The Sax Angle

Pension Pulse: The End Is Here?

Posted on 30. Dec, 2012 by Pension Pulse.

FRIDAY, DECEMBER 28, 2012

The End Is Here?

Noah Barkin of Reuters reports, Euro doomsayers adjust predictions after 2012 apocalypse averted:

Back in May, as the euro zone veered deeper into crisis, Nobel Prize-winning economist Paul Krugman penned one of his gloomiest columns about the single currency, a piece in the New York Times entitled “Apocalypse Fairly Soon”.

“Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams,” Krugman wrote. “We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years.”

Krugman was far from being alone in predicting imminent doom for the euro in 2012. Billionaire investor George Soros told a conference in Italy in early June that Germany had a mere three-month window to avert European disaster.

via Pension Pulse: The End Is Here?.

Tracking Top Funds Activity: Q2 2012

Posted on 19. Aug, 2012 by Pension Pulse.

SATURDAY, AUGUST 18, 2012

Tracking Top Funds Activity: Q2 2012

Earlier this week, wrote a comment on setting your sights on Soroswhere I briefly discussed what some top hedge funds bought and sold in Q2 2012. Will dedicate this weekend to take an in-depth look at how top funds positioned themselves during the second quarter.

Before I proceed, please remember the three sacred rules of 13-F filings:

1. Never buy or sell any stock based solely on 13-F filings.
2. Never buy or sell any stock based solely on 13-F filings.
3. Never buy or sell any stock based solely on 13-F filings.

Got it? Good because if you don’t adhere to these rules you will suffer enormous losses chasing the latest fad that some “guru” is supposedly buying. And yes, I am thinking of the Facebook (FB) IPO flop.

Time to Give Funds of Funds Another Go?

Posted on 16. Apr, 2012 by Pension Pulse.

Guest Post By: Leo Kolivakis

Harriett Agnew of Dow Jones Financial news reports, It’s time consultants gave funds of funds another go:

Funds of hedge funds has become a dirty term since the financial crisis. The industry has struggled to shake off the mistakes of 2008: investments in funds of convicted fraudster Bernard Madoff, liquidity mismatches and underperformance. Memories of funds of funds forced to sell their best investments to stay afloat remain painful.

But those who dismiss funds of hedge funds as a spent force are overlooking a far more pressing issue: the problems presented by the rapidly rising power of investment consultants.

According to Deutsche Bank’s 2012 Alternative Investment Survey, the proportion of respondents using one has doubled in the past year to 60% and tripled since 2002.

Since 2008, institutions have increasingly bypassed funds of funds and invested directly in hedge funds, advised by investment consultants.

As a result, the fund of funds industry has seen net redemptions in every year since the 2007 peak, according to Hedge Fund Research.

Mainstream consultants have shifted from being hedge fund doubters to advocates, driven by relative hedge fund outperformance in 2008 and the diversification offered by some strategies. Just as their predecessors once emerged starry-eyed from meeting Mercury Asset Management, the current breed are in love with the household names of the hedge fund industry.

But this power shift throws up other issues. So enamoured are the consultants with direct investment that they have bulked up their in-house hedge fund research teams to meet increased demand for hedge funds from pension fund clients. They have become experts in hedge funds for business reasons, often making decisions on behalf of clients through the fiduciary model.

However, you can argue that this model presents potential conflicts because consultants are incentivised to encourage clients to invest directly, but draw on advice from their internal team.

Their use of external funds of funds is becoming increasingly rare. But in recommending that clients invest directly when putting together a hedge fund portfolio, mainstream consultants are effectively constructing their own fund of funds. And it is here that they are likely to fall short of their rivals.

Consultants may tout independence, but their fiduciary responsibility fosters the least risky options – and they have no skin in the game, something they always like to see from the managers they put forward. In sharp contrast, fund of funds managers put their own money to work, alongside their pension scheme clients.

Rather than taking a measured risk on a star or emerging hedge fund manager, the large consultants are more inclined to bet big on managing downside risk, picking “safe”, household names that will not get them fired if something goes wrong, as happened to Mercury.

Mainstream consultants have no track record of investing in hedge funds. Funds of funds have produced and managed performance and they were far from alone in struggling during the credit crisis.

Consultants argue that few fund of funds managers add enough value to offset the second layer of fees they charge. But the larger managers say they can negotiate fee discounts from quality hedge funds more effectively than consultants.

That said, the fund of funds industry has only belatedly realised it must justify the fees it charges. The over-diversified, low-turnover, multi-strategy fund of hedge funds has had its day. Those that remain in business have evolved their models and now differentiate themselves by offering bespoke mandates, advisory work or managed accounts.

Quality funds of funds can twin that with trading overlays, access to scarce strategies, genuinely uncorrelated returns or emerging talent. This is where the extra layer of fees can be justified.

The very best of these funds of funds go one step further and provide seed finance to new managers, the lifeblood of the hedge fund industry.

Do consultants bother with such funds, given these managers’ lack of a track record? Of course not.

Great article, touches on some of the key points I already alluded to in the ‘placebo effect’ of large hedge funds.

Once again, problems arise in the cover-your-ass pension governance model underlying most U.S. public pension funds where board of directors and pension fund managers exclusively rely on clueless pension consultants who just blindly shove them in ‘brand name’ hedge funds and private equity funds.

But as cynical as I am of pension consultants (some good ones but most of them are truly clueless and even dangerous), I’m equally not impressed with a lot of funds of funds that charge an extra layer of fees. They might have skin in the game but their performance is lousy, especially when you add that extra layer of fees.

