Gold Market Radar (August 20, 2012)

Sunday, August 19th, 2012

Gold Market Radar (August 20, 2012)

For the week, spot gold closed at $1,616.05 down $4.15 per ounce, or 0.26 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 1.14 percent. The U.S. Trade-Weighted Dollar Index edged higher, gaining 0.05 percent for the week.

Strengths

• Despite the dollar’s steady rise since the start of the summer, the gold price continues to defy efforts to push it lower.  Technically, gold has now traded above both its 50- and 100-day moving averages and the seasonally strong autumn rally in gold could well play out again this year.
• Gold sentiment likely got a boost when recent filings showed billionaire John Paulson raised his stake in an exchange-traded fund tracking the price of gold, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.  In addition, the $25 billion Soros Fund Management LLC portfolio also made a sizable increase in its exposure to bullion. The Soros Fund, based in New York, raised its existing weight by slightly more than 175 percent from the previous filing.  And finally, investment funds in China soon plan on launching the country’s first batch of gold exchange-traded funds, according to the state-run Shanghai Securities.
• Nomura International Plc told clients that the gold price is “not heavily pricing in QE3,” referring to so-called quantitative easing.  “The potential upside, were QE3 to be introduced, would likely far outweigh any potential downside.  Even if it is not introduced, real rates remain very low and the gap between them and gold is large.”

Weaknesses

• Great Basin Gold announced this week that CEO Ferdi Dippenaar has resigned with immediate effect. This is due to a strategic review process begun as a result of delays at the group’s Burnstone operation in South Africa.  On release of the news the stock tumbled 50 percent.  In recent months, both Aaron Regent and Tye Burt, CEOs of Barrick and Kinross, respectively, also have been shown the door during these tough times for gold miners.
• Clive Johnson, the president and CEO of B2Gold Corporation, expressed his frustration on the company’s quarterly conference call with regards to the difficulty of trying to get distressed companies to come to the table for a potential acquisition.  Johnson noted the self-interest of management versus the shareholders was clearly evident in that many companies either are unwilling to sign confidentiality agreements or, if they are, they come with caveats – shackles in the form of standstill agreements – that make it tough to do anything.
• The World Gold Council (WGC) recently reported that gold demand reached 990 tonnes in the second quarter, down 7 percent from a year ago. The weaker trend in investment, jewelry and technology demand for gold was compensated by the Central Banks’ surging appetite, which led to the largest quarterly increase since the second quarter of 2009. Though both China’s and India’s gold consumer demand declined year-on-year in the second quarter, retail investment demand ex-China and India actually rose 16 percent. In particular, the European purchase of bullion bars and coins rose 15 percent, revealing investors’ demand for gold for capital preservation in light of the European debt and banking crises. The WGC highlighted that Russia will continue to be a driving force in the gold market. It is now the fourth largest consumer of gold jewelry, and has the world’s eighth largest gold reserves.

Opportunities

• David Prowse, Metals and Mining Specialist Sales at Bank of America Merrill Lynch, recently visited a number of accounts in New York and Boston.  David reported that he was perhaps halfway through the second day before a single investor had mentioned gold or gold shares. It has essentially been a year since gold peaked last August and few have interest in the shares these days making it that much easier to pick up a reasonable position without much market impact.
• Barron’s also carried a technical analysis of gold bullion versus the gold stocks this past week.  The publication noted that for the first time in more than two years, gold stocks are looking better than the metal, although they are not yet fully in bullish mode.  Barron’s pointed out that the desire to sell gold stocks versus gold itself reached a climax in May and since then the short gold stock trade looks to have washed out, perhaps establishing a price floor, and making their risk/reward profile look fairly good
• Since February, the COMEX speculative position on silver has fallen by 72 percent.  A survey of hedge funds showed they are the least bullish on silver in almost four years.  However, physical holdings of silver via exchange-traded products has climbed for three months and is now valued at $16.2 billion. In the coming weeks, the Jackson Hole Fed retreat may be the last chance the Fed has to act before the presidential election.

Threats

• Platinum producers in South Africa, which account for 75 percent of world output, are facing plunging profits, surging energy costs, and labor instability.  Lonmin plc has been at the epicenter of the crisis.  The labor unions have been the nucleus of the problem where the Association of Mineworkers and Construction Union (AMCU) has been targeting the platinum mines to extend its membership at the expense of the established mining unions, the NUM and Solidarity which are nowadays seen by some as part of the mining establishment.  Several murders took place between the rival factions so police were called in.  Unfortunately the conflict escalated with 34 deaths at the Lonmin Mine.
• Some believe David Rosenberg of Gluskin Shelf to be a perennial bear but he’s pretty much one of the few strategists who is willing to mention the bad news and bare the disdain of those who want us to keep the rose-tinted glasses on.  Dave noted this week that the spike in food and gas prices casts a cloud over the back-to-school shopping season.
• With regard to investors’ appetite for income-producing securities versus taking the risk of parking cash in the equity markets and trying to sleep at night, Mr. Rosenberg pointed out that that retail investors eagerly snapped up nearly one-third of the largest municipal debt deal of the year, a $10 billion one-year bill issued by California with a range of 0.3 to 0.55 percent.

Tags: David Rosenberg, Dippenaar, Dollar Index, Exchange Traded Fund, Exchange Traded Funds, Gluskin Sheff, Gold Exchange Traded Funds, Gold Market, Gold Miners, Gold Price, gold stocks, Great Basin Gold, India, John Paulson, Market Radar, Nomura International Plc, Nyse Arca, Price Of Gold, Qe3, Rosenberg, Rosie, Russia, Sizable Increase, Soros Fund Management, Soros Fund Management Llc, Spot Gold
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Investors Losing Faith in Hedge Funds?

Friday, March 9th, 2012

 Nathan Vardi of Forbes reports, Investors Are Starting To Lose Faith In Hedge Funds:

For a long time, it seemed like nothing could diminish investor appetite for hedge funds. Even after the financial crisis embarrassed some of the industry’s most high-profile investors and caused the industry’s assets to tumble as hundreds of hedge fund closed in 2008, the hedge fund business quickly recovered. Last year the industry’s assets reached an all-time high of $2 trillion.

But 2011 turned out to be one of the hedge fund industry’s worst years ever. The average hedge fund fell by 5%. The average hedge fund specializing in equities fell by 8%. Hedge fund titans like billionaire John Paulson had a terrible year and lost massive amounts of money. At the same time, the S&P 500 returned a positive 2%. Evidence has started to emerge that some investors may have had enough.

According to research firms Barclays Hedge and TrimTabs, investors redeemed $15.2 billion from hedge funds in January, the highest outflow since the height of the credit crisis in January 2009.

This could only be the start of a river of outflows if hedge fund performance doesn’t improve soon. In January, hedge funds again trailed the U.S. stock market. The average hedge fund posted a positive return of 3.1%, underperforming the S&P 500, which returned 4.2% in January. Bank of America Merrill Lynch says that its investable hedge fund composite index was up 1.19% in February, yet still underperformed the S&P 500 by 2.87%.

“If hedge funds don’t deliver in aggregate this year, it is going to be a very real problem for the industry,” says Brad Balter, a Boston-based investment advisor who oversees just under $1 billion and farms out money to hedge funds. “2011 had a very volatile 3^rd quarter which hurt everyone, but if we go through another period of underperformance investors will question using them.”

FINalternatives also reports, Hedge fund redemptions , assets up in February:

Investors pulled $15.2 billion from hedge funds in January 2012, as overall industry assets climbed to $1.70 trillion from $1.68 trillion at end-2011.

According to BarclayHedge and TrimTabs Investment Research, hedge funds underperformed the S&P 500 by 110 basis points for the month.

“Hedge funds managed a 3.1% return in January after posting losses in seven out of the last eight months of 2011,” said Sol Waksman, founder and president of BarclayHedge. The benchmark S&P 500 Index returned 4.2% in January after outperforming the hedge fund industry for all of 2011.

“January marked the biggest monthly outflow since July 2009, when hedge funds redeemed $17.7 billion,” said Leon Mirochnik, an analyst at TrimTabs. “The hedge fund industry has experienced net outflows in four out of the last five months.”

Fixed income, multi-strategy, and merger arbitrage hedge funds are the only strategies to have seen net inflows since September 2011. Multi-strategy funds led, pulling in $2.6 billion in January. Mirochnik says investors seem to be “piling into strategies that can benefit from geopolitical uncertainty around the world.”

Funds of hedge funds underperformed their hedge fund counterparts by 140 bps, returning 1.7% in January and Mirochnik thinks FoF managers might have difficulty explaining “their layers of fees” to clients given that funds of funds have underperformed hedge funds by 200 bps over the past year.

In related news, hedge fund managers polled by TrimTabs/BarclayHedge remain bullish on U.S. securities, although the sentiment was less marked in February 2012 than in the previous month. Of the 105 hedge fund managers surveyed in the third week of February 2012, 40% were bullish on the S&P 500, compared to 45.4% in January. Bearish sentiment rose to 30.5% in February from 25.0% in January.

Nearly 30.0% of managers believe that U.S. equities will be the top-performing investment over the next three months. Gold came in second at nearly 23.0% followed by oil with 20.0%.

So what is going on? Are investors “losing faith” in hedge funds? Not exactly. They are simply becoming more aware that most hedge funds are full of it, charging 2% management fee and 20% performance fee for beta. And as we saw in 2011, most hedge funds had a a hard time even delivering beta, underperforming the market.

