The Eclipse

Another month end has come and gone. Another round of winners and losers in this business has emerged. With each passing day we are finally seeing the unwind of bull-market business models, leadership styles, and the investment processes embedded therein.

On this day of August 1, 2008, we will witness the Moon’s shadow crossing our Earth’s surface . Not unlike this day in 1831, when the New London Bridge opened (replacing the 600 year old structurally impaired and damaged one), today is the beginning of many great days. Today is the eclipse. Out with Wall Street’s old ravaged model that lacked transparency and accountability. In with the new and evolving changing of the guard.

John Thain’s Merrill Lynch is being sued this morning by the government of Massachusetts for fraud, while Peter Thiel’s Macro Fund, Clarium Capital, is being beneficed by George Soros as the new rising sun of global macro investing. The 40 year old Thiel is up +47% for his limited partners for the year to date, while Merrill is printing bailout paper -40-50% in the hole to its existing shareholders, telling them one thing, and doing another. Merrill takes out full page ads in Barron’s talking about their history. Meanwhile, Thiel is building businesses like PayPal and Clarium that are simply replacing their outdated foundations.

The US bankruptcy cycle that we hosted a conference call on last month is now in full motion. Our view was that the breaking down of the US financial system, and those old bridges holding it together, would lead to collapses on Main Street America. Since that call, Brian McGough has already worked through 3 bankruptcies in the US department store sector (Mervyn’s, Boscov’s, and Goody’s); Howard Penney was flashing Bennigan’s Steak going under this week; and Todd Jordan is watching private equity held casinos blow through their debt covenants. No, Wall Street doesn’t shop, eat, or smoke at these places. But that certainly doesn’t mean they cease to exist. Yesterday’s US jobless claims number reflected an ominous unemployment line forming, as a result.

I took the 4 train down to Wall Street on Tuesday, then I was in Boston on Wednesday, having meetings with American capitalists that have one thing in common – they’re changing. No, John Thain and Dick Fuld won’t see this powerful force of revolutionary American grit, until it’s too late. God Bless that reality. Out of this economic crisis, great changes are being born. Creative destruction has always been the answer in this country. It won’t go away – people that lie will. Schumpeter, Thiel, and the folks at Google will all raise their glasses to that.

The innovative geniuses at Wikipedia would do the same, and they call “an eclipse is an astronomical event that occurs when one celestial object moves into the shadow of another.” The forces of nature are in motion to see this through on Wall Street. I for one have been overly critical at times of what didn’t make sense to me in this business anymore. Those shadows are moving behind us. Now, I’ll have my feet on the floor early in the mornings, looking forward to new suns rising.

Have a great weekend,
KM