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When reading about the $50 billion Madoff hedge fund fraud, it hit me on the head: hedge fund redemptions at the end of this year are going to be absolutely huge, and that will mean a massive sell-off in global capital markets in the first quarter.

That would also mean a further rally for the the US dollar, as assets sold are redeemed largely in US dollars and thus boost demand for the greenback. Gold might take a slight set back, although it will more likely be in increasing demand as a safe haven asset and diversification against the coming dollar crash.

Inflationary stimulus

All this turmoil would really put the pressure on the incoming US president and his team, who will respond with bigger than expected stimulus packages and bailouts. That will make the upcoming and inevitable inflation even larger when it hits, and at the first whiff of inflation the bond market will tank and with it the US dollar.

Investors face a double whammy in 2009 - from hedge fund withdrawals crashing the stock market and later a dollar collapse. That would take capital markets to a real bottom.

Market bottom

My prediction of the Dow at 4-5,000 and gold at $4-5,000 an ounce for later next year still stands, and hedge fund redemptions followed by a dollar collapse will be the driving forces to achieve that bottom. It might take until 2010 to get that far but no longer.

Now try to argue the reverse: will there be sellers or buyers in capital markets after year-end redemptions come in? What is the chance of a positive tally for redemptions? Zero chance! Is the dollar bond market at a top or about to go higher? Is it hell!

Actually this will offer a great point to buy up the finest US stocks at rock bottom prices, but who will have the cash to buy by then? Certainly not anybody taking an optimistic view of the market outlook now.

I can empathize with those who feel the Madoff fraud is some kind of a warning of things to come. These frauds do not usually happen in isolation and are a symptom of the underlying malaise.

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This article has 70 comments:

  •  
    Given you are required to provide 45 days notice to YE for redemptions, all hedge funds are cashed up for this and that trade is done. They have known their Ye redemptions since Nov 15th so I beleive there already is a massive amount of cash on the sidelines (most hedge funds are between 50-90% cash.

    2008 Dec 22 07:57 AM | Link | Reply
  •  
    i disagree w/ you, Savvy. yes, hedgies need notification for redemptions but there were an amazing amount of gates put up in q4 preventing withdrawls for q4 year end. at somepoint that money comes out. this mini bear rally is drawing to a close.
    2008 Dec 22 08:06 AM | Link | Reply
  •  
    oh my god.
    That's truly a johnny-come-lately, if there ever was one.
    Are you aware that you usually cannot just ask for redemption of your hedge fund whenever you like or a Madoff hits? There are redemption periods and advanced notice requirements. which, btw. were the main drivers behind the huge selloffs in sep-november. most hedge funds have annual or quarterly redemption schedules with a 30-45 day advance notice. that means that anyone who wanted to redeem a hedgefund with annual redemption schedule per calender year would have to notify the fund by mid-November. If you didn't - then gl, you will have to wait for another year. similar with quarterly schedules.

    ther will be soem Madoff-effekt, no doubt. but the expectation voiuced in this silly article is nothing but a moronic guess that displays the author's lack of knowledge and perhaps his whishes. but certainly it adds TERO alpha to anyone's portfolio.

    what a complete joke
    2008 Dec 22 08:09 AM | Link | Reply
  •  
    sorry for the typos. was in a big hurry to reply to an article that's essentially total crap.
    Lol


    On Dec 22 08:09 AM User 305589 wrote:

    > oh my god.
    > That's truly a johnny-come-lately, if there ever was one.
    > Are you aware that you usually cannot just ask for redemption of
    > your hedge fund whenever you like or a Madoff hits? There are redemption
    > periods and advanced notice requirements. which, btw. were the main
    > drivers behind the huge selloffs in sep-november. most hedge funds
    > have annual or quarterly redemption schedules with a 30-45 day advance
    > notice. that means that anyone who wanted to redeem a hedgefund with
    > annual redemption schedule per calender year would have to notify
    > the fund by mid-November. If you didn't - then gl, you will have
    > to wait for another year. similar with quarterly schedules.
    >
    > ther will be soem Madoff-effekt, no doubt. but the expectation voiuced
    > in this silly article is nothing but a moronic guess that displays
    > the author's lack of knowledge and perhaps his whishes. but certainly
    > it adds TERO alpha to anyone's portfolio.
    >
    > what a complete joke
    2008 Dec 22 08:12 AM | Link | Reply
  •  
    Add to the hedge fund withdrawals the Obama Plan that will enable each 401K participant to withdraw $10,000 without penalty and a Dow at 5000 looks more and more plausible.
    2008 Dec 22 08:15 AM | Link | Reply
  •  
    First, is this late or what? I mean, hedge funds have been having withdrawals for quite some time. If this article had come out in December, 2007 it would have been prescient. Now, it is merely flatulant.