All this prompted Mindful Money to ask, Is this the end of the hedge fund manager?:

The headline that hedge fund bosses seem to have made a bit of cash in 2011 will hardly surprise many of the cynics who see them as more bogeymen of the financial services industry, alongside bankers. But these inflated pay-packets certainly seem counterintuitive at a time when many are predicting the end of the hedge fund manager altogether.

This Reuters piece, based on a Forbes survey showed that: “The top 40 highest-earning hedge fund managers took home a combined $13.2 billion… The top 10 hedge fund managers made more than $200 million each, while the lowest earning managers made $40 million each.”

But the report coincides with a Times article (paywall) predicting the end of an era for hedge fund managers: “Last year was a disaster for the $2 trillion hedge-fund industry. Desperately hoping for a recovery from the 2008 financial crisis, hedge funds actually lost investors 5 per cent in 2011, with some slipping as much as 50 per cent. Investors pulled millions of pounds out and hundreds of smaller hedge funds have closed.”

One analyst, who recently left a hedge fund, is quoted as saying: “The industry’s gone through cataclysmic change. There’s much more scrutiny. People are asked to work harder, in a more regulated environment, for less money. Everything’s more serious – you can’t send rude e-mails any more – it’s death by a thousand cuts.”

So how to explain these giant pay-packers? The Reuters article points to the fact that the more successful hedge funds are mopping up disillusioned investment bankers ahead of the imposition of the Volker rule, which seems to have benefited groups such as Europe’s Brevin Howard.

There certainly is more interest in alternatives. The most recent Morningstar fund flows survey showed that as risk appetite has increased, so has interest in alternatives: “Other broad asset classes also reversed the negative momentum of 2011′s second half. Funds in the allocation, alternatives, and commodities groups all enjoyed modest inflows in January.”

But this is benefiting some groups more than others. Man Group, the largest listed hedge fund managers has reversed a run of difficult performance: “Man said assets under management had risen to $59.5bn from $58.4bn at the end of December. Chief executive Peter Clarke told Reuters: If sentiment is maintained and performance continues, we’d expect it to translate into rising sales and net inflows. Man also held its dividend payment, which some analysts had suggested might be cut.”

The big money has tended to be made in the larger macro hedge funds, which have been able to use the market volatility to their advantage. The trouble is that the environment has exposed those hedge funds that are not doing anything very different to long-only managers and charging a lot more for it.

This Zerohedge article goes some way to exposing the lack of imagination in some hedge funds. It points to Goldman research into hedge funds, which demonstrates, among other points, that; “hedge fund returns are highly dependent on the performance of a few key stocks. The typical hedge fund has an average of 64% of its long equity assets invested in its 10 largest positions compared with 34% for the typical large-cap mutual fund, 18% for a small-cap mutual fund, 20% for the S&P 500 and just 2% for the Russell 2000 index.” Secondly, the Goldman research found: “Apple (AAPL) matters. One out of five long/short hedge funds has AAPL among its ten largest long positions and approximately 30% of hedge funds own at least one share of AAPL. When it ranks among the top ten holdings, AAPL represents an average of 8% of single-stock long equity exposure. In aggregate, hedge funds own only 4% of AAPL equity cap. The average hedge fund AAPL position equals 1.6%, given 70% of funds own no AAPL.”

As the Times piece points out, both markets and investors are getting smarter. The credit crisis exposed the limitations of the hedge fund industry and created a new scepticism about financial services generally: “In his book The Hedge Fund Mirage, industry insider Simon Lack calculated that between 1998 and 2010 hedge-fund managers earned an estimated $379 billion in fees, out of total investment gains of $449 billion. In other words, they took 84 per cent of the investment profits, leaving just 15 per cent for investors.” This may work in bullish times, but not when investors are short of cash and have Madoff in the back of their minds.

Weakening returns have also exposed the high fixed costs of some hedge funds: “While some larger hedge funds are still profitable, many smaller ones cannot afford the high Mayfair rents they took for granted until recently” says the article.

In other words, the hedge fund industry is the same as any other, the strong are getting stronger and the weak are falling away. The credit crunch has ensured that the hedge fund industry is becoming as Darwinist as any other.

The strong are getting stronger, able to attract talent because they have the big bucks to pay top managers, but it goes far beyond this.

According to the fifth annual global study released by SEI in collaboration with Greenwich Associates, with significant dollars poised to flow into hedge funds in 2012, managers must address investor transparency and liquidity concerns to take advantage of new funding opportunities:

The second report in the two-part series, entitled “The New Dynamics of Hedge Fund Competitiveness,” indicates a need for hedge fund managers to move beyond portfolio transparency to provide investors with consistent and insightful communications along with direct access to investment teams. Liquidity and the inability to control exit strategies have also emerged as key concerns for hedge fund investors.

“Transparency has been the focus for managers in recent years, but we’re seeing clients look for increased personal interaction and dialogue. This Era of the Investor™ is pushing managers to look beyond standard expectations,” said Philip Masterson, Senior Vice President and Head of Business Development, Europe, for SEI’s Investment Manager Services division. “The environment is shifting and while managers are showing improvements in reporting, the study shows that portfolio transparency is simply not enough to satisfy investors anymore.”

Beyond communication, the survey shows that investors want greater detail in terms of security-level disclosure, including leverage detail, valuation methodology, and risk analytics. The study also showed that liquidity has emerged as a key area of concern among investors. Nearly a third of respondents (31 percent) cited ongoing liquidity risk among their biggest hedge fund investing worries, while “an inability to control exit strategy” was named by 46 percent of respondents.

“Evaluating and selecting fund managers has always been a top-of-mind concern for investors,” said Rodger Smith, Managing Director of Greenwich Associates. “What this study brought to light is that, as long as they can articulate their value proposition and differentiate themselves from their peers, there is a place for smaller and newer funds in institutional portfolios. In fact, one in five investors polled said they have no asset minimum requirements in order to invest, and while a majority of those surveyed said they seek hedge funds with a history of at least three years, roughly a quarter would consider less, and 14 percent would not eliminate a fund without a track record at all.”

Highlighting the increasing inability of investors to distinguish among strategies, 17 percent of respondents said manager selection is the single most important challenge facing hedge fund investors today. While 95 percent of respondents said clarity of investment philosophy is important or very important in the selection process, more than half of respondents (61 percent) said there are too many look-alike strategies in the hedge fund industry.

Given that challenge, more than half of respondents (51 percent) said hedge funds are too complex to evaluate without a consultant’s help. Respondents were decidedly mixed on the importance of brand in the selection process, while operations are clearly a critical aspect in selecting managers, with 80 percent of those polled agreeing that operational strength is a hallmark of an institutional-quality fund.

The white paper is published by the SEI Knowledge Partnership, which provides ongoing business intelligence and guidance to SEI’s investment manager clients. To request the full paper, visit http://www.seic.com/HedgeResearch2012.

Some consultants are working to address investors’ concerns over liquidity and transparency. Roger Kenyon, Senior VP at FIS Group, told me they have found a way to address the liquidity, transparency and investment concerns of investors looking to allocate to emerging hedge fund managers. Roger sent me these comments:

Investors have always been interested in investing in emerging hedge fund managers. No doubt this has been a natural inquisitiveness about anything new; the hope of discovering a spectacular talent; and also a possible morbid belief in discovering a future blow up. Research shows that new managers with limited assets to manage outperform more established managers.

Yet this has not prevented investors from introducing all sorts of preconditions that the manager must satisfy before investors will act. Even the definition of what constitutes an emerging manager seems to be unsettled. In the long-only area some investors define the category to be managers with assets below $2 Billion. Among hedge fund investors the cutoff seems to be $200 MM.

The difficulty in getting access to funding by emerging managers is primarily due to the fact that they do not share the same characteristics of established managers. This does not refer to their potential to produce skill based returns, but primarily to the absence of the support infrastructure of larger funds.

These structures usually provide investors with a sense of confidence that management is governed with features such as oversight, liquidity and transparency. Emerging managers would not be so classified if they were required to build up these capabilities before starting a business as the time and costs would be severe impediments.

Luckily, the market has responded to this gap and has addressed these infrastructure problems in a comprehensive manner. Emerging managers can now access all the institutional level back up required to produce accurate and timely valuations, counterparty controls, risk controls and limit monitoring. In this way the manager has the freedom to leverage his investment skills; and the investor can be confident in the investment decision because of the high level transparency.

The characteristics of these processes cannot be undervalued. They allow a smooth flow of information in periods agreed upon by both manager and investor. These periods can be daily or wider spaced. Each partner can communicate with each other as needed. Investors can view the information from a viewpoint chosen by the investor. No longer will the investor wait for the manager to an interpret performance. He will have seen the results and he will have been able to see whether they were within his investment framework.

Needless to say, both manager and investor can set benchmarks, allowable securities, risk controls, and general operating features that both feel comfortable with. With this capability in place, concerns about performance, strategy, strategy drift, use of cash, leverage, and tracking error and returns attribution can be analyzed rather than be an issue of uncertainty .

These types of facilities should provide investors to be more aggressive in sourcing, investing and having a positive returns experience with emerging managers. Investors will be able to continually tailor their allocations as required because they can be assured of being able to call on the liquidity conditions which were agreed.

