Saturday, March 7, 2009

Random Interesting/Happy Videos

It's quite dour out there so I'm on the look out for either "neutral" informational type stories, or "feel good stories" to help balance what I am forced to talk about (reality) 98% of the time. Below are some interesting videos I found... (unless noted most are 2 minutes long i.e. the apparent attention span of mainstream American)

CBS News: Creating White Collar Work - Over a million white collar jobs are expected to be created by the new stimulus plan, which could provide a significant boost to the nation?s weakening economy.

Watch CBS Videos Online

Did You Know? (Hat tip to Todd Sullivan) I'm an information hog so this sort of thing fascinates me (5 minutes)

NBC News: From Migrant Work Camps to Medical Schools

CBS News: Invasion of the Squids - The population of the Humboldt Squid, which has 6-feet-long tentacles and weighs up to 100 pounds, has soared along the California coast line.

Watch CBS Videos Online

NBC News: Beijing Goes Bust Post Olympics (ok not a happy story but interesting)

CBS News: Virtual Realty - Just as some individuals find dates online, some homeowners are now turning to the web as a means of trading real estate. (cool!)

Watch CBS Videos Online

NBC News: Depending on Man's Best Friend (Service Dogs, not Guide Dogs - amazing!)

CBS News: Cleaning Up Toxic Assets - There's a radical idea that may be the solution to cleaning up the mortgage mess. As Anthony Mason reports, some investors are buying the toxic home mortgages banks are actively looking to unload.

Watch CBS Videos Online

NBC News: America's Pastime Welcomes Unlikely Rookies (American Idol meets Baseball meets India)

CBS News: Chutes and Ladders - A new office building in northern England is offering a way to keep spirits up in tough economic times. As Mark Phillips reports, there's no need for an elevator when you can take the slide.

Watch CBS Videos Online

CBS News: Congress Tunes into Twitter - While the words 'hip' or 'hi-tech' may not come to mind when thinking of the U.S. Congress, many politicians are now reaching out to new technology such as Twitter.

Watch CBS Videos Online

CBS News: North Dakota Economy Booming - Sparsely populated North Dakota may not seem like an ideal moving destination to some but, as Priya David reports, there are many jobs available there in one of the bright spots of the economy.

Watch CBS Videos Online

ABC News is still in the early 2000s - so I cannot embed any of their videos....

WSJ: Top US, European Banks Get $50 Billion of US Taxpayer Money thru AIG

Forgive me for focusing on this story so much - I just think it is a complete farce the government powers that be refuse to let American taxpayers know to whom their money is REALLY going to. I will be very interested what the public reaction is when German, UK and other foreign banks are disclosed as receiving American taxpayer money. So not only do we have to pay for our banks screw ups, we have to pay off the world over? Why doesn't the UK government or German government pay us back in kind - these are THEIR banks? How do you feel about bailing out Deutsche Bank? Barclays? Banco Santader (Spanish)?

If you are new to the story, keep in mind our previous Secretary Treasury Hank Paulson was the CEO of Goldman Sachs at the height of the actions that caused this house of cards to go down. No conflict of interest there.

If you are new to the story three stories to peruse
  1. AIG Counterparty Furor Grows
  2. Your Tax Money Paid to Investment Banks and Hedge Funds via AIG
  3. AIG - Propping Up a House of Cards
Here is the latest information via the Wall Street Journal as information is starting to leak - this data is only thru December - remember that has been MORE infusions SINCE and there will be MORE infusions in the future (trust me on that)
  • The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time.
  • The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.
  • Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter. Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.
  • More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.
If you don't know what the heck is going on here is a quick summary
  • Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion. The government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG. The bailout provided AIG with cash to pay the banks collateral on the money-losing trades; it also bought out underlying mortgage-linked securities, many of which are currently worth less than half their original value.
  • Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets. Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks.
Some banks that were paid by AIG after it was bailed out by the government
  • Goldman Sachs
  • Deutsche Bank
  • Merrill Lynch
  • Société Générale
  • Calyon
  • Barclays
  • Rabobank
  • Danske
  • HSBC
  • Royal Bank of Scotland
  • Banco Santander
  • Morgan Stanley
  • Wachovia
  • Bank of America
  • Lloyds Banking Group

Source: WSJ research

Weekend Reading

Stories below I did not have time to get to during the week - peruse at your leisure if any are of interest...

NYTimes: You're Dead? That Won't Stop the Bill Collector. Finally! Someone who won't put a fight paying the bills or asking for me to bail them out.

The banks need another bailout and countless homeowners cannot handle their mortgage payments, but one group is paying its bills: the dead. Dozens of specially trained agents work on the third floor of DCM Services here, calling up the dear departed’s next of kin and kindly asking if they want to settle the balance on a credit card or bank loan, or perhaps make that final utility bill or cellphone payment.

The people on the other end of the line often have no legal obligation to assume the debt of a spouse, sibling or parent. But they take responsibility for it anyway. Dead people are the newest frontier in debt collecting, and one of the healthiest parts of the industry. Those who dun the living say that people are so scared and so broke it is difficult to get them to cough up even token payments.

Collecting from the dead, however, is expanding. Improved database technology is making it easier to discover when estates are opened in the country’s 3,000 probate courts, giving collectors an opportunity to file timely claims. But if there is no formal estate and thus nothing to file against, the human touch comes into play.

USA Today: Half of 2008's Foreclosures Packed into 35 Counties

More than half of the nation's foreclosures last year took place in 35 counties, a sign that the financial crisis devastating the national economy may have begun with collapsing home loans in only a few corners of the country. Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year.

The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the nation's foreclosure actions last year, driving most of the national increase. And even among those places, a few stand out: Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation's foreclosures last year.

A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.

States Recruit Worried Californians

Several Western states are launching aggressive efforts to poach jobs, talent and industry from California, sensing an opportunity to capitalize on the Golden State's current political and financial woes.

Right behind Colorado are Arizona, Nevada, Oregon and Utah -- all planning to make similar runs at luring corporate executives, venture capitalists and manufacturers who might be fed up with California's political gridlock or anxious about potential tax hikes and deep cuts to schools, parks and other services.

NYTimes: Slump Humbles Blue Chip Stocks. What makes this selloff different than the NASDAQ bursting earlier in the decade is many "orphan and widow" stocks are being obliterated.

After months of breathtaking declines, this is what Wall Street has come to: Blue-chip companies, once considered safe investments and cornerstones of the economy, are akin to penny stocks. ... with no end in sight to the downward spiral, the New York Stock Exchange has temporarily suspended its $1 minimum share-price requirements to prevent a wave of delistings.