    Secondly, for tax reasons if for nothing else, I would have already done my hedge fund withdrawal.

    thirdly, there are a lot of stocks that have extremely low pe ratios and pay good dividends. What is your alternative? 0% T-Bills? I think that selective stocks look pretty good in this environment.
    2008 Dec 22 08:29 AM | Link | Reply
  •  
    There is quite a lot of negative criticism of this post here, but I am not too sure that all of it is justified. I do believe he did mention 1st quarter withdrawals. That does allow sufficient time for a 45 day notice. Certainly, there have already been plenty of hedge fund withdrawals, but the point here is that as bad as everything is, the Madoff affair might very well make a few people wonder whether their money is safe anywhere other than under their matress. It makes me wonder that. I believe I read that Madoff is going to bankrupt the SIPC fund. Sort of makes one wonder whether one should remove ones funds from every brokerage account out there.
    2008 Dec 22 08:48 AM | Link | Reply
  •  
    i think this is a good point - continued (increased?) fear leading to even further redemptions later in the 1st quarter

    not guaranteed that will happen, but certainly something to consider

    even w/an obama stimulus coming up

    we'll see i guess :-)


    On Dec 22 08:48 AM birder wrote:

    > There is quite a lot of negative criticism of this post here, but
    > I am not too sure that all of it is justified. I do believe he did
    > mention 1st quarter withdrawals. That does allow sufficient time
    > for a 45 day notice. Certainly, there have already been plenty of
    > hedge fund withdrawals, but the point here is that as bad as everything
    > is, the Madoff affair might very well make a few people wonder whether
    > their money is safe anywhere other than under their matress. It makes
    > me wonder that. I believe I read that Madoff is going to bankrupt
    > the SIPC fund. Sort of makes one wonder whether one should remove
    > ones funds from every brokerage account out there.
    2008 Dec 22 09:17 AM | Link | Reply
  •  
    Q1 2009 may be weak for the reason mentioned above, and other reasons of turmoil and economic weakness.
    2008 Dec 22 09:25 AM | Link | Reply
  •  
    I guess I wonder what is left to redeem?

    Tudor Investment Group had $5.7 billion invested at June 30 as disclosed in its 13-F. Its September 30 filing shows only $453 million.

    Atticus Capital, another much-celebrated hedge fund, went from $8.1 billion to $510 million.

    SAC Capital, run by the Steven Cohen, went from $14.4 billion to $7.7 billion.

    Vinik Asset Management, led by Jeffrey Vinik, who once ran Fidelity Magellan, went from $11.8 billion to $1.8 billion!

    These numbers are as of September 30. So they do not include the awful months of October or November, so current assets at these funds would be even lower now, but if you are already down 90% .... who cares?

    The reduction is of course the combination of selling to meet redemption requests, and a decline in market value of existing positions, if these funds are anywhere close to "typical" I have to conclude that downward pressure on the market on a go-forward basis has got to be minimal as ... well as they are all pretty much out of money....?
    2008 Dec 22 09:40 AM | Link | Reply
  •  
    Get in your bunker and load the guns because,

    We're - ALL FREAKIN DOOMED!!!!
    2008 Dec 22 09:49 AM | Link | Reply
  •  
    Peter Cooper does a nice job of laying it on the line. We too expect market averages to fall below the 2008 lows in 2009. We are noticing the wounded wealthy as they put their assets up for sale. A 20% asset price decline puts the majority of USA residents net negative on their personal balance sheets as they loose their jobs.

    The incoming USA Federal Government administrators are talking about pitching pennies into the welfare pot and building negative yield assets with them

    Good Luck

    2008 Dec 22 09:52 AM | Link | Reply
  •  
    Looks like the mattress is the best place for cash in the first quarter. Many "experts" are calling for a rising dollor against other currencies
    and short term treasuries pay zippo but are selling out. This will provide cover for Obama and company to spend over another trillion to stimulate"
    the economy throwing cash to friends and family in the first 90 days in office, then the hangover starts and inflation will come back with a heartless and rapid vengence.
    2008 Dec 22 09:54 AM | Link | Reply
  •  
    I'm not very conersant with this subject, but it seems to me fatpitch has a good point. While redemptions forced large scale sales of assets and helped force prices very low, not so much cash has been recovered by the punters. The other 90% or so has gone into space.
    So the 'cash on the sidelines' is not such a huge consideration.
    2008 Dec 22 09:56 AM | Link | Reply
  •  
    epeon said:
    "Thirdly, there are a lot of stocks that have extremely low pe ratios and pay good dividends. What is your alternative? 0% T-Bills? I think that selective stocks look pretty good in this environment."

    The answer is bank CDs. The whole reason for zirp is to recapitalize the banking system by driving the money market holders into CDs.
    2008 Dec 22 09:59 AM | Link | Reply
  •  
    All though we are ALL FREAKIN DOOMED.

    You Best have already gotten your Gold and Silver NOW. The inflated balloon is going to start up and Folks I really do not see it coming down for a long, long time.

    Oh and get some guns before the new Prez makes it so FREAKIN hard to get one you won't be able to fend off the others wanting to take it from ya.

    What a mess - Helicopter Ben and his warped views on money and now a new Prez that is trying to out do him - with hedge funds imploding to boot and would not be surprized to see a freeze on pulling out funds or a staggering limit put on that.
    Geeezzzzzzz
    2008 Dec 22 10:10 AM | Link | Reply
  •  
    All though we are ALL FREAKIN DOOMED.

    You Best have already gotten your Gold and Silver NOW. The inflated balloon is going to start up and Folks I really do not see it coming down for a long, long time.

    Oh and get some guns before the new Prez makes it so FREAKIN hard to get one you won't be able to fend off the others wanting to take it from ya.

