You're Finished
There's a particular passage in Roger Lowenstein's fantastic book about the rise and fall of Long Term Capital Management ("LTCM"). (When Genius Failed) LTCM is in dire straights due to the fact that it has become vastly overextended beyond not only its capital base, but its area of expertise. The hedge fund cannot remain solvent for more than a couple of weeks if it continues to take heavy losses. The losses that had been hitting it to that point had become epidemic and it had started to seem to some of the partners at LTCM that other funds and banks were deliberately targeting them to fail, even though no one knew any of LTCM's positions. Jon Meriwether, the Managing Director and founder of LTCM, called an old friend, named Vinny Mattone, to come in and advise the partners:

• "Where are you?" Mattone asked bluntly.
  "We're down by half," Meriwether said.
  "You're finished," Mattone replied, as if this conclusion needed no explanation.
  For the first time, Meriwether sounded worried. "What are you talking about? We still have two billion. We have half -- we have Soros."
  Mattone smiled sadly. "When you're down by half, people figure you can go down all the way. They're going to push the market against you. They're not going to roll [refinance] your trades. You're finished."

I keep thinking of this passage as I watch the stock market hemorrhage. The volatility today has been particularly interesting as its clear there is battle being waged. Many people are down by half and could go all the way down. We know the market can be pushed against one firm, but how many firms does it take to hold the line? To me, that's the question this week. The Street poignantly delivered its opinion of the President last week. So much for all the favors the administration has done for business. Wall Street is the most savage place yet conceived by capitalism and when it senses you're vulnerable on anything, down you go. Many funds (personal, mutual, hedge) have undoubtedly been ripped to shreds at this point, but remember there are still billions of $$ in the market and even those who have been knocked down collectively have billions of their own with which to fight back. It's a blood-sport out there and we may not know the winner until August. After all, that's when the 945 companies have to affirm that their most recent financials are accurate. Word should soon begin to leak if any of those companies will either miss the deadline or must restate their financials upon further review. 945 are a lot of companies. We already know about 6 of them being crooked and I'll bet there will be another 6 by the time labor day comes around. At this point it doesn't matter how bad the error is, any error will get you hammered for a day or two; perhaps more.

I don't think of this as a panic. It's a systematic removal of capital from an untrustworthy market. Rest assured that all that capital will one day be poured back into equity, but right now it's just too volatile. The Chairman of the NYSE was on Meet the Press yesterday and mailed in a truly pathetic performance which was matched later by Dick Armey. The bears are hoarding their money away for the winter. Just think, historically the market's worst month is October. Imagine what the market will say then if we invade Iraq in September and things don't go so smoothly. Blood-sport my friends, blood-sport.
- posted by levinson @ 7/22/2002 12:45:00 PM