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Hedge Funds Increase Gold Investments

“Don’t you invest in that just because you think it’s a good idea. I’m warning you.

It’s gold — that so-called safe haven for your assets — and if you’re considering it today, let me explain why you need to bypass it and move on. Although gold may well be one of your favorite items in the vault, as a long-term investment, it is just plain lousy.”

-Nick Kapur, The Motley Fool, May 11, 2009

A growing number of hedge fund managers might disagree with Mr. Kapur’s assessment of the yellow metal. The Dow Jones Newswires’ Joseph Checkler wrote the following on the SmartMoney website last night:

Hedge fund firms Paulson & Co. and Lone Pine Capital made big bets on gold during the first quarter, becoming the No. 1 and No. 2 shareholders, respectively, in the SPDR Gold Trust (GLD) exchange-traded fund, according to regulatory filings.

Paulson & Co. – run by John Paulson, who had already been beefing up his exposure to gold companies – bought 31.5 million shares of the ETF during the first quarter, according to its mandatory end-of-first-quarter holdings report with the Securities and Exchange Commission. That stake would be worth more than $2.8 billion if Paulson still holds all those shares at present.

Stephen Mandel’s Lone Pine bought 26.5 million shares of the ETF, which would be worth $2.4 billion if it still holds those shares. Lone Pine didn’t immediately return a message seeking comment.

Many hedge fund managers have been increasing their gold investments lately. More than 28% of the SPDR Gold Trust ETF’s outstanding stock was owned by hedge funds as of the end of the first quarter, according to Factset Research Systems.

The increased bets on gold come as the price of the yellow metal have remained high, above $900 an ounce. Funds also see hard assets as insurance against further turmoil in the financial system, including a decline in the value of paper currency.

Source:

“Hedge Funds Making Big Bets on Gold”
Joseph Checkler
SmartMoney, May 18, 2009

Trends Expert Says The “Greatest Depression” Is Upon Us

We’ve already experienced one blast from the past in David M. Walker today. How about one more, for good measure? Does anyone remember me talking about Gerald Celente some time ago? Like Walker, he’s in the headlines these days too. This is what I wrote about Celente on November 26, 2007:

Not surprisingly, the following story wasn’t picked up by the mainstream financial media. Back on November 19, UPI reported that Gerald Celente, trends researcher and director of the Trends Research Institute, told the Hudson Valley Business Journal (NY) that the United States is headed towards “The Panic of 2008,” where a financial crisis will send the U.S. dollar tumbling as much as 90% and the price of an ounce of gold soaring to $2,000. Celente told the paper:

We are going to see economic times the likes of which no living person has seen… The bigger they are, the harder they’ll fall.

Celente, who correctly forecast the subprime mortgage crisis, the dollar’s decline, and gold’s rise, said that the subprime fiasco was just the first “small, high-risk segment of the market” to collapse. He predicts that derivative dealers, hedge funds, buyout firms and other market players will also unravel. Massive corporate losses will also be an integral part of the “Panic,” which will result in a lower U.S. standard of living.

Okay, so Celente was wrong about a dollar crash and gold skyrocketing (at least in 2008), but he’s off to a good start with the remainder of his forecast.

So what’s the trends researcher saying these days? Plenty. He wrote on HoweStreet.com Monday:

The “Greatest Depression” that the Trends Research Institute forecast, well before Wall Street or Washington would acknowledge recession, is upon us.

The global financial markets are collapsing. All the pundit’s cautious predictions and business media’s hopeful expectations at the New Year for an economic turn around and imminent market bottom were dead wrong. There will be no turn around in the second quarter of 2009 or 2010 or 2011 … America and much of the world has entered the “Greatest Depression.”

The global financial system, built on endless supplies of cheap money, rampant speculation, fraud, greed, and delusion is terminally ill and will not be coaxed into remission by stimulus packages nor restored to health by government buyouts and bailouts.

There is no stock market bottom in sight. The only figure that can be forecast with confidence is that the Dow won’t reach zero!

As the crisis worsens, governments will take draconian measures to prevent total economic collapse and public panic. We have cautioned the likelihood of such measures before. But the rapidity and severity of the economic unraveling now demands immediate attention.

Expect massive bank failures, runs on banks, and bank holidays. Even if deposits are FDIC insured, quick access to money is by no means assured. At minimum, have reserves on hand for emergencies.

