Archive for March, 2008

Is Another Hedge Fund In Trouble?

Kurt Brouwer March 31st, 2008

Is another hedge fund in trouble? This piece from the Wall Street Journal tells the tale. For the full piece, free registration may be required [emphasis added]:

Activist Hedge Fund Pardus Halts Investor Redemptions (Wall Street Journal, March 31, 2020, Joseph Checkler)

New York-based activist hedge fund Pardus Capital Management said it’s halting investor redemptions, at a time where many of its holdings are plummeting in value.

Pardus, which manages more than $2 billion, is currently seeking changes at several companies whose stocks it holds, most notably Delta Air Lines Inc. and UAL Corp., the parent company of United Airlines. Pardus has for months been trying to get the two airlines to merge, and both investments have been significant losers.

Pardus, which does not use leverage, is down 40% from its high-water mark in early 2007, said a person with knowledge of the fund’s performance.

“The actions we have taken will allow us to protect the funds and their investors from the external short-term pressure of the broader financial markets and focus on realizing value on our portfolio companies for investors over an extended period of time,” Pardus said in a statement. The firm is run by Karim Samii.

A person close to Pardus, which holds large positions in the 10 or so companies it invests in, said that while the fund will not be making any new investments from its current funds, it would not immediately be selling out of everything, either.

“For the portfolio companies themselves, this is good news because it reduces any market anxiety that we might have to sell shares as we will be able to maintain our investment horizons on our core positions and complete our strategies,” Pardus said in the statement.

“They don’t want to be forced to have to bail out,” the person close to Pardus said…

I hate to say it, but I imagine other hedge funds and trading desks on Wall Street may be gunning for this hedge fund’s holdings in a manner reminiscent of Hemingway’s book, The Old Man and The Sea.

In that classic, an old fisherman caught a huge fish that was too big to fit in his boat. So, he towed it behind him. All the local sharks smelled blood in the water and they pretty much ate the entire fish before he could get it to shore.

Like the sharks in that fictional account, real life traders have to know about this fund’s positions and they too must smell blood in the water. Assuming they feel that these holdings are vulnerable, they may be shorting them with a view towards forcing Pardus’s hand.

For more on hedge funds, see Hedge Fund Woes Worry Pension Plan Managers and Hedge Fund Losses Lead To Redemptions and Drake’s Halt On Withdrawals Underscores Hedge-Fund Risk.

U.S. Stock Funds — Worst Quarter Since 2002

Kurt Brouwer March 28th, 2008

The last quarter of 2007 was a tough time in the stock market and the misery has continued this year. Though the quarter is not quite over, it has been the very difficult for stocks across the board. Hardest hit have been technology and financials. Consumer stocks have also struggled [emphasis added below]:

US Stock Funds Fall Most In First Quarter Since 2002 (Bloomberg, March 27, 2020, Sree Vidya Bhaktavasalam)

U.S. stock mutual funds plunged 8.8 percent in the first quarter, the most in more than five years, as technology and financial stocks succumbed to the slowing economy and a lending pullback.

The average equity fund fared worse than the Standard & Poor’s 500 Index, the benchmark for the biggest U.S. stocks, which dropped 7.4 percent with dividends through March 25. Prominent losers included Bill Miller, manager of Legg Mason Value Trust, and William Danoff, who runs Fidelity Contrafund.

Most mutual fund managers like getting noticed, but being called a prominent loser is never welcome. Bill Miller and William Danoff are excellent portfolio managers, but their investment strategies are deeply out of favor right now and the results show it.

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Bad Stocks, Bee Gees and Bellbottoms

Kurt Brouwer March 27th, 2008

I saw this piece from the Wall Street Journal, which compared the past 9 years of stock market struggles to those days of yesteryear — the 1970s.

I don’t know about you, but for me the piece brought back unhappy memories of bad stock markets, forgettable music and regrettable fashion statements (some of them my own).

However, once my reverse nostalgia for that lamentable decade passed, I did take exception to the comparison, which I’ll get to in a moment. But first, here’s an excerpt from the WSJ piece, which may require a subscription or registration [emphasis added]:

Stocks Tarnished By ‘Lost Decade’ (Wall Street Journal, March 26, 2020, E.S. Browning)

Over the past 200 years, the stock market’s steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.

The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.

…Until last fall, many investors had viewed the bursting of the tech-stock bubble as a nasty but short-term setback. The market had resumed its upward march, reaching new highs in October. Then the credit crisis began weighing on stocks, as did the possibility of a recession. By March 10, the S&P 500 was down 18.6% from its Oct. 9 record close, nearing the 20% decline that signals a bear market. It has rebounded since then amid the Federal Reserve’s efforts to stabilize the financial system, but it remains 13.3% below its October record.

