Previous Columns
9:00 AM EST, Friday, October 24, 2008: Yesterday our UltraShorts were mixed:

Today they'll 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:

High borrowing and the credit crisis are bad enough for hedge funds. Panicky clients are worse

ON THE trading floor of one of London’s 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.

The typical 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” funds—which try to exploit price anomalies among corporate bonds—have lost a staggering 46%. By some margin 2008 has been hedge funds’ worst year since HFR began compiling records in 1990.

The carnage 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 plenty.

-- The Incredible Shrinking Funds

BusinessWeek --

Stocks, bonds, and commodities will suffer as funds dump assets. Anyone with a 401(k) will get hit.

Investors on 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 commodities—which 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 money—some $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 fund.

-- The Hedge Fund Contagion.

From Bloomberg:

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.

"We've 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,'' he said.

-- 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:

Investors have 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.

Things 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 another cockroach..

3. 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.

4. 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.

Municipal 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

Credit default swaps are bad insurance. From reader Jim Stanko:

Your conversation with Dan 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:

A.I.G. Agrees to Let New York Review the Propriety of Its Pay Packages

A day after New York’s 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.

The attorney 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.

In addition, 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.

The announcement 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 losses.

Mr. Cuomo said he wanted to determine whether the payments had violated New York law and should be returned.

A.I.G.’s 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.

One particular 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.

“The days of extravagance, bonuses, stock options, those days are over,” Mr. Cuomo said on Thursday. “The taxpayers are now paying the bill, and they’re not going to pay for post-mortem parties.”

Regulators and 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.

On Thursday, 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 general’s 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 general’s concerns expeditiously.”

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.

According to the attorney general’s statement, A.I.G. will create a governance committee to set new expense management controls and will issue a new guidebook on its expense policy.

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 particular firm.

“The signal to corporate America is, it’s 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 you’re receiving taxpayer funds, the rules of the game change,” he said.

Simple 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 site.

More bad sheep jokes:
Since investors are being led like sheep to the slaughterhouse, I remember with fondness some sheep stories:

Why do Scotsmen wear kilts?
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.)

This 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, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.