Out of the Box and onto Wall Street E-Book

Mark Grant

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 689

Veröffentlichungsjahr: 2011

Beschreibung

A guide to thinking outside the Wall Street box Part memoir, part investment strategy guide, Out of the Box and onto Wall Street presents a revolutionary, alternative look at the world of finance. Revealing the essential rules for preserving capital and making long-term profits, the book provides timely observations on the current and future state of the world economy and investment markets, which are sure to be of interest to anyone considering alternative and time proven ways of making money. * Written by Mark J. Grant, Managing Director of Corporate Syndicate and Structured Products for Southwest Securities, Inc * Provides observations on the current and future state of the world economy and investment markets * Offers detailed analysis of investment trends, common investor mistakes, and the simple investment strategies that most people are unaware of * Designed for professional managers but also applicable for use by individual investors wanting a better understanding of the economy and how to pick smart investments for their own portfolio This is a must-read for anyone who wants to think about investing outside the Wall Street box.

Leseprobe

Contents

Acknowledgments

Introduction

Part I : The Wizard Calls the Ball

Chapter 1 : The Implosion of the Housing Agencies

Get Back to Where You Once Belonged

The Cost of Not Honoring Obligations

The Agencies and Uncertainty

The GSE Agencies as an Opportunity

What Is Given Can Be Taken

We Have Been Grievously Misled

One Moment, Please!

Freddie Mac and the Fairy Tale

Chapter 2 : The Call on the 10-Year Treasury

There Is No Blushing in Brussels

Spasms of Fear

One of These Days

The Legacy Influences

Highway to the Danger Zone

The “First-Class Indicator”

Chapter 3 : The Importance of the Euro

Dolphins/Pelicans—Things that Matter

Manna from Heaven

Greek Downgrades—The Fallout

It Is Not All Greek to Me

Self-Determination Becomes an Issue

If You Know How to Work It

With an Eye on Europe Once Again

Chapter 4 : Turmoil in Greece

The Greek Tragedy Becomes Farce

Greece on the Skids

The Shutdown in Greece

Greek Austerity and Other Fairy Tales

The Fifth Labor of Hercules

Why Greece Matters

Greece for Dummies

ΑΦΗΣΤE ΤΑ ΠΑΙΧΝΙΔΙΑ ΝΑ ΑΡΧΙΣΟΥΝ

I Am Not Backing Down

The EU Scenarios for Greece

Chapter 5 : The Crisis in Europe

The PIIGS of Europe

The Volker Rule—A Call for Action

Achtung, Absolument, and Being There

The Fire Is Out of Control

The European Union in Stress

The European Union in Crisis

A Matter of Perspective

I Make the Call—The Credit Crisis, Part II

Stopped at the English Channel

An Easy Choice

Record Deposits at the ECB

Nationalism Is the Trump Card

The Wizard’s Stress Test Primer

Who Espied the Beggar’s Leap?

The EU Ambassador Now Speaks for Britain

Part II : Learning to Dance Until It Moves

Chapter 6 : CPI Linked Securities

Structured Products

The Time Is Right

The Value of CIPS

The Mouse Trap Is Baited

The Deflation Trade

Chapter 7 : The Wisdom of Buying Senior Debt to Preferred Stock

Ahoy—Your Key to the Treasure!

The Gift

The Most Unique of Opportunities

Songs of the Siren

With Apologies to My Mother

Unintended Consequences

Seize the Opportunity (Carpe Vicis)

The Process of Elimination

Chapter 8 : AIG Debt

Our Undiscernible Future

His God Was Compound Interest

Unintended Consequences and Opportunities

The Church Separates from the State

The Wizard’s Apprentice

The Implications of AIG

Citigroup, AIG, and Peg Legs

One Place to Go and One Place to Avoid

Hold On, I’m Coming

Chapter 9 : Fixed-to-Float Bonds

The Camp Followers

The Fixed-to-Float Opportunity

Rumors of the Wizard in New York

2010—The Specifics

On a Mission

The Casting of Magic

The Most Undervalued Bonds

Play to Win

Chapter 10 : Grant’s Gambit

Grant’s Gambit

Bearing the Scars of Battle

Sailing Past the Statue of Liberty

Part III : Market Issues

Chapter 11 : Bear Stearns and Lehman Brothers

The Bond Insurance Companies

The Bet to Make!

