Congratulations to Allied Capital shorts.

Today was a big day for us. My largest holding by far (representing 75% of my holdings, actually) was in Allied Capital via fairly short-term puts. Today the stock collapsed, dropping 55% by lunchtime. I took this opportunity to to exit nearly my entire position due to the bailout issues. I know Allied Capital is worth $0 per share, I just don't know when it will happen. And with a Congress that is scared and 35 days away from an election, enough is enough. I am now almost entirely in cash, and will probably remain that way until the election is over. This was a big win, and congratulations to any of you who held ALD puts.

One of the major tenets of value investing is that you never give a damn about elections, but this case is unique in that the incumbent party is trying desperately to save face at the last minute. Their leader has the highest disapproval rating of any U.S. President in history, and as a result they are capable of almost anything right now. I don't trust them. Just as they are not really the party of budget discipline, they are also not really the party of free markets. There is a saying that "there are no atheists in fox holes." But I think the better saying is "there are no libertarians in market crashes."

I do still hold my somewhat significant position in MBIA, which I am shorting via puts, but they are deep-in-the-money ($20 strike price) and do not expire until January, 2010. I have time and room to watch that company collapse, so I will hold. I also hold a few $15 ALD puts which expire in January 2009. They are in the money as well, so I decided to hold a small stake. If these puts go to $0 it isn't the end of the world, but I think it is more likely they will double in value by expiry. If Congress doesn't interfere too badly, this will be a nice investment.

I was pretty steadfast in my convictions on my ALD positions back in July, but it was a trying time. There were large rallies which tested my patience. I'm convinced I would have 100% better returns than I do if I could be hit with a mallet, suffer amnesia, and forget I even own what I own.

If you purchased when that post was made, you're up around 250% in 2.5 months, but you went through a lot of Advil listening to policy speeches. I guess the lesson is, this market is no place for ad hominem investment decisions. You need to check your emotions, and know you are right because your facts and your reasoning are right, not because other people agree with you.

"Be fearful when others are greedy. Be greedy when others are fearful." -- Warren Buffett

Warren Buffett's book is here!

After years of waiting, Warren Buffett's own book has finally been released. He's dropped hints at it for years. I pre-ordered on the first possible day back in March, but I should have ordered same-day shipping! Now I have to wait until Wednesday.

976 glorious pages. I'm going camping on the beach this weekend with the single objective of reading the entire thing. Honestly I have no idea how interesting it would be to the layman, although Roger Lowenstein's biography on him was a tremendous success amongst the business book crowd. Roger's book was a tad smaller too, and didn't have near the cooperation. This is likely to stay pretty high on the NYTimes list for awhile.

Maybe you should help make that happen ;)

Washington Mutual blew up.

This is really frustrating. Wamu blew up, but we couldn't short it because our Stalinist market reforms have banned it. Did that work? Did that prevent Washington Mutual from going bankrupt? Did it keep the stock from going down?

If we go back to August 18th, we'll find my post entitled "Washington Mutual is going to blow up or come close to it" which I think today teaches us that no matter how much executives, PR personnel, or the Treasury Secretary lie to you, you can always find out how a business is really doing by how it facilitates business with its customers. We're now two-for-two here, so if your bank increases the rates on its CDs or any other investment structure, it is apparently time to close out your savings accounts (and any other business dealings you have with them) and head for the hills.

Employment is desperate

I'm starting to get resumes e-mailed to me every week now from guys looking for jobs at Citadel. The situation is dire. I wonder what happens in May when 20,000 kids get out of business school with new degrees. I predict unemployment will hit 7.5% by the end of 2010. The GOP will have lots of fodder with which to attack President Obama.

Welcome to Orlando

I neglected to mention that this past week I have actually been in Orlando. I'm here on business, and you'll notice that there are no travel photos accompanying this post. This is because Orlando is...not the least bit interesting.

To put it simply, unless you are here for Sea World or Disney World, Orlando is quite miserable. There is no culture. There is no art. There is no nature. It is basically a gigantic cesspool of anywherevill with urban sprawl the likes of which not even a Texan has seen. It was a $70 cab ride from the airport. You have to take 10 mile rides to the nearest anything. Everything is a chain. Denny's, CVS, and anything else that would make you wonder why you ever bothered to leave home to experience new things.

I tried actually walking to dinner tonight to the local TGI-Mc"Fun"sters or whatever the hell pseudo-character-filled restaraunt Brinker International has deamed up , and I would place the experience somewhere between taking Bunker Hill and sailing aboard the Titanic. To start, I learned there are no sidewalks. This is because the first rule of the cesspool is you do not walk in the cesspool. There is also nothing remotely close to anything else. I had to hack through corporate nature for miles, which usually consisted of landscaping involving anything that drinks too much water and has a lot of spikes (palm trees, for example). When I finally got to what was supposed to be the place, I found out it wasn't actually a real restaurant. It was a small office-version sitting inside a corporate campus, which was now closed. It took a 15 mile cab ride to get to the next nearest place to eat.

The place is so bad, my own hotel even employed its own urban sprawl within urban sprawl! My room was - I kid you not - a two mile hike from the lobby. They have to run gasoline-powered golf carts to take guests to any of the rooms sprawled across their land. And this was a Hilton! It must have taken 30 minutes each way every time I needed to go to the lobby for something.

Despite all this, I'm actually enjoying my trip. I love being on vacation and staying in hotels. This will, however, be the first place I've ever traveled where I am intentionally not going on a photography expedition and have no desire to do so. It is a weird feeling watching television in a hotel room and actually getting a full night's sleep. I have never done this before. I'm enjoying it.

The bailouts are coming.

Today we're talking about bailouts, and I immediately turn my eye towards exiting every position I have. Congress is scared, it is panicky, and it is 40 days from an election. That should scare the hell out of everyone. I can spend forever and a day crafting an elegant investment thesis, and it means nothing as some out of control Senator from any given district bails out (or refuses to) the company in his. As soon as I see an opportunity, I think it is time to board up the windows until November 4.

We have lost control.

That is simply all that is to be stated. We have finally lost control of the financial system.

Life changing decisions have been made.

I quit school quite awhile ago, and today is why.

Today is D-Day. This is when everything unwinds, and unless the United States steps in, we will face total systemic collapse of the U.S. financial system.

I've been waiting to drop the news to readers, and now that we find ourselves standing at the precipice, I find this to be an appropriate time. Back in October of last year, I stopped making value plays and went heavily short the U.S. financial sector. As time went on, it became apparent that we really were facing the cataclysm Warren Buffett had been discussing since I attended my first annual meeting in 2003. I took a leave from school and did not sign up for the spring semester. By March, when Bear Sterns collapsed, the writing was on the wall.

Two things were clear; 1) the financial system was going to face a systemic shock from which it would never fully recover in its original form and therefore, 2)The old models of education and career advancement were soon to be rendered useless. I thus made the decision to put myself on indefinite leave from school and shut down the process of pursuing an MBA after the Masters I was currently pursuing. I was already in the process of applying to M7 business schools when I made this decision. There would be no jobs waiting for me when I graduated two years later, inexperienced, and $120,000 poorer.

My old employer made me a good offer in terms of quality of life, which is important to me, and as a result I have returned t my old job as a mainframe programmer doing data mining for investigations for the federal government. We first talked back in March, but things work slowly at the government, and I only started working for them again on September 2 even though things had been in process for several months.

Because of the generous qualitative terms, this in no way impacts my ability to invest or post. Following economic news and processing that into investment decisions only takes around two hours out of each day, so I am fortunate enough to be in position where I can continue to do that and work a great job at the same time. The two don't conflict.

With each passing day, this proves to be a wiser decision. There will be 40,000 layoffs in Manhattan and 40,000 financiers with meaningful prior experience desperate for jobs by time I am able to obtain an MBA. Harvard allows credit to stay for five years, so I have time to reverse my decision should I deem it necessary,. But I don't expect it will be. No one is paying $350,000 to first-year spreadsheet makers anymore.

I feel fortunate to have had the luck and foresight to navigate the past 12 months and to actually come out ahead, and my heart sinks for those were stuck in a position from which they couldn't (or still cannot) escape. If you are 40 years old or more in Manhattan, your career is finished. I don't even know what you do. I don't know where you go.

Lehman Brothers executives are simply criminals.

