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Economic/Market Highlights 12/01-12/05/08: “Abbie Normal”

Posted by Larry Doyle on December 6, 2008 8:20 PM |

Normal?? What’s that? Abnormal?? What’s that? Long term buyers? Who are they?? Isn’t the long term merely made up of a series of consecutive short terms? Oh, the headache of it all!!

Is this entire economic tsunami the equivalent of the scene in Frankenstein where the good doctor asks Igor what the name of the brain was that he implanted into the young monster. Igor responds that it’s Abbie Normal. In a similar regard, is the government intervention into our capitalist system a plan intended to heal the patient but resulting in the creation of a monster instead?

So much to address with so many issues and problems. Let me attempt to keep this relatively brief (I know…not my forte) with some outstanding links to pieces and stories on some of the higher profile stories of the day.

Our equity markets continue to gyrate within the same overall range as it looks for the next major piece of economic news, that is November’s unemployment report, to be released Friday morning at 8:30am. It is a foregone conclusion that the report is going to be ugly with expectations that the number of jobs lost in November exceeded 300k with the unemployment rate likely moving into the low 7% range. Anything better than those numbers will likely be discounted. We all know the rate is moving to at least 8%, perhaps 9% and hopefully not 10% or higher.

Government bonds have continued to move higher in price, lower in rate as the market continues to expect both the Fed and Treasury to be determined in buying the long end of maturities in moving rates down. The Treasury has also launched an idea of having banks offer 4.5% fixed rate mortgages for new home purchases as a way of stimulating the housing market. This is a good idea in principle but like most other programs the “unintended consequences” are problematic….

Read more as to how, the “MBS Market Skeptical About Plans.”

Oil closed below $44 a barrel, a new 5yr low. I thought commodities were turning the corner last week but that was another head fake. Most market soothsayers (especially those who are trying to sell you something) will make the compelling case as to how cheap the equity market is based on all valuations. “Suck it up, come on and buy something, here’s the bottom…” On and on it goes.

We have tried to make the case here at NQ that the game has changed because the model has changed. The days of “originate to distribute” on Wall St. have gone and will not be back soon if ever. That model provided for an extended period of “cheap” capital which fueled the equity engine. As the market comes to grip with the unwinding of positions purchased with borrowed money (that’s the definition of delevering) and a cost of capital that reflects where real money will take risk, the equity market loses that strong upside potential.

The manager of the largest bond fund in the world (and likely a reader of NQ, no doubt) offers his thoughts on this in his December 2008 Outlook.

I will quote Bill Gross as he offers “stocks are cheap when valued within the context of a finance based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to…..that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.” I concur….perhaps Bill is a reader of NQ. Read his entire piece (it’s well worth it)…”Bill Gross’ Investment Outlook December 2008

Virtually the entire debt market remains closed to any new issue that is not explicitly government backed. This is NOT healthy. Even this week, the Port Authority of New York and New Jersey tried to place 300mm in debt with NO buyers whatsoever. This is a municipal authority that generates regular cash flow from tolls and fares. The fact that they can’t place debt is a statement as to the mentality of the investing community. We have spent some time here highlighting that what has transpired in the 401 Ks of every reader on this site, much like what has occurred with every money manager, has not left the most unregulated and least transparent segment of the market unscathed. The “roach motels” that have masqueraded as hedge funds are also deeply into “THE PAIN CHAMBER”!!

Some of the largest and once thought of as the savviest hedge funds have ceased allowing redemptions and are establishing more “side accounts” for less liquid holdings. Citadel Holding was down 13% for November and 47% for the year. Fortress, a fund that went public at close to 20 traded up into the 30s is now trading at $2. DE Shaw, Farallon and more have ceased with redemptions.

I highlight these not to accentuate the agony but merely as an indication that they all have positions and investments “overhanging” the market. That pressure keeps a lid on the market as it may attempt to rally and further pressures the downside. Read more here as to “Hedge Fund Withdrawals”

D.E. Shaw, Farallon Restrict Withdrawals as Fund Freeze Deepens2008-12-04 03:14:54.300 GMTBy Saijel Kishan and Katherine Burton, Dec. 4 (Bloomberg) —

D.E. Shaw & Co. LP, the investment firm run by David Shaw, and Farallon Capital Management LLC Limited withdrawals by clients, joining more than 80 hedge-fund managers to impose restrictions in the past two months.

