MR. MARKET MISCALCULATES – MACRO
No one writes about finance more insightfully – or elegantly – than Jim Grant. If you don’t subscribe to his Interest Rate Observer ($850 a year), you can get his collected wisdom here, in Mr. Market Miscalculates: The Bubble Years and Beyond, for $14.96 – or two samples free.
MR. MARKET MISCALCULATES – MICRO
When the market does get something wrong – and you can see it clearly at the time, without the benefit of hindsight – there is an opportunity. Of course, this doesn’t happen to most of us too often, if ever. And even when it does, the opportunity can be hard to seize.
Say it was clear to you at the time that much of the nation’s real estate market was wildly overheated. How would you profit from the market’s miscalculation? You could short (or buy puts on) the stocks of the nation’s home builders. But if you did it too soon and lost your nerve as the stocks rose even higher – and covered your shorts – or simply watched your puts expire worthless, your sharp insight would have been rewarded with a sharp loss.
So for most of us, it makes little sense to try to beat the market by choosing individual stocks (index funds make more sense) or to ‘time’ the market, attempting to jump in before it goes up and out before it goes down. Both are very hard to do successfully.
That said, there are a lot of very bright people whose professional lives revolve around finding ‘mispricings’ in the market and exploiting them, and – even if only as spectators – it’s interesting to see examples of their strategies. Like this one from my friend Chris Brown of fledgling Aristides Capital. Of the relative pricing of Ford Motor’s common stock () and its $3.25 convertible preferred. He writes:
‘F is at 2.83, the F.PRS is at 8.35. F.PRS converts to 2.8249 F shares at any time at the owner’s option. So, if you buy the F.PRS and short 2.8249 times as many of the Ford common, you are paying $0.36 for the entirety of the future dividend stream of the Ford preferred, which is $0.8125 per quarter, and is supposed to last at least 2-3 quarters.’
☞ In English: you want to be long and short the same amount of Ford so the price movement of the stock doesn’t matter. What you gain (or lose) owning the convertible you lose (or gain) by shorting the common. But! But! But! But! But! You get $32,500 a year in dividends on each 10,000 shares of the $3.25 convertible that you own (convertible into 28,249 common shares); while you pay zero in dividends shorting 28,249 shares of the common. So you get to keep $32,500 a year even if you don’t have any idea whether Ford stock is going up or down.
And the cost of doing this? Well, there are the commissions, but they should be small. And there is the cost of tying up your money. And in Chris’s case, there was a cost of 36 cents* per $3.25 convertible – $3,600 on 10,000 shares (if that’s how many he bought)
*When Chris took this position, shorting 2.8249 shares of Ford at $2.83 brought him $7.99. (Right? 2.8249 x $2.83 = $7.99.) Chipping in another 36 cents out of his own pocket, he had enough to buy one share of the convertible for $8.35. (Right? $7.99 + $0.36 = $8.35.)
So what’s the catch? Well, especially for average Joe’s like us, there are lots of catches. First, when I went to try this myself, I quickly discovered that my broker couldn’t borrow shares of Ford for me to short. Yours may or may not be able to. Second, even if I had been able to short F, by the time I tried, that modest 36-cent spread had widened, to a slightly less attractive 61 cents – because the price of the convertible I would have bought had not fallen as much as the price of the 2.8249 shares of the common I would have shorted. By the time you read this, the spread could be wider still (or narrower). Third, there would be commissions to pay, though at my broker they are trivial. But fourth – and mainly – what if Ford goes broke before it is able to make even one more $0.8125 quarterly dividend payment on the $3.25 convertible?
So there’s risk, but Chris thinks it’s a good risk to take. And that’s how (some) really smart investment professionals spend their days, trying to find little mispricings like that, where Mr. Market, through carelessness, has left a few crumbs on the table.
And now, at last:
You’ve heard of the three-minute egg? Behold the three-minute eggplant:
- Buy an eggplant. They’re cheap. They’re large. And yet a big eggplant has only 125 calories, with the skin. (The skin is good. Eat the skin.)
- Slice ‘the long way.’ Maybe five or six slices, each vaguely half an inch thick. (It doesn’t matter.)
- Microwave for 3 or 4 minutes. It’s okay to put the slices on top of each other – microwaves can penetrate anything.
- Let cool; salt and pepper to taste.
Yes, eggplant absorbs anything – it is the Zelig of vegetables – so you can goop it up with olive oil, cheese, tomato sauce, whatever. But why? Fresh from the microwave it is moist, mushy, and healthy. Where I’d experiment, beyond the salt and pepper, is in whatever other seasonings you might have around. And/or a soupçon of I Can’t Believe It’s Not Butter Lite with each bite.
You don’t hear much about sardines anymore.
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Shrouds have no pockets. (There's no luggage rack on a hearse.)~. . . as they say
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