Hedge Funds: The Third Quarter Report

This morning on the eliptical trainer at the gym I pulled out a third quarter report for a hedge fund of funds and read it. It had some numbers in it that weren’t particularly good, but were way better than I thought they’d be.

But I really wasn’t focused on the numbers this morning. I wanted to understand what had happened and what is going to happen in the hedge fund market going forward. And this letter was revealing on both fronts.

From what I could tell reading the letter,  it was nearly impossible to make money managing a hedge fund in the third quarter. I am sure that there are some hedge fund managers who made money in the third quarter but most of the biggest and most experienced hedge funds lost money in the third quarter.

And I suppose the same is going to be true for October when the numbers come in. If anything, October has been worse in many ways than September was. And yet, the vast majority of hedge managers are optimistic. It probably goes without saying that you have to be optimistic about your ability to make money to be a hedge fund manager.  

The big themes going forward that I took away from the letter are:

1) Fundamentals matter more than ever. 

This is the only way I know to make money and that’s probably because in my market, private equity, you cannot trade and you cannot be a momentum investor. You must build value the old fashioned way, building cash flow and strong balance sheets.

2) Reduced exposure – I read this term a lot in the letter. I think it means taking risk off the table and having less leverage and more cash. I think we’ll see hedge funds be more conservative for a while until the market stabilize.

3) Migrating from equities to debt/credit markets – This weekend I spent some time with a few public market investors and they all told me that with "high quality" credits trading at discounts that provide 15-20% yields, there’s very little reason to be in the equity markets. We in the equity business often forget that credit/debt can provide equity like returns in down markets. And we are in one of those right now. This is going to suppress valuations in the equity markets and make it hard to issue new equity securities for some time to come.

4) The SEC’s attack on short selling (both naked short selling and shorting financial issues) took a toll on hedge funds. This long quote (sorry about that) explains it well.

In September, the initial announcement targeting “naked” shorting set off a massive
short squeeze as investors that were naked were forced to cover.  This created losses
for all short sellers (even the legitimate ones) as the stocks rallied suddenly.  The dealer
community, which had often lent more stock than they had in their possession (á la an
airline that oversells seats on a particular flight), was forced to scramble to become
compliant with the new regulations.  This led them to force some accounts out of their
short positions, and to become more restrictive in their stock lending practices going
forward.  At the same time, many institutions halted their stock lending programs due to
losses incurred as a result of the Lehman bankruptcy, thereby exacerbating the
shortage of borrowable stock in an already supply-constrained market.

The shorting ban on financial stocks hurt many managers’ portfolios both directly and
indirectly.  Prior to the announcement, some managers had created “boxed” positions
(simultaneously long and short) in the equity of companies on the ban list to be able to
quickly hedge long positions elsewhere in the companies’ capital structures when the
time was right.  The ban was put in place at precisely the time when these shorts would
have been “activated”, but instead the strategy was rendered ineffective, and the long
positions were left unhedged in a declining market.  Others, who had held legitimately
established short positions in these companies (and had even taken losses on those
positions during the rally in July and August), were unable to capitalize on the trade
since the rules artificially propped up the shares and undermined their trade thesis at
exactly the moment it was expected to pay off.  Another set of investors who had taken
a bearish position in the credit of these financial companies (i.e. long protection in CDS)
saw their positions marked down when the market reflected a more optimistic outlook
for the companies in the absence of so called “predatory shorting.”  This move proved to
be temporary as sentiment soured again toward month end, but some positions had
already been sold.

Finally, the combination of these new rules prevented managers from capitalizing on
buying opportunities in the market.  Disciplined hedge fund managers that would only
increase long exposure with a proportionate increase in short exposure were
constrained since shorting was either banned (in financials) or hard to execute (due to
lack of borrow).  Even those with pre-existing long and short positions lost money as all
relative value spreads widened due to forced unwinding by investors caught in the slew
of technical forces described above

I find that quote fascinating in its recitiation of the law of unintended consequences. Now that managers have been burned with strategies that involve short selling, it will be interesting to see if they lessen their reliance on shorting as part of their overall strategies. It seems likely to me that they will, at least for a while.