USA Today: Japan Offers a Lifetime Job, if Hired Right Out of School. I've always been fascinated by the tests involved post schooling that literally can determine much of your life; the rate of suicide is high and I cannot even imagine the stress level.

Hundreds of young Japanese are getting pink slips before they even start work. Japanese companies, contending with plummeting sales and shriveling profits, are withdrawing job offers to university and high school seniors.

Anywhere else, the news might be shrugged off as the predictable consequence of an economic collapse. In Japan, it's sending shivers across the country, raising fears that another "Lost Generation" of young Japanese will be locked out of good jobs forever. "Whether they get a job when they graduate decides their whole life," says Yuki Honda, a professor at the University of Tokyo's Graduate School of Education.

That's because Japanese companies typically hire only fresh graduates they can indoctrinate in their corporate cultures, figuring anyone with experience elsewhere might bring bad habits. Students who don't have jobs waiting at graduation risk getting stuck with a lifetime of low-paying, dead-end employment.

WSJ: Political Lobbying Drove FDA Process. This is the type of thing that just makes you lose faith in the entire system we have in the country. Those who pay for political campaigns get free reign... it really is a joke. When you start to overrule scientists who are supposed to be watching out for the American people you have a serious problem. But it won't change...

The recent approval of a new device to treat knee injuries followed a lobbying campaign that overcame repeated rejections by scientists within the Food and Drug Administration, agency documents show.... senior FDA staff members complained in documents that the handling of Menaflex, made by ReGen Biologics Inc., shows how political and industry pressure can influence scientific conclusions.

NYTimes: Laid Off Workers Flee Dubai. Note to self, never buy property in Dubai

Sofia, a 34-year-old Frenchwoman, moved here a year ago to take a job in advertising, so confident about Dubai’s fast-growing economy that she bought an apartment for almost $300,000 with a 15-year mortgage. Now, like many of the foreign workers who make up 90 percent of the population here, she has been laid off and faces the prospect of being forced to leave this Persian Gulf city — or worse.

“I’m really scared of what could happen, because I bought property here,” said Sofia, who asked that her last name be withheld because she is still hunting for a new job. “If I can’t pay it off, I was told I could end up in debtors’ prison.” With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

...a downward spiral that has left parts of Dubai — once hailed as the economic superpower of the Middle East — looking like a ghost town.

UK Telegraph: Markets Need Morality UK's Gordon Brown Says. What a change of heart from just 3 years ago when "free markets self regulate and if we don't get rid of almost every regulation, our firms will all flee to London!" As with all things government, we'll go from 1 end of the pendulum to the other - no sensible common ground can ever be found. I do agree that LONG term incentives need to be the focus, AND when you screw up you should still not get your ill gotten gains. A world of actual effective board of directors would also be a nice bonus - but I'll keep dreaming...

Mr Brown told Labour activists in Scotland that he is now pushing for common international standards to curb the pay of bankers and "end the short-term bonus culture". "Only government can make the markets work in the public interest and not their own interest," Mr Brown told the Scottish Labour conference in Dundee.

He added: "We believe that markets need not just money men but morals, that being fair matters far more than being laissez-faire and that banks must always serve the public, not just serve themselves."

USA Today: For Laid Off Workers, So Hard to Email Goodbye

When Jim Neill got laid off, he sent around a farewell e-mail with a subject line designed to get people's attention: "Free food in the employee lounge." Then Neill, who had been with the National Association of Manufacturers for years, left 'em laughing. "These are tough times and with a young family I'm hunting for employment," he wrote, "but you'll be pleased to know I've also begun work on my long-delayed book and instructional DVD 'Rhymes with Truck: How to Use Profanity in Every Sentence.'"

There's an art to the goodbye e-mails flooding inboxes as a result of massive layoffs. A few, like Neill's, are laugh-out-loud funny. Some are bitter flameouts. Some read like brief memos or mysteries with no explanation of the move; others are like lengthy Oscar speeches thanking co-workers.

Two pieces in UK Telegraph which show "The One" and his wife Michelle are not quite so loved across the pond; at least based on these two views. Apparently Gordon Brown was somewhat snubbed by the Obama's. #1 Barack Obama Dislikes Britain, But He's Keen to Meet the Queen and #2 Was 'Lady MacBeth' Behind Barack Obama's Snub of Gordon Brown? (note - I'm an independent - I think both parties are doing an awesome job of ruining our country; so no political comments please) :)

On US radio's Garrison show today, I was asked for my reaction as a true born Englishman to President Obama's double insult - first the sending back of the Winston Churchill bust, then his snub to Gordon Brown.

In researching my new book Welcome to Obamaland, I discovered that Obama's judgment is pretty dreadful - but this? My favourite theory so far - suggested by presenter Greg Garrison - was that it was a move calculated to please his Lady Macbeth. At the moment in Britain, we're still in the "Doesn't she look fabulous in a designer frock" stage of understanding of Michelle Obama. Gradually, though, we'll begin to realise that she is every bit the terrifying executive's wife that Hillary Clinton was. Or, shudder, Cherie Blair.

USA Today: Consumer Bankruptcy Filings Up 29% Year over Year. We said last year that 2009 (and 2010) would be the year of the personal bankruptcies. If the credit card companies had not been so successful in making bankruptcies much more difficult mid decade (jumping through hoops, plus much higher costs) we'd already be seeing much higher number. But nowadays you have to go bankrupt just to file for bankruptcy! Thanks lobbyists! (please note - I don't think people should go bankrupt with ease or without long term penalty)

The number of U.S. consumers filing for bankruptcy jumped 29% in February from the year earlier, and the number is expected to keep rising as economic troubles deepen, according to the American Bankruptcy Institute Tuesday. Some 98,344 consumers filed for bankruptcy protection in February, according to the ABI which compiles data from the National Bankruptcy Research Center. It represents the most bankruptcies filed in the month of February since new bankruptcy laws went into effect in 2005. "We expect at least 1.4 million bankruptcies this year," said ABI Executive Director Samuel Gerdano, in a statement.

Reuters: In Past 2 Years, 87 Million in U.S. Went Uninsured. Wow, that is a much higher number than government reports - ah, the devil is in the details... 87 million at some point over the past 2 years did not have medical insurance. I type this as our readers from other 1st world countries retract in horror. Yep that's us - our political idealogy says if you don't have medical insurance you clearly don't work hard enough. Ask Rush! Richest country on Earth... yep. (ex debts) Get sick on wrong week - go bankrupt. Oh wait, we can't do that either (see previous story)

A third of Americans under age 65 -- 86.7 million people -- went without health insurance at some point during the past two years, according to a report released Wednesday. The report from the advocacy group Families USA showed that the lack of access to health insurance in the United States is more widespread than government statistics suggest.

