On The Importance Of Cheerfully Taking Criticism

There are two kinds of people who are ridiculed in this world; imbeciles and visionaries.

Georg Ferdinand Ludwig Philipp Cantor was a German mathematician who lived from around the middle of the 19th century to the turn.

Of Georg Cantor’s mathematical discoveries, he is most famous for developing set theory – an approach to solving proofs related to the span of all mathematical studies and wildly popular in the mathematics circles. His notation was so popular, that for a brief spell, pre-Gödel, some believed Cantor had discovered a means of proving or disproving any statement or proposition one could make.

But while Cantor’s set theory was popular, one of his greatest discoveries was so poorly received that the details of its reception are a matter of notoriety amongst mathematicians.

The subject was on what today is called transfinite numbers; and Cantor’s conclusion was something of the following:

Suppose I take all the positive real numbers 1,2,3…n and lay them in a set unto themselves and denote this R. And suppose that next to that set I take all the numbers between 1 and 2 and put them into a set and denote that S.

Which of these two sets of numbers is bigger?

After much deliberation, Cantor finally came to the conclusion that both had to be the same size. Thus, he developed the concept of finitely countably infinite sets and infinitely uncountably infinite sets. Between any two numbers there exist an infinite number of other numbers.

A second of Cantor’s controversies was around the following problem. Which is bigger, the set of all real numbers from (…-3,-2,-1,0,1,2,3…), or the set of only the positive real numbers (1,2,3…)?

The widely accepted answer was that the first collection of numbers must be bigger than the second, because the second set is contained within the first.

Cantor proved otherwise.

Cantor argued that for any of these sets, there exists an endless number of other numbers to make up the set. As both sets extends to infinity, it is formally impossible to reason that the first set is bigger than the second.

The first set contains the second set. Yet they are the same size.

This caused an uproar. Poincare and Kronecker (two extremely accomplished mathematicians in their own right) launched an assault on Cantor that crossed from merely objective to the highly personal. Other mathematicians eventually entered the attack also.

Then the Christians got involved. They seemed to feel that Cantor’s work was a direct assault on the omnipotence of God, a charge Cantor would spend his entire life fighting.

Cantor suffered a nervous breakdown in 1884 and was hospitalized. Upon release, he spent the next few years trying to piece together his reputation and make amends with his detractors. In 1899, he was checked into a sanatorium. Then again in 1903. In 1904, a paper from the mathematician Konig attempting to disprove his theorem, read out loud in front of his family, left him so thoroughly demoralized, he is said to have questioned the existence of God over his treatment. This set off a string of stays in mental hospitals that spanned every two to three years.

He retired from mathematics in 1913, in a state of abysmal poverty. He suffered a final mental breakdown and died in 1918. The effort of contemplating the infinite cost him his career, his reputation, and his very mind.

Shortly thereafter, his detractors finally admitted they could find no means of disproving his central theorem of transfinite sets. Today, it is so readily accepted that it is taught in undergraduate courses and occasionally introduced as early as grade school.

This POS month is returning, during this same POS time of year, bringing me all the usual blessing of aspersions and inflictions.

In 2010, I watched 10% of my account evaporate as Sallie Mae’s “qualified” leadership bought out a company I was then shorting, STU (who’s loan portfolio I would remark has continued to give headaches through its further deterioration and subprime status), for a 50% premium to last trade.

In 2011, short oil to the teeth, and up an inspiring amount I would add, the financial markets reversed course so suddenly I got whiplash, sending oil from the high $70’s back into the $100 range, in the timespan of a month or two.

And now, 2012, markets are collapsing just as I have decided to be long going into the holidays (for the first time in three years).

Fellows, I don’t know what it is about October, but this month can go to hell.

Don’t worry if you’re losing money today – you weren’t on the wrong side of the trade. October is just on the wrong side of me. And by your grave misfortune, I decided to make your house my ground zero.

Had I been in cash, we would be rallying 300% today. Had I been short, it would have been 600%. As I am long, we will trade to $0.00.

If I someday decided to put all my money in one single position, that stock and that stock alone would receive a legal challenge that sent the company into bankruptcy. If I owned a private company by myself, it would go bankrupt in the month of October.

October is an ass.

However, I somehow always manage to recover from this month’s less-than-genteel facets.

In 2011, I nailed some big trades including APC.

This year in 2012, oil collapsed (going on twice…) and my entire position got back to profitable.

I can survive October. But I would literally pay to see the month thrown out – we’re going to an 11 month calendar.

Look, I don’t want to talk about today, and especially not BAS which is ground zero for this selloff.

I don’t see how revenue downgrades are news. BAS already said they expected revenues to contract by at least as much as the market seems to be fretting over. This was on the table months ago. You’re only just now realizing it if you’ve had your head up your ass.

I’d much rather focus on the promising move in SKUL, which is preparing for an EPIC short squeeze.

It’s Christmas time…

I’ve been watching my BAS position, along with the entire energy services sector, being thrown off a highrise all morning.

I don’t know why, but all of a sudden, economic contraction matters again. Let’s gloss over that the entire planet has been in an industrial contraction since mid-2010, uninterrupted, and that this is not news in the least.

Let’s ignore that demand for basic materials ranging from oil to metals has been channeling downward only sporadically delayed from momentary noise – for two straight years.