Roger and I discussed how useless monthly “risk transparency” reports are and how investors who are looking to allocate to emerging managers are adopting this new approach to manage risk properly.

I cannot stress how important it is to look at emerging alpha talent, especially in this environment where there is a placebo effect of investing in large hedge funds. There is talent out there worth seeding but investors have to approach the seeding game a lot more intelligently.

Reuters reports that HSBC’s alternative asset management arm is scouring the market for promising new hedge fund managers, whose ranks are swelling ahead of the imposition of the Volcker rule, which cracks down on banks trading with their own money:

The rule could prove a boon for HSBC’s recently launched emerging manager programme as it is providing hedge fund managers across strategies such as long-short equity, distressed debt and trading funds.

“Several opportunities are arising from the Volcker rule. People are leaving the banks and launching their own funds,” Peter Rigg, head of HSBC’s alternative investment group told Reuters at a presentation in Zurich.

The Volcker rule, named after former Federal Reserve Chairman Paul Volcker, prohibits banks from trading with their own funds for profit, encouraging so-called proprietary traders to set up shop on their own.

U.S. regulators said on Wednesday they are unlikely to have the rule finalised by a July deadline, but many managers are still exiting banks ahead of when the ban is due to come into force.

Ex-Goldman Sachs stars like Pierre-Henri Flamand and Morgan Sze are among those to have already made the move.

Rigg said many managers perform best in the early years, when their funds are still small and they rely on strong returns to earn performance fees and draw in clients, rather than living off management fees levied on large asset bases.

He said HSBC’s $38 billion (23.8 billion pound) alternatives investment business can negotiate good fee discounts with these managers which it then passes on to its clients.

Rigg said HSBC’s funds of hedge funds were currently in “risk off” mode, meaning they are underweight strategies like long-short equities which rely more on market fundamentals than investor sentiment, while favouring strategies which look to profit from market trends, as well as smaller, nimble managers.

Tim Gascoigne, who was global head of portfolio management at HSBC Alternative Investments Limited, and who ran the $2.4 billion (1.5 billion pounds) GH fund of hedge funds left last month, after global banking group decided to merge its discretionary and advisory businesses.

Fund of funds are finding it increasingly tough to compete in an environment where investors are unwilling to pay an extra layer of fees. I happen to think that only the best funds of funds will survive the coming shakeout in the hedge fund industry, those that are able to add value in portfolio construction and identify new and existing talent.

And there are plenty of opportunities to seed emerging hedge funds. Bloomberg reports that Mike Stewart, who JPMorgan (JPM) Chase & Co. picked last year to oversee a unit of traders being moved out of its investment bank, has left to start a hedge fund.

Finally, Azam Ahmed of Dealbook wrote an excellent comment on Texas Teachers’ investment into Bridgewater. I quote the following:

If Bridgewater’s assets, and returns, continue to soar, the pension could do quite well. But if it has a string of bad years and investors withdraw their money, inflows could suffer.

“The investor has huge market risk,” said George J. Mazin, a partner at Dechert, a global law firm. “There have been a number of deals where investors bought high at the top of the market and in the next couple of years there was no growth and an attrition in assets.”

Such investments have been a mixed bag over the years.

Goldman Sachs, which started an in-house group to buy hedge fund stakes, has made some smart bets. Goldman’s Petershill fund bought a piece of Winton Capital in 2007 when the firm had less than $10 billion under management. Since then, its assets have swelled to nearly $29 billion, and performance has been strong, including a 6 percent return in 2011.

But Goldman has also had prominent losses. The Petershill fund bought a stake in Shumway Capital Partners not long before the firm’s founder decided to shut it down and return capital to investors. Another holding, Level Global Investors, was swept up in an insider trading investigation and decided to close shortly thereafter. Goldman lost big on its investment.

Morgan Stanley offers another cautionary tale. In 2006, it bought FrontPoint Partners, a hedge fund firm with $5.5 billion in assets. But soon, top managers started to leave. The relationship worsened when a FrontPoint manager was accused of insider trading in 2010.

In 2010, Morgan Stanley took a $193 million impairment charge related to FrontPoint. The bank sold its stake back to FrontPoint last year.

The deals can also prove treacherous for the hedge funds, as they try to navigate the relationships with their partners and their investors. An owner, like the Texas pension, may want fund assets to grow, because it means more money in hand. But an investor in the fund may want to keep a lid on the size, fearful that if the fund gets too large it will hurt performance.

I think Texas Teachers’ went overboard with this investment and time will prove me right. The landscape is changing in the hedge fund world. Investors fixated on the ‘old model’, chasing after the latest ‘superstar manager’, are going to be sorely disappointed. Those taking intelligent risks, changing without regret, will come out ahead.

Below, Bloomberg’s Dominic Chu reports that John Paulson lost 1.5 percent in February in one of his largest hedge funds, according to an investor update, paring this year’s gain and setting back efforts by the New York-based manager to recoup record losses in 2011. He speaks on Bloomberg Television’s “Inside Track.”

Also, Anita Nemes, Deutsche Bank AG’s London-based global head of capital introduction, talks about the outlook for the hedge-fund industry. Global hedge fund assets may rise 12 percent this year to a record $2.26 trillion as investors reduce cash and seek returns, according to an annual survey of investors by Deutsche Bank. Nemes speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack.”

Tags: Bank Of America, Billionaire, Composite Index, Credit Crisis, Forbes Reports, Fund Business, Hedge Fund Performance, Hedge Funds, Investment Advisor, John Paulson, Losing Faith, Massive Amounts, Merrill Lynch, Outflow, Rd Quarter, Redemptions, Terrible Year, Trimtabs, U S Stock Market, Vardi
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Morgan Stanley’s Latest ‘Commodity Thermometer’

Tuesday, March 6th, 2012

Two weeks ago we presented the latest and greatest “commodity thermometer” courtesy of Morgan Stanley’s commodities team. Below is the latest just released iteration. Not much of a change, with gold still the most loved, and inc the most hated (this could well be one of those “endorsed by John Paulson” moments), and the only notable change being that silver has pushed above Live Cattle and entered the Top 5.

(click to enlarge)

Tags: Cattle, Commodities Team, Commodity, Gold, Iteration, John Paulson, Morgan Stanley, Thermometer
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Complete John Paulson Letter (Year End 2011)

Thursday, March 1st, 2012

There are those who voraciously, and blindly, read any and all hedge fund reports, allowing the already useless information to enter one brain hemisphere and exit the other, just so they can brag that they read such and such’s monthly or year end letter. Frankly, we pity them, especially when in their attempt to ape success they confuse luck (which is responsible for 99% of hedge fund outliers) for skill, and in doing so constrain their minds even more. At least hopefully they don’t spend money on self-improvement books. As for trading recommendations, by the time an idea is in writing, the time to implement it is long gone. Anyway, for precisely this subet of people we provide the Paulson 2011 year end letter. Which is 102 pages. It is amazing how when one is printing money, one can get away with two paragraphs of year end ruminations and the LPs will be delighted. When, however one has brought AUM from $32 billion to under $20 billion net of redemptions, much more reading material is required to justify the 2 and 20, especially if the proceeds are used to invest in AAPL (and speaking of Apple, we wonder how long before the company starts charging a fee of 2 and 20 from all of its shareholders). We won’t spend much time dissecting the letter of a fund which blindly invested nearly half a billion in a company that two kids with an office exposed as fraud, suffice to copy and paste the following gem: “We believe this outperformance demonstrates our superior security analysis and selection due to our research edge.” Yup, mmmhmmm. All this and much more in the enclosed paperweight.

Incidentally, when we said 10 days ago that we have “Horrible News For Goldbugs – Paulson Is Bullish On Gold Again“, we were not kidding:

And so the Paulson overhang is back. Couldn’t Paulson just go ahead and buy Bank of America or some other worthless biohazard again? All that remains is for Roubini to say he prefers gold over spam (and always has, he was merely “misunderstood”) and the crash will be imminent.

Or perhaps we will learn following the next $1000 up move in gold that Gartman will have been long gold in Vietnamese Dong.

Well, at least cheap entry points will be available.

So far the thesis is playing out, and the cheap entry points are here again.

Paulson 2011 Year-End Firm Report

Tags: Aapl, Bank Of America, Biohazard, Brain Hemisphere, Hedge Fund, John Paulson, Lps, Outliers, Outperformance, Overhang, Paperweight, Printing Money, Reading Material, Redemptions, Roubini, Ruminations, Security Analysis, Self Improvement Books, Superior Security, Useless Information
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Neils Jensen: Investment Outlook (December 2011) – “The Facts They Don’t Want You To Know”

Friday, December 30th, 2011

The Absolute Return Letter December 2011

The Facts They Don’t Want You to Know

by Niels Jensen, Absolute Return Partners

What have Bill Gross, John Paulson, Anthony Bolton and Bill Miller all got in common? They are all ‘rock star’ fund managers who have fallen on hard times more recently. Life in the fund management industry is not what it used to be like. Life is tough even for the supremely skilled. Markets are changing, fund managers are struggling to adapt and clients are growing restless as a result. If I told you that the composition of an average UK equity fund changes by 90% a year, would that startle you? How would you feel if I added that the 20 funds with the highest turnover returned just 4.7% to investors in the 3 years to the end of March 2011 whereas the 20 funds with the lowest turnover returned 16.8% over the same period?¹

From the same source: Out of 1,230 funds across 12 different strategies, only 35 fund managers produced a performance consistent enough to earn their fund a place in the top quartile in each of the last three years (upper half of chart 1). In a universe of 1,230 funds, over a three year period and completely disregarding skill, the expected number of funds consistently ranked in the top quartile is 1,230*0.253=19.22.