Of 262 million Americans under 65, 33 percent were uninsured at some point during those two years, according to the report. This included 60.1 million adults and 26.6 million children and teens up to age 18, according to the report. Among those uninsured, 75 percent had no coverage for at least six months and 60 percent for at least nine months.

About 52 percent of individuals and families with incomes between the official poverty line and twice the poverty line -- $21,200 to $42,400 of annual income for a family of four -- were uninsured at some point during 2007 and 2008.

The government's most recent official estimate, based on Census Bureau figures, put the number of uninsured at 45.7 million in 2007. But that figure included only those who had no coverage for the entire year.

And let's send on a bright note - another strategist who says bright days ahead in the stock market. Reuters: Jim O'Shaughnessy sees S&P 900 in 2008.

U.S. stocks are trading at compelling prices after their plunge to 12-year lows this week and could rally 25 percent by the end of the year, said Jim O'Shaughnessy, a well-known investor on Wall Street.

U.S. stocks, as measured by the benchmark Standard & Poor's 500 Index .SPX, are likely to return after inflation 7.3 percent per year from now through 2019, said O'Shaughnessy, author of the best seller, "What Works on Wall Street." "I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally," he said, in reference to Wednesday's closing level for the S&P 500

Friday, March 6, 2009

Bookkeeping: Closing Apple (AAPL) Short

Good enough - made a decent piece of change and saw the gap fill. Worried about government intervention coming to squeeze shorts so want to limit the # of positions on that side of ledger. This was just a hedge on a crash which we are not getting today.

Closing Apple just over $84.

No position

AIG Counterparty Bailout Furor Grows

I am a bit bemused to watch the furor grow of WHOM exactly we are bailing out when we keep funneling money into AIG (AIG). We highlighted this issue last OCTOBER when it first came out and I recommend any new reader read this piece if you read nothing else this weekend [Oct 17: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG] I wrote at the time Hank Paulson was effectively bailing out his buddies at Government Sachs (GS) and Morgan Stanley (MS)... but since this is a relatively quiet part of the blogosphere, it only fell on reader's ears ;) I wrote

For those not following the AIG (AIG) saga - there is a lot of dirty laundry going on. First we were told its an $85 Billion bailout, but in a couple of steps after it's now increased to $123 Billion (so far!) It has been very difficult to sell AIG assets to pay off this loan thus far.

If you are into this type of thing and want some very interesting reading there is a damning Bloomberg article on how the former CEO of Goldman Sachs (GS) "saved AIG" and the first batch of money went in large part directly to Goldman Sachs (GS) and Morgan Stanley (MS). It will get the blood boiling if this is your type of thing - so essentially your tax dollars went from your pocket to Goldman and Morgan via a quick pit stop at AIG.

And that was just the first phases of the bailout.

Now the furor is growing as the big boys are catching on.... Joe Nocera's piece in the New York Times [Mar 1: NYT - AIG: Propping Up a House of Cards] seemed to wake people up.

Nocera followed up on his (sorta) blog

It is a simple enough question: who bought the credit-default swaps that American International Group sold during the housing bubble? And at this point — after Bailout No. 4, with the government handing A.I.G. another $30 billion to go with the previous $150 billion — you would think that the taxpayers would have the right to know that information. Is it Goldman? Royal Bank of Scotland? The Irish banks that are on the verge of collapse? What happened to all that transparency the new administration keeps talking about?

A fair amount of what A.I.G. was doing was pretty sleazy behavior, using credit-default swaps to help banks evade regulatory capital requirements. And yet when newspapers like this one have requested the information, they have been ignored or turned down.

The answer, as I understand it, is that A.I.G. views these as “confidential transactions,” and the government (as per usual?) is going along with that rationale. One government official told me that if the federal government divulged the names of the counterparties it would amount to a violation of the Trade Secrets Act — unless the counterparties agreed to it, which they never will.

Pretty unsatisfying, isn’t it? Gobs of tax money is going to bail out unnamed companies — and yet we aren’t allowed to know who they are, and are supposed to take it all on faith.

So the Federal Reserve is stonewalling ... your money can be sent to AIG but you are not deserving to know who is getting on the other side of the transaction. So send us your money and shut your mouth citizens!

Senator Jim Bunning, one of the few people who actually calls out the Federal Reserve and Treasury was none too happy

On Thursday, Mr. Bunning did not disappoint, as he lambasted the vice chairman of the Federal Reserve for saying that the names of American International Group’s trading counterparties should not be revealed.

As part of its rescue, the government has stepp ed in with a program to buy securities from A.I.G.’s counterparties at “par,” or full value, even though many of these securities are surely worth far less. And just who are these banks being bought out at par?

“Giving the names could undermine the stability of the company and would have serious knock-on effects” in the broader financial system, Mr. Kohn told lawmakers Thursday. Mr. Bunning pounced on this comment when he took to the microphone. “You are telling us,” he said sternly to Mr. Kohn, “that the counterparties that got par for their bonds or for whatever — the American taxpayer shouldn’t know who they are? And then you may come back to us and ask for more money for more banks and more corporations? You will get the biggest ‘no’ you ever got.”

Now the blogosphere it getting into the act - see Barry Ritholtz

My recent tirade against bailing out the hedge fund half of AIG makes much more sense when you consider who is actually getting all of the taxpayer largesse: Counter-parties of AIG, especially one Goldman Sachs. Some estimates have been in excess of $25 billion to GS.

Other rumored recipients of taxpayer dole include Morgan Stanley, Merrill Lynch, and Deutsche Bank.

Why rumored? Because of the infuriating refusal to turn over any information as to who these counter-parties are by the Fed and Treasury:

Nouriel Roubini chimed in

News and banks analysts’ reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout.”

Naked Capitalism talks about yet another conflict between the US government and Government Sachs (GS) [p.s. if you are new to the blog we call Goldman Sachs GOVERNMENT Sachs because it has so many people layered up inside Washington D.C.] This is a Treasury nominee, H. Rodgin Cohen - chairman of Sullivan & Cromwell.... next in line to work "closely with Timmy Geithner!

Sullivan & Cromwell has long been the outside counsel for Goldman, and outside counsel is a vastly more important role for a securities firm than just about any other type of business. In the stone ages, when I worked for a few years at Goldman, certain S&C partners had so much clout at Goldman that they could get a mid-level banker fired. And even then, “Rodg”, head of the banking practice, was a very influential figure at Goldman.

Here is a list of our "friends" we're bailing out - its not AIG; AIG is just a front. And they are not getting 50 pennies on the dollar, 30 pennies, or 70 pennies - they are getting every dollar. Keep in mind these were early amounts from the first round of bailouts. Lots more handed out since then! And more to come in the future.

