Alternative Assets Update

There have been a lot of great articles on hedge funds, private equity and commodities recently that I haven't had time to write complete blog posts on. So, if you have a few minutes come take a look. The picture to the right is John Arnold, he is happy because he was on the other side of the Amaranth natural gas bet . . . oh yeah, and he made nearly $2 billion in 2006. He'll probably tell you that running a hedge fund beats working at Enron!

Hedge Funds

1. "Behind the Hedge" is a great New York Magazine article on Hedge Funds, including bios on the "top dogs", "brainiacs", "bad boys", "single hitters", "home run hitters", and "whippersnappers" in the industry.
2. "Top Ten" What did the top hedge fund managers make this year? Let me give you a quick breakdown: Jim Simons and John Arnold edged out the competition by making somewhere between $1.5-2 billion in 2006. Coming in 3-5 were the other biggest names in the industry: Eddie Lampert, T. Boone Pickens and Steve Cohen. All managed to make over $1 billion. Not a bad payday if you ask me.
   
3. In this Bloomberg Article we learn that at the G-7 conference the leaders are calling in hedge fund managers to discuss "risks associated with their growing role in financial markets."
   
4. In this CNN Money Article "Bernanke: Hedge Fund Oversight Working" our Fed Chairman speaks about hedge funds and the positive effects they have on the economy. His comments were well timed before the G-7 conference meets in Canada to discuss hedge funds.
5. "Hedge Funds Still in Regulator's Sites": Perhaps a new administration in the US could encourage tighter regulation of hedge funds.
   

Private Equity Good News

1. From the WSJ article "Big Deals, Yes They're Possible Without Buyout Clubs" we learn that LBO activity is on track to do close to $2 billion of deals this year and is making up nearly 30% of all merger activity. Not too shabby.
2. PE shops raised $44 billion during Q12007. With this much liquidity I expect the buyout binge to continue for some time.
   
3. More good news: Much was made of the fact that Congress was contemplating taxing "carried interest" at income tax rates (35%) rather than capital gains rates (15%). In "The Tax Threat to Private Equity? " we learn that for various reasons this change is unlikely to occur. I can almost hear the collective sigh of the big players in the industry.
   

Private Equity Bad News

1. Bad News for the entire market: "Private Equity Breaks Records, IMF Gets Nervous" - While the level of activity has been high, the systemic risks are not going away. Many are saying that just like Sam Zell selling EOP high, the fact that Blackstone and others are looking to IPO may signal a peak in the PE Market.
   
2. The PE deals are getting more expensive. Or so says Taneesha Kulshrestha in "Downside of PE." The multiples firms are willing to pay for earnings have increased, this could be another sign of a market top.
   
3. The other major threat to PE is how the public perceives it. In "Hedge Funds lack buyout firm skills". The article first rips on hedge funds masquerading as PE shops, but goes on to say that miscommunicating their intent with the public, the employees and the media could lead to a significant backlash.
4. Perhaps Private Equity needs an image makeover. Or so argues Andrew Sorkin in "How to Show that You're No Gordon Gekko."

Commodities

1. "Crude Contract falls 4%" on unwinding of the "Iranian Risk Premium." It just makes you wonder if the Iranian government is placing bets on oil futures before it goes out and captures British soldiers. If I were a dictator in the Middle East looking to make a quick buck, it would seem a sensible strategy to me.
   
2. Jim Rogers foresees the comming commodity boom. He is a little wacky but I think having commodity exposure in your portfolio these days is a must, even if used just as an inflation hedge.
3. Prices at the pump have risen 2-3% since I last blogged about gas prices on March 26th. But, they appear to have leveled off for the time being. I will continue to track this as we approach the summer driving season. Check out the graph below courtesy of SanDiegoGasPrices.com (click to enlarge):

Mad Mon(k)ey Jim Cramer

From his perhaps overly forthright explanations of how hedge fund managers distort the market to his ridiculous television ranting and raving, former hedge fund manager Jim Cramer has become something of a pop culture sensation. Unfortunately some foolhardy investors have been seduced by his resume and background and are actually following his advice rather than recognizing Cramer for what he is; an entertainer.

Earlier today I stumbled across an incredibly useful website: www.CramerWatch.org. The site tracks Jim's Lighting Round stock picks and compares his performance to "Leonard the Wonder Monkey." Leonard is an actual monkey who picks his stocks based on a coin flip. The site tracks the performance of the picks over a one month period. Believe it or not even though Leonard was never a hedge fund manager he is outperforming Jim Cramer handily (data since November 1st, 2005):

Ongoing Stats:
Jim Cramer is right 49.30% of the time.
Jim Cramer's picks average a 0.12% ROI after 30 days.

