Wednesday, November 01, 2006

See, I told you so!

We knew it first.

Just before the market turned south this week I posted here that a market decline was likely. We are now seeing a classic bit of retrenchment. It’s possible (even probable) that the market is going to go up and down again over the next few months, but I expect a decline for the intermediate future (6 months to a year).

In making this call I am at odds with people like Kenneth Fisher, who theorizes that third years of presidential terms are almost always upward trending in the stock market. Go ahead and read it, I remain unconvinced that one should bet money on that trend over sound economic data. I actually find the article kind of humorous.

If you’ve bought into the Finance Wonk buy list (as I have) you might be interested in this presentation over at IPSCO, one of our investments. It’s one of only two buy calls I’ve made that are actually currently down (DOW and IPS, both down 3% or less), as opposed to the rest which have typically gained 15-20% depending on when exactly you bought. I’m still holding onto both IPS and DOW.

Some selections from the news wires:

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Economic Gloom

Reports on manufacturing conditions and construction spending offered little support for the idea the U.S. economy will rebound quickly from a slow third quarter, and futures traders have adjusted expectations for monetary policy, reflecting growing expectations of a rate cut as early as January and putting definitive odds on a rate cut no later than May.

[I am less convinced that rates will be cut this soon. I have been skeptical on this front for months, and have been right so far.]

The Nasdaq lost 1.4% today, the worst day for the tech-heavy index since Sept. 6. The broader market suffered, with declining stocks outnumbering advancing stocks by a ratio of two-to-one on both the Big Board and Nasdaq Stock Market.

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Public Hedge Funds?

It was only a matter of time before a hedge fund decided to go public. Fortress Investment Group, an alternative investment firm with more than $24 billion in assets under management, is set to file for an IPO that could value it at up to $8 billion, the Financial Times reports (subscription required), citing anonymous sources.

This would be the first public listing of its kind in the U.S.; Man Group, a London-based fund, first went public in the U.K. as a commodities broker with hedge-fund operations.

Francis Gaskins, president of Ipodesktop.com, said the most attractive part of Fortress going public is its already formidable track record in private equity -- it's a majority owner in several companies that have sold public offerings in the U.S. and the U.K. that have delivered strong returns since their IPO. The company owns 43% of Brookdale Senior Living, which went public in November of 2005 and is up 89% since, and owns 43% of Global Signal, which went public in June 2004 and is up 169% since. The firm is also a majority owner of Gatehouse Media, which went public a week ago.

"They can just say, look at us, we're a thoroughbred," said Mr. Gaskins. As for the implications for the rest of the $1.2 trillion hedge-fund industry, he said: "What happens when a new category goes public [is that] the best companies go first -- the higher-quality ones would follow this one."

Fortress seems to be motivated by a desire to turn its privately owned pools of money into "sustainable businesses with a longer lifespan," the FT wrote. The firm may float its own business, not just the funds, which means investors would be buying into the stream of fees earned by managers.

It raises some worries, of course. Would investing in this stock be as risky as putting money in an actual hedge fund? Are there more risks at a time when Amaranth and Archeus Capital (both well-respected, multistrategy funds like Fortress, though Fortress is bigger and probably more-respected) have just gone bust? Lastly, how much disclosure would be necessary, and would that cause trouble for the fund? "Well, I'm looking forward to reading their filing, and so is everybody else in the industry," says Mr. Gaskins.

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