JOULES,
hedge funds managers have mostly not been through a true bear market phase so don't have the knowledge or experience to restrain themselves.
Some have, some haven't. There are an estimated 8000 Hedge Funds currently. Within that number there are the usual geniuses, and dross.
This is proven by the 25billion inflows into (long) leveraged position to take advantage of the so-called new bull phase.
New money generally joins in the psychological good times, not during the pits of despair.
There is not sufficient evidence that I am aware of from Mar 07 to the April lows to confirm the unravelling of some large hedged postions but I am in no doubt that the volumes included that action.
The majority of the Hedge Funds are not hurting badly enough to cause a meltdown in the markets. As I said, the US Equity market is currently undervalued, even more so currently with the inversion of the Yield curve. This has prevented too much pain for the Hedge Funds. Also GM was only one position. Of more concern would be the "Carry" trades in the Treasuries.
The "Carry" trades will be hurting, but as we are still in a "Statistical" market, they can probably get away with it.............if they haven't already unwound the hedges.
After a severe 50-70% declines in the US markets from the Jan 2000 high do you not think that the sentiment is bullish and not a wall of worry? Did I miss something in my learning process after having lived through a severe bear market of 1970-74 where the losses weren't near as a bad?
The 1972 - 1974 Bear market was far worse than the 2000 Bear market, for the simple reason that it was again allied to a severe recession, or more accurately "Stagflation"
We could debate the depth of the 2000 2002 recession, but it was mild by comparison.
So, tell me about the Calpers which is effectively broke or The PBGC which is now taking over new retirement accounts which are in the red and this fund is ALREADY effectively broke because itself has NO money!
These retirement accounts are in common stocks....the economy is not geting better.....the world economy has a mass low interest rates...it is shrinking in a deflationary manner....the US Central Bank lowered the funds rate in a panic slash for a couple of years...why? ....because the American consumer has to spend more credit ....this blooming debt is funded by overseas investors in common stock and they are getting impatient to see a return on their investment and theyre are not getting it...low interest..
And herein lies the connundrum. What you say is partly true. I would question the % you seem to imply resides in Common Stocks. Yet no less true is that money must be invested to provide an income and show a return. You have a number of asset classes in which money may be invested. Fixed Income, where obviously large amounts are going, as the yield indicates, Real Property, most would agree that showing signs of a bubble, due to money flowing there from last few years, Commodities, again Commodities have been booming, due in large part to increased demand, but also a "Speculative" element.
Currently, the returns available on Equities look attractive by comparison, therefore, depite the "Bad news", the wall of worry, money will flow to Equities, and the Bull will live, albeit slowly.
Think on this; retirees are losing value in their acounts, major companies have to pump more into the retirement accounts to meet regulations so the value of the company dilutes....oversees investors are losing value and not getting any income, the mass decides it wants less stocks so the markets go down....more news of the GMs and Fords write downs plus higher funding costs to the companies...is the picture getting clear?
The GM & Ford have always been cyclical businesses. I agree their major concern, and significant drag on profitability has been Pension requirements.
Diverting cash from operations does not "dilute" the business, it simply reduces profitability.
The problem arises if, due to reduced profitability, debt cannot be serviced, as this due to the indentures will trigger insolvency. This is the reason behind the S&P downgrades.
GM, specifically has a very heavy Capitalisation bias to debt.
Debt constitutes 94% of the Capitalisation, and Common Stocks only 6%
As long as GM does not default, then the Bondholders will receive their income. The PROBLEM will arise at the Maturities, and redemption of Principal.
With the "Junk" rating the Cost of Capital has risen significantly, thus impacting the profitability in the future of GM's finance arm, which is critical to the business plan.
The US government is on a record belting debt spree with tax cuts it can't afford and spending it needs to cull...Take a look at Japan...same deal...real estate bubble...you got a mortgage that needs to be paid in a hurry but the real estate market is too slow and stocks easy to off-load at a cheaper price....which one are you going to relinquish first?
Depends on a large # of factors. The most important one being the NEED to sell.
If you HAVE to sell, then liquidity rules. However, the key is for the Government through Monetary and Fiscal policy, to try and prevent that NEED from arising.
Ok, see number 5 above: When leverage managers have to liquidate quickly in a losing positon they have to give up more than the original stake to cover the loss so the position left (which is now smaller in unit size) needs to outperform, considerably stronger than, the original stake and this I think is the most vital part of the picture not understood and the most crucial area that needs to be known. If during this time the postion keeps going against the managers then the rest is obvious yet, unfortunately, I think not obvious enough. This is the pin in the granade.
But this is not really the problem at all.
The real problem arises when due to leverage, they are FORCED to sell, as the margin calls cannot be met, and due to either their size, or competition also trying to exit........the liquidity dries up.
Now, margin calls force the funds to sell, but there are no buyers, and they implode, dragging counterparties with them. For this to happen, there would need to be a number of economic and market events to trigger the selling required to remove the liquidity. The last time in 1998 was triggered by Asia in '97 then Russia in '98 with Mexico and Venezuala thrown in for good measure, and a very high Equity market. So far, this is not the case.
By the way, the US has been showing consistant positive sentiment as observed by the Uni of Mich and many other sentiment surveys and on top of this the volitility is at historic lows and to me this is not indicative of a "wall of worry" regardless of what one may glean from the media the numbers simply do not support a bull market continuation. A smooth market encassed in such rampant and unguarded speculative clearly indicates to me that intelligence of hedge fuinds managers is not the key to long term gains or even longevity, period. LTCM is a clear example that arrogance rules the waves and such arrogance is born of a the same-old same-old desires much as they did in 1929-1930. Remember in 1929 some 5 months after the initial shock that many leading heads of states and banks agreed that hey had simply witnessed and unusual glitch and today the hedge fund managers have the EXACT SAME DISPOSTION FOR STUPIDITY.
The "NUMBERS"...........
To which numbers are you referring? The ones you have quoted, sentiment surveys etc?
The wall of worry does not refer to sentiment, more to "economic" concerns, some of which you have already touched on.
Quantitative numbers however paint a different picture. The "BULL" will not be a parabolic bull, but a sideways, bull, correcting imbalances through time predominantly, and to a lesser extent through price.
In 1929 the percentage of debt to GDP was 204............ today it is in excess of 300.
This I presume applies to Government debt?
While important, no denying the importance, Government deficits are or can be responsible for averting sequelae such as the depression of 1930 -1934. However, we are moving into very contentious economic theory.
No driver that I know would do this especially on a road they are not familiar with, so, what on earth makes a hedge fund manager think that just because they saw a bull market in the rear-vision that they are seeing one ahead of them?
Because they love to speculate.
Cheers d998
