1-2 Knockout

We'll See if He Listened

As I've always said, when the politicians fail you can always turn to god:

"Rocky Twyman of Washington, D.C., came to San Francisco over the weekend to stage a pray-in at a Chevron station. He is also calling on churchgoers to ask for God's intervention where he says politicians have failed." (story here)

Ok, I've never actually said that. 

You have to find it interesting that he went to California to deride the high price of gasoline.  At $3.91 it is the highest in the contiguous United States--mostly because of the special blend requirements the Berkeley Hippies insist on. 

Oh, and Hawaii, how did those gas price controls work out for you?  I see it got you all the way to up second highest price in the country (Alaska).  I guess you can't surf past economics after all, dude.

Hannah Montana Downfall Futures: The End is Nigh

Just last week our Miley Cyrus Downfall Futures ("MCDF") contracts spiked to record levels on the release of some racy photos of the Disney Star.  Well, it seems the teen icon has wasted no time in outdoing herself, as today saw the release of pics from a Vanity Fair photo shoot, depicting the topless icon, covered only by a small blanket. 

As expected, trading in all maturities of MCDF shot through the roof, with the longest-dated maturity, November, 2010 reacing the $1.00 level, implying a 100% chance of 'default' by her 18th Birthday.  Perhaps more interesting though, our market makers have noticed that even the short-dated maturities, as close as November, 2008 are trading at $0.96, as it appears speculators have lost all faith in Miley to avoid the same fate seen by other lolita stars such as Britney Spears, Paris Hilton and Lindsey Lohan.

Our pretend Proprietary Research ("p-PR") desk suggests those who are long the contracts stay that way, however, for the more bold traders out there could have an opportunity (albeit a miniscule one) to make windfall profits with a short trade.  We see this contrarian strategy being EXTREMELY risky, as all available data indicate MCDF contracts will reach default status long before the terminal maturity.

Reminder, from your summary prospectus, the following will constitute a Downfall, or Default Event:

• Drug/alcohol use (abuse)
• Sex scandal of any sort
• Caught hanging out in public with any of the following:
  • Paris Hilton
  • Brandon Davis
  • Lindsay Lohan (immediate downfall trigger)
  • 1-2
  • etc

• Stint in rehab/counseling
• Sudden drastic changes in behavior (e.g. Britney Spears)
• Other, similar things, see prospectus for details.

Disclosure:  Anal_yst is long and strong MCDF contracts. 1-2 is doing his best to make this happen in a timely matter for our Investors.  Consult your Financial Advisor.

Irrational Actors in a Gasoline World

Today's Curious Capitalist discusses how, with oil so expensive, gas station operators are working with razor thin margins (5c/gallon).  He also says, "A recent survey by NACS found that 29% of people would drive 10 minutes out of their way to save 3 cents on a gallon of gas." Ok, fair enough, people want to save their hard earned cash.  But this strikes me as an incredibly irrational way of "saving" money.

Using simple math we can see that in no way does anyone with a car actually "save" money. (I must assume that you are making at least minimum wage to own a car...if you don't this country is in bigger trouble than we thought).  With the current New York state minimum wage set at $7.15 ten minutes of life costs you $1.19.  Assuming a relatively average fill-up of 15 gallons, saving 3c/gallon only conserves 45c.  In fact, if you get 20mpg on your way to the gas station you spend 45c on the trip's gas alone. 

Again, if you travel ten minutes to a new gas station and work for minimum wage, you have spent $1.19 of life to save 44c.  All in (gas spent and opportunity cost) you have wasted $1.19 of your life AND 45c in gas for a grand expenditure of $1.54...all to save 44c.  Net-net you spend $1.20 for the privilege of sitting in more traffic.  Of course, that's assuming you only make minimum wage--if you make more you spend more.  Completely irrational.

Of course, the whole idea of Gas Hunting never made much sense to me anyways. 

This can be simply explained by the fact that we use mental accounting to separate our costs from our benefits, and we rarely actually incorporate them into one well. 

Federal government VaR (Open Call to Comment)

Calling all quants, economists, and traders: Does anyone know what the increase in the federal government's VaR is over the past 2-3 years?  I am including temporary facilities like the TAF, as well as GSEs, and hard-assets like the SPR.  Since it would be nearly impossible (outside of a full research paper) to do the entire Federal VaR from scratch, I am simply looking to see if we can determine the delta is.

I realize VaR may not be the most appropriate measurement of the riskiness of the government's holdings, so I welcome any other ideas, but I feel it's as good a place to start as any.  Please leave all ideas, data sources, etc in the comments.  I will follow up with some analysis when I find it.

Great Quotes

This election season we should all remember two of the finer points from two of the best economists of all time.

