Chapter 35: Respect Not Fear

January 19, 1984, Chicago, Illinois

Just before 5:00pm on Thursday, Joel Steinem called me.

"I found a block of stock," he said, "but I don't think you're going to like it."

"Tell me."

"Half a million shares at a ½ over the last ask; the entire block, take it or leave it. There are no other large blocks, and further calls are likely to move the market or require an even higher premium because word will spread that you're looking."

That would use up all my cash reserves, though I could get the extra cash from Murray Matheson just by asking for it. The question was, did I want to take that large of a position? My rough calculation based on the 52-week high and low was that I would put about $500,000 at risk to make $2 million. In my mind, that was a reasonable bet, and losing half a mil wouldn't cripple me. It was also a 'now or never' situation, as once others started buying, the price would go up.

"Go big or go home," I said. "I'll take it."

"I'll call and confirm. It'll be a private trade, so nothing on the ticker."

"Which is exactly what I want. Call me back, please."

"Ten minutes."

He actually called back six minutes later to confirm the trade.

"What will you take for those shares when someone comes begging?" he asked.

"9½, and that's firm for now."

"Compliance wants your documentation."

"They'll have it in tomorrow's analyst report," I replied. "It's a straight trade based on public information — announced cost-cutting and minimal competition on inter-island routes. Thanks for the assist."

"You're welcome."

I hung up, and about sixty seconds later, Murray Matheson appeared at my door.

"What the fuck?!" he demanded. "Hawaiian fucking Airlines? Half a million at a 10% premium? Based on?"

"Cost-cutting and lack of competition. It's slightly better than a fifty/fifty shot, but the downside is somewhat limited. You'll see our guidance in tomorrow's analyst report."

"Front running the entire firm?"

"It's a private trade, so it won't move the market, and I didn't suck up any excess shares. You'd have done the same thing."

"Fuck you, Kane!" he growled, but he clearly wasn't angry. "You fight dirty!"

"I warned Noel that I was going to try harder this year."

"Oh, so it's 'Noel' now, is it?"

"Per his instructions, I'm to use 'Murray' and 'Noel' in private."

"Just what I need! A punk kid gunning for me!"

"Would either you or Mr. Spurgeon have it any other way?"

"Hell, no! Keep up the good work! Is it true you bought a condo in the building?"

"Yes. About 15% below assessed value. I really like the commute."

He laughed, "I bet! You're moving up in the world, Kane. Keep it up, and the sky's the limit!"

He left, and I shut down my computers and trading terminal. I moved all the papers from my desk into a drawer and locked it. Bianca and I left the office together and took the elevator down to the lobby, where we met Jack. Thirty minutes later, we walked into the house, and I changed into comfortable clothes.

Later, after dinner, I asked Bianca to join me in the Japanese room for a private chat.

"What's up?"

"Something Deanna said last night, and I've been mulling it over and want your opinion."

"Of course."

"She asked to spend the night last night, though with no pressure and with an admission that it had only been a short time since Keiko died."

"You slept alone unless she joined you later and left before morning."

"I slept alone. When Deanna and I discussed it, she made a point which I can distill into the idea that, to move forward, I need to go to bed with someone, but I can't go to bed with someone until I move forward. Or, even shorter, I need to figure out how to move from 'if' to 'when' when I'm not sure I should."

"First, I'm not surprised Deanna offered. Second, I can't imagine anyone safer at the moment because the terms of your relationship are clearly defined and have been since you became her patron. Sex is, in effect, immaterial. Third, it has only been about three weeks, so I'm totally not surprised you demurred last night. I think that was probably wise. Have you given much thought to how the future might look?"

"Not really. The confusing thing is Keiko expressly told me what she felt I should do, but for some reason, it feels wrong to do that. I believe we discussed it, but when Keiko tried to get me to promise to find someone to be with, I pushed back, saying that I, in effect, had to keep my own counsel."