In December 2008, I wrote a comment on funds of funds facing extinction, stating the following:

…for all those pension funds that continue to pile into funds of hedge funds, make sure you are carefully selecting your funds of hedge funds by focusing on those that align of their interests with those of their clients (ie., they are not just huge asset gatherers) and make sure they conduct rigorous operational and risk management due diligence.

But whoever you choose, keep in mind that in this environment, most funds of hedge funds will be reduced to road kill.

Back then we were in the midst of an unprecedented credit crisis. Hedge funds and funds of funds were getting slaughtered, especially those relying on highly leveraged illiquid strategies.

The name of the game since 2008 is risk management. Sophisticated pension funds in Canada are much more aware of the need to manage liquidity risk. They too got hurt in 2008 with their hedge fund investments but have since learned to manage liquidity via managed accounts that offer them full transparency and liquidity. No moreclosing the gates of hedge hell on them.

But there is a difference between sophisticated pension fund managers in Canada investing in hedge funds and the pension herd in the U.S. which blindly follows the recommendations of their pension consultants that shove them in ‘brand name’ funds where they typically get raped on fees and are now finding that alternatives are not paying off for them. In Canada, and the Netherlands, pension fund managers are compensate properly, and the very best of them have industry experience and know how to discern true alpha from leveraged beta.

One of the best hedge fund managers in Canada is Ontario Teachers’ Pension Plan, which delivered 11.2% in 2011. A lot of the value added (alpha) in 2011 came from internal and external hedge funds. Ron Mock, Senior Vice-President, Fixed Income and Alternative Investments, knows his stuff as he previously managed a large fixed income arbitrage hedge fund before joining Teachers’ (that experience made him keenly aware of managing operational risk). Ron also has some of the very best portfolio managers in the industry who can slice and dice any hedge fund strategy to discern whether an investment is warranted.

Are Ron Mock and the folks running hedge funds at OTPP ‘gods’ of hedge fund investments? Hell no! I love talking to Ron and his team but don’t always agree with them. They don’t walk on water and they’redefinitely not invincible, but they’re damn good at what they do and will selectively consult a few trusted consultants and invest in a few funds of funds when they require expertise they don’t have internally.The buck, however, stops with them: they’re responsible for portfolio construction and are careful never to pay alpha fees for a beta strategy they can replicate internally.

Finally, I have personally met with representatives of some of the world’s best fund of funds. Out of the 50 or so I met, maybe 4 or 5 of them truly impressed me and it was because the people running them had extensive trading experience and knew what the hell they were talking about on portfolio construction and strategies The industry has evolved since then. There are now funds of funds specializing in strategies that cover commodities and a broad range of other sectors/strategies.

But even though the industry has evolved, one truism remains: the best funds of funds are truly competent, deliver alpha and are not in the game to become large asset gatherers. The very best of them are well plugged with the best hedge fund managers and are also well plugged with emerging alpha managers that deserve to be seeded.

I’m a true believer that in this environment, institutions should use selective funds of funds to seed emerging alpha managers but they need to make sure they find the right fund and make sure they have their best interests in mind when negotiating all the deal terms (not just fees but a lot more!)

Pension Pulse: Hedge Funds Ditch Treasuries in Droves?

Posted on 19. Mar, 2012 by Pension Pulse.

Pension Pulse: Hedge Funds Ditch Treasuries in Droves?.

Pension Pulse: Hidden Burden of Ultra-Low Interest Rates?

Posted on 03. Feb, 2012 by Pension Pulse.

Guest Post By: Leo Kolivakis

via Pension Pulse: Hidden Burden of Ultra-Low Interest Rates?.

Matthew Philips and Dakin Campbell of Bloomberg report, Banks Join Pensions in Squeeze as Federal Reserve’s Low Rates Erode Profit:

The Federal Reserve, which cut its target for the federal funds rate to a zero-to-0.25 percent range on Dec. 16, 2008, said last month that rates would remain “exceptionally low” at least through late 2014. While the unprecedented period of near-zero rates is meant to aid an ailing economy, it poses challenges for banks, insurers, pension funds, and savers.

The hope is that by making mortgages and other loans cheaper, ultra-low rates eventually may revive economic growth, Bloomberg Businessweek reports in its Feb. 6 issue. For now they’re squeezing profits at banks and disrupting investment strategies at insurance companies and pension funds. They’ve reduced payouts on savings accounts and bonds, and may lead to higher bank fees and insurance premiums.

“For most people, there’s been more downside to these low rates than upside,” says Barry Ritholtz, chief executive officer of FusionIQ, a New York-based investment research firm. “They’ve punished savers and people living on fixed income, and made insurance more expensive.”

For banks, low rates provided a boost at first because they could borrow money cheaply and reduce rates paid to depositors while still collecting interest on existing loans made at higher rates.

As old loans matured, banks had to make new loans at lower rates, cutting into profit. At JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC), the four largest U.S. banks by assets, net interest margins — the difference between what they pay to borrow and what they earn on loans — dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.

‘Margin Compression’

“There’s no best way to counteract net interest margin compression,” says Betsy Graseck, a Morgan Stanley (MS)analyst. “You need to have several different strategies.”

Many banks have announced cost-cutting plans, including layoffs and lower compensation. Jason Goldberg, a Barclays Capital analyst, says larger banks are increasing fees on deposit accounts and slashing debit-card rewards programs.

