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Posted 5/16/2005
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It's not the hedge funds, it's the Fed
Growing hedge-fund woes result from the Fed pouring too much cheap money into the economy. Also: United Airlines' pension default proves again that, in Corporate America, no one's word is worth much.
By Bill Fleckenstein
In light of last week's troubling hedge-fund headlines, I'd like to weigh in on the subject, beginning with the following point: Most "hedge" funds do no hedging at all. They're nothing more than leveraged investment partnerships, bearing no relation to the original concept as started by A.W. Jones more than 55 years ago.
Grounds for hedge heartache
In any case, with so-called hedge funds numbering 8,000, plus or minus, you can be sure of a couple things: - There aren't that many smart operators.
- Many of the people running those funds will have stretched too far to try to make the returns they've insinuated.
The amount of deleveraging that may be taking place is not quantifiable or knowable at this moment in time, but deleveraging is a decidedly bearish occurrence for financial markets. It would explain the undertow that's been at work lately. And it might also explain why the current "no-news-period rally" -- the interval between quarterly earnings reports when, in the absence of bad news, bullish fantasy often reigns supreme -- has been as lame as it's been.
In short, there is a lot of smoke and, in all likelihood, some fire. Folks can anticipate no shortage of stories, both true and apocryphal, about problems created by hedge funds.
There are just too many stories about convertible-debt arbitrage problems, carry-trade angst, widening credit-default-swap spreads, etc. for some form of that not to be occurring. In addition, there are stories of brokerage firms raising margin requirements for various hedge funds.
The wellspring of financial woe
Of course, it's not the hedge funds that are the problem. They are only a consequence of the Fed's easy-money policies -- and its strategy of bailing out the financial distortions and accidents so engendered with even more easy money.
As I have stated before, the Fed is trapped. We've reached the stage where people are only beginning to awaken to that fact and its attendant ramifications, none of which will be pleasant. Therefore, every time you hear about these troubles and want to get upset at someone, my suggestion is: Think of Easy Al -- as all our financial problems can be traced back to him.
United Airlines dumps a payload
Turning to a depressing news item that's liable to become a trend: United Airlines has won the right to default on its pension plans. As the papers reported last Wednesday, the task of paying retirees their benefits will fall to the Pension Benefit Guaranty Corp. (PBGC).
Related news and commentary on MSN Money
In the future, I expect the PBGC to be overwhelmed with problems like this (for starters, think the rest of the airline industry and the auto industry). This means that taxpayers will ultimately be forced to foot the bill, because the PBGC's assets are nowhere near sufficient to fund all the liabilities foisted upon it (as in, it's short $23 billion and counting).
The plight that so many companies find themselves in has often been a consequence of shortsighted corporate management (i.e., playing beat the number). The little guy will be forced to pay for the mistakes of chieftains at the top, who have repeatedly skated away with zillions of dollars. (One could perhaps argue that some of these benefits were too rich to begin with, though I am not making that case.)
The flawed bankruptcy "system" is also part of the reason why many of these troubled industries continue to get more troubled, rather than healthier. The first one into bankruptcy gets a lower cost structure and ultimately starts a price war -- eventually dragging its competitors into bankruptcy as well. Given that all of this is occurring when times have been relatively good, one can only imagine the types of problems that will emerge when times get tough in the not-so-distant future.
United's pension default is a shocking reminder that in Corporate America, nobody's word is worth very much. A person can slave away his whole life for the company and then be informed: "We're not going to give you what we told you we would."
Faith-based insider buying
Finally, in the rarer-than-a-hybrid-solar-eclipse department, I note that an insider at a chip company has purchased stock in the open market. As I told Fred Hickey, editor of "The High-Tech Strategist," who brought this to my attention, I cannot remember that happening in the last five or 10 years in any of the big-chip names. Fred agreed.
Nonetheless, it happens to be true that about two weeks ago, Mort Topfer, former vice-chairman of Dell (DELL, news, msgs) and current board member of Advanced Micro Devices (AMD, news, msgs), bought 25,000 shares of AMD, adding to the 25,000 shares he previously purchased. I checked the insider filings, and he also has stock options to the tune of roughly 18,750 shares.
While 50,000 shares of a $14 stock isn't an immense amount of money, it's not chump change, either. More importantly, as I pointed out, it's a very rare occurrence for a chip insider to spend money on company stock. Obviously, as I've been saying all along in my daily column, Topfer didn't join AMD's board to watch it fail, and he's certainly not buying stock because he thinks the company's prospects are poor.
I continue to believe that AMD is going to be a real problem for Intel (INTC, news, msgs), and I recently added to my AMD position as well. Time will tell whether long AMD/short Intel is a winning strategy, but I am pretty excited about both sides of the transaction.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money. At the time of publication he was long Advanced Micro Devices and Advanced Micro Devices calls and short Intel and Intel puts.
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