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Prescription: Large Doses of Father Time

Buck Woodford — Wed, 31 Dec 2008 06:46:53 +0000

I continue to believe that the end of this bear market will not come via any government program, bailout, etc. It will just take time. Potentially a lot of time, but that’s forecasting and you never know. Along those lines, I wanted to point you toward an interview from December 2007 with Barry Ritholtz. One quote that I espouse:

I don’t think the economy needs fixing… What do we do to fix night? We wait.. and it’s eventually day.

Click Here if video doesn’t appear

Some Managers Show Bad Business Etiquette

Buck Woodford — Wed, 31 Dec 2008 06:25:08 +0000

John Paulson has some forthright words for fellow hedge fund managers refusing to distribute capital back to clients. (Don’t confuse him with our sweaty Treasury Secretary, Hank Paulson — John has positively nailed this bear market, earning triple digit returns for clients in 2007 and double digits in 2008):

We think it’s a mistake for managers to use gates and other tools to limit investor access to their funds. While we recognize the difficulties of the current environment, we think it is a manager’s responsibility to raise liquidity to meet the redemption needs of their investors.

I could not agree more.

You may have heard of some large hedge funds “freezing” withdrawals from their investors. Since we manage separate accounts and not a hedge fund per se, I have no idea how that is even legal. Since I’ve heard of no lawsuits, their private placement memorandums obviously had some kind of obscure language that said “we can limit withdrawals for basically any reason.” That is of course a ridiculous business practice.

It seems to me that these managers are really pushing the envelope on retaining client business that they’d otherwise lose by free will. The worst part is clients are initially held to a lockup period of 1 to 3 years on their funds upon initial investment. These actions turn the flow of funds into an extremely unacceptable one-way street.

Teewinot clients have full access to their funds, at will, since the accounts are custodied in their name. Even if we were operating as a hedge funds, I can promise we would certainly never take the actions that these managers are taking. It’s not right.

Please read the piece, and tell me what you think. I absolutely think they are not holding such illiquid securities that they just can’t get out — they just can’t get out at the prices they want to ! And of course want to retain their asset base. I think this “change of terms” will backfire on them, as it would on anyone in any industry.

“A Leading Bear Turns Bullish.. Sort Of”

Buck Woodford — Tue, 09 Dec 2008 04:29:43 +0000

Barry Ritholtz (who writes a very informative blog, The Big Picture) was interviewed in last week’s edition of Barrons. It’s well worth the read.

After being bearish and right for a few years he is turning a bit more constructive. I liked the quote that at industry events he used to be the most negative guy in the room — but is now one of the few not negative. Barry’s analysis and lack of “bottom calling” all the way down gives him some well-deserved credibility. Certainly caught my attention.

Level of Disgust Rising

Buck Woodford — Thu, 04 Dec 2008 01:24:13 +0000

During 2008’s massive swoon, I have done very little searching for anecdotal evidence that a bottom was near. In general I still believe too many folks retain a “oh, it will come back” mindset — which works extremely well in Bull markets — for these to be the absolute lows of this entire Bear.

But.. I copy/pasted an email forward I received today. These are absolutely the kind of messages that would typically be created near intermediate-term (1-4 months) bottoms in Bear markets. Now, we won’t be going “all in” tomorrow morning or anything; but it’s definitely a point taken.

FW: Christmas Dinner Menu 2008

Appetizers
Mélange Of Frozen Markets
Tossed Assets With Government Guarantees
Frisée Of Foreclosures And Defaults

Main dishes
Évaporation de Credit à la Cold Turkey
House Signature Dish
Seared Investors In Bottomless Pit With Caramelized Investments
Overheated Markets Without Oversight à la SEC
Braised Bankers Rump With Bailout Coulis

Desserts
Sorbet Trio Of Shock, Disbelief And Insolvency
Off Balance Sheet flambé

Featured wine
Great Depression Grand Siècle 1933 méthode creditoise

This is the first post in a newly created category: “Signs of a Bottom”. But note the flipside: Although being occasionally bearish during the 2003-2008 Bull run, my first actual “Signs of a Top” post (quick, interesting read at this point) was in December 2006 — nearly a year before the actual peak. Timing these things is tough!

Another Fly in the Ointment

Buck Woodford — Wed, 03 Dec 2008 20:26:50 +0000

Port Authority Gets No Bids for Taxable Bond Offering

No bids.. As in zero !

“Lets Face It”

Buck Woodford — Wed, 03 Dec 2008 14:51:02 +0000

Acceptance is of course one step on the way to recovery. Auto bailout talk still signals denial to me.
Hedge fund manager Howard Lindzon wrote a short, witty post summarizing our current situation. The end about Steve Ballmer makes a very interesting point. For my time, Howard’s blog is one of the best market conversations out there.

