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I object very vehemently to the recent use of the term 'hedge fund' and 'hedge fund manager' to describe the mugs who are currently blowing up left, right and centre.
It's sloppy use of a highly specific term - a term that has now been reduced to a ludicrous jargon. Journos use it to try and make themselves look smarter than they are, by making it seem like they understand all this 'high finance' stuff. They (the journos) use 'hedge fund' talk to create an opportunity to explain their latest obsession - short selling - because by golly it's just so durned complex... spare me.
The easiest way to illustrate the difference between actual hedging and what the recently-fallen were doing, is by reference to the bookmaking industry.
So let's think of a scenario involving two guys: John Hedges and Freddie L. Everidge.
L Everidge - get it? Leverage... Oh I crack myself up.
John Hedges is a bookie - he's been in the game along time, and he's seen it all. He's cagey and prudent. So, he has a habit of laying off large bets - if a horse is heavily backed, Hedges hedges his bets by laying off part or all of his exposure with other bookies. Sometimes he is able to do this at slightly better odds than he has offered to his own clients, and he then pockets the difference - but most of the time he is just 'trimming' his exposure to the risk that a large bet goes against him.
Freddie L Everidge is a punter. He's had quite a few wins of late, and he and his mates have been doing quite well as a result. He decides he likes a particular horse, and decides to bet on it. He tells his mates, and they each throw a few bucks into a betting pool. They then go to the pub, and after 'talking their book' non-stop for hours, get a half-dozen folks he doesn't know - and who aren't experienced gamblers - to go in as well.
So far, Freddie is just putting other people's money at risk - on his judgment of an outcome. Losses will max out at 100%.
But now we move to the world of modern leveraged punting. Freddie goes and borrows a cartload of money - 20 to 30 times the pool - and places all that money on the same horse. That is to say, he does no hedging whatsoever - he just leverages up.
Freddie will look like a genius if his strategy works, but he will lose more than 100% if it doesn't. Fortunately his clients and his mates are not parties to the loan agreements, so their losses will be limited to 100% if it goes awry.John Hedges takes the bet, and lays off 80% of it. He make small gains if his strategy pays off, and lose small amounts if it doesn't.
Freddie is not a hedge-fund manager - he is a leveraged punter and so are a lot of these soi-disant 'hedge funds' that have been going toes-up recently.
To further explain the analogy, let's move to the Rant Model Portfolios - which have been hedged since February.
What does that mean, exactly? Is it the same as just having no stocks at all?
I'm glad you asked.
What it means depends on how the hedging is performed. There are several methods - but for a portfolio of any size (more than $10k, say) the sensible thing to do is to short-sell index futures or index CFDs, to the value of the portfolio.
Now the portfolio is not the index: the portfolio and the index have a different composition. If the stocks are well-selected, they will fall by less than the overall market, and the hedged portfolio will actually increase in value in spite of the market decline (because the gain on the index short will more than offset the losses on the portfolio). If the stocks are badly-selected, they will fall by more than the market, and the hedged portfolio will fall in value - but it will fall by far less than the market decline.
Furthermore, the stocks in the portfolio pay dividends - the hedged portfolio captures those dividends, since the stock is still owned.
If the hedging had been done and the market had risen, the idea is that the gains on the well-chosen stocks will be greater than the losses on the short index position. But of course the opposite could happen.
The Rant Model Portfolios use hedging at times when the market lacks investment merit (i.e., it is overvalued) and when the technical condition of the market is also poor (that is, the market is overbought, and market internals are deteriorating). Very rarely we might 'part hedge', or even hedge a specific stock (selling covered calls to the value of the portfolio holding). But it's not rocket science.
One thing that is certain - as contrarians, we will not be initiating hedges at a low, or removing them at a high.
I'm not telling anybody what the Rant Portfolios have actually achieved, until after I remove the hedges - but let's just say that year to date, they have outperformed the likes of...
- Warren Buffett (Berkshire Hathaway): -43%
- Ken Hebner (CMG Focus Fund) -56%
- Harry Lange (Fidelity Magellan): -59%
- Bill Miller (Legg Mason Value Trust) -50%
- Ken Griffin (Citadel): -44%
- Carl Icahn (Icahn Enterprises): -81%
By the way - those figures are as of their last SEC filing.... they will be significantly worse as of today (whereas mine will be better).
And with that in mind, let's have a chuckle at what happened in the Collapsing States of America... (remember - your Beloved GT has already said that the US will be three separate countries by 2025).