The Calm before the Storm

A Requiem for Bear Stearns

The Crisis Passes—The Issues Remain

Devastation on Wall Street

Chapter 12 : The American Credit Crisis

Exaggerated Projections

The Cost of the Window

A Financial Crisis Is a Normal Event

The Financial Crisis

Just Nowhere to Hide

A Time for Contemplation

And Into the New Year

The Lessons of a Financial Collapse

Chapter 13 : The Bailout

The Death of Logic and Proportion

On the Waterfront

Congress Understandably Balks

We Have Now Pledged $4.7 Trillion

Opportunity Knocks, Then Rings the Bell

The Soap Opera As the World Turns

Part IV : The Great Game

Chapter 14 : Politics

The Squeeze Is On

A Consideration of Political Risk

Political Risk Knocks, Then Enters

Just One Moment, Please

Pact with the Devil

The Inclusion of Political Risk

A Look Back—Heroes and Villains

Pay No Attention to What They Say

The Wisdom of Jefferson

Chapter 15 : The Great Game

The Wizard’s Wishes for You

The Hour of the Shire-Folk

The Change of Rules

Captain Hook at the Aegean Sea

And on Every Note in Between

Common Sense Dictates the Game Has Changed

Chapter 16 : You Know You Work on Wall Street When . . .

You Know You Work on Wall Street When . . .

You Know You Work on Wall Street When . . .

You Know You Work on Wall Street When . . .

You Know You Work on Wall Street When . . .

You Know You Work on Wall Street When . . .

You Know You Work on Wall Street When . . .

About the Author

Index

Copyright © 2011 by Mark J. Grant. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Grant, Mark J., 1950-

Out of the box and onto Wall Street: unorthodox insights on investments and the economy / Mark J. Grant.

p. cm.

Includes index.

ISBN 978-1-118-01810-1 (hardback); 978-1-118-05665-3 (ebk); 978-1-118-05664-6 (ebk); 978-1-118-05663-9 (ebk)

1. Global Financial Crisis, 2008-2009. 2. Finance—History—21st century. 3. Investment analysis. I. Title.

HB37172008.G733 2011

332'.042—dc22

2010051232

This book is dedicated to the fine people on Wall Street whom I work with each day. Regardless of comments made in the press or barbs thrown about by politicians, most of the people on Wall Street are honorable people who make every effort to do “the right thing.” The financial community is made up of people from all over the world, and your family name, your point of origin or the school that you attended make little difference. In the end, you are either bright enough to carry the torch or you are not. On Wall Street your reputation is not just a thing—it is everything; while we have a few bad apples, as in every profession, for the most part there is not a finer group of diverse people to be found on this planet. Our community is different in one very real sense—it is a profession of results. There is no trying; trying is for other areas of endeavor. Either the task is accomplished or it is not, and that is deeply inscribed in the bedrock in very stark black and white.

I am a guy that started at the bottom and made it somewhere toward the top. There are richer people, to be sure, and someone always has a bigger boat; but I had the opportunity, was given the chance, and was able to move myself to higher ground. The bright-eyed kid over time became a senior statesman and I dedicate this book to all of the people, over the years, who saw some promise and encouraged me on in my adventures. To all of my friends and clients: Please allow me to express my gratitude and dedicate this book to all of you!

Acknowledgments

I have lived my life by two guiding principles:

1. Have a great adventure, and if it is not good, then you are doing something wrong and it should be changed.

2. Surround yourself with people who you love and who love you.

Of all of the people on this Earth who have encouraged me in my endeavors, added joy to my adventure, and loved me through the bright and dark days of life, it would be my mother, Carlyn Pollock, to whom the greatest debt is owed. As she would tell you, if not for her I would never have had an opportunity to have this adventure, and, as any mother would tell you, she is right, of course. Consequently, I acknowledge my shining star, my mom, for her contribution to me and this book, and I also give thanks to my father, Stanley Grant, who has left us here and is off on his new adventure somewhere else in the universe. Better parents a son could not have had!

