TOPS:
MANAGED FUTURES
Equity markets experienced a historic downturn in January 2008, which never really relented. Most hedge fund strategies ended the year in the red and even the long commodity bull market reversed course but there was one asset class that performed well: managed futures. Managed futures programs tend to be long volatility, which was something we had in spades in 2008.
Inside the numbers (2008 through Nov.)
• 750 of the 993 CTAs listed in the Barclay Hedge database were profitable.
• 15 the number of CTAs returning more than 100%
• 86 the number of CTAs returning more than 50%
• 196 the number of CTAs returning more than 30%
• 318 the number of CTAs returning more than 20%
• 497 the number of CTAs returning more than 10% (the magic number that drew so many high flying investors to investment advisor Bernard Madoff.)
2008 ELECTION
Regardless of your affiliation, the 2008 Presidential election was historic, and that the longest election cycle in history is finally over without recount challenges or hanging chads is definitely a TOP. \
BOTTOMS:
EQUITY MARKETS
Equity markets started 2008 with a huge sell-off, then accelerated in autumn as the credit crisis and bank solvency crisis hit hyper drive.
POLITICAL AND ECONOMIC LEADERS
The huge financial hole we find ourselves in has been growing for years and our leaders have offered no solutions, just condescension and more of the same failed policies. The problems were easy credit and “too big to fail” institutions. The solution offered was more easy credit and pushing for more mergers to create larger institutions (see “Rogues gallery”).
• Special mention goes to the Congressional leaders who put a bullseye on CFTC Chairman Walt Lukken over high gas prices, while our entire banking system was battling solvency, and to SEC Chairman Chris Cox who attempted to scapegoat short sellers for the implosion of banking sector stocks.
AND THEN THERE WERE NONE
Last year, we detailed the multibillion dollar writedowns of investment banks. This year, not one of the five major U.S. investment banks exists as an investment bank:
• Bear Stearns: was purchased by J.P. Morgan after the Federal Reserve guaranteed $29 billion of Bear’s toxic debt.
• Goldman Sachs: altered its structure to a commercial bank following the bankruptcy of Lehman Brothers.
• Lehman Brothers: was the one institution standing when the music stopped. Lehman declared bankruptcy in September after the Fed refused to guarantee its bad debt to a potential acquirer.
• Morgan Stanley: altered its structure to a commercial bank following the bankruptcy of Lehman Brothers.
• Merrill Lynch: agreed to be purchased by Bank of America after the Fed got tough with Lehman
SENSE OF ENTITLEMENT
If you were not paying attention to the subprime debacle, you probably thought that the financial crisis began in September. It did not and neither did the bailout of financial institutions that, with one notable exception, could take on all the risk they wanted assured that the Fed and Treasury had their back.
A LITTLE OF BOTH
In a little more than five months, crude oil futures traded in a range of more than $110. That is 2.5 times their pre-2004 all time high!
BOTTOM LINE
While there are a multitude of reasons and places to put blame for the current recession, which threatens to grow into a depression, what caused the music to stop and reality to set in is the bursting of the housing bubble. And there is no relief in sight. The Standard & Poor’s/Case-Shiller home-price index for October had its highest year-over-year decline. It is down 23.4% from its 2006 peak and many analysts expect home values to drop another 20% before it bottoms.
TOMORROW’S LEADERS
According to a Federal Reserve Bank of Chicago press release, high school teams from five states competed on May 8 in Chicago for the right to represent the bank at the finals of the Fed challenge in Washington D.C. The Fed challenge encourages greater awareness among students of how the U.S. economy functions and the role of the Federal Reserve. Each team is required to analyze current economic data, develop a monetary policy and defend that policy in front of a panel of economists. In light of recent Fed policy we believe the following events should be added to the competition:
• Printing money
• Inflating the economy
• Bailing out Wall Street institutions
TOSSING THE BULL
The Philadelphia Stock Exchange in January held a promotion where local Cowboy (?) Clovis Crane rang the opening bell accompanied by TC, a 2,000 lb. bull from the Toughest Cowboy Rodeo. The gag was that TC was supposed to take the United States from recession to a bull market. While PHLX should be given credit for recognizing that we were in a recession back in January and in need of help, it was a bad omen that the rodeo event was held at the Wachovia Spectrum.
CAN’T CHEAT AN HONEST MAN
For years, many insiders had suspected Bernard Madoff’s returns were too good to be true. That did not stop many prominent investors and fund of fund managers from giving Madoff significant allocations. While some may have failed to do their due diligence, others surely thought that they were gaining an edge (see “2007 Tops & Bottoms: Not such a Sentinel,” February 2008).