One thing which is ever-so-slightly irksome, is the fact that some jerkwad decided to have a punt on the long side in the last five minutes. Had the Dow dipped below 7500 and closed there, I could have tooted about how we were at the lowest closing level since October 2002, and that from here we should rally 20 or 30 percent quite quickly. But no... some dill had to go and generate a rally to close the Dow above 7550. And it was utterly fake - as evidenced by the fact that less than 5 minutes after the close, Dow futures implied a Dow level of 7488.
Speaking of weak markets... Citigroup is now below $5: if it stays below $5, then apparently a lot of fund managers will have to remove it from portfolios.
This is perhaps the stupidest thing I have ever heard: having a price-level criterion for an investment. So if a stock existed that paid a 100% dividend, and had a PE of 1, some fund managers would be barred from owning it if its price was below $5? (Note - the market would never permit a viable stock to trade at multiples like that - it would be bought, and the yield would fall and the PE would rise... sure. I was making an example).
Now - thinking about whether today was a low or not in the US markets. Today is Friday in Straya, so tonight it will be Friday in the States.
Ask yourself... would you be buying in advance of a weekend, given what happened today? Take a look at what happened to the US long bond today - it rose six full points. I don't think the 30-year has ever had a move of that magnitude in a single day.
The bond market thinks the US is in a Depression.
Economic News
Initial Jobless Claims rose to 542000 - another half-million Americans who are now out of work. Hekuva job, Bushie.
The Conference Board's Leading Indicators declined to a level of -0.8 - worse than the consensus guess of -0.7. This index is a waste of time - it is a marketing tool, and should not be looked at.
Finally, the Philly Fed report showed a fall to -39.3 (consensus was for a rise to -30).
Yeah OK - we get it. Economic conditions in the US are dire. That comes from the Department of the Frickin' Obvious and the Institute of 'Duh, Idiot'...
Headline Indices
The Dow Jones Industrial Average lost 444.99 points (5.56%) to 7552.29 points. The index high for the day was 8187.00, while the low was 7514.13 - that's a 670-point reversal, and it took place in 3 hours.
The Dow components traded total volume traded of 2.48bn shares. Within the index, only 1 stock rose (GM, would you believe it), and it traded a total volume of 108.69m units; the other 29 Dow stocks fell, with aggregate volume of 2.36bn units.
The main decliners (in percentage terms) were -
- Citigroup (C) -1.69 (26.4%) to $4.71 on volume of 720.92m shares;
- JPMorganChase (JPM) -5.09 (17.9%) to $23.38 on volume of 159.38m shares;
- Alcoa (AA) -1.31 (16.1%) to $6.85 on volume of 49.85m shares;
- Bank Of America (BAC) -1.81 (13.9%) to $11.25 on volume of 193.3m shares; and
- General Electric (GE) -1.61 (11.1%) to $12.84 on volume of 234.45m shares.
The S&P500 Index lost 54.14 points (6.71%) to 752.44 points. Total volume traded in the index was 7.43bn units. Within the index, only 23 stocks rose, and 464 fell. Advancing volume was 496.68m units and declining volume was 6.91bn shares.
The main decliners (in percentage terms) were -
- Jones Apparel Group (JNY) -2.3 (47.6%) to $2.53 on volume of 10.1m shares;
- ProLogis (PLD) -1.18 (34.1%) to $2.28 on volume of 21.3m shares;
- Lincoln National (LNC) -2.24 (30.6%) to $5.07 on volume of 20.44m shares;
- Wyndham Worldwide (WYN) -1.31 (30.5%) to $2.98 on volume of 5.12m shares; and
- Chesapeake Energy (CHK) -5.32 (27.6%) to $13.98 on volume of 38.23m shares.
The Nasdaq Composite lost 70.3 points (5.07%) to 1316.12 points and the Nasdaq100 lost 51.09 points (4.7%) to 1036.51 points..
The Nasdaq100 index (NDX) contains 100 components; the total volume traded in the index was 1.54bn units. Only 12 component issues rose, with advancing volume a paltry 110.66m units; 86 issues fell, with aggregate volume of 1.43bn units.
The main decliners (in percentage terms) were -
- Flextronics International (FLEX) -0.67 (29.5%) to $1.6 on volume of 77.01m shares;
- Liberty Media (LINTA) -0.57 (21.7%) to $2.06 on volume of 7.06m shares;
- Joy Global (JOYG) -3.24 (17.6%) to $15.21 on volume of 6.62m shares;
- Steel Dynamics (STLD) -1.09 (17.2%) to $5.23 on volume of 9.82m shares; and
- Foster Wheeler (FWLT) -2.88 (17%) to $14.03 on volume of 10.05m shares.