Trendpost: When the ship is sinking there are very few options: Life boats, life rafts, life preservers … and for the late to act, possibly a few pieces of floating debris to cling to.

We are trend forecasters, not certified financial advisors legally empowered to provide such advice. Although gold prices declined today some $15 to $925 per ounce, we forecast that gold will be one of the few life saving investments that will continue to increase in value, reaching $2,000 per ounce and beyond.

Buy gold online – quickly, safely and at low prices

Source:

“The ‘Greatest Depression’ Under Way”
Gerald Celente
HoweStreet.com, March 2, 2009

For Whom The Bell Tolls, Part 7

Apparently, ugly performances by the financial markets are taking their toll on “sexy” hedge funds. CNN Money’s Ben Rooney wrote last night:

A record number of hedge funds went bust during the third quarter, a report showed Thursday, as shaky markets and tight credit drove investors away from risky investments.

Hedge Fund Research, a Chicago-based information company, said the number of hedge funds liquidated in the third quarter rose to 344, which is more than three times the 105 liquidations in the third quarter of 2007. It’s also 77 more than the previous record of 267 liquidations in the fourth quarter of 2006.

The data also showed that 693 hedge funds were closed in the first nine months of the year versus 409 in the same period last year. That’s an increase of 70% and represents nearly 7% of all hedge funds, according to HFR…

At this rate, hedge fund liquidations are on track to reach 920 for the full year, the report said. That would outpace the 563 liquidations last year, and could top the previous record of 848 in 2005.

Back on October 29 in a post on Investorazzi.com , I spoke of billionaire investor George Soros’ prediction that the global financial crisis would reduce the hedge fund industry to as little as a third of its present size. In a speech at the Massachusetts Institute of Technology on October 28, Soros said:

In my estimation (the industry) will be reduced in size by anywhere between half and two thirds.

Fourth quarter data should be interesting to look at. Stay tuned, folks.

FREE Finance Magazine Subscriptions (to qualified individuals)

Source:

“Hedge fund graveyard: 693 and counting”
Ben Rooney
CNN Money, December 18, 2008

Commercial Real Estate Crisis Grows

Bad news is quickly shifting from residential real estate to the commercial real estate market. Matt Apuzzo of the Associated Press wrote Thursday:

The full scope of the housing meltdown isn’t clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts nationwide.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure.

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Apuzzo explained that the CRE crisis could grow into a full-blown meltdown. From the piece:

Companies have survived plenty of downturns, but economists see this one playing out like never before.

In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

The retail outlook is particularly bad. Circuit City and Linens ‘n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.

Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won’t have the money. Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.

Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida — states with a high concentration of mortgages in the securities market, according to Fitch — are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them.

Look at the bright side. At least the mall rats will be back.

I know, stick to my day job…

Scene from “Mallrats” (1995)
YouTube Video Link
Warning! Foul language and animal cruelty… sort of

Source:

“Malls, hotels next victims in new mortgage crisis”
Matt Apuzzo
Associated Press, November 27, 2008

Great Depression 2 Right Around The Corner?

Scary stuff from MarketWatch columnist Paul Farrell the other day. On Monday, Farrell wrote:

Now it’s time for my 2008 update, a look into the future where things will get far worse during the next presidential term. And given human behavior, especially in the deep recesses of Wall Street’s “greed is good” DNA, it seems inevitable that no matter how well-intentioned the new president may be Wall Street and Washington’s 41,000 special-interest lobbyists will drive America into the Great Depression 2.

Farrell then goes and rattles off 30 ‘leading edge’ indicators of the next Great Depression. From the piece:

Every day there is more breaking news, proof Wall Street’s greed is already back to “business as usual” and in denial, grabbing more and more from the new “Bailouts-R-Us” bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas — anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 “leading indicators.” Each problem has one or more possible solutions, but lacks unified political support. Time’s running out. We’re already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

1. America’s credit rating may soon be downgraded below AAA
2. Fed refusal to disclose $2 trillion loans, now the new “shadow banking system”
3. Congress has no oversight of $700 billion, and Paulson’s Wall Street Trojan Horse
4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year
6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps
11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
13. Fed also plans to provide billions to $3.6 trillion money-market fund industry
14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion
16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown
18. Big three automakers near bankruptcy; unions, workers, retirees will suffer
19. Corporate bond market, both junk and top-rated, slumps more than 25%
20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
21. Unemployment heading toward 8% plus; more 1930’s photos of soup lines
22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
23. China’s sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
24. Despite global recession, U.S. trade deficit continues, now at $650 billion
25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
26. Now 46 million uninsured as medical, drug costs explode
27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
28. Outgoing leaders handicapping new administration with huge liabilities
29. The “antitaxes” message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises

And “leading indicator” number 30? Farrell wrote:

At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan’s Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America’s problems will take years and will burn trillions.

