Options are the DNA on Wall Street

Ok, in one sentence, you have to read this article: click here.

Since the Bear Stearns collapse, there's been an ever increasing amount of talk about speculation and the impact that option traders and commodity, specifically, futures commodity, traders have on the markets. Well, this article certainly helps to support such arguments pointing-out that some investors made-out like bandits on the Bear collapse with a monstrous options bet not even the most bearish investors could have pulled-off without loosing a hell of a lot of sleep.

Apparently, some hedge fund companies placed million-dollar bets on put options with strike prices less than half of Bear Stearns' market share price at closing that day. If this doesn't smell like insider trading, then I don't know what does. The fact that this is the top headline today, the ones who were on the winning side of these trades are definitely sweating right now. You can be sure that regulators are going to be using a microscope in their investigation and if those gamblers (I mean traders) didn't lose any sleep before, then they're sure going to now!

Connection between writedowns and the economy

We've all heard about the big financial institutions, especially the investment banks, reporting enormous writedowns. According to Bill Gross, the manager of the largest bond fund, the total writedowns across the financial system could amount to as much as $1 trillion. When you consider that there is about $5 trillion in home mortgage loans, that's a significant number; the question is, what does it mean for the economy as a whole.

Well, if you've every studied fundamental accounting, then you'll be familiar with the concept of balance sheets and balancing inflows and outflows. When a company writesdown some assets, then that necessarily means that it has reduced one part of its balance sheet that directly affects its liquidity and ability to raise additional capital, no to mention its ability to pay its bills. In order to offset that lost liquidity, the company will sell assets or reduce lending. Reduced lending, of course, is the equivalent to the tightening of monetary policy Federal Reserve, which essentially works to slow down the growth of the economy by making borrowed funds that much more expensive (i.e. higher interest rates).

To make things worse, we're only at the beginning of the story. Firms are still announcing more writedowns and the consensus is that we're still going to see at least double of what we've seen thus far. When you think about this in terms of a domino affect, then this is still the first part of the domino chain; only after the financial institutions perform the compensatory actions that they'll need to after the writedowns, will the economy begin to feel the full effects of what we're seeing reported in the financial press. Bottom line: we've still got a great deal of pain ahead of us and it will simply take time for there to be a real recovery - no matter what the folks on CNBC would like us to believe when the market rallies.

Writing the GMAT? Prepare to be Palm-Printed!

Following the scandals that rocked the GMAT exam this year, it looks as though there will be a new step introduced to the MBA-application process: fingerprinting; well, palm-printing to be more precise. This article desicribes how the new technology will help affirm a test-takers identity and ensure that we are who we say we are when we sit down to write that all-important test. Looks like we're actually going to have to study now.

Employee Free Choice Act

This is scary. I'll admit to getting in on this story just today, but it really looks as though that I may not be alone. I first heard about this bill on CNBC this morning and subsequently went looking around the web to find an article that I could read on the subject. The fact that it took me more than a minute to find one is worrying. This is a very important subject and it's not getting nearly enough attention if you ask me.

At issue is the ability of a company's employees to certify a union without the need for a secret ballot that is currently required by law. Under the new legislation, a union could be certified without the company ever knowing about the registration drive until it was all over. This is a big, BIG, deal. If you run a company or invest in one, you want to watch this closely. What's worrying, however, is that one of the articles that I did find refers to this as an "obscure" bill; how can this possibly be obscure? It has the ability to transform the business landscape ...and no, that's not an exaggeration.

Further empowering unions will dramatically affect companies nationally. On CNBC this morning, they were interviewing the founders of Home Depot and they put it very bluntly. To paraphrase, they explained that this bill, if passed, would mean that a union could become certified and then install arbitrators that would set the wage rates for the company. Notice, that management did not enter into this equation. Could you imagine what this could mean for some companies? Could you imagine being a fledgling business, struggling to survive against your larger incumbent competitors, and learning that your employees just certified a union and that you would now be told what to pay your employees? This is exactly the issue at hand and it deserves far greater attention than what is currently getting.