    What a mess - Helicopter Ben and his warped views on money and now a new Prez that is trying to out do him - with hedge funds imploding to boot and would not be surprized to see a freeze on pulling out funds or a staggering limit put on that.
    Geeezzzzzzz
    2008 Dec 22 10:10 AM | Link | Reply
  •  
    I'm not up to speed on hedge funds, so excuse me if this is a silly question.

    When hedge funds receive redemption requests, does that obligate them to sell holdings immediately? Or can they cover the redemptions with cash on hand and sell when the timing is more beneficial to them?

    I'm just wondering if all of the YE selling is done, even though all of the YE redemptions are done.
    2008 Dec 22 10:33 AM | Link | Reply
  •  
    look, all this talk about investments is a delusion. we are going into anarchy, there won't be anyone buying anything they can't eat wear or kill with.
    2008 Dec 22 10:42 AM | Link | Reply
  •  
    is everybody happy @ this holiday time? have a merry "ponzi" should be the theme of the here & now.the sheeples are fleeced but still very concerned about yesterdays football score.legal or illegal,its all ponzi.im surprised no one has created a ponzi derivative(AAAAAA) rated of course by our ethical rating co'.s.
    2008 Dec 22 10:46 AM | Link | Reply
  •  
    This guy is just talking his book. There should be a requirement of disclosure. The Oct/Nov redemptions were more by banks calling in their loans to over-leveraged hedge funds (Lehman's collapse triggered) than individual redemptions. Will their be another wave of redemptions? Not by bank loaned hedge funds since that has been exhausted. The question is whether individual/corporate/n... redemptions will tank the market due to Madoff. Certainly it tanked Madoff but w/ the Govt. backstopping the markets and the banks at least off the mat and beginning to load...I don't think so. One good housing stat, i.e. inventory reduction, new home sales, whatever...and this market will rally huge. I think we'll see that sometime late in the 1st qtr/early 2nd qtr. when mortgage rates hit 4%.
    2008 Dec 22 10:50 AM | Link | Reply
  •  
    I think your off by thousands for gold prices and for the S&P. I have spoken with attorney colleagues recently in the Caymans and the BVI. Apparently, a very large percentage of funds have already suspended redemptions. In addition, there are a sizeable number of new hedge funds (yes, new) coming online after January 1. Add to that some facts mentioned above, like "notice provisions" and gates, and there will not be an avalanche caused by hedge fund redemptions in the 1st quarter. Although, I do agree there will be a material affect caused by redemptions.
    2008 Dec 22 11:03 AM | Link | Reply
  •  
    Hedge funds have already redeemed - that is what was happening over the past 3 months.
    And so have mutual funds, which is ten times the size of the hedge fund industry.
    A very severe recession is already priced in; the only possibility of a next leg down is if depression numbers start to roll in...
    2008 Dec 22 11:23 AM | Link | Reply
  •  
    HA! Did you copy other people's homework in grade school? Your analysis is taken directly from Peter Schiff, word for word. Schiff's investments got an F in 2008. You might want to rethink who you are copying from...
    2008 Dec 22 11:25 AM | Link | Reply
  •  
    IMHO the hedge fund selling is over for the time being. Shares may drift lower, as there will be no positive earnings news except for rare exceptions for quite some time, but the big massive wholesale selling is over.
    2008 Dec 22 11:36 AM | Link | Reply
  •  
    Boubou makes a good point,

    "I'm not very conversant with this subject, but it seems to me fatpitch has a good point. While redemptions forced large scale sales of assets and helped force prices very low, not so much cash has been recovered by the punters. The other 90% or so has gone into space.
    So the 'cash on the sidelines' is not such a huge consideration."

    With 30:1 leveraging in the investment banking (IB) business there are 30 phantom IB dollars in the system for every real dollar. The IB dollars that inflated asset values in hedge funds are debts that have to be repaid when those assets (collateral) are redeemed for real dollars. For every 30 IB dollars there is only 1 real dollar left after the IB debts are repaid. The whole system was little more than a gigantic trade of IOUs. IOUs were used as collateral on other IOUs.

    If there is $30 trillion numerical asset value in IB inflated funds, then when these are completely unwound or deleveraged there will only be the original trillion left that the IBs started with. And if IBs got their capital as loans from commercial banks, then even this $1 trillion of capital will evaporate when those loans are repaid.

    The whole derivatives system is built on inflated IB money that cannot be redeemed for real money because the IB money is mostly IOUs which is debt. To make redemptions in real money, funds have to sell assets that are not debt, like stocks or mortgages or other real value collateral-based loans. But if there was only $1 trillion of real money put into this system, then that's all you can collectively take out once all the IOUs are written off against each other.

    There was a 30:1 bubble and everyone in it felt rich and a lot of people cashed out bubble money for real money. Maybe all the real money is already gone and there is net zero real value left in this system. That would mean a lot of people are swimming naked and the tide continues to go out.
    2008 Dec 22 11:46 AM | Link | Reply
  •  

    Unless central banks start adding to their gold stocks rather than distributing gold via sales and leases the price of gold will continue to be controlled by JP Morgan and the Fed selling short on the Comex. With the price of oil as low as it is there is no Goldfinger who can move gold higher.
    2008 Dec 22 12:37 PM | Link | Reply
  •  
    The Treasury and Fed will continue to "support & manipulate" financial markets keeping Dow in a 8,000-9,000 range.

