If any one tries to tell you differently, all you need to do is show them the chart below. As last week's trading illustrates, every time oil went up, stocks went down, and every time oil pulled back, the market gained steam.
Sunday, June 29, 2008
As a cheerful Bloomberg headline reminds us, equity investors are facing their worst June since the Great Depression. And sure enough, most major markets (the Hang Seng, Dax, CAC, S&P 500 … ) are down more than -8% this month, pulled lower by a number of concerns including a) the health of Western banks, b) the rise in oil prices, c) deteriorating economic growth and d) worsening inflationary pressures.
If the current month ended today the Dow Jones Industrial Index would be down 9.4% and have locked in the worst June since 1930. Check the following chart, coursey of Paul Kedrosky, for the painful picture.
“Granted, June 2008 is not in the top 30 bad months of all time, so let’s keep our heads on, but if it feels like it’s been a nasty, nasty month, that is because it has been,” said Kedrosky.
Friday, June 27, 2008
June 27 (Bloomberg) -- Daniel Fuss, manager of the $18 billion Loomis Sayles Bond Fund, cut his U.S. Treasury holdings in favor of non-U.S. markets that haven't been hit as hard by the credit shortage.
``My sense is that the U.S. is tough, and that Asia is not weakening to the extent that some people believe,'' Fuss, 74, said yesterday at an industry conference in Chicago.
Fuss, vice chairman of Boston-based Loomis Sayles & Co., reduced his U.S. Treasury investments by more than two-thirds in the six months ended March 31. One-fifth of the fund's assets are now in non-U.S. bonds, led by Canadian securities at 9.4 percent. Loomis Bond has climbed 4.4 percent in the past year, more than 64 percent of rivals, according to data compiled by Bloomberg.
The Chinese and Russian economies are still ``fairly robust,'' said Mewbourne, who has increased holdings in countries such as Brazil. The Pimco fund, which has 37 percent of assets in emerging-markets debt, gained 2.4 percent in the past year, ranking it ahead of 75 percent of peers.
Bond investors are struggling to balance attractive yields with risk because of a credit crunch triggered by the collapse of subprime mortgages last year.
Yields on U.S. Treasuries have fallen as investors have fled to the safest government-backed debt. The 10-year note's yield declined 7 basis points to 4.03 percent, after earlier touching 4.02 percent, the lowest in more than two weeks.
Within the U.S., the bond-fund managers said they are investing in corporate debt. Fuss has reduced his U.S. Treasury holdings, while adding to corporate bonds and high-yield debt. His fund holds 3 percent in Treasuries, down from 10 percent last September, and 18 percent in high-yield credit.
``One thing I get excited about is high-yield bonds,'' Fuss said. He helps oversee $50 billion, including accounts for institutional investors.
Mewbourne, of Newport Beach, California-based Pacific Investment Management Co., said hybrid securities issued by U.S. banks such as Citigroup Inc. offer good opportunities for bond investors.
``There's a pretty good certainty that big banks in the U.S. aren't going to default,'' Mewbourne said.
Emerging-market bonds fell yesterday, pushing yields relative to Treasuries to their widest since April, as declining U.S. stocks prompted investors to shun higher-yielding assets.
Falling values of fixed-income securities have forced banks and securities firms worldwide to take $400 billion in asset writedowns and credit losses, according to Bloomberg data.
Mewbourne and Fuss spoke at a conference organized by Morningstar Inc. Also speaking in Chicago, Pimco Co-Chief Executive Officer Mohamed El-Erian said investors are reassessing risk in the wake of the credit turmoil and the emerging might of developing economies.
Pimco, a unit of Munich-based Allianz SE, is the largest manager of bond assets, with more than $800 billion. Loomis Sayles, a subsidiary of Paris-based Natixis, manages $130 billion in bonds and stocks.
That's what author, investment advisor, and former neurologist William Bernstein said at Morningstar's Investment Conference Thursday. It's worth paying attention to his opinion because eight or so years ago in his book, The Intelligent Asset Allocator, he crunched a lot of data and concluded that REITs, TIPs, junk bonds, and small-value stocks would have higher future expected returns than the large-growth stocks that were dominating the headlines and investors' portfolios at the time.
Currently Bernstein sees most stocks as modestly overvalued, and REIT yields as not that attractive. He's also worried about what effect currency fluctuations could possibly have on foreign equities, which have benefited tremendously recently from a weak dollar. He didn't include commodities in his overall assessment, though, because he doesn't use them (he doesn't like the futures markets and doesn't trust the retail funds and ETFs that offer commodity exposure). But he does think commodities are in a bubble.
Bernstein thinks about relative valuations among asset classes, but the author of the Efficient Frontier Web site is really a buy-and-hold investor who uses mostly passive funds from DFA and Vanguard. He spent a lot of time talking about the right way to rebalance a long-term portfolio. Bernstein has done considerable research into the best ways to rebalance--whether to do so at preset times on the calendar or when asset classes meet certain thresholds. He prefers the threshold method because he said he thinks it can result in better returns, though he admits that he has had trouble coming up with hard data to back that up. The difference between really good rebalancing and average rebalancing is about 10 or 20 basis points, or hundredths of a percent, in portfolio return, he said. No matter which form of rebalancing you choose, Bernstein has concluded that you can go two or three years without resetting your asset allocation.
The former neurologist said he doesn't pay as much attention to behavioral finance as you would expect for someone with a medical background, but he said it can help you understand what emotional responses to expect when tough investing decisions arise. Like a pilot who has to overcome his fear of pushing down on the plane's stick when losing speed (doing so helps gain airspeed), investors have to steel themselves to make the hard choice. Bernstein, a former pilot, noted that some of the best trades are made when you have a nauseous feeling in your stomach.
The biggest mistakes most experienced investors make, Bernstein said, are not knowing enough economic and market history and conflating economic growth with equity returns. The current credit crisis, the burst of the technology stock bubble, and the collapse of hedge fund Long-Term Capital Management have all been called 100-year storms in finance, but they've all happened in the last decade. China's economic growth has been astronomical in the past 15 years, but its equity market returned just over 1% from 1993 through December 2007.
