Thursday, May 31, 2007

Palm - Back up reading

In a move that could be described as "totally unsurprising," Palm shareholders have approved the much-discussed partial sale of the company to a private equity firm called Elevation Partners (of which Bono is a member), and also a change in the board of director's makeup. The plan is for Mr. MacPhisto and co. to pay $325 million for a 25-percent stake in the company, while Palm itself will pay out a $9 per-share distribution, or about $940 million in cash, to shareholders for their reduction in ownership.

There will also be a new executive board chair, namely, Johnathan Rubenstein, an Apple alumni who ran the iPod division from 2004-2006 and led creation of Apple's iMac computer before that, was part of the executive team that joined Apple after Steve Jobs returned to run the company. Fred Anderson (another former Apple officer), and Roger McNamee (a Silicon Valley investor) will also join the board. A commentator said of the switch, "There are a lot of moving parts here, but the goal is to bring in transformation and change the dynamics of the company. “Apparently, Palm has hopes that Mr. Rubenstein will help create "innovative products" and "bring them to market quickly."

OK, Lets line up some facts…about the road to death of a company…Palm is on the road to death. Gateway showed us the way – Dell didn’t learn from Gateway and made the same mistakes. Dell looks alive but they lost their customer base and confidence. Computers use to be like “new cars coming out.” Everyone waited for the features, the speed, better screens, etc.” Microsoft provided better programs (windows 98 and XP – probably the best for the PC.) These programs were heavily ladened and required much more storage – and the chip makers provided faster chips to manage the programs and storage and lightening speed. Lots of competition, every company up – lower prices led to computers becoming a commodity. So, everything became about service and durability. IBM could not compete in a commodity based product and sold out to Lenova – a Chinese based company. Dell will be headed in that direction – a brief and somewhat sketchy discussion of the Computer Industry – Except for Apple - who has about 5 to 10% of the market and a very faithful customer base (who feels that the Mac is in a category of itself and is far distant relative from the commodity called PC.

The PDA (personal digital assistant) arrived on the markets, more than 10 years ago, and PALM owned the space. RIM (Research in Motion) a Canadian company, came into the market with a slightly better approach and equipment – and over the years became the dominant player (actually creating an addiction based, life changing environment for its users “take whatever you want from me, but don’t take my Blackberry – please!” It appears that PALM just stood still, very little improvements, didn’t keep up…and Blackberry took over the market period.

Cell Phones and MP-3 players were being developed along with computers and PDAs at the same pace – and again became commodities like the computers, except for the Apple Ipod – and of course Blackberry had no competition.

Apple has been an incredible company, developing new and innovative products that have made them the leader in innovation with consumer loyalty and a product that put competitors to shame. So powerful was their entry into the MP-3 environment - they changed the entire music industry in less that a decade – better for them and very much worse for the “greedy” music companies and their entire manufacturing, distribution and retail empires. Apple, as everyone above 2 years old knows, has just entered the Cell phone arena with a product that has put all the cell phone manufacturers to shame. Only the Blackberry still shines because of it’s cell phone interface with their most appreciated PDA. Apples Stock on the NASDAQ sells for a price earnings ratio 40 and a forward estimated price earnings ratio of 30. They have products coming out and upgrades faster than you can think – full of amazing innovation and consumers at the edge of their chairs waiting.

RIMM (Research in Motion – Blackberry) Actually, is a one product company

a.k.a, “a one trick poney.” They have 8 million users – who feel their Blackberry is a 3rd hand in their lives – and are always awaiting innovative upgrades from RIMM – and they are awarded with them on a more than regular basis. RIMM’s stock on the NASDAQ and sells for a price earnings ratio of almost 70 and a forward price earnings ration of 30. (showing much faster earnings growth than apple – but the same forward price earnings ratio.) Some have said of the astronomical rise of RIMM’s price, is that it is justified by the fact it is the same as Apple – but no one is discounting the “one trick pony” concept or it’s vulnerability to disruption of service.

OK, the center of our discussion is three companies – 2 of the great, great companies who are currently considered giants and are favorite sons in the markets – and one company (PALM) who they (Wall Street) have measured the body and are beginning to build the casket.

What’s different here? Gateway consented to go down – Dell is looking at being alive – but the oxygen is slight….Palm, however, is not a commodity based company and has “assets” that are desirable for anyone looking to be a competitor in the PDA monopoly of Blackberry.

Apple’s Iphone has a 5 year contract with AT&T which does not allow them to have any customers other than AT&T – in the United States.

Some Very Successful retired executives of Apple along with Bono and a few others have just taken a 25% interest in Palm for $325 Million – which is less than table scraps (pennies) to them.

The Fantasy begins:

“Fantasy - An unrealistic or improbable supposition.- a capricious hallucination – by a highly fanciful mind, with nothing better to do then write this bull shit – and the time to do it”

$325 Million and more than 3 giant egos – don’t go into the mortuary and try to revive the dead. It’s been done before – if there is a success rate, it’s counted in decimal points of small fractions.

There is no question that Apple is going into the lucrative PDA market with the Iphone, Ipod combination. I’m sure they have 80% of the work required to advance this product to the market – done.

Apple is an innovator of operating systems (palms current Microsoft program is not really competitive.) Apple has everything except a few PDA programming techniques, which it could readily develop – and a name – Palm, BUT, Apple cannot enter the cell phone market in the United States for 5 years. And a PDA competitor of Blackberry better come into the arena within 3 to 9 months. As I related in the beginning of this document (2nd para.) “Apparently, Palm has hopes that Mr. Rubenstein will help create "innovative products" and "bring them to market quickly."

Again the Fantasy - Apple joins a partnership with Palm to provide support both in terms of equipment and software – so that Palm can be revived and be competitive. Apple people already have a 25% interest in Palm and not only know how to talk – “Apple Talk” - they helped invent it. Are they still friends?


