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Archive for December, 2008

Fidelity Brokerage Used Madoff's Firm as a Market-maker

December 17th, 2008 No comments

According to the last 606 filing by Fidelity, the brokerage used Madoff Investment Securities L.L.C. as a market maker. For the September 2008 quarter, Madoff executed 10.9% of NYSE, 5.88% of Nasdaq, and 20.12% of AMEX trades for Fidelity brokerage.

To be clear, this is Madoff’s market-making business not the Ponzi scheme fraud of the investment advisory business. However given that the government has seized the whole Madoff company including the market-making unit and froze all its assets, the statements and records are now known to be a total mess, and that the SIPC is liquidating Madoff Investment Securities L.L.C according to the Wall Street Journal today, one is right to be concerned if Fidelity has any loss exposure due to the nature of the relationship. What about the trades executed by Madoff for Fidelity that haven’t settled yet when the firm was seized? Are all the trading records reliable? There are a lot of questions that need to be answered.

I contacted Fidelity and they said they have no information at this time and executives are working on an official statement to address customer concerns. It would behoove them to get a best estimate of the company’s exposure out as soon as possible.

UPDATE: I have now been told by Fidelity there may be no plans for an official statement. I will now go with Schwab for 2009.

Categories: News

Government Tax Revenue is in Secular Decline

December 10th, 2008 No comments

Most equity markets and investments are down around 40% on the year. Let’s say housing is down 20-30% on its way down to 40%. Consequently local, state, and federal government tax revenue prospects are severely damaged.

Property taxes will go down precipitously on the decline in home values. There will be no capital gains revenue for cities, states, and federal governments. In fact, companies and individuals are going to sit on huge 40% losses which they can carry forward for a long, long time. Governments are not going to see any material capital gains for several years.

Unfortunately governments have built up huge liabilities in the last few “boom” years. Policemen, transit workers, and teachers were able to negotiate significant increases in benefits with tax revenue on the upswing. I don’t see how state and local governments are going to remain solvent given the circumstances. Already states are tens of billions dollar in the hole and this is just the beginning. The end-game is the Federal government to print trillions of more dollars to cover the state and local deficits.

The scary scenario with trillions upon trillions of United States government debt being created is “What if Asian countries that buy this debt like China say “no mas”? The dollar will plummet and all our assets may then decline severely in value. I hope that doesn’t happen, but I fear it does.

Categories: News

Beware of 2X Inverse ETFs: SKF, SRS, FXP

December 10th, 2008 2 comments

I see a lot of retail traders getting blown up by the 2X inverse Ultra-Short ETFs like SKF (financials), SRS (real-estate), and FXP (China). What people don’t realize is when you buy these ETFs, you are not only investing for a decline in the sector index, but also the day-to-day sequential pattern of price movement.

This is because the ETF re-jiggers their exposure to 200% every day. Consequently if you get too many consecutive up-days in the respective index, you get hurt badly due to the law of compounding. This is why SRS and SKF are basically flat on the year, while the actual real-estate index and financials index are down huge year-to-date.

The smarter thing to do if you want negative exposure to financials or real estate is to just short the 1X ETF like XLF or IYR. At least you are guaranteed exposure only to the sector’s fundamentals, not random day-to-day sequential price movements, which are tough to predict.

Categories: News

November 2008 Hedge-Fund Performance

December 8th, 2008 No comments

Fund, November, YTD

Maverick 0%, -27%
Greenlight +3.9%, -19.8%
Paulson Advantage Plus +3.2%, +34%
Kingdon -4.4%, -24%
Tosca Limited -5.2%, -68%
Fortress Drawbridge Global Macro -2.3%, -23%
Citadel -13%, -47%
Highbridge Capital -2.98%, -28%
Highbridge Convertible Arbritrage -9.44%, -43.66%
Clarium -5.4%, -8.1%

Sources: WSJ, Bloomberg, Dealbreaker.com

Categories: News