He sees “nothing but large increases in the deficit … I think it would be worse than the depression. … Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.” It’ll get worse because “the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.”

Reuters concludes: “Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. ‘I just want to get people thinking about this, and to realize this is a road to disaster,’ said Whitehead. ‘I’ve always been a positive person and optimistic, but I don’t see a solution here.’”

Farrell’s conclusion?:

We see the Great Depression 2. Why? Wall Street’s self-interested greed. They are their own worst enemy … and America’s too.

Geez. Looks like I picked the wrong week to quit smoking…

Scenes from Airplane! (1980)
YouTube Video Link

Source:

“30 reasons for Great Depression 2 by 2011”
Paul B. Farrell
MarketWatch, November 17, 2008

Related Post

From our sister blog Investorazzi.com this afternoon:

“George Soros: U.S. Economy Heading Towards ‘Deep’ Recession, Possibly Depression”

Billionaire investor and hedge fund manager George Soros told Congress today that the U.S. economy is heading toward a “deep” recession— possibly a depression.

Related Posts

Two for you. From our sister blog Investorazzi.com earlier today:

George Soros: Hedge Fund Party Over

“The global financial crisis will reduce the hedge-fund industry to as little as a third of its current size, billionaire investor George Soros said on Tuesday.”

Marc Faber Says Global Markets Stuck At Low Levels

“According to Faber, the U.S. government will in future have no other choice than to print money, which in the long term will lead to inflation.”

Trying To Predict An Economic Recovery

Even as a financial storm continues to blow through the U.S. economy, some are trying to predict a turnaround. From Reuters this morning:

U.S. Treasury Undersecretary David McCormick said on Wednesday the U.S. economy is in for a challenging few quarters but could start to recover late next year.

“The coming quarters will be very challenging,” McCormick told a lunch in Hong Kong.

He said, however, that the U.S. economy was resilient despite challenges posed by turmoil in the financial sector.

“Our hope is that (the U.S. economy) will turn upward toward the end of 2009,” he said.

David McCormick. Hmmm. How do I know that name? Could this be the same David McCormick I talked about in an April 25 post, where I wrote:

Yesterday, a senior official in the U.S. Treasury Department said the U.S. economy could improve slightly in the second half of 2008, and that there are some encouraging signs in the credit markets. David McCormick, Under Secretary for International Affairs, said the improvement would be due to a fiscal stimulus of $150 billion, which would help create 500,000 new jobs this year…

Because of these measures, McCormick said:

We will begin to see a slight improvement in the back half of 2008 and obviously carry that momentum in 2009. But make no mistake, a very challenging time for the economy.

Ha! Let’s hope we don’t carry “that momentum” into 2009.

Even more optimistic than Mr. McCormick is the International Monetary Fund. According to an IMF report issued earlier today:

The International Monetary Fund on Wednesday issued a gloomy economic outlook for the United States and the Western Hemisphere, saying U.S. economic growth will be close to zero or even slightly negative for the rest of 2008 and the following few months.

In a new report that uses data from as recent as mid-October, the IMF projects economic recovery in the United States will not begin until the second half of 2009, and will be more gradual than previous recoveries because of the exceptional nature of the asset price adjustments taking place.

At odds with the Treasury Department and IMF is Nouriel Roubini, a former Treasury Department director in the Clinton administration and head of Roubini Global Economics in New York. Dr. Roubini, who predicted a lot of the current mess the U.S. financial system finds itself in, appeared on CNBC earlier today. From their website:

The US economy is entering a two-year recession that will be longer and deeper than previously feared, said Nouriel Roubini, a well-known economist and professor at New York University.

“I believe we’re going to have two years of negative economic growth,” Roubini said on CNBC. “The last two recessions lasted only eight months each … This time around this is going to be three times as long, three times as deep. This is going to be the worst recession the US has experienced since the 1980s.”

