Like most 'on the street' I recognize journalists for the pigs-with-lipstick that they are. But this Jesse Eisinger guy at WSJ knocked my socks off with his last two "Long & Short" articles. Sorry, WSJ online is copywrited so I can't cut-n'-paste his "Lifting the Curtains On Hedge-Fund Window Dressing" today but recommend everyone go online or grab the hardcopy and have a look. He goes right after a Jeff Feinberg, hedge fund manager of JLF Asset Management for purported month-end window dressing of several small-cap stocks. Feinberg's shit has literally Hit The Fan. Ouch! Back in mid-August Eisinger did an article about tracking the performance of ARMs loans issued by one ARM-focused, and transparent company (whose name escapes me at the moment.) That article I've still retained for later study ... Eisinger's definitely doing his homework. Thus, two great articles I'd highly recommend.
Lifting the Curtains On Hedge-Fund Window Dressing September 7, 2005; Page C1 There are several names for it but the most common are Painting the Tape or Portfolio Window-Dressing. That's when a fund manager buys lots of shares in a specific company they already own, helping push the share price higher and thereby helping to dress up performance figures. Such practices have historically focused on the last day or days of the quarter, since mutual-fund managers focus intently on quarterly performance figures. The practice was never widespread, but was too common for comfort. Regulators have rarely done much about the curious movements of certain stocks in the final days of a quarter or a month. [Long] But now it appears as if strange movements are appearing at the end of the month. Why? It may be because of the proliferation of hedge funds. Many hedge-fund investors get monthly updates. A down month sets off red flags for hot-money investors and can cause an unwanted exodus of cash. "Hedge-fund investors have been typically much more short-term-oriented and driven more by monthly returns. It's a short-sighted way of looking at it," says Barry Colvin, the president of Tremont Capital, a "fund of funds" that also tracks hedge-fund data. The practice of tape-painting usually takes place in stocks with small market values that don't trade a lot of shares. The low volume of trading means a big buyer can move the share price more easily. In the old days, when portfolio managers actually talked to live traders, they might instruct them to "buy it sloppy" -- to disregard price for the purchase. Often -- but not always -- the share prices recede in the days following the quarter or month. A fund manager investing in a smaller stock can hang on to the stock, rather than sell right after the quarter. Also, a spurt of buying can lure followers. But eventually, the big holder in the smallish stock has to sell, and the exit isn't so pretty. So why do it? Usually investors like to buy low and sell high, but on the last day of the month, the rule becomes buy high and sell wherever or whenever. The reason is that every little bit helps to make a portfolio's monthly record as good as it can be. One reason that such practices aren't more widespread is that when a big fund plays around with a small stock, it probably won't have a huge impact on its overall performance. Therefore, such practices are usually the purview of smaller funds, where a big move in a smallish stock can have an impact on overall monthly or quarterly performance. Last Wednesday was the last day of trading in August. It had its share of striking stock charts that look like the letter L lying on its side. In other words, the stocks were trading flattish until the last hour of trading or so and then shot up on heavy volume. Among them: ⢠Medical Properties Trust, a health-care real-estate investment trust with a market value of about $430 million, was up 50 cents, or 4.8%. ⢠True Religion, a $340 million market cap maker of one of those brands of jeans that women actually pay 240 bucks for, was up 46 cents, or 3.1%. ⢠Golf Galaxy, an owner golf-supply stores with just over $200 million in market value, was up $1.25, or 6.8%. LONG & SHORT MAILBOX Are you seeing more cases of window-dressing? Please send comments and questions to longandshort@wsj.com. Reader comments -- and Jesse Eisinger's answers -- about the Long & Short column. Published Monday mornings. ⢠Nano Proprietary, a nanotechnology company with just over $250 million in market cap that is traded on the bulletin board, was up 19 cents, or 8.4%. ⢠Pico Holdings, which runs a water company and owns land in Nevada, and has a market cap of just over $400 million, was up $1.20, or 4.1%. Those were big one-day jumps, especially since all of these stocks beat the performance of the small-stock tracking index, the Russell 2000, which was up just under 2% that day. All but Medical Properties have moved higher since Aug. 31. It's impossible for outsiders without access to the trading records to know what happened for sure. But there is one common thread: They are all stocks that were owned recently by JLF Asset Management, a roughly $500 million hedge fund run by Jeff Feinberg, according to recent Securities and Exchange Commission filings. ⢠As of an Aug. 31 proxy filing with the SEC, JLF owned 6% of Medical Properties Trust. ⢠As of a July 22 SEC filing, Mr. Feinberg was listed as a 5.4% holder of True Religion. ⢠As of an Aug. 11 SEC filing, Mr. Feinberg owned 6.2% of Golf Galaxy. ⢠JLF owned 6.2 million shares, or about 6.2%, of Nano Proprietary as of the latest SEC filing. ⢠JLF had 404,000 shares, or 2.5%, of Pico Holdings as of June 30. JLF was listed as a selling shareholder in a July 14 offering document. I sent Mr. Feinberg an email detailing the movements in these five and 10 other companies that his funds were listed as owning as of the latest filings that had noteworthy, but less significant, moves on the last day of August. When he called me back, he told me he wouldn't comment on specific positions and trades. But he told me: "There's no incentive for me to do anything like you are insinuating," adding, "Almost half the companies I don't own and the vast majority we have not transacted in recently." I asked him about the five stocks listed above and one other, and he repeated the line above. He then ended the phone call. Mr. Feinberg started his hedge fund in 1999 and developed a reputation as an active trader and griller of managements. He says he has compounded annual returns since then of 22%. He says that after having taken a sabbatical for several months in 2002 to spend time with his three children, he reopened at the beginning of 2003. He was up 15% in 2003 and up more than 18% in 2004, he says. Since he was down in 2002, when he reopened, he honorably declined to take a performance fee until he got back to even, a common industry practice for an ongoing fund. Year-to-date, he says he is up more than 5%. In July, he was up 9%, he said. But in August things didn't go so well: His fund lost 2%, he says. It's not hard to see one reason that might be: Abercrombie & Fitch, of which JLF owned 437,100 shares as of June 30, was down 29% in the August after having issued a disappointing forecast. August might have been even tougher if his other positions hadn't rallied on the last day.