In my dream fantasy, people who are apple bonafides are going to slowly acquire PALM stock over the next 3 months – faster if things progress and maybe none if obstacles appear early. Palm has 104million shares and a cash equivalent (including tax benefits) of $10 a share. The infusion of $325million for 25% - would, along with the distribution of $9 leaves $4 of cash and equivalents for a stock that will be selling for (15 – 9) $6 a share. Elevation Partners has lined up additional loans so that any change in direction will be easily financed. Currently, believe it or not PALM has a positive cash flow and earnings – A price earnings ratio of 25 and earnings of .54. After the distribution of $9 a share the market capital of the entire company will be $.7 Billion. Apple has $20 Billion on hand

Which increases at $3 Billion annually.

My dream left out the probable law suit between AT&T and Apple – no dream is perfect.

This isn’t any different than a large pharmaceutical company partnering with a small start-up to develop a drug. If successful, the small company is consumed by the large company – (4 ½ years in Apple’s case (AT&T – time remaining)

RIMM is a one-trick pony – they had a sever outage of their service in April of this year – it was a big story – the stock dropped – their other products – none.

Showed their vulnerability – IT WAS A VERY BIG STORY – last April.

Two weeks ago – early September- they had another outage – was I sleeping

Was it mentioned, anywhere, other than in the technical periodicals? Maybe I was sleeping – dreaming up this dream – fantasy.

OK, after I awoke, and I always make wrong decisions – I am going to PALM mid-term call options at “above the money” for little $ outlay. I am going to very short-term short RIMM – in and out with very little exposure – tight stops.

RIMM has a 2.3 Beta
AAPL has a 1.4 Beta
GOOG has a 1.02 Beta
MOT has a 1.13 Beta
INTC has a 2.06 Beta
HPQ has a 1.88 Beta

The Beta coefficient is a measure of a stock’s volatility in relation to the rest of the market. Beta is calculated for individual companies using regression analysis. Beta is also referred to as financial elasticity or correlated relative volatility.

The bigger the Beta – the faster the rise and conversely the faster the fall

The effect on options of a PALM one time $9 distribution

Ameritrade announced a one time $6 distribution

PER CONTRACT 1) 100 Ameritrade Holding Corporation (“AMTD”)
Common Shares
2) $600.00 Cash ($6.00 x 100)*

*The cash portion of the deliverable remains
permanently fixed as part of the option deliverable, and
does not vary with price changes of securities also
included in the deliverable
Example of owning calls when there is a substantial cash distribution

Taxability of $9 distribution - a dividend to the extent of accumulated earnings and profits and current year earnings – the remainder a return of capital

Taxability and other important information relating to the Elevation Partners and their acquisition:

From the Balance Sheet Retained Earnings (for financial statement purposes – not what is for tax purposes) is a deficit $431 million (-431) there is no deferred tax liability – but anything from -431 to -1 could be a difference.

Last year (financial statements) retained earnings reduced to -431 from -824
I believe this was due to an operating income of 100+ and a tax refund probably from carrybacks of 300+

Their year ends at 5/31/07 Past with 60+ mil profits the Retained earnings as of fye 5/31/07 is the current deficit of -431 Mil

From this information and a concept of renovating the company from top to bottom – of which many of the expenses should be written off I would assume that most of the $9 distribution will be a reduction of basis – meaning that whether one purchases calls at this time or the stock – the tax consequences should not be dissimilar

That’s my take – my only concern is the contract between AT&T and APPLE where there may be phrasing dealing with partners and assignees – and being considered ---partners and assignees, for this contract, will be considered as a principal to this contract (Apple)

Something to consider – Blackberry’s biggest provider is AT&T and possibly Apple can work within AT&T to do what is required to enter the market of PDA’s and reduce RIM’s hold on the market – RIM is powerful, Apple is devastating and more powerful! As a side note AT&T could also be a winner within the frame of the discussion in this paragraph. Just thru pricing, APPLE can have a devastating affect on RIMM (the one trick pony). Long PALM, long AAPL

Short RIMM.

OK, deal the cards.

Sunday, May 6, 2007

Taking time off

double click map to enlarge

Well, I wandered alone through a desert of stone
And I dreamt of my future wife.
My sword is in my hand and I'm next in command
In this version of death called life.

My plate and my cup are right straight up.
I took a rose from the hand of a child.
When I kiss your lips, the honey drips;
I'm gonna have to put you down for a while...

Every day we meet on any old street
And you're in your girlish prime.
The short and the tall are coming to the ball;
I go there all the time.

Behind every tree there's something to see.
The river is wider than a mile.
I tried you twice, you can't be nice;
I'm gonna have to put you down for a while...

Here comes the nurse with money in her purse,
Here come the ladies and men.
You push it all in and you've no chance to win;
You play 'em on down to the end.

I'm laying in the sand gettin' a sunshine tan,
Movin' along, riding in style.
From my toes to my head you knock me dead;
I'm gonna have to put you down for a while...

I count the years and I shed no tears;
I'm blinded to what might have been.
Nature's voice makes my heart rejoice.
Play me the wild song of the wind!

I found hopeless love in the room above,
When the Sun and the weather were mild.
You're as fine as wine--I ain't handing you no line;
I'm gonna have to put you down for a while...

All the merry little elves can go hang themselves!
My faith is as cold as can be.
I'm stacked high to the roof and I'm not without proof;
If you don't believe me, come see.

You think I'm blue? I think so too.
In my words you'll find no guile.
The game's gotten old, the deck's gone cold,
And I'm gonna have to put you down for a while.

The game's gotten old, the deck's gone cold;
I'm gonna have to put you down for a while.