Do you agree few asset classes look cheap? Are commodities a bubble? What's the best way to rebalance? And do you know your economic history?
Senior Mutual Fund Analyst
From data compiled by Bloomberg, financial firms have now written down $399 billion, with much more expected in the coming weeks. On the flip side, they have raised a total of $322 billion in new capital.
Below we highlight the writedowns and capital raised of major financial firms around the world. Citigroup (C) tops the writedown list at $42.9 billion, followed by UBS ($38.2) and Merrill Lynch ($37.1). Goldman Sachs and Wells Fargo are at the bottom of the list with $3.8 billion and $3.0 billion written down respectively.
In the table we also include the current market cap for each firm as well as the ratio of writedowns to market cap. ETrade (ETFC) tops this list with a ratio just over two (writing down $3.3 billion with a current market cap of $1.6 billion). Washington Mutual and Merrill Lynch are the only other firms that have written down more than their company is currently worth. JP Morgan, Goldman and Wells Fargo have the best writedown/market cap ratios.
June 27 (Bloomberg) -- The Citigroup Inc. team that invests in distressed corporate bonds and loans is being broken up as its leaders leave to start a hedge fund later this year, according to a person familiar with the matter.
Jeff Jacob and John Humphrey, who set up the bank's global special situations group in 2004, will depart in about two months with six or seven members of their team, said the person, who declined to be identified because the plans aren't public yet. The group's assets, which amount to several billion dollars, will remain at Citigroup, where some will be placed in a customer- trading group's inventory and some will go into a new principal- investing division, the person said.
``We have decided to restructure our Global Special Situations Group in order to maximize the significant opportunities in the global distressed sector,'' said Danielle Romero-Apsilos, a spokeswoman at Citigroup in New York. She declined to elaborate on the team's plans or to say how much if any capital the bank might invest in the fund.
Citigroup has taken $43 billion in writedowns and losses from the collapse of the U.S. mortgage market, more than any other bank. Its shares have tumbled more than 40 percent in New York Stock Exchange composite trading this year amid fears the bank will post more losses as it writes down the value of debt securities it owns. The stock fell to its lowest level since 1998 yesterday after Goldman Sachs Group Inc. analyst William Tanona said the bank may reduce the value of its assets by $8.9 billion.
The global special situations group invested in corporate bonds and loans, not in mortgage or structured credit, the person said. Joshua Rosner, a managing director at Graham Fisher & Co., said the departure of Jacob and Humphrey raises questions about how their assets had been performing.
``If the performance was great, given all the problems that Citi's been having you'd think it would be in the best interest of Citi to keep them,'' Rosner said.
Jacob and Humphrey are starting their new fund because they see an opportunity in the market and have been approached by potential investors about starting a new business, said the person familiar with their plans.
Thomas Gahan, who ran Deutsche Bank AG's global capital markets division, said in March that was leaving to start his own investment firm, citing a ``huge opportunity across the credit spectrum.'' David Sherr, who oversaw Lehman Brothers Holdings Inc.'s securitization group, started his own hedge fund in March, and Rick Rieder, who managed a proprietary-trading fund at Lehman, brought about $5 billion of Lehman assets with him to a new hedge fund called R3 Capital Partners earlier this month.
Some members of Citigroup's global special situations group will join the customer-focused distressed sales and trading business led by Carl Meyer, while others will join a private investment business run by John Peruzzi, the person said. Both Meyer and Peruzzi will report to Carey Lathrop, who runs global credit trading, the person said. All are based in New York.
Thursday, June 26, 2008
But there was one winner on Thursday - the venerable Smith & Wesson, maker of handguns and beneficiary of the US Supreme Court’s decision that Americans have an individual right to bear arms.
SWHC rose 6.7 per cent after the Court ruled that Washington DC’s handgun laws violated the Second Amendment to the Constitution.
said in a recent telephone interview. Unlike many of his peers, Eveillard does not believe the storm is over. "The transition to a better economy may take quite a while and be quite painful," he said.
Wednesday, June 25, 2008
Below we highlight the S&P 500's performance on days when the Fed has made a Fed Funds Rate decision since August 8th, 2006 when the Fed stopped its long period of hiking rates. We also include the index's change in the week after the close on the FOMC day. As shown, the average change in the S&P 500 on these days has been 0.46% since 8/06. During the current easing cycle, the index has been up three times and down four times. The days when the market has been up have generally been big up days (2.9%, 1.2% and 4.1%).
Yesterday's release of short interest figures for the Nasdaq confirmed the increases we saw last week in the NYSE. Updating our figures for S&P 500 short interest shows that the average stock currently has 5.8% of its free float sold short. While part of the rise can be attributed to hedge funds and the increased popularity of long/short mutual funds, at least some is attributable to negative investor sentiment.
Tuesday, June 24, 2008
Chalk it up to seasonal factors, but it's good to see some green in the month over month readings of the S&P/Case-Shiller Housing indices. As shown at right, 8 of the 20 cities that Case-Shiller track showed increases in home prices from March to April. Cleveland saw the biggest month over month increase at 2.94%, followed by Dallas (1.12%), Denver (0.83%), and Seattle (0.72%).
There were plenty of declines in April as well, however. Miami fell another 4% in just one month, while Las Vegas, Tampa, Minneapolis, LA, San Fran, San Diego and Phoenix all fell by more than 2%.
And the year over year numbers are still quite depressing. The Composite 10-City index was down 16.3% from April 2007 to April 2008. And Charlotte, which was the last city to hang onto year over year price gains, finally turned negative versus a year ago.
Below we highlight historical charts of the monthly year over year percent change in median home prices for the 20 cities tracked by S&P/Case-Shiller. If you look real closely, you'll see that in April the year over year declines stopped declining by as much as they have been recently.
