The Not-So-Smart Smart Money

It should be fairly evident by now that heavy redemptions at hedge funds over the past two months contributed significantly to the recent pounding in the one area where markets are liquid – stocks. Moreover, the deleveraging process continues to impact many hedgies as available capital (for leveraged strategies) has dried up*.

Accordingly and in anticipation of continuing redemption demands (many of which remain unsatisfied due to gating), many hedge funds have sold more than has been requested thus far. Lastly, there is some talk that private equity commitments of institutional investors are also forcing redemptions in their hedge fund holdings.

Investment Strategy Implications

With the market cap of the S&P 500 sitting at $7.4 trillion and money funds (institutional and retail) amounting to more that $3.3 trillion, the momentum nature of hedge funds and their high cash positions would only need a less bad environment (see Barton Biggs’ comments in yesterday’s Financial Times) to trigger a stampede back into equities.

With valuation currently at deep recession (bordering on depression/deflation) levels, any earnings surprises into 2009 (as in something north of $70) would be the justification for buying what was just sold.

*One wonders what has transpired behind closed doors between financial institutions and government re lending to the masters of the universe.

Comments

[RickRussellTX:]

My reading exactly. I got back into the market again, after being out since Dec. 2001, precisely because I think the downward spiral of the markets and the credit crisis are related. Tighter lending restrictions means that funds and corporations with short-term holdings need to convert them to cash for operations and debt payments, which results in several rounds of panic selling.

I suspect we'll hunt around these lows for another 9-18 months before returning to the usual uptrend. In the meantime, I'm going to be scouting for bargains.

2008 Nov 26 08:27 PM

[herbert hoover:]

I agree with the previous poster. I waited until teh November lows to buy myself a 100K portfolio of stocks for about 30 K. It's already up by about 20% already. Even if the market goes down, it'l be hard to lose money on this stuff since they are all blue chips paying at least 7 percent dividends.

2008 Nov 26 09:12 PM

[SugarDaddy:]

I think the bulk of the sideline money will be put to use elsewhere, considering they must surely understand the future of the USD crushing whatever equity position they take in the US stock market.

2008 Nov 26 09:13 PM

[damienhaas:]

How about quality corporate bonds? Some yield more than 10 percent. Isn't it a better bet than stock equities now where the earning visibility is not clear?

2008 Nov 26 11:47 PM

[johngonole:]

Not really sure if corp bonds or stocks are better. In a worst case scenario obviously stocks with zero debt and high profit margins are the best bet. See companies like Microsoft, dell, wlp, gd, aeo.

2008 Nov 27 03:46 AM

[chzwiz:]

Not so fast. nObama is staffing moderates like Volker that have experience with inflation. The Fed is aware of what may happen if they do not mop up the excess. That will start to happen once lending starts to get back to normal. The dollar may do quite well in the long term. Comments by nObama about cutting programs like farm subsidies to Ted Turner point to fiscal responsibility. I am not nearly as pessimistic as I was 3 months ago.


On Nov 26 09:13 PM SugarDaddy wrote:

> I think the bulk of the sideline money will be put to use elsewhere,
> considering they must surely understand the future of the USD crushing
> whatever equity position they take in the US stock market.

2008 Nov 27 06:13 AM

[Lincolnpark:]

Don't you think it is about time to cut with the "nObama" smear and give the guy some credit? Unlike the Fox news image, he isn't a latte-sipping elite radical, but an intelligent and tremendously organized man who is making excellent choices for his cabintet. He hasn't delivered yet but you've got to respect his moves so far, which I credit with the sharp rise in the market over the past week.


On Nov 27 06:13 AM chzwiz wrote:

> Not so fast. nObama is staffing moderates like Volker that have experience
> with inflation. The Fed is aware of what may happen if they do not
> mop up the excess. That will start to happen once lending starts
> to get back to normal. The dollar may do quite well in the long term.
> Comments by nObama about cutting programs like farm subsidies to
> Ted Turner point to fiscal responsibility. I am not nearly as pessimistic
> as I was 3 months ago.
>
>
> On Nov 26 09:13 PM SugarDaddy wrote:

2008 Nov 29 11:47 AM