The Short End of the Long View


The Markets…It is still amazing to me — having been in the capital markets for many years now — how psychology can turn on a dime. Concerns about Europe have faded, though no concrete progress has yet been made on the Greece restructuring and the economic news from Europe continues to be dismal.

The worst performing markets in 2011 have been the best performing markets thus far in 2012. Returns have been led by China and the emerging markets, both up nearly 10% in the first few weeks of the year. China has reported sharp slowing in economic growth — but this year that is perceived as positive in that the Bank of China will need to ease interest rates to stimulate the economy (go figure?).

The fundamental news from the U.S. has been decent but the market has moved a long way up very quickly. The clock is running on Greece. I am sure that many of these bonds are now in ‘vulture’ hands, that is, distressed investors who know how to play hardball on restructuring.  If my assumption is correct, these bondholders likely purchased the securities for nominal amounts and hold the CDS (insurance) against them.

In my prior life as a High Yield investor, we called this “the hold out” strategy. These guys play tough and  really want a default to collect on their insurance.  Unlike with the major European banks, the authorities have little leverage on these players.  I don’t think the market is focusing properly on this issue — likely because it is not really clear to the investment community who the really owns Greek bonds at this point.

It would not exactly merit a badge of honor to disclose that particular investment to the investing public…


Hildebrand and the Swiss Central Bank Scandal…This did not get a lot of press over here in the states, but it did get a lot of press in Europe (from which I have just returned from a business trip). This was the case where Philipp Hildebrand, head of the Swiss Central Bank, was forced to resign after his wife was discovered to be “front running” the Swiss Bank before it intervened in a massive way on the Swiss Franc.

Hildebrand’s wife bought $500k in dollars just before the intervention. Both used to work for a large hedge fund in New York and had a glamorous lifestyle. I wonder what the Swiss Central Bank was thinking about when they hired Hildebrand from the private sector hedge fund business. Did they assume that he and his wife would be honest and not front-run the bank? Seems like a reasonable assumption. Or was the Swiss Bank naïve enough to assume that several high powered former hedge fund managers would put their investment acumen to bed and simply have tea in Zurich?

Some things just don’t change. The compulsion to make large profits from illicit and confidential information in the capital markets is a powerful tonic, whether from insider trading here in the U.S. to abusing the sovereign power of the Swiss Central Bank to make profits. An old-time investor used to use a good expression:  “Leopards don’t change their spots”. There is no simple answer to the problem of ethics. You are either born with it or it is cultivated by a good moral compass. Otherwise, you harbor the temptation to gain from the capital markets illicitly.

The abusers seem to find new ways each year to beat the system but they rarely go too long without being caught.


Eastman Kodak, RIP…The Company that George Eastman founded in 1880 filed for bankruptcy last week. It was a lion of the Dow Jones Averages for nearly 75 years. In 1885 Eastman invented the film roll which became the forerunner for motion picture film. By 1976 Kodak controlled 90% of the film market and almost the same dominant share of the camera market. The company coined the term “a Kodak moment” that forever will be synonymous with the perfect picture opportunity.

In 1975, Kodak introduced the first digital camera. Ironically this was the start of its slow decent into oblivion. Fuji of Japan took Kodak on head-to-head in the roll film market. Kodak could simply not compete with the new digital technology, a problem which softened its lock on the picture market. Kodak was around for 130 years, but now the pace of change is so rapid in so many industries, that companies come and go almost unnoticed and never achieve the brand recognition that Eastman Kodak earned for itself.

Several generations before us knew only Kodak (and later Polaroid with the marvel of the instant photograph) as the dominant force in still and moving pictures. Many of our most treasured family memories were due to George Eastman and the Kodak name. There is no price and value you can put on that type of asset. It is rather sad that Eastman Kodak will fade into the memory of the capital markets, ironically having enabled priceless picture memories that will last forever for generations of Americans present and past.

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