2nd Letter

This is another email I sent out late Friday afternoon. Crazy times.

Dear Partners,

This is proving to be the best fold I have ever done in my life. I am a simple man. A man who is skewed (often times to a fault) towards inaction. Someone who plays spades during the day to avoid thinking about the daily market gyrations. Someone who thinks about how the life cycle of the Alaskan snow hair is related to life and the markets (something that will be in my next letter). Someone who longs and shorts stocks over a period of years. It took 30 seconds when the London news passed the wire for me to come to the conclusions of what this meant. Another 30 minutes to make several calls and send emails to make sure I wasn't losing it. The United States today is littered with investors and hedge funds that most likely imploded. Some of it very smart money who knew what they were doing. If I would not have taken the drastic action I took, we would be down hundreds of thousands of dollars today.

For example. I was short Zion Bank. I was short it as a 2009 story because I think their commercial real estate book is horrible. If your were short the stock, you better know why your short it because it had a 40% short interest. I had heated debate with other investors on the name testing and stretching my thesis. Maybe I was wrong but I felt like I was right along with a lot of other money who was short the stock as it went up over 20% in the month of August and September. This stock was near a three month high yesterday. Yesterday the stock closed at $45 a share. This morning, in four minutes the stock went to $121 a share setting an all time high by over 40% and up 169% on the day in four minutes. That ruined people!!!!! The stock is now back down up only 12% but if you had multiple names that did that at once, your toast, done.

MBIA is also another stock that I was heavily short. I first started shorting it personally 14 months ago at 60. It was the first trade I ever did when I opened my firm. The stock went to $4 a month in a half ago. The NY insurance office practiced its own manipulation giving MBIA a book of business that on the surface made it look really good. If you spent the time to dig into it looks like long term it is a horrendous deal. The type of business that MBIA did from 2004 to 2007 to get into this mess in the first place that under prices risks. The stock went from 4 to 19 in weeks. A gigantic short squeeze. I rode it out though it was painful. It dropped back to $10 prior to yesterday. After the market closed yesterday news came out that should have sent the stock down 20 to 40% today. Today it is down 6%. In my opinion, it is more insolvent than an old goose that is no longer capable of laying a golden egg. I covered yesterday. Should I short it back? It didn't make the list but it has more impact on financials than most small regional banks that did make the list. If it starts plummeting does the government step in?

Today SKF was halted. An etf ultra short on financials. The problem is that the ETF creates synthetic positions through swaps to replicate the going short financials. The people who sell them their swaps short financials to protect their swap position. These market makers can no longer do this. You have massive institutions who use this to hedge their portfolio, to make sector bets, to short the financial index while going long individual names.

This forever changes the game of investing. The short ban covers almost 800 names and it only last a few weeks but once it lifts who cares? If stocks start going down again does the government do it all over again? Does it get expanded? Even if this fixes the problem (it didn't in Pakistan, Zimbabwe, or China) you will have an overall lower equilibrium valuation on the markets because of greater risk premium demanded.

History is littered with stories of market manipulation. Almost all of them ended in failure by the manipulators. One of the most famous ones occurred in the 1970s with the Hunt Brothers trying to corner the silver market. It completely blew up in their face causing them suffer massive losses. This is the biggest market manipulation in the history of mankind. History would tell you it will most likely not end up good.

We continued our wind down today. We still own a small Mexico chicken company and a small Canadian company. Both companies are very illiquid and I have only been able to get out of about 60% of the position so far. What is left makes up currently about 1.7% of the portfolio.

I really don't know what I am going to do. I have enough money saved up that I could go work at a restaurant on a beach somewhere and learn how to surf. Something I have always thought about doing. For the time being I will wait and see how this plays itself out. Look at the investment world and see if I can play the game. Maybe short bonds and long stocks. From a philosophical utilitarian perspective (the greatest good for the greatest number) maybe this is what needed to happen. I really don't think it ultimately changes much but the markets were staring into the abyss and we needed a time out. I support everything else the government is doing including the RTC and now buying commercial paper. This short change rule (especially the day before options expiration) ruined many people. The London news hitting at 1:00 was not an accident. I am sure Treasury Secretary Hank Paulson called his Goldman buddies and told them I can't tell you anything but watch what London does. I was extremely blessed from above to see it happen and be able to determine quickly what that meant. The problem is next time there may not be any warning. How do you play those hands when a heavily shorted stock that you are also short goes up 169% in four minutes? This was a chance for long and wrong money to get out.

For America I truly hope I am wrong about a potential crash coming. I wonder though if it does happen who will everyone blame then? All week Russia was mocked for shutting their markets down two days in a row by Wall St. All I have to say is at least Russia shut it down for everyone.

I will keep everyone posted.