5) Shakeout – There’s a shakeout coming in the hedge fund business as the strong funds survive and the weak fail. I don’t want to reveal anything close to confidential from this fund of fund’s letter but I was shocked at how small their redemptions were in Q3 and how small the redemptions in the funds they are investors in were as well. Of course, that may change in Q4 with the December redemptions, but in any case I think investors will stick with the funds that have long track records of success and leave the funds that don’t.

Which of course begs the question about what we (the Gotham Gal and I) are doing with our hedge fund investments in light of the carnage we have witnessed and the losses we have taken. We like the funds we are in and the managers and have a lot of confidence in them. We’ve taken the hit already and my gut says it’s up or at worst flat from here so we arent’ likely to be redeeming. But as a friend said to me this weekend, "are you putting more capital in at these levels?" And that has me thinking. I don’t have an answer yet, but I do agree that you are either a buyer or a seller. If you don’t want to buy more, that tells you something.

That’s all I’ve got. I’m looking forward to the discussion in the comments. In fact, I welcome it because it will inform the answer to that last question.

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Comments (Archived):

  1. Druce

    There’s a hysteria about hedge funds which I suppose is the downside of the hype the last few years. The banks, which were highly regulated and supposedly safe, have blown up catastrophically. Nevertheless, the hue and cry is about those reckless hedge funds. (who I might add operated with far more prudent leverage and haven’t run to anyone for a bailout)’Hedge fund’ is not an investment strategy, it’s a business model for a way to set up a fund. (Marshall McLuhan said ‘Art is what you can get away with.’ Well, a hedge fund is what you can get way with charging 2 and 20 for.)The hedge funds have performed about as one might have expected along strategy lines. Strategies depending on liquidity and convergence and availability of credit have done poorly. But so far, at least, no large scale blowup like LTCM.some funds of funds may promise more liquidity than is actually available… could make things interesting.

  2. andyswan

    After the affirmative-action mandates Congress gave to Fannie and Freddie, and the resulting catastrophic fallout, It should come as no shock that government reacting to market events with knee-jerk legislation has unintended, very negative consequences. Why anyone wants to give the Fed Gov’t a seat at their kitchen table is beyond me….but from a market perspective their involvement has been damaging to say the least.S-Oxley is another example, and must be repealed NOW.I would not be putting more capital into public markets until there is some indication that government is going to resume a business-friendly posture.

    1. Druce

      hear, hear…throw out those dang socialists who have been in office the last eight years…

      1. steveplace

        The Fannie-Freddie nonsense is several decades old and a bipartisan effort.

      2. markslater

        touche.its like the other chap who came on here spouting off on the political post. It amazes me that arguments continued to be made using convenient parts, when its the whole story that should be examined. if you are going to talk about fannie – start from the beginning. If you are going to talk about SARBOX – examine the founding cause and effect (god knows alot of us were a part of its genesis)The paradox continues to see us struggle with the crossroads of free market economics and government intervention. Should we litigate ala Spitzer, or legislate as in whats going on now?i will tell you first hand watching the hedgies brazenly enter into financial products they had no business being in (i watched this unfold last year on a large piece of debt we were raising) is just as scary and irresponsible as the knee jerk legislation you speak of.of course this all provides for stronger buy or sell dynamics.

    2. fredwilson

      but would you be taking your capital out?does not wanting to buy more mean you should be selling?

      1. andyswan

        Yes and (in a liquid market) yes.

