C(S,T) = SN(d1) - Ke^{-rT}N(d2)
Sometimes, after we make a trade, we wonder...who is the idiot on the other side of our order?
The Thanksgiving break has always given us a chance to catch up on our reading. When Genius Failed, Roger Lowenstein’s blow-by-blow account of the debacle at Long-Term Capital Management, was an instant classic back in the day. Myron Scholes, one-half of the famed Black-Scholes duo, plays a prominent role in the story.
Lowenstein relates a story that took place during LTCM’s capital raising roadshow, and we believe the exchange is typical of how cocky traders and investors really feel about the anonymous souls who take the other side of their trades…
At one point during the road show, a group including Scholes, Hawkins, and some Merrill people took a grueling trip to Indianapolis to visit Conseco, a big insurance company. They arrived exhausted. Scholes started to talk about how Long-Term could make bundles even in relatively efficient markets. Suddenly, Andrew Chow, a cheeky thirty-year-old derivatives trader, blurted out, “There aren’t that many opportunities: there is no way you can make that kind of money in Treasury markets”. Chow, whose academic credentials consisted of merely a master’s in finance, seemed not at all awed by the famed Black-Scholes inventor. Furious, Scholes angled forward in his leather-backed chair and said “You’re the reason---because of fools like you we can!” The Conseco people got huffy, and the meeting ended badly. Merrill demanded that Scholes apologize. Hawkins thought it was hilarious, he was holding his stomach laughing.
Alas, book smarts don’t always triumph over common sense. The hedge fund imploded and Conseco went bankrupt. It was a room full of bloated egos...and longer-term...losers.
Tomorrow UTC readers should give thanks...for all the fools out there willing to take other side of your trades. But keep the hubris in check.
Because even the smartest investors can end up looking like turkey’s.
Nails Hammered
Several weeks ago we profiled television talking head and ex-major league baseball player Lenny “Nails” Dykstra. Lenny’s financial interests are as varied as they come...and he has undoubtly logged a series of 90 hour work weeks since keeping on top of his empire.
Lenny still talks a good game of trash...and the stock picks he offered up on a Saturday episode of Fox News Channel’s “Bulls and Bears” have chalked up reasonable gains in the interim...it was “game on” against Nails in a spirited stock picking contest.
Dykstra Pix 10/20/06
Lenny’s mini-portfolio is heavy on energy exposure and holds bigger-cap names than our sketchy speculative issues. Quite frankly his stocks bore us to tears. He is holding his own against the indices, although certainly lacking beta if there is an acceleration of momentum in this one-way tape.
Field of Schemes
The UTC faithful know how we feel about stadium naming rights partnerships…
Apparently we are not the only ones dubious about the merits of these transactions...the deal announced today between Citigroup and The New York Mets should give bitter Mets fans an excellent chance to make some money on the short side...just kidding
But we can’t help but wonder…
Will Jamie Dimon ever show his face at the Mets new Digs?
Life in the Fast Lane
Getting out of Gotham every now and again keeps us sane. We love to fly into SkyHarbor in November, work on our tan and take in the local sights.
Which in Scottsdale of course means garish plastic surgery, porsche carrera convertibles and “For Sale” signs on nearly 30% of the houses we drive by.
But our holiday in the Sonoran Desert has been anything but relaxing. Its not the old folks and their geriatric groupies, driving 45 mph in the left lane of the 101 freeway, who are annoying us. Or the Budweiser swilling Nascar fans in town for this weekend’s race who weave in and out of traffic at 110 mph.
Its the waiters at the local watering holes.
Fire, Ready, Aim
After hours trading on Wall Street reminds us of the Wild West...especially during earnings season. Cowboys armed with level II screens roam markets that are devoid of their usual liquidity, hoping to hit a bid or offer that some poor schmuck left up on ARCA while he ran to the can. Shit happens.
Armed with incomplete information and in many cases Attention Deficit Disorder, these cowboys are willing to put on large bets that often come back to haunt them, sometimes in less than a minute...or even seconds later. Its not for the faint-of-heart. But it can be pretty hilarious to observe.
The frenzied afterhours trading in Reseach in Motion on September 28th is a case in point. RIMM haters, in the form of shortsellers, are more plentiful than deer in the suburbs. It was essentially the end of the third quarter adding to the suspense. RIMM’s earnings release was delayed by 15 minutes as the company dealt with some last minute issues and management braced themselves for the drama that was sure to follow. Due to the unusual delay, the stock dribbled down immediately to $85-ish as early bets were placed.
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