MONDAY, AUGUST 25, 2008

UP AND DOWN WALL STREET  

Follow the Leaders

By ALAN ABELSON  | MORE ARTICLES BY AUTHOR

Advice to homeowners worried about foreclosure. Hedge funds on the edge.

AS THE PARTIES PRIMP FOR THEIR MADE-FOR-TELEVISION extravaganzas -- the Democrats this week, the Republicans next -- we feel obliged to point out that after dillying and dallying lo! these many months, trading the usual down-and-dirty barbs and serving up the usual bromides, the presumptive candidates finally have come to grips with the salient issue of our times -- housing.

Just about all the severe ills afflicting our woebegone economy and wreaking all manner of havoc on the citizenry -- the credit drought, the inexorable rise in joblessness, the swoon of the stock market, the drastically shrinking value of their biggest asset and with it the now-lost alchemy known as refinancing that turned even the most humble abode into a seemingly inexhaustible fount of cash -- are rooted in the sad demise of the American dream.

Happily, both camps are blessed with a few unsung canny aides who deserve our heartfelt thanks. For it was they, we can authoritatively report, who brought the plight of housing to the attention of the respective candidates and supplied them with the facts and figures attesting to the devastation of shelter, which had somehow eluded the ken of Messrs. McCain and Obama. And no wonder: Those worthy gents were preoccupied with more important matters like choosing a vice president and trying to remember the name of the president of Georgia.

Gently, those dedicated, anonymous aides informed each of their boss of bosses that a great tsunami of foreclosures was sweeping the land; that delinquency rates on mortgages have reached heights never before attained in all of recorded history; that inventories of unsold houses remain frighteningly swollen; that mortgage applications have hit a new low since the turn of this century, with the index that keeps tabs on them falling from a peak 1,857 in the week of May 30, 2003, to 419 in the week ended Aug. 15, 2008.

This nation is extraordinarily fortunate that McCain and Obama are just the men to tackle this critical -- make that vital -- issue and render advice not concocted in some smoke-filled back room in Washington or ivory tower on a bucolic college campus at some significant remove from reality. Rather, both of those putative leaders can speak to the grave condition of housing from a wealth of personal experience.

McCain owns perhaps as many as seven houses (he himself cheerfully admits to losing track of the exact number), and Obama lives in a fine dwelling that he shrewdly bought with the help of a friend. All of us simple and beset homeowners might do worse in these parlous times than adopting the approach of either candidate.

Now, granted, seven houses may seem too many (such a pain to mow all those lawns), but consider the advantages. Most particularly, if, on the house he happens to be occupying at the moment he falls a little behind (say, six months or so) on the mortgage payments, he can always thumb his nose at his relentlessly bothersome lenders, toss the keys to them and traipse off to one of his other houses. We realize your average strapped homeowner may not be up to seven houses. But no problem: Four, or even three, would do quite nicely.

Obama had the smarts when he still was not rich and famous to get a bit thick with a chap in Chicago who was well-heeled and, if not famous, at least infamous as a dubious operator who made a career of swapping favors for influence with local pols. That Good if shady Samaritan helped him gain possession of a house that he might not otherwise have had the scratch to buy.

Unfortunately, if you're of a mind to seek out the fellow, back in June he was convicted of a couple of felonies and so, we can assume, for the while he is out of action. But that needn't discourage you: The woods are filled with sleazy types eager to extend a helping hand, especially if you're an up-and-coming politician.

In any case, our point is: No need to be unduly stressed by mortgage worries and the threat of foreclosure. Just follow our leaders.

THE STOCK MARKET STAGED A little bail-out bash in the final session on rumors that Lehman and Fannie and Freddie would escape a fate worse than debt, thanks to the magnanimity of Uncle Sam in the case of the last two and just about any name would do in the case of Lehman. We fearlessly relay those "rumors," secure in the knowledge that the SEC frowns only on rumors that make stocks go down, but holds an exceedingly benign view of rumors that make stocks go up.