Government is defined as an institution that has the legal ability to coerce. -Douglas C. North

“There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income. -Milton Friedman

And with 50% of our population not paying any income taxes the odds are against the government ever caring about price again.  Sir ouch.

Subprime In Hollywood: or Never Stray from Your Core Competency

Today’s Page Six (you know you all read it) has an interesting lead article detailing an ongoing feud between Merchant Ivory Productions and actress person incredibly dumb blond, Susan Malick. The column has a numerous juicy tidbits to dwell on (not including the fact you have to be in Wikipedia to be considered a legitimate actress, in my book), two of which are actually pertinent to finance. First, the lead:

April 21, 2008 -- "The City of Your Final Destination" - the new prestige film from Merchant Ivory Productions starring Anthony Hopkins and Laura Linney - may be headed to its own final destination: a court of law.

Fetching blond actress Susan Malick, a longtime friend of director James Ivory ("Howard's End," "A Room With a View"), says that in 2006, she invested $250,000 in the flick in exchange for an associate producer credit and the promise she'd be paid back with interest by June 2007. She used credit cards to pony up the cash.

Ok, an “actress” ponied up $250k in wealth debt for an undisclosed interest rate and the right to call herself an Associate Producer. She played lender to a borrower, who presumably hoped to put the money in a profitable endeavor. The risks and potential profits were undoubtedly unknown to the lender (‘actress’), and better known to the borrower (studio), but she lent anyways. I believe it is safe to assume she was more concerned with the Associate Producer credit than with the actual investment’s payoff probabilities, but that is beside the point. She (stupidly) believed she was being compensated for the risk of the loan.

She also believed she could make more out of the AP credit (an asset) than the person who was selling it. Due to her acting experiences she probably assumed that with this one final asset in place she could derive synergies out of her new actor/producer role.

Also, let us also take a second to think about what the unsecured borrowing costs were on her AmEx. She was attempting to arbitrage a market that was stacked against her from the start–unless the studio was offering her ~30% pa. But that’s just stupid lending and there’s nothing really funny about that.

But Malick, who does not appear in the movie, says she has yet to be paid back. She says she's now being sued by American Express, which she owes $350,000, including interest. To add insult, she's not even getting a film credit.

Ouch.

"It has been a disaster. My credit has been destroyed and I'm living hand to mouth," Malick, who lives in the West Village, told Page Six. "James Ivory was a wonderful friend. But when I call him now he says, 'I can't speak of this,' or 'I have a call waiting.' Little did I know how much contempt for me he could hold in the bone marrow of his body. It breaks my heart."

Her high-powered lawyer, Salvatore Strazzullo, is headed to Manhattan Supreme Court for an injunction to stop the release of the movie, which Ivory directed and is to be previewed at the Tribeca Film Festival.

"To see a struggling actress like this being so taken advantage of is terrible," said Strazzullo. But why is Ivory apparently refusing to repay Malick? His agent, Rand Holston, declined to answer, referring us to Merchant Ivory executive producer Paul Bradley - who did not return our call.

Malick's ties with Ivory go way back. She appeared in "Cotton Mary," co-directed by Ivory's business partner and companion, the late Ismail Merchant. A close pal of Malick told us: "It's very sad. She considered both Ivory and Merchant father figures."

Lesson 1: Wow. It breaks my heart too. And I think I’ve heard this story-line before (there are only twelve plots in cinema after all); only usually it is the unfair “to see a struggling borrower being so taken advantage”. The cognitive dissonance required to see this story any differently than the subprime debacle is incredible. I hope to see this line of questioning from the judge come Malick’s court date:

Judge: You mean you lent money to someone without verifying their creditability and now they’re not paying you back?!

Actress: Yes

Jedge: Those jerks. Wait, did you check any documentation to ensure Jim Ivory could pay you back?

Actress: No. We just assumed that since his previous movies were successful his next one would be too. It was only a short-term loan anyways. He was going to refinance the film after TriBeCa.

Judge: How dare he borrow something he couldn’t repay!? The injustice. The man works at a large company with money everywhere. He has to have some more money lying around. We can’t just let you lose this money. It would negatively effect your credit rating and wealth!

Actress: Totally. That’s why I’ve been saying. Here this guy works at a big mortgage company movie studio and he’s not giving me the money I gave him.

Judge: How did you let this happen? Oh, right, you both assumed that since his movies had done well in the past they would continue to profit? And this one hasn’t profited yet, so he hasn’t paid you back?

Actress: Exactly. I’ve tried contacting him, but he doesn’t want to talk to me.

