fleckenstein calling it quits

Discussion in 'Wall St. News' started by zdreg, Dec 16, 2008.

  1. zdreg


    he market's misplaced optimism

    Stocks may claw upward for now, but the next quarter could be a different story. And while the threat of financial-stock collapses is fading, this brutal recession has far to go.
    By Bill Fleckenstein

    This week, I thought I might take a moment to update where we stand in the big picture.

    Returning to my baseball analogy, I believe the financial crisis is probably a little later in the game and could even be in the ninth inning. The chance of a collapse in any important financial stock now is rather small.

    However, I believe the economy is only in the third inning of a brutal recession. As for the funding crisis and the potential problems in the dollar and in bonds, most people still don't really realize that a game has been scheduled.

    As for the stock market, my hunch is the rally that has been under way for a couple of weeks will continue in fits and starts until sometime into early next year as folks become optimistic about what the new Obama administration will propose. A lot of the monetary and fiscal stimulus that's been announced has not yet had time to have an effect. And, since there's a big difference between proposing something and having it work, it's quite likely that folks will get overly excited.

    All of these are reasons I haven't wanted to be short recently, though I think that if the stock market behaves in the fashion I just described, there will probably be a pretty decent shorting opportunity sometime in the first quarter. But for now, I think the most likely path is higher.

    Even if that's the case, however, I expect some brutal declines, such as we saw Dec. 1. (Although that decline did turn out to be a head fake, buyers still could have gotten shaken out of a lot of money if they'd bought stocks carelessly.)

    So, to summarize: It's dangerous to be short right now, though it's probably too early to be long for real. (Folks who are adept traders might be able to make some money.) Other than in precious metals and precious-metal securities, I don't plan on doing much on the long side.
    All good things must come to an end
    I recently announced a change of investment focus on my Web site (subscription required), which consequently received a bit of publicity in the mainstream media. In the interest of keeping readers of the Contrarian in the loop, I would like to share what I wrote:

    After considerable thought and deliberation, I have decided to make a major change in my life: I am going to close my hedge fund. I have several reasons for no longer wishing to run a short-only fund, as I have for the past 12 years.

    I originally decided to start the fund because of developments in the 1990s that I wanted no part of. I felt that then-Federal Reserve chief Alan Greenspan was fomenting an environment that would lead to disaster, as consultants, financial advisers and the public at large were losing all respect for risk.
    Video on MSN Money
    Investing losses © ULTRA.F/Getty Images
    How strong is the fear?
    On Dec. 9, investors snapped up Treasury bills paying 0%. Not since 1940 have T-bills paid so little, yet demand was 4 times greater than the supply. The real problem, Jim Jubak says, is that the alternatives aren't any better.

    Of course, the reckless behavior carried far higher and lasted much, much longer than I'd imagined it could. However, the recent carnage in the stock market, real-estate market and the financial system (as well as the job losses) has washed away those excesses to a large degree, and it has violently demonstrated the risks associated with investing.

    A future goal of mine, when I set up the fund in 1996 -- as I attempted to step aside from the madness -- was to return to the long side of the business at some point, after investors became more rational about risk and when stocks offered a better risk-reward proposition. I considered this option briefly in 2002 after the stock bubble imploded, but the cleansing process was postponed due to the burgeoning real-estate bubble.

    Continued: What the new year may bring

    What the new year may bring
    Though I think the stock market still has unfinished business on the downside, I believe that 2009 is the year to prepare for a return to managing money in a more balanced fashion, with longs (and some shorts), as there are plenty of interesting ideas that appear to offer a margin of safety.

    Compelling opportunities on the short side are not as abundant as they were just a few months ago (though there still are plenty). The "value restoration project," to quote Jim Grant, has been brought about by the consequences of disastrous Fed policies and the madness of the crowd, both of which have concerned me for the past 15 or so years.

    Lastly, on a personal note, running a short-only hedge fund is very stressful, nerve-racking and generally not very much fun, entailing an intense focus on the short term to effect risk control. In addition, one views the world differently when operating solely from the short side, and I would like to widen my focus as I did when I managed money from 1982 to 1995. My wife is especially happy about this potential change.

    My efforts in 2009 will be directed toward setting up an investment vehicle to be managed by Fred Hickey and me. It won't be a hedge fund and will hopefully be available to everyone.

    Many in the "hedge" fund community have behaved in a disgraceful manner in the past couple years by taking huge fees and then either running at the first sign of trouble (by giving back money to avoid having to recoup drawdowns from high-water marks) or locking people up and not giving them their money back at all.

    Consequently, I'd rather not be part of that industry going forward. The Contrarian, as well as my daily Market Rap on my site, will continue as they hav