In other words, more than half the 35 managers were there not because of skill but because, statistically, someone was always likely to ‘over-achieve’. This leaves about 15 fund managers out of a universe of 1,230 – ca. 1% – who could with some right claim that they have consistently been in the top quartile.

The problem is we don’t know who they are. All we know is that none of them are managing Asian equities, North American equities or Global fixed income funds as those three strategies didn’t produce a single top quartile performer between them. And when you look at the second, and slightly less demanding, part of the study – those who have been in the top half in each of the past 3 years – the picture is broadly the same (lower half of chart 1). 177 fund managers achieved the required consistency but 154 of the 177 are likely to have done so because of luck, not skill.

I have never come across a fund manager who openly admits that his (or her) outperformance is down to luck. On the other hand, I often come across fund managers who suggest their underperformance is down to bad luck. I suppose no manager ever skilfully underperforms, but to put it down to bad luck is an insult when we all know that human error is the most common cause of underperformance.

If a fund manager’s outperformance is based on skill rather than luck, wouldn’t one expect the majority of the outperformance to come from those stocks with the highest weights in the portfolio? This seems a reasonable assumption given that one would expect any rational fund manager to allocate the most capital to his/her highest conviction ideas.

However, in a study conducted by UK consulting firm Inalytics (see here), 39 of 42 Australian funds managers who outperformed their benchmark owed their outperformance to the ‘underweights’ in the portfolios – suggesting that human error is not only the source of underperformance but perhaps also of some of the outperformance.

Bestinvest produces an annual survey called Spot the Dog (see here for the latest survey) which has gained considerable attention in the UK fund management industry, although it is not a league table you will be proud to be mentioned in. According to the 2011 survey published back in August, over £23 billion is currently managed in so-called dog funds², an increase of no less than 74% since the previous report.

You don’t become a dog just because you have a bad quarter or two. The members of that exclusive club have a history of serial underperformance, yet they will generate in the region of £350 million of fees to their firms this year despite the obvious value destruction.

And the story gets worse – much worse in fact. According to an unpublished report conducted by IBM, our industry destroys $1,300 billion of value annually – a staggering 2% of global GDP (see here for details). This includes about $300 billion in fees on actively managed long-only funds which fail to outperform their benchmarks, $250 billion spent on wealth management fees for services which do not meet their benchmarks and $50 billion in fees on hedge funds which underperform. Do I need to say any more?

Why are fund managers finding it harder than ever to outperform and what are the long term implications of those miserable performance statistics? Let’s deal with the ‘why’ first. There is no question that managing money – in particular equity mandates – has been a delicate affair over the past decade.

Through the 1980s and 1990s global equity markets benefitted from a strong undercurrent of bullishness. As a result, fund managers went into the bear market of 2000-01 on a wave of optimism (who doesn’t recall the repeated calls in the late 1990s of a new investment paradigm?) epitomised by the record high P/E levels in 1998-1999 just before it all went pear shaped in 2000.

Tags: 3 Years, Absolute Return, Asian Equities, Bill Gross, Bill Miller, Equity Fund, Fixed Income, Fund Changes, Fund Management Industry, Fund Managers, Investment Outlook, John Paulson, Neils, Niels Jensen, Period 1, Quartile, Rock Star, Star Fund, Tho, Turnover, Uk Equity
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Investing in Gold has Been Solid in 2011; Gold Miners? Not So Much

Thursday, December 29th, 2011

It has been a head scratching year for the gold miners – despite a very good year for gold itself (until recently) and stable production costs, their stocks have simply not reacted as expected.  Some of the largest investors in the world have expected a different behavior – the WSJ takes a closer look at this divergence in 2011.

• Gold has been among the best investments in 2011.  Shares of gold miners? Among the worst.  Gold is up 12% this year but shares of gold miners have fallen almost 16%. Smaller gold miners are down almost 40%, based on the returns of leading exchange-traded funds tracking those stocks.
• The surprising gulf has caused pain for some of the biggest names on Wall Street—including John Paulson, George Soros, David Einhorn, Seth Klarman and Thomas Kaplan—many of whom piled into gold shares over the past year, sometimes by shifting away from gold itself.
• Bulls figured that gold miners had more upside than gold, partly because mining stocks outperformed during past bull markets for the metal.  But this year, gold miners have been hit by concerns that haven’t tarnished gold prices. Investors have worried that mining costs are rising, and that governments around the world are becoming more aggressive in taxing resources companies. They’re also concerned that gold miners might squander any windfall with ill-conceived acquisitions or other moves.

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Tags: Bull Markets, Closer Look, David Einhorn, Disclosure Notice, Divergence, Exchange Traded Funds, George Soros, Gold Miners, Gold Prices, Gold Shares, Good Year, Investing In Gold, John Paulson, Personal Portfolio, Portfolio Securities, Seth Klarman, Stable Production, Thomas Kaplan, Windfall, Wsj
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12 Economic Facts of Christmas (Tick by Tick)

Thursday, December 22nd, 2011

Dear All

It is finally here. No, I do not mean the ECB’s botched effort at rescuing the financial sector and promoting the carry trade. I am, of course, talking about Christmas. The season to be jolly and perform obscure acts like singing on your neighbours doorstep despite never usually speaking to them.

“Christmas waves a magic wand over this world, and behold, everything is softer and more beautiful”
Norman Vincent Peale

Here at Tick By Tick, we take Christmas very seriously. As a result, we feel obliged to provide you, the loyal reader, with a present of our own. (Drumroll please). I would like to present Tick By Tick’s 12 Economic Facts of Christmas

1. In the last 12 months, the Federal Reserve has increased Money Supplied to the Economy (M2) by 9.9%.
2. Despite the Insolvency of Europe. If you had shorted EURUSD at this very day last year, you would have only made a 0.7% profit.
3. The Greek Stock Index (ASE) has outperformed Citigroup by 10.36% if held for the last 5 years. If you discount the reverse stock split, Citigroup is now trading at $2.60 vs. $55.70 in 2007.
4. Consumer Goods producer Procter & Gamble can now borrow money over a 5 year period for less than every Eurozone member with the exceptions of Germany and Finland.
5. Linkedin, Pandora and Groupon are all loss leading companies. Yet, if you had bought their stock at IPO, you would have made +171%, 8.9% and 50% in the first days trading.
6. China’s stock market is now trading at the same level as it was during Q3 of 2000. During this period, Chinese GDP has almost tripled.
7. The sum of all US debt both Public and Private equates to $56tn with underfunded future liabilities of $1 037 000 per capita. The official US public debt figure reached 100% of GDP just yesterday.
8. “Legendary” Hedge Fund Manager John Paulson, about whom a variety of books have been written, has lost over 50% of his funds value in this past year.
9. In a Bloomberg poll held during December 2011, eleven Sell Side Analysts predicted, on average, that the S&P 500 would grow by 11% to 1379. Of these, the most bullish was Goldman Sachs who openly predicted a 17% rally. The index of the 500 largest American companies is currently down 1.49% YTD.
10. Being long S&P Volatility has been a successful strategy for 4 of the last 5 years.
11. In the last month, Bloomberg have published 25 179 articles with the words Europe and Concern included in the prose.

….And Finally

12. Santa has to visit 832 Homes per Second to deliver all of his gifts.

Before I leave you for Turkey and a range of other customary foods, I would like to openly thank Grant Williams for encouraging me to start Tick By Tick and write independently. Without his words of wisdom, criticism and encouragement, the prose that you are reading would be nothing more than synapses firing in the grey matter that is my brain. I would also like to thank you, the reader, for showing faith in my work and both sharing and critiquing my ideas. 2012 is going to be a very important year and I look forward to making it that little bit more interesting for all of you.

Merry Christmas

George Adcock

Founder

www.tickbytick.co.uk

@TickByTick_Team

Tags: Carry Trade, Citigroup, Consumer Goods, Doorstep, Drumroll, ECB, Economic Facts, Financial Sector, Hedge Fund Manager, Insolvency, John Paulson, Leading Companies, Linkedin, Loyal Reader, Magic Wand, Norman Vincent Peale, Procter Amp Gamble, Public Debt, Reverse Stock Split, Stock Index
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Hedge Fund Redemptions Surging?

Wednesday, December 14th, 2011

Hedge Fund Redemptions Surging?

by Leo Kolivakis, Pension Pulse

Here is something that caught my attention. Svea Herbst-Bayliss of Reuters reports, Hedge fund redemptions surge after losses:

Hedge fund investors finally seem fed up.

After months of heavy losses, big and small clients asked funds to return $9 billion in October. That number is three times as large as the $2.6 billion (1.7 billion pounds) they pulled out in September, data from BarclayHedge and TrimTabs Investment Research show.

The dramatic jump in redemption requests shrank the industry to $1.66 trillion, its lowest level in nearly two years and well below its $2 trillion peak, the researchers said in a report released on Monday. The redemptions are the largest since July 2009 when $17.8 billion was removed.

