Wednesday, December 24, 2008

Equities---early 2009 challenges

Over the last six weeks there has been a commonly expressed point of view that after year-end there was reason to believe that the equity markets could begin to be revived. No one was predicting a robust turnaround but many were speculating that companies with quality balance sheets and strong franchises in products or services that are needed would begin to see value buyers step in, cautiously of course, but the turn would begin. This thought was based on the expectation that investors, especially hedge funds, would have worked through their flight to cash, tax selling, and required redemptions. This no longer appears to be the case.

The number of hedge funds that are shutting down is not known, at least not here, but that number is large. There is no incentive to stay open for many with the earn-back agreements that are standard for most(no % take out on future gains until current losses have been recouped). Even big funds, like the two Tontine funds that totalled $11 billion earlier in the year, are shutting down. This means that instead of just accomodating redemptions at the year end calendar date, the closing funds will be going through an "orderly liquidation". They will continue selling in the coming months in a process that is intended to preserve what value is left for themselves and their investors. The selling will continue and any rallies in stocks, especially those that were top heavy with hedge fund investors, will be quickly met by what once was called "profit-taking" but now should be named "loss-mitigating".

Another shoe has dropped as well. The Madoff fraud has demolished confidence in the high net worth investing model globally, at least in the near term. Money invested based on reputation and trust will head for the exits and new money will be slow to come in. That's more selling of equities that's focused on 2009.

With any belief in the viability of equity markets longer term, there are without question many good companies that could now be categorized as "deep value". Choosing them is not like shooting fish in a barrel, far from it, but there will be a time when doubles, triples and home runs will come from some of these investments. The beginning of 2009, however, is not likely to provide the relief that some had anticipated.


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