June 24 (Bloomberg) -- Goldman Sachs Group Inc.'s Global Alpha hedge fund has gained 19 percent this year after a plunge of almost twice that amount in 2007, said three people with knowledge of its performance.
The rebound through mid-June reflects improved returns for quantitative funds, which rely on computers to select trades, after investors rushed to exit similar strategies last year during the credit crunch. Goldman's Global Equities Opportunities Fund, which required a $3 billion cash infusion last year, has gained about 7 percent, said the people, who declined to be identified because the returns are confidential.
Global Alpha, run by Mark Carhart and Raymond Iwanowski, shrank to about $2.5 billion from a peak of $12 billion, while Global Equities fell to $1 billion in assets from $6 billion. New York-based Goldman manages $146 billion in alternative assets including hedge funds and private equity.
``One of the lessons learned is we cannot be as big as we were,'' said Robert Litterman, chairman of Goldman's quantitative investments, at the GAIM International hedge fund conference in Monaco on June 19. ``We couldn't get out and if we had it would have made it worse. We had to ride it out.''
Goldman now uses proprietary trading ideas for about 35 percent of its positions, compared with 5 percent last August, when funds with similar trades rushed to unwind them in what Litterman called a ``de-leveraging explosion.''
``It was a disaster by any description,'' possibly prompted by funds selling to raise capital for losses elsewhere, such as subprime mortgages, Litterman said.
Goldman spokeswoman Andrea Raphael declined to comment.
Quant Funds Gain
While quantitative funds have prospered, hedge funds overall are roughly flat through May in the $1.9 trillion industry's worst start to the year in nearly two decades, according to Chicago-based Hedge Fund Research Inc.
``Quant funds are doing extremely well,'' said Marco Dion, an analyst at JPMorgan Chase & Co. Dion said last year's shakeout left only investors committed to the strategy, so quant fund managers haven't faced as many redemptions as some other strategies. Dion estimated that many so-called long-short quant funds may be up 10 percent to 15 percent this year.
Litterman said he had missed signs of the proliferation of common quant trading strategies. One was spotting a book on the topic in a bookstore in Malaysia. Another was realizing the interest in Goldman's own funds showed investors were pouring capital into the investment style, including through so-called multistrategy funds, he said.
``It was like turning a light on in a dark room to see the amount of crowdedness,'' Litterman said. ``We were less attuned to it because we didn't think of it as a trade, we thought of it as a business.''
Goldman and investors including Maurice ``Hank'' Greenberg, the former chairman of American International Group Inc., pumped about $3 billion into Goldman's Global Equities to shore it up last August.
June 24 (Bloomberg) -- One of the amazing things about golf is how many people have been fooled into believing it is actually a real sport. All over the world people now talk and think about golf as if it's more like football or basketball than, say, bird- watching.
The first and most obvious symptom of this mass delusion is the need for golfers to gin up a melodrama inappropriate to the occasion.
It's not enough for Tiger Woods to be the world's best golfer. He must also jump around and holler, pump his fists and thump his chest, and generally behave in ways that clash, tonally, with the thing he's actually doing: dinking a little white ball around in the grass, all by himself.
The striking thing about the recent U.S. Open wasn't that Tiger Woods won it playing on a broken leg. The striking thing was how much he -- and the golfing world -- clearly relished the idea of Tiger Woods playing on a broken leg.
As he limped and grimaced up fairways and around doglegs, with the crowd and the cameras lusting for every wince-laden drive, he was no longer just golfing. He was elevating golf to the status it so desperately seeks: the status of a genuine athletic event.
Finally, you could hear the golfing world thinking to itself: A golfer is proving once and for all that our game is a test of deep character and physical courage.
See: Golfers play hurt!
See: You can even get hurt playing golf!!!
Well, you can get hurt playing darts, too. Or hiking. Bowling can be seriously hazardous, if you don't know what you're doing. Play with enough passion and you can even injure yourself in a spirited game of Monopoly. (I once cut my finger grabbing Park Place.)
Play Through It
It's absurd when you get hurt bowling, just as it is absurd when you get hurt playing golf -- or would be if golf assumed its rightful classification among curious outdoor hobbies, on the same mental shelf as scuba diving and tai chi chuan.
But it can't. Golfers will not allow it. Too many rich, important people are too heavily invested in the belief that golf is a serious athletic event.
Too many rich, important people need for golf to be viewed as a proxy for combat, a test of character, a showcase of mental toughness, and so on. There's too much social pressure for golf to assume anything like an honest place in the world of human activities.
For some time now our age of specialization has been creating a big problem in the sports world. Serious athletes resemble ordinary human beings less and less, but rich, important people want to identify themselves with athletes more and more.
There's an obvious need for some physical activity that can pass itself off as a sport in which rich, important people can easily participate, and simulate the motions of a pro, without fear of total humiliation.
At first blush this would seem impossible. Rich, important people often lack athletic ability, and so any faux sport would need to be doable without balance or dexterity or coordination. Many rich important people are also fat and physically lazy -- and so the faux sport must also be doable with a minimum of exertion.
It would be a plus, for instance, if it could be done, without shame, while riding around in a little electric cart.
Enter golf. If it didn't exist, some rich, important person would have had to invent it for himself.
For the Birds
Once you see golf for what it is -- an activity more like birding than basketball that, for the sake of rich important people, everyone is pretending is more like basketball -- you begin to understand a lot of otherwise hard-to-fathom golf- related phenomena.
For instance, the huge sums paid to real athletes, from real sports, to play golf. The appearance fees that any recently retired jock can earn by playing a round of golf with businesspeople is, on the face of it, bizarre.
It's hard to think of another form of recreation that pays jocks to associate themselves with it. Spelunkers don't pay ex- jocks to spelunk; tai chi chuan masters don't pay ex-jocks to contort themselves conspicuously in the local park.
Only golf pays ex-jocks to play it -- so that the people who engage in it can feel more jock-like.
