World Markets 101

Madoff Investor Commits Suicide after Losing $1.4 Billion

Thierry de la Villehuchet, founder of Access International, a hedge fund that raised funds in Europe to be managed by Madoff, was found dead in his New York City Apartment today.  It was reported that he cut his arms and wrists in an apparent suicide.  Access International had been funneling three-quarters of it’s assets into Madoff’s ponzi scheme.  According to the LA Tribune, an associate of Villehuchet had said that he "could not cope with the pressure following the outbreak of the scandal.”  Something tells me that this may not be last suicide that results from this tragedy. 

3x the Fun with New ETFs from Direxion

The markets have experienced record volatility in 2008, but if this roller coaster ride has left you feeling a little bored than maybe you need to get on board with the latest 3x ETFs from Direxion.  In case you were unaware, “ultra” ETFs have been soaring in popularity over the past several years.  An “ultra” fund allows an investor to achieve double the return of the underlying index and they have been very popular with short term traders, that is, until Direxion came along.

Just several months ago Direxion launched a group of ETFs that allow an investor to capture 3x the gain in the underlying index.  The competition between these two firms reminds of the scene from Something About Mary where the hiker discusses his competition for 6 Minute Abs with Ben Stiller.  His idea was to develop 5 Minute Abs and put 6 Minute Abs out of business, but it’s that simple.  In fact I’ll go out on a limb here and predict that in two years we get 4x ETFs, why not?  Unless small investors get burned on these products and start suing the firms for their losses I can’t see why it wouldn’t be a possibility. 

Below is a list of current and just released 3x funds from Direxion.  There is a long version and a short version of each 3x ETF.

On the long side*:

Symbol                             Name                            Index

BGU            Large Cap Bull 3x Shares        Russell 1000

TNA            Small Cap Bull 3x Shares        Russell 2000

ERX             Energy Bull 3x Shares              Russell 1000 Energy

FAS             Financial Bull 3x Shares          Russell 1000 Fin. Services

DZK             Developed Markets Bull 3x   MSCI EAFE Index

EDC             Emerging Markets Bull 3x      MSCI Emerging Markets

TYH             Technology Bull 3x                   Russell 1000 Technology

 

On the short side*:

Symbol                             Name                            Index

BGZ            Large Cap Bear 3x Shares        Russell 1000

TZA            Small Cap Bear 3x Shares        Russell 2000

ERY             Energy Bear 3x Shares             Russell 1000 Energy

FAZ            Financial Bear 3x Shares         Russell 1000 Fin. Services

DPK            Developed Markets Bear 3x MSCI EAFE Index

EDZ            Emerging Markets Bear 3x     MSCI Emerging Markets

TYP            Technology Bear 3x                  Russell 1000 Technology

 

*I do not recommend leveraged funds to clients.  Readers considering investing in any of the funds listed above should first speak with a financial advisor to determine suitability. 

Should Advisors Rebalance into Equities for the New Year?

Many passive money managers rebalance at least annually based on a schedule rather than an analysis of current conditions.  With equities being down so much and government bonds being up so much one would expect that those allocations will be adjusted at the beginning of the year, but Mohammed El-Erian is encouraging advisors to move up the capital structure, rather than reallocate to equities.

 

In a recent address to institutional investors on December 2nd, the PIMCO chief said that “There is no reset button” to cure the credit crisis.  “The dislocation is occurring at the heart of the financial system – not at the periphery – and it follows that the normal circuit breakers will not work.” John Paulson head of top performing hedge fund Paulson & Co. agrees that equities are not the place to be.  Paulson said on December 3rd that the process of de-leveraging is a little more than half complete, but that over the next two years, he sees the “best opportunities ever” in three distressed markets: mortgages, banking and finance, and high-yield debt.

Bernie Madoff on Regulation

This video shows Ponzi King Bernie Madoff discussing the SEC and market regulation with a group of people.  He even mentions the fact that his niece was recently engaged to an SEC regulator, hmm........

Will You Survive the Coming Dollar Flood?

Sometimes economics is simple: how do you stop deflation when you control the printing presses?  Print more money.  Of course the idea of printing money should be used only as a last resort given the inflationary implications down the road.  Today the fed announced it would cut short term rates to a range between 0% and .25% and that it may print money to buy longer term bonds, which would lower longer term rates.  The lowering of longer term rates has a larger impact on the economy than the lowering of short term rates.  They also announced that they may purchase additional mortgage securities to help put a floor under real estate prices.  The markets rallied on the news with most indexes closing above their 50 day moving averages while the dollar broke its short lived uptrend.

Taxpayer Money could be used to Bailout Private Equity

The “big three”, or more fitting the “little three”, are not created equal.  Chrysler is owned by the huge private equity firm Cerberus Capital chaired by former treasury secretary John Snow.  Cerberus has been reluctant to loan the money to Chrysler that would allow the company to “restructure” or even continue their cash burning operations.  However, the idea of taxpayers loaning money to Chrysler is something that would be ideal for Cerberus.  So let me get this straight, loaning money to Chrysler is too risky for Cerberus, but they would like us taxpayers to put up the cash and believe they have a viable plan to profitability?  The private equity firm has gone as far as stating that they would support a merger with GM where they would forego a profit.  GM and Ford have lost over 90% of their value from their highs, yet Cerberus is willing to take one for the team and break even, gee thanks guys!

$50 Billion “Ponzi Scheme” Exposed

Remember the old saying “if it’s too good to be true it probably is?”  Well investors in Bernard Madoff’s hedge fund should have been asking themselves that very question since 2004.  The fund reportedly returned 7-9% consistently over the years purportedly using a strategy where they wrote options against the fund’s positions.  Mr. Madoff told employees on December 10^th that his fund had lost $50 billion and that it was essentially a ponzi scheme whereby old investors are paid out by finding new investors. 

Mr. Madoff’s fund supposedly managed $17 billion mainly for fund of funds and charitable organizations.  The fund of funds that were feeding the accounts that Madoff’s firm managed were leveraged to a factor of 3, which meant investors in the fund of funds were receiving steady returns of 21-30%, or so they thought.  One fund of funds mentioned on CNBC had raised questions about the legitimacy of the returns since the strategy that was being implemented typically yielded lower returns than what Madoff was reporting.  It is not yet clear where that $50 billion number is coming from that Mr. Madoff has referred too, but by any means a fraud measured in the billions is certainly going to be one of the biggest if not the biggest in history. Details will be released over the next few weeks as to how exactly Bernard "Made off" with the money.