Huck's Tune - Bob Dylan

Wednesday, May 2, 2007


-by James Thurber

Mr. Martin bought the pack of Camels on Monday night in the most crowded cigar store on Broadway. It was theatre time and seven or eight men were buying cigarettes. The clerk didn’t even glance at Mr. Martin, who put the pack in his overcoat pocket and went out. If any of the staff at F & S had seen him buy the cigarettes, they would have been astonished, for it was generally known that Mr. Martin did not smoke, and never had. No one saw him.

It was just a week to the day since Mr. Martin had decided to rub out Mrs. Ulgine Barrows. The term “rub out” pleased him because it suggested nothing more than the correction of an error – in this case an error of Mr. Fitweiler. Mr. Martin had spent each night of the past week working out his plan and examining it. As he walked home now he went over it again. For the hundredth time he resented the element of imprecision, the margin of guesswork that entered into the business. The project as he had worked it out was casual and bold, the risks were considerable. Something might go wrong anywhere along the line. And therein lay the cunning of his scheme. No one would ever see in it the cautious, painstaking hand of Erwin Martin, head of the filing department at F & S, of whom Mr. Fitweiler had once said, “Man is fallible but Martin isn’t.” No one would see his hand, that is, unless it were caught in the act.

Sitting in his apartment, drinking a glass of milk, Mr. Martin reviewed his case against Mrs. Ulgine Barrows, as he had every night for seven nights. He began at the beginning. Her quacking voice and braying laugh had first profaned the halls of F & S on March 7, 1941 (Mr. Martin had a head for dates). Old Roberts, the personnel chief, had introduced her as the newly appointed special adviser to the president of the firm, Mr. Fitweiler. The woman had appalled Mr. Martin instantly, but he hadn’t shown it. He had given her his dry hand, a look of studious concentration, and a faint smile. “Well,” she had said, looking at the papers on his desk, “are you lifting the oxcart out of the ditch?” As Mr. Martin recalled that moment, over his milk, he squirmed slightly. He must keep his mind on her crimes as a special adviser, not on her peccadillos as a personality. This he found difficult to do, in spite of entering an objection and sustaining it. The faults of the woman as a woman kept chattering on in his mind like an unruly witness. She had, for almost two years now, baited him. In the halls, in the elevator, even in his own office, into which she romped now and then like a circus horse, she was constantly shouting these silly questions at him. “Are you lifting the oxcart out of the ditch? Are you tearing up the pea patch? Are you hollering down the rain barrel? Are you scraping around the bottom of the pickle barrel? Are you sitting in the catbird seat?”

It was Joey Hart, one of Mr. Martin’s two assistants, who had explained what the gibberish meant. “She must be a Dodger fan,” he had said. “Red Barber announces the Dodger games over the radio and he uses those expressions – picked ‘em up down South.” Joey had gone on to explain one or two. “Tearing up the pea patch” meant going on a rampage; “sitting in the catbird seat” means sitting pretty, like a batter with three balls and no strikes on him. Mr. Martin dismissed all this with an effort. It had been annoying, it had driven him near to distraction, but he was too solid a man to be moved to murder by anything so childish. It was fortunate, he reflected as he passed on to the important charges against Mrs. Barrows, that he had stood up under it so well. He had maintained always an outward appearance of polite tolerance. “Why, I even believe you like the woman,” Miss Paird, his other assistant, had once said to him. He had simply smiled.

A gavel rapped in Mr. Martin’s mind and the case proper was resumed. Mrs. Ulgine Barrows stood charged with willful, blatant, and persistent attempts to destroy the efficiency and system of F & S. It was competent, material, and relevant to review her advent and rise to power. Mr. Martin had got the story from Miss Paird, who seemed always able to find things out. According to her, Mrs. Barrows had met Mr. Fitweiler at a party, where she had rescued him from the embraces of a powerfully built drunken man who had mistaken the president of F & S for a famous retired Middle Western football coach. She had led him to a sofa and somehow worked upon him a monstrous magic. The aging gentleman had jumped to the conclusion there and then that this was a woman of singular attainments, equipped to bring out the best in him and in the firm. A week later he had introduced her into F & S as his special adviser. On that day confusion got its foot in the door. After Miss Tyson, Mr. Brundage, and Mr. Bartlett had been fired and Mr. Munson had taken his hat and stalked out, mailing in his resignation later, old Roberts had been emboldened to speak to Mr. Fitweiler. He mentioned that Mr. Munson’s department had been “a little disrupted” and hadn’t they perhaps better resume the old system there? Mr. Fitweiler had said certainly not. He had the greatest faith in Mrs. Barrows’ ideas. “They require a little seasoning, a little seasoning, is all,” he had added. Mr. Roberts had given it up. Mr. Martin reviewed in detail all the changes wrought by Mrs. Barrows. She had begun chipping at the cornices of the firm’s edifice and now she was swinging at the foundation stones with a pickaxe.

Mr. Martin came now, in his summing up, to the afternoon of Monday, November 2,1942 – just one week ago. On that day, at 3 P.M., Mrs. Barrows had bounced into his office. “Boo!” she had yelled. “Are you scraping around the bottom of the pickle barrel?” Mr. Martin had looked at her from under his green eyeshade, saying nothing. She had begun to wander about the office, taking it in with her great, popping eyes. “Do you really need all these filing cabinets?” she had demanded suddenly. Mr. Martin’s heart had jumped. “Each of these files,” he had said, keeping his voice even, “plays an indispensable part in the system of F & S.” She had brayed at him, “Well, don’t tear up the pea patch!” and gone to the door. From there she had bawled, “But you sure have got a lot of fine scrap in here!” Mr. Martin could no longer doubt that the finger was on his beloved department. Her pickaxe was on the upswing, poised for the first blow. It had not come yet; he had received no blue memo from the enchanted Mr. Fitweiler bearing nonsensical instructions deriving from the obscene woman. But there was no doubt in Mr. Martin’s mind that one would be forthcoming. He must act quickly. Already a precious week had gone by. Mr. Martin stood up in his living room, still holding his milk glass. “Gentlemen of the jury,” he said to himself, “I demand the death penalty for this horrible person.”