Which is the first reason ex-jocks have suddenly all become avid golfers. Michael Jordan may think he plays golf obsessively because he likes to play golf. He in fact plays golf obsessively because -- at least in the beginning -- it paid.
And it paid because millions of pudgy rich men long to be able to say to themselves and to others: Michael Jordan and I play the same sport. If instead of being paid millions of dollars to golf, Michael Jordan was paid millions of dollars to play tiddlywinks, or to bird-watch, we would all be marveling at the ferocity with which Michael Jordan pursued the ivory-billed woodpecker.
Once golf has lured actual athletes into it, with cash, it takes little effort to keep them there. As the golfing world knows, money is not golf's lone appeal. Once you create a faux sport -- an activity that seems like an actual sport, without the ardors of an actual sport -- you create something even better than a sport: an argument for not doing whatever it is you are meant to be doing.
Hence what might be called golf's negative attraction; it pulls people in by what typically is not found there. In no particular order of importance these are:
1) Actual Work
4) Awareness that any of the above might be more important than golf.
Some meaningful number of rich, important men have persuaded themselves, and perhaps even their loved ones, that golf is not merely golf. That in playing golf they are simulating work -- or, at any rate, training for work.
This explains yet another curious trait of golf, not found in bird-watching or snorkeling -- although often found, oddly enough, in tai chi chuan.
The people who engage in it always seem to be making a point of not enjoying it. Tiger Woods makes golf seem like a lot of things but one of those things is not fun.
(Michael Lewis, author, most recently, of ``The Blind Side,'' is a columnist for Bloomberg News. The views expressed are his own.)
Peter Boockvar of Miller Tabak made a good point in a commentary this morning. Discussing when and how we might find a bottom, he notes: "In my opinion it comes down to predominantly one factor and that is when house prices stop going down. When that occurs we will be able to comfortably quantify all the remaining exposure and securities tied to it."
With that said, the Case-Shiller home price index was weak but not as weak as expected. The composite of 20 metro areas fell 1.4 percent from March to April; a decline of 2.0 percent was expected. This was the smallest month over month drop since August-September of last year. Year over year, the decline was 15.3 percent; 15.9 percent was expected.
Bottom line: prices are still declining, so we have not hit a clear bottom, but the rate of decline is slowing.
Monday, June 23, 2008
By MARK DeCAMBRE
June 20, 2008 --
Fortress Investment Group is considering adding another $1 billion to the war chest it's amassed to take advantage of the pain being felt on Wall Street.
The US' first publicly-traded hedge fund is aiming to raise the extra cash on top of the $2 billion so-called "credit opportunities" fund it has been marketing to investors since January to invest in distressed assets.
Fortress' fund likely will look to purchase debt including securities such as mortgage-tainted collateralized debt obligations and leveraged loans that have been stuck on bank balance sheets and have plunged in value.
Writedowns in soured debt total about $400 billion at financial firms.
Some investors, however, still see potential value in the assets, which have been trading at deep discounts.
Last summer Deutsche Bank, Citigroup, UBS and Merrill Lynch were jammed with hundreds of billions in debt on their books, which prevented them from doing future business.
That backlog has been reduced by more than $90 billion - but that still means billions in assets still need to be unwound.
For instance, embattled Lehman Brothers sold $147 billion in loans and bonds but still has more than $600 billion in debt on its books.
A spokeswoman at Fortress in New York declined to comment on the hedge fund's plans.
“Well I don’t know why I came here tonight
I got a feeling that something ain’t right
I’m so scared in case I fall off my chair
And I’m wondering how I’ll get down those stairs
Clowns to the left of me, jokers to the right
Here I am..”
- ‘Stuck in the Middle with You’ by Stealer’s Wheel; also the soundtrack to the notorious ear-removal sequence in Quentin Tarantino’s ‘Reservoir Dogs.’
There has never been any shortage of clowns and jokers in the investment markets, but it sometimes takes a bear market to flush a few out. In contradiction to the widespread fear that hedge funds would precipitate the Next Big Crash, we now know that it was actually the banks that laid its (wobbly) foundations. Now, with sentiment fragile and fund managers widely sheltering in cash, the journalists are having a go at pushing at the pedestal.
“RBS issues global stock and credit crash alert,” warned Ambrose Evans-Pritchard of the Telegraph, inviting “one of the worst bear markets over the last century.” The RBS research note in question was more subtly entitled “Crude-flation Concerns Spike”; while crude-flation is undoubtedly an uglier word even than stagflation, it is not clear who Spike is, nor why he should be concerned.
It is certainly difficult to know quite how worked up (if at all) to get about the RBS note in question. Some of us evidently felt that the markets had already “crashed” in the conventional sense of the word, given the falls in credit markets and stocks – particularly banking stocks like, say, those of RBS (-60%) – since the summer of 2007.
“The very nasty period is soon to be upon us – be prepared,” warned RBS on 11th June (2008). The market environment is nasty already, and has been for quite some time, as anybody with any form of investments will surely testify. Perhaps future research will report the sad passing of Queen Victoria or the sinking of the SS Titanic. But it is always nice to hear that the banks who brought us the credit crunch in the first place are bang up with events. Just after they’ve had their latest emergency rights issue.
There is, of course, a long and inglorious history of commentators calling for a Crash. Perhaps the most piquant example is that of Elaine Garzarelli, the stock analyst who became associated in the public’s mind – no doubt thanks to the press – with “predicting” the 1987 stock market “correction.” As Michael Lewis of Bloomberg pointed out in 1997, thanks to the marvel of modern technology it is now easier to keep tabs on the prognosticators and less easy for them to squirm away in a cloud of over-hedged obfuscation. Access to a Bloomberg terminal “illustrates among other things the sheer lunacy of anyone who would bet money on anything Elaine Garzarelli said:
Aug 5, 1996: Garzarelli Sees Market Rise as Selling Opportunity
Oct 8, 1996: Garzarelli More Pessimistic on Direction of Stock Market
Oct 26, 1996: Garzarelli Sees US Stocks Falling up to 20%, Magazine Says..
