20,000+ Wall Streeters to Wave Farewell by end of ‘09

The below story ran in Wednesday’s Financial News and that figure doesn’t include any losses from the Bear Stearns/JPM acquisition.

Gulp.

Wall Street may lose 20K jobs by end of 2009
Stephanie Baum
25 Mar 2008

Job losses in the financial sector in New York City are expected to reach 20,200 by the end of next year as the credit crunch deals its hardest blow to Wall Street, according to the Independent Budget Office of New York City.
The figures reflect an analysis of the mayor of New York’s preliminary 2009 budget and financial plan through 2012.
A spokesman for the budget office emphasized that the information in the analysis was subject to change.
The report provides estimates through 2009 based on information received by the end of February, before JP Morgan agreed to acquire Bear Stearns.
The spokesman said: “I hear repeatedly that every recession is different. This one is heavily based on finance and that’s going to hit New York City hard because New York is so dependent on the financial services sector... It remains to be seen how hard this will be.”
The agency predicts the financial activities sector will shed 12,600 jobs in 2008, a 2.7% decline from last year.
The estimate includes 5,300 jobs in the securities industry. Jobs tied to the credit market will account for the biggest percentage decline with 4,100 job cuts projected for 2008, a 4.4% decline over last year. It expects losses to slow down to 7,600 job in 2009.
Securities industry profits last year reached their lowest level since 1994 with $3.2bn (€2bn) according to the Independent Budget office estimates, a dramatic downturn from the near record $20.9bn in profits the sector produced in 2006.
The budget office expects losses to continue in the first quarter, but predicts an improvement in Wall Street’s performance later this year with “positive quarterly profits for the rest of 2008.” It predicts Wall Street companies will make a profit of $6.6bn and to nearly double next year to $12.2bn.
Investment banks and the mortgage industry have sustained much of the job losses since the onset of the credit crunch.
Another analysis of the city’s preliminary budget will be released in May.

For the independent research world, Wall Street job losses provide an interesting conundrum: will most firms cut back on spending so drastically that they confine spending to bare bones, in-house necessities and entirely scale back the use of outside products and services?

Or will they invest in fractional ownership or outsourcing-type solutions that can help them to contain costs without all together sacrificing valuable insights and information?

Bottom line: for any companies servicing the financial sector, proving value, providing an edge, and impacting the bottom line has never been more critical. And for the users of information, keeping in-house costs contained will prove equally vital....

'Mad Money' Causes Mad Losses

Whether or not Jim Cramer ‘knew better’ about BSC when he made the statement below to Erin Burnett on CNBC yesterday afternoon:

“Look, let’s understand two things, I said the common stock was worthless on Friday, as soon as this thing was at 36 because we saw a look at the bonds. If you kept your money in Bear you made out. You got the liquidity. Keeping money at Bear – I guess I could have caused a run on the bank and said take your money out of Bear. I guess people could say hold it, he’s saying buy the common stock. I mean, what the heck. I cannot cause a run. It turned out the Federal Reserve guaranteed the money. I’m not going to tell people to pull money out of these places. The Federal Reserve is guaranteeing the money. They are not guaranteeing the equity. I got a lot of things wrong in my life, but I don’t regret the fact when I said don't take your money out of Bear. If you have your money in Bear you still got it today. Remember, there’s Bear Stearns the common and that person was going to pull the money out of Bear. We got a guarantee. JPMorgan is now Bear.”

One thing’s for certain: this is the danger that exists when a large group of investors rely on a single source as their primary source of investment information – and suddenly, that source is wrong.

We don’t mean to go lightly on Cramer – I mean, if he did in fact make the ‘strategic decision’ that he ‘could not cause a run,’ then 20/20 hindsight given what’s occurred tells us his response was irresponsible. But quite frankly, we think this was just one of those situations where it was impossible for him to come out unscathed. Would we have rather had him ‘cause a run’ on the bank? Would that have been responsible? I suppose we’ll never know.

