Friday, December 31, 2010

Morning Note...

Really not much to say this morning, folks… Happy New Year to your and yours…

Futures ~10bps lower this morning on year-end profit taking, most likely.  Europe was lower on a half-day of action; -25bps on the aggregate but the U.K. and France were both down ~1% and Germany is closed.  Asian markets were mixed overnight, with Shanghai the lone standout at +1.75%.  Oil -80bps, Gold +43bps, USD -45bps, EUR/USD 1.3370. 

In terms of commentary, I thought this was the best piece of the morning thus far:

Perennially, there tends to be a lot of hype around the last day of the year (buzz words like window dressing, portfolio rebalancing, tax loss selling, etc).  I remember I flew back from Hawaii a day early so as not to miss 12/31 a few years back.  It wasn't worth it ... I should've stayed on the beach.  We looked at broader market volumes over the past 10 years on the last day of the year, and today tends to be slower than people make it out to be.  Broader market volumes on 12/31 have been 77% of the December average, and 84% of the prior 10-day average (which tends to be light to begin with).  12/31 is around in-line with the prior 5-day avg.

As for PERFORMANCE, SPX has closed RED on "year-end" 7 of the last 10 times, and RED on 5 of the last 6.  The avg abs value move of SPX = 0.66%.  MVRX has outperformed SPX on 7 of the last 10 year-end days, XLP has lagged on 4 of the last 10, Russell 2000 has underperformed on 8 of the last 10.  Have a safe NYE!  Being 6 blocks from Times Square right now is 50 blocks too close for me.

Regarding Hedge Funds and this year’s performance, here’s an interesting NY Post article:

Hedges clipped

The normally boisterous and upbeat hedge fund crowd is limping into 2011 bearing the heavy weight of lackluster performance and an ominous insider-trading probe -- leading some industry watchers to wonder if the new year could be marred by another round of fund closures.

In 2010, the number of hedge funds to close their doors permanently declined 32 percent to just 585 firms through the end of the third quarter, according to fund tracking outfit Hedge Fund Research. But fund watchers say the recent downturn in closures may just represent a lull in the storm.

In terms of performance, the hedge fund industry -- which prides itself on being smarter than the Average Joe and charging clients 2 percent management fees and 20 percent on the profit -- struggled to eke out superior returns this year, leading the average hedge fund to close 2010 up a mere 7.5 percent, according to Hedge Fund Research. That's below returns for average stock market indexes like the S&P 500, which is up 13 percent this year.

"If the market is continually as tough as it has been, I think you are faced with guys who will say, 'I've had a good career. I've made my investors money,' " before throwing in the towel, said Sam Hocking, head of prime brokerage at BNP Paribas.

Leading that trend to the exit is noted moneyman Stanley Druckenmiller, who announced in August plans to call it quits after 30 years, citing the "stress of performing" amid a rare slump of just 5 percent.

Compounding the industry's pressure has been the Department of Justice's massive insider-trading probe, which has ensnared numerous hedge funds, including Raj Rajaratnam's $3.7 billion Galleon Group and a $1.5 billion health-care fund managed by Morgan Stanley's FrontPoint Partners.

What's more, the FBI in November conducted high-profile raids on three prominent hedge funds, including Diamondback and Level Global, which both manage money for prominent pension funds, including the New York State Common Retirement Fund.

Andrew Schneider, a founder of hedge fund services firm HedgeCo Networks, said investors have definitely grown skittish over who might be implicated next. Following the fed raids, some of his investor clients moved money out of funds that may be more likely targeted for insider trading, like event-driven funds, and reallocated to distressed funds, forex funds and computer-driven funds, Schneider said.

"Investors are holding back new investments in event-driven and merger M&A types of funds because of what's going on, even though some of them passed due diligence," he said. Investors are saying, "We don't know who's involved and we don't want to take the chance," he said.

Among the few fund managers on track to end 2010 with a bang appear to be those who took concentrated risks. Bill Ackman's Pershing Square Capital Management is up 35 percent, with big bets on distressed investments, while John Paulson's controversial gold fund is up 33.6 percent.

Grange Johnson, head of LaGrange Capital Management, said the only way to escape the current doldrums is to take risks on beaten-down plays. This year, Johnson's bets on Coinstar, the controversial operator of the DVD kiosk platform Redbox, returned his fund a good 200 percent after Coinstar settled several high-profile lawsuits with its distributors.

Of course, such plays come with their own stresses, said Johnson, whose fund is up roughly 60 percent this year.

"It's the type of investment that is prone to second-guessing," he said.

BGP lower on reports it is delaying payments to vendors as it tried to refinance.  UAM sells medicare prescription drug business to CVS for ~$13/share.  CLWR Chairman to step down.  IMAX higher on reports that Sony may bid $40 for the company.  S to buy $200M in CLWR debt.  BARD raises SWK estimates.  STFL positive on HOT.  BARD raises TNB estimates. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Best Quotes:  Interesting article from yesterday…

Dec. 30 (Bloomberg) -- Marc Faber, who advised investors to buy U.S. stocks in March 2009 as the Standard & Poor’s 500 Index began a rally of as much as 86 percent, said U.S. Treasuries are a “suicidal” investment.
     Government bonds are likely to decline, said Faber, who publishes the Gloom, Boom and Doom report. After bottoming in December 2008, the 10-year Treasury yield rose as high as 3.9859 percent in April on government measures to stimulate the economy. Concern about a second recession in three years sent yields lower through October.
     “This is a suicidal investment,” Faber said in a telephone interview from St. Moritz, Switzerland. “Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S.
long-term bonds.”
     On Nov. 3, the Fed said it would buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. U.S. bond funds had withdrawals of $8.62 billion in the week ended Dec. 15, the most in more than two years, according to Washington-based Investment Company Institute.

                          Rising Yields

     Treasury 10-year note yields will rise to 5 percent from yesterday’s level of 3.349 percent, Faber said, without specifying a time frame. As bonds fall over the next decade, he said investors should buy precious metals, real estate or equities. U.S. debt has returned 5.7 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index.
     Treasuries fell today as reports showed initial jobless claims dropped more than forecast, U.S. businesses expanded at the fastest pace in two decades and pending home resales beat expectations. The yield on the benchmark 10-year note advanced
0.02 percentage point to 3.37 percent at 4:28 p.m. in New York, according to BGCantor Market Data.
     Bonds may rally in the next two or three weeks, Faber said.
     Faber correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 then climbed 10 percent to its record of 1,565.15 seven months later, and ended the year up 3.5 percent.
     Faber said equities may continue to advance as the dollar weakens as a result of loose monetary policy.
     “If you print money, the currency goes down and the S&P 500 goes up,” he said. “By the end of 2011, people will look at 2012 and think 2012 could be a very bad year because the policies applied are not sustainable and create a lot of instability. Investors may look at 2012 and 2013 with horror.”