And a mere few years after she was regarded as a stock market genius, the cruel headline:
Elaine Garzarelli Denies She’s a Contrary Indicator
Good luck to the analyst who insists on feeding the media with constant “forecasts” of market direction. The beast is insatiable, though, and it can turn from fawning puppy to slavering rottweiler in less time than it takes to look up how to spell Teun Draaisma.
And yet there are reasons to be cheerful (or at least not full-bloodedly crazy ape apocalyptic) on the basis of the latest Merrill Lynch fund managers survey. A net 27% of fund managers were underweight in equities relative to other instruments of confiscation. A net 42% of managers were overweight cash, up by 10% from May. Karen Olney, chief European equities strategist at Merrill, was quoted by the Financial Times as saying that :
Investors don’t know where to go. They are favouring oil and commodities plays in equity markets, which shows that inflation is playing havoc with the rest of the economy.
At PFP, we are quite happy telling investors where to go. On second thoughts, there may be better ways of expressing that sentiment. But the investment approach that makes the broadest sense to us is simply to remove one’s dependency on (still volatile and still largely vulnerable) equities and (extraordinarily unattractive) bonds, and to raise one’s exposure to absolute return funds and real assets, subject to the vagaries of relative valuation. By absolute return funds, we mean diversified hedge funds as opposed to warmed over and reinvented bond funds travelling under the guise of something useful but happening to charge higher fees.
As the marketing departments of big investment houses know well by now, there is a danger of being entirely out of the stock market, in that the single best days of market performance account for huge portions of the market’s overall return for any period. And you have to be in it to win it.
But by the same token, there is absolutely no requirement to be invested in rubbish (bank stocks; retailers; homebuilders; businesses exposed to the bowel-shattering horror show that is the Anglo-Saxon middle market consumer), and there are still plenty of reasons to be invested in high quality businesses associated with energy, energy support services and infrastructure, not least because they’re about the only remaining equity assets still rising in price. That makes them sound like momentum plays. Which they are, to a degree - but the likely period of that outperformance and momentum is a matter of years, rather than days or weeks.
The other lingering scent of good news hangs sweetly in the form of Japan. CLSA’s Jolyon Montague quotes Sir John Templeton: bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. Japanese stock markets seems to have moved, finally, from the pessimism to the skepticism stage. And as Asian hedge fund specialists Stratton Street point out, the relative performance of equity markets in Q1 and Q2 in local market terms is striking:
We were perhaps a little harsh on RBS: yes, it is an absolutely ugly investment environment. Some of us realised that, and articulated our fears, months ago. But we are convinced that selective opportunities remain, even in equity markets, if not in bonds. And as the Sage of Omaha has it, one good time to be greedy is when others are fearful.
A real bear market is supposed to start after major market indexes decline at least 20%. By that measure, the bear isn’t here. But who’s kidding who? You know it’s a bear market on Wall Street when:
1. You receive yet another “Dear John” letter from your panicking money manager that starts, “As I’m sure you know, the month of June has been very challenging…” and ends with the old tease that, “It is in the most challenging of markets that the greatest opportunities appear.”
2. You tell your wife that the crisis on Wall Street is actually a good thing, as it will bring New York real-estate prices down and make it easier to buy a bigger place. Even though you bought your apartment less than two years ago, have no children and will be lucky to get any bonus this year.
3. You don’t have to lie to your friends anymore about the drive time from New York City to the Hamptons. With the roads empty, it finally takes the hour and 45 minutes you always pretended it did.
4. You receive the eerily familiar email from the company CEO full of resolve that the firm will come out of this difficult period even stronger. Then you realize–it is the same email you received two months ago but from a different CEO.
5. Your cubicle is moved yet again as your office floor undergoes its fourth reorganization in less than a year. You speculate on whether it is a good sign that you are sitting closer to your boss until you find you are the only two left in the department – and you are the one next to the photocopier.
6. You recall how you all laughed about the pilot program to outsource banker work to India. Until it went fully operational, you stopped laughing and were told to pack your things.
7. You are relieved that the value of all your company vested and unvested shares and options is down only 50% from its peak nine months ago. Never mind that you could have easily dumped most of the shares at prices that won’t be seen for another 10 years.
8. After months of naysaying the agriculture boom, you finally succumb and find tremendous value in the shares of a $72 billion fertilizer company that was worth a 10th of that two years ago.
9. You walk around smartly reminding everyone at the firm how you warned them that the traders would finally get their comeuppance. Until you remember that the traders are still running your bank and most of Wall Street.
Yes, Virginia, there is a bear market out there.
The recent declines in many Financial stocks have put them in unprecedented negative territory. Below we highlight historical charts of the percentage from 52-week highs for Lehman (LEH), Wachovia (WB), Citigroup (C), Merrill Lynch (MER) and Bank of America (BAC). At its low point earlier this month, Lehman was 72% below its 52-week high, making it the furthest below it has ever been. Wachovia is 68% below its highs over the last year, and Citi got down to 66% below back in March. Merrill Lynch and Bank of America aren't quite at record territory yet, but they're getting close. Back in 1998, Merrill got down to 65% below its 52-week high, and it is at -60% now. In 1990, BAC was 66% below its 52-week high, and it's at -50% now.
The consensus view is that the struggling Financials still have much further to go on the downside before the pain is over. But if they fall much further, they might have dug a hole they can't get out of. Taking a longer-term view of one, two, or even five years from now, will these charts have marked a screaming buy, or a clear sign that the companies were "toast?"
Friday, June 20, 2008
Even the best are struggling. As of yesterday's close, Bill Miller's Legg Mason Value Trust was down 22.7% on the year versus the S&P 500's decline of 8.55%. Mr. Miller's fund performance is doing nothing to help out Legg Mason's stock (LM) either. As shown, it is down nearly 30% on the year.
We think we have it bad here...
