I had the most hits ever on today.  First of all, thanks for that and thanks for being supportive.  Let’s all stop and breathe for a minute.  There is a tremendous amount of fear in the marketplace and deservedly so.  We are seeing things we’ve never seen before.  Ever!  Gold up almost $90 an ounce today.  The government making deals and potentially acquiring companies.  Stocks going up and down over 20% in a day.

We’re not perfect and I’ve spent the last 24 hours acknowledging that.  Our goal is always trying to make money in any environment.  We’ve been bearish this whole year but have tried various trades here and there.  Some have been successful and some haven’t.  We’ve also attempted to buy long-term investments.  Many of those haven’t worked.  But, since I’ve been writing this blog, I’ve pounded home the fact of keeping some shorts, keeping some cash, having some bonds, having some private equity (if you’re accredited), and not being afraid to trade.  That’s what has saved us.  Not to say we haven’t lost money.  The worst period I’ve had all year came in July and part of August.  The quick exit and unwinding of hedge funds out of materials hurt me for that time period.  But, during that time, I had a lot of shorts and a lot of bonds.  That’s what has kept me in the game.  And hopefully, you have done the same.

I want to sit back and breathe for a moment and look at this from a helicopter view or look at it like someone that was just placed on earth with a pile of cash.  Knowing what I know and seeing where we are right now,  what would I be doing?

First of all, fear is dominating the marketplace.  People are terrified and liquidating 401-Ks, money markets, etc.  They are buying treasuries even though they are getting virtually nothing as far as interest.  They are getting safety.  I think this is one of the biggest bubbles we’ve seen.  Some treasury rates are as low as they were in 1954!  So, shorting treasuries through ETFs or mutual funds is one thing I’d be doing.  Secondly, there are some really good financials out there.  The government is doing everything in their power to make these companies extremely profitable in the next few years.  So, I’d be looking to buy the best financials on earth.  Thirdly, what does medical have to do with sub-prime?  Nothing.  So, I’d be looking to buy some great medical/biotech companies that are growing fast and have a clean balance sheet.  Since banks aren’t lending, I’d be looking to do the lending myself through private equity deals.  Companies need credit.  I’d be the credit.  Lastly, the bond market is showing me unbelievable deals.  I’d be searching through all the bonds to see where the best deals are.  Right now, it’s agency bonds, various corporate bonds, and some convertible bonds.  I’d be playing small and I’d be holding a lot of cash.  I’m doing all of the above.

The Government Hedge Fund

I mentioned last night that the government is acting like a hedge fund that invests in turnaround companies.  They are making some unbelievable deals right now.  I keep hearing the word bailout on television.  But, it’s not really a bailout.  Let’s take AIG for example.  They made a bridge loan that gives AIG something like 8.5% + LIBOR.  That equates to about an 11.5% per year loan.  In a couple of years, they will be able to sell that note to a private equity company.  Tons of people would like to have that note receivable.  AIG had a cash flow problem.  So, basically, the government is an originator of these deals and will be able to sell them making the government a lot of money.  The more they make these deals and the more they sell them, the smoother our system will be.  They are the lender of last resort.  AIG couldn’t turn anywhere else really.  They turned down a couple of deals but probably not this big of a loan.

Let me know if you agree with the way the government is handling the situation by posting a comment.

Have a good evening.

3 Responses to “Breathe”

  1. 1 bluescreenmarketing September 17, 2008 at 5:34 pm

    Why is it that our nation’s leaders are allocating our tax dollars to a non-governmental entity to bailout a company most of us could care less about? Since when does failure to operate a business properly merit the pity and hard-earned dollars of American citizens? I know of hundreds of business owners who have made mistakes in running their business; and not only does no one come to their aid one iota, but because they are self-employed business owners, even in a crisis they are unable to get access to simple financial benefits such as food stamps or Medicaid (that even illegal immigrants can get) when necessary!

  2. 2 Wilson Singapore September 17, 2008 at 10:27 pm

    Hi Karl,

    I have been enjoying reading your blog for the last 3 months.

    I agree with you the way the government is handling the situation.
    The government has “bad choice” and other “worst choices”. they choose the “bad” choice”. because this is the best of all options.

    Would appreciate if you let us know what are the companies when you found great medical/bio companies.



  3. 3 Hedge Fund of One September 18, 2008 at 3:06 pm

    Thanks for your comments and your candor, Karl. I enjoy listening to you on BizRadio and visiting with you from time to time at events in Houston. I think that the government has been doing about the best that they can at this time and given the challenges that they face. However, we will face consequences, as every solution introduces problems of its own. The AIG bridge loan looks like it could be a good deal for the government, if they manage it properly and if AIG is able to pull through this period to pay back the loan; I am not so confident that they can. I remember an online ad on in which AIG bragged about how their share price had continued to climb even with the financial crisis because they were so well-managed. To me, today’s (09/18/2008) market reaction seemed excessive for the rumor of an “RTC” for bad debts.

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