The fulcrum upon which the coming meltdown rests is the concept of financial alchemy. That a lump of coal (a mezzanine tranche of mortgages) could be transformed into a nugget of gold (an AAA rated group of mortgages). It turned into a nugget of something alright, but it wasn't gold.

Lehman Brothers was a key player in the alchemy that caused their own destruction, but I'll be damned if they aren't trying to revive themselves by - wait for it - devising a whole new method of financial alchemy. Honestly, I would like to see anyone above the title of Managing Director subpoenaed and considered suspect for their attempts to defraud innocent Americans.

Warren Buffett once said that when hiring someone, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. That sums up Lehman Brothers nicely, which is why I heavily shorted them with options and stock and any other way I could eight months ago and recommended my readers do the same.

Lehman is now trying to split themselves into a bad bank and a good bank. The bad bank magically takes away all of Lehman's assets, but the good bank doesn't have to record any write-downs. Impossible you say? Where did those "assets" go when they simply disappeared off the good bank's balance sheet? Easy: they basically plan to "loan" the bad bank 75% of the money, and then they will sell the worthless crap to the bad bank. They get to report a sale on the assets! Ken Lay would be proud. But with the assets being so worthless that Lehman needs to jettison them, how can they ever expect the bad bank to repay the good bank the loan? Well, you're never going to get very far in investment banking by asking annoying questions like that.

Warren Buffett taking the reigns of his regional banks

Warren Buffett is directing his regional banks to stop insuring deposits above the FDIC limit. The end of the world is nigh.

The Yen carry trade continues to unwind.

Here is the yen vs. the dollar.

It is always fun to go back and read old posts. Here's the last time I mentioned the Yen carry trade, in August of 2007.

Are you scared yet?

If you follow economics closely, two things should be apparent right now.

• #1 Conditions should scare the hell out of you.

• #2 The Prospect of John McCain winning the Presidency and therefor Lindsey Graham becoming the next Treasury Secretary should scare the hell out of you.

Forgive me for being part of Graham and McCain's "nation of whiners" but ten-year treasury yields are so low, that the last time they paid this little my grandfather was five years old. Treasuries have been rendered pointless for anything other than trying to prevent catastrophic loss of your wealth. The government pays 3.89% interest annualized over ten years and inflation is at least 4.5%, so I get to make an "investment" that is guaranteed by the federal government to lose me money. And yet people (and countries) are piling in.

You could invest in CDs at Wamu, but that's going to blow up. How do I know this? Because every other bank is offering 3.5% on CDs, but Washington Mutual is offering 5%. Why would they offer so much more than everyone else unless they are outright desperate for cash. This is the exact same thing Indy Mac did before it blew up. If you've got money saved at Wamu, you better join the bank run. True your money is insured, but how long will it take to get your money back when the FDIC runs out of money and no one even knows how to refill the coffers? What do you do when your ATM card stops working?

Obama might surprise.

Obama is losing his place in the polls, but we may be in for a surprise. The thing about polls is that they are only as good as their models. If we have any significant changes in the voting bloc this time around, the polls become invalid. If young people show up to vote - which they always say they will and they never actually do - that wins it for Obama. If black people show up to vote - which they always say they will and they never actually do - that wins it for Obama. If both these groups show up, you get a surprise landside.

This rally is ludicrous

Patience is the key to successful value investing, but I am getting sick and tired of these pseudo rallies. If I hear one more person say the economy is sound or that housing has hit bottom, I swear I'm just going get out of everything and hold gold. I'm tired of paying interest while I wait for these dead-cat bounces to stop.

Wow, I feel a little better.

Back in Austin

On the way back home, we watched "Into the Wild" on the Prius' Nav screen. It is the true story about an idealistic young kid who hitchhikes up to Alaska, backpacks into the wilderness, and dies not all that far away from where we were staying before we headed into Denali National Park.

The movie is kinda bad. I would recommend you just read John Krakauer's "Into the Wild", which is far better and far more accurate. This young man has developed quite a cult of personality from those who identify (or wish they could) with his spontaneous lifestyle. But Alaskans view it differently. The guy died ten miles from a major highway and wasted an entire moose when he killed it without knowing how to field dress it. He ended up nearly starving. I admire his zeal, but Alaska isn't Disneyland. The wilderness out there is the real deal.