D.E. Shaw, which oversees $36 billion, capped redemptions from its Composite and Oculus funds, said two people familiar with the New York-based company. Farallon, a $30 billion firm based in San Francisco, did the same with its biggest fund after investors asked to get back more than 25 percent of their money.

The firms are two of the biggest to block withdrawals,known as putting up gates, so they aren’t forced to liquidate investments at distressed prices to raise cash. New York-based Fortress Investment Group LLC said yesterday it froze an $8billion fund after getting redemption requests for 40 percent of its assets. Tudor Investment Corp., the Greenwich, Connecticut,firm run by Paul Tudor Jones, locked the $10 billion BVI Global fund last week ahead of plans to split the fund into two.

“There’s no longer the stigma associated with putting up gates or suspending redemptions as it was before this crisis,”said Jaeson Dubrovay, head of the $19 billion hedge-fund group at consulting firm NEPC LLC in Cambridge, Massachusetts. “It’s actually being encouraged by some large institutions as a way to protect longer-term investors from those who panic and redeem.”

Darcy Bradbury, a spokeswoman for D.E. Shaw, and Steve Bruce, a Farallon spokesman, declined to comment.

Industry assets peaked at $1.9 trillion in June, data compiled by Chicago-based Hedge Fund Research Inc. show. Investment losses and withdrawals may shrink that amount by 45 percent by the end of this month, according to estimates by analysts at Morgan Stanley.

Outperforming Peers

The gate on D.E. Shaw’s Oculus fund was triggered after the company received redemption requests for more than 8 percent of assets, said the people, who asked not to be identified because the information is private. The fund, which tries to profit from global economic trends, is up about 10 percent this year,compared with the average 16.4 percent decline for the industry through October, Hedge Fund Research reported.

Investors asked to redeem more than 6 percent of D.E. Shaw’s Composite fund, which pursues multiple investment strategies and has lost 4 percent.

Even hedge funds that are outperforming peers have been hit by redemptions because they are a more ready source for cash for investors. Shaw, 57, started his firm in 1988 and has 1,600 employees worldwide.

I told you that I would try to keep this brief so let me work at highlighting three other key points:

1. Auto Situation: I believe we will see a “prepackaged bankruptcy”. I do not think Congress has the votes, the determination, and certainly not the backing of the current administration. I think a prepackaged bankruptcy along with a heavy dose of government oversight will buy the auto industry some time and money.

2. The future??? Have we ever had a future economic outlook that has been this uncertain. I have tried to be consistent in promoting incentives for private capital (capital gains tax cuts, freezing tax rates, increased tax credits) to enter the market to facilitate the transferral of assets from weak (levered) hands to strong (unlevered, private) hands. Where are the leaders of industry when you really need them to pound the table on this front?

Meanwhile what do we get?? Barney Frank salivating over sweeping regulatory overhaul. Isn’t this the same Barney Frank who was “in bed” with Freddie and Fannie” and was willing to “roll the dice” in the sub-prime space. Excuse me while I puke…

Read more if you must, (pardon the expression, I do encourage you to read this) “Frank Foresees Sweeping Regulatory Overhaul“.

3. Like any war, and make no exception, we are in the fight for our economic lives here, you need to know how you are going to get out. We have sung the praises here of Sheila Bair and once again, Sheila has the courage to highlight that for the long term economic health of our country and the world we need to be working on where and how we get the government out of our markets.

Read more, as to “Government Rescue Plan Needs Exit Strategy.”

Sorry, that was not as brief as I would have hoped but I do hope it is beneficial. “It’s Alive”!!!


**The unemployment report today did reflect a loss of over 500k jobs for the month with a revised loss of app a further 100k job loss from October. This was the single largest job loss in over 30yrs. In a “sell the rumor, buy the news” scenario the overall market actually closed firmer by app 3% spurred by positive news form Hartford Insurance. We remain in the same overall range of the last two months … Have a nice weekend … LD***

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