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Hedge Fund Managers Agree on One Thing: Economy is Still Bad

Date: Friday, May 29, 2009
Author: HFN Daily report

To paraphrase a hoary joke: "What do you get when you put a bunch of hedge fund managers in a room and give them 15 minutes to prognosticate?"

Disagreement, except on one count: the overall economy still has a long way to go before it works its way out of the current economic crisis.

Perhaps that was what should have been expected with hedge fund industry leaders like Kynikos Assoc.'s Jim Chanos, Pershing Square Capital Management's Bill Ackman, Paul Singer of Elliot Assoc. and David Einhorn of Greenlight Capital, as well as a host of others who took to the podium Wednesday at the 14th Annual Ira Sohn investment research conference.

The event is held to raise money for organizations that treat pediatric cancer. It is dedicated to the memory of Ira Sohn who was a Wall Street trader before succumbing to cancer at age 29.

At last year's event, Einhorn made his now famous short recommendation for Lehman Bros., arguing that the firm was over-leveraged and was not correctly valuing its losses. Lehman publicly pooh-poohed Einhorn, only to declare bankruptcy that September.

This year didn't have a dramatic prediction on the Lehman level, although to listen to the money managers the overall U.S. economy was still in dire straits and not likely to be better any time soon.

Peter Schiff, president of Euro Pacific Capital, who was one of the hedge fund managers who correctly called the subprime mortgage crisis, had a lot to say about government intervention, none of it good.

Alan Greenspan, the former Federal Reserve chairman, for example, "was the bartender who got everyone liquored up," according to Schiff, with his low interest rates that allowed the average citizen to splurge on houses and consumer goods they couldn't afford and the banks to provide the means to do so.

Schiff takes an exceptionally dim view of the Obama administration's attempts to shore up failing companies, calling it nothing more than a Ponzi scheme.

"I don't know know why we have Bernie Madoff in jail," Schiff said. "We should appoint him to be Secretary of the Treasury."

Paul Singer of Elliott Associates more temperately said that if the government didn't follow established rules of law, it would make it difficult for businesses to assess risk. Singer was critical of both the Bush administration's $700 billion bailout and Obama's excoriation of Chrysler hedge fund bondholders, saying that arbitrary government action wouldn't hold up in the long run, "where the rule of law gives way to steam rolling, or creditors being publicly pilloried, or Congress being threatened to write a blank check."

Unsurprisingly, Einhorn who was short the financial sector, was also not happy with bank bailout programs. His solution is that the banks own up to the losses that have already occurred and convert debt to equity to achieve proper levels of capitalization.

Einhorn's big short this year is Moody's Investor Services because he believes that the ratings agencies are a model that is broken and should not be fixed.

"Ratings contribute to bubbles," during an upturn, Einhorn said, while instead of downgrades being properly applied to warn about a company's problems, they are usually the final nail in the coffin.

One short seller who had a rosier view of the current federal government was Chanos. He said that what really happened for the last 30 years since the "Age of Reagan" was increased government involvement without regulation. Consequently, for-profit social services had thrived without delivering the best product.

"Obama is different," Chanos said, "despite the bailouts, which he inherited from [former Treasury Secretary Hank] Paulson."

Ultimately, Chanos said, Obama's belief that universal healthcare and education should be considered rights and are important to his legacy as President, would mean fundamental changes in those areas.

For-profit educational companies and certain healthcare services that rely on government subsidies would be vulnerable, Chanos said.

His prime example was Lincare Holdings Inc. (NASDAQ: LNCR), a respiratory care provider to patients at home. That industry is rife with potential for Medicare abuse, Chanos said, and Lincare is a "poster child" for what is about to happen as the federal government strives to reel in costs in the healthcare industry.

Returning to that part of the healthcare industry that brought the hedge fund managers together to air their views, Einhorn said that his long-running short on Allied Capital (NYSE: ALD) had finally paid off and he could make good on a pledge to donate a portion of the profits from that trade to the Ira Sohn Conference Foundation.

With that the donation from Greenlight Capital and the more than $2 million raised from the conference, $5 million was the total raised for pediatric cancer care, according to Daniel Nir, co-chair of the conference and managing partner of Gracie Capital.