“There are certainly a lot of levers they are pulling,” Goldberg says. “That said, it’s a big challenge. For a lot of these banks the majority of their profits comes from net interest income.”

Low rates also present a special challenge to insurers, which need safe, predictable investment returns to pay claims.About 64 percent of the property and casualty insurance industry’s portfolio is in high-grade corporate bonds. The average yield on investment-grade corporate bonds has fallen to 4.3 percent, from 6.2 percent in July 2007, according to data compiled by Bloomberg.

Insurance Losses

Insurers suffered $32.6 billion in losses from January through September 2011 in the wake of natural disasters including Hurricane Irene and tornadoes in the Midwest. To make sure they have cash available, insurers have begun moving some of their money into shorter-term bonds, says Steven N. Weisbart, chief economist at the Insurance Information Institute. Since shorter-term bonds have lower yields, that shift leads to a further squeeze on investment income.

Data through the third quarter indicates that industry profits were down 60 percent from the same period in 2010. Weisbart says that to make up for lost investment revenue some insurers may begin tightening underwriting standards and raising premiums.

Like insurers, pension funds have long counted on bonds to help them meet future obligations. After four years of low rates, and a decade of flat performance in the stock market, corporate pension funds face record shortfalls. A January report by Credit Suisse Group AG estimated that 97 percent of companies in the Standard & Poor’s 500 have underfunded pension plans.

‘Dispiriting Year’

The combined deficit at the 100 largest defined-benefit plans increased by $236.4 billion last year, according to an annual pension study by Milliman Inc., a Seattle-based actuarial and consulting firm.

“This was an unusually dispiriting year,” wrote John W. Ehrhardt, a co-author of the report. Depressed interest rates were responsible for 90 percent of the funding shortfall accrued since the middle of 2011, Ehrhardt says. “It’s all about having to cope with low rates right now.”

To address the shortfalls, companies have been making record levels of cash contributions to their pension funds over the past year. Boeing Co. (BA) recently announced that it would contribute $1.5 billion to its pension plan in 2012.

Traditionally, pension funds followed a simple allocation rule of thumb, investing 60 percent of their money in stocks and 40 percent in bonds, according to Ehrhardt.

‘More Sophisticated’

“That was the answer for many years,’” he says. “Things have gotten much more sophisticated.”

The biggest change over the past decade has been the position pension funds have begun taking in alternative investments. Between 2006 and 2010 they doubled their exposure to riskier investments — including real estate, private equity, and hedge funds – to 20 percent, according to Milliman.

Lately, pension funds have been trying to boost yields by buying bonds with longer maturities. By lengthening the average maturity of their bond portfolios by about six to eight years, funds have been able to get about two percentage points of extra yield, says Ari Jacobs, a pension specialist at consulting firm Aon Hewitt. That strategy carries its own dangers: When interest rates rise, the value of existing bonds falls–and longer- maturity bonds drop more than shorter-maturity ones.

“The traditional tools to manage a portfolio, like time horizon and diversification, have been thrown out the window,” says Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago. “All the lessons my generation has learned over our lifetime have been seriously called into question these last few years.”

Indeed, the ‘traditional tools’ to manage a portfolio, like time horizon and diversification, are not working as well as the past precisely because in an ultra-low interest rate environment, all asset classes are highly correlated.

The only real refuge from a shock in such an environment is government bonds. The article above blames the Fed for ultra-low rates but the reality is that the bond market still fears debt deflation, which is why rates remain at historic low levels. It’s not just ‘QE’, there remains a deep fear that the world is slipping into a debt-deflationary spiral.

How should pensions adapt in such an environment? Go back to read my comment on ATP, the world’s best pension/ hedge fund. I added insights from Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), the best pension plan in North America. Read his comments carefully. The folks at HOOPP and ATP get it.

What else will help pensions? The macro environment. This morning’s strong jobs report out of the U.S. crushed expectations. Stocks rallied and bond yields jumped on the news. While this is good for pensions, it won’t make enough of a difference to shore up severely underfunded pension plans.

Importantly, you need a significant jump in real yields and a huge boost in stocks and other risk assets to help close the huge deficits pensions have experienced in the last few years. But even that won’t be enough. We still need serious pension reform and a better approach to managing assets and liabilities at pension plans.

And don’t cry for banks, they always find ways to profit off money for nothing and risk for free. In an ultra-low interest rate environment, the name of the game remains trading, and the big banks are going to continue pushing hard on trading revenue from their capital markets operations. Fees from underwriting, IPOs and merger arb will also add to banks’ bottom line.

But what about savers, workers and many others trying to survive these volatile markets? They’re getting crushed because most of them do not enjoy the benefits of a defined-benefit pension plan. That is the real tragedy of our time, one that needs to be addressed by courageous politicians willing to make the case for boosting DB plans.

Finally, Fed Chairman Ben Bernanke says he won’t tolerate inflation to boost jobs, but I can assure you he’s doing everything in his power to counteract restrictive fiscal policy, reflate risk assets and stoke inflationary expectations. When it comes to deflation or inflation, the Fed prefers to err on the side of the latter, and so do pensions and financial institutions.

Below, Bloomberg excerpts from Bernanke’s testimony before the House Budget Committee on the U.S. economy, budget deficit and Fed monetary policy. Bernanke says the economy has shown signs of improvement while remaining vulnerable to shocks. Barring a collapse in Europe, the U.S. economy will continue to surprise to the upside for the remainder of the year.