…Stocks also underperformed other investments during the 1930s and the 1970s. During both of those periods, stocks would rally strongly, only to fade. It took well over a decade in each case for stocks to move lastingly upward.

After the 1970s show ended, the stock market entered a long up market, which began in 1982. According to this piece, that bull market ended in 2000, but even so it was a very nice 18-year run. If this is correct, are we in for another strong market for stocks, once this present funk has passed?

First, we have the positive side from Professor Jeremy Siegel, who is best-known for his book Stocks for the Long Run (McGraw Hill 2002). But, the piece also quotes Yale’s Professor Robert Schiller who wrote Irrational Exuberance (Princeton University Press 2000):

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Defending The Dollar

Kurt Brouwer March 20th, 2008

Source: Wikipedia

For our latest thinking on the dollar, click here:

How Far Has the Dollar Fallen? And Why? — What’s Next?

In the last day or two, we have seen some signs of life in the slumping dollar. The dollar has perked up slightly and most commodity prices have fallen — some a little bit and some (such as gold) a lot.

The dollar tends to respond most quickly to changes in the Fed Funds rate. As that interest rate falls or rises, the dollar usually moves in the same direction. However, it does not always work that way. The Fed again cut rates yesterday, but it appears that the currency markets see an end to the cutting because the dollar strengthened.

Though the weakness in the dollar has been good for U.S. exports (see Trade Deficit Down — Economic Growth Up), it has been bad for imports, particularly commodities. Now, some observers think the U.S. Treasury needs to take action to get the greenback going up again [emphasis added]:

Time For Some Treasury Dollar-Defense (Kudlow’s Money Politic$, March 20, 2020, Larry Kudlow)

With the dollar rising all of a sudden, and commodity prices plunging, this would be a great time for the Treasury to get out there and buy dollars. Totally squeeze the short sellers. Right now. Send a clear statement that the U.S. wants a stronger dollar. It would do a lot to reduce inflation expectations. And it would drive gold prices down $200 from here.

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Fed Fix Works For Now

Kurt Brouwer March 20th, 2008

Here is one report that the traffic jam in the credit markets is easing. Some of the wrecked cars have been towed away. And, now that they’ve been cleared, we can see that other cars really have not been damaged as much as we thought.

And, this report from the Wall Street Journal [emphasis added] also contains a tidbit on the opportunistic investing strategies of Bill Gross and Pimco:

Fed Fix Works For Now (Wall Street Journal, March 20, 2020, David Reilly & Liz Rappaport)

The Federal Reserve’s latest dose of medicine to calm the credit crunch appears to be working as yields in the mortgage-bond market have dropped in recent days.

“Every little bit of support in the mortgage market helps every other single market out there,” said Jim Vogel, head of agency debt research at securities firm FTN Financial. “The Fed, by a combination of actions, is giving people more assurance that things are better for now.”

…Of course, the good news doesn’t mean the financial crisis is over. The mortgage-market calm is fragile and could easily be undone if, say, default rates again lurch higher, another high-profile financial firm fails or more multibillion-dollar write-downs force banks to curtail lending further and seek emergency capital. “There is no such thing as an all-clear siren at the moment,” Mr. Vogel said. “It’s too soon to say, ‘Dismantle your bomb shelter.’”

…Yields on Fannie- and Freddie-backed bonds have fallen nearly a full percentage point since spiking on March 6, a day after Carlyle Capital Corp. disclosed that it couldn’t meet margin calls from some of its bankers. The difference on the yield on 30-year mortgage-bonds compared with a blend of U.S. Treasurys fell to 2.74 percentage points, from 2.87 Tuesday, said FTN. That difference, or spread, compared with a 20-year high of 3.7 percentage points on March 6.

…To combat the fear in the markets, the Fed created a new $200 billion lending facility, allowed brokers, not just banks, to borrow funds and financially backed the Bear Stearns sale. Those actions, coupled with Tuesday’s interest-rate cut, helped to reverse the climb in mortgage-bond yields.

That brought buyers back into the market. Noted bond investor Bill Gross, who manages the $123 billion Pimco Total Return fund at Allianz SE’s Pacific Investment Management Co., said in an interview Tuesday that he was actively buying mortgage bonds…

Bill Gross and Pimco have been opportunistic during this traffic jam in the credit markets as we pointed out earlier (see Pimco March Investment Outlook and PIMCO Buys Citigroup Bonds). The effects of the various Federal Reserve moves are beginning to have an effect in other areas too. Home mortgages rates are heading down again.

It’s too soon to say the credit crunch is over, but it is fair to say that it is easing up a bit.

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