Saturday, November 15, 2008

Gendell, Scholes Are Losers as Hedge Funds Drop for Fifth Month - Saijel Kishan and Katherine Burton

Hedge funds run by Jeffrey Gendell and John Burbank III posted their worst monthly losses in October. Peter Thiel gave back gains made earlier in the year. Nobel-prize winner Myron Scholes froze his biggest fund.

The managers, like many in the $1.7 trillion hedge-fund industry, were caught in a downdraft of market declines, client redemptions, demands from lenders for more collateral and forced asset sales that accelerated after Lehman Brothers Holdings Inc. collapsed in mid-September.

Funds fell by an average 5.4 percent last month, pushing the year-to-date drop to 15.5 percent, according to the HFRI Fund Weighted Composite Index compiled by Chicago-based Hedge Fund Research Inc. Investors have been handed losses for five straight months, the longest streak since HFRI started the index in 1990.

``October was the perfect storm for liquidity drying up, especially in the credit markets,'' said Gary Vaughan-Smith, co- founder of London-based SilverStreet Capital LLP, which has $600 million invested in hedge funds for its clients. ``We are through the worst and the turmoil should be gone by the end of November.''

While hedge funds have held up better than actively managed mutual funds or index-based investments, losses in 2008 are almost certain to be the biggest on record. U.S. global equity mutual funds fell by an average of 39 percent in the first 10 months of the year, according to data compiled by Bloomberg. The Standard & Poor's 500 Index was down 34 percent. The hedge-fund industry's only unprofitable year was 2002, when the HFRI index shed 1.45 percent and the S&P 500 tumbled 23 percent.

Redemptions Rise

Hedge fund investors have reacted by requesting withdrawals that may reach 15 percent of assets in the U.S. and 25 percent in Europe, Huw van Steenis, a Morgan Stanley analyst in London, told clients last month. Combined with investment losses, industry assets may drop by 24 percent to $1.3 trillion in the fourth quarter, van Steenis said.

``I don't think the hedge fund model is broken,'' said Jaeson Dubrovay, head of the $19 billion hedge-fund group at Cambridge, Massachusetts-based consulting firm NEPC LLC. ``We just need to loosen the credit spigots to get the system working again. We don't anticipate that they will be loosened in any way like they were before.''

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested. They typically charge fees of 2 percent of assets and 20 percent of investment profits.

Tontine, Passport

Gendell's Tontine Capital Partners LP fund, based in Greenwich, Connecticut, plunged 65.7 percent in October, extending its decline for the year to 76.8 percent, according to investors. Burbank's Global Strategy fund fell 38 percent in the month and 44 percent year-to-date, according to a letter to clients of his San Francisco-based based Passport Capital Management LLC.

Ken Griffin, founder of Citadel Investment Group LLC, lost 22 percent last month in his Kensington and Wellington funds, extending the year-to-date-slide to 39 percent, according to people familiar with the firm.

Chicago-based Citadel, which oversees $16 billion, held a conference call with investors Oct. 24 to dispel speculation that it was liquidating. Griffin, 40, told Citadel bondholders that the firm had $8 billion in untapped bank credit and 30 percent of its assets in cash, and faced ``modest'' client redemptions.

Gains Evaporate

Some managers have seen gains from the first half of the year evaporate. Clarium Capital Management LLC, the hedge-fund firm run by PayPal co-founder Thiel, slumped 18 percent in October, according to estimates given to investors. The San Francisco-based firm's Clarium LP fund reported a year-to-date decline of 2.8 percent, wiping out the 58 percent gain from the first half.

Harbinger Capital Partners Fund, run by Philip Falcone, dropped about 5 percent in October, bringing its loss for the year to about 13 percent, according to investors. The New York- based fund was up 42 percent at the end of June.

Blue Mountain Capital Management LLC of New York and London, Scholes's Platinum Grove Asset Management LP in Rye Brook, New York, and Deephaven Capital Management LLC of Minnetonka, Minnesota, were forced to freeze investor withdrawals after a surge in redemptions.

Some Winners

``We continue to re-evaluate hedge funds,'' Brad Alford, head of Alpha Capital Management LLC in Atlanta, which invests in hedge funds, said in an interview. ``They should do better.''

Managers that made money last month include Christian Levett, whose Clive Capital LLP fund advanced 19.8 percent, bringing its annual return to 43 percent, according to investors. The firm manages more than $2.5 billion from London.

Ionic Capital Management LLC, a $3.5 billion hedge fund run by former Highbridge Capital Management LLC executives Bart Baum, Adam Radosti and Dan Stone, rose 8 percent in October, extending its gain to 16.5 percent for the year, according to a person familiar with the New York-based firm.

John Paulson's New York-based Advantage Plus Fund, which rose 3.8 percent last month, extending its increase for the year to 29.4 percent, according to investors.

Bruce Kovner, who runs Caxton Associates LLC in New York, posted a 2.6 percent return in October for his Caxton Global Investment Ltd. fund, which has climbed 7.25 percent so far this year.

Bob Farrell’s Ten Market Rules to Remember

1) Markets tend to return to the mean over time. This

is especially noteworthy now, for the housing market is

returning to its mean by plunging, as are equity market,

the dollar, the Yen, et al.



2) Excesses in one direction will lead to an opposite

excess in the other direction. They always do, and the

excesses of the housing bubble and excessive, lenient

bank lending, are giving way to the housing collapse and

inordinately tight lending practices.



3) There are no new eras — excesses are never

permanent. And how strongly does that speak to us

now, for the supposed era of unending housing price

increases and of globalisation has given way to weak

housing and growing protectionism.



4) Exponential rapidly rising or falling markets usually

go further than you think, but they do not correct by

going sideways. Markets correct by going in the

opposite direction, falling sharply after sustained, broad

rallies, and rallying after sustained broad weakness. The

world ebbs and the world flows; it has always been thus,

and shall always be thus.



5) The public buys the most at the top and the least at

the bottom. Of course they do; they always have and

they always shall. The public buys when euphoria reigns,

and it sells when depression does years later.



6) Fear and greed are stronger than long-term

resolve. We are human beings dealing with rational and

irrational markets; to believe that "fear" and "greed" can

ever be lost is naive for they are the most fundamental of

human traits.



7) Markets are strongest when they are broad and

weakest when they narrow to a handful of blue chip

names. Just as volume must follow the trend, so too

must good markets have broad support and weak

markets have broad weakness... and at the moment, the

market is very, very broadly weak.



8) Bear markets have three stages — sharp down —

reflexive rebound —a drawn-out fundamental

downtrend. This really is how this bear market shall end;

not with a hoped for "V" bottom, but with a great

washing-out... a capitulation... and then months, or even

years, of base building.



9) When all the experts and forecasts agree –

something else is going to happen.... or as we like to

say, "When they are yellin', you should be sellin,' and

when they are cryin,' you should be buyin.' "



10) Bull markets are more fun than bear markets.... or

as a friend of ours from Raleigh, N. Carolina used to say

many years ago, "Bears don't eat; bulls party!"

Friday, November 14, 2008

Interview with Don Coxe - ROBIN GOLDWYN BLUMENTHAL

November 7th, 2008

ONCE A WEEK, LOADS OF INSTITUTIONAL INVESTORS DROP whatever they're
doing to tune in to Donald Coxe's strategy conference calls. Small
wonder. With a keen sense of history and wry sense of humor, Coxe has
helped his followers anticipate some of the biggest shifts in markets,
be they in stocks or commodities. As global portfolio strategist for
BMO Financial Group, a Toronto-based bank that is among Canada's
largest, he now sees real hope for two sectors that have been taking
poundings: banks and commodities. Though he launched the Coxe
Commodity Strategy Fund this past summer, right before commodities
took a nose dive, Coxe remains convinced that we are in the midst of
the greatest commodities bull market of all time. For his reasons,
please read on.

Matthew Furman for Barron's

"The gigantic investment returns are all going to be tied to companies
that meet real human needs and do it better than other companies. What
a great time to be an investor."--Donald Coxe

Barron's: What's your take on the monetary scene?

Coxe: The Fed has doubled the debt on its balance sheet in five weeks.
We don't know how long they are going to be carrying out these
policies, which would send Milton Friedman spinning in his tomb. On
the other hand, they had to do it. I challenged groups this week,
saying, if I had said to you a year ago things will be so bad that the
Fed will double its balance sheet in five weeks, would any of you have
ever invited me back to speak to you? And, of course, the reaction was
the same: Clearly you are stark raving mad.

Are the economic prospects any better in Europe?

The Europeans had thought it was an American problem, but European
banks have lent a vast percentage of their capital to these Slavic
countries, with even worse demography than Europe. Emerging markets
are such a powerful asset class because each generation is bigger than
the next, and there is an increasing middle class and a high savings
rate. That's the stuff of real economic power, and a terrific
investment concept. By contrast, in the OECD countries, each
generation is just 60% of the predecessor generation, there's no
growing middle class and there's a zero savings rate. The formula
across the OECD is for sluggish growth at best.