Sore ARMs? A Peek Inside Potential Mortgage Troubles WSJ: August 10, 2005 California isn't the best place to go looking for canaries -- unless they're metaphorical ones. The state has one of the frothiest housing markets, and banks have been enablers. Investors looking for early warnings of trouble in the mortgage industry should give Downey Financial's numbers a look. Two weeks ago, I wrote about the rising popularity of option adjustable-rate mortgages, especially in the land of Schwarzenegger. Option ARMs give borrowers the ability to make a minimum monthly payment that results in the balance of what's owed going up. Lots of people are doing that, seemingly oblivious to the risk: Interest rates are rising, and if housing prices fall, homeowners could end up unable to afford the monthly nut on a home they'd have to sell at a loss. But, as I noted, investors haven't been able to gauge banks' exposure adequately because the disclosure generally is poor, though that problem has improved a bit recently. At Downey, disclosure is good; it's the exposure that's bad. A small Newport Beach, Calif., bank with a stock-market value of $2 billion, Downey writes option ARMs like Californian plumbers write screenplays. Downey had a blockbuster second quarter. It reported earnings of $2.29 a share, beating estimates by a whopping 75 cents a share. The stock is down a notch since then, but it's up more than 30% for the year. Other measures disclosed last week in quarterly SEC filings are more troubling. To remind readers, if a borrower chooses to make that minimum monthly payment, a bank nevertheless books the entire monthly amount owed as earnings. That's noncash earnings, which is fine -- as long as the bank isn't allowing people to buy wildly overpriced homes they might not be able to afford as interest rates rise. As of June 30, $12 billion, or 87% of Downey's ARMs are option ARMs. Its customers have racked up $72 million in additional balances on those mortgages by choosing to make minimum monthly payments. That's called negative amortization. Right now, Downey's negative amortization is a mere 0.6% of its ARM portfolio. But that measure understates its significance. Its negative amortization balance is accelerating, from $51 million in the first quarter and $37 million in the fourth quarter of 2004. These noncash earnings were 20% of Downey's earnings per share in the second quarter. If that trend continues, more than 40% of Downey's current-quarter earnings would be noncash. Analysts already expect earnings to decline to $1.79 a share in this quarter, so it would be a bigger slice of a smaller pie. In other words, the bank's earnings are being increasingly driven by sales of a product to inherently risky customers. Downey Finance Chief Tom Prince says concerns about option ARMs are exaggerated and that his bank previously has had even more exposure to them without problems. "I'm not particularly concerned about it," he says. So far, the bank has had little problem selling off option ARMs into the secondary market. But the company has cautioned that profit margins on those sales are likely to go down. Since Downey has been disclosing negative amortization figures for a while, we can see what the customer patterns are. They don't bode well. Banks argue that these loans are appropriate for customers who want flexibility or who have variable salaries, like salespeople who work for high, but unpredictable, commissions and bonuses. That should mean, then, that rising interest rates wouldn't necessarily lead to an increase in people choosing to make minimum payments. Yet the percentage of payments by Downey customers that are big enough to make their principal go down is falling (as a portion of the loans). Why? Probably because some customers are only repaying their mortgages by refinancing their homes, not when they get paid that big bonus. With mortgage rates unlikely to head down soon and housing prices potentially stalling, customers aren't going to get that chance much anymore. Those bonuses better be pretty good. The Office of the Comptroller of the Currency is looking broadly at ARM practices. Regulators there would be even more concerned if a bank's capital were at risk. At Downey, there's no sign of that for now. Negative amortization represents 6% of the bank's equity. But that could be 9% at the end of this quarter, based on recent trends. This canary is looking a bit peaked.
To me both articles are weak, the second less so than the first. In the first article, he can't even establish that the guy bought any stock. Seems pretty thin for an "expose." Some small stocks went up on a day the whole market was up. that's a scandal? The second article reeks of the type of Herb Greenberg spoon-fed-by-shorts "journalism" that has made greenberg so suspect. Yes, he gets a few of them right, but he's not really a journalist. He's just a whore for shorts. Is that what the WSJ is aspiring to?
This article doesn't even make sense. Unlike mutual funds, hedge funds have a watermark. Hence if you push up share prices at the end of the month, you've just moved up your watermark that much higher for next month.
It made perfect sense. You either didn't read it, didn't pay attention, or don't have a real-world clue about how fickle hedge $$ can be.
============ Thanks BlueHshoe Think WSJ is on to something with noting small caps can be punched around more than others; & ARMS could easlly be trouble to borrower/banks. However disagree with the implication that hedge funds or mr Feinburg is some sort of cookie monster; buying on last day, & first day of month has been around much longer before hedge funds do the volume they now do.
SEC doesnt' go after anybody unless they have to, and generally once there name is in black ink, as in Feingold's case, they'll have to ... And if he doesn't keep his shit togethor (perhaps gets a run on client $$ as happens regardless of so-called lock-ups) other funds could gun for him, i.e. dump on his stocks. Long and short, this article seriously threatens his franchise ...