Trim Tabs: Just Kidding, Blame Mutual Fund Redemptions
Another crazy week is coming to an end on Wall Street, and not a moment too soon. Thursday morning witnessed a freak out over the data point du jour, hedge fund redemptions.
Truth be told this has been taking place for weeks-Atticus had moved one of their funds into a high cash/market neutral posture by early September after watching the rest of Wall Street shoot against their positions in natural resources equities, and having a similar portfolio to Ospraie, which closed its flagship fund, was the kiss of death.
Last week traders were buzzing with liquidation rumors over other prominent long/short funds; cleanup blocks were printed left and right, although not everyone got the memo and Main Street was in the dark, as usual. Of course I am not as plugged in as I once was, but will not be the last man on the deal team as long as mom and pop still have a balance in their 401(k)s and IRA's...and even tried to talk myself into a more constructive posture despite the carnage:
October 8th
It will take a long time to heal the wounds suffered in the past few weeks and months, but it might finally be time for long only funds to market weight commodities/resource equities, hedge funds who shot against their brothers to begin covering resource equities on weakness, and investors to at least consider putting some money to work if they were fortunate enough to sidestep the bloodbath.
Stocks retested last weeks lows Thursday morning, primarily because of panic over hedge fund liquidations. I probably helped fan the flames, but this was really old news. And now Trim Tabs, whose data was cited in the hedge fund redemption stories, is backtracking a bit. Or at least changing their tune to some extent.
Forced selling by hedge funds, which has exacerbated market turmoil in recent weeks and in particular crushed a group of stocks once favored by the funds, may be easing, according to a report Thursday by TrimTabs Investment Research.
Unfortunately, that may not mean the stock market has stopped falling, warned the firm, which tracks money flowing in and out of hedge funds, mutual funds and exchange-traded funds.
Hedge fund investors redeemed at least $43 billion in September as they reacted to the industry’s worst year for performance in at least a decade, TrimTabs reported.
More redemptions are expected through the end of 2008, but TrimTabs said that many hedge funds have already sold enough of their positions to meet current and future withdrawals.
“They should not be the main source of forced selling anymore,” TrimTabs Founder Charles Biderman said in an interview.
I have been spending more and more of my time on Twitter.com, banging out a random stream of consciousness, including facts and figures that hit my screens all day. We noted mutual fund redemption numbers last week as cited by Morningstar, and now the redemption story has shifted to the vanilla (long-only) complex.
If hedge funds have already raised enough cash, that could reduce some of the pressure on these types of shares. However, the overall stock market may be already suffering from a new source of selling, TrimTabs added.
Mutual funds have been getting roughly $5 billion a day in redemptions in October because retail investors are spooked by the financial crisis, Biderman said.
Several times this month the stock market has slumped sharply during the final hour of trading. That may be because mutual fund managers are getting a summary of redemptions each afternoon and have to sell quickly to return investors’ money by the next morning, Biderman explained.
“The problem with the market is not hedge funds anymore,” he added. “Forced liquidations appear to be coming from mutual funds.”
In any case, I have been trying to make a case for buying the beaten up names that were pummeled day after day...natural resource equities and steel, among others. Have we finally seen a low in stocks like Cleveland-Cliffs, which just changed its name to Cliffs Natural Resources (CLF-NYSE) and the beaten up Steel Dynamics (STLD-NYSE)?
The stock dropped from $40 to $10, where it was promptly downgraded by Morgan Stanley and Goldmans Sachs on the 8th and 9th of October, respectively. Management put up decent numbers today when they released earnings, and tried to explain what has hit them over the last three months…
Co commented on steel stock prices which are at “silly levels”; way oversold; we’re trading below book value. Co says it cannot believe what has happened to steel stocks, talk about oversold; it has to do with hedge funds, momentum money. It’s at silly levels, STLD is now below book value, way oversold.
Co says demand has considerably weakened in the commodity universe. However, inventories are low and should get lower and buyers wait for prices to decline. Co says it’s reasonable for the industry to operate at 75-80% of capacity in 2009. Even at 40% operating level, you cannot drive Butler, IN plant to a loss. No other steel co, except Nucor, can compete with STLD on cost side—in fact, co says it competes better in a weak environment… Co says 2009 could be better than 2008. Co has a strong balance sheet, not as strong as Nucor, but we can compete with anybody on cost side.... briefing.com conference call notes
In recent weeks fundamental analysis has consisted of nothing more than pulling up a list of a company’s biggest shareholders and basing a decision to buy or sell based on the staying power of the shareholders. Some buyside shops were toxic as they spiraled into liquidation mode and the hyenas pounced, making it more difficult for the trapped longs to sell.
We have exhausted that game to some extent...and while the mythical bottom might finally be in, the near term upside might not be all that exciting.
But Main Street has gotten an expensive lesson in the ways of Wall Street, and have might even picked up a few tricks of the trade.
Helluva way to earn a living, ain’t it?
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Goldman and Morgan Stanley pulled the plug on their ratings of Steel Dynamics last week. Fading Goldman’s call on crude oil this past summer was a good move....and they just downgraded their forecasts for metal commodities as well...after copper has been cut in half since the fourth of July.
What a joke. Maybe they will get this one wrong too....
STLD 6-month chart...fresh downgrades last week from the best and brightest
Goldman Cuts Commodity Forecasts
FT
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Forced hedge fund selling may be over: TrimTabs
Forced hedge fund selling crushes some stocks
Marketwatch
Commodity bear market now worse than stocks’ slide
LA Times
Previously
October 8th
Opportunity Knocks: Hedge Funds Done Puking?
1440 Wall Street
October 16th
Hedgistan Gears Up For “Death March” as Redemptions Gain Momentum
1440 Wall Street
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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
