Tontine’s Gendell Unrepentant After Giving Back Gains

The carnage in the hedge fund community has had tongues wagging for weeks now, and shooting against crowded positions held by large funds, has resulted in independent proprietary traders scoring some of the biggest gains of their careers.

Rumors continue to fly over the viability of certain hedge fund complexes, but ultimately their futures might hinge on the lockup provisions and investor bases they have taken on over the past few years. Lemming like Hedge Fund of Funds who became seduced by big numbers and big names played follow the leader into a number of funds, and are attempting to hit the exits at the same time.

However, the most discriminating hedge fund managers were able to gather assets through different channels, and in many instances their investors are the C-suite executives of the very companies they invest in. Fat rolodexes provide an edge to managers with unlimited access to the corporate elite, but many of the managers live in a world that has tarnished their objectivity and they failed to see the forest through the trees.

Tontine Associates have recently given back a big chunk of the gains they have posted over the past five years, but legendary manager Jeffrey Gendell, who has major skin in the game via his personal stake, claims to be soldiering on despite grievous losses. Blocks of stock in many of his 13-F filings have been crossing the tape recently, and many of the street took it as a sign he was all but done for.

Rumors of Tontine’s demise are greatly exaggerated, executives inside the secretive Greenwich, Conn., fund tell The Post.

“There is a lot of misinformation floating out there,” one executive of the fund told The Post last week in a telephone interview. “We are meeting our margin calls, paying the investors that can redeem and not unwinding our funds.”

The insider, disgusted with industry rumors concerning Tontine’s ultimate downfall, said people should “be wary of the fund-of-funds guys. That is fast money and they are panicky. Besides, they are in contracts.”

Those contractual obligations - locking up investors for three or four years - are part of Gendell’s strategy, and have served him and his investors well over the past 11 years. New York Post

Gendell’s thesis on steel stocks is not completely unwarranted --Arcelor-Mittal (MT-NYSE), which I do not believe he owns, released encouraging news last week, but a global slowdown and massive de-levering worldwide has made June’s crowded trades the worst longs to carry on your sheets. And earnings at steel companies seem destined to slow no matter what the end market they ultimately serve.

Steel analyst Michelle Applebaum, who has roughly 70 BuySide clients paying a pretty penny for her insights and long-time connections into the industry, pulled the plug on the sector in mid-to-late August, a warning that Gendell did not heed:

There’s Gendell’s insistence on sticking with his top holding, US Steel, when many were warning traders to ditch the stock. The company’s shares dropped over $100 a share this year.

Steel expert and hedge-fund consultant Michelle Applebaum says she went negative on US Steel mid-August, saving clients’ precious money by telling them to get out at $140. It closed Friday at $44.59.

Yet Gendell blames the loss on a confused market and not his own decisions. He writes in the October letter to investors that “the public is not interested in future earnings or large cash positions, and we saw US Steel fall despite the expectation that they will earn $18 per share this year.”

Applebaum counters that view, saying “No, the stock dropped because investors are only interested in future earnings and that’s why the stock got slammed. The market expects fourth-quarter earnings to be lower then predicted.” NY Post

The decline in AK Steel (AKs-NYSE) has been every bit as ugly; any stock owned by both Tontine and Harbinger Capital has been beat like a red-headed stepchild.

Perhaps the shorts have pressed these stocks too hard, but the blood letting won’t likely end until the weak hands are forced to the sidelines, and Gendell’s merchandise is mopped up by predatory traders who have been snapping up shares of stock like KBR Inc. (KBR-NYSE).

Are we there yet? Maybe in some names...but anyone willing to go long the stocks will have to run a gauntlet thrown up by securities regulators. It is too late to turn back the clock, but Hank Paulson’s efforts to prop things up have witnessed many unintended consequences. Hank Paulson might not be a fan of hedge funds, but his undeclared war against them has accelerated the most brutal de-levering many of us will witness in our lifetimes, and wiping out the hedge funds ain’t exactly treating Main Street well either.

Of course, there is a silver lining for distressed hedge funds, who will soon be crowned the new Kings of the Street.

If there is a bull market somewhere, you now know where to find it. Although long/short hedge funds probably never anticipated turning into distressed funds in quite this fashion.
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X Marks the spot...US Steel’s one year ride
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Tontine’s straits became public knowledge last weekend, and Gendell’s position in Patrick Industries (PATK-NASDAQ) quickly paid the price as investors rushed for the exits when trading reopened last Monday.
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TROUBLE SHOOTER- SECRETIVE HEDGE FUND COCKY UNDER PRESSURE
New York Post
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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