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The perils of Paulson

  
Analysis, Education
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The crown may be slipping fast from billionaire trader John Paulson’s head.

The hedge fund manager became an overnight sensation in 2007 by betting big and early on the collapse of the U.S. housing market, and then doing much of the same on a surge in gold prices. But he is now emerging as one of this year’s big losers in the $2 trillion hedge fund industry.

His Paulson & Co. hedge fund firm, which managed $38 billion as recently as this past March, is down to about $35 billion as of the first week of August, and it shrinks a little bit more with every big drop in the U.S. stock market.

One of Paulson’s two main funds is now down more than 30 percent this year, the firm has reported to clients, compared to a much smaller 6.1 percent decline for the average hedge fund, according to Hedge Fund Research.

The problem for the 55-year-old manager: His equally daring bet that the U.S. economy and housing market would rebound strongly from the financial crisis — a big wager that looked prescient a year ago — isn’t panning out as planned.

Paulson’s funds have amassed huge, mutual fund-style stakes in shares of financial institutions like Bank of America, Citigroup, Hartford Financial, Popular Inc. and American Capital. But these are ringing up hefty losses.

And with fears of a double-dip recession in the United States mounting, coupled with this month’s 13 percent plunge in the S&P 500, the talk is growing on Wall Street that unless Paulson can quickly turn things around, the hedge fund king could be hit with a wave of year-end investor redemptions.

“There are many investors who have experienced great gains with John Paulson, but a lot of the money has come into his funds after those great gains were achieved, and the relative newcomers are seeing a lot of heavy losses,” said Daryl Jones, director of research at Hedgeye Risk Management, which sells investment research to institutional investors. “I would imagine it would lessen their appetite to stay with someone who is supposed to be a big superstar but is down double digits right now.”

Paulson, through a firm spokesman, declined to comment. But people close to Paulson point out that other than hedge fund guru George Soros, no one has consistently made more money for clients than the man referred to by his friends and associates as “J.P.”

LOYALTY TEST

This year, however, his investors’ loyalty is being put to the test.

Maybe no one single trade has come to symbolize Paulson’s bullishness on the U.S. economy more than Bank of America. By August 9, the troubled lender’s shares were down 43 percent this year, reducing the value of the 124 million shares Paulson owned as of March 31 by $784 million. Paulson is believed to have sold some of his Bank of America shares as the stock has plunged toward the $7 mark, but the firm has refused to comment on its current position. (link.reuters.com/gem23s)

The picture isn’t much prettier for Paulson’s large share holdings in Citigroup, Popular (formerly Banco Popular) and SunTrust Banks. The value of Paulson’s equity stake in those three banks, assuming the funds haven’t sold any shares since March 31, would have declined by more than $800 million over the past four months.

And then there is Sino-Forest, the troubled Chinese forestry company. Paulson absorbed a $500 million loss on the stock in June after allegations of accounting irregularities at the Hong Kong-based company surfaced earlier in the month. (link.reuters.com/hem23s)

The series of missteps is tarnishing the near god-like status the former Bear Stearns trader has earned over the past few years.

Much of the $20 billion in outside investor money Paulson manages has come from pension funds and clients who bought in after he made $15 billion for the firm in 2007 on his well-chronicled subprime mortgage trade. Paulson raised that money by making his hedge fund one of the most widely available to wealthy customers of dozens of large and small brokerage firms. (more…)

Charting The Epic Collapse Of The World's Most Systemically Dangerous Bank

  
Analysis, Education
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It’s been almost 10 years in the making, but the fate of one of Europe’s most important financial institutions appears to be sealed.
After a hard-hitting sequence of scandals, poor decisions, and unfortunate events,Visual Capitalist’s Jeff Desjardins notes that Frankfurt-based Deutsche Bank shares are now down -48% on the year to $12.60, which is a record-setting low.
Even more stunning is the long-term view of the German institution’s downward spiral.
With a modest $15.8 billion in market capitalization, shares of the 147-year-old company now trade for a paltry 8% of its peak price in May 2007.

