Whitebox Advisors

Imagine a few months from now Mark Zuckerberg calls a press conference to announce his goals for Facebook for the next few years. As the crowd waits with baited breath, he announces three: 1.To have Facebook recognized as the worlds coolest company. 2. To triple the number of Facebook employees, because there are so many cool things to do and because we all have to work together to fight unemployment. 3. To make Facebook employees on average the highest paid in the world, because income inequality is incompatible with FBs values.

t is a first principle at Whitebox to be security agnostic: to penetrate the labels like bond and stock and hybrid and assess the real status of a security by the risks and rewards that flow from the combination of economic circumstances and the details of capital structure. For most of the last decade it was quite clear to us that equities bore all their traditional risk but bolstered only bond-like rewards (at best), while high yield bonds often offered equity-like returns that could be shielded from default risk by shorting the all too risky stock of the same or a similar firm.

This Time Is Different, the catchy title of the popular book by economists Carmen Reinhart and Kenneth Rogoff, has also become a catchphrase summing up the world-weary wisdom of our time. Reinhart and Rogoff, in recounting eight hundred years of financial follies and investment bubbles, gleefully point out that in every case experts offered plausible arguments for dispensing with traditional rules of valuation, i.e., "this time it's different."

I'm generally happiest, professionally, when I have at least one strong investment conviction. Currently I have two. I want to be long large-cap equities and short small-cap equities. And I want to be long cheap options on natural gas, mostly by owning E&P (exploration and production) firms that have become attractively cheap with the collapse of gas prices.

Todays crisis has nothing to do with the shadow banking system or any other sort of shadow. Todays crisis is all out in the bright sunshine and remarkably straightforward. The supposed danger is that some major economic power (i.e., not Greece) will become unable to access credit markets. Spanish or Italian or French bonds will decline so steeply as to imperil the banks that own them or appear to do so, causing a run on global financial institutions as severe as 2008s.

For decades the fondest wish of the finance professoriate has been to prove that money managers who believe they earn alpha are kidding themselves and their customers. The latest attempt, titled Active Portfolio Management and Positive Alphas: Fact or Fantasy? is the work of Cornells Robert A. Jarrow, a prestigious name in mathematical finance. Jarrow, based on some previous work with Philip Protter, sets out to prove that the source of all (or nearly all) alpha must be a true arbitrage. Since true arbitrage is vanishingly rare, he then argues alpha must be as well.

This is a great time to invest. But you have to make sure you really are investing and not accidentally outvesting. The market is currently sorting credit into about four big categories. Three of those categories are priced roughly in reference to Treasuries (outvestments). Those are the categories in which we are not interested. The first category, obviously, is Treasuries themselves. Next, short-term paper of super-blue-chip firms. Third, bonds that are just on the border of being investments. Finally, all domestic bonds whose prices are detached from Treasuries.