The next day Mr. Martin followed his routine, as usual. He polished his glasses more often and once sharpened an already sharp pencil, but not even Miss Paird noticed. Only once did he catch sight of his victim; she swept past him in the hall with a patronizing “Hi!” At five-thirty he walked home, as usual, and had a glass of milk, as usual. He had never drunk anything stronger in his life – unless you could count ginger ale. The late Sam Schlosser, the S of F & S, had praised Mr. Martin at a staff meeting several years before for his temperate habits. “Our most efficient worker neither drinks nor smokes,” he had said. “The results speak for themselves.” Mr. Fitweiler had sat by, nodding approval.

Mr. Martin was still thinking about that red-letter day as he walked over to the Schrafft’s on Fifth Avenue near Forty-sixth Street. He got there, as he always did, at eight o’clock. He finished his dinner and the financial page of the Sun at a quarter to nine, as he always did. It was his custom after dinner to take a walk. This time he walked down Fifth Avenue at a casual pace. His gloved hands felt moist and warm, his forehead cold. He transferred the Camels from his overcoat to a jacket pocket. He wondered, as he did so, if they did not represent an unnecessary note of strain. Mrs. Barrows smoked only Luckies. It was his idea to puff a few puffs on a Camel (after the rubbing-out), stub it out in the ashtray holding her lipstick-stained Luckies, and thus drag a small red herring across the trail. Perhaps it was not a good idea. It would take time. He might even choke, too loudly.

Mr. Martin had never seen the house on West Twelfth Street where Mrs. Barrows lived, but he had a clear enough picture of it. Fortunately, she had bragged to everybody about her ducky first-floor apartment in the perfectly darling three-story red-brick. There would be no doorman or other attendants; just the tenants of the second and third floors. As he walked along, Mr. Martin realized that he would get there before nine-thirty. He had considered walking north on Fifth Avenue from Schrafft’s to a point from which it would take him until ten o’clock to reach the house. At that hour people were less likely to be coming in or going out. But the procedure would have made an awkward loop in the straight thread of his casualness and he had abandoned it. It was impossible to figure when people would be entering or leaving the house, anyway. There was a great risk at any hour. If he ran into anybody, he would simply have to place the rubbing-out of Ulgine Barrows in the inactive file forever. The same thing would hold true if there were someone in her apartment. In that case he would just say that he had been passing by, recognized her charming house, and thought to drop in.

It was eighteen minutes after nine when Mr. Martin turned into Twelfth Street. A man passed him, and a man and a woman, talking. There was no one within fifty paces when he came to the house, halfway down the block. He was up the steps and in the small vestibule in no time, pressing the bell under the card that said “Mrs. Ulgine Barrows.” When the clicking in the lock started, he jumped forward against the door. He got inside fast, closing the door behind him. A bulb in a lantern hung from the hall ceiling on a chain seemed to give a monstrously bright light. There was nobody on the stair, which went up ahead of him along the left wall. A door opened down the hall in the wall on the right. He went toward it swiftly, on tiptoe.

“Well, for God’s sake, look who’s here!” bawled Mrs. Barrows, and her braying laugh rang out like the report of a shotgun. He rushed past her like a football tackle, bumping her. “Hey, quit shoving!” she said, closing the door behind them. They were in her living room, which seemed to Mr. Martin to be lighted by a hundred lamps. “What’s after you?” she said. “You’re as jumpy as a goat.” He found he was unable to speak. His heart was wheezing in his throat. “I – yes,” he finally brought out. She was jabbering and laughing as she started to help him off with his coat. “No, no,” he said. “I’ll put it here.” He took it off and put it on a chair near the door. “Your hat and gloves, too,” she said. “You’re in a lady’s house.” He put his hat on top of the coat. Mrs. Barrows seemed larger than he had thought. He kept his gloves on. “I was passing by,” he said. “I recognized – is there anyone here?” She laughed louder than ever. “No,” she said, “we’re all alone. You’re as white as a sheet, you funny man. Whatever has come over you? I’ll mix you a toddy.” She started toward a door across the room. “Scotch-and-soda be all right? But say, you don’t drink, do you?” She turned and gave him her amused look. Mr. Martin pulled himself together. “Scotch-and-soda will be all right,” he heard himself say. He could hear her laughing in the kitchen.

Mr. Martin looked quickly around the living room for the weapon. He had counted on finding one there. There were andirons and a poker and something in a corner that looked like an Indian club. None of them would do. It couldn’t be that way. He began to pace around. He came to a desk. On it lay a metal paper knife with an ornate handle. Would it be sharp enough? He reached for it and knocked over a small brass jar. Stamps spilled out of it and it fell to the floor with a clatter. “Hey,” Mrs. Barrows yelled from the kitchen, “are you tearing up the pea patch?” Mr. Martin gave a strange laugh. Picking up the knife, he tried its point against his left wrist. It was blunt. It wouldn’t do.

When Mrs. Barrows reappeared, carrying two highballs, Mr. Martin, standing there with his gloves on, became acutely conscious of the fantasy he had wrought. Cigarettes in his pocket, a drink prepared for him – it was all too grossly improbable. It was more than that; it was impossible. Somewhere in the back of his mind a vague idea stirred, sprouted. “For heaven’s sake, take off those gloves,” said Mrs. Barrows. “I always wear them in the house,” said Mr. Martin. The idea began to bloom, strange and wonderful. She put the glasses on a coffee table in front of the sofa and sat on the sofa. “Come over here, you odd little man,” she said. Mr. Martin went over and sat beside her. It was difficult getting a cigarette out of the pack of Camels, but he managed it. She held a match for him, laughing. “Well,” she said, handing him his drink, “this is perfectly marvellous. You with a drink and a cigarette.”