I have two fabulous assistants that work with me: my junior partners, the Sorcerer’s apprentices. I wish to thank them both for their hard work—Angela O’ffill for handling more than her share of the workload as I got the book ready to be published, and Tara Schuerman for helping to organize the book. There would have been no book without their invaluable assistance, constant loyalty, and late hours worked. I doff my Wizard’s cap to both ladies and say “thank you” with great affection and humility as they both fit into the category of surrounding myself with people that I love.

Finally, there are Bill Gross and Paul McCulley at Pimco, Pimm Fox at Bloomberg News, Andy Heiskell at Mutual of America, Cliff Noreen at Babson/Mass. Mutual, and Howard Potter at the Capstone Funds to thank. Without their encouragement and prodding, this book would never have been written. They pushed, pulled, and gave their support to this book as I often wondered if anyone outside of the professionals with whom I do business would have any interest in my meanderings. Finer people there are not on Wall Street, and each is a “stand-up guy” who carries his values and high standards to our profession. Thank you, my friends.

Introduction

For almost four decades I have been working on Wall Street. There have been great joy and moments of incredible aggravation. I climbed up the ladder step by step, starting from the first rung, and made every effort to continuously pull my way higher. All of the content that you will find here was written for investment professionals. You may not understand each and every subject or nuance, but I believe the general concepts can be easily understood. My commentary is reflective of 10 years where the only distribution was made to professional money managers of one type or another. This is the first instance where Out of the Box has been made available to the public.

My book is not about the stock market, though certain principles apply, or the bond markets, where I have spent most of my time; but it offers some methods for investing that are often not taken up in the news of the moment. Many of my views, I am not apologetic to tell you, have been formulated through long experience. I have often felt that, regardless of any person’s intelligence, there is just no replacement for having lived through the battles of the markets, and I wear each scar proudly; each has shaped my vision of how to win at the Great Game. There is a subtle but very real difference between “being right” and “winning,” and I have always played to win.

I am up each day at 4:00 a.m. to write my commentary; this is what it takes to get it right. Every single morning, I bounce out of bed and head to the computer to see what has happened overnight. From day one until this moment, I have found it exciting. Wall Street is the biggest sandbox in the world, where you get to come and play with the boys and see if you can scramble to the top. As I am a giver of advice, I get to interact with some of the best and brightest minds on the planet, and here—besides making money, which is always fun—is one of the aspects of my life that I have always cherished. It is amazing, really: some guy from Kansas City, another from Pakistan, a trader from Iowa, a saleswoman from some small town in France. Some coming from the local college and some out of the London School of Economics, and the playing field is leveled with your ability to either earn your own way in or not. There is no place for losers and no place for crying, and the Great Game takes no prisoners.

You may note certain conjuror’s tricks in this book. It all seems like magic until it is explained, and then everyone goes, “Oh,” and the magic is replaced with knowledge and it appears oh so easy. There are Grant’s Rules and the experiences of living through financial crises and how one deals with inflation and many other life experiences that I share with you as you walk through the chapters. My musings are not a point-and-click methodology for making money, but carefully read, I believe it will help you in how to manage your own personal finances—especially those directed at investments. There is no quick way to accumulate knowledge and no reliable way to increase your capital in a short period of time except by the learning of life’s lessons. What is written in this book cannot be learned in school, any school, and there is no teacher of this course except the longevity of experience.

One of the important lessons to be found in this book is the importance of the capital structure. Equities are at the very bottom of what is possible to purchase by any institution or individual and that has been a maxim lost upon the general public for generations. It has often seemed to me that most people were not savvy investors because they were peering into the wrong pigeon hole. You should own bonds for “capital preservation” and stocks for “appreciation,” and your holdings in debt instruments should always significantly outweigh what you own in equities. This has been proven time and time again by financial difficulties, and if there is one guarantee that I can provide you, it is that the markets have always and will always go through cycles, with booms and busts and economic crises as part of the process. You do not own stocks for their dividends; you buy bonds for yield and to keep what you have labored so hard to make, and equities are never the cake but the icing that is layered upon it.