Pension Pulse: State of Injustice?

Posted on 25. Oct, 2011 by Pension Pulse.

TUESDAY, OCTOBER 25, 2011

State of Injustice?

Ekathimerini reports, EU deal will need a big majority:

A new bailout for Greece, currently being hammered out by European Union leaders as part of a broader rescue package for the bloc, will need a qualified majority of at least 180 in Greece’s 300-seat Parliament, Finance Minister Evangelos Venizelos suggested on Monday after telephoning opposition party leaders from Brussels to brief them on the progress of talks at an EU summit.

Asked by reporters late on Monday whether the government would seek a qualified majority when the rescue package reached in Brussels is put to a vote in Greece’s Parliament, Venizelos said that “such matters must be addressed with a heightened sense of responsibility and if possible voted through Parliament with a broad majority, not because this is a legal requirement but because it is a national imperative and political responsibility.”

The minister added that he had briefed party leaders on “the framework of negotiations, the basic figures, the crucial issues, the priorities and the risks.”

Earlier in the day, the leader of the rightwing Popular Orthodox Rally (LAOS), Giorgos Karatzaferis had indicated, in an interview on Mega television channel, that the government was planning to seek 180 votes for any deal reached in Brussels, instead of a simple majority of 151.

via Pension Pulse: State of Injustice?.

Beyond the European Debt Crisis?

Posted on 19. Sep, 2011 by Pension Pulse.

I’ve found some interesting reading material on the European debt crisis.  The markets are completely obsessed with this rightly or not.  I’m equally obsessed, I have to admit so enjoy these musings by Pension Pulse

FRIDAY, SEPTEMBER 16, 2011

Beyond the European Debt Crisis?George Soros wrote an excellent comment asking, Does the euro have a future?HT: Steve:The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States.

via Pension Pulse: Beyond the European Debt Crisis?.

Pension Pulse: Forget 2008, This Is Like 1987!

Posted on 14. Aug, 2011 by Pension Pulse.

THURSDAY, AUGUST 11, 2011

Forget 2008, This Is Like 1987!

Finally, someone who makes some sense! David Kotok of Cumberland Advisors was interviewed on Yahoo Daily Ticker stating, Forget 2008, This Is Like 1987:

After dramatic moves in the futures markets, U.S. stocks opened higher Thursday morning after European bourses reversed early declines.

via Pension Pulse: Forget 2008, This Is Like 1987!.

Beware Contagion From Greeks Baring Rifts?

Posted on 18. Jun, 2011 by Pension Pulse.

Thursday, June 16, 2011

 

Beware Contagion From Greeks Baring Rifts?

Richard Barley of the WSJ reports, Beware Contagion From Greeks Baring Rifts:
 

Euro-zone politicians may be fiddling while Athens burns. Tuesday’s meeting of finance ministers brought no progress on how to address Greece’s funding problems and avoid setting off a financial crisis. But conditions in European markets are deteriorating. The main risk from Greece has always been contagion, and that process is already under way.

Most directly, prices of Portuguese and Irish bonds have fallen sharply, with 10-year yields rising above 11% and the cost of insuring their debt at record levels. The gap between Spanish and German 10-year bond yields is at its widest since January. The market is effectively giving no credit for any reforms or budget policies set out in the past six months.

The next link in the chain, the banking system, has been affected. In Spain, progress by banks on regaining market access has gone into reverse: Average borrowing from the European Central Bank jumped to €53 billion ($76.32 billion) in May from €42 billion in April.

Meanwhile, the contagion into core banks may be being underestimated by investors. Moody’s on Tuesday said it could downgrade France’s BNP Paribas, Société Générale and Crédit Agricole due to their holdings of Greek debt, and the ratings firm is looking at whether other banks could face similar risks.

Disturbingly, the worries have now reached non-financial companies, which have been virtually bulletproof this year. Investment-grade bond issuance has come to a near-standstill. The yield premium on Portugal Telecom‘s February 2016 euro bond over German Bunds has widened a stunning 2.3 percentage points in the last two weeks, data from Société Générale show. Italian and Spanish credits are under pressure too. The credit market now starts by pricing government risk and then works back to price debt from financials and companies, one investor says: Greece is a destabilizing influence at the center of the market’s deliberations.

When German Finance Minister Wolfgang Schäuble last week proposed a seven-year maturity extension for Greek bondholders, setting up the current standoff with the ECB, he suggested there was a chance to minimize the negative impact on financial markets. That was always an optimistic hope. The reality is that markets are starting to wake up to the risks of a Greek debt restructuring. Europe’s politicians need to act fast to stem the tide.

Markets have started to wake up to the risks of Greek debt restructuring? No kidding? The problem is that Eurozone politicians still have their heads up their asses (I’m sorry, calling it like I see it, and there is no way I’m going to sugarcoat this crisis). With each passing day, there is a huge risk of another international banking crisis — and this one will make 2008 look like a walk in the park! (Had lunch with two of Montreal’s most promising hedge fund managers yesterday and they’re both bearish on this market).

Meanwhile, over in Greece, Reuters report that Greeks of all ages want politicians to pay:

 

 

Greek workers of all ages and professions, pensioners, students, the old and young marched on parliament in Athens Wednesday to vent their anger at the country’s politicians and their austerity plans.

Tens of thousands took part in the protest rally, which follows three weeks of peaceful evening gatherings in the central Syntagma Square of people from all walks of life, tired of tightening their belts a year after Greece received an EU/IMF bailout.