The Wall Street Journal in December, citing a confidential document and people familiar with the matter, revealed that about $19 billion of the payouts went to two dozen counterparties between the government bailout in mid-September and early November. As previously reported, nearly three-quarters went to a group of banks, including Société Générale SA ($4.8 billion), Goldman Sachs Group ($2.9 billion), Deutsche Bank AG ($2.9 billion), Credit Agricole SA's Calyon investment-banking unit ($1.8 billion), and Merrill Lynch & Co. ($1.3 billion), the Journal reported at the time.

"It's reasonable to ask why holders who would have received only pennies on the dollar for their credit-default swaps absent any government intervention would expect or deserve payments for what essentially is a bankrupt company."

With its latest rescue this week, the government has committed more than $170 billion to prevent AIG's collapse.

Cramerica - for the corporation, by the corporation. But don't argue - it's for the best of us all. Main Street is Wall Street. Just keep repeating that and go watch American Idol... the government will take care of the rest.

Stephen Colbert Creates the Doom Bunker

Hat tip to Paul Kedrosky - 4 minutes to put a grin on your face

Bookkeeping: Short Amazon (AMZN) on End of Days Scenario

I'm using (AMZN) as my hedge on a crash scenario. Short 6% allocation under $62. There is a gap to $52

If hedge funds start to liquidate the last generals go - those would be Autozone (AZO), Mastercard (MA), Visa (V), (BIDU).

Netflix (NFLX) same boat, etc - just an insurance policy and if market reverses up I'll get out quick

Today is the most important day - either we get a late day reversal that would be a signal to buy buy buy or we have potential for a crash situation here... I am not covering Apple (AAPL) either. We'll know better last 2 hours - if we reverse today you could see a ton of buyers rush in. Open to either scenario - will let the market dictate. Until then sitting back and watching.

EDIT 11:20 AM - Apple has now filled its gap at $83 - praise the market gods. Finally. Under normal circumstances I would cover and declare victory. Today, due to bipolar outcome I listed in previous paragraph I am sitting tight. Again to make it clear, if we get that late day reversal I will be covering shorts and singing praises of Kool Aid. For now these are part of my insurance policy - I have no idea what the rest of the day brings but I want to have insurance in case the outcome is bad. China is the new technology sector (hey it's safe! buy without fear!) Obama cannot mess with China stocks at least...

Short, Apple in fund and personal account

Bookkeeping: Sold a Good Portion of Emergent BioSolutions (EBS) off Earnings

Sold a good portion of Emergent BioSolutions (EBS) off last night's earnings; still like the name but had a 13% type of pop; I will update this entry with details later in the day. Sold in the $19.20 to $19.60 range and taking it down to a very small position i.e. 0.2%ish for now - down from 1.5%ish.

They had some delays this quarter and lowered guidance a bit for next year - not a huge deal but as with all things healthcare related, even anthrax payments are under the threat of Obama finding cost savings ;)

Long Emergent BioSolutions in fund; no personal position

Bookkeeping: Reshort Apple (AAPL)

This bugger finally decides to weaken once I covered. Typical. Of course a stock would be weak today when the market is up, while it was strong/impervious when the market was crashing. That makes sense.

Reshorting just below $86 after covering a few days ago...

I'll look to cover at that gap at $83... again - as was original goal. (or lower as a hedge against market) 4.5% allocation - it might not be a huge win but I want this one out of "principal"

Short Apple in fund and personal account

New York Post: Where is Paul Volcker

For those not in the know - Paul Volcker was the Fed head before Alan Greenspan. He dosed out some very serious medicine to the country rather than what we've done the better part of 25 years since (kick the can policies). So the pain was sharp, abrupt, not fun - but he killed inflation (along with other macro economic reasons) and set the stage for a period of growth and rebirth. Since then we've abandoned his policies and every time a recession threatens we flood the world with cheap dollars. That works a few times, until it doesn't. Now you see the "it doesn't" part.

I had high hopes since Volcker was somewhat part of the economic team in the Obama administration but in my readings it appears Larry Summers is freezing out Volcker. Summers is infamous for an ego that makes Donald Trump's look small. Geithner? He walks on water ... well at least until he speaks. CNBC's Charlie Gasparino has this piece in the New York Post. Keep in mind as you read this Gasparino is "right of center" and we can say its some part 'reporting' and some part 'opinion' - where the two cross; I'll leave up to the reader.
  • ON Wall Street, they're call ing the Obama economic team "the gang that couldn't shoot straight," after Jimmy Breslin's novel about a bunch of moronic mobsters. If you really want to understand why the markets have been tanking, why the smart money is sitting in cash and gold - well, just study the policy, or lack of it, that these guys have come up with to address economic ills not seen since the Great Depression.
  • The sad thing is, the "gang" took office with high hopes on Wall Street. Treasury Secretary Tim Geithner, the former New York Fed chief, was supposed to have the experience needed to handle the banking crisis. Larry Summers, the head of the president's National Economic Council, was part of the brains behind the Clinton-era recovery.
  • And Paul Volcker, chairman of Obama's Economic Recovery Advisory Board, helped save the free world back in the late 1970s and early '80s as chairman of the Federal Reserve when he squeezed inflation out of the economy and (along with President Ronald Reagan) helped return us to prosperity.
  • Wall Street loved this team. That's why the market rallied around the time Obama took office, even as he was promising tax hikes for "the wealthy." But what looks good on paper doesn't always translate into success .
  • The disappointment on Geithner starts with the fact that, since taking the job at Treasury, he's failed to articulate a way to bail out the imploding banking system - even though knowledge of the banking system's ills was supposed to be his strong suit. Worse, the word is that Geithner is still having trouble putting together a senior staff so he can come up with a bailout plan.
  • Thanks to all the class warfare produced by his boss, I'm told, Geithner can't find qualified people from Wall Street (the folks who know markets better than anyone else) to help solve the crisis. Instead, one saddened Obama supporter from Wall Street told me, "He's looking at a combination of bureaucrats and academics for these jobs."
  • Larry Summers? Everyone knows he's smart, but the word from Wall Streeters who are trying to pass him ideas for solving the banking crisis is that his ego's as large as his intellect. That is, they're finding him impossible to deal with.
  • Perhaps the biggest disappointment is Volcker, a true American hero who as Fed chairman tamed the stagflation of the '70s - but seems to be muzzled at a time when the country needs him most. Volcker, possibly the world's most experienced economist, is being treated like the crazy aunt in the attic. He's around, wandering the halls - but no one in the administration seems to care what he thinks.
  • He's said almost nothing publicly about how to solve the current economic crisis. Worse, people with knowledge of the Obama economic team say Volcker's been blunted behind the scenes - caught in the dysfunction between Geithner and Summers.
  • Here's how one top Wall Street exec, who has tried passing along ideas to the Obama team, put it: "Geithner thinks he's in charge, but he has no staff to get anything done. Summers sits there and likes to remind everyone he's in charge - and Volcker, probably the only adult in the room, has his nose out of joint because no one is listening to him." (wonderful - welcome to the brain trust that is saving your world)
  • It all has Wall Street's collective head spinning - and Obama's most ardent financial-industry fans deserting him. During the campaign, Obama won over the street even as he was bashing the financiers who'd plunged the country into crisis through their bad bets on risky bonds. Sources tell me Jamie Dimon of JP Morgan, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley and Dick Fuld of Lehman Bros. (when there was a Lehman Bros.) all became supporters, as did Larry Fink, the head of money-management powerhouse BlackRock, and senior executives at Merrill Lynch (though then-CEO John Thain supported John McCain).
  • I've been doing some unofficial polling of these same people in the last couple of weeks, and the sentiment has shifted dramatically.