I have always believed that the best and most important concept in investments was a warning. This is a well-reasoned approach to what not to buy, and this is not often found in anything that is available to the public because everyone has some axe to grind. In the bond markets or the stock markets, you make money in decimals, but you lose money in points. To make money is a long grind upward, but on the downside the G-forces are massive and increase exponentially. Consequently, you will find a good portion of this book concerned with what not to own or what not to buy, as my approach has always been to work with my clients on a long-term basis to help them to achieve the best results. What I have suggested they purchase never had anything to do with my firm’s inventory or some new deal but was grounded totally in what I thought had some advantage. I have done very well in my world—better than I ever thought was possible—but I did it in my own way with no sacrifice of my standards or ethics.

For 10 years now, through my commentary, I have tried to add value to the proposition. That is what I do, and many of the largest financial institutions on the planet have listened and continue to listen. They do not always agree with my viewpoint, as you might expect, but they give my opinion some thought and then they pay for it by doing business with me. I warn and I cajole, and I look at massive portfolios with an eye toward the future and occasionally some sector or play seems undervalued, and I try to point them in that direction. Every day, I give my friends and clients my very best and my thoughts are not contaminated by anything except my own ability to think. In some sense, it is rather like being the Sherlock Holmes of the investment world as sensible deductions are often the magic key upon which the world turns and upon which a solid investment foundation is built. It is never the news but what the news means, and if I have any abilities, it is there that my abilities rest.

If you are looking for a book on how to gamble or some new methodology for speculating, then this book will not fulfill your desires. If, however, you are looking for some grounded principles of how to prudently invest your money, then you may find that some of the Wizard’s secrets, presented here for the first time to the larger audience, will help to light your way down the treacherous road. What you know will always help you but what you don’t know can sink your ship before it has left port. It is my hope that Out of the Box and onto Wall Street will increase your knowledge base so that your capital can increase along with your understanding. There is nothing on Earth like the Great Game, and I invite you to join me on my journey as I seek to master the playing field.

The Formative Years

After I left law school I wandered into one of the largest banks in Kansas City. I began my professional life here as a trainee, working in the credit and bond departments. It was 1974 and the market was horrible. Interest rates were rising very slowly but continuously like some Chinese water torture. No one was making any money. There were no computers in the whole place, and people were using yield books to figure out prices. There was yelling and screaming and phones in everyone’s ears. What seemed, at the time, like large amounts of money were moving around, and someone continuously updated the chalkboard. I had no idea what was going on—but I was fascinated and I was hooked!

I had to find out. I needed to find out. All these guys in suits and ties sitting, standing, moving, pushing, yelling, screaming, and bells were ringing at various intervals. There was the clack, clack, clack of some machine and paper was pouring out on some undecipherable tape. Young men and women were scurrying from one desk to the other and collecting some multiple copied papers. I had a chance to look at one. Who knew what it said. It might have been written in Mandarin for all I knew. No one seemed to agree on anything, and everyone was spread out on long trading desks. I was told that there were traders and salespeople, and that guy over there was the manager. They were all frantic. They were all disheveled. They were all hard at work, but at some work that I had never experienced in my entire life. God, it was exciting! When I think back about it all these years later, I still find it exciting. I have always found it exciting. It is the Great Game, and my ability to experience it would change my life forever.

I knew nothing about what these people were doing. I had no guess as to how it all worked. My father, after all, had been in advertising.