Leonard the Wonder Monkey is right 50.13% of the time.
Leonard's picks average a 0.34% ROI after 30 days.

Of course this post suffers under the weight of one fatal assumption; that is that you actually needed proof that trading based on Jim's recommendations is anything other than sheer tomfoolery.

Bill Gross: Real Estate is 15-20% Overvalued

Those of you who follow this blog know I am bearish on the US residential real estate market. I wrote a blog post back on March 15th entitled "Is Real Estate A Good Investment." I encourage you to read it if you haven't already. To summarize briefly, I expect a secular bear market in residential real estate over the next 5-10 years. Unlike the stock market which can adjust quickly and dramatically, the real estate market -- due to lack of liquidity, disguised price declines and the ability of sellers to hold out for the right price -- typically unwinds slowly and painfully. Ultimately it is the tightening of credit and an increase in the number of motivated sellers that forces a real estate market down.

One prominent investor whose opinion agrees with mine is bond market sage Bill Gross. His April 2007 Market Commentary, entitled "Grim Reality" concludes that home prices are approximately 15-20% overvalued. For those of you unfamiliar with Bill, he manages one of the largest bond portfolios in the world at PIMCO and has been called "the world's most prominent bond investor" by the New York Times. Bill's market commentary is widely read and studied.

Bill isn't the only sage who has been calling for home price declines. The other gurus in the bear camp include Yale economist Robert Shiller, Jeffrey Gundlach Chief Investment Officer of TCW Group (a firm with almost $100 billion under management), and of course David Tomnitz the CEO of home builder DR Horton (okay, okay Tomnitz isn't a guru, but you gotta love a CEO who tells analysts and investors that 2007 "is going to suck"). I must say this is a formidable bunch, its a wonder David Lareah isn't more intimidated . . . . perhaps he should be.

Grassroots Microcredit

I was first introduced to Microcredit earlier this year and found it incredibly interesting. Unlike top down aid given from government to government, microcredit empowers those in need of aid to borrow, start businesses and ultimately repay the loans they were given. You can read all about the history of Microcredit on Wikipedia here.

Microcredit has been around for quite some time but received much more attention after Muhummad Yunis, the founder of Microlender Grameen Bank, received the Nobel Peace Prize last year.

I think one of the most brilliant aspects of the Microcredit movement is the ability of individuals like you and I to give directly to entrepreneurs all over the world: Ghana, Afghanistan, Ecuador, Azerbaijan, Ukraine, Uganda etc. One of the best places to lend is KIVA.org. The next time you want to give back I encourage you to check out the site and with a loan as small as $25 you can truly make a difference in someone's life. The whole process from registering to lending money takes all of 10 minutes. Remember it is not charity, it is a loan and the payback rates are astonishingly high. Here are the statistics as reported by Kiva:

• So far, Kiva has experienced a 100% repayment rate on all businesses with completed loan terms. (See our "Paid Back" section)


• Prior to Kiva, our Field Partners have historically experienced a >96% repayment rate with the poor they serve.


• In the past 30 years, over 100 million of the world's poor have received a micro-loan and demonstrated a >95% repayment rate

Think of it as investing in the world. You can check out a video by Nick Kristoff at the New York Times here. Thanks Mike for letting me know about Kiva. Mike is investing with a corn producer in Kenya, I chose a farmer in Cambodia. You should join us, both entrepreneurs still need more money.

Tiger = Athlete + Philanthropist

Tiger had a rough start to this year's Masters. After Friday he stood at 3 over par. Unfortunately for the leaders, they only have a 5 stroke cushion over the Stanford educated golfer, which puts Tiger well within striking distance. Should be an exciting weekend of golf ahead.

Though Tiger may be a few strokes off the lead in this years Masters, at the spry young age of 31 he is already the wealthiest athlete in the world and one of sports most generous philanthropists. Most people have heard mention of his 155 foot Christensen Yacht, his $40mm mansion in Miami and his supermodel wife, but Tiger is probably most proud of the achievements of the foundation he started with his father Earl 11 years ago. Since its inception, the Tiger Woods Foundation has given away over $30 million to a variety of youth initiatives and touched the lives of over 10 million children. The TW Foundation's mission statement can be found on their website, but for your benefit I have copied it below:

"We empower young people to reach their highest potential by initiating and supporting community-based programs that promote the health, education and welfare of all of America's children."

At the rate he's going and at his young age Tiger and the TW Foundation will in all likelihood have a profound impact on the lives of hundreds of millions of children the world over. Very few people in history can say the same.

