Monday, February 2, 2009

Black Swan is Relative/NYX?/SKYPE as a Disruptive Technology and Harbinger for things to Come/SNTA

I do believe that the existence of Black Swan events vary among individuals, and it can sometimes be best characterized in terms of degree.   It would be easy to predict massive losses from CDO pools consisting of subprime and Alt-A mortgages in 2007.  This would cause any prudent investor to sell whatever is owned and certainly avoid issuing any credit insurance on the pools.  To the extent that compensation is increased notwithstanding the known risk, with the consequences of the risk assumed by another party, then that system undermines the modeling for, and the assessment of, the known or easily ascertainable risks. In other words, greed and the identity of the party who bears the brunt of consequences for failure will color the assessment of risks.    It is also obvious that anyone actually raising the risk as an impediment would have been fired for interfering with the path to riches.  There were apparently many individuals aware of the risks who were simply forced out, particularly at Merrill, and anyone else cognizant that the risks were too great would just keep their mouths shut as a career move.   Who would dare to put their hand in between a piece of meat and a hungry lion?

Every investment decision that I make has to go through a wash and rinse cycle many times, trying to figure out what risk will eat me, which is always an imperfect process but it does cut down on the magnitude and number of mistakes.  All risks can not be identified, but many can as long as you are actively looking for them.  Then, it would become a question of whether the risk is worth the reward and the amount of capital to devote to the transaction taking into account what is known.   I have to be very attuned to the level of risk, and the potential pitfalls, because I bear the brunt of a wrong decision.  This sensitivity to risk is due solely to my experience and most importantly to the party who bears the entire consequence of failure.  In Wall Street, the consequences of risk taking and the potential rewards have become separated to such a degree that the full panoply of things that could go wrong are not assessed because such evaluation would lead to less leverage and risk and consequently less compensation. 

Even though I was very attuned to the developing credit risks in 2006 to 2007, which caused me to take protective measures, and to avoid most financials other than Bank of America and to even buy SKF, the full extent of the disasters to come would have been a Black Swan event to me looking into the future from 2007.   So, I avoided buying the financials, nor did I own shares in Fannie, Freddie, AIG, Lehman, Wachovia, Washington Mutual, etc.  And, if I had been the boss at Citigroup, AIG, or Merrill,  I would have certainly cut way back on the ownership of mortgage backed securities and would have certainly stopped the issuance of insurance policies on all CDOs at AIG.  But,  the severity of what was about to occur was not anticipated by me.  If I could have anticipated it, I would have gone 100% into Treasuries and just kept my precious metals.  I am not sure anyone could have predicted in 2007, with possibly a handful of exceptions, the seizure of Fannie and Freddie, the implosion of Lehman, and the failures and near failures of a bevy of other major financial institutions.  The severity of the upcoming crisis was the Black Swan event for me.     I would have to say that I was able to save a six figure sum by anticipating what I did which I attribute to my experience and being constantly attune to information about risks, considering the risks always to be more important than the potential upside because I am the person who bears 100% of the consequences of failure.  If you took  100% of the consequences of failure away from me, and let the U.S. government bear 100% of the risk with me getting 100% of the rewards,  I would still be attuned to the risk simply because forty years as an investor has so conditioned my brain to look out for the bogeyman that I could never change now what I do.  But I would have to say that such a development would likely change some of my decisions nonetheless, probably not for the better. 

I have been considering adding a position in NYSE Euronext (NYX) since Cramer recommended it at about 60 or so bucks higher than the current price.  I heard him admit error and blame Thain for snookering him for that earlier recommendation.  I believe that it was Cramer's stock pick of the year at the time Thain was running NYX.  Then I heard Cramer recommend it again in the low 20s.  I see that several firms downgraded the stock this morning based on adverse currency exchange rates and challenges in NYX's European business.  MarketWatch    MarketWatch  Goldman Sachs reduced NYX to sell and Keefe, Bruyette & Woods lowered its rating to market perform.  Citigroup reduced its earnings estimates.   I am going to focus on looking at NYX seriously as a buy this week on further weakness.  The dividend yield at the current price of 19 is around 6.3%. NYX Stock Quote - Nyse Euronext Stock Quote - NYX Quote - NYX Stock Price I would think the recent strength of the dollar on currency exchange from NYX's European operations are well known and understood, and the current price probably has all bad news baked it into it, as if no good news will ever come again. This is similar of course to most stocks now, but I am most interested in the ones that have more secure dividends and high yields at current prices.  But any stock would go into the toilet after receiving so many downgrades and negative comments from the wizards of Wall Street and would have difficulty finding upside traction. 

After the release of the ISM manufacturing data this morning, the market managed to enjoy a temporary rally off its opening lows.  The data stills shows serious contraction in the manufacturing sector, just not as bad as anticipated.Yahoo! Finance

I downloaded Skype for the IMAC over the weekend and used it for a video long distance call computer to computer.  It worked great.  This has to be a disruptive technology for incumbent phone companies.  Being a old guy, I am a little slow on the uptake with technological innovation.  In my defense, I have been using the internet since 1995 and bought an IPOD soon after its introduction. 

One thought that has been creeping into my consciousness recently is that the unprecedented actions undertaken since September 2008 by the Federal Reserve and the government may have just slowed down the advent of the next Great Depression rather than prevented it from occurring. I thought that I would share that really scary thought.  I certainly have been operating under the belief that the government's actions did prevent a depression from starting last year and would likely keep one from happening. 

This is a link to stories about SNTA seeing unusual option activity.CNBC Stock Blog — Options Trading - CNBC Stock Blog - CNBC.com       TheStreet.com SNTA is presenting at a conference on 2/9/09.  The company also completed enrollment in the Phase 3 trial of elesclomol in patients with metastatic melanoma.   I just own 100 shares of SNTA, recognizing its risks.  

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