2010 Q2 client letter
We hope your summer is going well.
Now that we’ve reached the mid-point of 2010, we thought this would be a good time to look back at our list of Top 10 Themes for 2010 and see how our predictions have fared. We’ve attached this list with an assessment of each of our calls.
Like the recent quarters that have preceded it, the second quarter of 2010 was very eventful. On April 16th, the SEC dropped a bombshell when it filed a civil lawsuit against Goldman Sachs charging the firm with fraud over its marketing of a 2007 subprime mortgage product known as ABACUS. The lawsuit shocked many in the financial services industry as it demonstrated the SEC was getting serious (though many have argued too little too late) about holding the larger firms accountable for questionable business practices that helped accelerate the subprime meltdown. As a result, Goldman’s reputation has taken a major hit and the firm’s share price has fallen over 30% since the lawsuit was first announced. The lawsuit helped set the stage for the financial reform bill now working its way through Congress. And while the White House and Congress have repeatedly denied any knowledge of the SEC’s lawsuit prior to its announcement, the timing of the suit certainly didn’t hurt the bill’s chances of being passed.
On April 20th, an explosion on the Deep Horizon oil rig in the Gulf of Mexico destroyed the platform, killed 11 workers and ruptured a riser pipe on the ocean floor that continues to leak oil and gas into the Gulf of Mexico as of this writing. While initial reports downplayed the severity and extent of the leak, the world quickly learned how devastating this disaster would become after several attempts to staunch the flow failed. The only viable solution now appears to be the two relief wells BP is digging, which are still several weeks from completion. The spill, which is now the largest ever to originate in US waters, will no doubt have long term environmental and economic consequences for the gulf region. In the short term, we will likely see the spill become a focal point for the coming energy bill as well as the November mid-term elections.
May 6th marked the day of the now infamous Flash Crash. At approximately 2:45 pm, the Dow Jones Industrial Average lost over 700 points in a matter of minutes, only to regain those losses several minutes later. At one point, the Dow was down 998.5 points, which represented the largest intraday point decline in history and temporarily wiped out over $1 trillion in market value. The cause of the crash has been vigorously debated, but many agree the central problem was an issue of liquidity (traders willing to buy and sell stock in quantity at the prevailing price). Today, much of the stock market liquidity is provided by high-frequency traders (HFTs) – computer-driven algorithms used by firms trading at speeds measured in the millionth of a second. While these HFTs provide liquidity during most normal market conditions, they are not always required to participate in the market (their primary objective is to turn a profit, not to maintain orderly markets). Many critics have suggested that something like the flash crash could occur if a group of these HFTs stop trading simultaneously. The SEC has since instituted system-wide trading curbs or “circuit breakers” on any S&P 500 stock that rises or falls more than 10% in a five minute period. It remains to be seen whether or not these measures will prevent another Flash Crash.
In addition to the above the highlights, the quarter also saw a further deterioration in the European sovereign debt crisis, a sustained correction in global equity markets and a some less than stellar economic data from China.
But not all the news is bad!
On a personal note, this past quarter also marked the first year anniversary of Washington Square Capital Management (on May 15th). This past year has been memorable (to say the least) and we wanted to thank you again for your commitment to work with us – we recognize that none of this would have been possible without you.
Memorial Day Weekend also marked the marriage of Subir to Molly Barker. There were two weddings: an Episcopal service held on Friday May 28th in New York City and a Sikh service held in Glen Cove, NY on Sunday May 30th.
We look forward to speaking with you during our quarterly review.