TB’s Quote of the day: ”If you can’t drink a lobbyist’s whiskey, take his money, sleep with his women and still vote against him in the morning, you don’t belong in politics.” Jesse Unruh, late Treasurer of California…and ole Jess believed it…at least HE practiced what he preached. TB’s idol, Herb Caen, also quoted this of Jesse: “Sometimes you have to rise above principles.”
…TB thinks you can take that rally and shove it. He is also willing, as he has in the last three countertrend rallies that he will gladly admit it if he is wrong! In the meantime, how many money managers, trying to window dress for quarterend in the worst quarter since Q1 2002 (even for hedge funds), bought the trade yesterday? As TB said, and several readers concurred: he is mad as hell, at the government, greed of corporations, and a total lack of concern for the common good at all levels. That is not in the best interests of the world. The rest of today’s commentary will be on this topic.
1. Greed…by hedge funds, investment banks, and other forms of sin. Greed is rampant and contrary to Ivan Boesky, greed is not good…perhaps for an individual but not for a society or the world. I the Michael Lewitt piece referred to yesterday, he went on a rant about the stupidity with which investment banks, and the mortgage subs of commercial banks pay out bonuses…immediately or at least by yearend without knowing the outcome. Loan brokers got paid on loans that went bad some within 3 months and some even before the first payment was made. TB has marveled for decades…and in fact commented on the fact that brokers (Merrill and LF Rothschild in TB’s personal experience) paid huge salaries to bond traders based on their prior performance at another firm invariably the lost money for us), that huge bonuses are paid and then a firm loses money the next. TB also said this about how unconscionable it was for Goldman to pay out those huge bonuses and as he predicted, take a big hit then next quarter. Shareholders are either sheep or have been relegated useless by the government. The SEC has not moved to enforce shareholder initiatives that are passed and then ignored by management. Also, TB railed at the $400 million plus paid to outgoing Exxon Mobil Chairman Lee Raymond a man whose only mark was eliminating unprofitable divisions in his first year as CEO…and owed his success to the price of oil moving up which pulled his stock price with it. So sure was TB that this company would disappoint…and it will eventually…that in reviewing a clients portfolio he consults on he advised selling the stock, but the client also owned MRO, CVX, and COP, so despite leaving a lot of money on the table he was still participating. For the record TB favors not owning more than one stock in a sector and if one is unsure which to buy then use an ETF.
Hopefully, we will come to our senses in compensation and do something about it this time, but if we have seen the bottom as the bulls say it will be forgotten…quickly…even though those with no capital invested are reaping higher rewards than those that do. Lewitt suggests putting at least 75% of bonuses in the company’s stock…say for a period of five years…then it could be withdrawn on a rolling basis. Now that makes sense to TB…what about you? As much as TB complains about hedge funds (as a group), at least they have capital at risk…as did Blackstone (BX) and Fortress (FIG) before their IPO’s and look how poorly those stocks have performed…those IPO’s should never have been allowed.
2. Hedge Funds and Pension Funds. As reported above, Q1 was the worst quarter for hedge funds as a group since 2002. We have seen many notable failures and multiples of those are shuttering their doors or merging. Many are not allowing liquidations by investors. Also according to Bloomberg equity hedge funds held a record amount of cash in Q1…could this have been the boost yesterday?
In a survey of about 1/3 of the $1.9 trillion in hedge funds, they held approximately $90 billion in cash at the end of January, $65.8 billion in February…at a 2% plus 20 fee think how much one is paying for cash…a negative return…no conventional money manager would hold that much cash…not that that is always a good thing. The reason for the high cash levels, besides no conviction in market direction could also have been due to margin calls and trying to paydown borrowings in TB’s humble opinion.
Lewitt also pointed out that John Merriwether, a finance professor who made his mark in risk arbitrage at Salomon Brothers and went on to found Long Term Capital Management which failed in 1998 with what some said was as much as 100 times leverage, and was trying to start another fund the following February when TB was in London, now manages Relative Value Opportunity (sic) Fund. That fund was leveraged 14.9:1 at the end of February…and was reportedly DOWN 28% year to date while only averaging 7% since inception in 1999. It is hard to decide who learned less, Merriwether or his investors…surely they didn’t read the book or believed him! Perhaps those 20% of profits fees should be also accumulated and only paid out over 5 years. TB’s Law: Leverage distorts returns and leads to volatility.
Pension funds that are overfunded…an oxymoron since when they are overfunded it assumes they will earn an 8% return from that point forward until the last liability is exhausted…did so with the use of alternative investments…mainly hedge funds and REITS. Those are failing them now, either outright or in sub 8% returns. So we are going back to the situation that existed from 2000 to 2005 for most. TB has warned about buying stocks of large companies that still have defined benefit pension and health plans…they will bite you! Are equities the best investment for pension funds…despite all the hype experience suggests they are the worst for immunizing a long string of liabilities. This should be intuitive to many of you who are retired or planning to retire and see market volatility and declining values of your investments altering your future lifestyle…not to mention home prices and those pesky home equity loans.
TB has frequently mentioned John Ralfe, who converted Boots PLC’s pension fund to 100% bonds in 1999-2000…precisely as foreign funds were throwing money into the US stock market. A new study by BNY Mellon Asset Servicing shows that:
”While UK Equities has (sic) been declining as a major asset class for UK pension funds over the last few years (mandated by the government), 2007 saw the largest fall to date. UK bond allocations, including Index-Linked, now exceed UK Equities for the first time ever.” (Equities fell to 28.7% from 34.4%).
This not only shows Ralfe was correct (and he was able to buy bonds with coupons and yield over 6%), but that the consultants (actuaries) who created the problem by not rebalancing the equity portion of the portfolio, were wrong…dead and costly wrong. US consultants are equally culpable in TB’s opinion.
Furthermore Over the past five years the weighted average return has been positive, averaging 12.1%, and was 6.4% for 2007, and 80% have seen volatility (risk as measured by standard deviation of returns), between 5.1% and 7.8% per annum which is historically very low. Here is the link to the complete article…if you are a money manager it is a must read:
4. Why TB is bearish on stocks. There are approximately $300 billion in auction rate securities (ARS). Many of these have had failed auctions although those backed by muni’s are gradually calling them by issuing the underlying long term bonds, BUT over $50 billion are issued by bond funds to leverage their portfolios. These are not only illiquid and are paying low “rate formula” yields, but were sold to high net worth individuals who were told they were liquid…many of those now need that money for taxes. If they can’t get the money there where else can they get it? Their bank? home equity? credit card? How about selling stocks? As a professional money manager TB has seen this every year. True it won’t be anywhere near $50 billion but stocks, and bonds, will likely be sold. Money managers don’t sell until the last moment so unless there was some selling yesterday to take advantage of the hedge fund driven rally there is a lot to follow, and if it the market turns down it will only fuel the fire.
Can anyone point to anything that would cause a rally of nearly 200 points right out of the chute (volume in the first half hour was a strong 211M shares but had tapered to 343M at the end of the first hour and was only slightly above average on the day. Well the thing was UBS whose Chairman resigned and they are going to write-down an additional $19B BUT that is better than estimated! They are going to raise $15 billion in new capital…saying ‘dilution’ is the only way to get back on their feet! The stock rallied 14.6% to $33 which is still half of what it was on 4/25/07! THIS is a reason for the entire financial sector to pull the rest of the market with it? Pullease! At the same time they had there rating cut and equity analysts also lowered ratings. How can one invest in stocks and not know what dilution is? This is truly pathetic. Deutsche Bank also has losses and Morgan Stanley analysts said six quarters of earnings were erased…yet the stock rallied 4.9%! If you can explain this, let TB know and he will provide space in this column…IF you are brave enough!
Now let’s look at why the Indexes are not bullish despite that big rally:
Financials rallied 5.6% led by an 8.1% gain in brokers! Can you believe that? Most of the other gainers were losers too. Banks +4.1% while the KBW Bank Stock Index of smaller regional banks rose 6.9%!
Dow Industrials: Closed 12656, 4 points off the day’s high. Took out 12,622 from 3/24 but look: to set a higher high they need take out 12,749 (2/4), 12767 (2/1), 12795 (1/14) and 12931 (1/10). Meanwhile the trendline from the 10/11 high, 14198 is now 12,853 and the 200 day moving average is 13154!
Dow Transports: Best of the indices…despite independent truckers losing money/freight levels down.
S&P 500: Closed 1379, Trend is 1410. Major res at 1388 double top from 2/26-27 and 1396 another double top form 2/1-4.
Nasdaq 100: closed 1855. High and high close is 2239, 200 day is 1967 and trendline is 1980! Also, 10 points above the close, 1865 is an opening gap that ended in a down day.
Russell 2000 is pathetic and so are others…now you know why TB is still a bear!
Lastly, commodities are weak as deleveraging continues. We have had far too much volatility in a notoriously volatile sector. Gold fell $33 yesterday breaking support at $900 and has been trending down since the 3/19 high close of $1,009.80…it fell $59.10 the next day, biggest selloff of the rally. Crude is similar yet you wouldn’t know it from Energy stocks led by Exxon Mobil which alone added 66 points to the NYSE Energy Index and a 1.3% gain while XOM was up 2.9%.
If you want to play here, be my guest but NOT with TB’s retirement money!
TB hopes your money manager read this before he plunges into the market headlong today.
All the best,
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 2, 2008