    The purpose is to keep insurance companies solvent. However, at some point, this support will bebome unsustainable. At this junction, DOW will dive down with Gold jumping up (unless Obama will follow FDR's Great Gold Robbery.)
    2008 Dec 22 12:43 PM | Link | Reply
  •  
    Again, as I often lament, Blogs give a veneer of credibility to people just because it is often nicely formatted and online. Clearly this poster doesn't understand the first thing about hedge funds. Hedge funds often lock in their investors for extended periods of time. Even when redemptions are allowed, they must be notified in advance, and typically are limited as a proportion of your total investment (Citadel = 1/16 of your investment per quarter can be redeemed) or as a proportion of the fund's total AUM (the famous gates).
    2008 Dec 22 01:13 PM | Link | Reply
  •  
    Gold @ $5,000 in 2009?

    Unless we get a burst of hyperinflation, that can't happen. If you think otherwise, you're insane.
    2008 Dec 22 01:42 PM | Link | Reply
  •  
    It seems reasonable to assume that the largest brunt of hedge fund redemptions would have already been felt, although future redemptions certainly seem reasonable, as they always do, and even future inflows will occur as many investors decide that buy and hold is a "ponzi scheme", as I have seem some people comment.

    However, on the flip side of this argument, many endowments and pensions have a set mandate of how much equity exposure they have to hold. usually, these pensions will rebalance quarterly, semi annually, or annually. Many of these pensions and endowments have held off on rebalancing due to extreme market conditions. Also, they have been unable to rebalance due to a high weighting in non liquid alternatives. With 2009 coming in, there is the potential that many of these funds, who are some of the participants in the redemptions that we are discussing, will take that money and invest in equities or fixed income, depending on where their allocation currently is underweight.

    While they impact of the pension rebalancing can be argued for hours, a large amount of this money is coming out of the hedge fund universe, and since there is a 30 to 45 day(in some cases, 120 day) redemption notice, that does give an argument to why there are such high cash levels.

    So while this upcoming redemption period for quarter 1 may lead to massive waves of selling, it could just as easily lead to massive waves of buying. Nothing is certain. It is also important to note that even when you get in your notice to your hedge fund for a redemption, say 45 days in advance, of December 31st, you still may not get a check for your money until January 15th to January 30th. So the old trader's almanac for a January rally may end up being a February rally. Only way to find out is to stay tuned.
    2008 Dec 22 01:47 PM | Link | Reply
  •  
    Obama will either go to public with the truth to get the citizenship to pressure the House or he will go with the flow with your further looting strategy you mentioned below. If he does what is right, he takes the risks and rewards of being another Martin Luthar King. Does the man have the willingness to give all for the citizenship? I guess we will know soon enough. Trust is broken, destroyed out the window. Flushing the system of the excesses including the failed leadership takes years. True, if you have cash, there will be some attractive looking assets in 2009 for a buy and hold strategy

    On Dec 22 09:54 AM applesauce wrote:

    > Looks like the mattress is the best place for cash in the first quarter.
    > Many "experts" are calling for a rising dollor against other currencies
    >
    > and short term treasuries pay zippo but are selling out. This will
    > provide cover for Obama and company to spend over another trillion
    > to stimulate"
    > the economy throwing cash to friends and family in the first 90 days
    > in office, then the hangover starts and inflation will come back
    > with a heartless and rapid vengence.
    2008 Dec 22 03:08 PM | Link | Reply
  •  
    this site is great.it is very informative.it informs me that nobody knows anything at this time.you can ,though ,all be sure of one thing-if you are not working you are not spending.
    2008 Dec 22 03:40 PM | Link | Reply
  •  
    I am related to herbet hoover and you are no herbert hoover. Not kidding either.

    All you nervous nellies are sdad excuses for human beings.

    Gold at 4K? Dow down to 5K...IF and thats one of the biggest if's I have ever heard...not one single one of you is going to be happy to be alive.

    Be very careful what you wish for.

    What a dummy story. IT WILL NEVER HAPPEN NOT EVER.


    On Dec 22 08:15 AM Herbert Hoover wrote:

    > Add to the hedge fund withdrawals the Obama Plan that will enable
    > each 401K participant to withdraw $10,000 without penalty and a Dow
    > at 5000 looks more and more plausible.
    2008 Dec 22 04:37 PM | Link | Reply
  •  
    What is this the silly screaming nellie channel. I cant believe what I am reading from all you silly cowards.

    We had a NASTY correction...money is being pumped in FAST...game over.

    Thats it the bear market is over just not anyone here seems to have figured it out.


    When the priniting presses around the world start going full tilt...those that control what you think you know will soon thereafter brainwash you via the media into thinking everything is ok again.

    It will work and you will all go back to your regular buy and hold and live happily ever after.

    A couple of you will get carted off to the funny farm and to those I say GOOD RIDDANCE you silly nervous nellies.
    2008 Dec 22 04:48 PM | Link | Reply
  •  
    Oh and to the silly fear mongering simpleton that wrote this article. You really need to work on getting a degree that allows you to make intelligent predictions about economies and markets and if by chance you already have one ( I doubt its a REAL one)...please go back to school at once and leave the brave and the bold to guide us through this mess and SHUT THE HELL UP.
    2008 Dec 22 04:52 PM | Link | Reply
  •  
    The two negative ratings are interesting. So, two bulls disagree and one realist agrees.