A slowdown in global economic growth combined with continued problems in credit markets and housing will haunt the economy, Roubini said.

In addition, he sees hundreds of hedge funds getting wiped out, combining with earnings to provide another weight on stocks. “I believe that the worst is still ahead of us. I think that the next few weeks and months are going to be negative surprises on the economy,” he said. “I think that overall the earnings are going to surprise to the downside.”

Dr. Roubini said there was one good thing about the massive government intervention we’ve been seeing, although the end result will still be a severe economic recession in the United States. From the CNBC piece:

The only good news is that systemic risk in the financial sector, or the idea that damage won’t be isolated to specific companies but rather will spread through the industry, has been reduced by government intervention, he said.

“But we’re going to have a severe recession. If this is going to be a two-year recession, that’s not priced by the market. And there are significant downside risks for the stock market and credit markets in my view,” he said. “Yes, we’re going to avoid the Great Depression, we’re going to avoid a 10-year stagnation. That’s not going to be the case.”

Let’s hope so.

Sources:

“Treasury Sees US Economic Recovery in Late 2009”
Reuters, October 22, 2008

“IMF: No U.S. growth til mid-2009”
CNN Money, October 22, 2008

“Recession Will Last At Least Two Years: Roubini”
CNBC, October 22, 2008

Hedge Fund Manager Credits ‘Idiots’ On Wall Street For Success

Oh my. A number of Wall Street traders, bankers, and government officials must be clamoring for Andrew Lahde’s head right now. Lahde, the manager of a California-based hedge fund, Lahde Capital Management, gained notoriety last year after his one-year-old fund returned 866% betting against the subprime collapse. And in September, Lahde decided to hang up the gloves. Today, his “goodbye” letter appeared on Conde Nast’s Portfolio.com. Or, maybe it should be called his “good riddance” letter. From Lahde:

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America…

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life…

I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life – where I had to compete for spaces in universities and graduate schools, jobs and assets under management – with those who had all the advantages (rich parents) that I did not…

Give up on leaving your mark? Seems to me that Lahde left a few dents with this “fond” farewell.

Source:

“Hedge Fund Manager: Goodbye and F—- ”
Matthew Malone
Conde Nast’s Portfolio.com, October 17, 2008

Hedge Funds To Be Tested Tuesday

Have you ever seen those television commercials that consist of “real life” testimonials for products? I remember watching TV in the late nineties and “John Smith,” stockbroker, would rave about some great vacation destination. After stocks came crashing down, “Jane Zinfandel,” real estate investor, took up the baton and went on about how much she loves her exercise equipment. When the U.S. housing market collapsed, “Joe Brown,” hedge fund manager, appeared on my TV set and let me know who makes the finest luxury automobile. The “coolness” factor of these occupations rose exponentially while hot money flowed their way. Once the flow reversed, however, it became a different story. And for hedge funds, this reversal of fortune might have been reached. Louise Story of the New York Times wrote yesterday:

First, the money rushed into hedge funds. Now, some fear, it could rush out. Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

“Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

Recent performance for the industry has not been stellar. Story noted:

Now, the heady returns of the industry’s glory days are over, at least for now. This is shaping up to be the industry’s worst year on record, with the average fund down nearly 10 percent so far, according to Hedge Fund Research…

Returns are not in yet for September, but hedge fund managers say this month is even worse than the summer. Some funds were hurt by new rules from the Securities and Exchange Commission on short-selling, a tactic for betting against stock prices. The commission made it more difficult to short all stocks and temporarily banned the strategy in more than 800 financial stocks. In particular, this hurt convertible-bond managers, who often buy bonds that can be converted into shares and short the underlying stocks.

The short-selling ban lasts until Thursday evening, but it is widely expected to be extended.

As a result, some hedge funds are going under. According to Story:

A growing number of hedge funds are closing down. About 350 were liquidated in the first half of the year. While hedge funds come and go all the time, if the trend continues, the number of closures would be up 24 percent this year from 2007.

Source:

“Hedge Funds Are Bracing for Investors to Cash Out”
Louise Story
New York Times, September 29, 2008

Quotes For The Week

This week, the QFTW (plural!) have to do with the looming government bailout of Wall Street and the financial system:

It’s astonishing, devastating, and very harmful for America and American citizens. It means we’re in for the worst recession since World War II, as well as higher long-term interest rates, higher inflation, higher taxes, a weaker dollar and substantially lower stock prices.

