Archive for October, 2008

Hedge Fund Lays Off Equity Staffers

Kurt Brouwer October 16th, 2008

The Wall Street Journal reports [emphasis added below] that the hedge fund, Perry Partners, is laying off quite a few of its equity analysts.  This is interesting because the firm has a solid record of success in equity strategies such as merger arbitrage.

Hedge Fund Perry Partners Lays Off 20 to 30 Staffers in Equities (Wall Street Journal, October 16, 2008, Heidi N. Moore)

Richard Perry, the 53-year-old founder of Perry Capital, built his name in the world of merger arbitrage. So it struck more than a few people as odd recently when Ted Martin, head of Perry Capital’s risk-arbitrage efforts, left the firm along with a senior trader in the group.

It seems Martin and his trader were caught up in a changing tide as the hedge fund refocuses its business away from equities and into credit, particularly distressed debt. It’s a remarkable move for Richard Perry, who founded his firm in 1988 after making his name as an equity arbitrager at Goldman Sachs.

As part of that effort, the firm is laying off 20 to 30 staffers, people familiar with the matter told Deal Journal. A person close to the situation said Perry also has made some hires to boost its standing in debt investing.

Here is Perry’s official statement on the moves, courtesy of a spokesman for the firm:

“The traditional long/short equity model is undergoing rethinking and Perry Capital has taken appropriate steps to restructure so that it may better capitalize on more appealing current investment opportunities. The firm remains a special situation equity investor, but it sees unprecedented opportunity in the global credit markets that requires fewer equity professionals. The nimble asset-allocation process that has been a hallmark of Perry Capital’s long-term success dictates such a realignment of its near-term investment focus.”

Perry Capital, like many other hedge funds, has been hit hard by the plunging stock markets. The $11 billion Perry Fund was down 8.5% in the third quarter alone, a person familiar with the firm told Deal Journal…

Clearly, Perry Partners’ equity strategies have not been working, hence this change is being made.  It is also interesting that they are now moving aggressively into distressed fixed income securities.  With all the problems we have seen with mortgage-backed securities, junk bonds, other corporate debt and so on, I’m certain that this market is relatively inefficient right now.  Pricing of these securities is difficult hence opportunities abound for those can analyze well and also have the capital to pull the trigger on purchases.

We have seen the folks at Pimco Total Return and the Pimco organization in general moving aggressively in this area (PIMCO Buys $2.5 Billion In Mortgage-Backed Bonds) and it sounds as though this hedge fund is going to more focused on doing this also.

Merrill Lynch: Money Managers Are Pessimistic

Kurt Brouwer October 15th, 2008

Merrill Lynch regularly surveys large money managers around the globe to see how they feel about various assets. Right now, the only appealing asset for big investment firms seems to be cash. And, they particularly do not like stocks.  Nor do they like Wall Street analysts, although it’s hard to fault them for that.

Brett Arends, who writes the R.O.I. column for the Wall Street Journal, opines on the findings of the latest survey and what it might mean for investors [emphasis added]:

Is Pessimism Good News? (Wall Street Journal, October 15, 2008, Brett Arends)

…the mood is so utterly bearish across the board right now that I am fighting the urge to turn into a raging bull.

Look at Merrill Lynch’s latest fund manager survey. Every month, Merrill surveys the biggest money managers around the world to find out what they think about markets and what they are doing with their own portfolio.

Right now they hate almost everything except cash. Merrill calls the new survey, out Wednesday, “one of the most pessimistic” ever. “Over the past month, fund managers have lost faith in global growth, commodities, China’s economy and emerging markets,” the firm reports.

Sound bearish? That isn’t. Quite the reverse: When the big money managers are very bearish, that’s often positive. It means they are already out of the market. “Three factors are coming together that have tended to be associated with market rallies,” reports Merrill.