Judge: And he’s starting to hang up on you? You mean he’s not calling you to see if you can re-structure his debt? Well, I can see that even though you didn’t check any of his documents, you made the loan in good faith, so you’re ok. Let me round up my boys in Washington and see if we can’t get you a big tax break–or better yet, we’ll have them buy up your loan and put the risk on the taxpayers back.

This exchange could be funny if it wasn’t the exact argument going on in DC right now--and if I was a more humorous writer. Only we are chiding all of the lenders for not checking their borrower’s credit, and letting the borrowers off the hook. We have simply reframed the issue. Most people would read today’s Page 6 and feel immediate empathy towards the ‘little girl’ who was taken advantage of by the ‘big bad borrower’. We argue how the lenders were making all these predatory loans, but never how the borrowers were gaming the system. Essentially we have all come down to David v. Goliath arguments in the name of political expedience. If you’re an individual then it doesn’t matter how you screwed up, Uncle Sam will save you; if you’re a corporate entity Barney Frank will be there to hunt you down and kill you.

Could you imagine Countrywide saying “yea, we lent money to people who couldn’t afford it. We didn’t do any due diligence because we figured houses would keep appreciating. Why don’t you go after those lowly homeowners who owe us our money!” Well, yes, but the world would laugh in their faces, claim they lent recklessly, and that it is more important to save the borrowers than the lenders.

Yes, I know this issue is a lot more complex than I am making it out to be. If you are going to scold me for that, so be it, but I ask that you see what a difference a Frame makes.

Lesson two: never stray from your core competency!

Hannah Montana Downfall Futures Spike on New Photos!!!!

Since they began trading at the end of March, our Miley Cyrus Downfall Futures ("MCDF") have been trading mostly horizontal.  However, pictures released just yesterday show that the implied probability of the contracts expiring in the money has shot up to record levels.  (Mostly SFW):

Our market makers put today's closing price at $0.94 for the November, 2010 contracts on record volume, up from their previous levels of $0.69.

1-2 Knockout Hannah Montana Downfall Futures:  Get 'em while they're hot!

Disclosure: Anal_yst does not own Hannah Montana, as that would be illegal on several fronts.  Anal_yst may be involved in structured OTC derivitive contracts to acquire Hannah Montana sometime on or after the November, 2010 contracts expiration...1-2 makes a market in celebrity downfalls, and may participate in, or contribute to, Miley Cyrus' downfall

Tea and Cake or Death

In our continuing segment, Everything Old is New Again comes a re-reading of Eddie Izzard's Dress to Kill.  In it he critiques the Stonehenge (one of the biggest henges in the world), American history, and the perks of being an "executive transvestite" (*cough* SAC *cough*).  One of Izzard's most well-known routines was performed during Dress To Kill: a satirical depiction of Church of England fundamentalism, wherein Izzard explains how Church of England fundamentalism would be impossible because people would be shouting out "You must have tea and cake with the vicar or you DIE!" and "CAKE OR DEATH?!"   

What does this have to do with finance, economics, or politics?  Well, simply replace "tea and cake" with "federal funds", and "death" with "bankruptcy" and you'll see where we're going with this.

So my choice is, "or death"?

As an aside, the five greatest minutes of my life involved Eddie ripping on me mercilessly for ten minutes over breakfast.  He was not in drag.

Computer Got Jacked

This will be the first in a series of exclusive channel checks from our actual lives. 

1-2's laptop was stolen over the weekend from his apartment.  Luckily the device is guarded by Lojack for Laptops.  The incident has been reported to the company NASDAQ:LOJN, who has built it's growth strategy around auxillary services to it's trademark vehicle recovery system.  I will keep you updated as to the progress of the recovery, Lojack's assistance, and when I can return to normal posting responsibilities.

Until then, if you see a Dell M1330 laying around NYC throw me a comment.

This Week in "Duh"

Venerable department store icon Macy's (NYSE: M)  is really at the forefront of retail strategy.  I'm totally not being sarcastic either.  WSJ has a piece about how Macy's is announcing the unprecedented move of tailoring items in its stores to local tastes.

Now, after Macy Inc.'s same-store sales dropped 1.3% in 2007 from the previous year, Chief Executive Officer Terry Lundgren is changing course. He is ditching the nationwide cookie-cutter approach in favor of tailoring merchandise at the world's largest department-store chain by sales to local tastes.

"What the consumer wants in the Galleria of St. Louis is different from what the consumer wants in State Street Chicago, or what the consumer wants in Portland, Oregon," Mr. Lundgren says. He now wants 15% of the merchandise in stores to reflect local preferences.

Duh.

I just hope they didn't pay McKinsey or BCG to come up with this brilliant, ground-breaing strategy.  Pretty sure this item speaks for itself, demanding no further comment.