The real problem is the bigger picture issue – when investors are looking to one source, and when that source understands the power (as Cramer well understands) and credibility their recommendations have with their audience, we’re treading into dangerous territory. Dangerous for the investment ‘advisor’ because he needs to responsibly weigh his influence into the words he chooses; and dangerous for investors, because this ‘skewing’ – no matter how honorable the intentions – can result in conflicted advice.

Clearly we didn’t learn any lessons from the Global Settlement back in 2003, or investors would recognize that when they blindly follow the direction provided to them by a single source, they know how the story ends: massive losses.

Hopefully investors – and maybe even Cramer himself – will learn a lesson from this situation and recognize that diverse views strengthen our market structures and help in educating investors so that they are more capable of making sound investment decisions.

We Called It

(Per our usual disclaimer…”It Ain’t Braggin’ If It’s True!")

On November 29th, 2007, StreetBrains held a client event where each of our analysts made their ‘Big Calls’ for 2008. Some of those calls have already come to fruition, and we’re not even out of the first quarter.

Steve Digilio, senior analyst at The Bank Notes made his call that a top bank would fail or be acquired in 2008, and today, he’s right twice over. Today JPMorgan Chase (JPM) and the New York Fed have had to step in and provide financing to a failing Bear Stearns (BSC). Also, the Wall Street Journal noted this morning that National City Corporation (NCC), the 13th largest bank holding company by assets as of December 31, 2007, has reportedly put itself up for sale.

Larry Rothman, senior analyst at DebtVisions, made the call back then that Sharper Image (SHRP) would file bankruptcy in 2008, which it did in late February.

Additionally, Rothman said that increased volatility would lead to increased convertible issuance from certain sectors, particularly biotech. Since then, Vertex Pharmaceuticals (VRTX) and OSI Pharmaceuticals (OSIP) have utilized the convertible market.

Last but not least, this Wednesday, March 12th, Gotham Research closed a pair trade - long Aetna (AET) and short Humana (HUM) - with an advance of 20.13%.

Uh-oh, Client 9! You got Hook-Winked!

We won’t beat the dead horse by recapping one of the ‘most glorious days on Wall Street’ (according to one floor broker), but the hypocrisy of the Client 9 scandal is deserving of its own definition.

How does a guy who tears down Dick Grasso by tearing apart his personal life (affairs, lovechild, whatnot) get off saying things like, “I do not believe that politics in the long run is about individuals, it is about ideas, public good, and doing what is best for the state of New York.” My how the rules do shift when people suddenly find themselves under fire.

Grasso’s likely throwing himself a party, as he now gets to play the role of the helpless victim who was unjustly taken down by a corrupt politician. Hats off to you, and your turn of luck, Mr. Grasso. We can’t wait to see the 60 Minutes exclusive interview we’re sure you’re already working on.

From a business perspective, we have to wonder what this will mean for the Global Research settlement, which is set to end in ’09. Will Spitzer’s fingerprints undermine the importance of the original causes behind the settlement?

We certainly hope not, but in the meantime, plenty of Wall Street types are going to pull up a front row seat to watch him squirm.

Accountability: Does Yours Add Up?

This past weekend, I walked into my upper west side laundromat to let them know that the wash-and-fold laundry they had returned to me was missing 5 garments. Upon the discovery of my missing items, I thought “Hmm. This must happen from time to time. They must have a lost and found for lost/dropped items, or a way to contact other patrons to track down misplaced pieces. I’m certain this can be resolved.”

To my dismay, not only did the store not have a lost and found, or a system to track down my (favorite) lost items, but the owner adamantly demanded that I “go home and check again” and assured me that her laundromat (and I quote):

“Does Not Make Mistakes.”

This statement infuriated me. I assured her that her business should certainly win an award, because if they in fact had never once made a mistake, as she claimed, then they were the first business in the history of all business to do so. I stormed out steaming, and short $600 worth of my favorite garments, with no one to hold accountable for my loss.

