Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Friday, October 24, 2008: Yesterday
our UltraShorts were mixed:
be in the money big-time. As I write this column early this morning, shares
in London are down 8.7%. The Japanese Nikkei 225 is down 9.6%,
and futures in the U.S. are off huge -- 6%+. There are now expectations
that the S&P 500 which closed last night at 908 will tumble to around 700
before this is all over. That's another 23% drop.
The latest culprit
for this misery are jittery investors who are bailing out of hedge and mutual
funds every which way from Sunday -- including on the secondary market. As investors
bail, hedge funds sell.
Every major business magazine and newspaper is on the hedge fund story. The
stories panic investors, making things worse. Think endless spiral down. Investors
bail. Hedge funds sell. Stocks fall. Investors bail. Hedge fund sell. Stocks
falls. You get it.
From the Economist:
and the credit crisis are bad enough for hedge funds. Panicky clients are
ON THE trading
floor of one of Londons big hedge funds, the banks of Bloomberg screens
still flicker with life but the traders are almost silent. None of us
can quite believe what we are seeing, says a senior manager. A year
ago hedge funds were the omnipotent vanguard of financial capitalism. They
were uncompromising in their search for returns, and they dominated trading
activity in most securities. But the industry has been humbled.
fund has fallen by almost a fifth so far this year, according to Hedge Fund
Research (HFR), an analysis firm (see chart 1). Convertible arbitrage
fundswhich try to exploit price anomalies among corporate bondshave
lost a staggering 46%. By some margin 2008 has been hedge funds worst
year since HFR began compiling records in 1990.
is indiscriminate. In Asia as well as London and America, hedge funds are
closing some or even all of their operations. Few strategies have worked well.
Ken Griffin, the boss of Citadel, a fund based in Chicago and known for its
quantitative trading techniques, told investors that September was the
single worst month, by far in its history. Even David Einhorn, an American
short-seller who bet successfully on Lehman Brothers demise, has lost
Incredible Shrinking Funds
bonds, and commodities will suffer as funds dump assets. Anyone with a 401(k)
will get hit.
Main Street have another reason to fear opening their brokerage statements:
the rapidly shrinking hedge fund industry. In the coming months, hundreds
of hedge funds may shut their doors, sparking a massive fire sale on all sorts
of investments. Just about anybody with a 401(k) or pension plan will feel
the pain, since the sell-off will only exacerbate the plunge in stocks, bonds,
and commoditieswhich make up the core of most people's portfolios.
The 10,000 hedge
funds with more than $1.7 trillion in assets are caught in a vicious cycle.
Worried investors are pulling out their moneysome $31 billion through
September, according to Hedge Fund Research. As part of the great deleveraging
that's happening across the financial system, lenders are cutting credit lines
or demanding that funds come up with more cash in what's known as a margin
call. The cash squeeze is forcing hedge funds to dump holdings. "Redemptions
and margin calls are exaggerating the market swings," says Timothy M.
Ghriskey, co-founder of Solaris Asset Management, a $2 billion institutional
Hedge Fund Contagion.
Oct. 23 (Bloomberg)
-- Hundreds of hedge funds will fail and policy makers may need to shut financial
markets for a week or more as the crisis forces investors to dump assets,
New York University Professor Nouriel Roubini said.
reached a situation of sheer panic,'' Roubini, who predicted the financial
crisis in 2006, said at a conference in London today. ``There will be massive
dumping of assets,'' and "hundreds of hedge funds are going to go bust,''
Roubini Says `Panic' May Force Market Shutdown
And the Wall Street
Journal is reporting that many hedge fund investors are not waiting for redemption.
They're selling their holdings on the secondary market. Hedgebay
runs a secondary market for hedge funds. I checked this morning. Hedgebay lists
far more funds for sale than for buying.
It's not just
hedge funds. From Morningstar:
been selling their mutual funds in record numbers. According to Morningstar's
Market Intelligence data, a net amount of $49 billion left mutual funds in
September alone. We've been tracking redemption data since January 2000, and
that's the largest one-month outflow that we've seen to date. Yet, it looks
like October is on pace to beat it. Looking at the first half of this month
and only the portion of the mutual fund universe that has reported asset figures
to us, we believe a more severe outflow picture is brewing for October. The
heavy redemptions are likely due to the widespread losses that haven't been
isolated to a few asset classes but have spread to more conservative asset
classes and funds.
The heavy redemption
activity that we've seen has implications for funds and shows a repeat of
investor behavior that seems unlikely to pay off for anybody.
we've learned recently:
1. When things
are awful, they can get more awful.
2. This is a classic
Cockroach Recession. There's always another contagion, just like there's always
Big down days do not mean we've reached a bottom. One learned manager wrote
last night, "We remain optimistic that we are in a bottoming process, but
it is not easy and certainly not painless." I won't even try and figure
what the "bottoming process" is.
The market goes down big-time one day and the next it might go up. But the trend
is unmistakably down.
5. No one should
be in this market, except to short. No one. I repeat No one.
6. Latest area
to short -- pricey retailers. They're going to have a really lousy Christmas.
7. Never ever
have an emotional attachment to a stock. They're just bits of paper.
bonds have some appeal:
Yields are high,
and the risks relatively low. The risks are simple: Most municipalities (states,
cities, counties) are in big financial trouble. Unless the Federal Government
bails them out, many will go broke. The Democrats have said they announce a
bail out plan for municipalities the day after Obama is sworn in -- if he wins.