Fortunately, it appears as though there are more than a couple of organizations ramping-up advertising campaigns to educate the public about the bill and its consequences. The fact is that this has already passed the house and only remains to pass the Senate before becoming law.

Actions Speak Louder Than Words. Sorry.

"Anybody can make loans. But banks are finding the problem right now is getting the money back." Can you say duhh? I mean, really; isn't that obvious? According to what we're seeing in the financial markets, it certainly does appear as though the banks have forgotten this fundamental principle. This article speaks to the efforts made by the Fed and Treasury to shore-up investor confidence in the financials, but when greater and greater exuberance among the banks is revealed, I don't think that any positive thinking can outweigh the market's pessimism.

Unfortunately for the government, actions speak louder than words and investors aren't going to jump back into the financials en mass before this industry demonstrates that it's learned something from this latest economic bubble and has very clear direction on how to surface once again. The government's efforts to combat speculation (or better phrased, manipulation) by short-traders and commodity futures traders and its support of Freddie and Fannie, are positive and likely necessary, but it's just not enough. These sorts of acts may keep us out of a modern depression, but they're sure not going to prevent a recession.

Almost comical, SEC's Chairman Cox's statements about how he intends to reveal unfounded rumors are just unrealistic. The markets already do a good job of uncovering untruths, but it simply takes time. Sometimes that required time is calculated in minutes and seconds, but in a global economy, this short window of time can represents billions of dollars traded worldwide. Again, such recognition by the government that rumours do possess the power to move markets is good and their intentions, too, are positive. That said, their ability to do anything about it is nil and beyond satisfying some concerns among unsophisticated investors, these sorts of statements will do nothing to help stabilize the markets or the economy. The unhappy truth is that it will take time. The economy didn't fall into this mess overnight and it won't recover that quickly either. Sorry.

Online Ad Slump?

With a headline like "Google ad slump spreads abroad", this article is certainly a little deceiving. Yes, it's true that the ad sales of Google, Yahoo! and Microsoft have all been falling, but that's relative to staggering growth rates that they've all enjoyed in this segment over the past few years. Google, of particular note, has seen growth rates approaching triple-digits, so a fall to only double-digit rates is certainly newsworthy, but let's not kid ourselves; there are many businesses that would love to see these sorts of growth rates!

I do appreciate what this slowdown means for the markets and I certainly don't question that the earnings misses reported by both Google and Microsoft last week needed to be followed by consequential declines in their stock prices and I'm sure that Yahoo! will see the same result from its report tomorrow. That said, with the majority of the economy slowing to a crawl or beginning to move backwards, the growth rates of almost 50% at Google and even double-digit rates persisting at both Microsoft and Yahoo!, this is the last segment with which investors should concern themselves.

I can't help but be reminded of a 'Lying with Statistics' lecture in undergrad. Headlines like this one only confuse the markets and inject further volatility. Similarly, seeing a headline that oil prices have "plunged" following several days of record-setting increases is just ridiculous. Newspapers and TV networks do need to sell ads and these headlines do grab your attention, but I would hope that readers and viewers would just wise-up a little - enough to send a message to these news directors and editors that we're not that easily manipulated. ...at least my hope is that we're not that easily manipulated.

Fund Managers Still Believe in Financials

For quite a while now, I've been looking for the bottom in the financials along with many others watching the market. This article about fund managers certainly seems to support my thinking, but also makes me glad that I haven't taken the plunge just yet. With the best fund managers seeing their portfolios hit by as much as 60% year-over-year, that represents a lot of explaining to investors.

Are these fund managers just fooling themselves? Are they just too stubborn to see what's going-on? Many believe that the financials have been unfairly pummeled by the markets. To some extent, I agree, but there's no denying that they deserve much of their stock price declines resulting from the CDOs and the continuing housing slump. That said, there I do also believe that investors have been so scared-off from this industry that the stocks have fallen harder than they should have. Of course, the question then becomes when will we see a bottom in the financial and when is the best time to get back in. Looking at the performance of the funds managed by the vest best of Wall Street, it would seem that even those in the know don't really know.