Hundreds of hedge funds had a deadline for clients to pull out money in October and dozens of clients opted to use it after seeing five straight months of losses.

Even some of the industry’s biggest stars like John Paulson, who have hit home runs with bets against the housing market and on gold, have sunk into the red. Paulson’s main Advantage fund was off nearly 50 through the end of September and his investors had until October 31 to say if they wanted to exit.

And while a strong stock market rally helped put most managers into the black at the end of October, the gains did not last long with average losses of nearly 1 percent reported in November, industry data show.

“Investors seem to have lost patience with lackluster hedge fund returns,” said Sol Waksman, founder and President of BarclayHedge.

For years investors gave their managers lots of time to let their strategies work. Now they are becoming less generous, especially as they debate whether lackluster returns can offset hefty fees where managers often take 20 percent of the gains and add on another 2 percent management, investors and managers have said.

Investors pulled $2.6 billion out of so-called long short funds that pick bet on and against stocks, the strategies where most of the industry’s money is invested.

Macro funds which make big bets on currencies, interest rates, and commodities faced redemptions of $1.8 billion and funds specializing in emerging markets strategies saw investors ask for $1.6 billion back. Funds that apply several strategies to the same pool of capital, so-called multi-strategy funds, took in just over $1 billion in new money.

Meanwhile investors also slowly returned to merger arbitrage hedge funds, after pulling money out for months, the researchers said.

“This is the second-straight inflow in this strategy, which had considerable outflows in the previous 10 months, Leon Mirochnik, analyst at TrimTabs said. “These funds posted the heaviest outflow in the past 12 months at over $5 billion (31.8% of assets) while posting the second highest return out of all categories at 2.6%.”

Go back to read my recent comment on hedge funds’ fading star. Could it be that institutional investors are finally waking up to the harsh reality that most hedge funds offer mediocre results and are nothing but large asset gatherers? Is this going to be like December 2008 when hedge funds got clobbered and funds of funds faced extinction?

I doubt it. Most redemptions are already done but now we are realizing why losses in Q3 2011 were so savage and why stock markets remain moribund. Don’t know if we’ll see a Christmas rally after all; this year could be a total writeoff. But don’t be surprised if hedge funds come back with a vengeance, especially if markets pick up in the first quarter of 2012.

One hedge fund that is not facing redemptions is Steve Cohen’s SAC Capital. Surprisingly, Cohen came out to state that insider trading rules are “vague”:

Hedge fund billionaire Steven A. Cohen in sworn testimony earlier this year called the rules on insider trading “very vague” and said sometimes it’s a “judgment call” as to whether a tidbit about a public company is inside information.

The founder of SAC Capital Advisors LLC, one of the hedge fund industry’s best-known firms, offered up his views on insider trading during two days of deposition testimony in February and April this year as part of a long-running civil lawsuit filed by Canadian insurer Fairfax Financial.

It’s rare for Cohen to speak publicly and even rarer for him to share his views on something as controversial as insider trading. Cohen’s insights are revealing not just because of his status as an industry titan, but because his $14 billion firm continues to draw attention in an ongoing investigation by U.S. authorities into insider trading.

In the deposition, an extended excerpt of which was obtained by Reuters, the 55-year-old trader says he often leans on his fund’s lawyer to determine whether something constitutes inside information and admits to being not well-versed in SAC Capital’s own internal compliance manual.

“The answer is when you’re trading securities, it’s a judgment call,” said Cohen, during the deposition that spans more than 600 pages. “Whatever the compliance manual says, it probably doesn’t take into account every – every potential situation.”

(For more from the transcript see: link.reuters.com/vat55s)

The deposition was taken in connection with a lawsuit filed in 2006 by Fairfax, alleging SAC Capital, Kynikos and other traders took part in a so-called short conspiracy.

The lawsuit alleges the hedge funds bet against Fairfax shares and then spread negative stories about the company in hopes of driving down the stock price. Recently, SAC Capital won a motion to be dismissed from the insurer’s lawsuit but Fairfax’s claims of improper trading against other hedge funds and traders continues.

Reuters petitioned the court to obtain the transcript. SAC Capital and its lawyers had sought to keep the excerpts of Cohen’s deposition sealed, arguing that the contents were trade secrets and information that would be useful to competitors.

A Cohen spokesman declined to comment.

In the deposition, Cohen acknowledges that in the aftermath of Galleon Group founder Raj Rajaratnam’s arrest on insider trading charges in October 2009, his public relations firm suggested he begin reaching out to some reporters to burnish his image and “dispel” rumors of improper trading.

In particular, Cohen talked about a December 2009 story in The New York Times on SAC Capital and a subsequent June 2010 profile of Cohen and his wife Alexandra in Vanity Fair.

“There are rumors and what we wanted to do was dispel any notion of that,” he said.

When asked by a Fairfax lawyer what rumors he was referring to, Cohen responded: “The rumors you just stated, that people weren’t sure how we conducted our business.”

In the questioning, Cohen comes off as controlled and well-prepared to engage in a sometimes testy back-and-forth with Fairfax’s lawyer, Michael Bowe, over the dividing line between what constitutes permissible and improper trading.

Cohen says the rules on what constitutes inside information are “very vague” and sometimes it can depend on whether the information will move a stock, hurt another trader or can be obtained through another source.

For instance, Cohen said if he got a tip that an analyst is going to downgrade a stock and his fund opts to buy the stock, that is proper “because I’m on the other side of the trade.”

Cohen said what is “material” in analyzing whether or not it is inside information often depends on the circumstances.

“You know, I mean, I can argue that someone else could think that a – being short in front of a sell recommendation is a non-event because it’s not going to move the stock, and somebody else would think, you know, that’s trading on material nonpublic information regardless if it moves the stock or not,” said Cohen. “These are judgment calls.”

At one point, Cohen shows some of his frustration with all the questions from Fairfax’s lawyers about what constitutes inside information.

“We’re having this conversation for about three hours about what’s material and whatnot,” says Cohen. “It’s pretty clear that you and I have different views on it.”

In the deposition, Cohen also takes issue with the word “edge” to describe SAC Capital’s trading advantage over his rivals. Cohen says he “hates” the word and doesn’t like to use it to describe SAC Capital’s work. Yet he acknowledges the hedge fund talks about having an “edge” in some of its marketing material.

The release of a redacted version of Cohen’s deposition came after Reuters went to court to seek access to it and other documents produced in the lawsuit filed by Fairfax in a New Jersey state court.

The Cohen deposition also was recorded on videotape but the judge’s order only required the parties to make available a transcript.

A copy of Cohen’s full deposition was subpoenaed last year by the Securities and Exchange Commission, which was conducting its own investigation into Fairfax’s allegation.

Last week Reuters reported that the SEC closed its investigation in the Fairfax case with regards to SAC Capital and James Chanos’ Kynikos Associates. (link.reuters.com/xus55s)

Not sure where the SEC is going with this. Looks like they are out to get Steve Cohen but in my mind SAC Capital didn’t do anything different from what other hedge funds routinely do. Were Steve Cohen and his traders always “kosher”? Probably not, but he didn’t become one of a handful of elite hedge fund managers by getting involved in petty insider trading scams. That’s total rubbish.

The reality is that hedge fund redemptions might be surging, but true alpha is always in demand. Guys like Steve Cohen, Ken Griffin (Citadel), and Tom Meyer (Farallon Capital) are part of an elite group of hedge fund managers that know how to deliver alpha. They got whacked in 2008, but came back stronger. They will survive the next hedge fund hurricane while most of their competitors will disappear.

But for now, I wouldn’t worry too much, despite underperforming, plenty of dumb money still piling into hedge funds. Barring a European collapse, which I just don’t see happening, there won’t be another massive wave of deleveraging à la 2008 due to surging hedge fund redemptions.

Below, Vanity Fair’s Bryan Burrough, author of “Barbarians at The Gate,” talks with Bloomberg’s Margaret Brennan about Steve Cohen, the billionaire who runs SAC Capital Advisors LP in Stamford, Connecticut. Burrough wrote about Cohen for the July issue of the magazine in what is Cohen’s second-ever published interview.