    On Dec 22 09:25 AM investor88 wrote:

    > Q1 2009 may be weak for the reason mentioned above, and other reasons
    > of turmoil and economic weakness.
    2008 Dec 22 05:17 PM | Link | Reply
  •  
    Listen, this message is pointed to you and D-Train. It is always advised to have 90 days food, water and medicine. We live in a chaotic universe. Research the Business Cycle and how it is created, what the civil unrest factors are and then you will probably determine you can invest in the Boom or the Bust and come out on top. If the anarchy you describe unfolds, your better prepared by being a land owner that can generate your own electricity and nearby a water supply. But this is an INVESTMENT website. Expect us to either discuss Investments or how to correct leadership inbalances that interrupt our investing.


    On Dec 22 10:42 AM gollwoods wrote:

    > look, all this talk about investments is a delusion. we are going
    > into anarchy, there won't be anyone buying anything they can't eat
    > wear or kill with.
    2008 Dec 22 05:27 PM | Link | Reply
  •  
    On Dec 22 10:33 AM RCA wrote:

    > I'm not up to speed on hedge funds, so excuse me if this is a silly
    > question.
    >
    > When hedge funds receive redemption requests, does that obligate
    > them to sell holdings immediately? Or can they cover the redemptions
    > with cash on hand and sell when the timing is more beneficial to
    > them?
    >
    > I'm just wondering if all of the YE selling is done, even though
    > all of the YE redemptions are done.

    1) While hedge funds could cover with cash if they had it, most don't normally sit on a lot of cash, so with 45-90 day advance notice required, most of the selling should have been done.
    2) Someone mentioned gates prevented selling and therefore selling would resume in Q1. It depends upon the "gate: I've read where some funds have "two year" gates, so look for those funds to resume selling in Oct 2010, if they need to sell then.
    3) There is apparently more than one aspect to the "safe haven" angle of the T-Bills/short T-Bonds. Some hedge fund managers have said they've liquidated what they could (ie, more than needed) and invested the rest in US Bills/bonds so that if they get additional re"dump"tions, they can sell the T-Bills rather than liquidate illiquid assets at what they view as unusually depressed prices.
    4) There is "cash on the sidelines" (see 3). Even if the hedge funds don't have it, customers do. Sooner or later the fear (or recession or depression) will be over and whatever cash is out there will flow back to assets. This is especially true if the dire predictions of future inflation become true, although the assets being bought will be "hard assets".

    There may be other reasons for a crash, but I'm afraid Mr. Copper's horse hasn't just left the barn, it died of old age, because in the speed of this market, hedge fund redemptions isn't "yesterday's news", it's last years.
    2008 Dec 22 05:28 PM | Link | Reply
  •  
    Quite a few hedge funds allow quarterly withdrawals after an initial 12-36 month lockup, meaning many hedge funds could be hit with withdrawal notices for the quarter ending in March. That means there could be substantial selling during that quarter.


    On Dec 22 08:12 AM User 305589 wrote:

    > sorry for the typos. was in a big hurry to reply to an article that's
    > essentially total crap.
    > Lol
    2008 Dec 22 06:43 PM | Link | Reply
  •  
    Are you forgetting, SPIC has a printing press, and is sewed to it brain to brain...


    On Dec 22 08:48 AM birder wrote:

    > There is quite a lot of negative criticism of this post here, but
    > I am not too sure that all of it is justified. I do believe he did
    > mention 1st quarter withdrawals. That does allow sufficient time
    > for a 45 day notice. Certainly, there have already been plenty of
    > hedge fund withdrawals, but the point here is that as bad as everything
    > is, the Madoff affair might very well make a few people wonder whether
    > their money is safe anywhere other than under their matress. It makes
    > me wonder that. I believe I read that Madoff is going to bankrupt
    > the SIPC fund. Sort of makes one wonder whether one should remove
    > ones funds from every brokerage account out there.
    2008 Dec 22 07:53 PM | Link | Reply
  •  
    Everyone of you made interesting points. I am just a technical (meaning engineering, not stock chartist!) guy with no economics background but I would venture to ask a stupid question, hopefully some one would give me a hint of sorts.

    derrly made some interesting number crunching above. From my superficial and eclectic view, looking a the DJIA average chart over the past 30 years, it appears to me that the Dow at 2000 is the support level. Is this view credible? If so when will that happen? How, if ever, is the drop to 2000 related with derryl numbers. Calling all scholars.
    2008 Dec 22 10:52 PM | Link | Reply
  •  
    Even with the lockups and gates, continuing fraud-related revelations will drive some redemptions through 2009. It is not at all clear whether funds of funds have prepared for withdrawals even if their constituent funds have cashed out.
    2008 Dec 23 01:07 AM | Link | Reply
  •  
    i dont agree with this article the reason behind this is very simple, that consumptiion from the major consuming countires will be declined and is still declined if it reach upto 4-5000 ouce dollar that means only funds can make this possible not the real consumer.
    Second thing is that funds will be sell gold at every higher price because of deleraging expected to be continue at least for sometime ..... only funds can make it possible if they are able to invest and ready to loss ....world economy mostly reduced the consumption capacity second thing selling from IMF (gold ) can take prices belwo the 600 ounce dollar....