“I feel rage and disgust,” 45-year-old civil servant Maria Georgila, a mother of two, said in front of parliament.

“These measures are very tough and they won’t get us out of the crisis. I can’t believe they have no alternative.”

Like others yelling “Thieves!” and raising open hands toward parliament in a traditionally offensive gesture, 38-year-old Maria Koutroumba said she felt betrayed.

“They are traitors, they’ve plagued the country,” the unemployed woman said of the politicians as she helped form a human chain around the parliament building.

“These measures are hurting us, the ordinary people,” said Koutroumba, who used to get by on short-term contracts in the private sector but is now out of work, like over 800,000 Greeks.

The jobless rate hit a record 16.2 percent in March as cutbacks to rein in Greece’s huge debt burden of 340 billion euros stifled the economy further. The EU and the IMF expect the Greek economy to contract 3.8 percent this year.

Greece’s international lenders have also insisted that the country sell 50 billion euros of state assets to reduce its debt mountain.

“More people must take to the streets and say that Greece is not for sale,” said Koutroumba, who spent the night on the square and said she would stay as long as needed.

Greek lawmakers were due to discuss a new austerity package of 6.5 billion euros in tax rises and spending cuts this year, including higher tax on cars and restaurants and slashing the public sector workforce.

“We wouldn’t be here if they (the politicians) had made sacrifices as well,” said 60-year-old pensioner Panayotis Dounis, who said he had joined the non-political rally in front of parliament nearly every night for about half an hour.

BREAD AND OLIVES

Dounis said he wanted no violence at the anti-austerity rallies. Most protesters marched peacefully Wednesday, though the rally was marred by clashes between stone-throwing youths and police.

“I am willing to make sacrifices, to live only on bread and olives, but what are they (politicians) doing for us?” asked the former builder, who retired last year.

“I want them to work for four years without getting paid, for Greece, for their country,” said Dounis, whose three children are jobless and who believes MPs can afford to work for free for a while.

Singer Vassilis Theodorakopoulos, 32, who performs in various places to make ends meet, has been camping in central Syntagma Square for the past 20 days.

“All of these governments must vanish,” he said. “We want to reorganize Greece away from any memorandum, the EU and the IMF.”

 

If I were an ordinary Greek citizen, I would be enraged as well. While Greece’s elite are parking their money offshore in Cyprus, Switzerland, UK and Germany, most Greeks are struggling to get by on crumbs, bearing the brunt of the strict austerity measures being imposed on them. There is no long-term game plan on creating jobs, much like in the US where the jobs crisis is getting worse. I think politicians from around the world should carefully listen to professor Robert Shiller below on how to revive America’s ‘animal spirits’.

 

Posted by Leo Kolivakis at 5:26 AM

Is the US Jobs Crisis Here to Stay?

Posted on 06. Jun, 2011 by Pension Pulse.

Is the US Jobs Crisis Here to Stay?

John
Talton of the Seatle Times reports, Why
the US is in a jobs crisis:
 

The situation is nicely encapsulated by economist Nouriel Roubini’s tweet
this morning: “US economy now close to stall speed. From anemic recovery to
tipping point to stall speed and growth recession. Is a double dip next?”
The economy only
created 54,000 jobs last month. It takes
between 125,000 to 150,000 net new jobs a month just to keep up with the organic
numbers of people entering the labor force, much less make up for the losses of
the Great Recession.
Unemployment “officially” stands at 9.1 percent, the real rate much higher.
“To remind us what a healthy unemployment rate looks like, four years ago, in
May 2007, the unemployment rate stood at 4.4 percent, and 11 years ago, in May
2000, the unemployment rate was 4.0 percent,” according to economist Heidi
Shierholz of the Economic Policy Institute. “The U.S.
workforce needs the pace of job growth to accelerate dramatically in order to
re-establish full employment within any reasonable timeframe, and instead, the
recovery is on pause.”
Put another way, by the blog Zero
Hedge, the U.S. would have to create 250,000
jobs a month for 66 months just to return to where unemployment stood in
December 2007 by the end of President Obama’s second term. But why is job
creation broken?

It’s an area where we need urgent research and sober debate. I can think of
these reasons:

• The stimulus and the Federal
  Reserve’s QE2 failed. They arguably prevented worse unemployment and
  deflation, but it’s impossible to prove a negative. The stim was particularly
  ill-suited for job creation — heavy on ineffective tax cuts, light on
  infrastructure. Too much of the Fed’s money was used to save the Wall Street
  playerz, then let them make a new killing off it.
• Business models have changed. Many companies
  have found ways to do as much or more with fewer workers. Thus, record corporate
  profits and cash on hand haven’t translated into much hiring. Offshoring,
  technology, doubling-down on the existing workforce and continuing industry
  consolidation all play a role.
• The negative feedback loop continues to discourage hiring: The housing
  collapse (where so many jobs were created in the 2000s); millions struggling
  with the consequences of losing their homes or being underwater on mortgages;
  10-year wage gains worse
  than during the Great Depression, lowering buying power and hurting
  business; many small businesses, a key engine of jobs, unable to get loans;
  government fiscal crises hurting investment and education, as well as causing
  layoffs in this sector and hurting small private vendors.
• The jobs-skills disconnect. Millions
  of jobs for the housing bubble required relatively few advanced skills. But
  manufacturers now complain they can’t find the workers who have the training to
  handle the leading-edge jobs they have. This is even more pronounced in advanced
  technology sectors.
• The dogma about tax cuts for the wealthy
  leading to job creation doesn’t work. Indeed, job creation during the
  George W. Bush administration was some of the worst since the Hoover years, but
  it was cloaked by the housing bubble. Meanwhile, the political climate won’t
  allow for more aggressive job-creating stimulus, such as infrastructure
  spending.
• The capital markets have disconnected from
  their traditional role of assembling funding for productive, job-creating
  enterprises. Much of the big profits come from trading or job-killing
  mergers. LinkedIn and Groupon are clever and will siphon off
  billions of dollars in investment. They will create relatively few jobs. Even
  seemingly traditional large corporations spend time making profits trading on
  Wall Street rather than using the money to hire. Meanwhile, the finance sector is among the most
  politically powerful and will protect the status quo.
• The hollowing out of much of the economy is
  real and it has happened in sectors that once created millions of jobs.
  Tens of thousands of factories closed during the 2000s, and not just in the auto
  industry. The textile and apparel sectors in the Carolinas were devastated by
  NAFTA and China’s entry into the WTO. Again, this was cloaked by the housing
  bubble.
• The recovery has never been broad-based, and
  businesses have been faced with ongoing uncertainty. President Obama did
  himself no favors here with the complex health revamp, although it is a huge
  windfall for the insurance industry. But the uncertainty also includes the price
  of oil and the future of energy costs.
• The sectors once called “high tech” (but almost everything involves high
  tech now) are not creating large numbers of American jobs, as retired
  Intel Chief Executive Andy Grove has pointed
  out. As companies “scale up” they are no longer doing much hiring of
  Americans.
• Some will point to immigration, and in the 2000s the U.S. saw its largest
  wave of immigration in its history, even larger than 1890 to 1920, and much of
  it illegal. The academic evidence points to immigrants being a net plus in terms
  of economic output vs. their cost in social services. But it’s also true that easy immigration helped drive
  down wages. Yet this took place as American business as a whole adopted
  Wal-Mart’s low-wage, part-time, minimal-benefit model. “Consumers” got
  low prices, but unfortunately they also suffered as workers. Who to blame
  here?

For all the political theater, America has a
jobs crisis much more than a debt crisis. Until it fixes the former and
creates broad-based growth, it can’t meaningfully address the
latter.

 
I totally agree with many points expressed in this article, especially the
last point on America’s jobs crisis being far more important to fix than the
debt crisis. Right-wing pundits have been busy spinning the debt crisis but the
reality is unless there is a meaningful and sustained jobs recovery, the debt
crisis will never be addressed. And don’t believe anyone who tells you
otherwise.
How do I know this? Just look at Greece. Austerity is a disaster, pushing
their economy to the brink. Greece doesn’t have a manufacturing base and relies
almost exclusively on tourism and shipping as the pillars for its economy. Young
and smart Greeks are leaving the country not because they want to, but because
there are simply no opportunities in the private sector. Greek policymakers are
doing absolutely nothing to address serious structural issues in their
economy.
That brings me to my next point. The real crisis behind the jobs crisis in
the US and pretty much the rest of the developed world is the leadership crisis.
Politicians and policymakers are spewing the same old ideas. Liberals want to
increase deficit spending while conservatives want to decrease taxes and cut
spending. Same old, same old. There is nothing new in these policies based on
ideology. Nobody has the courage to take on interest groups and admit that there
is a fundamental problem with the current trajectory.
What really worries me from a social perspective is that the disconnect
between the financial system and the real economy is widening income inequality.
QE2 hasn’t done much for the real economy yet, but it’s been a boon for traders
and money managers. The financial oligarchs couldn’t care less about what’s
going on in the real economy, and neither do America’s corporate titans. All
they care about is their total compensation which continues to rise to record
levels while millions struggle with unemployment.
Unless something is done to address structural issues in the labor force,
including the ever widening income gap between the haves and have-nots, a whole
generation of workers will suffer from chronic unemployment and along with it,
loss of job skills, loss of dignity, and most worrisome, chronic mental and
physical health problems that will put additional pressure on public
spending.
Now is the time for our political leaders to step up to the plate and address
the jobs crisis. If they don’t act quickly and forcefully with fresh and
courageous ideas that work, then capitalism as we know it is doomed. If this
sounds too “Marxist” for you, then you’re ignorant of history and how human
beings always repeat the same mistakes. Somewhere down there, Marx is grinning
in his grave. I leave you with an interesting discussion from ABC’s This Week on the prospects for
the class of 2011.

Posted by Leo Kolivakis
at 10:07
AM

Chanos vs. China?

Posted on 27. May, 2011 by Pension Pulse.

Svea Herbst-Bayliss and Matthew Goldstein of Reuters report, Top hedge fund chiefs: short green tech, store gems:
Bet against solar energy, says famed short seller James Chanos. Squirrel away gems, advises bond guru Jeffrey Gundlach. Go long on discount retailer Family Dollar, counsels activist investor Bill Ackman.

These and other hot — or unusual — ideas emerged on Wednesday from an annual conference where top hedge fund managers pitch their best investment ideas.

Chanos threw cold water on alternative energy companies, saying that shares in wind turbine maker Vestas Wind Systems and solar panel maker First Solar Inc likely will fall.

Arguing that alternative energy may not create the jobs politicians predict, Chanos said he would likely offend the green movement with his bets.