Although it's widely believed to be underestimated, the CPI in the US is on the lighter side of inflation compared to the 70 other countries listed below. As shown, the median CPI for the 71 countries is 5.83% (YoY) compared to the most recent CPI of 4.2% in the US. The highest inflation rate goes to Venezuela and the Ukraine at 31%, followed by Sri Lanka (26%), Vietnam (25%), Egypt (19.7%) and Pakistan (19.27%). Although our "official" inflation rate is below the majority of the countries we analyzed, prices here are higher than major countries like France, Germany, the UK, Canada and Japan.
Chart(s) of the day - Morgan Stanley’s stagflation matrix:
From the MS asset allocation committee, which includes FT Alphaville favourites Stephen Jen and Teun Draaisma:
Inflation risks plague all portfolios. Investments across regions and asset classes are all affected by inflation’s surge to multi-year highs. In 80% of developed and emerging market countries where central banks have inflation targets, inflation now exceeds them.
A new inflation regime. We expect inflation to be higher and more persistent in the next several years than what is priced into bond markets and what consensus forecasts suggest.
From tailwinds to headwinds. Deregulation, globalization and strong productivity growth helped central banks to keep inflation low over the past 20 years. Now, re-regulation and protectionism are making a comeback, globalization has turned inflationary, and productivity growth has ebbed.
It’s global, not local. Don’t bank on the economic slowdown to dampen inflation pressures much. Our research suggests inflation has become globalized. Thus, to keep inflation on target, central banks would have to engineer severe recessions. Most will lack the resolve to do so.
And here’s the ppt slide showing the end of the Goldilocks era - welcome to the new inflation regime:
Where do you hide? Here are the MS “group picks”:
Thursday, June 19, 2008
Citigroup’s CFO Gary Crittenden rattled investors on Thursday when he said the investment bank could incur “substantial” second-quarter writedowns on its holdings of collateralized debt obligations linked to subprime mortgages and on leveraged loans.
While the second quarter writedowns are unlikely to be as large as the $6bn hit recorded in the first quarter, “if current trends prevail, it is fair to conclude that we will continue to have substantial additional marks on our subprime exposure this quarter,'’ Crittenden said. “Although in a sequential quarter comparison, we may continue to see the magnitude of the marks decline, as the exposures that we have have declined.'’
Citigroup may also have to write down the value of assets backed by the bond insurers, Crittenden said. In the first quarter, the investment bank recorded a cost of $1.5bn related to their exposure to the bond insurers, and may record a “similar'’ cost in Q2, he told investors.Five year CDS contracts on Citigroup’s debt hit a multi-week high of 125 basis points after the comments, made on an investor conference call. The news also hurt other banks and brokers - JP Morgan added 2bp to 90bp, while Bank of America widened by 5bp to 92bp.But the benchmark Markit CDX index of investment grade North American companies was largely unchanged, edging just 1bp wider to 116.5bp.
Below we highlight the central bank rates of major countries and regions around the world. We also provide where the rates stood just before the Fed cut the US Fed Funds Rate from 5.25% to 4.75% back in September. As shown, Brazil currently has the highest central bank rate at 11.25%, followed by Russia (10%) and China (7.29%). Japan is by far the lowest down at 0.50%. Since September, the US has cut rates by 325 basis points, which ties Hong Kong for the biggest cut in rates. Canada has cut the third most at 1.5%, and the UK is the only other country in the list that has cut (-0.75%). Five countries have raised rates since the US starting cutting -- China, Mexico, Australia, Russia and Brazil.
In the bottom chart, we provide a historical look at the central bank rates of G-7 countries since the start of 2006 (France, Italy and Germany are under the ECB). As shown, the US has been the most aggressive easer of the bunch during the credit crisis.
Wednesday, June 18, 2008
By Tom Cahill and Poppy Trowbridge
June 18 (Bloomberg) -- John Paulson, founder of the hedge fund company Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.
``We're only about a third of the way through the writedowns,'' Paulson, 52, told the GAIM International hedge fund conference in Monaco today. ``There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilizing.''
Paulson, whose New York-based company manages about $33 billion, made bets last year that subprime-mortgage debt would fall after he noticed ``bubble like'' prices. His Paulson Partners fund rose 18 percent a year since it started in 1994, and his main subprime-debt fund rose 591 percent last year. Banks and securities firm worldwide posted more than $395 billion in losses and writedowns since the subprime crisis started last year.
The U.S. is heading into a recession as falling home prices weigh on consumer spending, Paulson said. The second half of this year will be worse than the first as the economic slowdown spills into 2009. Signs of stress are ``accelerating'' in the housing market, and he's betting on falling securities prices, he said.
``I don't consider myself a bull or a bear,'' he told the audience at Monaco's Grimaldi Forum. ``I'm a realist.''
A Royal Bank of Scotland Group Plc strategist agrees that stock and credit markets still face the worst in a slump that started almost eight months ago.
`Most Bearish Period'
``Mid-July through to October is likely to be the most bearish period we will experience in the bear market that began in the fourth quarter of last year,'' Bob Janjuah, a credit strategist at the bank in London, wrote in a report dated June 11.
The MSCI World Index has lost 13 percent since reaching a record in October. The index is down 4.1 percent this month after the Federal Reserve and the European Central Bank policy makers indicated interest rates may need to increase as the threat of inflation intensifies.
The economic slowdown and inflation have put central bankers ``into a dangerous corner'' where the chance of a ``major policy error has just super-spiked,'' Janjuah wrote.
Ambac Financial Group Inc., the second-biggest bond insurer, is ``the most leveraged, troubled company out there,'' Paulson said. It's at risk of being downgraded to non-investment grade, he said. Ambac spokeswoman Vandana Sharma declined to comment.
Ambac shares have lost 92 percent of their value this year after losses on subprime mortgage securities caused the company to lose its AAA credit rating at Fitch Ratings. Ambac, which said today it will terminate its ratings contract with Fitch, fell 7 cents, or 3.3 percent, to $2.07, in New York Stock Exchange composite trading.
