That Was a Crazy Game of Poker

The game is finally over! I have flexed my Walton MBA statistics-enhanced muscle at the expense of my fellow students and have won an unnamed sum from my peers! (well actually I tied) Thanks Prof. Aloysius! Also, please no one mention this to the IRS, I don't like taxes, I feel safe posting this on my blog because nobody reads it anyways.

Bubble Logic

-This picture was taken in Bentonville last week, and it's not the only cupcake store in NorthWest Arkansas, do I smell a tasty & delicious bubble? Also, sorry for the random co-worker who stepped in front of my phone.

My dear readers, it’s finally occurring, the long brownies/short cupcakes arbitrage strategy is finally paying off! I quote a headline from a recent article on Yahoo!’s homepage: “Cupcakes and 6 Other Food Trends That Have Lost Their Cool”

I don’t like to brag or anything, but I think I could be the John Paulson of the dessert market. And, if this comparison proves to be true, I would really like to have a book written about this mythical trade entitled “The Tastiest Trade Ever”, you may remember Mr. Paulson had a book written about his short of the housing market in 2008 called “The Greatest Trade Ever”.

To explain how to make a killing in the dessert market without spending a single grain of sugar from your sugar reserves you must have an understanding of a couple key terms, we’ll start with arbitrage. Arbitrage is a wonderful idea, but typically only occurs in theory and the world of super-computing, the latter I don’t’ have access to and the former doesn’t exist so none of the following writing is applicable to much of anything in my world or likely yours, but I digress. What I was about to get to is that arbitrage is all about mis-pricing, this can be the mis-pricing of a single asset traded in two different markets or the divergence (a statistical anomaly) of one or more assets from an expected or observed, price or pricing relationship. This statistical divergence lends itself to the particular kind of arbitrage set up in the long brownies/short cupcake strategy, statistical arbitrage (statarb for short, try using statarb in a sentence today, people will think you know more than you do).

I have long been an observer/partaker in the dessert market, and have participated in many of the ups and downs of this market. I was a participating member in the 2004 Great Vanilla Ice Cream Intake bubble and sadly I was also present for the subsequent sugar crash that always follows those kinds of gluttonous bubbles. Dessert cakes have long been a favorite sector but until recently I hadn’t noticed the trade to make it profitable. The dessert cake sector of this market is highlighted by a small, but tasty, set of securities ranging from the aforementioned cupcakes and brownies to such luminaries as lemon bars, cookie cakes, tiramisu, and coffee cake. An interesting thing is that while all members of this sector compete against one another, their prices are highly positively correlated, or at least I think they could be. When cupcakes began outpacing the others after much publicity in the Sex and the City TV series and subsequent movies I began to take notice. Not wanting to expose myself to potential upside still in the cupcake bubble I looked to statarb to remove the risk. To illustrate this risk reduction, imagine I short cupcakes at a $2X/unit and buy an equal dollar amount of brownies at $X/unit. Knowing, from prior research, brownies trade at parity with cupcakes (unlike pricy tiramisu) I can go long brownies and short cupcakes as I believe brownies are undervalued relative to cupcakes and when the prices converge, in percentage and not actual price, I make money.

As I see it, the beauty of this trade is two-fold, 1) I don’t have to know anything about the current price of the items, or even where the prices are going, essentially I am betting the percent spread between cupcakes and brownies will tighten in the future, and 2) I can fund the purchase of brownies by the short of cupcakes, thus limiting, or even reducing altogether, my capital outlay. Another benefit (although one I don’t subscribe to) is, theoretically at least, this is a risk-free trade.

So to wrap this all up I’ll conclude with this profound statement, I’ve just profited from a trade in which I didn’t have to spend a dime and didn’t take on any risk, sounds enticing, doesn’t it? Also, and as promised, the new poll should be up, the czar (fellow MBA’er here at Walton) thinks Citigroup common stock is headed to $8 within the next year, it currently trades around $4. I think he’s wrong, where do you think it’ll end up in two weeks? I’m going with $3.85, apparently I’m short Citigroup. I’ve had enough blogging for one night, I’m off to O’Hara’s house to hone my statistical skills playing poker (thanks Prof. Aloysius!!).

