Wisdom from "The Age"

By on August 4, 2007

The following is excerpted from a recent article in the Australian publication “The Age” written by Marcus Padley. I found it to be sensible and it would be nice if a U. S. publication could write with such clarity:

“Can you taste the fear, the potential for collapse?

There are other factors. Hedge funds sell anyway. Any fund with a “hedge” in its name will now fear investors baling out and the best protection is to cash out before the redemptions appear. So they are selling. If it all turns to disaster, it is the right decision. If they miss a few per cent, better that than oblivion.

Mum and dads have to sell. You don’t even have to be invested in a hedge fund. Thanks to margin lending and contracts for difference (CFDs), a lot of us are running our own little leveraged hedge funds, and leverage providers are getting pretty twitchy.

More disasters will come. As more leveraged funds squeal, the easier it becomes for those in trouble to admit to it.

This is just the beginning of a rejection of leverage.

A run on leverage has the potential for a complete crash in hedge funds, margin lending, geared investments and debt markets. All markets will follow.

Leverage. Clever while the market goes up, stupid when it is going down. Leverage is nitrous oxide for investments. Everything is faster and more glorious, as are accidents that become more likely and lethal.

Of course this is no time for heroics. It’s too early to buy into this scenario. Come back later.

But don’t go for too long:

■ China will grow at 9 per cent until 2015 and beyond.

■ We are not the US. It has huge credit card bills and a housing market slump that threatens the boom in debt and consumer spending.

■ The Federal Government is riding a wave of tax receipts from booming resources. That will not stop. A stable growing economy attracts investment and promotes further tax cuts.

■ Resources are still cheap and won’t care about hedge funds.

■ Resource producers are swimming in cash. The leverage problems won’t worry them.

■ Industrial companies have already had the private equity froth blown off prices. Since the failure of bids for Qantas and Coles, we have got the message.

■ There is a good results season coming up. Industrial earnings should be up 15 per cent and resources almost 30 per cent.

■ International investors will favour Australia as a safe haven.

■ Even the banks have fallen despite a wealth management boom. They are now a defensive sector.

■ The soulmate of panic is opportunity. You can already buy National Australia Bank at $37.08, down from $44.70. BHP Billiton at $35.96, from $39.79, and Rio Tinto at $91, from $105. This is a good thing for those who survived.

Obviously the market has risen a lot, the herd is in control and the unwinding of leverage could be a short-term disaster. In Australia, we’ll be all right in the long term, although amid the hedge fund storm, it’s just too early to be bargain hunting.

Parting thought. One pick-up line you will not hear this weekend: “I’m a hedge fund manager.”

Marcus Padley is a stockbroker and the author of the daily stockmarket newsletter Marcus Today. www.marcustoday.com.au”

Amen

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