Mr. Martin puffed, not too awkwardly, and took a gulp of the highball. “I drink and smoke all the time,” he said. He clinked his glass against hers. “Here’s nuts to that old windbag, Fitweiler,” he said, and gulped again. The stuff tasted awful, but he made no grimace. “Really, Mr. Martin,” she said, her voice and posture changing, “you are insulting our employer.” Mrs. Barrows was now all special adviser to the president. “I am preparing a bomb,” said Mr. Martin, “which will blow the old goat higher than hell.” He had only had a little of the drink, which was not strong. It couldn’t be that. “Do you take dope or something?” Mrs. Barrows asked coldly. “Heroin,” said Mr. Martin. “I’ll be coked to the gills when I bump that old buzzard off.” “Mr. Martin!” she shouted, getting to her feet. “That will be all of that. You must go at once.” Mr. Martin took another swallow of his drink. He tapped his cigarette out in the ashtray and put the pack of Camels on the coffee table. Then he got up. She stood glaring at him. He walked over and put on his hat and coat. “Not a word about this,” he said, and laid an index finger against his lips. All Mrs. Barrows could bring out was “Really!” Mr. Martin put his hand on the doorknob. “I’m sitting in the catbird seat,” he said. He stuck his tongue out at her and left. Nobody saw him go.

Mr. Martin got to his apartment, walking, well before eleven. No one saw him go in. He had two glasses of milk after brushing his teeth, and he felt elated. It wasn’t tipsiness, because he hadn’t been tipsy. Anyway, the walk had worn off all effects of the whiskey. He got in bed and read a magazine for a while. He was asleep before midnight.

Mr. Martin got to the office at eight-thirty the next morning, as usual. At a quarter to nine, Ulgine Barrows, who had never before arrived at work before ten, swept into his office. “I’m reporting to Mr. Fitweiler now!” she shouted. “If he turns you over to the police, it’s no more than you deserve!” Mr. Martin gave her a look of shocked surprise. “I beg your pardon?” he said. Mrs. Barrows snorted and bounced out of the room, leaving Miss Paird and Joey Hart staring after her. “What’s the matter with that old devil now?” asked Miss Paird. “I have no idea,” said Mr. Martin, resuming his work. The other two looked at him and then at each other. Miss Paird got up and went out. She walked slowly past the closed door of Mr. Fitweiler’s office. Mrs. Barrows was yelling inside, but she was not braying. Miss Paird could not hear what the woman was saying. She went back to her desk.

Forty-five minutes later, Mrs. Barrows left the president’s office and went into her own, shutting the door. It wasn’t until half an hour later that Mr. Fitweiler sent for Mr. Martin. The head of the filing department, neat, quiet, attentive, stood in front of the old man’s desk. Mr. Fitweiler was pale and nervous. He took his glasses off and twiddled them. He made a small, bruffing sound in his throat. “Martin,” he said, “you have been with us more than twenty years.” “Twenty-two, sir,” said Mr. Martin. “In that time,” pursued the president, “your work and your – uh – manner have been exemplary.” “I trust so, sir,” said Mr. Martin. “I have understood, Martin,” said Mr. Fitweiler, “that you have never taken a drink or smoked.” “That is correct, sir,” said Mr. Martin. “Ah, yes.” Mr. Fitweiler polished his glasses. “You may describe what you did after leaving the office yesterday, Martin,” he said. Mr. Martin allowed less than a second for his bewildered pause. “Certainly, sir,” he said. “I walked home. Then I went to Schrafft’s for dinner. Afterward I walked home again. I went to bed early, sir, and read a magazine for a while. I was asleep before eleven.” “Ah, yes,” said Mr. Fitweiler again. He was silent for a moment, searching for the proper words to say to the head of the filing department. “Mrs. Barrows,” he said finally, “Mrs. Barrows has worked hard, Martin, very hard. It grieves me to report that she has suffered a severe breakdown. It has taken the form of a persecution complex accompanied by distressing hallucinations.” “I am very sorry, sir,” said Mr. Martin. “Mrs. Barrows is under the delusion,” continued Mr. Fitweiler, “that you visited her last evening and behaved yourself in an – uh – unseemly manner.” He raised his hand to silence Mr. Martin’s little pained outcry. “It is the nature of these psychological diseases,” Mr. Fitweiler said, “to fix upon the least likely and most innocent party as the – uh – source of persecution. These matters are not for the lay mind to grasp, Martin. I’ve just have my psychiatrist, Dr. Fitch, on the phone. He would not, of course, commit himself, but he made enough generalizations to substantiate my suspicions. I suggested to Mrs. Barrows, when she had completed her – uh – story to me this morning, that she visit Dr. Fitch, for I suspected a condition at once. She flew, I regret to say, into a rage, and demanded – uh – requested that I call you on the carpet. You may not know, Martin, but Mrs. Barrows had planned a reorganization of your department – subject to my approval, of course, subject to my approval. This brought you, rather than anyone else, to her mind – but again that is a phenomenon for Dr. Fitch and not for us. So, Martin, I am afraid Mrs. Barrows’ usefulness here is at an end.” “I am dreadfully sorry, sir,” said Mr. Martin.