Volatility
The CBOE Volatility Index advanced +6.84 points (9.21%) to 81.10 points and the CBOE Nasdaq100 Volatility Index advanced +6.14 points (8.22%) to 80.80 points.
Breadth and Internals
A total of 3785 issues traded today on the NYSE; today's total volume was 1.59bn shares. A total of 334 stocks posted gains for the day, and volume in advancing issues totalled 1.02bn shares. Exerting downwards pressure on the index were 3414 losers, which accounted for a total declining volume of 0.55bn shares. 45 stocks made new 1-year highs on the NYSE, while 1684 shares plumbed new 52-week depths.
On the Nasdaq 3054 tickers traded today; total Nasdaq volume was 3.15bn shares. A total of 426 stocks posted gains for the day, with aggregate volume of 0.22bn shares changing hands in the day's winners. The red zone of the Nasdaq exchange comprised 2526 losers, and total declining volume was 2.91bn shares. 2 Nasdaq-listed stocks hit new 52-week highs, while 1272 shares dipped to new 1-year lows.
| Major Market Statistics | |||
| Index | Close | Gain(Loss) | % |
| Dow Jones Industrial Average | 7552.29 | -444.99 | -5.56% |
| S&P500 Index | 752.44 | -54.14 | -6.71% |
| Nasdaq Composite | 1316.12 | -70.30 | -5.07% |
| Nasdaq100 | 1036.51 | -51.09 | -4.7% |
| CBOE Volatility Index | 81.10 | +6.84 | 9.21% |
| CBOE Nasdaq100 Volatility Index | 80.80 | +6.14 | 8.22% |
Dow Darlings
- General Motors (GM) +0.09 (3.2%) to $2.88 on volume of 108.7m units
Dow Duds:
- Citigroup (C) -1.69 (26.4%) to $4.71 on volume of 721m units
- JPMorganChase (JPM) -5.09 (17.9%) to $23.38 on volume of 159.4m units
- Alcoa (AA) -1.31 (16.1%) to $6.85 on volume of 49.9m units
- Bank Of America (BAC) -1.81 (13.9%) to $11.25 on volume of 193.3m units
- General Electric (GE) -1.61 (11.1%) to $12.84 on volume of 234.5m units
Most Traded Dow stocks:
- Citigroup (C) --1.69 (26.4%) to $4.71 on volume of 721m units
- General Electric (GE) --1.61 (11.1%) to $12.84 on volume of 234.5m units
- Bank Of America (BAC) --1.81 (13.9%) to $11.25 on volume of 193.3m units
- JPMorganChase (JPM) --5.09 (17.9%) to $23.38 on volume of 159.4m units
- Microsoft (MSFT) --0.76 (4.2%) to $17.53 on volume of 138.9m units
Precious Metals
Precious metals futures were mixed -
| Precious Metals Futures | |||
| Index | Close | Gain(Loss) | % |
| Gold | 746.4 | 10.4 | 1.41 |
| Silver | 9.02 | -0.29 | -3.11 |
| Palladium | 179 | -14.85 | -7.66 |
| Platinum | 784 | -39.7 | -4.82 |
The Gold Bugs index (XAU) contains 16 components; the total volume traded in the index was 156.41m units. Within the index, 4 issues rose, with aggregate volume of 41.91m units; 12 issues fell, with aggregate volume of 114.5m units.
Today the index rose by 1.8 points (2.5%) to 73.71 points. Contributing to the advance were -
- Newmnt Mining (NEM) +0.6 (2.7%) to $23 on volume of 13.49m shares;
- GoldCorp (GG) +0.41 (2.2%) to $19.03 on volume of 20.4m shares;
- RandGold Resources (GOLD) +0.54 (2.1%) to $26.73 on volume of 1.62m shares; and
- Agnico Eagle Mines (AEM) +0.31 (1.2%) to $26.49 on volume of 6.4m shares.
Energy Complex
Energy futures got shellacked -
| Energy Futures | |||
| Commodity | Close | Gain(Loss) | % |
| Crude Oil | 48.78 | -5.32 | -9.83 |
| Heating Oil | 1.6775 | -0.0962 | -5.42 |
| Natural Gas | 6.293 | -0.45 | -6.67 |
| Gasoline RBOB | 1.0025 | -0.1045 | -9.44 |
| Ethanol | 1.643 | -0.044 | -2.61 |
The Oil Services index (OSX) contains 15 components; the total volume traded in the index was 172.23m units. Within the index, 0 issues rose, with aggregate volume of 0m units; 15 issues fell, with aggregate volume of 172.23m units.