I arrived at 7:30 in the morning on my first day. I expected to wander in and be among the first people in the trading room. I was hoping to ask a few questions and get some idea of what I was supposed to do. But that wasn’t going to happen as everyone had been there for hours. You must understand, the bond markets don’t close except on the weekends. They begin Sunday night in Tokyo and keep going until Friday night in New York. Different trading desks in Tokyo, London, and New York City pick them up as the sun shifts around but during the week, the sun never sets on them. Bonds are used to hedge positions and acts of terrorism, moves by various central banks, revolutions, and various dislocating political events need to have somewhere to go to lay off the bet. Every significant happening in the world causes a reevaluation of interest rates and risk. Every trader in the world has a position and is at risk. That risk must have someplace to be balanced, and that is why the markets are open. On top of that is the fact that our currency is the money of the world and our bonds are the watershed benchmark. Financial institutions in every place on the globe, from Ghana to Greece and from Finland to France own American bonds. They have to be able to trade them somewhere and do so when they are awake. It is very difficult to trade bonds when you are asleep. I have tried it. Not an easy thing to do!

I showed up every day as early as I could. I sat with traders and salespeople alike and tried to understand what they were doing. I learned to read the bond tables, calculate yields, and calculate prices. Most of the guys on the floor were nice to me. They had been though it themselves. They knew the drill. I was prodded and pulled and given every crummy task that could be given me and I grinned and bore it. I finally understood that those pieces of paper represented tickets or transactions between the bank and the clients. The back office stuff—or where the tickets get cleared and where the money changes hands—still eluded me, but I was getting the hang of it. I was on my way.

But I nearly derailed my career before it started. My department dealt in certificate of deposits (CDs). We bought them and sold them as well as various other short-term instruments. This means that the maturities on these things were days or weeks and not years. I began to formulate an idea and went to see the executive vice president of the bank to present my idea. He listened politely but immediately rejected my idea, noting that “Commerce Bank is not going to change the financial markets, Mark,” I was told politely. “We are an old-line and conservative institution. We do not create new financial instruments and we follow along and make our money in the time-tested ways.”

Soon after, the manager of the bond department called me into his office to berate me for going over his head. I thought I was going to lose my job, but somehow I wasn’t fired. I learned to never jump over someone’s head again. It is not well taken, probably not in any business, and certainly not in the financial community. I survived the moment, however. It may have been the first time that it happened to me, but certainly not the last time that someone asked me what the hell I was doing.

Sometime later, as I recall, I was put into sales. I was given the smallest of country banks to call on. I would have strict supervision. My conversations would be monitored. I was to be mentored by one of the more senior guys. He would review each ticket, if there were any. I was on my way! It was that year, my first year in the business, and I was the richest that I have ever been before or since. As I recall, and I might be off on this, I made about $48,000 in my first year of production. I went off my salary as soon as I could and starting getting paid based on my production. It was a wonderful experience and one that frightens most people. If you produce, then you get paid; if you do not produce, then you do not get paid. I learned that I could produce. I learned how to sell, and my sales shot up as I gathered more experience.

Somewhere along the line, I was invited to interview at Stern Brothers & Co. It was a fine old investment bank of good reputation that was headquartered in Kansas City. I was to spend the next 14 or so years of my life here, and I never, ever, thought I would leave. As I look back on it now, as I muse about those glorious days at Stern Brothers, I am filled with delight and boyish enthusiasm about where I really started my career.

The advice I got from two Stern executives—Julian Gumbiner and Bill Wall—has stayed with me over the years: Study the numbers and have good relationships.

Treat your account as you would wish to be treated. No one sale is that important. A sale is the conclusion of making good choices that benefit your clients. If there is no benefit to the client, then do not make the sale. Endeavor to be a partner with your client to help him win the game. A good relationship is a dialogue that helps the client make more money than by doing something else. Add value to the process and just don’t sell a bond.