It was at this point that the door to the office blew open with the suddenness of a gas-main explosion and Mrs. Barrows catapulted through it. “Is the little rat denying it?” she screamed. “He can’t get away with that!” Mr. Martin got up and moved discreetly to a point beside Mr. Fitweiler’s chair. “You drank and smoked at my apartment,” she bawled at Mr. Martin, “and you know it! You called Mr. Fitweiler an old windbag and said you were going to blow him up when you got coked to the gills on your heroin!” She stopped yelling to catch her breath and a new glint came into her popping eyes. “If you weren’t such a drab, ordinary little man,” she said, “I’d think you’d planned it all. Sticking your tongue out, saying you were sitting in the catbird seat, because you thought no one would believe me when I told it! My God, it’s really too perfect!” She brayed loudly and hysterically, and the fury was on her again. She glared at Mr. Fitweiler. “Can’t you see how he has tricked us, you old fool? Can’t you see his little game?” But Mr. Fitweiler had been surreptitiously pressing all the buttons under the top of his desk and employees of F & S began pouring into the room. “Stockton,” said Mr. Fitweiler, “you and Fishbein will take Mrs. Barrows to her home. Mrs. Powell, you will go with them.” Stockton, who had played a little football in high school, blocked Mrs. Barrows as she made for Mr. Martin. It took him and Fishbein together to force her out of the door into the hall, crowded with stenographers and office boys. She was still screaming imprecations at Mr. Martin, tangled and contradictory imprecations. The hubbub finally died out down in the corridor.

“I regret that this happened,” said Mr. Fitweiler. “I shall ask you to dismiss it from your mind, Martin.” “Yes, sir,” said Mr. Martin, anticipating his chief’s “That will be all” by moving to the door. “I will dismiss it.” He went out and shut the door, and his step was light and quick in the hall. When he entered his department he had slowed down to his customary gait, and he walked quietly across the room to the W20 file, wearing a look of studious concentration.

Tuesday, May 1, 2007

Saved Reading - Ayn Rand - Black Swans

On Ayn Rand:
Ayn Rand on business leaders. It's quite amazing that her 1200-page book, Atlas Shrugged, is now 50 years old but ranked in the top 500 of all books sold on Amazon.

My experience at various trading firms and with traders across settings confirms the NY Times piece: many market participants are attracted to Ms. Rand's philosophy (which she called Objectivism).

Here are a few Objectivist principles that are especially relevant for trading:

1) The Primacy of Reason - There *is* an objective world out there ("existence exists", as Ms. Rand puts it), and our survival depends upon the exercise of our reasoning mind to grasp reality and base our actions accordingly. Following Aristotle, Rand defines man as "a rational animal": reason distinguishes us from other species. There is no greater moral virtue than the independence exercise of one's reason, for that is what enables us to survive.

2) The Virtue of Self-Interest - This is probably the most misunderstood facet of Rand's philosophy, as what she calls "selfishness" is commonly thought of as hurting others in order to further oneself. Rather, Rand declares that each person has the right to live for him or herself and pursue his or own fulfillment, as long as that does not violate the rights of others. Serving others is not perceived as a moral imperative; rather, the idea is to live a heroic life in which one strives effortfully, using one's reason, to pursue worthwhile goals. Rand defines the "good" as that which furthers life.

3) The Imperative of Freedom - If individuals are to live lives guided by reason and the pursuit of life-furthering goals, they must enjoy the political and economic freedom to do so. The ideal State derives its (limited) power from the consent of individuals who possess fundamental rights; the State does not grant rights to individuals or take them away. Freedom in the political sphere is expressed through democracy, fundamental rights, and rule of law. Freedom in the economic sphere is expressed through the right to own private property and the ability to pursue one's own economic goals (capitalism).

Why do I say these basics of Objectivism are relevant for trading? I believe that the successful trader is, in essence, living out these principles: using independent reason and judgment to pursue self-chosen goals and exercising the prerogatives of economic and political freedom.

Perhaps most important from my own perspective is the way that Rand, as novelist, captures the heroic dimensions of human life and what is possible for each of us. In the characters of Howard Roark in The Fountainhead and John Galt in Atlas Shrugged, we encounter people of principle, who fight for those principles, and make a difference as a result. Her novels, I believe, are as much a spiritual compass for readers as a philosophical one: hence their enduring appeal, particularly to young people.

The best Objectivist advice I can give traders is to not be afraid to dream and dream big, but to always have the determination to act on reality, not fantasy. There is much to be said for having your eyes on the stars and your feet on the ground. If your life is a canvas or ball of clay, your mission is to fashion a work of art. Your life belongs to you: not to other people, not to a sovereign State, and not to religions and cults. Make it count.

The Black Swan

Last week, seemingly so long ago and so far away, I was wondering through St. James Park in London. It was a perfect afternoon in a perfect park, with willow trees reflecting on the pond and the Eye of London in the distant background. And then there it was. It swam into my vision. A black swan. A rather inelegant bird when compared to its august white brethren, but recognizable as a swan nonetheless. Seeing a black swan seemed to cap off the day, as I had just finished reading a book whose title was inspired by the dark fowl.

Just because all the data says that there are only white swans does not prove that black swans do not exist. All we can confidently assert is that no one has seen one - yet. To prove that a black swan does not exist would take an infinite number of observations, and yet only one observation is needed to prove they exist. And thus philosophers debated the black swan issue and showed that by induction you could reason they did not exist.

And that was the case until explorers did indeed find a black swan in Australia. The term "black swan" has come to mean an event or discovery whose existence was not predictable from the available data, and whose effect on society or the markets yields surprising and unexpected results. (And just to note at the beginning, not all black swans are bad. Sometimes they are very good, even if a surprise.)

I had been saving Nassim Taleb's latest book, "The Black Swan - The Impact of the Highly Improbable," to read on my summer vacation. Glancing through the book when I first got it assured me that I wanted to give the book more than a quick read. I was not disappointed. You can quibble over various points in the book (and I may at some point), or not like his confrontational style, but this is a book that demands to be consumed slowly and thoughtfully.