THE BEGINNING OF THE END

If the deaths of Lehman Brothers and Bear Stearns were quick and painless, the coming demise of Deutsche Bank has been long, drawn out, and painful.

In recent times, Deutsche Bank’s investment banking division has been among the largest in the world, comparable in size to Goldman Sachs, JP Morgan, Bank of America, and Citigroup. However, unlike those other names, Deutsche Bank has been walking wounded since the Financial Crisis, and the German bank has never been able to fully recover.

It’s ironic, because in 2009, the company’s CEO Josef Ackermann boldly proclaimed that Deutsche Bank had plenty of capital, and that it was weathering the crisis better than its competitors. (more…)

UBS latest to cut India's FY12 growth forecast to 7.7 pct

  
Analysis, Economy, Education
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(Reuters) – UBS on Wednesday joined the growing list of brokerages lowering India’s 2011/12 economic growth forecast, paring Asia’s third-largest economy’s growth to 7.7 percent from 8 percent, as interest rate rises and higher oil prices start to bite.

Morgan Stanley and Bank of America-Merrill Lynch had last week lowered their growth forecast for the Indian economy in the next fiscal year that begins in April to 7.7 percent and 8.2 percent.

UBS also cut the world’s second-fastest growing major economy’s gross domestic product forecast for the current fiscal year to 8.7 percent from 9 percent on weak December-quarter growth and continuing weakness in the industrial output growth.

“The reason for the slowdown is as before: lagged impact of todays tight money on demand plus effect of higher oil prices,” Philip Wyatt, an economist at UBS wrote in a note, adding he sees the economy recovering to 8.6 percent growth in 2012/13.

India’s economy grew at a slower-than-expected 8.2 percent in the December quarter from a year earlier, after expanding at 8.9 percent in the previous two quarters.

Industrial output in January topped forecasts, but was still weak at 3.7 percent annual rise.

“We expect WPI (wholesale price index) inflation to accelerate from 7 percent in March 2011 to 7.7 percent a year hence,” Wyatt wrote.

India’s headline inflation unexpectedly quickened in February on rising fuel and manufacturing prices, raising expectations for aggressive central bank tightening beginning later this week. (more…)

Soros Says "Crisis Far From Over, We Have Just Entered Act 2"

  
Analysis, Economy, Education
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The bearish case has just gotten another notable supporter in the face of George Soros, who during his remarks at a conference in Vienna, said that the “we have only just entered Act II” of the global financial crisis.

Bloomberg reports:

Billionaire investor George Soros said “we have just entered Act II” of the crisis as Europe’s fiscal woes worsen.

“The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.”

Concern that Europe’s sovereign-debt crisis may spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp.

“When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide,” Soros said.

One wonders if Soros, who made a name for himself originally in the currency markets, is involved in the current record FX volatility. Of course, with animosity toward “speculators” at unprecedented levels, it probably would not be very prudent of anyone to disclose they are now taking on Central Banks directly.

Why We Fear Simple Money Solutions

  
  Education
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I keep coming across an interesting problem. People say they want things to be simpler — investing, life insurance, retirement planning, etc. But when a simpler (and effective) option is proposed, they reject it as too simple.

In most of the money situations I’ve come across, the best solution is almost by definition the simplest. (Note: I didn’t say the easiest.)

So why don’t we go for simple?

1) We don’t believe it will work.

We’re attracted to complexity because anything that requires a lot of something — time, details, money — should work, right? By default, if it’s simple, say only two steps instead of ten, we think we’re missing out.

2) We think simple should be easy.

It’s like the guy who goes to the doctor and says he doesn’t feel well. There must be something wrong with him that a pill could fix. But all the doctor says is, “Get more sleep, eat healthier food and exercise three times a week.” (more…)

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