Need a Job? Don't Mind the Weather? Consider Saskatchewan

At this point it has become useless talking about individual stocks because similar to September - November 2008 we are seeing massive "horde" trading where individual names mean very little. So while I'm keeping an eye on the stock specific news most of it is being ignored as people flee in terror.

In my quest for good news, reader Steve sent this story about his home province, Saskatchewan; I thought with oil falling so much in price and agriculture cooling off, the region would be suffering but apparently not. While it's not too easy for Americans to move up to Canada - I guess one could begin the process now and hope by 2010 you are accepted. Or you can just wait until things get really bad here and to create jobs / keep the populace from raising pitchforks/torches, we invade Canada and make it the 51st state.... whichever comes first.

I said I'd go anywhere in the world to find good news .... thanks Steve :) Via CNN
  • Normally, "hot spot" isn't the first phrase that comes to mind when talking about Saskatchewan, Canada. But with most of Canada suffering from devastating job losses, this cold province is becoming exactly that. It's an asterisk to the entire country when it comes to the economic climate, and Premier Brad Wall is shouting it as loud as he can.
  • "It's a great time to come to Saskatchewan," said Wall, who even called the Toronto Star newspaper to tout his province's economic success and let Ontarians know there were jobs for the taking. "For those who are losing their jobs, we need them to know we have thousands of jobs open right now in both the private and public sector," Wall said. "We have a powerful story to tell, a story of success and that's something we want to share with those who are struggling."
  • Wall's province is one of the exceptions to the unemployment increases battering provinces across Canada. Saskatchewan's unemployment rate fell to 4.1 percent in January from 4.2 percent in December, making it the only province recording a decline. In Ontario and the city of Toronto, unemployment rates rose to 7.2 percent and 8.5 percent respectively. To the west, British Columbia shed 68,000 full-time jobs in January. More Saskatchewan jobs should be on the way. To stave off any possible recession, Wall announced a $500 million infrastructure "booster shot" to help keep the economy strong.
  • "All across the country, industries are getting quite ill," Wall said. "We aren't immune to it. We see some impacts in terms of layoffs and new vehicle purchases slowing off, and so we want to be proactive in staying ahead of the curve." (proactive? does not compute - must be the American in me ... proactive... leadership... in same sentence? cannot process this)
  • On Tuesday, the Conference Board of Canada released a report that said Saskatchewan will likely continue to lead the nation in economic growth in 2009 because of the infrastructure investment and tax reductions.
  • The province has also been reaping the benefits of an influx from nearby Alberta. When the government in Alberta decided to raise the oil royalty rates, oil exploration and expedition companies decided to move their operations to Saskatchewan in hopes of making more money. "Alberta has always been the gravy train of oil," said Montgomery, who is also a former resident of Regina, the capitol and second-largest city in Saskatchewan. "But with the new royalties, oil companies are saying 'Why stay here and make less when the opportunities right next door are even better?' Many other companies may start to follow suit."
  • Montgomery said people looking to move have said that cheaper land and insurance prices are among the other reasons they are headed to Saskatchewan. That means more business for Wall's province and more jobs coming to the area.
  • Not that there's a shortage of jobs. On Tuesday night there were nearly 6,000 private- and public-sector jobs on the Web site
  • A constant stream of revenue from oil production and exports also buoys the economy in the province. Saskatchewan falls just behind Alberta, as the largest oil exporter in Canada, and Wall's province sends more oil to the United States than Kuwait. Wall said the province is the leader in uranium production and produces a third of the world's potash.
  • The province is working with Montana on a $212 million climate change initiative that would create the first major greenhouse gas storage project in North America. The carbon dioxide from coal-fueled power plants would be stored in the ground in Montana and later be withdrawn for use in oil production.
  • Wall encouraged people not to count out a move to the province based on stereotypes that it is "only winter here," and "all of the land is just rolling hills." "'It's a beautiful, big place where life is great and right now there's also opportunity," he said. "I'm very, very biased, but I can't imagine a place I'd rather be, especially with what's going on economically around the world."
Always a bull market somewhere....

Thursday, March 5, 2009

WSJ: Mortgage Bailout to Aid 1 in 9 Homeowners

I won't make my normal editorial comments aside from a short comment below; I just wanted to find a piece that explains this homeowner bailout in detailed format. Let me preface this by saying with the amount of money we are using at the Federal Reserve to fund or backstop, combined with the multiple stimuli (sp?), combined with the TARP, combined with the bailouts - we could of just handed every person with a mortgage a huge check a year ago and solved 70% of the problem. Heh.

My comments specific to the mortgage bailout are if we are going to do this (which we are) it should be restricted to
  1. people who actually put a down payment (5% minimum perhaps) - if you put 0-1% down you are a renter essentially (or a rampant speculator)
  2. if you extracted equity (refinanced with cash OUT) you should not qualify - many of those people were buying nicer kitchens, cars, or funding lifestyle vacations while others (hand raised) did none of that and scrimped and saved. If you refinanced just for a lower payment but did not extract equity than no problem.
  3. Primary residence only (that *is* part of the program)
  4. anyone who gets into this program should give up all gains on sale of house 1:1 to government until the amount gained is in excess of amount they saved through the program (this would cause those who could otherwise pay but are thinking of "faltering" or "threatening to" so as to get cheaper payments, to at least think twice before they "lapse")
I will also say this program is a huge handout to the financial companies who are handling the mortgages (big surprise there). There are so many other issues but they are no longer worth debating because it will happen - I would just prefer the limitations I see above. Remember, thus far within 6 months, nearly 60% of people who have had loans modified already re-defaulted and I saw an interview where officials of this program are HOPING they only see a 40% re-default rate. That's pathetic really - it means best case we throw $4 out of every $10 out the window.

