Thursday, October 16, 2008

Is the "smart" money stupid?

Hedge funds liquidating after the market is down 40%. Is that "smart" money or stupid? Hedge funds buying XOM and CVX up 10, after selling them down 7 the day before. Is that "smart" money or stupid?

The "smart" money hedge funds sell stocks at 3 times earning down to 2x earnings. And then they make the front page of the Wall Street Journal because they want to sit out of the market because it has become dangerous. Sitting in cash after the market is down 40% gets you a headline in the press? The "smart" money is afraid of their own shadow.

Let the "smart" money blow up. Let them sell, and let the market get rid of them. The crazy selling shows they can't handle their money, and they surely can't handle their client's redemptions.

The markets will survive. The credit markets are slowly unthawing, and these massive dislocations happen when markets bottom. And bottoming is a process. It's supposed to be difficult, and it's supposed to be wearing, and it's supposed to be emotionally hard on people. How else could you buy companies at 2 or 3x earnings? The seller has to lose their head. And they have!

So stocks that were cheap, were cut in half and then cut in half again.

Morgan Stanley's CEO, John Mack, was on CNBC today telling viewers how his company is deleveraging.

Deleveraging happens at bottoms.

In fact, let's look to Treasury Secretary Paulson for clues on tops and bottoms. Now his mantra is capital raises and deleveraging. On February 29, 2000, when the NAZ was screaming, and we were making the climatic top in equities, here's what Paulson, as Chairman of Goldman Sachs had to say in front of the Senate Banking Committee:

"In addition, we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place. This means that needed net capital reform is likely to come only when the SEC is prepared to conduct these risk management examinations with its own staff or is confident that SROs have the capability to perform them. This degree of oversight will require development of staff experienced in this area. We believe there is little incentive for the SROs to meet this responsibility."

At the top of the market, he wanted increased leverage.

Now at the bottom, he wants people to sell in the abyss to take their leverage down.

Once again, I ask---Is the "smart" money stupid?

No comments: