Annus Horribilis
In December the fund lost -4.6%, while the S&P 500 gained 0.8%
Year to date the fund lost -21.5%, while the S&P 500 lost -38.5%
The Markets and the Economy
Another incredible month to finish a totally crazy year! The biggest “surprise” so to say (for some at least) was the Bernard Madoff 50 billion USD ponzi scheme fraud case. That certainly gave the fund of hedge fund industry a black eye; talk about due diligence! I sincerely hope that nobody reading these lines lost any money in this fraud.
The economy continues to be in poor shape and seems to be getting worse by the day. I would say that it doesn’t matter anyhow, as the market is a leading mechanism anyhow and will turn long before the economy gets better. However in this case, we are in uncharted territory. Indeed, it is really the consumer that is in terrible shape in this recession (we can finally talk about a recession, as the NBER officially declared it… with a start date of December 2007; talk about foresight!!!). The consumer is way over leveraged and needs to restablish his own “balance sheet”. As he can no longer extract cash from his own (the so called “home equity withdrawal”), he needs to find money elsewhere. Already credit cards are maxed out, and will certainly be the next problem we will hear about in 2009. After all the loans are being called…. well, what a surprise, he will need to actually save some money. That simply means no more consumption. Chain store sales are likely to be in the doldrums. So will GDP…
One particular point this month: housing. I strongly believe that housing will be the key to getting us out of this mess (so much as it brought us into it). For the markets to rise, we need to see house prices stabilize. For housing prices to stabilise, we need to see several things:
- inventories need to fall to more normal levels of 5-6 months, instead of the current 11 months
- the price to rent ratio needs to fall to more normal levels; this means prices need to drop at least -7% to get back to a long term average, or -18% to come back to the trough of the last 25 years
- a peak in unemployment (ie: a fall in monthly unemployment data); this is probably the hardest to predict, but it seems unlikely before Q4 2009
In the mean time, the market has enough space to drop long-term. S&P 500 valuations could trough around 8x the Shiller P/E (current price divided by the average EPS of the last 10 years). Currently we are at 18x, so the market could easily drop over 50% before its final bottom, which seems years away. Not to be a party pooper, there certainly will be several important bear market rallies before then so don’t despair.
The Fund
The fund had a terrible month to finish a terrible year; its first in negative territory. Even if in relative terms the fund performed well above its goal (10% better in relative), it didn’t fullfill its absolute return goal.
We are simply unable to find new investable ideas, and continue to look more regularly that normal for new ideas. Again, we do not want to err from our time tested model, even if the market is running away.
Finally, if you have a good sense of humor, and can read some french, please take a minute to visit my new year wishes page. I wish you a healthy, fun, and prosperous 2009.
All the best,
Daniel Pfund