See the graphic below (click to enlarge) to see who IS and who IS NOT set to benefit

Via the Wall Street Journal
  • The Obama administration announced details of a housing-rescue plan it said would help as many as one in nine homeowners, from low-income Americans struggling to avoid foreclosure to well-off borrowers who owe more than their homes are worth. While the administration wants a sweeping program that would prevent millions of foreclosures, it doesn't want to be seen as rewarding the greedy or reckless.
  • It has two main components.
  • First, the government will offer financial incentives and subsidies to persuade mortgage-servicing companies to ease up on borrowers who are in financial straits so severe that they risk losing their homes. Borrowers will have to sign affidavits attesting to their financial hardships. In return, they will see their interest rates drop to as low as 2%, their payment periods lengthened, and other modifications aimed at bringing their monthly payments to 31% of their income -- commonly considered a reasonable ratio. This program will be limited to first-lien mortgages with outstanding principal balances that don't exceed $729,750, in the case of single-family homes.
  • Loan-servicing companies will receive up to $3,500 from the government to participate, with the government also matching a portion of the lenders' costs, dollar-for-dollar. Homeowners will get as much as $5,000 apiece in federal money to reduce their outstanding balances, as a way to encourage them to stay current on the modified mortgages.
  • The second main component of the plan calls for Fannie Mae and Freddie Mac, the government-backed mortgage giants, to refinance loans for millions of borrowers who may owe more than their homes are worth, even if they are wealthy enough to afford their current payments. There is no income ceiling for beneficiaries. But they must have mortgages held or guaranteed by Fannie Mae or Freddie Mac, and they cannot owe more than 105% of the current value of their home.
  • That raises the possibility that homeowners considered well-off by national standards may qualify for public aid.
One example with numbers
  • Under the loan-modification plan, a hypothetical borrower earning $4,000 a month, with a $225,000, 6.5% loan with 28 years remaining, could see the rate fall to 2.73%, and the monthly payment drop to $1,240, from $1,737, according to Thomas Lawler, an independent housing economist. The government would cover about $155 of the $495 payment reduction. Principal payments and federal subsidies would reduce the outstanding balance to $193,000 after five years.

Tim Geithner Did not Save Us After All

Remember, when he who would walk on water with the speech to save us was set to be unveiled? The market rallied in anticipation of magical words solving all our problems [Jan 27: We are Saved. Version 21, 287]

Financial stocks are happy after hours as details of the government's plan to overpay for bad assets with your grandchildren's money.... err, I'm sorry - as details of the government's plan to make excellent long term investments emerge... i.e. "the bad bank".

Remember, it's not the first 21,286 solutions that matter. It's the 21, 287th.

"We're saved! The Fed is cutting rates"
"We're saved! They rescued Bear"
"We're saved! Some sucker (BAC) bought Countrywide"
"We're saved! Fannie and Freddie taken over"
"We're saved! AIG solved"
"We're saved! Lehman now gone"
"We're saved! Merrill sold to Bank of America"
"We're saved! The Fed is backstopping commercial paper"
"We're saved! The Fed is backstopping money markets"
"We're saved! Wachovia sold to Wells Fargo"
"We're saved! TARP is passed"
"We're saved! Citigroup backstopped and given new loans"
"We're saved! Bank of America backstopped and given new loans"

I left out about 15 other instances, but you get the point. We rally on each one as the lemmings clap and nod their head - time to buy stock. Just add this to the list.

Worshiping false idols is dangerous. I have said continuously that when the market finally realizes the problem is larger than the government and there is no knight in shining armor we'd really see people give up (selling). It looks like that realization is sweeping over the land.

Since Tim Geithner has opened his mouth the S&P has fallen from 870 to 682; thats nearly 22% or a full bear market Tim. I am not placing the blame on him; I am just shaking my head at the excitement over his magical speech and 'thesis' buying, even to this day. We also rallied 3-4% in an hour when he was announced late in 2008 because after all - he walks on water and the government will make all our problems go away. If its not one Treasury secretary its another - someone will save us. False idols.

As for the fund, well I got Charlie Browned yesterday. [Feb 5: Charlie Brown Market] Lucy put the ball down - we had that cute reversal and after standing on the sidelines perfectly hedged for week after week after week (nearly 2 months) - we fell for it. And got clobbered today for a 3.7% loss which is more than the whole year combined before today. Humbug. It is a very rough market - and even 1 day of being wrong can decimate your capital. So I'm sort of peeved about that... but as a country it really is getting bad now. [Feb 4: Americans Lost $10.2 Trillion in 2008] The worst January on record has been followed by the 2nd worst February has been followed by the worst start to a March.

As for tomorrow we will have a roaring bad employment number - as always, it won't be the number but the reaction to the number. Almost all my conditions for a bottom are falling in place - we now are seeing the panic selling and except for a handful of names; most of the generals (leadership/hide out stocks) are now being smoked. Still some holdouts in technology but I'll consider this "close enough". From here it's not going to be so much buying but an exhaustion of selling we want to see - all these silly "up 1%" premarket moves after 4% down days are just prolonging the process.... hopefully the band aid is ripped off and we can put in an intermediate bottom.

Hopefully this is worth it for the firms and people at the top of said firms (along with the regulators, and credit agencies, and politicians and consumers who themselves were greedy or financially illiterate). Some small percentage made boffo bucks on the way up (glad we could all help buy the mansions, art, and yachts), but now all the peons get to suffer on the way down.

Just remember times like these when the Kool Aid is flowing and some magical speech or proposal will be presented to "save us". Onward to solution 21,288.

Gamestop (GME) Hit by's (AMZN) Move into Used Games

Whooo... brutal. So you are sitting in Gamestop (GME) - smug in the realization you have one of the few retailers on the planet that is still doing well. I mean, video games are among the last things that people will give up in the Great Recession. The chart is excellent to boot! Then you wake up today - and find out is bursting on the scene. We just noted less than 2 months ago that used games were a BOON to Gamestop [Jan 21: WSJ - Used Games Score Big for Gamestop] Apparently, Amazon has a Wall Street Journal subscription...