    ok gold stock can be rise between the time.. since they are always bullish , but the dollar expected to be recover very soon currently trading at 77 but it can be highe above 100 very soon and next year which will be the main reason of higher gold prices in future...... i am going to make my short postion from US$890-850 for short term target of US$690 and then US$590 ..........upside price can rise upto US$1080
    2008 Dec 23 02:22 AM | Link | Reply
  •  
    Anyone a FED worker with TSP funds?
    I saw a news flash the Barclays got hit by Madoff.
    Barclay holds or controls TSP.
    Any comments about TSP. Safe or not?
    2008 Dec 23 02:43 AM | Link | Reply
  •  
    Peter Cooper: Are you going to stand behind your statements? I am willing to wager $100k, maybe more, that the price per ounce of gold does not equal or exceed the Dow index in 2009. I wrote this comment also to your other article claiming the same thing. Any takers?
    2008 Dec 23 03:05 AM | Link | Reply
  •  
    I'm a soon to be retired Fed (10 days). And though I've looked, I've not found any references to a "Madoff-effect" on the TSP.
    2008 Dec 23 03:55 AM | Link | Reply
  •  
    OK - I'm not going to comment on the blatant sensationalism in your writing. For the sake of your health, I hope you are attempting to be sensationalistic. The one item I will comment on, which you didn't mention, is that there is a 0% Long-Term Capital Gains tax in 2009.

    Yes everyone, read this again, its fact:

    LONG TERM CAPITAL GAINS TAX IN 2009 IS ZERO PERCENT
    2008 Dec 23 04:00 AM | Link | Reply
  •  
    we will see a bottom when people take up value added jobs and stop showing up on TV and announce the news on all channels, or do power point presentations and collect large salaries for that BS. Real problem is that too many people wanting to live off of a very few production people.
    2008 Dec 23 04:40 AM | Link | Reply
  •  
    PORN built the internet which in turn boomed the computer business which in turn destroyed financial integrity.
    2008 Dec 23 09:08 AM | Link | Reply
  •  
    while we can't argue that more redemptions are imminent, we actually think the worst is over. that initial wave back in november really caught the market off guard and so funds have taken proactive steps. we track hedge funds on our blog and have noted that many prominent funds have suspended redemptions, as we wrote about here: www.marketfolly.com/20...

    there will be redemptions for sure, but not near as severe as the last wave we saw.
    2008 Dec 23 09:22 AM | Link | Reply
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    *correction

    while we can't argue *against the fact* that more redemptions are imminent,

    sorry left that phrase out
    2008 Dec 23 09:23 AM | Link | Reply
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    What's your theory on DOW and GOLD? Do you understand economics? Your article seems to be a lame duck. Watch GOLD crash next year. If you are lucky, GOLD won't go below $550.
    2008 Dec 23 12:24 PM | Link | Reply
  •  
    March 30 will see about 20% of HF assets flow out. Most funds are either de-levered or have already sidepocketed their bagholders, so it' snot clear whether much more selling will be triggered.

    Mutual funds might get crushed much more

    on the other hand, a lot of big institutional investors are "underweight" equities (that's what happens when your investment loses 50%...) so could allocate.

    If you still have free hands, PE/VC funds are making big capital calls and there aren't many (any?) realizations right now, thus the big IIs may need to raise cash to meet these calls.

    More return => you are betting on risk premia
    Risk premia are in proportion to the underlying liquidity; not much else is really involved
    In good times, making stupid high leverage bets on low liquidity things pays off handsomely, and if your competitor is doing it and you aren't you get fired...
    2008 Dec 23 01:50 PM | Link | Reply
  •  
    "I told you so" (follow up to earlier comment)...

    Today Cerberus Partners announced that it was returning ONLY 20% of the amount of investor redemptions (it has the right to limit redemptions)and is suspending redemptions for up to one year.

    So, as I said, some gates are up to two years - Cerberus just lowered it's one-year gate.

    Also, like I said, Cerberus does not want to liquidate at what it believes are "unusually depressed prices". It had, in fact, just made a big bet on mortgages in Sept and while it admits it is wrong, it still believes the prices are too cheap to sell.

    One thing I did NOT know: it doesn't even have to meet the redemption requests - ergo, it's giving 20% of the request and locking up the rest.

    So I seriously doubt hedge fund requests will crash the market.