How should investors approach today's stock market?

If you aren't deeply in the equity market, this is not a time to be
committing large amounts of money. Stocks are cheap but they can get
cheaper; we know that. We got back to the Dow having a multiple of 5.9
in December of '74, which was the foundation of Warren Buffett's
wealth because he started buying at that level. The Dow isn't anywhere
near 5.9 [its multiple last week was 11], but some of my favorite
stocks are trading at lower P/Es than that. I can tell you they are
the fertilizer, oil and agricultural companies.

Tell us some more about those industries.

The core investment concept of our time is that we are living through
the greatest simultaneous effervescence of personal economic liberty
in history. When people go from abject poverty to dwellings with
indoor plumbing, electricity, basic appliances and access to motorized
transportation, they have more economic liberty than 99% of humanity
enjoys and we are adding 50 to 150 million people a year to that list.
The gigantic investment returns are all going to be tied to companies
that meet real human needs and do it better than other companies. What
a great time to be an investor, because it is not just about the
dwellings and the transportation, it is about the high-protein diet.
When I came back from a trip two years ago, I said the biggest
commodity story is going to be food, bigger than the other ones. It is
high-protein food. The way to play that is through the fertilizer
stocks, the genetically modified seed stocks and the farm-equipment
stocks. [Coxe would not recommend specific companies, citing his
firm's compliance restrictions.]

What are the big trends in food consumption?

If you look at areas under cultivation, wheat has only gone up in
hectares a little bit in a decade. Rice is flat in a decade.
Meanwhile, our need for protein has gone up dramatically because
people are consuming more beef and pork. But more important than oil
in this decade is milk. In rural India, the kids are getting animal
protein and they are going to be physically stronger than their
parents. Their brains are going to be better.

But there's still a serious global food shortage.

Until four months ago, when you Googled "global 'blank' crisis" it was
the global food crisis. The global food crisis was our big theme. The
global financial crisis has pushed the food crisis off the front page
at a time when people are actually getting together to say, "How do we
deal with this problem?" We have an enormous challenge, but we also
have the technology to increase farm productivity. Investors who
invest in this are going to make a lot of money, and they don't have
to apologize to anybody for doing it. If it hadn't been for [the
development of genetically modified crops], corn would have gone to
$10 a bushel [instead of a recent high of $7.50] and we would have had
another 100 million people starving. This is a great investment theme.

Which commodity groups do you like best?

Agriculture is first. We will need more fertilizer. There are only
three farm-equipment companies of any size in the world. Terms of
entry are difficult. You have to have dealerships. CNH Global [ticker:
CNH] is one of the top three companies in the world in the field. It's
a subsidiary of Fiat and its stock has collapsed, but earnings haven't
collapsed. In May it sold for $45 a share. It's $17 now. The next
group has to be gold stocks. A period of massive reflation always
leads to a good move in gold.

Next?

The third group is energy. Despite Obama's plan to spend $150 billion
on alternative energy, each year we still lose 4.5 million barrels of
oil a day that we have to replace. Oil is trading now at $61 a barrel,
but oil for delivery in 2015 is trading at over $90 a barrel. Those
with reserves in politically secure areas of the world will do well.
Venezuela could solve a large part of the world's energy needs, but
not under the current management.

How about base metals?

Those stocks are selling for pennies on the dollar. Take BHP Billiton
[BHP]. It was $95 in May, it recently fell to $30, but it's back up to
nearly $40. This is an unrivaled set of assets, a great balance sheet,
top-notch management and no scandals.

Is copper worth a look?

Copper is now at $1.80 per pound, where it was in '05. But as soon as
the economy recovers, copper always doubles in price. It's levered to
growth in China and India. They have an increasing percentage of
well-off people who use energy and metals, and each generation is
bigger than the last. Since 1995, China has had a plan to create 200
cities of more than one million people. The investment strategy should
be tied to areas of the world that are growing the fastest in the next
five years.

As for stocks in general, when will we know that they're ready to
rebound?

In every bear market since 1972, when the banks went through a period
of at least six weeks where they outperformed the S&P, it was over.
But we can't use the rule this time because of the TED spread, which
has a 100% forecasting record in all bear markets.

You have our attention.

The TED spread is the spread between the front-month T-bill contract
and the front-month Eurodollar contract, because the Eurodollar
contract is uninsured deposits in banks around the world in dollars.
Therefore it is the measure of risk in the system. It reached a high
of 500 after Lehman Brothers collapsed. The highest reading we have
ever had up till then was 415 when Continental Illinois bank went bust
in 1984 and got saved in order to save the system. The only reason
they knew they had to save it was because of the spike in the TED
spread. I know that from having interviewed the people involved. I
used it to predict the crash in 1987. Then there was a long period
where my knowledge of the TED spread was useless.