One quote:

The trend is so clearly down that betting against it other than for trading purposes is bad business. Betting on the trend as it goes south is just damn hard because I have never seen anything like it. So I mostly watch…

We’re doing the same.

Keeping an Eye on the Bond Market

Buck Woodford — Wed, 03 Dec 2008 05:47:53 +0000

It does not portend good things to come. And that’s my #1 reason for exercising extreme caution in the equity markets right now.

Below are charts of 10 yr Treasury yields (just move the decimal one place to the left and that’s the actual % yield). The first one shows the last 6 months while the second spans the last two decades .

6 months.. Daily bars:

20 years.. Monthly bars:

Yields have now broken solidly below the 3.07% “panic” all-time low in 2003. My working assumption now is that 3% will now be a ceiling, not a floor, for the 10yr going forward.

The 20 year chart shows how yields have plunged into completely new territory these last few weeks. And since very short-term (3 month) Treasury bill yields have been steadily hovering around zero% for a while, this drastic move represents a curve flattening (much to Julian Robertson’s chagrin, I feel sure, as he has been betting on a steepening yield curve).

Further, the TIPS spread has collapsed, implying expectations of little to no inflation in our future. Curious sidenote: In searching for quotes on the TIPS spread, I found it interesting that the Federal Reserve of Cleveland has temporarily discontinued tracking it. That’s plain odd.

There are logical fundamental reasons behind these moves. And, not surprisingly, they are far from positive.

Demographically, the US is now similar to Japan when they started their 20 years worth of slow/no growth and miniscule bond yields. First, we’re an aging population with a large wave of retirees on the way. Second, we are supporting “zombie” companies like Fannie Mae, Citibank, AIG, and now probably General Motors. The political inability to accept losses and allow the economy to experience cleansing effect of much-needed company bankruptcies is nearly identical to Japan’s failed methods of propping up insolvent companies.

Nothing is certain, but it’s not at all out of the question that a similarly languishing future awaits us. Scary stuff. Please share any of your thoughts in the comments section.

Teewinot’s Risk Management Philosophy.. on Video

Buck Woodford — Thu, 20 Nov 2008 09:04:44 +0000

Because so many have asked “how do you avoid losses in the stock market” — I tried my hand recording a video in an attempt to explain. This is certainly new territory for me, both marketing and technology-wise.

Note: charts shown are Daily, each bar representing one full 9:30am-4pm trading session. The buys and sells made in client accounts are shown by yellow up/down arrows. I didn’t verbally explain that in the recording. But hey I’m a rookie on the microphone..

Click here to access the roughly 15 minute project

Please leave any thoughts or questions on the Comments page & I’ll happily address them.

One Guy Who Got It (Mostly) Right

Buck Woodford — Wed, 19 Nov 2008 22:55:29 +0000

Jim Rogers — who was George Soros’ initial partner in his hedge fund empire — has been unrelenting in calling the financial collapse in the United States. On the downside, Rogers has been, and continues to be bullish on China and commodities. On a side note, he authored by far my favorite book about economies around the globe: Adventure Capitalist.

Click here to view a recent interview with Jim, in which he updates current thoughts about markets and the global economy.

Don’t Doubt the Hedgies, Long-term

Buck Woodford — Thu, 16 Oct 2008 07:44:43 +0000

Many top managers are having a rough go of it. Most of the pain came in September. After many solid years managing Tontine Partners, Jeffrey Gendell lost a bundle this year - nearly 2/3 of the fund’s value. In the same article, it mentions that David Einhorn’s Greenlight fund lost 17% in September alone — and this is the guy who presciently predicted Lehman Brothers’ bankruptcy 6 months in advance! A heavier hitter than either, Ken Griffin’s Citadel group, has steered their primary fund to a nasty 30% loss on the year.

But don’t think that the entire industry is in danger. The concept of performance-based pay will always attract the best and brightest.

Near the end of this Financial Times article, the CEO of a large Swiss bank — which admittedly advises clients to allocate heavily to absolute return investments — makes an outstanding point:

“The hedge fund industry is the most talented people who have come
together to manage money. When they don’t achieve they disappear. There is a Darwinian process that we don’t really see in the long-only world.”

Teewinot fully intends - and remains well on track - to survive this negative environment and absolutely thrive as the world eventually emerges from it. There is no hurry, no panic, no “hail mary” environment for us. We’re simply preserving our clients’ capital in down periods, seeking opportunities for profit, and taking calculated/limited risks.

Please check out Teewinot’s 2008 3rd Quarter Client Letter for more information.