Let’s pretend we didn’t already know this was happening.

Because about a month ago, everything was fine. And now, right now, it matters. We just cannot go on.

“Did you know Italy’s economy contracted last quarter?”

Well gee, I could have guessed. Something about it also contracting every other quarter for the prior 8…

At any rate, BAS is being unfairly hit here. I’ve been through their books, and they’re trading reasonable. Even with broad slowdown, they’re basically in a position to absorb the shock. And they’re a survivor – I welcome industry consolidation because BAS will emerge the winner.

So I added to BAS for $11.31.

Cash stands at 10%

The housing market was supported starting in 2008, when the Treasury Secretary Henry Paulson intervened with, amongst other things, a rescue package for Freddie Mac and Fannie Mae. This is fairly common knowledge.

What you may have forgotten is that the exact terms of the Treasury intervening amounted to a blank check on all losses incurred by the two institutions. Well, sort of…

The precise terms were that the Treasury would take on all losses incurred by the two institutions over cash flow for a period of 4 years. That bailout is set to end with 2012.

Which brings me to a quandary.

I don’t believe that these two institutions have been resolutely fixed yet; what is the likelihood that Fannie and Freddie can operate as independent organizations? More importantly, what happens if they require further government support?

In the 90’s, Fannie and Freddie accounted for over half of all new mortgages being generated. This irritated conservatives to no end, who you will recall launched an effort to reform the two institutions that was ultimately shot down by liberals who liked the social reforms they were bringing to the poor. Since they only suspected that the situation was unstable and would bring turmoil, the Republicans ultimately had to back down from their drive to reform the quasi-private entities.

Today, the situation is very different…

Now, Fannie and Freddie account for ALL new mortgages. We know that they are unstable and are losing money left and right. And Republicans are flat out pissed.

And here’s where the issue for me lies. You see, I own two multifamily REITs which have sort of, kind of admitted that they get all their financing needs either directly or indirectly through Fannie and Freddie. The consequences of a failure of either of these firms is unacceptable. The Real-Estate lobby is in high gear right now, pushing as hard as they can to save these institutions from conservative zealotry.

And I don’t know how this will end.

If the government support of Fannie and Freddie are set to end with 2012, then any future support would require a vote of Congress. When that vote hits the House, it’s a complete toss-up.

Part of me would like to believe that conservatives in the chamber will ultimately behave rationally. But right now, House conservatives, especially those that originated from the Tea Party, have so much egg on their face that I don’t know if they can see clearly.

Remember that these guys were voted in on a wave of anger and charged with one task: undo the (then) last 2 years. They set out to accomplish this goal from the most fortified of positions – all they needed to do was nothing and they would have had ultimate negotiating privilege. And in the end, with all of these advantages…they accomplished nothing.

They were tricked by their peers to surrender a 60/40 majority and concrete demands in exchange for a 50/50 split on a committee that ultimately dropped all of their recommendations. And they gave up veto ability by preapproving anything the committee came up with.

It was in that instant I realized these congressmen were nothing but Freshmen, with no chance of victory.

The problem was, I think so did they. When they realized how they’d been played like school children, they had to have been embarrassed.

And now, a year after the debt ceiling, I don’t think they’ll be as willing to negotiate. They’ve already been shafted once, left holding the bag looking like idiots. Will they fall for it twice? Our failures have a habit of hard lining us into unwavering positions. If Fannie and Freddie come up, I could see the House putting an elbow into the GSE’s throats, just to make a point.

In that outcome, I can say without hesitation, the entire housing market would relapse.

In my portfolio, CLP and AEC would crater. CLP, the better performing of the two, would be in bankruptcy inside of two years and financing dried up. Ironically, the weaker of the two names, right now, AEC, would probably emerge a victor (after the initial 50% losses) – the reason they’re hated so much is because they raised $100 million in cash (about 10% of their total assets). That’s enough money to keep the company running for 2 ½ years uninterrupted.

AEC’s CEO Jeff Friedman is such a shrewd SOB – I love it. I’d put money with him nine days out of ten. The guy didn’t just live through the Savings & Loan crisis; he was in charge during it. He remembers what it looks like when the US government wakes up one day and decides to sink an entire industry. He’s not going to get caught on the receiving end of that just because some punk 30-year-old analyst who was sitting in Trigonometry 15 years ago decides he thinks he knows how to run a business better than a veteran.

The guy has a mound of cash at his disposal, and judging how, after saying that money was for acquisitions and debt extermination, he hasn’t used a drop of it, I’m going to guess what they’re really afraid of is a credit shock.

So, as of right now, I would say that, rather than that silly cliff everyone’s talking about, this is the biggest issue in 2012. If Fannie and Freddie get sidelined by a hardline conservative coalition in the House, all stability in the housing market so far will be for nothing as it goes back into meltdown. And this time, the sole bright spot in real-estate, multifamily rentals and demand, will not escape the shock.

I’m putting my money that it doesn’t happen – it’s just too extreme. But the question comes down to this:

Do you think Republicans are concerned citizens trying to steer the course of government for the better? Or, do you think they’re out of their God-damned minds?

I bought some more CCJ for $21.32, bringing my total cash position to 15%.