Tags: Advantage Fund, Bayliss, Dramatic Jump, Fund Investors, Heavy Losses, Hedge Fund Redemptions, Hedge Funds, Hefty Fees, Home Runs, Housing Market, Investment Research, John Paulson, Market Rally, October 31, Redemption Requests, Reuters Reports, Stock Market, Trillion, Trimtabs, Waksman
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News That Matters (August 26, 2011)

Friday, August 26th, 2011

via thetrader.se

FT.com
Japan’s parliament passed two pieces of legislation that Prime Minister Naoto Kan said were conditions for him to resign as early as Friday, Bloomberg reports. The upper house of the Diet on Friday passed bills to subsidise renewable energy and authorize the sale of deficit bonds, http://ftalphaville.ft.com/thecut/2011/08/26/662956/japans-kan-poised-to-resign/

Britain’s weakening economy may require another round of monetary stimulus, according to one of the “hawks” on the Bank of England’s monetary policy committee, the FT says. “Substantial further weakening of inflationary pressures would, http://ftalphaville.ft.com/thecut/2011/08/26/662906/boe-hawk-makes-call-for-qe2/

John Paulson, one of the world’s most successful hedge fund managers, has extended losses throughout August to leave his flagship fund down almost two-fifths for the year, the FT says, citing a person familiar with the fund’s performance. His Advantage Plus fund was down 38.7 per cent for the year as of Friday, http://ftalphaville.ft.com/thecut/2011/08/26/662876/paulson-fund-extends-august-losses/

Goldman Sachs managers have been reminding their London-based employees that temporarily higher salaries granted to them for 2010 would expire beginning in 2012, says the WSJ. The move dates back to a decision to shift bankers’ pay into salaries and away from incentive-based compensation, http://ftalphaville.ft.com/thecut/2011/08/26/662881/goldmans-london-employees-face-salary-reversion/

A swathe of states along the east coast of the US, from North Carolina to New York, have declared emergencies ahead of the arrival of Hurricane Irene, the BBC reports. The first hurricane of the Atlantic season is now a category three storm, http://ftalphaville.ft.com/thecut/2011/08/26/662856/irene-prompts-state-of-emergency-in-six-us-states/

Short-selling bans on selected European bank stocks have been extended by regulators until the end of September, in an unprecedented degree of regulatory co-ordination, the FT says. Regulators on Thursday http://ftalphaville.ft.com/thecut/2011/08/26/662846/european-short-selling-ban-extended/

South Korea’s leftwing opposition is celebrating the outcome of an unprecedented referendum on whether the state should pay for school lunches, which they say paves the way for Korea to become a welfare state, http://ftalphaville.ft.com/thecut/2011/08/25/662751/s-korea-referendum-opens-door-to-welfare-state/

Manmohan Singh, India’s prime minister, has appealed to Anna Hazare, the social activist, to halt his 10-day public hunger strike in an anti-corruption campaign that has spurred thousands to take to the streets, http://ftalphaville.ft.com/thecut/2011/08/25/662711/singh-makes-emotional-appeal-to-hazare/

The context for Ben Bernanke’s speech in Jackson Hole on Friday differs notably from that of a year ago, so anybody expecting a message that sharply changes the current setting of monetary policy is likely to be disappointed. http://ftalphaville.ft.com/thecut/2011/08/25/662691/bernanke-to-signal-steady-setting-in-fed-policy/

Brevan Howard, the world’s largest macro hedge fund, has made close to $1.5bn over the past three weeks on the back of turmoil in the global markets. In a month in which equity markets worldwide have seen declines of more than 10 per cent, the gain comes as a vindication for the $32bn London-based fund manager, which for more than a year – like many of its peers – has struggled to make headway in volatile conditions. http://www.ft.com/intl/cms/s/0/60634250-cf02-11e0-86c5-00144feabdc0.html?ftcamp=rss#axzz1W0sb4140

Greek sovereign debt yields have spiked on fears that a side deal struck between Athens and Finland on collateral for the Nordic country’s share in the most recent €109bn rescue could imperil the bail-out agreement struck earlier this summer. Greece last week agreed to put an estimated €500m into a Finnish escrow account as collateral for Finland’s share in the bail-out, but the deal has caused consternation among other eurozone members, several of which have now said they also want similar agreements. http://www.ft.com/intl/cms/s/0/66136c64-cf0e-11e0-86c5-00144feabdc0.html#axzz1W0sb4140

WSJ.com
Amid choppy trade and after Wall Street’s decline Thursday provided little incentive to buy stocks, Japan’s Nikkei Stock Average was flat, Australia’s S&P/ASX 200 added 0.3%, South Korea’s Kospi Composite was up 0.8% and New Zealand’s NZX-50 was down 0.3%. Dow Jones Industrial Average futures were up 69 points in screen trade.http://online.wsj.com/article/SB10001424053111904787404576531223161931578.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Eight of Belgium’s main political parties are set to assemble Friday for critical talks on overhauling the country’s complex system of government, discussions analysts say are vital to resolving a political impasse that has exacerbated concerns about its finances. Belgium has been without a government since a separatist party from the Dutch-speaking north garnered the most votes in national elections in June 2010. The party, the N-VA, wasn’t close to a majority and couldn’t form a coalition. http://online.wsj.com/article/SB10001424053111904009304576530392508721296.html?mod=WSJEUROPE_hpp_MIDDLESecondNews

Greece’s worsening slump is threatening to compound another risk for the country: the steady withdrawal of money from Greek banks. In the last 20 months, the country’s banks have suffered an unprecedented withdrawal of customer deposits. Tens of thousands of Greeks—from the well-heeled to the less well-off—have moved their savings out of the country or stashed the cash in safe-deposit boxes or under a mattress, bankers say. The consequence for many Greek banks is a growing shortage of liquidity that is increasing their reliance on emergency funding from the European Central Bank and forcing them to further cut lending to businesses. That, in turn, is deepening Greece’s recession, making it harder for the government to narrow its gaping budget deficit.http://online.wsj.com/article/SB10001424053111904009304576528081501462432.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

France’s President Nicolas Sarkozy made a brief stopover in Beijing, where he urged China to join international efforts to rebuild Libya and was reminded by President Hu Jintao to protect China’s investments in euro debt. Mr. Hu, however, reiterated his faith in the European economy. “China believes that Europe is wise and able to overcome the current difficulties and to maintain the economic stability and growth,” Mr. Hu said. He underscored that China continues to regard Europe as a major investment destination and said it expects Europe “to take measures to ensure Chinese investments there are safe.” http://online.wsj.com/article/SB10001424053111904875404576530092461903686.html?mod=WSJEUROPE_hpp_MIDDLESecondNews

China’s big banks reported hefty profits in the first half of this year, but signs of strain are showing from their massive lending binges and as they struggle to meet tougher capital requirements. Profits of the nation’s five biggest banks by assets, led by Industrial & Commercial Bank of China Ltd., were buoyed in part by a greater focus on business that generates fee income, such as credit cards and wealth-management products. The shift comes amid Beijing’s efforts to rein in bank lending as it fights inflation that resulted from a surge in credit used to stimulate the economy during the global financial crisis.http://online.wsj.com/article/SB10001424053111904875404576529831122324362.html?mod=WSJAsia_hpp_LEFTTopStories

Japan’s economy minister said Friday that the government on Monday will release a list of suggested responses to the strong yen for the incoming administration, expected to be formed next week after Prime Minister Naoto Kan steps down. Further comments by Economic and Fiscal Policy Minister Kaoru Yosano, at a regular press conference, suggest the government is leaning toward coping with, rather than fighting, a yen whose strength threatens the fragile recovery in the country’s export-reliant economy. He expressed reluctance about further aggressive yen-selling intervention, saying it “is a necessary weapon but not one we can use frequently.” http://online.wsj.com/article/SB10001424053111904787404576531411270701064.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Marketwatch.com
Crude-oil futures staged a late-day rebound Thursday to close modestly higher as Hurricane Irene fed concerns about a slowdown in refinery production on the East Coast, providing a lift to heating oil and gasoline prices.  Crude for October delivery climbed 14 cents, or 0.2%, to close at $85.30 a barrel on the New York Mercantile Exchange. It had earlier traded as low as $83.01 a barrel, pressured by losses in U.S. equities and strength in the U.S. dollar. http://www.marketwatch.com/story/oil-futures-tick-higher-in-electronic-trading-2011-08-24

Gold futures closed higher Thursday as lower equities and a swirl of rumors that Germany might be next to get a sovereign-debt downgrade contributed to renewed nervousness in the markets. The yellow metal had spent most of the trading day extending losses, hit by a margin-requirement increase and as investors lost heart that economic stimulus is forthcoming. Gold for December delivery added $5.90, or 0.3%, to finish at $1,763.20 an ounce on the Comex division of the New York Mercantile Exchange. It had traded as low as $1,705.40 an ounce — some $187 below Monday’s record settlement of $1,891.90 an ounce. http://www.marketwatch.com/story/gold-declines-over-uncertainty-over-fed-2011-08-25

Reserve Bank of Australia governor Glenn Stevens said Friday in a statement to the House of Representatives economics committee that markets remain on edge and the global growth outlook does not look as strong as it did six months ago. The year-end consumer price inflation rate will probably remain well above 3% in the September quarter but is then likely to come down, Stevens said. He added that it would be reasonable to expect that a decline in confidence arising from the recent international events may well dampen demand somewhat compared with the outlook the central bank gave in early August.http://www.marketwatch.com/story/australias-central-bank-says-markets-on-edge-2011-08-25

Japan chalked up a small victory in its war against deflation Friday, as the government announced the core consumer price index posted a surprise increase for July, rising 0.1% compared to a year earlier. Separate forecasts from Dow Jones Newswires and Reuters had expected core CPI, which excludes volatile fresh food prices, to fall 0.1%. A 3.4% year-on-year rise in fuel, light and water charges helped push the index higher. The gain came despite a revision to the index’s base year, which was expected to give a downward bias to the result, according to Dow Jones Newswires. http://www.marketwatch.com/story/japan-consumer-prices-post-surprise-rise-2011-08-25

Reuters.com
Spot gold lost 0.4 percent on Friday, on course for its first weekly drop after seven straight weeks of gains, as investors awaited a speech by U.S. Federal Reserve Chairman Ben Bernanke later in the day. Spot gold declined 0.4 percent to $1,762.29 by 0218 GMT after a 1.1 percent rise on Thursday. It was on course for a 4.8-percent decline on the week, its sharpest weekly fall since week ended March 1, 2009. U.S. gold traded nearly flat at $1,764.30. http://www.reuters.com/article/2011/08/26/us-markets-precious-idUSTRE7781Q420110826