    Note: I am worried that the Dow could hit the one or both of the next support zones, which I gauge around 6,000 and then 4,000, but I have no idea what might cause it (and I'm sticking by the logic in an old economist joke - "If you give 'em a number, don't give 'em a date; if you give 'em a date, don't give 'em a number."),
    2008 Dec 23 02:11 PM | Link | Reply
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    If Mr. Cooper is so sure that the hedge funds are going to be dumping MORE shares on the market in early 2009, I'm pretty scared. What scares me the most, that which is talked about the least, is that it becomes more and more undeniable that the concentration of wealth in America is way past dangerous. Most people that are invested in these funds are extremely wealthy. The institutional investors seem to representing people and entities who have also accumulated massive wealth over the past decade or two. These folks have had more money than they could spend and would put a lot of their capital in riskier ventures, in order to get higher returns, because it was was like playing with "house money". That is until that amount grew so large that they were freaking out about the numbers of zeros next to numbers in their loss column. Once they started selling, it triggered more and more selling, until the market hit it's recent bottom. I'm guessing that the hedge funds have already dumped these massive amounts of debt and equity on the market. This is what's been feeding the bear, IMHO. This concentration of wealth operates like a syndicate, or selling group. Even if it's not a concerted selling effort, they're all accepting the same economic theories, etc. This has the massive cascading effect it has, even in light of $700billion bailouts, because these uber-wealthy hedge fund investors are holding an amount of money that moves world markets more than if all the little investors and governments together works toward a common end. Too much money in the hands of too few. When they are too big, perhaps we fail?
    I hope he's wrong, and that we've seen the effects of cascading hedge redemptions. Good luck to us all.
    2008 Dec 23 04:01 PM | Link | Reply
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    The crash caused Madoff bust, not the other way around
    The author got it backwards.
    "The scheme began to unravel when, in 2008, clients wanted to withdraw $7 billion from the firm and Madoff was struggling to raise $7 billion to cover redemptions. On December 10, 2008, he suggested to his sons that the firm pay out several million dollars in bonuses two months ahead of schedule. Then at his apartment, he admitted to his sons that his firm was a fraud."
    2008 Dec 23 04:05 PM | Link | Reply
  •  
    I find it hard to believe that Madoff's sons are innocent. I suppose time will tell but dad may have just taken the fall. The senior Madoff certainly has worked out less fantastic schemes. Do the apples fall so far from the tree? Call me skeptical. We'll see.
    2008 Dec 23 07:23 PM | Link | Reply
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    I think Derryl just made the case for deflation. The money lost is huge compared to Fed injections.
    2008 Dec 23 10:31 PM | Link | Reply
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    Agree with the ones saying the worst wave of selling is over. It has certainly set the tone for the 3rd and 4th quarter this year. My guess is the worst is over; a wholesale depression is already priced in most equities.

    Even with GDPs contracting at 0,5-1,5% for some time (and that won't last long), I think there are many real inexpensive shares out there. Look at dividends, p/e, and p/b, allow yourself a huge margin of error, and make a bet.
    2008 Dec 24 07:17 AM | Link | Reply
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    Inflation has to come back when the government printing presses start up. We're supposedly a 70% consumer driven economy- government wants everyone to spend, spend, spend and pay off its debt with cheaper dollars.

    Once the financial industry decides it has got all the cash from the government it can get, lending will start again, traders (and hedge funds) will decide that the recession will indeed end, future earnings will start to look better and debt smaller due to inflation, and yr. to yr. comparisons will bouy up shortsighted investors due to our society's soundbite attention span.


    2008 Dec 24 12:02 PM | Link | Reply
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    Thank you for the article. It and all of the comments gave me food for thought.

    I guess my gut reaction is to do the opposite. If everyone tells me the sky is falling, I am getting even more Bullish.

    I am the most aggressive I have been since June 2006. Loaded up and ready to go here, been buying aggressively last two weeks.. Fully invested now, long by about 75% my max.

    Just my thoughts
    2008 Dec 24 02:04 PM | Link | Reply
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    I am no professional economist (which may actually be a plus), but I'll proffer my opinion.

    There was massive leveraging, as derryl pointed out, but not all of that needs to disappear - in fact, what Bernanke is praying for is an eventual re-leveraging at sustainable levels. From what I've been reading, seems the problem now is that banks have capital (from the Fed and Treasury), it's just that they are still too scared to lend it. Their reasoning is probably justified, though, as the second wave of asset destruction has yet to start. The first was induced by Wall Street and began mid-last year when signs in hedge funds first started to show, and was a case of leveraged euphoria coming down to earth. The second is that "earth" in Main Street is also rapidly collapsing, in wages, employment, earnings, and consumption, which is happening right now.

    I am playing this as conservatively as possible in cheap equities, and looking for the eventual inflation spike that Bernanke will cause by making this fall as painless as possible. I think that spike will make asset prices very cheap, if not even cheaper than now, for a very long time, when adjusted for inflation. In that sense, I don't see the Dow or S&P falling much further in nominal terms, but I do see real value stagnating at these levels for quite some time. I came to this conclusion when I considered shorting oil stocks, and then noticed that I can be right, and still lose out due to inflation, currency debasement, or whatever. Remember, during the Great Depression, we were on the gold standard. With fiat, we can inflate to eternity to prop up nominal prices. Values do not need to nominally go down for us to all become much poorer in reality.

    That's my answer to setting price targets for, well, just about anything except Treasuries.



    On Dec 22 10:52 PM Teutonic Knight wrote:

    > Everyone of you made interesting points. I am just a technical (meaning
    > engineering, not stock chartist!) guy with no economics background
    > but I would venture to ask a stupid question, hopefully some one
    > would give me a hint of sorts.
    >
    > derrly made some interesting number crunching above. From my superficial
    > and eclectic view, looking a the DJIA average chart over the past
    > 30 years, it appears to me that the Dow at 2000 is the support level.
    > Is this view credible? If so when will that happen? How, if ever,
    > is the drop to 2000 related with derryl numbers. Calling all scholars.
    2008 Dec 24 02:52 PM | Link | Reply
  •  
    I completely agree and couldn't have said better myself.