      2. Druce

        if you have great managers with solid strategies and you think HFs have a long-term place in the portfolio, certainly no reason to redeem.There are some funds whose model might be dead for now. For example stat arb started getting killed a while back. Guys like Renaissance sort of took over the market-making function from brokers and did a better job; They made a lot of money, which made more money flow in, which made markets even more liquid and helped them go up, which allowed them to use more leverage, etc., and the virtuous cycle continued. Now it’s running in reverse, lower liquidity, higher volatility, loss of capital. The managers that depend on low volatility, liquidity, easy credit should give capital back. if they don’t and try something new, then redeeming doesn’t sound like a bad idea.There are managers who can outperform over long periods of time. I say this with the same degree of confidence that rather bet on a portfolio of Todd Brunsons and Phil Hellmuth at a poker table than the whole field. There are even relatively simple strategies that will work for a long period of time – Buffett made a lot of money on risk arb, then a lot of people started doing it.The problem with hedge funds is the fees… if a 2/20 fund returns 10%, the manager takes 2/3 of the profits and you make 6%. If the manager makes an awesome 14%, you make 9.2% and match the S&P long-term and the manager takes half the profits.And the fund of funds adds another layer of fees. An interesting thought experiment is how high a pre-fee performance do you need to get a stock-like return, and how high before you’re making as much as the managers. You’re paying for a portfolio of Doyle Brunsons, the question is are you getting one… they’re pretty hard to find.I don’t see the logic of if you’re not buying you should be selling… only works if there are no transaction costs and you’re trading 100% the time and you have an infinite stack. I’d rather buy a significant amount when I have a significant edge and the rest of the time do nothing… so I end up with a sufficient diversification without totally diluting my edge.

        1. andyswan

          Man I love the Poker/Investing analogy….and I also agree re: funds and their fees.98% of people would be best off simply buying SPY (the S&P 500) and selling 9% OTM calls against their position every month. Practically guaranteed to outperform the SP with no fees of any size.

        2. Druce

          numbers up there look a little screwy…at 2/200% pre-fee – manager gets 2%, investor gets -2%6.66% – manager gets 3.33%, investor gets 3.33%25% – manager gets 7%, investor gets 18%at 3/30 (2/20 fund wrapped in 1/10 fund of funds, admittedly on the high side)0% pre-fee – managers get 3%, investor gets -3%15% – managers get 7.5%, investor gets 7.5%25% – managers get 10.5%, investor gets 14.5%how good would an entrepreneur have to be for you to back a capital intensive startup with that split? maybe if it’s Steve Wynn and it’s a guaranteed 20% return on equity and IPO at 3x book.HFs can add return and diversification, but you want to get the real deal superstars or it can be a ripoff.

          1. Druce

            actually Renaissance killed it – http://bit.ly/FD83 . I have no idea what they do or how they do it. mean-reversion strategies like AQR and GS Global Alpha got hurt.

      3. howardlindzon

        absolutely. if you aint buying you are sellling. i disagree about the fundamentals though. You are assuming these hedge fund managers ‘know’ what fundamentals are and that the numbers they are looking at are real.the stock market is more mood than fundamentals.

        1. Druce

          in the immortal words of Larry Wall… there’s more than one way to do it.hedge funds aren’t just stocks, and some (horrors!) are even technical instead of/in addition to fundamental.

    3. Teags

      Hello all,I am normally a quiet lurker here, I think you have a great blog by the way Fred.I was just a little confused by one of the comments here and curiosity has gottenthe better of me I’m afraid. This is the comment:”After the affirmative-action mandates Congress gave to Fannie and Freddie, and the resulting catastrophic fallout…”I am somewhat acquainted with real estate development, actually in the interest of full disclosure, I am quite well acquainted with real estate development. Which is why it is interesting that I was unaware of new affirmative action mandates with respect to real estate. Would it be possible for the poster to be more specific about what affirmative action mandates he is speaking about? Thanx in advance, Teags