The housing and credit-market slump pushed Ambac to three straight quarterly losses after more than a decade of profit. It has written down $5.2 billion since the collapse of the U.S. subprime mortgage market last year.
Paulson's outlook is consistent with the view of hedge funds meeting in Monaco this week. More than 80 percent of the 1,300 fund managers, investors and service providers gathered in Monaco for the annual conference said they expect the credit crisis will continue, according to a GAIM survey. About 23 percent said the situation ``will deteriorate significantly.''
Bill Browder, founder and head of Hermitage Capital Management, said securities firms have a ``vested interest'' in claiming an early end to the crunch. ``If we're in the seventh or eighth inning, this is a 100-inning game,'' he said.
`$10 Trillion Opportunity'
Paulson's speech was the biggest draw at the event, which comes as the hedge fund industry endures some of its worst performance in nearly two decades, rising just 0.13 percent through May, according to Chicago-based Hedge Fund Research Inc.
``John Paulson has of course been very successful by making the right trade last year,'' said Manuel Echeverria, chief investment officer of Optimal Investment Services SA, a Geneva based investor with about $10 billion under management. ``We'll have to see what he's going to do now that the trade has run out of juice.''
Paulson said he's preparing to buy distressed securities such as bank loans, call them a ``potentially $10 trillion opportunity.'' While it is still ``premature'' to invest in many of them, he sees ``opportunities this year'' to buy mortgage backed debt, he said.
He hired employees this year to research securities firms such as Citigroup Inc. for long-term investment positions. ``We're trying to see the right entrance point,'' he said. ``If you invest too early, you lose money.''
Tuesday, June 17, 2008
June 17, 2008
Shakeout Roils Hedge-Fund World
Big Firms Gain Clout as Field Matures; Parking the Maserati
By GREGORY ZUCKERMAN
June 17, 2008; Page A1
The hedge-fund business -- among the most reliable fortune-producing machines in recent years -- is going through a brutal shakeout.
Just a few years ago, traders found it relatively easy to quit Wall Street jobs, hang out a hedge-fund shingle and cash in. Investors beat down the doors with eagerness reminiscent of the late-1990s dot-com frenzy. It took only a decade for the industry to grow to 8,000 funds from a few hundred.
But now smaller hedge funds, including top performers, are shuttering, and even brand-name traders are finding it tougher to get new ones off the ground. Only 1,152 new funds were launched in 2007, down almost 50% from a 2005 peak, according to Hedge Fund Research Inc. Because so many funds closed last year or merged into others, the business expanded by just 589 funds overall, the smallest increase in six years.
The next test: The possibility of a wave of withdrawals at the end of this month, the next quarterly date on which many investors are permitted to pull out their money. The inflow of new money from investors has already been slowing during the past two quarters. At the same time, hedge-fund returns have been flat, adding to the pressure.
Managers of hedge funds -- private partnerships that cater to wealthy individuals and institutions and are less regulated than, say, mutual funds -- like to think of themselves as a unique breed, capable of racking up big profits from opportunities that ordinary investors overlook. But in fact their profession is tracing the path of other businesses, whether autos or computers, that enjoyed rapid growth, led by aggressive entrepreneurs, before confronting deep challenges. And just as, say, eBay Inc. and Yahoo Inc. left rivals in the dust, or Vanguard Group and Fidelity Investments came to dominate the mutual-fund world, the largest hedge funds, such as Och-Ziff Capital Management, D.E. Shaw & Co. and Paulson & Co. are pulling away from the pack.
By the end of last year, 87% of all the money in the business was handled by funds managing $1 billion or more, and 60% was held by managers sitting on $5 billion or more. The dominance by the largest funds has been accelerating: In the past two months alone, the world's largest public hedge-fund company, Man Group PLC, increased assets by $4 billion, to $78.5 billion.
The shift is helping the big funds play a more powerful role in shaping the business and financial landscape. Last month, for example, Carl Icahn's fund, Icahn Associates, launched a bitter fight with Yahoo to try to gain control of its board. His hope is to entice Microsoft Corp. to revive its interest in buying Yahoo. Although that looks increasingly unlikely, it would theoretically yield a payday of hundreds of millions of dollars for Mr. Icahn's firm.
The megafunds increasingly behave more like sprawling investment banks, replete with layers of management, rather than swashbuckling investment vehicles. Some funds even have started offering basic corporate loans, a field traditionally left to regular banks.
A big difference with the banks: Hedge funds make much fatter paydays. Jim Simons of Renaissance Technologies, Steven Cohen of SAC Capital and Kenneth Griffin of Citadel Investment Group all earned at least $1 billion last year.
The transformation of the hedge-fund business caught Bertrand des Pallieres off guard. For years, Mr. des Pallieres cashed hefty paychecks as a top trader at J.P. Morgan Chase & Co. and then at Deutsche Bank AG, before leaving last year to launch a hedge fund of his own. He had sterling credentials -- and a terrific running start: Deutsche Bank indicated it would invest hundreds of millions of dollars with his new firm, SPQR Capital LLP, according to Mr. des Pallieres.
He rented swanky office space in London's upscale Mayfair district and dangled generous pay packages to staff his fund. Mr. des Pallieres got so distracted launching the business that, last summer, he forgot to pay the parking bills on his $160,000 blue Maserati Cambiocorsa. The coupe was impounded for three months before he noticed.
Mr. des Pallieres set lofty goals for his fund. "We thought a billion dollars was a good figure to count on," he says. But just over a month ago he shelved the project and fired half his staff. Deutsche Bank had second thoughts about becoming an investor, Mr. des Pallieres says, and he couldn't find other takers.
Deutsche says it never committed to making the investment.
Today, Mr. des Pallieres has a more modest goal of investing smaller sums in infrastructure assets such as ports and bridges, a longer-term play. "You benchmark yourself against the firms that started two or three years ago, and you get depressed," he says.