Today the index fell by 10.97 points (8.76%) to 114.32 points. The main decliners (in percentage terms) were -
- National Oilwell Varco (NOV) -4.86 (21.4%) to $17.86 on volume of 17.78m shares;
- Nabors Industries (NBR) -2.67 (20.7%) to $10.22 on volume of 11.29m shares;
- Transocean Inc (RIG) -11.57 (17.3%) to $55.4 on volume of 15.22m shares;
- Rowan Co (RDC) -2.52 (17.2%) to $12.1 on volume of 7.22m shares; and
- Halliburton (HAL) -2.72 (16.8%) to $13.46 on volume of 24.35m shares.
Currency Futures
Currency futures lent a bid to the USD again... a short is setting up. The Australian dollar got absolutely belted. Buy AUD pretty much right now.
| Currency Futures | |||
| Index | Close | Gain(Loss) | % |
| U.S. Dollar Index | 88.54 | 0.975 | 1.11 |
| Euro FX | 1.25 | -0.0088 | -0.7 |
| Swiss Franc | 0.8181 | -0.0083 | -1 |
| Australian Dollar | 0.6113 | -0.0323 | -5.02 |
| Canadian Dollar | 0.7782 | -0.0227 | -2.83 |
| Japanese Yen | 1.0561 | 0.0182 | 1.75 |
| New Zealand Dollar | 0.5253 | -0.0204 | -3.74 |
Bellwethers
The nine-stock group that makes up the Rant bellwethers declined on average by 9.2%. The fallout occurred as follows:
- General Electric (GE) -1.61 (11.14%) to $12.84 on volume of 234.46m units.
- Citigroup (C) -1.69 (26.41%) to $4.71 on volume of 720.98m units.
- Wal-Mart (WMT) -0.34 (0.67%) to $50.66 on volume of 39.94m units.
- IBM (IBM) -4.23 (5.57%) to $71.74 on volume of 17.51m units.
- Intel (INTC) -0.26 (2.08%) to $12.23 on volume of 113.18m units.
- Cisco Systems (CSCO) -0.61 (4.05%) to $14.47 on volume of 119.02m units.
- Google (GOOG) -20.62 (7.36%) to $259.56 on volume of 9.75m units.
- Fannie Mae (FNM) -0.05 (13.16%) to $0.33 on volume of 33.02m units.
- Freddie Mac (FRE) -0.07 (12.5%) to $0.49 on volume of 18.74m units.
Other Indices of Interest...
The Banks index (BKX) contains 24 components; the total volume traded in the index was 1498.59m units. All stocks in the index fell.
Today the index fell by 1.79 points (4.41%) to 38.83 points. The main decliners (in percentage terms) were -
- Citigroup Inc (C) -1.69 (26.4%) to $4.71 on volume of 720.92m shares;
- JPMorganChase (JPM) -5.09 (17.9%) to $23.38 on volume of 159.38m shares;
- Comerica Inc (CMA) -2.83 (14.5%) to $16.75 on volume of 5.47m shares;
- Bank Of America (BAC) -1.81 (13.9%) to $11.25 on volume of 193.3m shares; and
- Suntrust Banks (STI) -3.68 (13%) to $24.61 on volume of 8.2m shares.
The Semiconductor index (SOX) contains 18 components; the total volume traded in the index was 349.8m units. Within the index, 2 issues rose, with aggregate volume of 11.92m units; 16 issues fell, with aggregate volume of 337.88m units.
Today the index rose by 4.43 points (2.5%) to 181.53 points. Contributing to the advance were -
- Novellus Systems (NVLS) +0.16 (1.5%) to $10.62 on volume of 5.05m shares; and
- KLA-Tencor Cp (KLAC) +0.1 (0.7%) to $15.19 on volume of 6.86m shares.
The ChildKiller ("Defence") index (DFX) contains 17 components; the total volume traded in the index was 296.55m units. All of them fell.
Today the index fell by 0.08 points (0.04%) to 221.08 points. The main decliners (in percentage terms) were -
- General Electric (GE) -1.61 (11.1%) to $12.84 on volume of 234.45m shares;
- L-3 Holdings (LLL) -5.84 (9%) to $59.32 on volume of 2.44m shares;
- Embraer Empresa (ERJ) -1.07 (8%) to $12.3 on volume of 0.8m shares;
- Northrop Grummanl (NOC) -2.6 (7.1%) to $34.2 on volume of 4.97m shares; and
- United Technologies (UTX) -2.77 (6%) to $43.22 on volume of 16.35m shares.