        1. Teags

          OK ,I see. You are talking about the CRA. Or more specifically, the Fannie and Freddy mandates with respect to CRA.Yeah, big mistake there. But these were not affirmative action mandates. That is, they may have been intended that way, but that is not how developers typically used them.Generally, these regulations were used hand-in-hand with other local and state mandates, like TIF for instance, to redevelop inner cities. Most often, downtown areas. Hip, flashy condos and townhouses that we sold to people at what I am now willing to admit were exorbitant prices. That is, we *did* redevelop areas that you may consider ‘minority’, but we typically did not redevelop *for* ‘minorities’. In fact, most of the areas redeveloped in this fashion, at least through the 90’s, were decidedly non-minority when the redevelopment was completed. This was the right thing to do, though we have been, and still are, taking quite a beating for it in many communities. You may have noticed that somehow ‘gentrification’ is now a dirty word.Now we did make mistakes. One was over building. If you have been to Chicago or Miami lately you know what I am talking about. The other was being lax on standards, or even looking the other way when people bought in many of our developments. Which you rightfully point out has turned out to be a direct contributor to the sub prime crisis. That said, many of the new residents of these areas were actually pretty solid people. There was nothing in their background to tell you they would not pay their mortgages.Anyway, I told you all of that to tell you this.One. People like me are a little touchy right now. When we hear terms like ‘affirmative-action mandates’ we get our pants in a tizzy because business is so bad. We don’t like the idea of giving some other group a leg up for no reason. Try to be careful how you throw that term around.andTwo. People like me like to think of ourselves as the responsible developers. We are willing to take our share of the blame for what has happened, but no more than our share. I myself bowed out at the end of 2003, taking only minority stakes in other developer’s projects from there on out. So when I see criticisms of regulations or mandates that I may have used, I tend to try to make sure that there is some education that happens there so people know the full story.

          1. markslater

            great post – not having ever been in your business this was informative.

          2. andyswan

            Thanks…good stuff.

          3. J

            Dude we know all that.Listen to the ‘activist’ groups and they will not say ten words before mentioning that people in low-income neighboorhoods are often minorities.If they say “banks are lending based on financial merit” people will say “of course banks are supposed to lend based on financial merit”.

    4. steveplace

      “Why anyone wants to give the Fed Gov’t a seat at their kitchen table is beyond me….”I hear Paulson cooks a mean paella.

    5. fredwilson

      andy, i think there’s all kinds of blame to go around but i am hoping we can discuss what’s on my mind which is what’s in front of us, not what happened.

      1. andyswan

        Fair enough.What’s in front of us is not good and I see no reason not to reduce. Micro-Startups are going to be a focus of mine….

    6. Guest

      Andy forgot to mention that ACORN is also very much responsible for what happened. Along with Bill Ayers and Socialists and Marxists and Terrorists (Domestic and Islmo-fasict) and BlackPeople Generally (BlackPeople are sorta like BlackBerries, but have generally lower battery lives and are thus harder to control) and lastly, but probably mostly, the Los Angeles Times.What should not – and should never – receive any scrutiny is the fact that many people had incentives to take big risks, used models that incorrectly gauged the risk, and that there was no/few government regulations in place that could have acted like a check on the risk.Instead, only the stuff in the first paragraph matters. Obviously.

      1. andyswan

        To be clear, I never blamed a party or a candidate in this thread.I was simply making the point that the more government is involved in business and the distribution of the rewards of business, the less likely I am going to be to invest in businesses that I don’t have direct control over. That’s all.Fred’s question in point 4 is “would you be adding” and my answer is “no, I’d be reducing and here is why”.Not that big of a deal.

        1. Guest

          Just to be clear, I was only saying that Andy correctly pointed out that “the affirmative-action mandates Congress gave to Fannie and Freddie” lead to the economic crisis currently faced by large parts of the world. It is very clear that the main — though not only, I list more above — reason for the economic crisis was too much U.S. government regulation and mandates. Very clear. Therefore, the only way forward is to get rid of all of those regulations that got in the way of the efficient functioning of markets for credit default swaps, collateralized debt obligations, etc. Andy realizes this. I don’t know why Democrats (always weak on security/murderers of unborn babies) don’t.Andy for Congress.