"I recall the discussion afterwards, and I totally get why you said that, and, honestly, given it has only been three weeks, I'm not surprised. I think there's a key question you need to answer that will be instructive."

"What's that?"

"Would you feel like you were cheating on Keiko if you and Deanna slept together? And would where it happened matter?"

"You mean 'our bed' versus, say, on Deanna's futon?"

"Yes."

"I don't know," I replied. "In fact, I think those three words sum things up nicely — I don't know the best way forward."

"The key is to not allow that to paralyze you in the long term. If it were six months from now, I'd say sleep with Deanna and get back in the saddle, so to speak. Now? I wouldn't be too concerned. On the other hand, maybe you need that kind of closeness. Perhaps Deanna detected that need and is offering a solution. And, as I said, Deanna couldn't be any safer given the parameters of your relationship."

"I hear you," I replied. "Let me think about it."

"Of course. What did Mr. Matheson want today?"

"To give me grief about a big play I made. You've seen the forecasts — what am I saying? You ran the scenarios! I found a play that should double my money while only risking about twenty percent on the downside, and I got into it before it hits the analyst report tomorrow."

"Is he pissed?"

"No, of course not! It's good for the firm. I expect to get similar grief from Noel Spurgeon in the morning."

"What's the upside?"

"Two mil, possibly two and a half."

"And if you're wrong?"

"The downside is around five hundred grand. I can absorb that. Obviously, I'd like to double my money for the overall 2% gain in AUM. The risk/reward ratio is around 4 to 1, possibly 5 to 1, in my favor."

"Your goal is to beat Noel Spurgeon, isn't it?"

"Obviously! I told him during my compensation meeting that I'd try harder this year. Today was me trying harder."

January 20, 1984, Chicago, Illinois

Late on Friday morning, Julie called me to let me know Noel Spurgeon wanted to see me. I went right up to his office, and Julie asked me to go right in.

"Your new mortgage is approved," he said. "You negotiated a good deal, considering they paid $280,000 in '80 and spent $50 grand remodeling."

"Do you know what happened?"

"Divorce and neither could buy the other out."

Which, I felt, explained the negotiations. More than likely, I had been negotiating with a pair of attorneys — one for 'him' and one for 'her', and at least one of them had felt 'firm' didn't mean 'firm'.

"How do you know the details?"

"It was owned by a former classmate of mine from Wharton who was a senior exec at the CME. He's at NYSE now in New York. Are you vouching for Jack Clinton?"

That was typical of Noel Spurgeon — no transition, just switching topics, and everyone was expected to keep up.

"Yes," I said firmly. "Both for the runner job and his recommendation for his old job."

"Do I have to say it?" he asked.

I was certain he didn't approve of Naomi taking over the mailroom, and I was also certain he knew I'd stand my ground if pressed.

"Do I have to argue with you?" I replied.

A wry smile spread across Noel Spurgeon's face.

"You really aren't afraid of me anymore, are you?"

"No. I have a lot to learn from you, and I respect you, but I'm not afraid of you."

"Good. Murray came to talk to me earlier about your move on Hawaiian."

I had mulled over the move on the drive to work and had a pretty good idea of what it was he was going to say.

"He's concerned I'm holding back research so that I can, in effect, front run the other traders."

"First, it was a bold move — the kind of move Murray or I would make. That's the kind of aggressiveness we need. Did you hold back the research so you could make that play?

"No. Kirov brought in Peters and Young yesterday afternoon because they had differing opinions, and the three of them could not reach a consensus. You saw my resolution in this morning's report. I was confident enough in Peters' assessment that I made the trade. I absolutely had the information before anyone else, and there's no way around that based on the role you've assigned to me."

"So it's my fault?" he asked. "Like Eve blaming the snake in the garden?"

"I'm not up on my talking snake mythology, but someone once told me that Adam actually blamed God, not Eve or the snake."

"They taught me in Sunday school that Adam blamed Eve, but religion is the last thing I want to talk about, despite the Biblical nod!"

