The great conundrum for traditional asset managers (of which I am one) is how to explain irrational market movements. Most long only longer term managers seek either growth or value or a combination of both. However we are now in a market where those traditional investment themes are being obfuscated by hedge fund managers and short term momentum traders.

Take what happened to Ospraie Management, LLC as an example. The Ospraie Fund which had $2.8 billion last the beginning of August lost a reported 26.7% of its value during that month in the wake of a “substantial sell-off” in energy, mining and resource equity stocks. There is no doubt in my mind that Ospraie was leveraged and controlled far greater than $2.8 billion of equities. Now they are liquidating and closing up the fund. Ospraie is not alone.

All that a hedge fund manager will do in these circumstances is close the fund because they will not earn their performance fee which typically is 20% of the funds profits. Many of these managers will open up a new fund with a similar investment format in a few years thus wiping out the performance deficit and start from a zero performance benchmark. A prima facie example is John Meriwether who after blowing up Long Term Capital in 1998 started JWM Partners in 1999 and has lost a sizeable percentage of its assets this year.  

So who suffers? In the short run it is the value and growth investors who see their investments being whipsawed without rational explanation. When your stock falls 10% in one day is it really worth 10% less or is a leveraged liquidation taking place without concern for price? What do you do?

Perhaps you should follow the advice of two of the best investors of our time, Berkshire Hathaway’s (BRK/A, BRK/B) Warren Buffett and Charlie Munger.  They are less concerned about short term movements and can see the forest for the trees. They will stick to their value oriented approach with the full knowledge that the markets and their investments will not rise each and every year. They know that there are some down years and some periods of time when irrational behavior will grip the markets.  Shares of BRK/A are down over 15% this year. Buffett and Munger don’t have to worry about performance fees. They will stick around and survive. In fact, they are on the prowl for good investments right now. Ask yourself this question – would you fire Buffett and Munger right now knowing that they are off about 15% in 2008?

If the answer is yes then I suggest that you do not invest in the securities markets.  If the answer is no then you have made the conscious decision, and in my opinion the correct one, to focus on the long term benefits of active growth and value investing.

Posted By Scott Rothbort at September 3, 2008

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The McCain Veep choice is going to get plenty of attention the next few days. The selection is also a possible market mover in the future.

I think that we could see a woman. Kay Bailey Hutchison is a possibility but McCain does not need Texas he already has it. Yet don’t rule her out. I think that Carly Fiorina formerly of Hewlett-Packard (HPQ) or Meg Whitman of Ebay (EBAY) fame both have a shot but it is more likely that their lack of political experience leaves them as possible cabinet appointments should the GOP win.  Wall Street would like that, especially in techland.

Minnesota is a state that the GOP would like to take along with its 10 electoral votes. That makes Tim Pawlenty a possibility. Charlie Christ, governor of Florida is a rumored selection but it already appears that McCain will win Florida so that might be a waste. However, a possible long shot could be with Lincoln or Mario Diaz-Balart. Both are Hispanic and young. That is a “two-for” for McCain. However, Lincoln was born in Cuba thus Mario who was born in the US would be the more optimal choice. I think that the juicy take is in Pennsylvania where Tom Ridge could deliver the state. The talking heads on television seem to think that the pro-life Mitt Romney will be picked to appease the religious right.

One thing that is certain is that McCain won’t upset the Hillary supporters with his pick. I think he has a nice opportunity to get a post-convention bounce with the right pick. A woman or Hispanic would do just the trick.

As for the market reaction, I believe that the S&P 500 (SPX) has already lost about 100 index points just on Obama’s clinching of the Democratic nomination back in late May. A GOP rise in the polls could help support the SPX and a GOP victory in November will put a big bid into stocks. A strategic vice presidential running mate could make the difference to the markets.

Posted By Scott Rothbort at August 27, 2008

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The talk the last few weeks has been of demand destruction for crude oil. OK we got some of that and it took crude oil down over 20% in a very short period of time. Now we could be in for the worst kind of destruction - that of supply. Is anyone out there concerned about the Russia - Georgia situation? What happens if the conflict escalates and oil supplies are cut off or if pipelines are damaged or destroyed? The long and short speculators can have fun with the markets all they want but if the supply from Russia or OPEC or Venezuela or Nigeria is cut or manipulated or destroyed then the crude rally will be even bigger the next time around. The bottom line is don’t be so quick to assume that a crude oil “bubble” has popped or that we even had a “bubble” at all.

Posted By Scott Rothbort at August 21, 2008

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Yesterday UBS analyst David Palmer downgraded Darden Restaurants (DRI) to “Neutral” from “Buy”. In order to rationalize that downgrade the analyst moved their price target down $1 from $39 to $38. Yet DRI remains his top pick in the casual dining segment. The stock moved from $34.97 to $33.01 on the “downgrade”. If the analyst expects the stock to move to $39 or nearly 9% from the closing price before the rating change why change the rating at all? To me, an anticipated 9% move to a price target is a rather bullish sign and a signal to buy not just hold a stock. This is another example of deceptive, confusing and poor research ratings. I don't necessarily put blame on the individual analyst in this case but this is an indictment of the entire research system.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of DRI --- although positions can change at any time.

Posted By Scott Rothbort at August 20, 2008

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McDonald’s (MCD) reported total sales growth and same store comparable sales today which were McHuge. Here is how it breaks down:

Global MCD: Comp sales +8.0%; Systemwide sales in constant currency +9.5%

US: Comp sales +6.7%; Systemwide sales +7.6%

Europe: Comp sales +7.6%; Systemwide sales in constant currency +9.5%

Asia/Pac/MidEast: Comp sales +7.2%; Systemwide sales in constant currency +10.0%

There is no denying the fact that MCD is able to capitalize on: more traffic flow in the US as consumers trade down (in economics we call this the “Substitution Effect”); expanded hours around the globe; capturing share of the quick service coffee business as the McCafe concept continues to expand; and, growth in China / Russia.

The real question for MCD right now is how they will make adjustments to the dollar value menu. Due to the rise in beef prices these menu items have become less profitable and possibly loss leaders. There is no doubt in my mind that MCD will carefully design an alternative marketing and product strategy.

Finally, MCD has built four restaurants on the Beijing Olympic site: one in the Olympic Village to serve athletes, one at the main press center to serve the huge media population and two for the spectators in the main activity area, the Olympic Green. This will not only help August sales but will also help to bolster post Olympic sales once the athletes return home.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of MCD --- although positions can change at any time.

Posted By Scott Rothbort at August 8, 2008

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