From the movie ‘Trainspotting’:

“Choose life. Choose a job. Choose a career. Choose a family. Choose a fucking big television, Choose washing machines, cars, compact disc players, and electrical tin openers. Choose good health, low cholesterol and dental insurance. Choose fixed- interest mortgage repayments. Choose a starter home. Choose your friends. Choose leisure wear and matching luggage. Choose a three piece suite on hire purchase in a range of fucking fabrics. Choose DIY and wondering who you are on a Sunday morning. Choose sitting on that couch watching mind-numbing spirit- crushing game shows, stuffing fucking junk food into your mouth. Choose rotting away at the end of it all, pishing your last in a miserable home, nothing more than an embarrassment to the selfish, fucked-up brats you have spawned to replace yourself. Choose your future. Choose life… But why would I want to do a thing like that?”

Doesn’t make sense at all! Paying $3.18B in an all-cash deal for an advertising company that has a bad rep? I think the Google co-founders just made a very rash decision in buying DoubleClick. I guess the founders of Google have already cashed-out of their Google stock. You can pretty much play with other people’s money when you have a few billions in the bank.

Slashdot | Google buys DoubleClick for $3.1 Billion

Perkins shared his views on why a trading bounty is such a beautiful
thing. “You ask a big CEO what he makes, and it’s a huge number, but
it’s all tied up in stock and options. Traders get paid in cash. It’s
liquid. It’s real. You can go, ‘Here, look,’ and slap someone across
the face with it.

Trader Monthly lists the traders who made the most money in the business last year. You needed to have made at least $50M to be even in contention.

If you have it,you don’t need it. If you need it,you don’t have it. If you have it,you need more of it. If you have more of it,you don’t need less of it. You need it to get it. And you certainly need it to get more of it. But if you don’t already have any of it to begin with,you can’t get any of it to get started,which means you really have no idea how to get it in the first place,do you?...Wanting it,needing it,wishing for it…The point is,if you’ve never had any of it…people just seem to know

When someone with experience proposes a deal to
someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.

• old adage

“It struck me that perhaps a lot of the people you see walking about are dead. We say that a man’s dead when his heart stops and not before. It seems a bit arbitrary. After all, parts of your body don’t stop working — hair goes on growing for years, for instance. Perhaps a man really dies when his brain stops, when he loses the power to take in a new idea. Old Porteous is like that. Wonderfully learned, wonderfully good taste– but he’s not capable of change. Just says the same things and thinks the same thoughts over and over again. There are a lot of people like that. Dead minds, stopped inside. Just keep moving backwards and forwards on the same little track, getting fainter all the time, like ghosts.”

– Coming Up for Air, by George Orwell

Report on BRIC: Brazil, Russia, India and China by Goldman Sachs.

I maintain a broad exposure to all these four countries through country specific ETFs and ADRs.

Via RGE:

You start with 20,000 euros invested by some investors into a hedge fund of funds; this is all equity. Then, this fund of funds borrows—at a leverage ratio of three—and invests the initial capital and the borrowed funds into an hedge fund. Then this hedge fund takes this fund of funds investment and borrow—at a leverage ratio of two—and invests the raised capital and the borrowed funds into a deeply subordinated tranches of a Collateralized Debt Obligation (that is itself a highly levered instrument with a leverage ratio of nine). So the final investment of 1 million has behind it 20,000 of equity capital and 980,000 of debt. So, if the value/price of the final investment falls by only 2% the entire capital behind it is wiped out. This is a credit house of cards where a dollar of capital is turned into 49 dollars of additional debt to finance an investment of 50. The systemic dangers/risks of this fragile credit house of cards are complicated to assess as they depend on how much of this debt/credit accumulation is concentrated or spread among many financial intermediaries. But, at face value, this kind of leverage ratios looks scary.

In the commodities markets for every winner there is a loser. For example, when Amaranth lost $6.5bn it didn’t go into vapor-space. Instead, corresponding gains were realized by Merrill, Morgan, Goldman, JPM, Citadel, Centaurus, BP Capital, etc.
With this correction of oil from $81 to $51/bbl, the biggest losers are the commodity index holders of the GSCI, CRB and probably historical long oil players perhaps like Phibro and BP Capital. The winners are clearly the E/P companies that hedged their production anywhere above $51. But, remember only 6 months ago these companies were underwater.

The renewed interest in commodities however has increased volatility. There was too much money placed in a market that couldn’t readily absorb the money flows without abberations to pricing and value. This was no similar to the dot com boom.
At the moment no one cares if speculators fail in a downward market. The massive price movement created some good value with E/P companies increasing production and searching for alternatives. The bad was that these hedge fund parasites, oily investment bank and greasy floor speculators were able to temporarily prey off of the general public while not producing a drop of oil, but reap billions of dollars through inflated prices in a one-way market move.

FT Alphaville » Blog Archive » Threats lurking behind the growth of complex finance

Modern finance is based on two key concepts. In very simple terms:

1) You split a given unit of risk into infinitesimally small units and spread it across time (from now into the furthest future)

2) And across space (to many people or entities as possible)

Everything else in finance is just built on top of these two concepts.

So this means that if the risk does pan out in the end, each person in the game loses very little at any given time. However, the question is “What will happen when there is systemic risk that affects the whole financial system?”

The value of derivatives in the the financial system now totals an astonishing 802 per cent of the world’s GDP, providing 75 per cent of global liquidity. Securitised debt is worth 142 per cent of global GDP, providing 13 per cent of liquidity.

...

The transfer of risk also introduces opacity – making it fiendishly difficult to see who might be left holding losses if a credit shock did occur or to prevent concentrations of credit risk developing in the system.

Paul Tucker, head of markets at the Bank of England, conceded in a speech last month that the Bank found it hard to interpret M4 - one of the broadest measures of money – because structured finance and hedge fund activity seemed to be distorting the data. Worse, banks’ balance sheets are no longer an accurate guide to activity either because banks are shuffling risk around. So what would happen in a financial crisis remains – as he put it – “unknowable”.

Right now there is little sign of an end to the credit party, nor it would seem to the mounting uncertainty about what might happen when the debt dance ends.

There won’t be any blog postings till the second week of January 2007. I will be travelling, hosting friends during the holidays, catching-up on long-pending personal work and spending quality time away from my Mac.

If you are a regular reader, check back by Jan 10th. Happy holidays!

Bloomberg has a piece on the reasons for Amaranth blowup. The spread between the natural gas contracts for March-April and October-January (i.e., winter and summer contracts) narrowed substantially. The firm had bet 58% of their assets in such energy trades and 78% of profits were a direct result of these positions. No wonder they blew up when the market went the other way.

Oh yeah…sign of the changing times ..baby..changing times!

Even the stiff upper lip and buttoned-up holiest of holy ‘The Economist’ now has a blog. I just can’t believe it. Though I am all for it, I just can’t believe it! My friends and regular readers of this blog know that I practically carry my weekly dead-tree ‘The Economist’ everywhere; to the gym, to my bed, in the subway and to the coffee table and sometimes even to the beach.

The online blog is called the Free exchange.

Development Marketplace 2007 open for entries – World Bank Group

Have a good idea for a development project? Need $50,000 to $200,000 in funding?

The World Bank’s Development Marketplace is offering $4 million in awards for innovative projects to improve health, nutrition and population outcomes (read: high fertility) of poor people in developing countries. Submit an application online by November 17.

YouTube – David Bonderman on the Rise of Private Equity Part 2