…The Merrill survey sometimes is an incredibly useful handbook for individual investors. It tells you what the big money crowd is thinking, and feeling, and where they have placed their chips. At market extremes, it is a wonderful contrarian indicator, or “magnetic south,” pointing in exactly the wrong direction.

Thus fund managers were hugely bullish on European equities 16 months ago, just before those markets collapsed, and hugely bearish on Japan back in the spring of 2003, just as it hit rock bottom.

A staggering 93% today are blowing Bronx cheers at analysts’ earnings forecasts. They think corporate earnings will disappoint in the year ahead. Indeed 51% believe forecasts are “far too high.”

…Everywhere you go, there huge skepticism about any rally. Worldwide share prices are worth 30% less than they were at the start of September, and nearly a fifth less than they were at the start of October, but unlike in 2001, or 2006, no one is calling this “a great buying opportunity.” No one is jumping in.

The Wall Street Journal on Tuesday reported that a number of big hedge fund managers have also been moving heavily into cash in recent days. Some of them are frightened about the market chaos. It makes you wonder why they’re hedge fund managers…

The market crash in the past month has been astonishing and it has caused many investors to wonder why they own stocks or mutual funds or even hedge funds.  Neither I nor Brett Arends knows when this market for stocks — and for most bonds too — will turn around.  But, the increase in skepticism and the downright pessimism we are seeing now is a phenomenon that generally appears at market bottoms.

Retail Sales Down 1.2% in September

Kurt Brouwer October 15th, 2008

I think we would all agree that retail sales have fallen based on anecdotal evidence and recent reports.  But, how much did they fall in September?  Answer: 1.2%, which is the biggest drop since 2005.  Though it is not good, that 1.2% drop does not quite live up to the overheated rhetoric employed in the headline or the article itself [emphasis added]:

Retail Sales Plunge 1.2% in September (Associated Press, October 15, 2008, Martin Crutsinger)

Retail sales fell off a cliff in September, plunging by the largest amount in three years as worried consumers shunned the malls and auto showrooms in the midst of the country’s financial meltdown.

A 1.2% drop is like a fall off a cliff?  Maybe a curb, but not a cliff.  Now, if you heard someone say that sales fell off a cliff, wouldn’t you think in terms of 10% or 20%?  The AP continues:

The Commerce Department reported Wednesday retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. It was the biggest decline since retail sales fell by 1.4 percent in August 2005.

The bigger-than-expected decline significantly increased the risks of a recession because consumer spending is two-thirds of total economic activity.

The weakness was led by a 3.8 percent drop in auto sales. Sales dropped below 1 million units as consumers struggled to find financing.

The biggest decline since 2005?  Funny, I don’t remember 2005 as being a down year.  What happened? Given the state of the economy, it’s not surprising that car sales are down.  For that, there are lots of reasons, one of which is the difficulty of getting financing from suddenly-shy banks, credit companies and so on.

Retail sales have now fallen for three consecutive months, the first time that has occurred on government records that go back to 1992. Economists had expected sales to be down in September as a flood of bad news about the financial system and rising unemployment increased consumers’ worries.

Many analysts believe the overall economy, as measured by the gross domestic product, is slipping into a recession, triggered by a steep slump in housing and the severe credit crisis.

Even excluding auto sales, retail sales showed widespread weakness, falling by 0.6 percent or double the decline outside of autos that had been expected…

Absent faltering auto sales, retail sales fell about 0.6%.  That makes sense to me too because everyone has been scared silly by all the talk of financial meltdown, impending doom and the Great Depression II.   Clearly, a slowdown in retail sales is not great for the economy, but these levels seem reasonable to me and they are far from the level it would take to justify a phrase such as over a cliff.

Via: Wall Street Journal/Best of the Web 

Gloomy Report from the Federal Reserve

Kurt Brouwer October 15th, 2008

The Federal Reserve produces a quarterly report called the Beige Book, which is a summary of economic activity in each of the Fed’s 12 districts.  The Beige Book for the third quarter is quite gloomy about economic activity around the country.  And, at this point, economic weakness is self-reinforcing because consumers who worry about their job stability naturally spend less, which leads to slower sales for businesses of all types. Anticipating slower sales, businesses cut inventory and lay off workers and so on.

