ManyPeaks.com

The San Diego Union-Tribune ran this story last week.. they make a good point.

“Just stop paying your mortgage“

The whole capital injection / liquidity provision / preferred equity investment stuff that our Treasury & Federal Reserve keep coming up with are all simply awful ideas in our opinion.  I could go on for a long time about why, but many have gone there already.  Intelligent, widely held thoughts about moral hazard, socializing risk / privatizing profit, etc, get a lot of publicity even though Washington has over-ruled them.

Summary: it’s half socialism, half robbery.  And a very slippery slope for our nation.

I could also type for hours about how Fannie, Freddie, and the Federal Reserve itself have no place in free markets and we’d all be better off with the dissolution of all three .   But I don’t have that kind of time or inclination.

Apparently, in this modern America: a business will be mocked and additionally taxed if they do too well, yet get government assistance if they screw up badly enough.  This encourages recklessness and mediocrity, not hard earned business success.  Any social safety net should be reserved for individuals, not companies.

I don’t believe for one minute the “trickle down” arguments that are being espoused.  Banks will hoard this capital.  From Bloomberg.com: “Paulson Lacks Leverage to Compel Banks to Put New Cash to Work.“  Yes he does.

The only other item I must note: This bailout stuff obviously socializes corporate losers. We so quickly forget that not very long ago — this summer — with oil at $130 and ExxonMobil stock at $92 there were calls to socialize successful businesses also.. via ill-conceieved “windfall profit” taxes. But those voices are long gone with $85 oil and a $67 Exxon stock price. The free market took care of the “exorbitant” energy prices, as it would with these financial industry issues if allowed to proceed sans Government.

Thanks to Barry Ritholtz’s excellent blog, The Big Picture, for the cartoon.  Thanks to the 1st Amendment for allowing me to vent.

I was in attendance when my alma mater, the University of Virginia, hosted a panel discussion among 5 prominent hedge fund professionals last weekend. The Old Cabell Hall auditorium was packed.

Julian Robertson was certainly the headliner (and as a Tar Heel, the only non-Wahoo of the bunch) but they are all sharp guys.  I primarily went to brief John Griffin - who taught by far my favorite college class via teleconference from his New York fund’s office - and several other former professors on Teewinot’s progress and my career in general.

After much discussion of the obigatory topic of 2008 - financial industry malaise - they were each asked by moderator Griffin to give their best current investment idea.  Their responses:

Chris Shumway said that buying stocks that were down huge primarily based mostly on hedge fund liquidations would be a long-term winning strategy.  It’s always debatable why a stock is down, but this does make fundamental sense.

Paul Touradji layed out a thesis for shorting copper.  He believes that base metals are priced based on the “velocity of money” - a measurement that’s likely to drop as the world generally de-leverages.  Fair enough.

Julian - believe it or not - was bullish on a particular derivative bet.  He believes the interest rate yield curve will steepen significantly, and discussed “steepener swaps” as his favorite investment right now.  While chuckling, Griffin said that when Julian called to tell him about the idea, Julian joked that in his family this Christmas there would be “a steepener in every stocking.”  Us finance people are really easily entertained. 

Rick Gerson made a good point that United States corporations had really gone down the road of “professional” management — he compared it to outsourcing.  Naming a few middle eastern companies that he deemed good investments, Rick made the case that in these frontier markets there are still plenty of “owner/operator” public companies in which the people running the show retain 70-80% ownership.  He presumably has some of Blue Ridge’s money allocated to these situations.

John Griffin did not share any specific security that he liked, but ruminated that what he’d really like is the ability to “arbitrage time.”  Basically that in a world dominated by short-term thinking, it’s hard to take a stand on a company or stock because even if you’re eventually right, the losses you may sit on during the interim can cause both your investors and employees to get hot & bothered.  I hear what he’s saying, but that’s just the fact of life with public/listed company investing.  If you don’t want a daily price quote, you’ve just got to get big enough (or partner with other funds) to buy the whole company and take it private.  The practice of not marking to market is a different game.

Much thanks and respect to Mr. Griffin and the rest of the panel.  Heck, getting 2 minutes with hedge fund legend Julian Robertson on stage afterwards was in itself worth the trip!

I’m not simply referring to the fact it’s been going down.

Global equity markets have obviously seen a rout for weeks now. But even if one has suspected such action — as we have — it is still a difficult trade to capture.
To us, the best course of action is either hedging long positions with shorts, or holding a significant portion of the portfolio in cash.

Kevin Depew of Minyanville.com details the risk I’m referring to:

Risk in equities remains high on both sides. You can’t short stocks because if it is not already illegal, it is too risky to try and match wits (and capital) against the SEC, Treasury, Federal Reserve and Federal Government. No one really knows what desperate rule, mandate, acronym or Fed action will cross the wire next, temporarily crushing short sellers. Similarly, you can’t buy stocks either, because doing so means you are essentially gambling on the success of the SEC, Treasury, Federal Reserve and Federal Government.