As promised, today I will deliver why I chose to attend the University of Arkansas and get a Walton MBA. But first, a little divergence to post an interesting thing I read over the weekend. If you know me, you know I love NPR, and they have a section called Planet Money every once in a while that attempts to make sense of the massive amount of economic and financial news out there, but sometimes it's a little whimsical. They also run a blog and podcast and if you click on the following quote you'll be directed to a recent post about economic bubbles. A teaser from said post:

"If I were playing the dessert market, I'd have shorted cupcakes and gone long brownies the minute "Sex and the City" went off the air." (Planet Money blog)

And now to the main event, the reasons, both multitudinous and compelling, I chose to get a Walton MBA. As I was preparing to finish up my undergrad I wasn't quite sure what was coming next. Fortunately, and unlike most in the economy of early 2009, I had options in staying with Smucker's (with whom I was interning) or attending graduate school.

In early April of 2009 I decided to take the GMAT and in mid-April I took it and did fairly well (as a note, the route of signing up and immediately taking the GMAT is not one I endorse). So I began my decision journey and started close to home and in my comfort zone. Initially I looked at KU, MU (Missouri), OU and OSU (Oklahoma), and TU (Tulsa). I wanted to stay in the region and I wanted to go to the best in the region, so I started with those five. Walton was literally not on my list even though it was the closest geographically to my family home in NE Oklahoma.

Initially, and like most in my generation, I turned to the internet for my first cull. I liked what I saw from OU, OSU, and TU, and I had good e-mail correspondence with all three. About the same time I was selecting which schools to visit I was participating in a business competition with a group from MSSU and with a friend of mine (Alex Kieslich) who had already decided to attend Arkansas. During a weekend when we competed in Jefferson City he told me some things about Walton and offered to mention my name and e-mail address to Rebel Smith, the admissions director for the graduate school. About a week, and a personalized e-mail from Rebel after that, and I had a visit lined up. (Also, as a note to any admissions people, the personalized e-mail is the most priceless persuasion tool)

At that point, pre-visit, I wouldn't say Arkansas was at the top of my list, but at least now it was on my radar. My visit was on a Friday and I took it off work and carpooled down to Fayetteville with Alex. I remember thinking the campus looked nice (I had never been on it despite living slightly over an hour away) and liked the parking garage right next to the graduate school. While there I had the standard talks with the program director and admissions director, spoke with career services and had lunch with a current student, all par for the course, pretty much the same thing I experienced at Tulsa which I had visited about a month earlier. None of the standard stuff held much sway with me because, the way I look at it, one afternoon visit is not enough to gain an understanding for the intracacies of the faculty, one student is not enough to decide if you'll fit in socially with a particular program, and fifteen minutes with career services is not enough to decide if they'll work with you to help you get the best job possible after graduation.

Yet at the end of the day, I walked away with Walton at the top of my list and so far out in front of the others I didn't even want to look back. For me, there ended up being three reasons for this:

1. Direction - My dad is a civil engineer and all of my family is very mechanically-minded so I have a tendency to analyze all objects with flow and direction. This leads to three possible outcomes, forward, backward, and static (going nowhere). And what I saw when I looked at other schools was not necessarily atrophy or backwards motion but apathy, they didn't talk about getting nationally ranked and they didn't talk about how competitive they were, which left me feeling apathetic about their schools. Both of these things were talked about by nearly everyone at Walton, and I could tell the staff felt they were on the cusp of something big. Essentially I had the feeling the program was in forward motion with everyone working to make the program better. As it turns out, my feelings were correct and we were just ranked the #25 full-time public MBA program this spring by US News, and now we're tasked with keeping, and building this impressive momentum.
2. Camaraderie - One thing that personally made a difference for me was the feeling of camaraderie I felt I would receive at Walton. Unlike all the schools I visited, the full-time students at Walton travel in one large pack. We started with 36 people this spring and at the change of classes we would move as a 36-person mob from one room to the next. This allows you to know everyone in the program by name, know their significant others, know their hometowns, and eventually it creates this fabric where you don't have to remember any specific due dates or meeting times because the group will. I think of this past semester like no one knew everything, but collectively, we knew it all.
3. Facilities - For me, this was the one that held the most sway. I remember Rebel taking me up to the MBA floor and we looked at the case study rooms and the classrooms and I was absolutely stunned. The facilities looked better, in person, than any pictures from any other school I had seen on the internet, even crazy aspirational programs I wouldn't consider applying to. Rebel told me some of the GSB staff went to Cambridge, Mass. to examine Harvard's facilities and the people who did their's did ours and honestly, I think we must have the best facilities in the nation.

I know I'm leaving many small reasons off this list and if I think of them I'll post them, but this is getting lengthy and I'm getting hungry so I'm out. Stay tuned because I think I'll add a poll with a predicted close for Citi stock in the next coming weeks, the Czar thinks it's going up and I think he's wrong so we'll let you decide.

An Introduction

So. . . this is my first attempt at blogging and I'll start with an introduction. My name is Brock Hauser and, as indicated in my blog title I am an MBA candidate at the University of Arkansas in Fayetteville and have one year left in the program. I'm 23, which is slightly young for our program and for most top MBA programs in general so I thought an apt title would be "Doogie Hauser" as the other Doogie Howser was an MD of exceptional youth.

A little background information about me, I've lived in Fayetteville for about six months now. Prior to starting the Walton MBA program I worked for two years as an accounting intern with The J.M. Smucker Co. at their canned milk manufacturing plant in Seneca, Missouri (and if you're wondering; yes, we cried over spilt milk). While working there I completed my undergraduate degrees in Accounting and Finance at Missouri Southern State University in Joplin. However, I did not begin my collegiate career in Joplin and was actually a transfer from the University of Kansas, where I spent my first three semesters, and between those two academic stints I lived for six months in Australia. You might ask what I was doing in Australia, and while I wish I could answer that I was studying abroad or work and broadening my horizons this is not the case, I didn't really do much of anything, I lived in Brisbane, and spent most of my days sitting on a beach, hiking, rock-climbing, bicycling, and learning how to do other fun things like kite-boarding and surfing. I had a blast while I was there, but I also realized it wasn't a realistic lifestyle, after all, you can't sit around and not contribute to society for all of your life (unless you live in France or Denmark, but that's a story for another day). Anyways, prior to Australia I didn't really know what I wanted to do, but when I got back I figured it out pretty quickly. I had always held a keen interest in finance and business but finance, while seemingly rock solid when compared to art history, is not the most tangible major, so I tacked on accounting as well.

This is getting a little long so I'm going to wrap up all of my life prior to college in the next 2-3 sentences. Born in Joplin (coincidentally where I finished college), lived in Stillwater, Grove, and Tulsa, OK for the next nine years and while in Tulsa, as a young tyke, participated in everything from figure skating, ballet, and piano lessons to soccer, ice hockey, and road racing (completed my first 5k at age 5). We then moved from Tulsa to American Samoa and lived there for two years before moving back to the mainland and living in Neosho, Missouri for the next three years. However, my parents wanderlust was not satiated and we moved to Ma'adi, Cairo, Egypt for eighteen months before moving back to Neosho where we stayed for two more years. After the second stint in Neosho we moved to Wilmore, Kentucky and I attended all four years of high school there and competed in varsity soccer and tennis.

Just as some minor foreshadowing, and to keep all of my readers (ha! like I have any!) intrigued enough to come back, next time I will discuss why I chose the to get a Walton MBA!!!