Monday, May 16, 2011

Just Another Manic Monday?

On Monday, I hooked up for lunch with someone who works at a successful Montreal hedge fund. He complimented me on my blog and then we started talking about alpha talent in Quebec. There are some exceptional hedge fund managers in this province that are being totally ignored by Quebec's large institutions (for God knows what reason!).

I would like all the global funds that read my blog to contact me (LKolivakis@gmail.com) and I'll be glad to share more information on our alpha talent in Quebec. Many managers have worked in London, New York, Chicago and decided to move back to Montreal for personal reasons. I want to support them as much as possible because Montreal's hedge fund community is small but offers tremendous potential. I want Montreal to become the fastest growing hedge fund center and will do everything I can to support our talented alpha managers.

The person who I had lunch with today introduced me to another person who is in the process of starting a relative value commodity fund. I spoke with this manager late this afternoon and was blown away by how sharp this guy is. Unlike most commodity fund managers who mostly trade front end oil futures, this manager and his small team have years of experience trading all commodities, including energy, metals, corn, sugar, and other soft commodities.

We had a great discussion on the financial crisis. Like me, he was extremely bearish back in 2006. I told him I was researching all these complex CDO-squared and CDO-cubed structures and was petrified. He told me he wanted to buy out-of-the-money put options when the S&P reached 1400 but his manager didn't like the idea. "People do not want to hear bad news".

I laughed because it's so true. Just like permabears on Zero Hedge do not want to hear good news. My brother called me tonight to tell me to tone it down on Zero Hedge. I told him that I try hard to ignore the idiots who keep insulting me but once in a while I'll vent and tell them to "F off". But my brother is right, once you're in the public eye, any cyber idiot can insult you so it's best to strictly ignore these cowards.

Back to that commodity manager. He impressed me because he uses liquidity flows, technical and fundamental analysis to take positions in various commodities and understands the term structure of the commodities he trades, linking it to his fundamental analysis. He uses derivatives wisely and isn't looking to hit home runs every time. One thing he told me is that a lot of "superstar" commodity managers are one hit wonders (one fund was up 200% last year and lost 40% last month). That's why I tell all institutional managers to focus on process over performance.

We also talked about how crazy things got back in 2008. I told him to ignore hot money investors like Swiss fund of funds and find patient capital like large global pension funds. Interestingly, he explained to me what happened in 2008. Redemption notices were coming in hard at fund of funds and they first pulled money away from liquid strategies like commodity trading advisors (CTAs), global macros and L/S Equity funds. They also redeemed from illiquid strategies but those funds took longer to liquidate their positions. I remember, it was one redemption after another, forcing hedge funds to close the gates of hedge hell.

He told me some of that is happening now. Big moves in commodity funds, many of which are liquidating positions to shore up liquidity. He shorted silver and made a bundle last week. Lots of managers, especially CTAs, are getting whipsawed in these volatile markets. But he didn't tell me he was bearish on commodities. Quite the opposite, he sees the secular uptrend continuing but there will be plenty of volatility along the way (which he will play using derivatives).

When the time is right, I will reveal this manager by updating my blog post on Quebec absolute return funds. Just by talking to this guy, I know his fund will be very successful. Again, I urge global pension funds investing in hedge funds to visit beautiful Montreal. We need more patient capital willing to support our talented alpha managers, some of which have years of experience working at large financial centers and at the large Canadian pension funds on internal alpha strategies.

It was another manic Monday. If you visit Zero Hedge and read the commentaries, you'll want to slice your wrists. SocGen is now forecasting a Chinese slowdown and warns commodities will sell off hard. I say keep buying these dips because we're heading much, much higher (many solar stocks are way oversold as the big hedgies keep manipulating them to death!).