-Jim Rogers, legendary investor and CEO of Rogers Holdings, in the September 22, 2008, issue of the New York Sun

CBS News found 21 former staffers from the Senate Banking, Housing and Urban Affairs and House Financial Services Committees are now lobbyists for financial firms. Their job? To lobby those in Congress who will shape the financial bailout. The former staffers now represent hedge funds, private equity firms, investment banks and the failed mortgage giants Fannie Mae and Freddie Mac.

-CBS News, September 26 2008

The bottom line is the Democrats want to give this money to the banks because most of it’s going to go to the large New York city banks, and those folks are generous supporters of the National Democratic Party, senators and congressmen running for re-election, and Barack Obama.

-Peter Morici, University of Maryland business professor and multiple-time winner of MarketWatch’s “Forecaster of the Month” award, September 28, 2008

You have the former Chairman of Goldman Sachs asking for 700 billion dollars, and in his initial request, asking for it in such an un-American way that I think he should have resigned. I think Paulson has terminally misunderstood the nature of the American system. Not just no review, no judicial review, no congressional accountability. Give me 700 billion dollars, 700 BILLION dollars! I’ll be glad to spend it for you. That’s a centralization of power that is totally un-American.

-Newt Gingrich, former Speaker of the House on ABC’s “This Week with George Stephanopoulos” roundtable, September 28, 2008

Manhattan Real Estate: Has The Day Of Reckoning Arrived?

I’ve been tracking the Manhattan real estate market for a while now. In spite of the carnage taking place in other regions of the country, this posh area has appeared to be pretty resilient. Not anymore, according to some Manhattan insiders. Last week, Brian Ross of ABC News looked at whether or not the “Day of Reckoning” had finally arrived for the Manhattan housing market, and wrote:

Manhattan’s finest co-op apartments may have already lost a fourth of their value as a result of the financial crisis, and the worst is yet to come, says leading New York estate broker Kathy Sloane, of Brown Harris Stevens.

An owner of a five-million dollar Park Avenue apartment, only an average residence by investment banker standards, “may be lucky to achieve $3.5 million” a month from now, said Sloane, whose clients have included celebrities, the super-rich and prominent families including the Clintons.

“If someone saw a bid between $3.8 million and $4.2 million from a qualified buyer, take that bid,” said Sloane in an interview to be broadcast on 20/20 Friday night.

“You can be Lehman Brothers or you can be Merrill Lynch, meaning you can go down with the ship,” she said, “or you can say, look, there’s a huge storm about to crash and we need to get to higher ground and make a plan.”

Ross also spoke to Newsweek contributing editor and Manhattan resident Holly Peterson about how the turmoil on Wall Street is affecting local real estate conditions. Ross wrote:

Prices for some apartments in premier Park Avenue and Fifth Avenue co-operative buildings have soared well beyond $50 million in recent years, pumped up by the super-sized salaries and bonuses of investment bankers and hedge fund operators.

Now, they may not be so welcome.

“Five years ago, if you were an investment banker that meant big bucks and automatic entry. And today it is a dirty word,” said author Holly Peterson, the wife of a multi-millionaire investment banker and the daughter of multi-billionaire financier Pete Peterson.

*Well known for her send-up of Park Avenue society in the book, Manny, Peterson says co-op boards will be afraid to approve investment bankers for sales “because they know your stock is worthless.”

Across Manhattan, says Peterson, “the gilded age is over.”

“People who are worth thirty, forty, fifty millions dollars lost it all,” she said. “And now they have their apartments, and their country houses and their ski houses but they have mortgage payments on all of those. And they have no cash.”

Source:

“Top Broker: NYC Real Estate Already In Steep Decline”
Brian Ross
ABC News, September 18, 2008

It’s A Hedge Fund Hell

Seems like yesterday hedge funds were all the rage. Now, however, the industry is trying to deal with its worst returns since 1990. James Quinn of The Telegraph (UK) wrote yesterday:

The $2,000bn (£1,122bn) global hedge fund industry is experiencing its worst performance in 18 years as a result of the continued credit crisis and wider economic malaise.

The industry, which has until now prided itself on out-performing other money managers, has become one of the many victims of the general downturn affecting financial markets.

Hedge funds are experiencing the worst returns since 1990, the year that Hedge Fund Research began tracking performance, with the average fund down by 4.7pc on the year to August 28.

