Sunday, December 14, 2008

The next investment trend--Safes

And why not? Treasuries give you a 0% yield. Soon all the Treasury money market rates will be negative, and with the rate cuts coming this week, regular money market rates will be in the 1% level. Do you think that all the money markets can just fill up on Goldman's and GE's FDIC paper?

The total money that the Treasury has printed in cash dollars, held by banks is only $179 billion dollars. There is another $837 billion floating around the world. (The link below, H.4.1. 8. under liabilities, Federal reserve notes outstanding)

The Federal Reserve has expanded it's balance sheet by a couple trillion, and has guaranteed over $7 trillion of assets. Cash (green cash you can put in your pocket)is being taken out of circulation in banks, and cash (electronic cash) is being lost through redemptions or going to money heaven via hedge funds. Does anybody think that the rich whose wealth is being eviscerated won't start keeping an increase of cash in safes? Or do you believe that is only for the right wing NRA blue collar survivalist? The difference is the rich man's cash is $500 dollar euro notes, and gold stored in Switzerland, which, however you cannot store there anymore, because the storage facilities are already filled up.

Madoff's swindle of $50 billion will completely change the environment in hedge fund land, but the effects of it yet haven't been seen because the hedge funds have put up gates blocking people from accessing their money.

And as long as we have this credit crisis, dubious assets will remain on the books of these funds, whose values are "overstated" If colleges like Harvard are attempting to dump their private equity assets at .50 cents on the dollar, and they can't find any bids, what do you think your obscure assets are worth? And why do you think these funds have such dubious assets? Because these are the assets they can mark up, and take the phantom appreciation on the same in cash; pretending that they have actually made you money, when in fact, they are just stealing it from you. These assets will be locked up until they have become marked down, and then a turn in pricing can be seen. Then they will allow you to cash out, and the manager will take the appreciation on your marked down asset.

Now compare this to a real estate speculator, in 2006 who puts on a $200,000 HELOC on a $500,000 home, that he paid $300,000 for in 2004, with 5% down. He cashes in the HELOC, and spends the 200K, and now his house in Florida is worth 275K. That's your hedge fund. When stock prices were up, he booked you for the 20% profit on the gains in the unrealized value of your portfolio. But there wasn't liquidity at the top; he and other hedge funds were goosing the stocks to make those prices, and he paid himself cash on this unrealized appreciation. As HELOC's were tacked on these homes to get liquidity, there wasn't buyers at these phantom prices, just like your stock wasn't liquid.

Now that the home is underwater, what's your HELOC worth? In many cases they are selling at cents on the dollar; but the bank hasn't yet marked it down. Those are your dubious investments in the fund. What happens though if a turn in housing starts to happen? Mark the asset down to cents on the dollar, cash out the investor and let the fund buy the HELOC.

In this environment, you can paint anyone with a broad brush. Sometimes however, the market changes so quickly, that what appears to be fraud, is just the changing market. Let's take a look at Eddie Lampert's ESL hedge fund, whose largest position is in Sears. Eddie bought Kmart in bankruptcy and on January 1, 2004 the stock was $23 a share. K-Mart merged with Sears, and on December 31, 2006 the stock was $168. Eddie, through ESL owned 66 million shares of Sears. $145 a share of appreciation X 66 million shares gave ESL almost a $10 billion gain. He got 20% of it or close to $2billion dollars.

Today Sears is at $46, and his position in Sears is worth $3 billion, yet Eddie was paid $2 billion. ESL didn't sell any Sears shares, but Sears did buy back shares 100 points higher, which kept the stock propped up. Thank goodness there isn't a clawback provision for hedge funds, and that ESL's investors money is locked up! And is Sears goes back to $170, Eddie won't get a cut on that appreciation

Should hedge funds be paid on unrealized appreciation, and not suffer any of the consequences when the investment falls? Why should they? It's not their money-It's yours!

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