Friday, November 7, 2008

General remarks on a Marketwatch article

Here are excerpts (and my commentary) from an interesting article in Marketwatch, summarizing newsletters currently being sent out from hedge funds, with
fascinating warnings about the near future, and encouragement of careful stock selection.
Interesting they all are because no one really knows what will happen.

Hedge fund managers 'funereal' in midst of crisis

More pain expected, but some look for opportunities in 'rubble', by Alistair Barr


SAN FRANCISCO (MarketWatch) -- In the midst of the worst financial crisis since the Great Depression, several top hedge fund managers sent a grim message to their investors in October: it isn't over.

...The Maverick Fund, Ltd. was down more than 7% last month through Oct. 17, leaving it off roughly 26% so far this year, according to a hedge fund performance report compiled by HSBC's private bank.
In Maverick's Oct. 9 letter to investors, the firm reported that its funds lost between 14.4% and 40.6% during the third quarter.
"I cannot find words to describe our disappointment, embarrassment and shock over the above results," Ainslie wrote.....


...
"Be careful buying ANYTHING today," Kyle Bass, managing partner of Hayman Advisors, warned in an Oct. 17 letter to investors.
"There will be a time to buy stocks," he added. "That time is a few years into the future when the strong have separated themselves from the week ... a time when unemployment has hit 10% and U.S. GDP has dropped 4-5% (maybe more)."
He criticized Berkshire Hathaway (BRKA)
Chairman Warren Buffett who advised investors to buy U.S. stocks in a New York Times column last month.
"Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed," Bass wrote. "Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don't."...

...Seth Klarman, a top-performing value investor and head of The Baupost Group LLC, told clients in an Oct. 10 letter that the economic downturn could be "vicious and protracted."
"The financial market collapse and bailout makes us sick," he wrote. "There is likely more carnage to come."
The U.S. dollar will likely weaken and its reign as the world's reserve currency could end, Klarman predicted. Longer-term, U.S. interest rates may rise as foreigners have to be enticed more to invest in dollar-denominated assets, he added.
The recent Treasury Department bailout has yet to be paid for and should add to inflationary pressures over time, especially when the economy begins to recover, he said....

...Thomas Barrack, founder of distressed debt and real estate investment firm Colony Capital, said the crisis has exposed how complicated the financial system has become -- and how difficult it will be to get it working properly again.
"I have absolutely no idea how the intricacies of the global financial system function. I had previously taken solace in believing that 'the other guys' did understand," said Barrack, a former Reagan administration official. "What we all now realize is that nobody understands and nobody ever understood."
"The current turmoil is larger, more complicated, more volatile, more interconnected and more global than anyone had anticipated," he added in an Oct. 14 letter to investors.
Barrack has experience with troubled banks during previous financial crises...Bank stocks probably haven't bottomed yet and the stock market "will no doubt have further and dramatic dips," he predicted.

...Oaktree's Marks expects boutique investment banks including Evercore (EVR) to benefit as larger banks become more regulated, bureaucratic and risk-averse.
"In the third stage of a bear market ... everyone agrees things can only get worse," Marks wrote on Oct. 16. "There's no doubt in my mind that the bear market reached the third stage last week."
"That doesn't mean it can't decline further, or that a bull market's about to start," he added. "But certainly it's a good time to pick among the rubble."
Maverick's Ainslie said on Oct. 9 that he'd never seen as many extremely over-valued and under-valued stocks at the same time. That presents great opportunities for hedge funds that both short equities and go long.
"The most important objective at this point is simply to endure this unique turbulence to be positions to take advantage of the far more productive environment that will exist on the other side of this nightmare," he wrote. End of Story

Am I ever glad to see that final note of hope and optimism.

A friend of mine is saying that she would like to get better than 3% for her investments. Of course, three percent overall for this year, not shorting, would have been "good", in retrospect.

I think that there are lots of Treasury bills that could hand over more than that amount. Even Fidelity Cash Reserves are offering nearly 5%, and then again some real estate funds that are based solely or mostly on returns from commercial rents are steady growers usually, like the TIAA-CREF Real Estate fund. It's just hard to beat the money-market rate without shorting.

The "peer-to-peer lending" idea is catching on. A friend today invested with a promised 8.5% return in a year in a bridge loan for a soul-food restaurant. Businesses are looking at innovative ways to raise money to meet their short-term expenses.

http://www.marketwatch.com/news/story/Top-hedge-fund-managers-funereal/story.aspx?guid=%7B8C0A785F%2DF1E5%2D4E84%2DB020%2DB4E6AA1C6496%7D&dist=hplatest

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