      2. fredwilson

        WTF?This blog is supposed to be for rational, civilized discourse

        1. Guest

          I cannot imagine a single rational, civilized person who has considered the crisis for more than about five minutes who would take Andy’s position seriously. It is pure ideology and that’s what my comments were attempting to satirize.

          1. fredwilson

            Oh, the satire was lost on me

  3. harsha

    I hope you have come across this, http://business.timesonline…On one side, SEC banned shorting on financial shares, while Goldman Sachs was caught in a naked short on VW, funny.It’s a lesson to be learnt for hedge funds.

    1. Druce

      if a hedge fund had cornered VW stock like Porsche did, Merkel would be flipping out and warrants would be out via Interpol…all the hedge fund managers will have to switch from Cayennes to Beetles

  4. Ted Murphy

    I don’t see the current environment as significantly different than historical precedents. Of course, I went through the ’87 crash, and I was trained by guys who went through severe bear markets in the ’70’s.It is very difficult to react successfully to market events; rather you need to constantly position your investments so that they are most likely to meet your goals. After you’ve had enough failures in foresight, you realize that’s the best you can do.Take a step back and look at your goals. Then, approach the stock market as one tool to achieving the financial aspects of those goals. Don’t let the tail wag the dog.

  5. Steven Kane

    fundamentals always matter i think. sure there are brief periods where pure momentum investors look smart, but those times are flashy and crashy. whereas Graham and Dodd never go out of style.new edition of G & D’s timeless work, Security Analysis out recently. Main text hasn’t changed of course but very worthwhile new introductions and forewords to the texts by some of the best and brightest value investors of our time, including the usually very publicity shy seth klarman, who even agreed to a brief interview to talk about the work. everyone, read it here:http://tinyurl.com/klarmani

  6. Steven Kane

    separate comment, re your last question, should one more capital into funds because their NAV’s are down?there is no simple or pat answer. every investor and opportunity is a singular situation.but one can generalize by answering with an even more important question: are you comfortable with your asset allocation?if the answer is yes, then do not put more money into attractively priced funds just because they are priced attractively. stay the course with your asset allocation/diversification strategy (remember you *already* have exposure to those funds)again, i defer to truly brilliant and longterm super successful investor seth klarman, who says “As Graham, Dodd and Buffett have all said, you should always remember that you don’t have to swing at every pitch. You can wait for opportunities that fit your criteria and if you don’t find them, patiently wait. Deciding not to panic is still a decision.”

  7. MartinEdic

    I think the limits on short selling were a political reaction in the ‘punishment’ category, something done for short term satisfaction with no consideration of how markets are balanced by hedging. As Mark Cuban pointed out, when you limit shorts you take away the ability to know what the market really thinks. Since trust is a major factor in the freeze of liquidity we’re experiencing, limiting our knowledge means limiting our ability to trust those on the other side of a loan- are they being artificially propped by limits like these?I defer to the finance people on this thread- but this it how it looks to me, a mere marketing guy!

    1. andyswan

      Bingo. It is the same nonsense that we got where “speculators” were blamed for the price of oil.Something (namely OIL under $65) tells me we aren’t going to see Congress trotting out “BIG OIL” CEOs and speculators much this fall.Makes me wonder if the “windfall profits” tax will be levied….and if not, who is going to be tapped for that revenue? Perhaps a windfall profits tax on short sellers!?!?!? LOL

      1. fredwilson

        We don’t need a windfall profits taxWe need some way to keep foreign oil above $70/barrel so we can buildalternative technologies here in the US with private capital and get areturn on investmentI think it’s called a tariff or a tax

        1. Guest

          Robert Samuelson has an interesting proposal: increase the gas tax by a penny each month for 4-5 years. This way you are not hitting everyone on the head right away, yet you make everyone know that prices are going up, so you better think what kind of car you buy, etc… I like it.