Once cooled off, I started to think more about accountability, and more importantly - lack thereof.


“Your First Loss Is Your Best Loss.” (‘Ace’ Greenberg)

Katherine Burton, hedge fund reporter at Bloomberg News and writer of the book Hedge Hunters, noted at a recent conference that the main thing that sets a great hedge fund manager apart from a mediocre one is their ability to reverse a position – or more specifically, ability to say “I was wrong” and get out of the water before the damages become too great to overcome. This, I thought, is what it means to be accountable. This, is what 'Ace' Greenberg (and the many others who have used this line) meant when he said “Your First Loss is Your Best Loss.” Mistakes will be made in any business (even at my delusional, former UWS Laundromat), but having strategies and processes in place to mitigate risk will help contain damages.

It seems many bulge bracket firms haven’t quite nailed this delicate risk/reward balance either, and instead, the research provided by these firms often sticks with any calls or positions it takes - despite prudent cause to adjust their recommendations.

Perhaps you’re thinking this is responsible, for analysts to not waver greatly in their positions, so as not to upset the overall flow of the markets. But if that is your contention, I would counter with one simple term, which quite succinctly embodies the type of thing that occurs when analysts are 'locked in' to positions:

Sub-prime.


We agree that there is a balance that must be achieved, but we also think that analysts should have the freedom to weigh in the factors they believe are most pertinent. That is, by way of their title, what ‘analysts’ are suppose to do, isn’t it? Analyze the facts at hand, and make recommendations accordingly?

Fortunately, the independent research world has created a safe-haven for analysts to properly utilize their abilities. If they change their mind about a position, they are well within their rights to say so. On the contrary, if they adamantly stand by a call, despite absolute upheaval in the markets, they’re welcome to hold true to that as well – but the point is, they make calls based on all of the factors they feel are relevant to take into account, not the set of factors that are afforded them. Particularly in a volatile market, the ability to be nimble is a critical element for responsible, accountable analysis.

mjb

Good Money is on the Alpha Bet

Alpha is a huge buzz word in the fund management industry these days, as noted in the Special Report on Asset Management in this past week’s issue of The Economist.

Similar to how people default to call a tissue a “Kleenex” or a cola a “Coke”, the true meaning and value of alpha, it seems, is being diluted as it becomes overused and overextended.

There’s a lot of chatter out there about how ETFs, hedge fund replicators, and other relatively new investment vehicles are being designed to match the returns of hedge funds, and that perhaps alpha is a farce, and that if returns can be replicated without the implications of management fees and huge payouts to fund managers, then that is of course a more desirable way to invest.

We whole heartedly disagree.

While in theory it may sound great to get all of the upside reward of fund returns without the overhead/management fees, the logic is slightly flawed.

Consider this:

You invest with a managed fund – mutual fund, hedge fund, or other. Let’s say for argument’s sake that the average fund returns – meaning, the average return of a grouping of funds – is about 8%.

But, as an astute investor, you of course don’t want to invest with a fund that is just making the average. You want a fund that will outperform its peers, its index. On the high end of the scale, there are firms who have returned somewhere in the range of 20%. Perhaps this fund is run by a tried and true manager, who has mastered his skill. Perhaps he’s a pretty lucky guy this year.

Or perhaps, he’s got better, more exclusive information and analysis than everyone else to base his trading decisions upon.

This small pool of highly skilled managers who fall into the latter category seek out exclusive information that helps to ensure that they stay out ahead of the pack. This is where true alpha exists.

Of course we understand that the higher the best performer comes in, the better the index as well, but investors looking at fund investments typically see “average” as a four-letter word.

So, while the media, fund replicators, index funds, and funds with mediocre returns would very much like to lead investors to believe they can access alpha and the returns it generates by taking these various short cuts, we think outsized returns from managed funds - generated by alpha - will continue to speak for themselves.