Astronomers have spotted an exotic planet that seems to be made of diamond racing around a tiny star in our galactic backyard. The new planet is far denser than any other known so far and consists largely of carbon. Because it is so dense, scientists calculate the carbon must be crystalline, so a large part of this strange world will effectively be diamond. http://www.reuters.com/article/2011/08/26/us-planet-diamond-idUSTRE77O69A20110826

President Barack Obama held a conference call on Thursday with top advisers to discuss the economy and progress on a plan he will announce next month to lift U.S. hiring and growth, the White House said.  Obama, vacationing on this upscale island off the coast from Boston, spoke with Treasury Secretary Timothy Geithner, chief of staff William Daley, White House budget chief Jack Lew, and National Economic Council director Gene Sperling. http://www.reuters.com/article/2011/08/25/us-usa-obama-jobs-idUSTRE77O1EW20110825

Bloomberg.com
Warren Buffett may have earned $1.3 billion in one day on his $5 billion investment in Bank of America Corp. (BAC) The preferred shares Buffett’s Berkshire Hathaway Inc. (BRK/A) bought are worth about $3.53 billion, Phil Jacoby, chief investment officer at Spectrum Asset Management Inc. in Stamford, Connecticut, estimated. Warrants included in the deal are worth about $2.73 billion, based on Bank of America’s share price of $7.65 as of 4:15 p.m. in New York trading, said Clay Struve, a partner with Chicago-based CSS LLC. http://www.bloomberg.com/news/2011-08-25/buffett-s-bank-of-america-stakes-net-1-4-billion-in-profit-on-first-day.html

Philippine economic growth probably slowed for a fourth straight quarter as government and consumer spending eased while faltering global demand hurt exports. Gross domestic product increased 4.1 percent in the three months through June from a year earlier, according to the median estimate of seven economists surveyed by Bloomberg News ahead of an Aug. 31 report. The economy expanded 4.9 percent in the first quarter, the least since 2009. Philippine markets will be shut Aug. 29 and Aug. 30 for holidays. http://www.bloomberg.com/news/2011-08-25/philippines-may-extend-growth-slowdown-as-global-demand-falters.html

The global economy has a 50 percent chance of slipping into recession as Europe and the U.S. struggle to grow, according to Nobel laureate Michael Spence. “I’m quite worried,” Spence said in a Bloomberg Television interview in Hong Kong yesterday. “A combined downward dip in Europe and America, which is a good chunk of the industrialized economies, I’m quite sure will take down growth in Chinaparticularly, and that will then immediately spread to the rest of the emerging economies.” He put the likelihood of such a scenario “at about 50 percent.” http://www.bloomberg.com/news/2011-08-25/world-economy-has-50-chance-of-falling-into-slump-spence-says.html

The Federal Reserve’s decision to keep record-low interest rates and the possibility of further steps to spur the U.S. economy may stoke commodity prices and fan inflation in India, the Asian nation’s central bank said. “Given the fiscal limitations and growing signs of weakness in the U.S., the Fed has already indicated that it will pursue its near-zero rate policy at least till mid-2013,” the Reserve Bank of Indiasaid in a report in Mumbai yesterday. “It has also hinted at another dose of quantitative easing. This policy stance may keep the commodity prices elevated.” http://www.bloomberg.com/news/2011-08-25/u-s-fed-s-monetary-policy-may-spur-inflation-india-s-central-bank-says.html

Federal Reserve Bank of Kansas City President Thomas Hoenig said there’s a limit to how much more the central bank can help the U.S. economy and that the focus should now be on solving the country’s fiscal problems. “We can’t do it all,” Hoenig, the central bank’s longest- serving policy maker, said in an interview with Bloomberg Television that airs today. “We have a problem in this country with debt” and “if we don’t turn to the long run, we will be dealing with overnight crises for as far as the eye can see.” http://www.bloomberg.com/news/2011-08-25/hoenig-says-fed-should-focus-on-fixing-u-s-finances-instead-of-economy.html

CNBC
A plunge in recent economic data puts the probability of a double-dip recession , 80 percent, according to modeling by Bank of America Merrill Lynch released Wednesday, reflecting the toll the U.S. debt downgrade, Europe’s woes and stock market volatility has taken on economic activity. http://www.cnbc.com/id/44278624

A third round of quantitative easing by the Federal Reserve is coming by year end, influential economist Nouriel Roubini told CNBC Thursday. “The reality is we’re heading toward recession, and one of the few policy bullets has left is monetary policy or QE3,” Roubini said. http://www.cnbc.com/id/44276918

Facing pressure to keep money printing in check, U.S. central bankers are mulling a modest approach to stimulus that would give the struggling economy only a tiny boost — if it helps at all. After two rounds of bond purchases that have pumped $2.3 trillion into the banking system, the Federal Reserve could buy long-term Treasury debt while selling short-term securities it already holds.http://www.cnbc.com/id/44280530

At a time when the economy should be creating employment at a fairly steady pace, the U.S. actually may have lost jobs in August. That disturbing trend could be made apparent next week when the government releases its monthly nonfarm jobs report. Some prominent economists think the report will show a modest decrease in jobs when the final tally is made for the turbulent month.http://www.cnbc.com/id/44275068

CNN.com
While China has been able to use its considerable economic clout to forge strong ties with Africa, experts say India is hoping that a mix of soft power and business expertise can win it friends and customers on the continent. Over the last few years, Beijing has struck deal after deal with African countries, often building extensive infrastructure projects and providing loans in exchange for access to natural resources, trade opportunities and expansion into new markets. Lacking China’s deep pockets, analysts say India has often struggled to compete directly with Beijing, especially for natural resources such as oil and gas. http://edition.cnn.com/2011/BUSINESS/08/25/india.charm.africa.china/index.html

USAtoday.com
Fixed mortgage rates edged up this week from their lowest levels in decades. But few potential home buyers have been able to capitalize on them.The average rate on the 30-year fixed mortgage rose to 4.22%, Freddie Mac said Thursday. That’s up from 4.15% last week, lowest level on records dating to 1971. The average rate on the 15-year fixed mortgage, a popular refinancing option, rose to 3.44%. Last week it fell to 3.36%. http://www.usatoday.com/money/economy/housing/story/2011-08-25/Mortgage-rates-come-off-their-historic-lows/50135046/1

WashingtonPost.com
Porsche AG and Bayerische Motoren Werke AG, predicting record sales for their luxury German cars this year, are vying to find enough Wunderkinder to make them. An aging workforce and declining enrollment in technical studies caused the shortfall of available engineers in Germany to rise to an all-time high of about 77,000 last month, according to the VDI German engineering association.http://washpost.bloomberg.com/story?docId=1376-LQFAQE0UQVI901-4AU68C36PV5PS3HAUHSGNTQ2D2

BBC.co.uk
A UK government minister has defended a deal with the Swiss that could capture tax of up to £5bn but keep bank account holders’ identities secret. Undeclared money held by UK taxpayers in Swiss accounts will be taxed for the first time, at up to 34% of the total. Treasury minister David Gauke said the deal was historic, with no chance of the Swiss abandoning tax secrecy altogether.http://www.bbc.co.uk/news/business-14662950

Telegraph.co.uk
Greece has been forced to activate an obscure emergency fund for its banks because they are running short of collateral that is acceptable to the European Central Bank (ECB).  In a move described as the “last stand for Greek banks”, the embattled country’s central bank activated Emergency Liquidity Assistance (ELA) for the first time on Wednesday night. http://www.telegraph.co.uk/finance/financialcrisis/8723588/Greece-forced-to-tap-emergency-fund.html

A leading Nobel economist has backed Labour’s warnings that the UK is slashing spending too fast and risks tipping a fragile economy into another downward leg. Britain has jumped on the band-wagon of fiscal tightening in a big way,” said Professor Edmund Phelps from New York’s Columbia University. “I have some sympathy with that but I’m not sure it is being implemented as deftly as it should be. If you slam on the brakes too hard you risk throwing the infant through the windscreen,” he told The Telegraph at a forum of Nobel laureates on Lake Constance. http://www.telegraph.co.uk/finance/financialcrisis/8723302/Nobel-gurus-warn-Britain-on-fiscal-overkill-and-Fed-on-monetary-overkill.html

Consumer confidence continued to fall last month amid increased uncertainty around the UK’s economic outlook and is set to dip further in August, according to the Nationwide’s latest survey. Nationwide, the UK’s third largest mortgage and savings provider, said its Consumer Confidence Index recorded a reading of 49, well below its average reading of 79 and down on 51 in June.http://www.telegraph.co.uk/finance/economics/8721583/UK-consumer-confidence-continues-downward-slide.html

Britain’s economic recovery will be undermined by new European employment laws which will cost companies almost £2 billion a year, business groups have warned. Vince Cable, the Liberal Democrat Business Secretary, has agreed to a controversial European directive to give agency workers the same rights as full-time employees of British companies. http://www.telegraph.co.uk/finance/jobs/8723731/New-EU-job-rights-will-derail-British-recovery.html

The recession on Britain’s high street is the worst for more than 40 years, the boss of the Co-operative Group has claimed, as shares in a trolley-full of retailers plunged. Peter Marks said that for the first time people have been cutting food budgets – normally an area that is relied upon as “recession-proof”. “People are spending less on food – that’s a first,” said the Co-op’s chief executive. He added that he and other retailers are having to cut prices radically to shift stock. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8723408/High-street-recession-worst-for-40-years-says-Co-Op-chief-Peter-Marks.html