When Warren Buffett announced that he was giving the bulk of his personal fortune to the Bill and Melinda Gates Foundation he was asked why he had selected the Gates Foundation. Buffett replied that in any situation it makes sense to select someone "better equipped than you are to do it." After all, Buffett continued "who wouldn't select Tiger Woods to take his place in a high-stakes golf game." Few would argue this point. I have a feeling however that in a few years time Woods will not only be known as the world's greatest golfer but also as one of its most generous philanthropists.

Daylight for Sarbanes-Oxley?

Yesterday the SEC went a long way towards approving new audit standards for the Sarbanes-Oxley (SOX) legislation. When SOX first passed in the summer of 2002 the country was in a state of uproar over the corporate accounting scandals at Enron and Worldcom. Congress agreed with the public and passed SOX by a vote of 423-3 in the House and a whopping 99-0 vote in the Senate. The lopsided vote should have been the first sign that the legislation had serious flaws.

In its defense Sarbox did exactly what it purported to do; it effectively established new or enhanced standards for corporate management, public company boards and public accounting firms. However, in the sticky task of striking a balance between investor protection and overregulation the pendulum swung a bit too far towards the latter.

The problems start with the costs of compliance to SOX, which at $4.36 million, represent a major hurdle for small companies. The increased regulation has also made the US less business friendly and has driven many companies abroad. Some pundits have even linked SOX with the wave of private equity activity that we are currently experiencing.

I for one don't want any more Enron's, but I do think that changes to SOX are necessary. I applaud the SEC for taking a step in the right direction by voting to ease the compliance rules for small companies.

Source: "SEC Votes to Ease Sarbanes-Oxley Rules"
Author: Marcy Gordon

Real Estate Roller Coaster

So the question becomes, will the next section of this ride be a "soft landing" or a "moderate downturn" or will we be throwing our hands over our heads and screaming for an extended period of time? Thank you SpeculativeBubble for an illuminating ride.

New Century Files For Chapter 11 Bankruptcy

Readers of my blog know that I have been quite bearish on New Century Financial (NEW) for some time now. Well, as expected NEW finally filed for bankruptcy protection this morning. You can read the article here. I have written numerous articles on the state of subprime lending and the precarious condition New Century finds itself in as the nations largest independent provider of subprime mortgages. The first was back on March 4th, I called for a NEW bankruptcy back on March 12th, and detailed their last gasps for breath on March 23rd. My general thesis is that subprime lending is far too risky in a bear real estate market. The ability of overleveraged subprime borrowers to support their mortgage payments was and is linked in large part to how much equity they could build in the property before having to refinance. Many of these borrowers are underwater and are facing recasting mortgages that they cannot afford anymore. Because lending has tightened up they aren't even able to refinance into a loan like the one they currently have. As a result the looming recast wave will lead to a slew of foreclosures.

So what does this all mean for a monoline subprime lender like New Century? After all, they don't carry most of these loans on their books, they package them and sell them to banks and hedge funds. Well, those same banks aren't going to have the same appetite for risk that they had before once they realize how unstable these subprime loan portfolios are. Since New Century has very little of its own capital they are entirely reliant on the ability to arrange financing. If they get cut off they can no longer lend money and are quite literally dead in the water.

What kills me the most is the way the subprime brass frame themselves as the defenders of the helpless and the weak. Even as his company files for bankruptcy New Century CEO Brad Morrice had this to say:

"These loans have helped millions of Americans, many who might not otherwise have been able to access credit or to realize the benefits of home ownership," he said. "The non-prime sector will remain an important part of the American economy."

I'm not going to lie Brad, you have done as much harm as you have good. Don't get me wrong, there are some borrowers who took out subprime loans who will hold on to their homes and enjoy all the fruits of homeownership. These borrowers benefited greatly from being able to get a loan that they otherwise would not have been unable to get. But, I would say that most subprime borrowers will actually be hurt financially as a result of getting a subprime loan.

Brad Morrice and his ilk have done nothing more than feed the American Dream to those who can't afford it. He claims to be a relentless defender of those with bad credit, helping them realize the benefits of home ownership, but as many as 25% of NEW's loans in 2005/2006 will lead the borrowers to foreclosure. While owning your own home is part of the American Dream I think in this country we have a quixotic focus on home ownership that deludes many in to making bad real estate decisions. Add pushy mortgage brokers and loose lending standards into the equation and you get a perfect storm. I fully expect a lawsuit to emerge against New Century with claims of predatory lending. Until then we'll have to deal with Brad telling anyone who will listen all the good he has done.