SHINE ON
Members of CME Group including board member Bob Corvino shaved their heads as part of a St. Baldrick’s Day event to raise funds for young cancer patients.
PICTURE THIS
Remember the disaster movie craze of the 1970s? Well Cantor Fitzgerald applied to the CFTC to launch an exchange listing movie box office receipts.
COWBOY AND INDIAN GIVER
Legendary energy trader and wind power proponent T. Boone Pickens donated $165 million to the Oklahoma State athletic department several years ago. The donation was left in Pickens’ funds, growing to more than $300 million but remained there when energy markets and Pickens’ BP Capital hedge fund dramatically reversed this year. Word is OSU expanded Boone Pickens Stadium with money borrowed off of the donation that is now blowing in the Oklahoma wind. And the Cowboys thought they had problems with the Sooners.
ALTERNATIVE INVESTMENT?
A hedge fund Web site reported in November that Adultvest Inc. has closed its Priapus Investment Fund, which invests in the adult entertainment industry. Despite the rough year, apparently it has been a bull market for pornography. Well some of the Congressional testimony by bank officials on the credit crisis has been outright obscene.
SIGNS OF THE TIMES
• Just desserts: The Telegraph reported that Lehman Brothers CEO Richard Fuld was punched and knocked out in the Lehman gym on the Sunday Lehman declared bankruptcy. Lehman had been rumored to be in trouble ever since the March bailout of Bear Stearns. Fuld reportedly turned down several serious offers before the firm was forced into bankruptcy in September.
• Bonus babies: Executives from Goldman Sachs and Morgan Stanley announced that they would forego 2008 bonuses. Bonuses?!%#
FIGHTS OF THE YEAR
• CME/ICE REDUX: While CME Group won the battle over the Chicago Board of Trade in 2007, many experts believe that the Intercontinental Exchange has the inside track on the market for cleared Credit Default Swaps. Of course the competition is open and also involves Eurex and NYSE Euronext and given the risk involved with CDSs, defining the winner may be tricky.
• THE FED vs. BANKING COLLAPSE: While analysts attempted to read the Fed tea leaves, economist John Williams put it more simply: “[The Fed’s] primary concern is keeping the banking system solvent. If Bernanke had not done what he did [we] would likely have seen a failure of the banking system similar to what was seen in the 1930s.”
DUBIOUS AWARDS
UNDERSTATEMENT OF THE YEAR
“I made a mistake in presuming that the self interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders and the equity in the firms,” said former Federal Reserve Bank Chairman Alan Greenspan in his Congressional testimony on Oct. 23, 2008.
SORE WINNER AWARD
Andrew Lahde, founder of Lahde Capital Management, a hedge fund that earned 870% in 2007 by shorting the type of mortgaged backed toxic instruments that have left large institutions at the Fed’s doorstep tin cup in hand, announced his exit in October and thanked those who allowed his success: “The low hanging fruit, i.e., idiots whose parents paid for prep school, Yale, and then the Harvard MBA, were there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”
BIGGEST LOSER
General Motors had the biggest percentage decline, -87.14%, of any of the 30 stocks in the Dow Jones Industrial Average. They nosed out Citigroup, -77.21%, which of course qualified them for a government bailout.
TOO BIG/CONNECTED TO FAIL
• Fannie Mae • Freddie Mac • American Insurance Group • Citigroup
ROGUES GALLERY
LACK OF LEADERSHIP
It is easy to blame the heads of investment banks, a few schemers and fraudsters for the U.S. fiscal disaster, but our leaders assured us that the worst news was behind us time and time again and that everything was okay — right up until they said we needed a bailout NOW!
BAD OMEN
The year of lack of corporate oversight got off to a bang when Jerome Kerviel, a junior trader on the Societe Generale proprietary trading desk, managed to hide $7.2 billion of losses before they were discovered by the French bank. Remember the good old days of early 2008 when a $7.2 billion rogue trade seemed liked a big deal?
THE BIG ONE
Bernard L. Madoff, chairman of Madoff Investment Securities and a former chairman of the Nasdaq stock market, was arrested in December and charged with running a $50 billion ponzi scheme. While Madoff’s alleged fraud is audacious in its scope and in some of the big-name victims, a good portion of the outrage falls on the SEC, which ignored warnings about Madoff’s operations going back a decade.
