News that Moves: Gov't Manipulation Footprint, $150bln Out of Hedge Funds, The Privateer/gold, Real Estate Reality

RCM Comment: We are saddled with the burden of having to manage money through the footprint of government manipulation. And it is the stated goal of this blog to help you, the reader, spot this footprint so you can put in perspective the violent swings in the markets. The government, through the direction of the Plunge Protection Team (PPT), has been supporting the equity markets for years. Never was this manipulation more evident than during the period of ultra-low volatility leading up to 2008. During that period the equity markets never dropped more than 2% by the close on any given day. That type of consistency is not possible in a real world scenario. It is, of course, possible in a Madoffesque puppet show where 8-10% returns every year for 20+ years are accepted as real. But I digress. Of course, PPT support can cut both ways. Was it just coincidence that the markets plummeted during the senate debates leading up to the 1st TARP hand out? Or did the PPT simply step away from its support of the markets to help add to the panic that would force weak-minded politicians into agreeing to anything Paulson and the Fed wanted? With this in mind it should come as no surprise that the equity markets sell off as the date rapidly approaches for the release of the rest of the TARP funds. Please don't misunderstand: I am not suggesting this is the sole reason for the decline. There are many other negative factors that are weighing on the equity markets as you will read in the rest of this blog. However, the velocity and timing of the decline is a clear footprint.

$150 bln taken out of hedge funds in December - FT
FT reports investors pulled close to a net $150 bln from hedge funds last month in spite of moves by dozens of funds to halt or suspend redemptions. The record December figure, equivalent to about 10% of industry assets, extends the run of outflows to four consecutive months and has increased the total net outflow for 2008 to $200bn. The size of the once lucrative industry has almost halved in the past year, to $1,000 bln under management, according to data from TrimTabs Investment Research and Barclay Hedge. Conrad Gann, chief operating officer of TrimTabs, said he foresaw more redemptions in the first quarter of 2009. "We expected December hedge fund redemptions to be significant, but the results are still surprising ... twice the peak equity mutual fund outflows in September at $72bn," he said. The hedge fund industry was clearly "under duress", Mr Gann said. RCM Comment: We have been following this story in these pages for the last few months. As you may recall we have stated that this is the number one reason for the extreme volatility we have experienced and the main reason why all asset classes have suffered simultaneously. Until this issue resolves itself expect more of the same. On a more positive note, in this environment the proverbial 'baby gets thrown out with the bath water', so time is best spent building a list of no-brainer opportunities such as buying gold or energy pipelines yielding 12%+. As always, be patient.

The Privateer: As we pointed out here last week, 2008 was the ninth year in the past decade during which the $US "price" of Gold has gone up. But 2008 stands alone because it was the first year since the $US Gold bull market got underway in 2002 during which Gold has gone up in the face of a deflationary bloodbath with $US TRILLIONS being wiped off the valuations of "assets" of all descriptions. 2008 was the year in which Gold proved beyond doubt its quality of preserving purchasing power in the face of ANY type of financial and/or monetary chaos.

Rates fall, but refinancings are limited - WSJ
WSJ reports interest rates on fixed-rate mortgage loans for prime borrowers have fallen to below 5%, the lowest level since the 1950s, triggering a wave of mortgage-loan inquiries from borrowers eager to refinance. But lenders and mortgage companies say that as many as half of the people who want to refinance can't meet the credit hurdles and won't get approved. While the low rates haven't caused a stampede of people seeking loans to purchase homes, they have set off a wave of refinancing applications. An index measuring refinancings is at its highest level since June 2003, according to the Mortgage Bankers Association. But a large percentage of applications are being turned down. Only about a third of U.S. mortgage debt outstanding is likely to qualify for refinancing, said Doug Duncan, chief economist of Fannie Mae. Nearly 70% of borrowers don't make the cut, he said, most often because their credit isn't good enough or they don't have sufficient home equity. A significant number of homeowners owe more than the current value of their homes, a situation sometimes known as being "under water." Others can't profitably refinance, often because they hold jumbo mortgages, those above the $625,000 limit for loans that can be bought or guaranteed by Fannie Mae or Freddie Mac in the highest-cost areas. RCM Comment: People repeatedly ask us what we think of the real estate market. Well, this story sums up the problem in a nutshell. Recovery in the real estate market is problematic not because of liquidity (we all know the Fed has created new money out of thin air and pushed it into the hands of banks) but because of lending standards. With the collapse of the Wall St. securitization scheme banks now must keep most of the loans on their books and naturally standards have gone up.