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[TTHQ Staff]

BEING STREET SMART
____________________

Sy Harding


WHERE ARE THE WINNERS? June 17, 2005.

Wall Street giant Goldman Sachs reported this week that bad bets on the direction of markets by its trading department contributed to its net income for the 2nd quarter dropping 27% from its level of a year ago, missing analyst estimates for the first time in two years.

Hedge funds, which had made large profits in recent years from their ability to bet on either direction in any market; stocks, gold, bonds, currencies, had been all the rage for several years, attracting more than $1 trillion dollars from investors. For awhile new hedge funds were forming faster than mosquitoes after a rainstorm in Maine. From a few hundred ten years ago, to more than 8,000 at last count (hedge funds, not mosquitoes).

But over the last year so many hedge funds have been running losses, or making just fractional gains, that it’s being reported that money is being pulled out of them quite aggressively, and concerns among regulators are rising that too many might begin taking unusually high risks even for hedge funds, in an effort to recoup before they lose their investors.

Their problems were highlighted this week with the announcement by previously prospering hedge fund Marin Capital Partners, which was managing $2 billion in investor assets, that it is giving up, closing down, and returning the remaining capital to its investors. Dow Jones Market Watch reported it is the most high-profile hedge fund casualty so far.

Investing in commodities had also become a popular alternative to the struggling stock market. But so far this year commodities have also been a money pit of whipsawing problems. The CRB Index of Commodity Prices spiked up 14% in just four weeks to a high in March. That enticed still more investors to get out of the then troubled stock market and into commodities. Unfortunately, the CRB then plunged 10% over the next two months, before whipsawing again, to a 5% rally over the last four weeks.

Crude oil was a popular commodity earlier this year. Crude prices had risen to a record $57 a barrel by mid March, making it look easy. Analysts projected the trend would continue and lead to $80 oil by year end. But the ink on those projections was hardly dry when crude prices instead began a 20% plunge that soon had those newly minted commodity investors, and hedge funds, wringing their hands and bailing out. Projections were reversed to expectations that the rise in oil prices was over, and it was headed to under $40 a barrel. Commodity investors hardly had time to reposition in short-sales in line with the new projections, when crude prices reversed back to the upside again and were soon back to the previous record highs.

Gold has also whipsawed investors badly so far this year. Gold reached a 17 year high at $455 an ounce in December, just a month after the new gold exchanged-traded-fund GLD, allowing investors to invest directly in gold bullion, was introduced. It then plunged to $411 in just two months, only to rally back up to $445 in just five weeks, followed by an immediate plunge back down $415, and recently back in rally mode, closed this week at $438 an ounce.

Even the man with the reputation of being the most successful investor in the world, got caught on the wrong side of markets. Last year, having raised his cash level to a huge $40 billion on concerns about the U.S. stock market, Warren Buffett publicly maligned the U.S. dollar, and U.S. policies that he contended were turning it into a third-rate currency. By the first quarter of this year he was reported to have a $22 billion bet on a continuing decline in the dollar. While he may be right in the long-run, which he insists he will be, the dollar has been rallying strongly for the last five months, moving 10% against him so far. His highly respected investment company, Berkshire Hathaway, is down 9% from its level in January.

For buy and hold stock investors, the Dow is still down 3% from its March high, and the Nasdaq is still down 4% from its January high. But market-timers have not fared any better. Thanks to the rally of the last two months, those who exited the stock market at my sell signal on March 22, have seen the S&P 500 rally back to 4% above its level at the exit.

Bond investors, while at least having positive overall performance so far this year, have also been shaken by considerable volatility. Bonds were up 8% over the first 6 weeks of the year, only to decline 8% over the next 6 weeks, and then rally 13% over the next two months. And now have come back down 4% over recent weeks. The volatility, and probably the risk of remaining in bonds with the Fed raising interest rates, has had investors bailing out of bond funds since February (but also out of equity (stock) funds.

So where are there happy investors who have not been bailing out to go searching elsewhere?

You guessed it. In real estate.

No sad faces there yet. Buy a house, paint it, put it back on the market and make a big profit. . . . . . . Whoa. That’s an observation, not advice at this late date in the cycle.


Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.