On the winning side are goliath funds run by money managers like Daniel Och. The 47-year-old Mr. Och, who left Goldman Sachs in 1994 to launch Och-Ziff, made $1 billion last year when his firm went public. While the general perception is that successful hedge funds post eye-popping gains, that's not his selling point. So far this year, none of his funds have gained more than 1.2%, though he is still beating the overall market.
When Mr. Och meets potential investors, he emphasizes his firm's risk-management skills, including a track record that includes only 20 losing months in its 15 years. Over the same period, the S&P 500 has had 59 losing months.
Investors like the sound of that. Och-Ziff managed $33.3 billion at the end of the first quarter, up 30% from a year earlier. Investors "particularly appreciate how we preserve their capital" in market dips, Mr. Och says.
Indeed, simply racking up top returns isn't enough in the current mood. Xerion Capital Partners LLC scored compounded annual returns averaging 21%, after fees, in its five years of existence. Nevertheless, last year its founder, Daniel Arbess, saw that large institutions such as pension funds and endowments were becoming reluctant to put in new money. They told Mr. Arbess they wanted to see a bigger client-service team and that Xerion, with several hundred million in assets, was simply too small.
So in October, Mr. Arbess sold his firm to much bigger Perella Weinberg Partners, a $3 billion firm formed by banker Joseph Perella. Now, institutional investors are once again showing interest.
'Tough to Manage'
"The bar has gone up, it's tough to manage $250 million to $500 million," says David McCarthy, a 20-year hedge-fund pro. He recently shuttered his own fund, which invested in other hedge funds, even though its returns topped the market last year. The reason: Investors kept telling him the $300 million firm was too small.
Pressures like these reflect the changing nature of hedge-fund investors themselves. Traditionally, the investors were wealthy individuals seeking the hottest funds with the biggest returns. Pension funds often were wary, viewing hedge funds as risky.
Now, however, institutional investors are changing that view. Pensions, charities and endowments increasingly are investing in hedge funds in part because of the potential to make money even in a down market. (The funds attempt to do that by making bets on both rising and falling prices.) However, institutional investors tend to prefer larger funds with brand-name recognition, and avoid scrappy upstarts.
"We used to be more hesitant to give money to large funds, the fear was they wouldn't perform as well as others, but that hasn't been the case lately," says Brett Barth, who helps run BBR Partners LLC, a $4 billion New York firm that invests in hedge funds. That said, the larger the hedge funds get, the tougher it likely will be to stay nimble and generate outsized returns.
Despite the tougher environment, hedge funds remain an extremely lucrative business. Most charge investors a management fee of least 1% of assets invested, then 20% or more of any gains.
Overall, the $1.9 trillion hedge-fund industry is holding up. The average fund is flat this year, through May, according to Hedge Fund Research. That beats the decline of 3.80% in the Standard & Poor's 500 in that period, though it's below the gain of 0.94% in the Lehman Brothers bond index. Last year, the average hedge fund gained 10%, compared with returns of 5.5% for the S&P 500 and 7.8% for the Lehman index.
But because of their fee structure -- which includes a percentage of gains -- many funds find it hard to pay their employees if they can't generate gains.
At the same time, the debt-market turmoil of the past year has undermined a key hedge-fund investing strategy. Until recently, funds routinely amplified their returns by investing lots of borrowed money. However, as bank lending has tightened, that strategy has taken a serious hit. Smaller and newer funds are having the most trouble arranging this kind of borrowing.
The more challenging market conditions mean the gap between winning and losing funds is widening. Last year saw the widest divergence between top-performing funds and bottom-performing funds in more than five years, according to Hedge Fund Research. The top 10% of funds scored gains averaging 62% last year, while the bottom 10% had losses of 14%.
Brad Alford, who once picked hedge funds for Duke University's endowment and now runs Alpha Capital Management LLC, an Atlanta financial-services company that caters to wealthy individuals, says he is placing fewer clients in hedge funds. That is partly because there has been a rush of competitive products, such as low-cost mutual funds that try to act like hedge funds.
"We used to invest in hedge funds because we got stocklike returns with bondlike volatility," Mr. Alford says. "Now we're getting bondlike returns with stocklike volatility." Another reason he's turning away from hedge funds is tax-related: Short-term profits from hedge funds are taxed at a 40% rate, which is higher than taxes on long-term trading gains from other kinds of investments.
Pushback From Investors
Mr. des Pallieres, the founder of SPQR Capital, didn't expect so much pushback from investors. He had been in a division at Deutsche Bank that had anticipated -- and therefore profited from -- last year's mortgage-market crisis, and imagined there would be rich investment opportunities in the aftermath. So last year he rushed to launch his own hedge fund.
Deutsche Bank's interest in his firm gave him confidence, he says. Early meetings with other potential investors also seemed positive.
By last fall, however, the outlook darkened. He read a news report that the Deutsche Bank executive he was negotiating with had left the bank. It soon became clear that the big German bank wasn't going to ante up.
"Deutsche Bank invests in hedge funds and other investment vehicles whenever we think the opportunity is attractive," a bank spokeswoman said.
Executives at other banks still seemed interested in investing in his fund. Until, that is, Mr. des Pallieres realized that some of them were suddenly fighting to keep their own jobs, rather than focusing on his hedge fund.
"People kept getting fired" in the middle of negotiations, Mr. des Pallieres recalls.
To boost morale of his staff, he told employees he was confident investors would turn up. But Mr. des Pallieres was spending as much as $1 million a month keeping the firm operating. Then, in January, when fellow London-based hedge fund Peloton Advisors suffered billions of dollars of losses in a matter of days, his remaining investors backed out.
Mr. des Pallieres and his girlfriend went to a resort on the Maldives for a week's vacation, trying to figure out what to do. When he returned, he called a meeting for the firm's employees, telling them he wasn't willing to fund the business anymore.
Mr. des Pallieres is refocusing the firm on the narrower business of investing in infrastructure assets such as bridges. He's also cutting his expenses. But he's hanging on to the Maserati. "It's not that bad," Mr. des Pallieres says.