          1. fredwilson

            Works for meAlthough a hit in the head is good for people too

        2. howardlindzon

          I so agree and remember blogging that the worst thing for the environment was for oil to crash. I got berated for saying it on yahoo techticker.I dont think $60 oil will last long, but this is not a good price for anybody

          1. Johnny LeHane

            occasional reader, first time poster. Love the blog Fred. . . and this is a great discussion. I think Jim confused satire and hyperbole, but that’s ok [side note: it has been said that sarcasm is very hard to pull off in writing, so beware]…Medium and Long term, increased energy prices leading to development of AltEng is great, but if we are lucky enough to see sub $70 oil for 3 or more months, we will get some consumer price relief across the board, as well as increased consumer spending because they will just feel like they have more money when they see those sub $3 gas prices. This will help soften this downturn further.

  8. Desarae A. Veit AKA DesaraeV

    Interesting. I don’t know a lot about the stock market, hedge funds, or balance sheets, but I understand the lack of realistic view points people can have sometimes. Thank you for sharing.Desaraehttp://www.dveit.com

  9. Harry DeMott

    As someone who works at a fund, I was interested in your comments. Yes Q3 redemptions are low – but Q4 will be terrible – and many of the larger funds have put their gates up (i.e. limited withdrawals to a certain % per quarter until you are out) I can’t imagine looking at any sort of equity fund these days with the opportunities in distressed debt and bank loans. I’m clearly talking my own book here (work at a distressed fund), but there is still a fundamental disconnect between these two markets and the prices on offer in debt land make the necessary returns in equities too high a hurdle to clear given the fundamentals at this point in time.

  10. Dan

    What high quality credits are you referring to that are yielding 15-20%?

    1. fredwilson

      I’ll have to ask my friend who I referenced in the post

      1. Dan

        Did your friend ever get back to you regarding this?

        1. Druce

          Barrons article on high yields in corporate space made me think back to this threadhttp://online.barrons.com/a…LSBDX – yield a shade under 10%, duration a shade over 6 yearsI’ve heard of some crazy yields on bank debt – banks were trying to get it off the books – but impossible for most to participate in. (makes me wonder about bank debt mutual funds but seems like a complex situation to evaluate)

          1. fredwilson

            HmmIs that the current yield?Are these trading at par or a discount?

          2. Druce

            very good questionhttp://www.loomissayles.com…quotes 9/30 NAV was 11.89, 8.45% yield. that would mean a monthly distribution of .083, actual distribution was .0801 so there’s a minor discrepancy but seems like current yield. not sure if they distribute based on actual coupons received which would be a little uneven. according to Investopedia the SEC Yield is a current yield.using last price of 10.21 and last monthly distribution of .801 that would give 9.4% current yield. using .0845 * 11.89 / 10.21 I get 9.84%.clearly holdings are mostly trading at discount … so yield to maturity is higher when they mature at par.Barrons article quotes a 9.78% yield, notes portfolio is invested mostly in corporates yielding 10 to 12%.so I don’t know for sure but based on this info and sanity check, looks like current yield is a bit under 10%, ytm is over 10%.I own this little bloodbath, Dan Fuss has a pretty impressive long term record, will probably top it off in taxable account after the annual distribution which I think is second week in December, shouldn’t matter for tax-free accounts.one point he makes in the article is he expects some of the companies to be bidding to buy debt back at these prices which might make more sense than buying back stock. of course if companies can’t roll over without paying through the nose or start defaulting then all bets are off.

  11. josh guttman

    Good post Fred. Been working on a hedge fund related post myself. I found many of the actual hedge fund q3 letters fascinating. Will forward you the ones I liked best.