The only good news in the report — that inflation is on the wane — is also a pretty logical continuation of the theme of a slowing economy.  Further, the reduction in rates of inflation is driven largely by falling energy prices [emphasis added below]:

The Beige Book: Commentary on Current Economic Conditions (Federal Reserve Board, October 15, 2008)

Reports indicated that economic activity weakened in September across all twelve Federal Reserve Districts. Several Districts also noted that their contacts had become more pessimistic about the economic outlook.

Consumer spending decreased in most Districts, with declines reported in retailing, auto sales and tourism. Nearly all Districts commenting on nonfinancial service industries noted reduced activity. Manufacturing slowed in most Districts. Residential real estate markets remained weak, and commercial real estate activity slowed in many Districts. Credit conditions were characterized as being tight across the twelve Districts, with several reporting reduced credit availability for both financial and nonfinancial institutions. District reports on agriculture and natural resources were mostly positive, although adverse weather associated with hurricanes Ike and Gustav negatively affected the South and the Midwest.

Inflationary pressures moderated a bit in September. While several Districts noted continuing pass-through of earlier price increases for metals, food and energy, most indicated that cost pressures had eased. Labor market conditions weakened in most Districts, and wage pressures remained limited. Several Districts reported lower capital spending or reductions in capital spending plans due to the high level of uncertainty about the economic outlook or concerns over the availability of credit…

The reaction of the stock market today suggests that we have merely traded worries about the financial panic and the credit crunch for fears of a much slower economy. The economy has been slowing for some time now, but those concerns took a backseat to fears about the risks to the financial system as a whole. The U.S. Treasury and the Federal Reserve and the FDIC and many other entities have been taking steps to unclog the credit markets, recapitalize major banks and reassure investors that the financial system was sound.  And, there have been some signs of a lessening of fear that the financial markets would freeze up.

Unfortunately, now the focus has shifted to the contracting economy, which brings with it fears of falling corporate earnings.  So, the flight from stocks continues and the fear and loathing for anything other than cash is still in place.  It may well be that the bond markets have to rally a bit from these very low levels before stocks can build a base and undertake a meaningful and lasting rally.

Voting With Their Feet — Reader’s Digest Global Poll

Kurt Brouwer October 13th, 2008

There have been many polls about how people around the world would vote in our election.  Not surprisingly, Senator Obama comes out ahead.  I thought a more interesting aspect of this poll from Reader’s Digest was when they asked people in different countries whether or not they would like to move to America.  Surprising answers indeed, particularly from the French [emphasis added]:

Global Poll: How the World Sees the 2008 Election (Reader’s Digest, October 13, 2008, Carl M. Cannon)


…a majority of the French-the French!-express an interest in relocating to the United States. To some, this number might seem like a typographical error. Philippe Labro, a well-known French writer and filmmaker, told Reader’s Digest that to the French, “the reality of the American Dream” is embedded in the life stories of both presidential candidates. “America is still that land of the second chance, of multiple opportunities, where anyone can succeed,” he attests.

This view certainly prevails in India. Some 73 percent of respondents there express interest in relocating to the United States, which begs the question of where we’d put another, oh, 800 million people. Perhaps there’s some room in Canada, even though only about 25 percent of the Canadians surveyed say they’d consider moving south.

In Mexico, the nation that already sends the most immigrants our way, one third of those polled say they’d relocate here-a number that would surely be larger if the millions who have already voted with their feet could have been polled before they made the trip…

It’s revealing that people want to come here because America is the land of opportunity, but also because it is the land of second chances.

With all the turmoil we have seen lately, those of us who were born here may sometimes forget what a great country this is.  Those in India, Mexico, France and other countries have not forgotten.

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