"It's not about finding blame or fault; it's a feature of my unique position, and right now, being Head of Research is the role that best suits Spurgeon Capital. Who bitched?"

"Direct as always! Chau and Singh. You see their point, I'm sure."

"Yes, but prior to last Fall, they wouldn't have even known about it this morning unless one of their guys found it, and Peters worked for Thiele, not Chau or Singh. It's your call, Noel," I said. "I can wait until the information is published in the future if that will calm them down."

"What happened to bold and aggressive?"

"It does Spurgeon Capital no good to have two highly successful portfolio managers not trust the Research Department to provide timely, accurate analysis. I promised to run Research for you, and that's my main role. In this case, it wouldn't have made much of a difference, and, frankly, they wouldn't have moved on this trade. Nobody did, actually, except you. So it's not this analysis and trade; it's the principle. Those guys are my clients, and I shouldn't front run them any more than they should front run their clients."

"Do you think you were wrong to make the trade?"

"I do not. No firm rule or exchange rule prevented me from doing that. It's a question of trust, and I need to consider that for the overall success of the firm. This is a unique situation in the history of Spurgeon — a licensed professional who is an analyst rather than a full-time trader, broker, or portfolio manager. You asked me to run Research, so that's what I need to do, and I need to do it ethically and in a trustworthy manner. You reinforced that point in our compensation conversation."

"I don't want you to be less aggressive."

"I believe I could resolve situations such as this by simply waiting until the analyst reports are distributed. That won't disadvantage me in any way, and it's how things will be once you're confident Tony can take over Research."

"You know it's more than that, right? You have a real knack for it. It's the difference between people like Murray and me and Thiele, Singh, and Chau. Don't get me wrong — they are very good. But there is a significant difference between guys who can formulate a strategy based on analyst reports and guys who feel the market.

"The guys who make the real money have what amounts to a sixth sense. I'm not saying they just magically know, but for them, they can see the market, almost as if it were a living, breathing thing, and know what it's going to do most of the time. Do we get it wrong? Yes, of course, but if we never get it wrong, we're being too conservative. Get it wrong too many times, and you prove you don't have that sixth sense; you've just been lucky.

"Take HA, for example. You listened to three opinions and instantly knew the right move, and you made it without hesitation. You made a call most guys here wouldn't make because it appears to be a 50/50 bet. But it's not, really. Your expected value is four times your exposure. You only need to be right once every four times to break even and twice to make money. On a fifty/fifty bet, if you've calculated the odds correctly, you should be right twice out of four. Do you know the odds on the so-called even money bets at roulette?"

I nodded, "The even-money bets — odd or even; black or red — pay two to one, but they aren't actually even money bets because the house numbers — 0 and, in the US, 00 — reduce the odds from 50% to roughly 47.5%. Your expected value on that so-called even-money bet is actually a loss of about 5¢ on every dollar wagered."

"Draw a parallel."

I thought for a moment and nodded.

"The house numbers are outliers or unexpected events. They reduce your expected value but cannot be predicted any more than you can predict the number on a roulette wheel. That teaches us that a truly 50/50 bet isn't really 50/50. The thing is, those events are, by definition, unknowable. If it truly is a 50/50 thing, then you absolutely have to hedge your bets, reducing your upside but protecting against a major loss. Casinos frown on that and do their best to ensure you can't do it."

"Exactly. Now, tell me how you decided."

"I calculated the expected value against the risk and acted."

"And you did that in your head instantly, right?"

"Yes."

"And then you didn't hesitate to execute the deal. That's the difference between you and Singh or Chau."

"So, do you want me trading or running Research?" I asked.

"I need to clone you! I haven't changed my opinion. You make more money overall for Spurgeon as Head of Research. And, as promised, your bonuses will compensate you for the opportunity cost. I assume you're OK with that?"

"I am."

"Thanks for being a team player. I'll talk to Clinton in a few minutes about the new role. You're positive about Kasparov?"