Smh.com.au
A flash slide in Germany’s stock market dragged down indexes in Europe on Thursday, erasing earlier gains and shaking the confidence of investors cheering a $US5 billion ($A4.78 billion) investment by Warren Buffett in Bank of America. Germany’s main index, the DAX, fell about 250 points in a matter of minutes to trade down more than 4 per cent before recovering somewhat. By the close it was down 1.7 per cent at 5,584.14. http://www.smh.com.au/business/markets/flash-crash-in-german-stocks-puzzles-traders-20110826-1jcyj.html#ixzz1W6su62xP

TheGlobeandMail.com
Peru’s government is to wring an extra $1.1-billion (U.S.) of taxes from the country’s mining sector, making the Andean country the latest resource-rich nation to demand a greater share of the commodities boom. The decision, announced by prime minister Salomón Lerner in a speech to Congress on Thursday, brings to an end two months of hard-fought negotiations between mining companies and the new government. http://www.theglobeandmail.com/report-on-business/international-news/latin-american/peru-to-impose-extra-mining-tax/article2142431/

Xinhuanet.com
A senior Chinese official said on Thursday that stabilizing the general price level remains the government’s top priority, calling for all macro control policies in force to be fully implemented as it will be difficult to fulfill the government’s inflation control target. The remarks by Zhang Ping, the head of the National Development and Reform Commission (NDRC), China’s top economic planner, came at a bi-monthly legislative session of the Standing Committee of the National People’s Congress (NPC), China’s top legislature. http://news.xinhuanet.com/english2010/china/2011-08/25/c_131074299.htm

Standard & Poor’s on Thursday raised its outlook for Brazilian local currency credit rating to positive from stable, citing greater macroeconomic stability and stronger defense against external shocks. The rating was affirmed at the third lowest investment grade of “BBB+” and while the country’s foreign currency debt rating was kept at the lowest grade of “BBB-”. http://news.xinhuanet.com/english2010/business/2011-08/26/c_131075530.htm

Indonesia’s economy may not be seriously impacted by the gloomy global economic condition as it is predicted to keep growing by year end and next year amid growing exports, investment and consumption. The country’s economy has been well prepared to face the risks of possible economic crisis in the United States and Europe. Strong fundamentals, relatively stable political condition, and modest interest rate have the economy survived in the global financial routs in 2008-2009. Recently, growing middle classes, emerging wealth, expectation to jump to investment grade and moderate interest rate and economic growth, have lured more foreign funds. http://news.xinhuanet.com/english2010/business/2011-08/25/c_131074253.htm

Indonesia’s economy is forecast to grow by about 6.5 percent this year, as exports, investment and consumption pick up, Finance Minister Agus Martowardojo said here on Thursday. The minister forecast that the GDP to expand by 6.5 percent in the third quarter and slightly above the figure in the fourth quarter, as the government spending normally rises at the last quarter. “This year our economic growth is targeted at 6.5 percent,” Martowardojo was quoted by the biggest portal detik online as saying. http://news.xinhuanet.com/english2010/business/2011-08/25/c_131074202.htm

TheHindu.com
Inflation is likely to remain high and moderate only towards the latter part of the year to about 7 per cent by March 2012, the Reserve Bank of India said on Thursday, while warning against accepting the present inflation level as the “new normal”. “The decline in global commodity prices has not been very significant. Should the global recovery weaken ahead, commodity prices may decline further, which should have a salutary impact on domestic inflation,” the RBI said in its Annual Report for 2010-11, which was released on Thursday. However, the RBI said that the U.S. Fed’s policy stance “may keep the commodity prices elevated”. The U.S. Fed has indicated that it would pursue its near zero rate policy at least till mid-2013. It has also hinted at another dose of quantitative easing.http://www.thehindu.com/business/article2397123.ece

In what Finance Minister Pranab Mukherjee sought to dub as ‘disturbing’, food inflation surged to 9.80 per cent for the week ended August 13 from 9.03 per cent in the previous week, driven mainly by soaring prices of certain vegetables such as onions and potatoes, fruits, milk and protein-rich items. As per the WPI (Wholesale Price Index) data released here on Thursday, the fact that food inflation during the like week in 2010 was way higher at over 14 per cent did not provide any consolation to the common man even in terms of the high base effect anomaly. Showing an all-round surge in prices during the week, onions and potatoes turned dearer by 44.2 per cent and 16.39 per cent, respectively, on an annual basis. Fruits were also more expensive by 27.01 per cent while the prices of protein-based edibles such as eggs, meat and fish also went up by 13.37 per cent. Alongside, price of milk was higher by 9.51 per cent and cereals also turned 5.22 per cent dearer. http://www.thehindu.com/business/Economy/article2395980.ece

EconomicTimes.com
The Reserve Bank of India has more than doubled its reserves for contingencies this fiscal amid fears of the return of financial instability, such as the one in 2008, due to the worsening European sovereign crisis and flagging US economic recovery. Financial market troubles had eroded the profitability of the central bank’s international transactions in its last fiscal as interest rates on safe treasury securities, such as the US and the UK, remained at record low levels. But tightening domestic credit market partly compensated for the lower profits from overseas.
Lower returns on some of the assets also led to the central bank reducing transfer of surplus funds to the treasury by 20%. http://economictimes.indiatimes.com/news/economy/finance/rbi-doubles-reserves-for-contingencies-this-fiscal/articleshow/9739774.cms

India’s macro-economic fundamentals could deteriorate if the world slips back to recession as the government finances do not leave much room for stimulus measures, a central banker said. Uncertainties in the markets have risen after the Standard & Poor’s downgrade of the US credit rating and much depends on what the Federal Reserve Chairman Ben Bernanke says during the weekend at the annual conference in Jackson Hole in the US. “The fiscal space to provide counter-cyclical policy is limited compared to what it was in 2008,” said RBI deputy governor Subir Gokarn after releasing the central bank’s annual report. “A lot will hinge on the stand that Fed governor Bernanke takes,” he said. http://economictimes.indiatimes.com/news/economy/indicators/fiscal-deficit-may-surpass-4-6-of-gdp-as-subsidies-surge/articleshow/9739832.cms

Yonhapnews.co.kr
South Korea’s fiscal deficit shrank in the first half from a year earlier as the economic recovery helped boost the government’s tax revenue, the finance ministry said Friday. The consolidated fiscal account, which reflects the central government’s total income and expenditures, posted a 2.3 trillion won (US$2.1 billion) deficit during the January-June period, down about 9.1 trillion won from a year earlier, the ministry said. The shrinkage stemmed mostly from increased tax revenue buoyed by the continued economic recovery. http://english.yonhapnews.co.kr/business/2011/08/26/64/0502000000AEN20110826002800320F.HTML

TheMoscowTimes.com
Russia, Ukraine, Poland and “possibly” Hungary may be upgraded after Standard and Poor’s decision yesterday to raise the Czech Republic’s credit rating, ING Groep said Thursday. The countries may have assessments of creditworthiness lifted in the next six months, Simon Quijano-Evans, chief economist for the Europe, Middle East and Africa region at ING in London, wrote in a note to clients. S&P raised the Czech Republic’s long-term foreign-currency debt two steps to AA- from A, citing the government’s low indebtedness and the “prudently managed and balanced economy.” The country now has the fourth-highest grade, on par with euro-region Estonia. http://www.themoscowtimes.com/business/article/sp-mulls-upgrade-for-russia/442700.html#ixzz1W6ve8iVh

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Hedge Funds: John Paulson’s Main Funds Down 21% & 31%

Thursday, August 11th, 2011

by Trader Mark, Fund My Mutual Fund

Wow, this almost always happens.  A fund has stunning success, takes tons of inflows, grows huge – and then has a big flop.   Even the venerable John Paulson (who to remind, was ‘nobody’ before 2007) is taking it in the shorts this year… down 31% year to date!  August has been a horror.

Paulson has been far more bullish on the economy the past 15-18 months than I have been, and hence seems ill prepared for this sort of market reaction.  Not that it is easy for anyone dealing with these huge asset amounts – very difficult to move a battleship.  There were questions about his ability to manage such assets a year and a half ago… [Mar 29, 2010: Are John Paulson's Hedge Funds Now Too Big to Outperform]

Via NYT Dealbook

• The year keeps getting worse for the hedge fund titan John A. Paulson.  He began August down about 15 percent and 20 percent respectively in his flagship funds (His Advantage Plus fund uses borrowed money, which amplifies the ups and downs).
• Now, just 10 days in, August is shaping up to be the worst month of all. The two funds have continued to bleed, with the Advantage fund now down about 21 percent on the year and the Advantage Plus down 31 percent, according to several investors in the funds.
• Investors suspect that has also hammered Mr. Paulson’s hedge fund because his exposure to financial companies.
• Mr. Paulson sent a note to reassure investors last Friday about redemptions. In particular, he noted that investors in the Advantage funds had asked to pull out just 2 percent of the funds’ assets.
• It’s unclear what Mr. Paulson’s other funds are doing this month so far, since Paulson & Company gives investors only monthly updates on his other funds.

Copyright © Trader Mark, Fund My Mutual Fund

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