  12. Yule Heibel

    Fred, sorry to intrude as I know beans about hedge funds, but when you wrote, “…in my market, private equity, you cannot trade and you cannot be a momentum investor. You must build value the old fashioned way, building cash flow and strong balance sheets,” I was reminded of something I just read on Richard Florida’s “Creative Class” blog (see “Builders vs. Traders,” 10/28, http://tinyurl.com/6hx7wv).Florida references an article in Canada’s Globe & Mail by Geoff Beattie, “What we need are more builders,” 10/27, http://tinyurl.com/5kwrgp. Beattie discusses the role of government and regulation (“…trader mentality has crept beyond Wall Street and the business world and infiltrated government policy”) and asks how can we recover the builder orientation.Not sure that this adds anything to finding an answer to the question you posed, but I wanted to mention the builder / trader analogy, as it appears appropriate. You seem to be a builder, in it for the long(er) term. That’s good, yes?, and it makes you a leader, too.Now, having read through all the comments, I’m guessing that the Canadian-style “socialism” (haha) of Geoff Beattie and the Globe & Mail will rub a couple of readers the wrong way, but as the comments by Teags showed (he’s the developer who explained that gentrification — downtown condos in formerly minority neighbourhoods — isn’t some weird affirmative action by government to get minorities into homeownership), this complex story just doesn’t work in black and white anyway.

    1. fredwilson

      Thanks for the comments and the linkI will check them out

  13. Guest

    Here’s how I can help you, Fred. 3rd qtr GDP is out tomorrow. If you look at various surveys (for example CBS MarketWatch publishes consensus predictions) the “experts” are looking at -0.6%. An WSJ articles quotes Macroeconomic Advisers to be at -0.6%, too.I am no economist, but just a very simple number crunch of data that is out there says that this is extremely unrealistic. I think the very best case will be -2.0% (3rd Q real GDP). At very best!If you think that the market is pricing in a -0.6% 3Q GDP and a total peak-to-through of around of around -2% to -3%, then you should sell all your equity exposure. If you think that you friend talking about stable “double-digit yields on debt” assumes a corresponding sub-10% aggregate default rate on corporate bonds, then don’t listen to him.On the other hand if you think that the market has priced in a 8-10% peak-to through drop in GDP and your fixed income friend assumes ~20% corporate debt default rates, then you may be right that the market is bottoming out. It’s your call. The economy is easy to predict (for me at least, I don’t know what these Macroeconomic Advisers and other experts are smoking), the data is galore. Market sentiment, what is priced-in and what not is the tough call…

    1. Guest

      Bad call on Q3! I am eating humble pie now.Here’s what I had assumed and what the advance release actually shows (category, my assumption, BEA data, comment):PCE -2.5%, -3.1%, accounts for 71% of GDP Investment: -2%, -1.9%, about rightnet exports: -2.5%, +5.9%, that just can’t be right and will likely be revised substantially. It’s something of a statistical quirk, but the dollar got much stronger in the quarter, which should pull the “real” series down (should inflate real exports and deflate real imports)Government: +2%, +5.8%. Wow! here’s what saved the quarter. Real defense spending up 18.1%! This is what blindsided me, obviously…

      1. Ted Murphy

        Wow. This is an awesome post and self-response. Really, really good. Thank you!Edit – I’m trying to find a chart of PCE that shows -3.1% — can’t seem to find it:http:// research.stlouisfed.org/fre…[1][id]=PCE&s[1][transformation]=ch1

  14. Andy Abraham

    On Myinvestorsplace.com we have been speaking about Hedge Funds… We feel the most of the Hedge Funds that had problems because they used too much leverage…This leverage was their down fall… Are we thinking correctly?Andy Abraham Hedge Funds

  15. Joshua

    I’m reading FDR’s biography right now. Hoover, Rockefeller, Schwab and other power players stated that after the market crash of 1929-1932, the fundamentals of the underlying economy was strong and that it was an opportune time to invest. Everything that has taken place up to this point is eerily similar to that period of time.For those who have capital, position yourselves very carefully…there will be opportunity, but don’t expect a recovery for another 24-36 months. The ripple effect of unemployment resulting in even lower retail sales, increased commercial real estate vacancies and overall decreased production still has to work itself through the economy…and it has only just begun.

  16. Johnny LeHane

    The core question of does not buying mean selling, I have to say no. You may decide you want to shift your asset allocation and want less exposure to a sector, fund or manager. To do so, you stop buying that sector or fund as you continue to buy other sectors or build your cash. Am I missing something?