Final Post

This will be my final post on this blog, yes I could talk about the lessons I learned, about UBS, or more about Sales and Trading. But that really is boring stuff for me to talk about; after all in my view aside from learning about company specific things like culture, infrastructure and workflow, the life lessons really are the same across all internships. Hence I will attempt to explain the sharp drop in equity markets over the past 2 days instead. Hopefully you, the reader, finds that more interesting and applicable.

So the Fed came out on Tuesday and confirmed that they will be using principal payments from the mortagage backed securities they purchased during the crisis to reinvest in treasuries (recall basic bond math and all the articles in the financial press during fall of 2008 here). They further stated that the purpose of this is to keep their balance sheet at a constant size. In layman's terms this means the Fed will engage in a further, albeit much smaller, round of injecting cash into the financial system. This should be bullish for stocks right? Yes, it was on initial impressions, hence the short lived rally in equities post the immediate announcement. And then people started to realize the facts - the Fed is keeping its balance sheet constant, so going forward, aside from really small investments (around 150 billion), there will not be another stimulus or huge amounts of cash printed and pushed into the system. Furthermore, it was a policy announcement, not an operational one, i.e. no principal payments were reinvested.

The immediate result of this was the further tanking of the stock market and a sharp rally in the US dollar as the market came round.

Do note however, that the fact remains that the US economy is on tenterhooks, and the possibility of a double dip recession remains looming on the horizon. Implicit in the Fed's announcement and decision was the basis of a weak US economy, hence the need for a little nudge and reassurance. However the market plays out to this is anyone's guess, but unfortunately for the Fed, they remain cornered in a tight spot between a weakening economy and fiscal profligacy - not a good spot to be in.

All That Glitters is not Gold

Cliche title for an oft misunderstood metal... but one that has held, and continues to hold tremendous importance to man. As you can guess, I'm on a desk dealing in precious metals, chiefly gold; I will try to explain the mysteries of investing in the metal.

On a simplified basis, gold demand can be split into two broad categories: investment demand and commercial demand. Both names are self explanatory, but to give you a more specific definition, investment demand is comprised of buyers from the financial community - hedge funds, pension funds, mutual funds, anyone looking to speculate or hold gold for the long term. Commercial demand consists of buyers from industry, namely from dental services and car makers. Another important part of this category is made up of individual buyers - India is a huge retail market for gold due to its important uses in their culture, namely in dowries and numerous festivals they celebrate.

Considering both parts of the demand picture for gold, it becomes obvious that it is viewed both as a commodity as well as a store of value. This stands in contrast to other metals which are mainly used as industrial materials. Consider as a short example gold's main rival - silver. Silver is constantly mined and consumed as an industrial metal, and this can be observed in its price, which trades in double digits, compared to gold which trades in triple digits. Also consider that gold is hardly ever consumed as most of it is held physically as jewelry or in bars, to be converted into value later. This means its supply is mostly fixed, while demand fluctuates according to investment and commercial demand.

Thus, gold essentially becomes a currency - which harks back to the era of the gold standard, or the Bretton-Woods agreement. From that legacy, and the metal's cultural history of being a material valued by all, gold today fills the modern role of a currency of last resort, a hedge against inflation, or a hedge against the US dollar. All three roles are extremely similar and are based in a common line of reasoning - should paper based currencies, as they are doing now, continue to be printed freely to stimulate global economies, the fiat currencies of America and Europe will slowly lose their value, making gold even more valuable as the hard asset holds its value better than the paper asset.

Ultimately, the physical gold custody trade is an armageddon trade and is definitely a tail risk event... but it never hurts to be prepared does it?

The World of Buyouts, $ and a whole load of Junk

I'm on my second rotation now, on the High Yield trading desk - thought it would be good to explain High Yield/Junk Bonds/Leveraged Buyouts in layman terms.

Remember Barbarians at the Gate? If the title does not ring a bell, try RJR Nabisco. Kohlberg Kravis Roberts? How about Leveraged Buyout? Three names; one of the history's largest buyouts at $31.3 billion. Such is the infamy, and some might argue romance, of the leveraged buyout that the tale is relived in one of the most well read books in financial literature, even spawning a movie (arguably much less successful than the book). But financial wizardry aside, what is a Leveraged Buyout (LBO)? More importantly, why use of the term junk?

On an extremely basic level, an LBO is simply one company buying another company, but instead of funding the purchase with cash or stock, the acquirer uses debt. A lot of debt.

Consider this simple scenario. Company A wants to buy Company B for whatever reason. However, A does not have the cash to do so/ does not want to commit a large amount of cash to do so. Recall: Company A tends to be a private equity firm, private investment partnership, corporate raiders and the ilk. What does Company A do? Simple, it borrows. In a twist of financial magic however, Company A purchases B and pushes all the borrowed money into B. Here's how the magic works:

Company A creates a new Company, C. Recall: C is a SPV or special purpose vehicle, whose "special" purpose in this case is to house Company B and all the debt taken on to fund the purchase. Now, when the debt is raised, B is bought and housed into C, together with all newly issued debt. Hence the use of the word "Leveraged" since the entire investment is made using rmostly borrowed money. A Real life example, in time to coincide with the dying World Cup fever. The Glazer's bought Manchester United in a LBO, with the English club being placed into the SPV/holding company Red Football Ltd - together with that now infamous debt which has caused a minor revolt in the club's fan base.

