Markets are filled with players and emotions and opinions and arguments. I am not the type that likes to argue much. I usually state my position and if others want to listen, then that is up to them.

There is a proverb that says a picture is worth a thousand words. Pictures can describe complex stories with simple still images.  That is why I always remind people to simply Trade the Picture.  Pictures can strip away emotion and they can lead you to what is really important.

The president of  Stripnomics has posted three pictures.  I have posted the pictures below with his permission.

For the Aha moment with these pictures I quote:

Leverage is best employed when the probability of growth is high because if you get caught in a stagnant or negative growth situation you can fall prey to my oft mentioned term, “Gamblers Ruin.”

In gambling, this occurs when you lose your bankroll.  In the context of a firm, it is when the firm’s debt can no longer be serviced or restructured.”

First, notice how with Berkshire, Warren knows that there is a time for leverage and a time to reign in that leverage.

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With Lehman, leverage tipped past the point of no return.  From the tipping point, Gambler’s Ruin is inevitable.

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With Prologis (PLD), Gambler’s ruin is inevitable.  Nobody in the mainstream media is talking about this.  YET.  Another way to describe Gambler’s Ruin?  Ian Malcolm says it best, “Increasingly, the mathematics will demand the courage to face it’s implications.”

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Most famous blowups are due to Gambler’s ruin.  Prologis (PLD) will be no different.  I haven’t even had time to write about their extremely complex structure that can give rise to abuse.  I can’t say for sure if they are abusing their complex structure, but it sure smells like they are to me.  Especially with their prolific use of unconsolidated investees.

There are many other firms out there that have suffered from Gambler’s ruin of late.  (AIG), Bear Stearns (BSC), Fannie (FNM), Freddie (FRE).  That is all fine and good, but there are many more firms who will suffer from it.  It is my job as a volatilist to identify these things before they happen.  I need to understand volatile situations BEFORE volatility enters the room.

You wonder why the powers that be are blaming short sellers?  Because they know that these firms are too highly levered.  They know that they allowed them to become too highly levered UNDER THEIR WATCH.  So now they are putting out a PR blitz to put the blame on someone else.

Leverage is the problem.  Leverage was the problem. Leverage will be the problem next time.

Nothing changes in the markets, just the participants.  In any marketplace, the majority of the money always flows to the minority of hands.

Morgan (MS), Goldman (GS), Merrill (MER), Citigroup (C) are not out of the woods.

Neither are many many other publicly traded entities.

As I have stated before, the reddest of red flags is when a company blames short sellers for their problems.

The ban on short selling tells us who the government is trying to lay their problem off on.

Peace

Sometimes, things are so obvious that they are obsequiously hard to deny.  Case in point: a company that I own puts in, Prologis (PLD).  What is my thesis on this company?  First and foremost, this was brought to me by one of my colleagues at The Tinker Factory.  For a full view of his blog and his analysis click here.  It is really quite easy to explain.  Walk with me and talk with me.  I will run you through it quickly.  It’ll be just as if we are….at a party!

When we arrive at the party, the party and the counterparty start to party, then a party ensues.  Now the party is partying with the counterparty and all the parties join up and it is some magical financial RAVE type of event and everyone is feelin’ foot loose and fancy free and someone says every once in a while that the party should come down, but the party must go on and everyone at the party is now drunk and whoever rocks the party always rocks the party all night.  The party and counterparty aren’t around so they all decide to smoke some hookah and the next thing you know the counterparty becomes the party. Until he isn’t.  At some point that tug of war becomes so warped and out of proportion that the party just keeps countering the counterparty and when the police come everyone quiets down until the counterparty sues the party.  Uh OH!  You said that when whoever is now rockin’ the party rocks the party all night.  She will until she won’t. Until she doesn’t. But then the musical chairs became so obscenely weird that people were actually thinking this is not just any normal party.  After all how did so much partying just lead to the fact that whoever rocks the party always knows that the counterparty may not be in the mood if you counter the countering of the party.   Never sue each other over a party. The counterparty says that he doesn’t remember if the party went until the original party started.

You see what I mean.

Nothing is as it seems.

Is this really a party?

Oh know.

Or i mean NO!

Ouch.

Where is the party?

You get the point.  When nobody knows what is what and somebody perceives to know who is who, nobody can see anything.  Until they can.  That moment is called volatility.  Getting the timing of that right is the art of a volatilist.

The financial statements of this company look like a great big party.  Whoever is rockin’ the party is rockin’ the party, but the common shareholders will end up with none.  It is, after all, called common stock.

General Rule:

When something becomes common, it isn’t likely to be the most desired thing to have.

Is it?

Is it not ironic that Lehman initiated coverage with an overweight rating of Prologis (PLD) on July 24th?  As Alanis Morissette would say:

And isn’t it ironic… don’t you think
A little too ironic… and yeah I really do think…

Peace

Par-Tay