Well-known funds such as those managed by Atticus Capital, TPG-Axon, Citadel and Lone Pine Capital, are reported to be down between as much as 6pc and 25pc so far this year.

Yesterday, New York-based Ospraie Management LLC informed investors it will close its biggest hedge fund after losing 38.6 percent this year alone on bad commodity stock bets. The Ospraie Fund opened in 1999 and had $2.8 billion under management as of last month. After the blowup, Ospraie Management is left with three funds consisting of more than $4 billion of assets, which is down from $9 billion in March. Ospraie was once the largest commodity hedge fund firm.

Squirrel Nut Zippers, “Hell” (1996)
YouTube Video Link

Source:

“Hedge funds suffer worst returns for 18 years”
James Quinn
Telegraph (UK), September 9, 2008

Hedge Funds: Flash In The Pan?

On Tuesday, Jay Miller from the Wall Street Journal’s MarketBeat Blog talked about recent hedge fund performance. Miller wrote:

Hedge funds had a rough July as bets on rising commodity prices and falling financial stocks failed to pan out, according to research firm Morningstar Inc.

The Morningstar 1000 Hedge Fund Index fell 3.07%, its worst monthly performance ever.

“In July, the bet on long commodities and short financials didn’t work as well for hedge funds,” said Daniel Farkas, hedge fund analyst for Morningstar…

“It’s unusual for hedge funds to underperform equities in down markets, but hedge funds haven’t been able to navigate the credit crunch that started last summer,” Farkas said.

Hedge funds have had a tough time as of late. Back on July 10, I noted in a post that hedge funds, which often promise to make money in all markets, were in the red during the first half of the year. Chicago-based Hedge Fund Research reported that the average hedge fund was off 0.75% since January after slipping 0.68% percent in June, and that more funds went out of business during the first 6 months of 2008 than in the same period a year ago. In addition, fewer new funds were started.

There’s no shortage of hedge fund critics either. Recently, I read a piece that was suggested to me entitled “4 Reasons Investors Should Avoid Hedge Funds At All Costs,” which appeared on the website Bankaholic.com back on May 22. The author, Johns Wu, wrote:

But be warned, hedge funds are not all that they are cracked up to be. In fact, for an educated and conscientious investor, hedge funds can be a nightmare.

You can read the rest of the insightful article here.

And what about their most famous critic, the “Oracle of Omaha” himself- Warren Buffett? Back on March 13 I wrote in a post:

Just last week, the “Oracle of Omaha,” Warren Buffett, appeared on CNBC and warned of the volatile nature and exaggerated glamour of hedge funds:

CNBC: How do we see the end of this–of this explosion in hedge fund mania?
BUFFETT: Over time there will be a disillusionment when the–and incidentally, it won’t be disastrous or anything of the sort. There’ll be—there’ll be the occasional blowups here and there. But over time, when people find out that it’s not the holy grail, you know, the money will flow elsewhere. You know, people will–people always go through the rearview mirror, what’s been popular and has worked recently, and this will be like all the rest.

To be fair, hedge funds have been beating equity indices on a year-to-date basis. From MarketWatch on August 8:

Hedge funds tracked by Greenwich Alternative Investments fell in July, but continue to perform favorably against equity indices on the year. The Greenwich Global Hedge Fund Index (“GGHFI”) and the Greenwich Composite Investable Index (“GI2”) posted losses of -2.31% and -1.72% on the month, respectively. This compares to returns in the S&P 500 Total Return (-0.84%), MSCI World Equity (-2.53%), and FTSE 100 (-3.80%) equity indices. Year-to-date, GGHFI and GI2 have shed -3.00% and -1.82%, respectively, while equity indices have produced double digit losses. 32% of constituent funds in the GGHFI ended the month with gains.

“July highlights several popular hedge fund trades unwinding in a short period of time. While hedge funds as a group clearly had a weak month, their year-to-date returns still greatly outpace traditional long-only investment vehicles,” notes Margaret Gilbert, Managing Director.

Sources:

“It’s Hard to Be a Hedge Fund”
Jay Miller
Wall Street Journal (MarketBeat Blog), August 12, 2008

“4 Reasons Why Investors Should Avoid Hedge Funds at All Costs”
Johns Wu
Bankaholic, July 22, 2008

“Hedge Funds Lose Ground in July”
MarketWatch, August 8, 2008