    On Dec 22 09:54 AM applesauce wrote:

    > Looks like the mattress is the best place for cash in the first quarter.
    > Many "experts" are calling for a rising dollor against other currencies

    >
    > and short term treasuries pay zippo but are selling out. This will
    > provide cover for Obama and company to spend over another trillion
    > to stimulate"
    > the economy throwing cash to friends and family in the first 90 days
    > in office, then the hangover starts and inflation will come back
    > with a heartless and rapid vengence.
    2008 Dec 24 11:37 PM | Link | Reply
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    OK so there will be massive withdrawals from Hedge Funds. As proHDAnalyst and others pointed out there are lockups and gates which will slow the feed of redemptions over the next 5-6 quarters. But the funds aren't frozen into passivity, they are constantly re-adjusting their long/short hedges within the framework of the market, so there should not be such consternation about this subject causing destruction in the values of stock prices per se.

    Far more troubling, is that the market has disintegrated in such a rapid and devastating speed, that the average Joe, who was blindly investing his 401(k) and IRA contributions in listed stocks and mutual funds, may become paralyzed and leave his funds in MMM on the sidelines, or worse, refuse to participate in this sham altogether.

    When you combine the effects of early Baby Boomers retrieving funds, and new money sidelined, as well as, well heeled erstwhile hedgies retreating, Arab sovereign funds drying up under the weight of decreased oil revenues, Asian markets leeriness of our regulatory enforcement, you've got a serious problem maintaining valuations in the DJI.

    I wish I could see a bright and healthy New Year coming our way, but with our manufacturing sector DOA, our banking system barely limping, our national moral fibre mortally wounded, I fear the worst is yet to be.

    Happy New Year!
    2008 Dec 25 01:48 AM | Link | Reply
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    This is not the first time someone has proclaimed gold going to the several thousands range. How has that worked out in the past? I think the Dow will go lower, but if you're waiting for gold to go up 500%, best of luck with that.

    2008 Dec 25 09:41 AM | Link | Reply
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    Are all bets on or off for the New Year?

    When I recall some top lady stock market strategist (Elaine G) a few years ago predicting that the Dow will go to 40,000 in the coming years, I couldn't help but read all crystal balling with some reservation.

    Except perhaps for Nostrademus who even scholars debate his authenticity, no one human could predict the future.
    2008 Dec 25 01:16 PM | Link | Reply
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    High-school Investment Club redemptions might have a bigger impact than Hedge Funds. Hedge Funds are far smaller than they used to be, and many have imposed redemption restrictions.
    2008 Dec 25 01:55 PM | Link | Reply
  •  
    •  • Website: http://www.prw.net
    That is why i still believe in inflation rather than deflation. The real ballon is in IOU's. Even if the US govt. throws in 7 trillion dollars, there still used to be over thirty trillion. Now there are less dollars. That is why the dollar is still getting strong also. Less dollars available than before and no more IOU's. It's great when everyone has to play on a level field.

    Disclosure: I am both in cash and gold, 50/50. No stocks...yet


    On Dec 22 11:46 AM derryl wrote:

    > Boubou makes a good point,
    >
    > "I'm not very conversant with this subject, but it seems to me fatpitch
    > has a good point. While redemptions forced large scale sales of assets
    > and helped force prices very low, not so much cash has been recovered
    > by the punters. The other 90% or so has gone into space.
    > So the 'cash on the sidelines' is not such a huge consideration."
    >
    >
    > With 30:1 leveraging in the investment banking (IB) business there
    > are 30 phantom IB dollars in the system for every real dollar. The
    > IB dollars that inflated asset values in hedge funds are debts that
    > have to be repaid when those assets (collateral) are redeemed for
    > real dollars. For every 30 IB dollars there is only 1 real dollar
    > left after the IB debts are repaid. The whole system was little
    > more than a gigantic trade of IOUs. IOUs were used as collateral
    > on other IOUs.
    >
    > If there is $30 trillion numerical asset value in IB inflated funds,
    > then when these are completely unwound or deleveraged there will
    > only be the original trillion left that the IBs started with. And
    > if IBs got their capital as loans from commercial banks, then even
    > this $1 trillion of capital will evaporate when those loans are repaid.
    >
    >
    > The whole derivatives system is built on inflated IB money that cannot
    > be redeemed for real money because the IB money is mostly IOUs which
    > is debt. To make redemptions in real money, funds have to sell assets
    > that are not debt, like stocks or mortgages or other real value collateral-based
    > loans. But if there was only $1 trillion of real money put into
    > this system, then that's all you can collectively take out once all
    > the IOUs are written off against each other.
    >
    > There was a 30:1 bubble and everyone in it felt rich and a lot of
    > people cashed out bubble money for real money. Maybe all the real
    > money is already gone and there is net zero real value left in this
    > system. That would mean a lot of people are swimming naked and the
    > tide continues to go out.
    2008 Dec 28 12:18 PM | Link | Reply
  •  
    There have been massive hedge fund redemptions--the debate centers around how much more is coming.

    Question: what about redemptions from private equity firms? Won't this have a negative effect on equity markets?
    2008 Dec 28 01:33 PM | Link | Reply