And just like that, welcome to the Thunder Dome, Mr or Ms. Gamestop investor. (pssssst - how long before Obama & Co institute internet sales tax which will then in turn kill Amazon stock? We have a lot bills to pay and new taxes to levy)

Via Reuters
  • Inc (AMZN) will allow shoppers to trade in used video games for store credit, a move that may challenge a core driver of profitability for No. 1 U.S. game retailer GameStop Corp (GME). GameStop shares fell 13 percent on Thursday, after Amazon set the trial launch of "Amazon Video Games Trade-In." Users can mail in used games and get varying amounts of credit, including a 10 percent bonus toward items in Amazon's online video games store.
  • Amazon's move (, which includes free shipping, comes on the heels of reports that big-box retailers Best Buy Inc (BBY) and Toys-R-Us are testing the trading of used games.
  • Credit Suisse analyst Gary Balter called the Amazon development "disconcerting," suggesting that it chips into a kind of monopoly that GameStop has on used games, albeit one too small for game trade-in competition from Amazon to have much impact on the specialty retailer's profits.
  • GameStop profit margins have benefited from an active trade-in system in which shoppers return used games for a fraction of the purchase price or store credit. The returned games are sold at a higher profit margin than new games.
  • "That (Toys R Us testing) in many ways is less of a threat, as GameStop's advantage of 10 times as many locations and selection seem to make them less vulnerable," he said. "Best Buy and others have tested it for some time but have not been as successful."
  • Shares of GameStop had risen 35 percent in the past three months as sales of video game consoles by Nintendo Co Ltd, Sony Corp , and Microsoft Corp (MSFT.O) remained robust, driving consumers into GameStop stores to buy software for their systems.
  • Analyst Ben Schachter of UBS said investor reaction to Amazon's move may be overblown, since online sales are a small fraction of GameStop's business. Game enthusiasts, he said, prefer to go to a store, drop off a game, and grab a new one. "We believe the "instant gratification" of the trade-in process at physical stores remains a key advantage for GameStop," Schachter said in note to clients. "The bottom line is that Amazon is a formidable competitor, but we don't see any meaningful near-term risk, and online used just isn't a particularly big market."
While I generally think gamers want their games "now" rather than going through this longer time of time frame, from a stock market perspective it really doesn't matter if the reaction is overblown. The one thing investor's hate more than bad news is uncertainty, and now a dark cloud is over one of the few remaining hiding places.

No position

Send me any Positive Economic Story

or attach below... I spent 30 minutes last night trying to find some.

Fruitless :)

I have about 4 stories lined up but they are all such downers....

On the plus side the S&P is only 683 points away from where I'd go 100% long. Son... back in my day we used have these things called banks. Then the late 2000's hit.

Not much to add today; sort of like watching a car crash.

The Daily Show with Jon Stewart all over Stock Market

A bevy of clips from Jon Stewart last night making the rounds - hey if you can't laugh you must cry - the 3rd clip includes Joe Nocera who we just cited a few days ago in the AIG piece [Mar 1: New York Times - AIG: Propping Up a House of Cards] Apparently Rick Santelli was supposed to be the original guest but was pulled by CNBC (rumor) [Rick Santelli Speaks for the Silent Majority]

As for the market - yikes! Very little to talk about in terms of individual stocks - we are just waiting for the world to end here... Citigroup (C) fell below $1 for the first time ever... etc etc. I'm bullish here for a nice move up sometime in the next 2 weeks as extreme levels of fear, loathing and pessimism are making the rounds. But the next 2 hours or 2 days are the issue ;) Remember, we said 2009 would be a ping pong between hope and reality. Now the market is facing reality - and it is not pretty. I got caught in yesterdays late day reversal so today I know what it feels like to be a sucker mutual fund. We are now at the same divergence from the 200 day moving average as the worst period in November 2008. Any lower from here and we make new history... with recent lows broken the next place people point to is S&P 660.

Guest Post: Eric Jackson - The Good, Bad, and Ugly in Hedge Funds

The following is a guest post from Eric Jackson. Eric is founder and managing member of Ironfire Capital LLC and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund Ltd. His blog is Breakout Performance: Ironfire Capital

Not too long ago, practically every newly minted MBA wanted to be a hedge fund manager, and investors—including many conservative pension funds and endowments—rushed at the chance to place assets in hedge funds. Yet hedge fund managers were blamed for both artificially inflating the price of oil last summer and, when prices dropped, for contributing to the looming recession.

The mainstream press has now taken to derisively calling them "former masters of the universe," while noting that compensation is still "obscene." As quickly as assets came in during the up market, they have gone out in a declining market. In the last quarter of 2008, $152 billion in hedge fund assets were redeemed, even ones with positive returns in 2008.

As a hedge fund manager, I'm neither an apologist nor a cheerleader for my industry. Like any business, the hedge fund world has good and bad practices and managers. All managers need to accept accountability for the trying times we are living through. But it's fanciful to suggest hedge funds are about to disappear. Quite the opposite: The industry will be thriving even five years from now because it will continue to attract the best managers and the most sophisticated investors seeking alpha through innovative strategies. Here are some of the good and bad practices in the industry today:

Barbarians at the Gates

Hedge funds have long had "gates" as options available to the fund and/or manager included in their subscription documents. All investors reviewed these prior to making an investment. You haven't heard much about them because hedge funds haven't gone through a sustained down period the way we have in the past six months. As a result, a number of funds have exercised their rights to enforce a gate, reducing how quickly investors can redeem out of the fund. The intent of a gate is to prevent a panicked run on the fund, requiring forced selling, which can be very difficult for funds holding illiquid assets, and which further lowers the value of the remaining investors' assets in the fund.

Gates are a perfectly legitimate operating mechanism and will continue to be part of hedge fund investing. Moreover, as so many funds have decided to use them in the past four months, it is unlikely any one fund will be unfairly penalized by investors when they raise new funds down the road. The managers who will be penalized for putting up a gate are the ones who continue to charge fees after doing so. That's their right under their agreements, but it certainly doesn't engender goodwill, and investors tend to have elephant-like memories.

Overpaid and Underperforming?

Critics have attacked the standard hedge fund compensation model of 2% annual management fee and 20%-of-profits performance fee in light of the industry's poor 2008 performance (-19.2% for the average fund, according to Hennessee Group). Yes, many hedge fund managers made bad calls in 2008, but one-third of hedge funds made money in a year when the Standard & Poor's 500-stock index was down 40%. Only 1 in 1,700 mutual funds made money in the same period, meaning you were 50 times more likely to make money in a hedge fund compared to a mutual fund last year. What is that worth in fees?

Sadly, some hedge fund managers don't help themselves in the court of public opinion. Call it John Thain-itis. Many media profiles of hedge fund managers mention private jets, homes in the Hamptons, and flashy lifestyles, none of which has any predictive value about whether a hedge fund is a good investment. It's always been about the returns over a specific period of time, and the comparable risk-reward of other alternatives to invest their money.

Eyeing High-Water Marks

Hedge funds typically have high-water marks, which require hedge fund managers to make their investors whole before paying themselves performance fees. These high-water marks are going to cast a large shadow in the industry for the next few years.