"Does Mandy Peterson do a good job?" I countered. "And is Pérez doing a good job? I get the whole 'swinging dick' culture, as they call traders in London, but Kasparov will be in a support role, not joining the fraternity."

"You don't agree?"

"Let me pose a hypothetical question — is there, somewhere in the industry, a female trader better than Enderlee?"

"That's a low bar!" Noel Spurgeon retorted.

"I didn't hire him," I said flatly.

"Fuck you, Kane!" he growled. "I should toss you out on your ass!"

"But you won't because, in addition to knowing I'm right, the last thing you want is a 'yes, man'. A 'yes man' with a license is an expense with no value added. You may as well be running a retail brokerage at that point. There is more value added by a mailroom clerk than a 'yes man' with a securities license."

"I'll point out one thing, then I have to make some calls — no female I've ever met could have said that to me. Go make me some money and think that through."

He moved behind his desk, signaling the meeting was over, so I left and returned to 29 and found a message to call Beth. I picked up the phone and dialed her number.

"Bev packed up and left today," she said. "She returned the key. I have no idea where she's headed."

"I'm not surprised, and I couldn't predict what she's going to do, though I can't imagine she'd give up on Heather so easily. Thanks for letting me know."

"You're welcome. Let's have dinner at our usual place next week, if that works for you."

"How about Tuesday?"

"Sounds good! See you then."

After I said 'goodbye', I ended the call and contemplated what to do with the information Beth had provided. As irrationally as Bev was behaving, I could actually see her driving to Goshen, confronting her mom, and trying to take Heather. That would absolutely not be in Heather's best interests at this point, so I picked up the phone and dialed.

"Newton residence; Julie speaking."

"Hi, Julie. It's Jonathan."

"Hi, Jonathan! Have you heard from Bev?"

"No, but Beth called to let me know Bev packed her things, returned the apartment key, and left. I have no idea where she's headed, but I'm concerned she might try to take Heather."

"You really think that?" Julie asked, sounding worried.

"I think she's behaving irrationally, and given how angry she was with me about giving Heather to you, I think it's possible. I'm at work and busy, so I need to keep this brief, but I wanted to warn you."

"Thank you. I'm not sure if you heard, but the newspaper said Glen had waived extradition and will be returned to Ohio tomorrow."

That might also be a reason for Bev to go to Ohio, but I had no clue what she was thinking.

"Thanks for letting me know."

After saying 'goodbye', I ended the call and began my weekly portfolio analysis, using a new program Steve Smith had created for that purpose. It immediately flagged that I was overweighted in transportation stocks, which made me chuckle because I owned exactly one. That was enough to trigger the warning, as my investment profile did not include transportation stocks, with the target percentage set to zero. That didn't mean not holding any stocks in the sector, just that they were special circumstances.

The program properly identified HA as a portfolio risk, as it accounted for just under 2% of my AUM. It also flagged my December gold puts as being uncovered, which meant they counted as a liability, as I had no gold to actually deliver. I could cover them with call options, but that would eat up a few percentage points of my profit. I felt the risk that spot gold in December would be priced higher than my puts was small enough so as not to be worth the cost of the insurance. If world events took a bad turn, I could buy calls at any point to protect my position from further losses.

I noticed something missing, so I used the intercom to ask Steve Smith to come to my office.

"What's up?" he asked.

"My latest trade depleted my available cash to a critical level, and that should have been flagged," I said. "I think you counted the money used for the rolling treasury reinvestments as available because the money hit this morning, and the treasury purchases won't hit the system until the end of the day today."

"Making it appear you have more money than you actually do."

"And the same problem will occur when I have the redemptions so I can transfer funds for the pension plan. They'll sit in the sweep account for a few days before they move."

"All those numbers are variable, and you don't have specific Treasuries dedicated to specific purposes, right?"

"Correct."

Steve frowned, "That's going to be a tough nut to crack with the data we receive from the mainframe. You don't know the transfer amounts for the pension plan until a few days beforehand, right?"