Now, more importantly, why use of the term junk? Simple. Remember the credit rating agencies that rated all the toxic mortgages triple A? They rate bonds based on the company's ability to repay them. Basically, more bonds equals more debt equals lower chance of repayment equals lower ratings. At a predetermined point on these agencies' ratings scales lies a threshold of High Yield (Junk) status. Go below that point, and the debt is rated junk. So named due to their relatively higher probabilities of default and thus unpopularity with most investors. In an LBO, so much debt is raised that it is a virtual certainty for the new bonds/debt to be rated as junk.

Hence the term, its use in Leveraged Buyouts, and the obscene buyout amounts witnessed. All essential ingredients in a quintessential Wall Street tale.

How a Trading Floor Works

Imagine standing up to a sea of computer monitors and more than 1500 individuals fixated on the at least three screens in front of them. Add to that sales people standing and shouting at traders across the floor, as well as the incessant ringing of phones and never ending chatter of people talking to clients, each other and anyone else. What never fails to amaze the passive observer is the fact that all that activity is driven by a single entity - the market. Its millisecond changes in price and information sends ripples through the trading floor, bringing together activity from all around the country, and even from across the oceans into a single location.

But one has to wonder how all the chaos is controlled and packed into a neat organization, much less a global financial institution. First, consider the seating arrangements on the floor. Space is allocated to individual desks, which have their sales people and traders sit at most an aisle away. These desks deal in their own individual markets, with sales people either getting orders for traders to execute, or moving securities off the traders’ books. Now, consider the synergy available to the investment bank from having the bulk of its trading operations in a single location. Traders and sales people do not confine themselves to their desks; they move around, call, or simply stand up and shout across desks to get the pulse of other markets. These extra bits of information, cheaply and efficiently gathered, allow traders/sales people to form a much better picture of how markets are moving, what they term "color".

Color is the trading floor's edge. Sales people call their clients to update them on market color gotten from traders or other clients. This in turn allows them to get their client's perspective on markets, thus giving them an even clearer picture of the forces driving the markets. This process continues, and the trading floor that gives the best color, thus enabling its clients to make the most money, ultimately takes home the biggest share of the pot.

First Two Weeks at UBS

Tomorrow (Friday 18 June) will officially mark the end of my first two weeks as an intern at UBS. As a sales and trading intern, I'm based out of Stamford, Connecticut.

Having decided to spend my summer living in Stamford rather than commuting from NYC ( a close 45 min train ride away), I've started to get a real feel for the city. It's in a lot of ways a classic New England town with old architecture and a certain sense of coziness and homely charm, but at the same time sophisticated in its targeted development towards becoming a thriving hub of corporate activity. The city is home to corporate bigwigs such as General Electric, Thomson Reuters, UBS, RBS and World Wrestling Entertainment. The corporates, with their shiny and modern offices, stand against the backdrop of smaller brick buildings housing local businesses, restaurants and small offices - an eclectic mix of the old and the new, of progress and old world charm.

Now, to work proper. The first week was spent in orientation and training, with standard 9-5 hours. Nothing too unusual here, just the standard networking events, icebreakers and lectures covering basic finance/econ classes. The second week saw interns start working on trading desks; Matched Principal Trading for me. For those unfamiliar with the term or the often confusing nomenclature of finance, matched prinicpal trading is in the business of pairing buyers and sellers of securities (corporate bonds mostly, in this case). As this is a new desk, I get to be involved in a lot of business development work. For instance, in the first three days I performed an analysis of customer order flow throughout the trading day to get a gauge of the available liquidity (or the number of buyers and sellers and the amount they want to transact in) offered on our platform.

My program consists of three rotations across three different desks, and I have two more weeks left with MPT. The nature of the work is similar to that of a startup and thus has a clearly defined purpose, which gives me the opportunity to make myself useful to some degree - more than an intern can ask for.

First Post

I am a BBA junior, and will be interning at UBS Sales & Trading, Fixed Income and Commodities this summer. Talking to seniors who have interned on trading desks in the past, it seems that most of my summer will be spent building relationships with co-workers and full time staff, as well as basic office tasks like photocopying, scanning, picking up coffee, and picking up food. Outside of this, a lot of downtime is to be expected between tasks, with the onus on interns to take the initiative and seek out more work to maximize their learning experience.

As of now, UBS has not given any details about what my summer project would be, hence no one in the intern class knows what it entails, must be done or even what to expect etc. Given the amount of down time expected at work, working on the project and tuning it up to a high quality product should not be a problem since plenty of time can be spent on it.

Working at UBS will be exciting as they have a trading floor the size of approximately two football fields, with all traders on the same space. Such an environment will definitely be exciting and highly charged when markets are open, and is something I look forward to being part of. On the other hand, working for the first time outside of home and in a foreign working culture will be a challenge that I foresee must be overcome.