“The cost of wind is 50 percent more expensive than natural gas,” Chanos said, adding that Denmark-based Vestas would be a good company to bet against or sell short.

The environmental benefits of solar power are also questionable, he said.

Chanos said he is certain that he is on the right path on First Solar because top managers are leaving the company. “We advise you to heed their warnings,” he said, drawing both applause and laughter.

Ackman, who has cemented his reputation as a polite activist, said his new idea is on the passive side — indeed it is not even his own, but investor Nelson Peltz’s idea. He likes retailer Family Dollar Stores Inc for being accessible to shoppers and selling unique and inexpensive products.

While lagging behind chief rival Dollar General, its managers are trying to close the gap, and the company may be a buyout candidate for private equity firms, he said. (more…)

More Spying on Elite Funds – Part 2

Posted on 26. May, 2011 by Pension Pulse.

A follow-up to my last comment on spying on elite funds. We begin with an article by Naked Value on Seeking Alpha, Paulson & Co.’s Biggest Buy, Biggest Sell and Top Holdings. You’ll notice that unlike Dodge and Cox, Paulson & Co sold all their Pfizer shares, and initiated a new position in Hewlett-Packard Company (HPQ).

Unlike Soros, Paulson & Co is still betting big on gold, owning a significant stake in SPDR Gold Trust (GLD) and expects a continued recovery, and as such it thinks banks like Citigroup (C) will continue to benefit. The fund also owns Anadarko Petroleum Corp (APC) and Transocean Limited (RIG), which is the company Ontario Teachers’ bet on and made a bundle on.

Are you confused? Don’t be. You should be using the tools on the NASDAQ website to slice and dice the portfolios of these elite funds. For example, clicking on the % change in value header at the top of the fourth column will show you Paulson & Co’s new holdings (click on image to enlarge):

Note that apart from Hewlett-Packard mentioned above, Paulson & Co made a significant new investment in Weyerhaeuser (WY), buying up 31,700,200 shares during Q1 2011. Share prices for both companies are well off their highs, and if the fund did their homework, these could yield excellent returns going forward.

When analyzing 13F quarterly filings, it’s important to look at new holdings, not just top holdings. For example, looking at new holdings for Dodge and Cox which I neglected to do in my last comment, you’ll notice that they bought a significant stake in Motorola Mobility (MMI) and Microsoft (MSFT) during Q1 2011 (click on image to enlarge):

(more…)

Spying on Elite Funds – Part 1

Posted on 25. May, 2011 by Pension Pulse.

It was a beautiful long weekend in Montreal. I tried to enjoy it as much as possible getting out of the house every chance I got. Even went out with some buddies of mine on Saturday night and came back in the wee hours of the morning. Haven’t stayed up that late in a long time and of course, paid the price on Sunday as I was in a zombie state pretty much all day. One thing about turning 40, you can’t party like your 20 anymore, which is something my trainer reminded me of tonight as he trained me hard and screamed ”TO STAY LEAN AND MEAN, NO ALCOHOL!!!” 

I promised a follow-up on a few comments I started over the last two weekends, a brief intro to secrets of elite funds and keep on dancing till the world ends. This week, we’re going to delve deeper into this mysterious, secret world of elite funds as we analyze some of their recently released 13-F quarterly filings for Q1 2011. After reading this comment, and the follow-up in Part 2, you’ll be in a better position to understand what elite funds are buying and selling, and more importantly, how to use this information to your advantage.

Let me state flat out, my goal is to educate many investors, not spoonfeed them stocks to buy. Never, ever under any circumstance buy a stock blindly, even if elite funds are loading up on it. All major banks and institutions analyze 13F filings and quite often, these stocks are targeted by naked short sellers, large hedge funds and big bank prop desks which love to manipulate them up and down.

Moreover, as you will see in my follow-up comment in Part 2, I’m a heavy risk-taker. That’s me. I have no risk manager breathing down my neck and do whatever the hell I want with my money. I will ask other people’s advice, but at the end of the day, the buck stops with me and nobody else, just the way I like it (even elite funds have constraints on the positions they take on any one stock) I’ve been beaten, battered, bruised and enjoyed ups and downs, but that’s part of the game when you take inordinate risk in a very concentrated portfolio. I do this because I truly believe that over the long-term this is the way elite funds consistently beat the indexes.

Having said this, just because I am taking huge risk with my money, doesn’t mean I’m always right. I can stomach large swings in my personal portfolio and would never manage an institutional portfolio the same way or advocate that others do the same. For me, sitting in front of a computer all day trading was an extremely humbling and “real world” educational experience. Lots of senior pension fund managers have never traded for a living and they don’t understand the ins and out of trading or managing money. For them, it’s all about theory and the Efficient-Market Hypothesis (EMH). Worse still, some senior managers blindly believe in their risk models and leave no room for Black Swan events (which are occurring more frequently; instead of once every 100 years, it’s once every five years).

Only when you trade stocks, bonds, currencies, commodities and derivatives do you realize how irrelevant EMH is in the real world. The stock market in particular is heavily manipulated by big banks and their big hedge funds clients using multi-million dollar high-frequency trading platforms. Don’t for a second think it’s all clean — there is huge information asymmetry. That’s why I urge all retail investors to go back and carefully read my comment on the big secret where I offer practical advice for most investors to follow.