What does TED tell us now?

The spread has fallen to a little under 200 because of the various
bank-rescue programs, and it could easily get to 140-145, which signal
that banks are in a position to start lending again.

Does that favor any particular sector?

As they put this money into the banking system, then the oddity is
that when the bear market ends, the bank stocks will be among the
leaders in the rally that will come. This is based also on the
principle of redemption and religion, which holds that when you have
redeemed your sin you can come into heaven. When the bankers have
stopped sinning and have gone through enough penance, then...

How do we know this will happen?

The TED spread certifies for bankers collectively they are entitled to
go to heaven because it indicates they have gotten their balance
sheets in order and the system is working again and money is flowing
more freely.

Which banks are you buying?

We like those that show that they actually had a pretty good risk
culture beforehand, but a couple of mistakes were made. The system is
shot through with corrupt practices.

Thank you, Don.

The Best Business Schools of 2008 - by Francesca Di Meglio and Alison Damast

No. 1: University of Chicago
Booth School of Business
2006 BusinessWeek Rank: 1
Total Tuition and Fees: $97,165
Applicants Accepted: 22%
Pre-MBA/Post-MBA Pay in $ Thousands: 78.0/105.0
In Brief: This year's No. 1 has it all: ambitious students, academic rigor, and top-notch faculty.

No. 2: Harvard Business School
Boston
2006 BusinessWeek Rank: 4
Total Tuition and Fees: $101,660
Applicants Accepted: 12%
Pre-MBA/Post-MBA Pay in $ Thousands: 77.0/121.0
In Brief: A century old, Harvard's case-based curriculum continues to set the standard.

No. 3: Northwestern University
Kellogg Graduate School of Management
Evanston, Ill.
2006 BusinessWeek Rank: 3
Total Tuition and Fees: $93,918
Applicants Accepted: 20%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/110.0
In Brief: Kellogg's distinct culture of collaboration and competition sets it apart.

No. 4: University of Pennsylvania
The Wharton School
Philadelphia
2006 BusinessWeek Rank: 2
Total Tuition and Fees: $100,860
Applicants Accepted: 18%
Pre-MBA/Post-MBA Pay in $ Thousands: 80.0/120.0
In Brief: Highly competitive program features flexible curriculum, diverse student body.

No. 5: University of Michigan
Ross School of Business
Ann Arbor, Mich.
2006 BusinessWeek Rank: 5
Total Tuition and Fees: $90,879
Applicants Accepted: 20%
Pre-MBA/Post-MBA Pay in $ Thousands: 63.5/105.0
In Brief: School spirit runs high at Ross, where students are highly sought after by recruiters.

No. 6: Stanford University
Graduate School of Business
Palo Alto, Calif.
2006 BusinessWeek Rank: 6
Total Tuition and Fees: $97,842
Applicants Accepted: 8%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/125.0
In Brief: Small classes and sense of community in the heart of Silicon Valley are hard to beat.

No. 7: Columbia Business School
New York
2006 BusinessWeek Rank: 10
Total Tuition and Fees: $94,104
Applicants Accepted: 15%
Pre-MBA/Post-MBA Pay in $ Thousands: 75.0/110.0
In Brief: Finance focus and access to Wall Street are pluses—or used to be before the investment banking industry collapsed.

No. 8: Duke University
Fuqua School of Business
Durham, N.C.
2006 BusinessWeek Rank: 9
Total Tuition and Fees: $99,906
Applicants Accepted: 30%
Pre-MBA/Post-MBA Pay in $ Thousands: 65.0/100.0
In Brief: Passionate teachers and competitive, collaborative learning environment all get high marks.

No. 9: MIT
Sloan School of Management
Cambridge, Mass.
2006 BusinessWeek Rank: 7
Total Tuition and Fees: $93,568
Applicants Accepted: 15%
Pre-MBA/Post-MBA Pay in $ Thousands: 70.0/116.0
In Brief: Quantitative skills and entrepreneurship are this program's strong suits.

No. 10: University of California-Berkeley
Haas School of Business
Berkeley, Calif.
2006 BusinessWeek Rank: 8
Total Tuition and Fees: $84,055
Applicants Accepted: 12%
Pre-MBA/Post-MBA Pay in $ Thousands: 78.0/110.0
In Brief: Small size, diverse class, and attentive faculty are pluses. Access to Silicon Valley doesn't hurt either.