In another comment, Zero Hedge says bond king Bill Gross IS shorting Treasurys:
And while we wish we had an updated TRF holding (the last one is as of December 31, 2010), even using even stale data, we find that at the end of 2010 TRF had $608.3 billion in Net Futures held SHORT (link), and $588 billion in Eurodollar positions, which is precisely where his marginal synthetic rate bias/exposure is contained. Yes. This is a short equivalent position.
Bill Gross denied these allegations on CNBC, and says that Greece is the world’s biggest candidate for default (hmm, either those Norwegians are stupid for buying up Greek bonds or Bill is trying to pull a fast one on us again, snapping up Greek debt at default prices).

I asked the smartest fixed income analyst in Montreal to make sense of all this noise. Actually, this person is one of the smartest analysts I ever met and had the pleasure of working with and he's a great guy to boot. Here is what he wrote me:

"Debt tends to slow economic growth," Gross said in a live interview.

More accurately, slow growth leads to higher government debt.

The below matched my previous comments: Zero Hedge really didn’t pick up on the fact they are still long duration; they just have a spread position.

He blamed a "blogger" who created a "misconception" that Pimco had shorted Treasurys. The comment was an apparent reference to the zerohedge blog, whose author posted on Twitter that Pimco holds a negative duration weighted exposure to Treasurys.

Gross said only that Pimco is "very underweight" on Treasurys and that the firm is making money even though it has been on the wrong side of that trade in recent weeks.

"Pimco is doing just fine," he said. "We're outperforming 77 percent of the bond market universe because we're holding other bonds that are doing better than Treasurys."

Did you all get that? Pimco is still long duration but they have a spread position. He further explained this to me a couple of weeks ago:
They still have a positive duration, I believe, so the net Treasury short can be a viewed as a short Treasury-long spread product trade. But they are certainly playing up to the Zero Hedge crowd….

The fact that they have cash represents a curve position (or the residual of a curve position), so “charging a management fee for holding cash” is a bit unfair.

So I laugh when Bill Gross and others warn of a looming US debt crisis. They got the causation all wrong. Importantly, slow growth leads to higher government debt, not the other way around.

Finally, the Globe and Mail reprinted a Reuters article stating that U.S. taps pension funds as it hits debt ceiling:

U.S. Treasury Secretary Timothy Geithner told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294-trillion legal limit on its debt.

The U.S. Treasury will issue $72-billion in bonds and notes on Monday, pushing the nation right up against its borrowing cap at some point during the day, according to a Treasury official.

Mr. Geithner said he would suspend investments in two government retirement funds, which will give the U.S. Treasury $147-billion in additional borrowing capacity.

“I will be unable to invest fully” in the civil service retirement and disability fund and the government securities investment fund, he said in a letter to congressional leaders.

The Treasury has said the suspension of the investments and other measures it could take would give the government until about Aug. 2 before it will start defaulting on obligations, such as paying bond investors.

Congress is in charge of increasing the debt ceiling, but Republicans are demanding deep cuts to federal spending for the price of their support in raising it.

Mr. Geithner reiterated previous pleas for action. “I again urge Congress to act to increase the statutory debt limit as soon as possible,” he said.

Previous administrations have also tapped the retirement funds at times to avoid breaching the debt limit. Over the past two decades, Treasury has suspended investments five times, with the most recent suspension in 2006.

“Federal retirees and employees will be unaffected by these actions,” Mr. Geithner said, since Treasury must make the funds whole once the debt limit is raised.

But the measures still disrupt Treasury’s operations, as it must run two sets of books among other things.

What do I make of all this? Just more noise. Go back and listen to ABC's This Week's roundtable discussion on the economy. Krugman is right, this is more fear mongering by Republicans who claim spending is out of control, ignoring how fragile the recovery is. Again, debt rose because economic growth slowed in the last couple of years. Once the economy recovers, government revenues will recover and debt will not be growing as fast.

This is all noise, noise NOISE! I do not believe we are heading into the abyss or that a looming US debt crisis is upon us. These pullbacks offer global pension funds excellent opportunities to snap up shares in energy, commodities, financials, and technology. You'll see, this is just another manic Monday. And please don't forget to support me by kindly donating any amount on the PayPal link under the pig at the top of my blog. Just because it's free doesn't mean you can't show your appreciation.

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