(snip)" So here’s my crack at it. Two articles from venerable publications crystallized the following for me this week: It’s the hedge funds, stupid! Last week the NY Times, in true this-time-its-different fashion, wrote that the difference between the hedge funds and the dot.coms of yore is that “Hedge funds make money.”
Yeah, right. Smells like the bubble is morphing, and the MSM is being put to use once again as head corporate cheerleader. Another case in point, this week’s Barron’s led with a story by Michael Santili titled, “Abolutely, Positively, No One’s Safe.” The article talks about how even a company like FedEx, with a market cap of $34 billion, could be taken private in an LBO – at a 20% premium! The money is out there. Forget the “fact” that liquidity is drying up. FedEx has 700 planes and 44,000 trucks that could be used as collateral against which to issue debt. At the moment, it is undeniable that the hedge funds, or LBO-firms – whatever you want to call them – are the current force lifting all market boats.
Given that last week’s offer by Blackstone to take Hilton Hotels private at a 40% premium resulted in a rally of hotel stocks across the board, it is hard to miss the impact that private equity / hedge funds are having. Traders want to make quick profits, so they will increase the intensity in the search for the next potential buyout target, like kids looking for the golden certificates in Willy Wonka bars. Who doesn’t want to hit a jackpot like Hilton? Stocks will fly along with buyouts and rumors of buyouts. The old Wall Street adage “Even turkeys can fly in a hurricane” will be seen in full force.
Like an expert tai-chi move, bulls continue to use the bears own energy and momentum against them, forcing them to cover their shorts and causing the exact opposite of their intended results: big market gains. At 3:45pm ET, the Dow is up 271 points - an even 2% - to a new all time high! With today’s rally, I can hear the little bulls across the country starting to lick their chops: “Hey Martha! This article here in the Times says hedge funds make money! Do you think we should buy some?”
Maybe little bull, but go in with your eyes open. Hedge funds make money the same way vampires stay alive: by sucking the lifeblood from another living entity. But more important is this: the Dow is up around 10% so far this year, but according to both Richard Russell and James Stack, the small investors are so far staying away. They’re skeptical, and rightfully so. To the man on the street, the economy looks weak, it is hard to make ends meet, and every day prices seem to go up a little bit more. Things do not seem to be getting better.
Until today, the market has been no place for the small investor to play. But after today, or certainly after the Dow smashes through 14,000, the timid little bulls that were afraid to get into the market for fear of a meltdown will suddenly be clamoring to get in for fear of a melt up! Forget the fundamentals and the abundant bad news - prices are going up! Summer rally here we come!
So this is how this bubble will likely roll on – at least for a little while. Private equity can still borrow big to buy big, profitable companies (e.g. FedEx), extract a lot of fat banking & consulting fees from the company’s wealth, pay the fund managers’ and consultants’ salaries, slash jobs, cut services and squeeze even more booty out of the company, then turn around and sell the whole thing out in an IPO. Ca-ching! The fat cat hedge fund managers will cash out into the world of billionaire-ism by selling their shares to the billionaire-wanna-be’s known as the general public, who get their investment tips from the New York Times (newsstand price, $1). Shares thus pass from strong hands to weak as the market quietly tops amidst jubilation and cheer.
Later, after all the money is banked, and the managers have moved on, and the hedge-fund shares are in the toilet, we’ll find that the service at FedEx (or whoever the lucky target companies may be) has mysteriously deteriorated and earnings are down. Not so mysterious, really, when outside managers come in to butcher the company and kill morale. Profits decline and assets – those 700 planes and 44,000 trucks – start getting sold off at pennies on the dollar. Eventually all that remains of the company is a pathetic shell of its former self, the corporate vamps having sucked it dry of its vitality and life, just like the subprime borrowers who today find themselves both homeless and penniless, walking away from their payments on a mortgage under water. That, friends, is when the second great depression begins.
In the mean time, this is the housing bubble strategy all over again, just in a new form: Lend, borrow, buy, extract, sell, repeat. Through the alchemy of finance, the day of reckoning has once again been postponed, though who knows for how long? When things start looking grim again, PTB will have a new strategy to keep things rolling along that keen bubble morphologists will be required to sniff out.
But for now, enjoy the summer rally. Take a dip - the water is fine. Just make sure you don’t get yourself in too deep. The sharks are circling in the distance, and they are getting hungry."(snip)
from



Reply With Quote
Bookmarks