Warren Buffett, no spoilsport he, contributed to the upbeat mood by confirming, in effect, the conventional wisdom that Fannie and Freddie are too big to fail, or at least vanish from the face of the earth. And we agree. But they're not too big to undergo, shall we say, a "restructuring" that would bid adieu to management and wipe out the equity holders. Such an alternative would be semantically correct, avoiding "failure," which has such ugly resonance, especially for those sensitive types who were supposed to see that the two giant lenders weren't doing anything dangerously stupid.

Lifting investor spirits, too, was the assurance by Ben Bernanke at the annual Jackson Hole blahfest that inflation might be getting better unless it wasn't. OK, so that's not by any stretch what you'd term a ringing declaration, but Ben obviously subscribes to John Maynard Keynes' axiom that when things change, he changes his mind. Trouble is, with Ben things seem to change every two minutes.

As noted last week, although it seems to escape no one but a good chunk of Washington and Wall Street, inflation is very much with us and shows no great inclination to skedaddle. On that score, the Tennessee Valley Authority has just approved a rate hike of 20% -- that translates into adding $15.80 to $19.80 a month to customers' bills, the biggest increase in 34 years. And somebody discovered -- hold the presses! -- that gasoline prices go up like mercury but come down like molasses.

It isn't that we begrudge investors their eagerness to prance about joyfully any chance, no matter how slight, they get. But as we intimated above, housing remains sick as a dog, the credit crunch, if anything, is getting more crunching and the economy has only begun to feel the full impact of everything bad that is being visited on it.

Not exactly the stuff that makes for a strong and sustained market upswing. But bulls will be bulls, we guess.

HEDGE FUNDS HAVE BECOME A VILLAINOUS dark force disrupting the harmony that typically reigns on the investment scene. Once a shadowy fringe confined mostly to dabbling in the equity market, hedge funds have hugely expanded their voracious grasp to encompass just about every bourse on the planet and any kind of security or commodity that moves.

That, at least, is the view of a certain loony bunch in Washington and more civilized venues who blame everything from the surge in crude prices to the plunge in stock values on hedge funds and -- who knows? -- even global warming (hedgies live in castles and drive Hummers). In the interest of full disclosure, we confess that some of our best friends run hedge funds and they don't beat their wives or, even worse, their dogs. Are there nasty types in the business? You bet. But no more so than in journalism and a heck of a lot fewer than in Congress.

What prompts these musings is an interesting piece that popped up in our e-mail by Sherry Cooper, who covers economics for BMO Nesbitt Burns, entitled, "Hedge Funds Face Shock Waves." It's no secret, of course, as she notes, that "things are rough and getting tougher in the hedge-fund business." The $2 trillion industry has been hurt rather badly by the credit squeeze, forcing some managers to dump assets at fire-sale prices and others to close their doors.

Thus, Sherry reports, the first quarter saw a 20% leap in hedge-fund liquidations and 170 shut up shop, 30% more than a year ago. Investors in the funds can be cats on a hot tin roof, and she cites data by Hedge Fund Research that shows investment in such capital pools in the first half shrunk to $29 billion, from $118 billion, in the same time span last year. And the Morningstar 1000 hedge-fund index declined by a tad over 3% in July, the worst monthly showing ever.

Leverage, the elixir of hedge-fund investing, has become more costly and tougher to get, as prime brokers have tightened their credit terms. And Sherry predicts that more than one hedge fund manager will find the credit window closed because of a predilection for high-risk stuff.

She anticipates that many hedge funds will not be able to redeem their investors because of liquidity woes. Some already are "gating" investors -- that is, suspending redemptions -- which can easily add to the jitters of investors in other funds. And she wouldn't be at all surprised to see the toll of failed hedge funds mount in the months ahead.

Sherry concludes on a somber note: While hedge funds have weathered the financial storms fairly well, "now the ships are taking on water and some are sinking fast." Which, among other melancholy things, points to more turbulence ahead for the financial markets.


E-mail comments to mail@barrons.com