What high-water marks also do—from an investor's perspective—is level the differences between a hedge fund and a mutual fund or other asset manager. Any investor has to pay a percentage of assets in management fees to a money manager. In the case of hedge funds, an investor pays performance fees only when the manager makes money. Investors also know that hedge funds will invariably attract more talent because the compensation levels are higher than the mutual fund industry or elsewhere.

Some observers feel that high-water marks are not the panacea they seem. In a down year, they argue, you can just shut down your fund to avoid the pain of making back past losses and open up another shop across the street. Although this can and does happen, it's just as common for hedge funds to honor their high-water marks instead of taking the easy way out and shutting down, eliminating the high-water mark, and reopening later.

Bottom line: If managers screw up, they need to face the consequences. It's that kind of Darwinism which makes the industry strong. Investors shouldn't have any qualms about having to pay performance—or more correctly stated, revenue-sharing—fees.

Reconciling Differences

With over 10,000 hedge funds worldwide in 2008, funds naturally vary in size and strategy. Some pursue absolute returns, always seeking to grow capital, no matter the market; others aim to beat the S&P or other benchmark on a relative basis. Absolute and relative performance strategies have different levels of volatility due to the different types of risk they take on.

James Simons of Renaissance Technologies recently announced that his firm would not charge fees to existing investors for its Institutional Futures fund, which was down 12% in 2008, but would still charge fees on its Institutional Equities fund, which was down 16%. The difference between the two funds? The first follows an absolute return strategy, while the second aims to beat the S&P 500 by 4% to 6%, which it did.

There is no question that there's a sea change taking place in the hedge fund industry, which saw its assets decline by $782 billion, to $1.21 trillion, in the past year. That's a Detroit-like drop in demand on a year-over-year basis. Within five years, it's likely the mega-funds will dominate, similar to the private equity world, where you have KKR, Bain, T.H. Lee, and a lot of small fry.

Man Group in Britain will be the model for the biggest U.S. hedge funds, running multiple strategies and catering to the institutional investor and pension fund community. It's likely the funds with more than $5 billion in assets today will assume the mega-fund mantle in the future. Funds under that level will shrink or sell out. However, niche hedge funds will continue to thrive, as long as they have unique strategies that are successful.

Most will prosper with a couple hundred million dollars in assets, although some niche strategies can handle up to $2 billion. This is where a lot of innovation and outperformance in the industry will emerge. For example, the most feted hedge fund manager of the past two years is John Paulson, who made billions betting on credit default swaps, which predicted the severe souring of the housing market.

Prior to 2007, Paulson's firm was best known for its unremarkable, yet steady positive returns and merger arbitrage expertise. It's likely that he couldn't have made his bearish housing bet at a bigger shop. The perceived risk he was taking on with the CDS, especially going against the conventional wisdom at the time that housing would rise steadily because it always had in the post-World War II era, would have been rejected. Investors will be always on the lookout for the next great manager whose wave they can ride—and it will come from the smaller, more entrepreneurial managers.

Nothing Personal

Here's a scary thought for hedge fund investors: Hedge funds domiciled offshore (e.g., in the Caymans or British Virgin Islands) have boards of directors that tend, in my experience, to be far more lax and chummy than most corporate boards. (U.S.-based funds typically do not have boards as they operate as general partnerships.) These offshore boards tend to be small, typically two or three people, one of whom is often the hedge fund principal. Since the board oversees the investment manager's mandate, this is a huge conflict of interest that most hedge fund investors don't talk about.

Although it would be wrong to have a large bureaucratic board for a relatively small and entrepreneurial organization like a hedge fund, small boards often encourage managers to ask "friends" to fulfill this role. As a result, board meetings tend to be informal, tough questions don't get asked, and a real debate of legitimate risks facing the fund is avoided.

Many funds end up appointing a "rent-a-director" who lives locally and usually is recommended by, and affiliated with, the offshore lawyer working for the fund. These professional board members often have no job except serving on dozens of similar fund boards. They are simply there to be paid, so they clock in and clock out of meetings with a 9-to-5 mentality that would make a Dilbert character blush.

There are excellent hedge fund directors. However, perhaps not as many funds would be imploding this year had their boards done a better job at holding managers' feet to the fire when times were good.

Slimming Down

The hedge fund industry will be working off its "too big, too fast" growth in the coming years. We're going from 10,000 hedge funds to perhaps 6,000 in the next few months. Performance, operational, and increased regulatory issues will weed out one-third of all hedge funds within two years. Remaining fund managers will have fewer staff, less leverage, and less compensation.

Those hedge fund managers with creative and differentiated strategies (and a track record and a background check that pass due diligence muster) will always find investors. Anyone worth their salt will stick it out; the dead weight and hangers-on will leave. That will make for a better overall industry.

Amid this upheaval and in the wake of the recent Bernard L. Madoff scandal, two hedge fund-related service providers will flourish: (1) third-party administrators who independently calculate a fund's month-end net asset values (NAV) for investors, and (2) third-party due diligence consultants who will scour the backgrounds and documents of fund managers looking for red flags to warn potential investors. I am amazed that these are still not considered absolutely required by investors before making an investment.

Who will wilt: the big fund-of-hedge-funds. Investors want managers who create value. Middlemen who take margin out of the value chain will be forced to defend their existence. Maxxam, Tremont, and Fairfield Greenwich showed us through Madoff that too few funds-of-hedge-funds do meaningful due diligence on their investments that they promised their partners. Funds-of-funds won't die but will drop away in large numbers. Only those that are truly differentiated will survive.

Investors will (and should) place more conditions on fund managers and demand more transparency. Although it will be much easier to do this in a post-Madoff world, an investor's size relative to other investors in a fund will still determine his power to demand this transparency.

Registration Debate

Politicians on both sides of the aisle have called for more oversight on hedge funds, including a suggestion for mandatory "registration." What would registration really accomplish? Many hedge funds will continue to reside outside the U.S. and not need to register. But the largest hedge funds—with a majority of assets—in the U.S. already have registered and file their 13-F list of holdings on a quarterly basis. Registration for registration's sake, giving the government an abundant amount of data to do nothing with, seems a waste of time. Madoff, by the way, was registered with the Securities & Exchange Commission.

If the government wants to help improve capital markets, they should be prosecuting scammers and Ponzi schemes like Madoff, preventing "naked" short-selling abuses, and making it easier for shareholders to oust lazy and nonperforming members of corporate boards.

The hedge fund industry will work out its excesses carried over from the past five years and become a stronger collective of funds and fund managers. Most of the lemmings will leave, until the industry once again begins to experience excessive growth. Oversight must and will improve. Lessons will be learned. And investors will continue to flock to hedge funds because the industry will continue to attract the best managers with the smartest strategies.

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