The Black Swan took me several times longer to read than normal. Not because it is not easy or fun to read (Taleb can be quite humorous), but because I had to regularly stop and think (and often to re-read several times) about what he was saying. I rarely read a book twice. So many books, so little time. Generally, I mark it up and return to important sections if I need to. This is one book that I will definitely read more than once. Let me strongly suggest you get the book and set aside some time to read it. You can get it at

Mediocristan versus Extremistan

Taleb attacks (the correct word) the social sciences (in particular economics) which uses standard Gaussian bell curves to "prove" their points. Everything has to fit within the curve. There is little room in the neat world of the bell curve for events that are far from the center. He creates a world he calls Mediocristan which is the world of white swans, bell curves and predictability. He contrasts this with Extremistan which is the world of chaos, fractal geometry, power laws, black swans and where the unpredictable happens.

There are parts of our lives which inhabit Mediocristan and parts which dwell in Extremistan. Not knowing the difference can be problematic, if not fatal. And it is difficult to know where one country starts and the other ends. If you are in Mediocristan, then you can use your bell curve assumptions without fear. But if you wander into the murky border areas, you are no longer safe in your assumptions. And yet, the longer and deeper you go into Extremistan without a problem, thinking you are safe in Mediocristan, the larger the disruption is likely to be. Let look at a few quotes and some of his ideas here and there before we look the most recent eruption of a black swan:

"To summarize, in this (personal) essay, I stick my neck and make a claim, against many of our habits of thought, that our world is dominated by the extreme, the unknown, and the very improbable (improbable according our current knowledge) - and all the while we spend our time engaged in small talk, focusing on the known, and the repeated. This implies the need to use the extreme event as a starting point and not treat it as an exception to be pushed under the rug. I also make the bolder (and more annoying) claim that in spite of our progress and the growth, the future will be increasingly less predictable, while both human nature and social "science" seem to conspire to hide the idea from us. (Prologue xxvii)

"When I ask people to name three recently implemented technologies that most impact our world today, they usually propose the computer, the Internet, and the laser. All three were unplanned, unpredicted, and unappreciated upon their discovery, and remained unappreciated well after their initial use. They were consequential. They were Black Swans. Of course, we have this retrospective illusion of their partaking in some master plan. You can create your own lists with similar results, whether you use political events, wars, or intellectual epidemics.

"You would expect our record of prediction to be horrible: the world is far, far more complicated than we think, which is not a problem, except when most of us don't know it. We tend to "tunnel" while looking into the future, making it business as usual, Black Swan-free, when in fact there is nothing usual about the future. It is not a Platonic category!" (p. 135)

I think there is a physical reason that Taleb is right in that we will see more unpredictability I the future than we saw only a few hundred years ago, or even last century, as wild as that century was. I wrote a few years ago of Ray Kurzweil's book, The Singularity is Near. (Also very highly recommended - Ray wrote (in 2000) that the pace of change as encompassed by technology is accelerating.

"The first technological steps - sharp edges, fire, the wheel - took tens of thousands of years. For people living in this era, there was little noticeable technological change in even a thousand years. By 1000 A.D., progress was much faster and a paradigm shift required only a century or two. In the nineteenth century, we saw more technological change than in the nine centuries preceding it. Then in the first twenty years of the twentieth century, we saw more advancement than in all of the nineteenth century. Now, paradigm shifts occur in only a few years time. The World Wide Web did not exist in anything like its present form just a few years ago; it didn't exist at all a decade ago.

"The paradigm shift rate (i.e., the overall rate of technical progress) is currently doubling (approximately) every decade; that is, paradigm shift times are halving every decade (and the rate of acceleration is itself growing exponentially). So, the technological progress in the twenty-first century will be equivalent to what would require (in the linear view) on the order of 200 centuries. In contrast, the twentieth century saw only about 25 years of progress (again at today's rate of progress) since we have been speeding up to current rates. So the twenty-first century will see almost a thousand times greater technological change than its predecessor."

What Ray is saying is that most people project future growth in technology at today's rate of change. But the rate of change is accelerating, so that more and more change is packed into smaller and smaller amounts of time. While the vast majority of the thousand times greater technological change Ray is talking about happens in the last part of this century, some of it happens in the next twenty years. How much change are we talking about? Well, from when he first penned those words, the pace of change has picked up. At current levels, that means the 20th century was equivalent to about 20 years of progress at today's rate of change. That pace will continue to increase the amount of innovation we pack into just a few years. From his book Fantastic Voyage:

"...And we'll make another 20 years of progress at today's rate [of growth], equivalent to that of the entire 20th century, in the next fourteen years. And then we'll do it again in just seven years."

That means in the next 21 years we will see double the technological change that we saw in the entire 20th century. At that pace, we will see almost four times the rate of change within 25 years.

But that is just technology. There are also profound and rapid changes happening in the world of finance. Only a few decades ago, there was only a relatively small amount of derivatives in the world as compared to the totality of human commerce. Today we have a reported $450 trillion in derivatives. For us to think that such a thing can come about and not add to the unpredictable nature of the world is not realistic.

George Friedman of Stratfor points out (in a manuscript I just read for his new book, due out soon, we hope) that as humans we are dismal at projecting the future in a geo-political sense. Think about the beginning of every decade of the last century. Then move forward 20 years. Who got any prediction right? Did anyone see World War 1 in 1900 or even 1910? The rise of Germany and Hitler in 1920? The collapse of Russia in 1980? The rise of radical Islam in 1987? A war in Iraq in 2000?

And yet, we assume that the world of 2017 or 2027 will be not all that much different than today. But the only truly safe bet is that it will be radically different in ways that we cannot imagine.

As an illustration of the wildly unpredictable, I read this week (via Bill King) of a new discovery. "An Erie cancer researcher has found a way to burn salt water, a novel invention that is being touted by one chemist as the 'most remarkable' water science discovery in a century. John Kanzius happened upon the discovery accidentally when he tried to desalinate seawater with a radio-frequency generator he developed to treat cancer. He discovered that as long as the salt water was exposed to the radio frequencies, it would burn."

