aren't enough to cause a recession, the combinaion of all these things should cause more than a little bit of worry. Especially when one considers that housing has been the primary driver for the economy for the past several years. Add to the mix the fact that home equity loans are shrinking fast, and we have a real issue on our hands. Consider also that both housing starts and corporate earnings are leading indicators. I'll be watching the next few weeks of employment data very carefully - if jobless claims start rising again, I'd expect to see GDP growth level off and maybe even start to decline by the second quarter.

Of course, if the economy does start to cool off, what should we do to protect our investments? First off, inklings of recession are a great signal to take stock profits off the table. That's an obvious one. Usually, the best move is to roll into the bond market, since the Fed typically cuts rates in order to try and kick-start the economy. (Note, Greenspan's tenure as Fed chief has reached it's final few days, and nobody really knows how Bernanke will proceed. However, there's already a lot of speculation that Bernanke will, at the very least, stop raising rates within the next few months.) The only problem with the bond market right now is that it's already pretty high, since overseas investors, primarily from Asia, have been buying up our long-term debt with seemingly endless voracity. While it may be a safer bet than equities in general, you're not going to get rich buying bonds at these levels.

One interesting possibility, however, is to increase holdings in foreign securities, either debt or equities. In theory, if the US economy starts to slow, the dollar will weaken. Assuming that foreign countries do not experience as severe a slowdown, one could profit by buying foreign stocks, waiting for the dollar to weaken, and then convert back into US currency, taking advantage of both the forex play and, hopefully, decent returns on the stocks in general.

Keep in mind - it's hard enough to find a decent stock to buy in this country. Trying to do the research to find a solid company overseas, where accounting rules may differ, local laws certainly will not be the same, and finanical statements may not be written in English, can be extremely difficult. Not to mention, it's neither easy nor cheap to directly invest in many foreign countries. Perhaps a few closed end funds or country ETFs would be the best solution.

Saucy

Have you ever had one of those days when, while cooking dinner, you manage to make the silkiest, smoothest, most utterly perfect roux, only to realize that all you're making is a quick chicken in lemon sauce? It almost feels like a waste to take such a completely paragon base for a sauce and combine it with hardly anything. It was so perfect looking that I actually called Krikor over to look at it. (Philistine - his idea of cooking remains a jar of Newman's pasta sauce over spaghetti, despite my efforts to enlighten him.) I wonder if top chefs ever feel regret. Do they feel a tinge of sadness, after making a perfect meal, that someone else gets to eat it? Someone who has no idea of the true artfulness of the meal that has been prepared for him.

Lovely roux, you deserved more than chicken stock and lemon juice - not even freshly squeezed! Rest assured, despite that, you were still delicious.