When I was still a young pup, I first developed a work ethic that has survived all of my years in the business. I got to the office somewhere between 5:00 and 5:30 in the morning. I always figured that there were people a lot smarter than I on Wall Street, and I would need some extra time to keep up with them. I used to go through everyone’s inventory and try to figure out who owned cheap bonds. The Street was less efficient in those days, and it was possible to find a few offerings that were better than the others. Then I would call my clients and point out the value of what I had found and, sometimes, make a sale based on my knowledge. This was to be the start of my analytical background as I tried to identify value not only on price but on the fundamentals of the company. I read book after book that espoused Modern Portfolio Theory and tried to make sense of it and apply it to various credits. I quickly concluded that cash flows were the mainstay of how a company was doing. I still base most of my thinking on this part of a credit’s analysis, and I learned to run cash ratios in all manner of ways—cash flow versus assets, versus revenues, versus gross profit, versus net profits, versus historical models and several other scenarios that helped identify how a company was actually doing in terms of making money. Stern Brothers was too small to have in-house analysts, and I taught myself how to run the numbers. The more senior people at the firm couldn’t understand what I was doing and often chided me about it and told me that I should spend my time selling bonds, as that is what I was paid for, but I kept at it diligently. Soon, I was opening new accounts and doing business with several major institutions because they liked the viewpoint that I brought to the table.

I also learned, somewhere around this time, that getting an institutional client was one of the more difficult things to accomplish and that if you got one, and the buyer liked you, then there were all kinds of ways to expand your relationship. The person probably bought all kinds of bonds and you were involved with only one aspect of what he and his colleagues were doing.

My career at Stern was flourishing—I did business with some of the bigger players on the Street when I went to New York. I learned valuable lessons from people, including Larry Tisch, then CEO of CNA, and a wonderful guy known on The Street as Ricky Perretti. He was the number two guy on Merrill Lynch’s trading desk and eventually became a very powerful man at the firm.

As my career flourished, I had a number of good friends and colleagues who helped along the way; their names may not mean anything to you, but they were important to me—Mike Telerico, Al Milano, Jimmy Quigley, and Patrick Price, who became my boss at my current firm.

Enough of my reminiscing. Suffice it to say that I’ve had a great run and I’ve been helped enormously by many people. I’ve learned that a solid work ethic is mandatory for success, but a solid play ethic is also a necessary part of winning. Everyone needs to clear his or her head. Time off is good for the soul, good for your head, and, ultimately, good for your work. Sometimes perspective can be a valuable part of great achievements, and play time often adds new or different perspective.

—Mark J. Grant

Part I

The Wizard Calls the Ball

Chapter 1

The Implosion of the Housing Agencies

It was in 1938, during the Great Depression, that the U.S. Congress, in its wisdom, established the Federal National Mortgage Association (FNMA). Its sister agency, also a federally chartered corporation, Freddie Mac, is also a government-sponsored enterprise (GSE), as is FNMA, and to truly understand these housing agencies you must bear in mind that they were created by the government no matter what hallucinations our politicians bring to us so many years later. I would say that, since inception, these two corporations have been mismanaged, used as whipping posts by one party and the other and carefully kept off the books of the country so they will not directly impact America’s balance sheet.

These two congressional creations have been a convoluted scheme since inception, and while they do not carry an “implicit” guarantee of the government, they do carry an “explicit” guarantee so that they always trade right on top of United States Treasuries.

This gives them lower costs of funding, but what this guarantee is actually worth has been anyone’s guess since the companies were first created.

For 72 years, Congress has been involved with all kinds of shenanigans with these corporations, which has even included allowing the banks to buy them—prodded them to buy their debt, in fact—and gave their bonds a zero risk weighting so that the banking system in America is loaded up to the gills with their debt. Now what happened over time was that these two agencies became quite powerful and had big lobbying organizations, and they have been prime examples of public/private entities, as they had publicly traded stock and their own preferred stock plus both senior and subordinated debt. Finally, in a fit of angst, Congress turned against its own creations, much as the creator in Frankenstein turned against the monster it had created, and in 2008 began severing limbs. What took place, in my opinion, was a travesty that caused not only the unnecessary loss of wealth for individuals and institutions alike, but actually caused the bankruptcy of a number of banks as the result of quite capricious actions by Hank Paulson, then secretary of the Treasury, and others who made decisions that effectively bankrupted these entities as they threw out most of the management of these companies based on the fact that they were losing money, even though Congress and the administration were issuing policies and writing laws that were the cause of the losses.