Dr. Roy Rostrum, a Penn State University chemist with a serious pedigree, reproduced the experiment. The process seems to release hydrogen. Apparently it takes more energy to do so than is released, so it is not perpetual motion. Will this lead to anything? Who knows? But there are scores of such random discoveries each year, all with wild unpredictability attached to theme. And as we increase the number of researchers and scientists and garage tinkers in the world, we should expect and will have even more unpredictability.

But this is all hard for us to get our head around. Living in such a rapidly changing world is psychologically difficult. So we resort to trying to simplify things. Returning to Taleb:

"We, members of the human variety of primates, have a hunger for rules because we need to reduce the dimension of matters so they can get into our heads. Or, rather, sadly, so we can squeeze them into our heads. The more random information is, the greater the dimensionality, and thus the more difficult to summarize. The more you summarize, the more order you put in, the less randomness. Hence the same condition that makes us simplify pushes us to think that the world is less random than it actually is." (p.69)

And that tendency lulls us into complacency. And that eventually results in a "Minsky Moment." Hyman Minsky famously stated that stability produces instability, and that the longer things are stable, the greater the instability that will result, precisely because we are unprepared for it.

When "Because" Isn't Enough

Having seven kids, I have answered more than a few hundred questions with the brilliant "because such and such." The younger kids will sometimes even accept such answers, when a true skepticism would be more in order.

I admit to sometimes giving in to such a rationale today. I, along with my fellow humans, like causality. B happens because of A. And it is tempting to ascribe a simple because to today's black swan in the credit markets. It is all the fault of the subprime mortgage lenders. If they had not made bad loans we would not have the problem.

I would suggest that the problem is more systemic than that. Assume that we had the rational laws in place five years ago that we will enact next year preventing bad mortgage underwriting. Then there would have been excess and a bubble in some other part of the markets at some other point in time. As humans, that is what we do. We push the limits of greed, especially when accompanied by the illusion of stability, until the bubble bursts.

Sometimes the "because" is a synergy of multiple events. The internet is not possible without multiple inventions. It was around for 20 years before it began its rather meteoric rise in the late 80s. There is no simple because, but the implications and the unpredictability of the results were not clear in 1987 to all but a few wild-eyed, and generally considered crazy, individuals.

"This in itself greatly weakens the notion of "because" that is often propounded by scientists, and almost always misused by historians. We have to accept the fuzziness of the familiar "because" no matter how queasy it makes us feel (and it does make us queasy to remove the analgesic illusion of causality). I repeat that we are explanation-seeking animals who tend to think that everything has an identifiable cause and grab the most apparent one as the explanation. Yet there may not be a visible because; to the contrary, frequently there is nothing, not even a spectrum of possible explanations. (p. 119)

Gliding Into Disorder

But all is not that bad. We tend to think of Black Swans as bad events. But as noted above, there are good black swans which positively impact human existence. And Taleb himself sees a glimmer of the positive:

"We are gliding into disorder, but not necessarily bad disorder. This implies that we will see more periods of calm and stability, with most problems concentrated into a small number of Black Swans." (p. 225)

It is easy to take the credit disruptions of today and straight line the present into the future. But it might be more useful to see how the previous black swans of financial disruptions were dealt with.

Let's look at 1987, 1998 and 2000. All three periods had rather solid US economies. All three had rather significant disruptions. And all three saw the Fed open the liquidity flood gates.

You can expect the same today. As I have often written, when the Fed embarks upon a new course, they will go further and the course will last longer than anyone thought at the beginning of the process. Who thought when the Fed began to loosen monetary policy in early 2001, when rates were 6.25%, that we would see 1% within a short period of time? And who thought it would stay that way for so long? And when they began tightening again? Who thought it would get to 5.25%? Back then, 4% seemed like a very high rate.

Right now, the market is pricing in rate cuts of 75 basis points by the end of the year and another 25 basis points within 12 months. I think that is low. If the Fed is cutting, it is because they see the economy weakening. And I think that means they will cut more than anyone expects. What is the end number? I don't know. But I bet it is a lot lower than 4.5%.

Why? Because the credit markets are going to take a lot longer to sort out the mortgage problems than we might think. And that means that a lot of homes are not going to move for some time, which is not good for consumer sentiment or spending. And there will be substantially less mortgage equity withdrawal. As home prices drop 10% and then 15% and then 20%, boomers are going to realize that a large part of what they thought they had for retirement in the equity of their homes is not there. That means they need to spend less and save more. While that is good as an individual policy, it is rough on the economy at large. I still think this process ends in a recession.

But John, (I hear you ask) if the Fed cuts rates, won't that make mortgages cheaper? The answer is that for conforming loans it will. But right now, if you want a home with a loan larger than $417,000, you are looking at interest rates as high as 9%, even with excellent credit. And if you have poor credit? There are no subprime loans for you, without substantial down payments.

The problem, as I repeat, is not the availability of liquidity. It is the lack of credibility. No one is buying paper they are not absolutely 100% sure about. And until a new mechanism is developed that will allow for transparency in the mortgage markets which will then allow for the securitization process to being again, it is going to be tough to get a mortgage for someone who does not fall with the confines of conforming loans (for foreign readers, those are agency loans made by quasi government agencies like Fannie Mae which have the implicit backing of the US government.)

It will take some time, but the current disorder will again become order and the process will begin again, with a bubble happening in some other market which will eventually come undone and create a new black swan event.

(And yes, the implications of lower rates means a lower dollar and thus higher gold.)

And let's end with a great quote from Taleb, which is not exactly on point, but is a great quote nonetheless.

"We humans are the victims of an asymmetry in the perception of random events. We attribute our success to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whatever we do for a living. Ninety-four percent of Swedes believe that their driving skills put them in the top 50 percent of Swedish drivers; 84 percent of Frenchmen feel that their lovemaking abilities put them in the top half of French lovers." (p. 152)