Michael Covel: News & Info.

Heather Flick writes at Trader Daily:

Hated by many and understood by few, most hedge funds today are not even, literally, hedged. This is an industry in need of an extreme makeover…The name “hedged fund” was coined by A.W. Jones, a late-blooming Australian immigrant who in his 40s developed a strategy for eliminating market risk by taking complementary positions. Selling some stocks short while buying others long, he built his portfolio to have equal total value, rendering market-wide moves in either direction a wash. He hedged his bets based on stock picking rather than market direction, thereby creating a win/win situation. Today’s hedge funds are private-investment pools open to a limited number of accredited (savvy, rich) participants. These pools can invest in almost anything, which encourages creative management strategies unavailable to other, more regulated funds. That’s basically it. Although governed by the rules of private offerings, partnerships and LLCs, the term “hedge fund” actually has no legal definition.

That is a nice primer. It adds to a comment of mine from before.

The following comment is not meant to pass along a fundamental view about what direction you should take trading certain mortgage lenders. Rather it is a nice logical view from Ben Stein on the true economic impact of the troubled lenders we have all been hearing about:

Today, the reason is supposedly terror in the subprime mortgage market. To put this as frankly as possible, this is just nonsense. Even if subprime delinquencies and defaults are up, they’re a tiny portion of total mortgages. Suppose 13 percent of subprime mortgages are in default. Subprime itself is less than 15 percent of total mortgage debt, so that means that roughly 2 percent of mortgage debt is delinquent or in default. Yes, that’s more than it used to be, and is a disaster for the subprime mortgage companies. But when a mortgage defaults, the lender takes back the house or condo, sells it, and usually recovers about 75 percent of the loan value or more. That means the real loss would be about 25 percent of 2 percent, or 1/2 of 1 percent. In the context of a market as huge as the nation’s mortgage market, that’s not a lot. A few companies will go bankrupt, and someone will make a killing buying their bonds and portfolios at a huge discount as they turn out to be worth a lot more than people thought in March 2007. But it won’t mean a lot to a roughly $14 trillion economy, of which the subprime mortgage market is a tiny blip.

The International Herald Tribune ran with this article (PDF) recently. An excerpt:

Sticking with institutions that safeguard money instead of taking big risks with it may be the best course after a multiyear expansion, especially given the penchant that bankers have for poor timing. It is always possible that they have learned from past mistakes, but Sellar, for one, is not willing to bet too much on it. “I don’t think they’re more resilient,” he said. “They try to talk good talk about improved risk models and stress-testing different scenarios, but you’re never able to know which scenario will lead to a blowup. A lot of them didn’t manage to miss Enron.”

The ending analysis, at least the Enron part, is on target. The problem is the ’squishy’ way they get to that understanding: its all fundamentally driven.

An updated link of all versions and all translations of my books.

Jeremy Siegel offers this view about recent market activity. An excerpt:

When stocks were in this uptrend, the market attracted many “trend followers” or “momentum players.” These are speculators who make no judgment about whether stocks are cheap or expensive but only want to jump on the bandwagon. There’s an old expression on Wall Street — “Make the trend your friend” — and that’s just what these speculators did. But these trend-followers knew that the bull market wouldn’t last forever. They protect their profits by placing stop-loss orders below the current price. A stop-loss order tells the market maker to sell whenever the stock penetrates a predetermined level. Because the market never moved down 2 percent for so long, many stop-loss orders were placed 2 percent below the market. Once the 2 percent limit was breached, a wave of selling broke out.

This is an interview I did last fall that just appeared in late February 07 (PDF version). As a fun contrast, this is a review of my book Trend Following seen recently:

I cannot believe that a reputable publisher actually picked it up. The only explanation is - Covel is “kissing up” to some big money hedge funds and uses his book to promote them, hence they muscled the publisher….a big cluster fuck if you actually paid money for this piece of shit.

I love crazy people! This guy sounds like he needs a hug from someone or at least some mild electric shock therapy.

I offered some comment (PDF) recently to a reporter who openly admitted she was new to the subject of George Soros. I think she did a good job of “getting it” for a newbie.

The paperback edition of Trend Following is out. It includes a second forward by Charles Faulkner. High resolution cover.

Today, New Century Financial Corporation was all the news. Stock cratered. Straight down. Get ready for the dog and pony Congressional hearings show. I am sure there were accounting problems. If they violated the law, executives should get ready for their own version of HBO’s Oz. However, don’t complain if you are still holding the bag at $1.66 a share. There were clear warning signs in the price movement long before the meltdown. There were no excuses for not exiting, that is unless you were dollar cost averaging (losers average losers).

From today’s New York Times:

Big Money Still Learning to Lobby By JENNY ANDERSON: The hedge fund industry seems resigned to no longer be a wallflower in Washington as it joins the lobbying dance with Congress.