Teewinot is for now a long-only shop.  However with the existence of Inverse ETF’s, we could be economically short the market if we so chose.  This quote aptly describes our reluctance to do so in any significant size.

Japan is down 11% and the Dow futures are off another 200 points as I write just before bedtime.  It should be yet another interesting day on Wall Street.  I’ve noticed the business media has stopped counting the number of consecutive triple digit moves in the Dow Jones Industrial Average.  That won’t stop tomorrow’s session from adding to the count.

Two articles well worth reading:

• An excellent piece from Slate’s “The Big Money” website, which discusses how even though many many people saw this collapse coming (just like the .com bubble), so few were able to fully capitalize on the fall they so presciently expected.  I count myself among this camp.  Moral: investing is a lot harder than analyzing.
• Also, Kevin penned another solid argument on Tuesday, which I believe correctly describes the current crisis as one primarily made from impaired debt values, not simply a lack of liquidity.  Tomorrow at 10:00 am, President Bush will try again to convince us otherwise.

In a trader kind of way.  Courtesy of John Carter at TradeTheMarkets.com.  Good stuff but I doubt he’ll quit the day job.

“Before He Trades” ….. a Carrie Underwood Parody

Portfolio Update

More seriously, we still have client accounts very conservatively positioned… with only two stocks in the portfolio:

1. Tempur-Pedic (TPX) with it’s unique product, 50% short interest,
   strong new CEO, and stock price just breaking north from many months in
   the penalty box.
2. Fuel Systems (FSYS) which is a play on Boone Pickens’ well thought out plan to use domestic natural gas in our nation’s fleet of vehicles. (Aubrey McClendon, Chesapeake Energy’s CEO, is also promoting the idea on TV spots these days)  www.cngnow.com

On July 23rd, I was honored to speak to the Rotary Club in my hometown of Paris, Kentucky. The program was titled “Hedge Funds and Stock Market Philosophy.”

Most of the attendees had heard of hedge funds, but learned how they are typically set up operationally and the myriad strategies that they can employ. I certainly tried to dispel the myth of hedge fund similarity.

I dedicated 2/3 of the program to the differences between fundamental and technical philosophies of investing. I assumed this was new material for most of the group, so drilled down on one concept pretty hard:

• When you invest fundamentally, you assume that you know something that the market doesn’t.
• When investing technically, you assume that other players (with large proprietary research departments) know more than you do.. and you make buy/sell decisions based on their “elephant tracks”

The response was extremely positive from the members, many of whom I’ve known for years while growing up there. Of course the gig also provided an opportunity to pass out about 50 copies of our most recent Fact Sheet.

One of our readers (and valued clients!) asked for more detailed charts regarding yesterday’s post about Europeans’ returns owning United States stocks versus those a US investor achieved.

The chart below shows both the Euro vs. Dollar relationship and the Dow Jones Industrial Average for the past 10 years. Euro vs Dollar is always quoted with Euro first, so that’s why the chart is going northeast rather than southeast.

The basic premise is that much of the rise in equities since the March 2003 lows — which occurred the day bullets started flying in Iraq — is attributable to the devalued purchasing power in the US Dollar rather than a true increase in value that can be exchanged 1-1 around the globe.

This same concept applies to the well-publicized moves in commodities, including the chart of crude oil below. If your currency is Euros, this long term chart does not climb nearly this steeply. Instead of being a 4-bagger since 2001, oil is only a double during that timeframe in Europe. That’s a tremendous difference. The same could be said for housing price increases earlier this decade — home prices rose, but against what? A US dollar ! They did not rise that much when priced in other currencies.

Here is a chart of the Dollar Index, which measures our greenback against a diversified basket of currencies including Euros (the biggest weighting), Japanese Yen, British Pound, Swiss Francs, etc. The dollar has of course faltered against all of its competitors since early this decade, and now sits at its lowest value ever since the index was created in 1971.

Long US Dollars, by default

If you’re a European investor who’s owned the Dow Jones Industrial Average since 2001, you’ve taken a much bigger beating than us dollar-denominated locals. The greenback’s plunge is of course the culprit.

The “Euro-Dow” sits at the equivalent of only 7200 — versus the true 11,300 close on Friday.

Thanks to Alea Blog for this startling chart.

There are occasions — sometimes years — when stock markets are so unrelentingly strong that a good active manager who was previously known to be “prudent” becomes viewed as a laggard. This most often happens near major tops in the stock market. Teresa Lo of PowerSwings.com discussed just such situations in a very interesting piece last year. I certainly felt similar pressures from clients and prospects while the indexes romped from mid-2006 to mid-2007.

At Teewinot, we’ve always contended that managers need to be judged for their performance over a reasonable period of time: encompassing up, down, and sideways markets.

True risk management is a definite hindrance to performance in persistent, strong bull runs. That is a fact. During those times — in hindsight — you do undoubtedly do best by just staying long (even better, adding leverage).

However, when the Bull is taken to its knees, legit risk management exactly what portfolios need. It’s not just what you make during the uptrend that counts. It’s what you keep.