Today, the elite, left-wing, pinko newspaper, the New York Times, endorsed him
for president. Normally that endorsement would be the kiss of death. In this
case, it won't matter one way or the other. (Of course, I'm being facetious.
All of us who live in New York are still smarting from being smeared as tax-raising,
poor-people coddling elitists.)
Quote of the day
The budget should
be balanced, the Treasury should be refilled, public debt should be reduced,
the arrogance of officialdom should be tempered and controlled, and the assistance
to foreign lands should be curtailed lest Rome become bankrupt. People must
again learn to work, instead of living on public assistance." Cicero
- 55 BC
default swaps are bad insurance. From reader
Good on CDSs was spot on. One additional point: As you and Dan point
out, while the CDS have all the characteristics of insurance, and the purchasers
will probably argue in court that they thought they were purchasing insurance,
it was not called insurance. The reason AIG and others did not call it insurance
is that insurance is highly regulated with strict ratios relative to the firm's
capital. The more insurance written, the more capital required. In order to
"get around" this capital requirement the firms called the product
CDS and not insurance. Additionally, many companies, AIG specifically, issued
the CDS's from offshore entities beyond the reach of regulators. AIG did it
through its London Office who used a further off-shore entity.
And when the insurance
came due, AIG didn't have the money to meet its obligations and it went bust.
The U.S. Government, using our taxpayer monies, bailed it out -- but not before
AIG paid its executives huge bonuses for the bogus business. You'll be pleased
to read this story form the New York Times. Every time I read this story, I
want to puke:
to Let New York Review the Propriety of Its Pay Packages
A day after
New Yorks attorney general criticized bonuses and other payments made
by the American International Group, the insurance giant agreed to allow its
spending habits to be reviewed.
general, Andrew M. Cuomo, said on Thursday that A.I.G. would also cancel 160
conferences and other events that would have cost more than $8 million and
would provide information on compensation, bonuses and other payments to determine
whether the payments were proper.
Mr. Cuomo said A.I.G. had agreed to suspend a $10 million severance payment
to its chief financial officer, Stephen J. Bensinger, who is leaving the company.
came after Mr. Cuomo demanded that A.I.G.s directors take steps to claw
back payments to former executives like Martin J. Sullivan, who stepped down
as chief executive in June and received a $15 million severance, and Joseph
J. Cassano, who ran the unit blamed for the transactions that caused multibillion-dollar
Mr. Cuomo said
he wanted to determine whether the payments had violated New York law and
should be returned.
spending drew national attention this month after two former executives answered
questions from Congressional lawmakers about pay practices and outsize spending
that continued even after the company received an lifeline from the government.
point of contention was a weeklong retreat that a subsidiary, AIG General,
held for sales agents. The $442,000 in expenses included $150,000 for food
and $23,000 in spa charges.
of extravagance, bonuses, stock options, those days are over, Mr. Cuomo
said on Thursday. The taxpayers are now paying the bill, and theyre
not going to pay for post-mortem parties.
lawmakers have cited the events as a sign of excessive greed and corruption
in corporate America. The Treasury Department has announced that it is including
limits on executive compensation as a condition of receiving government aid.
the Federal Reserve reported that its loans to A.I.G. totaled $82.9 billion
as of Wednesday, up from $70.3 billion a week earlier. In September, the Fed
authorized a bridge loan of up to $85 billion. This month, the central bank
agreed to extend an additional $37.8 billion to the company.
Among the events
that A.I.G. has agreed to cancel are a $750,000 best operator
event in Las Vegas and a $500,000 risk management conference scheduled for
the Ritz Carlton in Half Moon Bay, near San Francisco. The company will also
cancel a $350,000 sales conference in November at Sea Island, Ga., and a $190,000
meeting scheduled for Scottsdale, Ariz., in January.
In a statement
released by the attorney generals office, Edward M. Liddy, A.I.G.s
chairman and chief executive, said, We know that the attorney general
shares our commitment to rebuilding A.I.G.s business and paying back
the U.S. taxpayer, and we will address the attorney generals concerns
Later on Thursday
afternoon, A.I.G. said Mr. Bensinger would be replaced as chief financial
officer by David L. Herzog, who has been a senior vice president and the comptroller
since June 2005.
the attorney generals statement, A.I.G. will create a governance committee
to set new expense management controls and will issue a new guidebook on its
Mr. Cuomo said
that his office was investigating compensation and other payments by other
companies caught up in the financial crisis, but he declined to identify any
to corporate America is, its a different day, Mr. Cuomo said,
adding that the changes put in place by A.I.G. should serve as a model for
other companies. When youre receiving taxpayer funds, the rules
of the game change, he said.
cheap backup for your computer files. This
is 16 gigabytes of flash memory in a package not much larger than a cigarette.
$99 on SanDisk's
bad sheep jokes:
Since investors are being led like sheep to the slaughterhouse, I
remember with fondness some sheep stories:
Why do Scotsmen
Because sheep can hear a zipper from a mile away,
Why do Scotsmen
make love to sheep on the edge of a cliff?
So the sheep will push back.
Ask a Scotsman
if there are any sheep in his family?
And he will answer, "Na-a-a-a-h." (You have to sound like a sheep.)
weekend: Concentrate on all the things that
really count in your life. Your health, your spouse, your children, grandchildren
and your friends.
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
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