You can tell how desperate the situation is because if this were 2 years ago, people would be raising a fuss, and worried about those "darn foreigners" buying our assets. Now, we are greeting this with hero worship - thank god, someone showed up to buy our crap.
I recall people SCREAMING this marked the bottom in financials (2 months before emergency cuts by the Federal Reserve, 4 months before the Bear Stearns bailout) Not so much, in fact we saw a continued stream of capital injections [Dec 31: Merrill Lynch Tapped Singapore - Next China and Middle East] I wrote
One of the themes I have been mentioning lately is the mainstream press clamor for how this must be the bottom for the financials because the 'smart money' is in... by smart money they mean mostly people sitting on eons of dead dinosaurs. I actually make the argument that the more money you have the more risk you can take, because heck, if you blow a few billion here or there - well there are more dead dinosaurs producing petrodollars tomorrow, and the next day, and the next. As for China, well that trade surplus is not going anywhere soon... so if you blow a few billion, US consumers will send you a few more billion next week. So in fact 'smart money' doesn't have to nail bottoms or tops very accurately. It is people with limited capital that actually have to be a lot more careful.
Just because you have a lot of money from one arena doesn't mean you are a smart investor, especially if your money is through no work of your own. We've seen many people (think Paul Allen of Microsoft fame) who took huge sums and proceeded to destroy much of their wealth in their future investments. Is that smart money? Are heirs of fortunes from their parents "smart money"? Do you think Paris Hilton's investing prowess is something to be excited about? Are people who just happen to be sitting on huge amounts of long dead dinosaurs suddenly "schrewd"? That's the talking points we are handed by the financial media. I'd rather listen to Buffet myself. Remember, when you print billions of dollars each day due to your dead dinosaurs you can afford to be "early" or "buy high" for the "very very long term". For the rest of us, we don't have those benefits, so we need to invest accordingly.
In February I mentioned that as one type of "smart money" was piling in, another type of "smart money" was piling out of financials [Feb 18: Eddie Lampart Selling Out of Citigroup While Arabs/Asians Piling In] I wrote
Now in an interesting twist it appears we have smart US money selling to smart foreign money as hedge fund king Eddie Lampert was selling a third of his stake of Citigroup (at a severe loss), most likely at nearly the exact same time the foreigners began piling in. So which smart money do you follow? ;) What is interesting about the Lampert move is one of the conventional wisdom themes that I do believe in... cut your losses. Eddie was buying in mid $40s to mid $50s and was selling large stakes somewhere in the $30s. Citigroup today? mid $20s. So in the short run it at least saved him from some more losses, even if he locked in some very bad results.
But back to Citigroup and the financials, is if an imminent rebound is coming by "2nd half 2008" why would Lampert not sit and wait out for the return of the roaring good times everyone is talking about by this summer/fall? Food for thought. Lampert has had a bad time of things lately but since the late 80s he has been one of the best in the business, so I'll still take his mind over those who benefit from sitting on dead dinosaurs or huge trade surpluses. And Buffet is not buying anything but stocks he has already been in, Wells Fargo (WF) and USB. I don't see any picking of carcasses there either. Strange considering we are going to be booming by 2nd half 2008.
And need I say anything about the "smart money" buying Bear Stearns? [Mar 13: "Smart Money" is Buying, So Should You!] I wrote
One of the propagandas constantly offered by the financial media is "you should buy because smart money is buying". We heard this throughout the fall in the financials as Arabs/Asians were buying stakes... just do a search for "dinosaurs" on the blog for earlier posts about how dangerous this line of thinking is to your portfolio. Even non Arabs/Asians are being blown up by the financials. Back in September 07, Joseph Lewis, a billionaire was adding to a huge stake (now nearly 10%) in Bear Stearns (BSC). The stock was trading $105-$120 or so at the time, down from a 52 week high of $160. Trumpets blaring, the financial media (and many investor managers who appears as pundits in these outlets) told us "the bottom is in", "kitchen sink quarter" and "smart money is buying" financials - so should you!
Conclusion: Oops. Bear is down to nearly $50 today on solvency fears. Ouch. Now if you are a billionaire with a nearly 10% stake, this stinks, but you still have your 8 houses, 3 yachts and private jet. Life will go on. If you are a regular Joe investor and you listened to the hype - well you just took a bath that is going to take a long time to recover from. Now in today's era you could call your government representative and ask for a bailout of your stock losses as it's the "in thing" to do nowadays, but I digress.
So now that we've had the benefit of time, we can look back to see just how silly these calls were - even though they were advanced by just about every "expert" they paraded on financial TV (not to mention throughout the print press). The apologists will now revert to the time old tradition of saying "we didn't mean things would get better in 3 months, 6 months, 9 months, we meant 5 years". Tell that to your account which has been pummeled... or tell that to the Arabs and Asians.... so now we wonder where we will go next? Here is the article but the last phrase sums it up, beggars can't be choosers - and that's the state of our financial system... a bunch of beggars.
- An all-star lineup of private-equity and sovereign-wealth funds opened their wallets when U.S. financial institutions needed capital during the early throes of the credit crunch. Who's going to help next?
- The pummeling Friday of National City and Washington Mutual shares knocked the respective investments of U.S. private-equity firms Corsair Capital and TPG well below the discounted prices at which they bought in.
- They're just the latest examples on a long list of high-profile bets that don't look as if they're working so far. Last December, Singapore's Temasek Holdings said it would invest $4.4 billion in Merrill Lynch at $48 a share, with an option to buy an additional $600 million. Friday, Merrill shares closed at $39.02.
- The Abu Dhabi Investment Authority struck a convertible-stock deal with Citigroup in November to pump $7.5 billion into the bank when Citi shares were trading above $30 a share. Now they're treading water at $20.
- China Investment Corp.'s $5 billion investment in Morgan Stanley last December in exchange for a nearly 10% stake is also out of the money; the shares are off nearly 20% this year.
- Then there was Warburg Pincus's bet on beleaguered bond-insurer MBIA. Even with its purchase of shares in January at around $12 designed to "average down" its initial investment at $31 a share, Warburg's investors are now proud owners of MBIA shares valued at $5.44 each, with a couple of board seats added in for good measure.
- Private-equity and government funds argue that they're long-term investors who've successfully weathered rocky periods before. At a conference last week, TPG co-founder Jim Coulter analogized such wagers to renovating a home, saying that however long you think it will take for your investment to recover, it will take "double the time, double the money." (Rationalization 101)
- Given the performance of these investments so far, how much worse does it have to get before pension trustees and university endowments and the top-tier private-equity firms they back ask whether it makes sense to keep doing this? How long before rich overseas funds stop giving cash to Wall Street firms that lose their money?
- Wall Street could bang its cups in dicier places. State investment funds are taking
root in places like Algeria, Angola, Libya and Zimbabwe. Kazakhstan has a National Fund, bulking up thanks to soaring oil and gas revenue. (I'd have to laugh if US banks turned to flipping Zimbabwe, which has inflation at oh, 1 million %? Kazakhstan? Perhaps we'll fly Borat in to close the deal?) - Selling stakes to funds of authoritarian or unstable regimes in frontier markets doesn't quite mesh with Wall Street's lofty image of itself. But it created this mess, and beggars can't be choosers.