Also, there a lot of doomsayers who believe the world is about to end. In fact, some preacher made a prediction that it was going to happen yesterday (nothing happened, what a shocker!). Then there are those who blindly believe in “sell in May and go away”. They’re going to be proven wrong too, but for now, it seems like there are plenty of jittery investors worried about the next shoe to fall (just look at the headlines above; click on image to enlarge).

After that long preamble, let’s get to business analyzing the holdings of elite funds. Macro news is just noise; we want to focus on what elite funds are actually buying and selling. Actions speak louder than words.

Let me begin with an article that lifted my spirits up this weekend (no pun intended). UPI reports that Viagra reduces MS symptoms in animals:

Multiple sclerosis symptoms in animals with the disease were drastically reduced by the sexual dysfunction drug Viagra, researchers in Spain say.The study, published in Acta Neuropathologica, showed a practically complete recovery occurred in 50 percent of the animals after eight days of treatment of the drug normally used in the treatment of erectile dysfunction.

Drs. Agustina Garci and Juan Hidalgo of the Universitat Autonoma de Barcelona studied the effects of a treatment using sildenafil — sold under the brand name Viagra — in an animal model of multiple sclerosis.

If given shortly after disease onset, the scientists say they observed the drug reduced the infiltration of inflammatory cells into the white matter of the spinal cord, reducing damage to the nerve cell’s axon and facilitating myelin repair.

Before you dismiss these findings, I already discussed them with my doctor friends and it turns out there is a plausible theory behind this. Viagra is a vasodilator which helps erectile dysfunction (ED) and why it may indeed help MS. Go back to read my comment on the road to liberation to understand the connection and please educate yourself on the benefits of vitamin D as it is quickly becoming linked to all sorts of conditions (check out Google news articles on Vitamin D; best in the form of D-drops in a glass of water, first thing every morning).

What does Viagra have to do with the holdings of elite funds? Why do I still have hard-on for stocks two and half years after I wrote my comment on post-deleveraging blues? Because institutions are stillhorny for hedge funds and still shoving billions into them, allowing them to grow larger and larger. More money flowing into directional hedge funds (L/S equity, global macro, CTA) means you will see wild gyrations in all risk assets, including high beta stocks.

I sent that Viagra article to a friend of mine and think he got a bigger hard-on than me. He owns a boatload of Pfizer stock (PFE) which has done quite well over the last year, going from $14 to nearly $21. Now, look at the top institutional holders as of March 31st, 2011 by clicking in the image below (data is free on Yahoo finance for every stock):

I note that the the world’s largest asset managers own it, Blackrock, Vanguard, Fidelity (FMR), Wellington, but I also noticed Dodge & Cox, one of the best fund managers in the world with a long-term stellar track record. They invest their own money alongside their investors and were out of technology long before the bubble burst in 2001 (it cost them some clients but they all came back).

So let’s dig deeper in Pfizer. The above just gives you a snapshot; it doesn’t tell you whether Dodge and Cox and other funds were adding to their Pfizer position during Q1 2011. In order to get this information, you go on the NASDAQ website and type in Pfizer’s stock symbol (PFE) at the top, hit enter, which brings you to this page. Scroll down the right hand side and under holdings, click on detailed institutional holdings, which will bring you to this page.

You will find the same funds listed above, along with all the other institutions that hold Pfizer shares, except now you can click on the funds and have a lot more details on all their holdings. I clicked on Dodge and Cox, which is on page 2 of the link above, and it brings me to a page that looks like this (click on image to enlarge):

I then scroll down to Pfizer and can see that they own 104,764,233 shares at the end of Q1 2011 (March 31st, 2011). Moreover, their position was unchanged. The cool thing about the NASDAQ site is that you can click on the headers at the top of each column to get even more information. For example, if you click on shares held, you will see their top holdings in terms of number of shares (click on image to enlarge):

You’ll notice that Dodge and Cox’s top holdings as of March 31st, 2011 are: Sprint Nextel, News Corp, General Electric, Boston Scientific, Comcast, Xerox, Pfizer, Vodafone, Hewlett Packard, Wells Fargo, Aegon, GlaxoSmithKline, Cemex SAB, Merck, Symantec, Time Warner, etc.

So what? This shows me that they’re heavy into big pharma now, positioning their portfolio into more defensive names (healthcare is 20% of their holdings) but they also take selective bets in banks (Wells Fargo) and technology (Symantec).

Once you have this information, you can look at the charts, see if price is above the 50-day and 200 day moving average, start tracking these companies and notice whether each dip is being bought and whether the stock keeps making news highs. Again, do not buy any stock blindly, even if elite funds are buying it, but use this publicly available information to start tracking what the elite funds are buying and to help you select a diversified portfolio of companies in all sectors. Or, if you’re a risk-taker like me, you can take more concentrated bets on a few companies.

Think I will end Part 1 here and delve into what other elite funds are buying and selling in my follow-up comment. If you enjoy these stock comments, please show your appreciation by clicking on the PayPal button which says “donate” under the pig at the top of my blog site. I welcome all financial support, large or small (PayPal calls it donation but I’m not a charity, just a blogger who writes on pensions, markets and health).

Finally, if you’re an institution, broker or family office looking to get a lot more detailed breakdown on what each top fund I track closely is buying and selling and which sectors they’re focusing on, then please contact me by email (LKolivakis@gmail.com) and I will be glad to offer you my services for a reasonable fee. I truly believe if you use this information wisely, adding some basic technical and fundamental analysis and money management principles, it will help you gain the advantage you’re looking for.