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2009 Year in Review: The Second Chance Saloon


Taking stock of what was, what is, and what will be.

"Now I don't have to tell you good folks what's been happening in our beloved little town. Sheriff murdered, crops burned, stores looted, people stampeded, and cattle raped. The time has come to act, and act fast. I'm leaving!" Reverend Johnson, Blazing Saddles

The summer siesta that signifies the midpoint of the calendar arrived and not a moment too soon. After six months of whips and change that were very strange, the market, as measured by the S&P and DJIA, is right back where it started.

That was fun, eh? Let's play it again, Sam!

When we began the year, we foresaw ten themes we believed could play out by the time 2010 arrived. As we emerge from our halftime break and shake the sand from our shorts, it's time to circle back and take stock of what was, what is and what will be.

The Not So Quiet Riot

January Thought: The age of austerity has officially arrived and we'll see a steady stream of social strife as the rejection of wealth increases in size and scope. While societal acrimony began to percolate last year, this dynamic will manifest through social unrest and geopolitical conflict as we edge ahead.

This is, without question, the single biggest socioeconomic risk as we stand at a critical crossroads. On the one side, there is orderly debt destruction that will ultimately pave the way for true globalization. On the other, there is isolationism and protectionism as sovereign nations protect their interests at any cost.

If calmer heads don't prevail and the global community takes a turn for the worse, history books will likely point to Shock & Awe as the beginning of WW3. You don't have to agree with this assessment; you simply have to respect it.

Update: While we've seen some debt destruction-such as General Motors (GPM) and Chrysler-the government sponsored push for credit expansion has muted the natural progression of an efficient market. While that may have been necessary to grease the wheels of capitalism, it continues to serve as drugs that mask the symptoms rather than medicine that will cure the disease.

The recent violence in China, Honduras and Iran, coupled with tension in North Korea and saber rattling on the currency front (not to mention the general direction of stateside social mood) is proof positive that this unfortunate theme seems to be playing out.

Hedge Fund Overhaul

January Thought
: Once upon a time, in the early 1970's, the mere mention of Wall Street was taboo at cocktail parties. The more things change, the more they stay the same as Main Street casts blame, in many cases rightfully so.

Early last year, I opined that 50% of existing hedge funds would cease to exist. The perfect storm of 2008 will expedite this process, as will reactive regulation following the Bernie Madoff scandal.

Typical hedge fund terms are "one and twenty," or 1% management fee and 20% performance fee. Expect industry standards to shift to a three-year aggregate performance structure that eliminates the annual payout and weeds out the excess capacity in this space.

Update: The pushback against all things Wall Street continues as the point of recognition percolates around the world. This will manifest in both the perception of financial professionals and the structural underpinnings of capitalism.

After a rough start to the year, hedge fund performance rebounded in the second quarter alongside the market. Still, regulatory pressure will increase, as will performance anxiety as expectations ratchet relative to the traditional fee structure. All the while, social mood will pick apart the utility of this segment of the financial wagon wheel.

Politicians (and their constituency) view hedge funds are an acceptable casualty of war and the back half of 2009 should continue to offer proof points in this regard.

Seismic Readjustment

January Thought
: Entering September, we offered that the disconnect between equity and credit would manifest as a car crash or a cancer.

Four months later, despite lower equities and massive government intervention, the equilibrium between equity, credit, commodities and currencies remains elusive.

In a free-market system-such as the one we used to have-these inefficiencies would be naturally resolved by supply and demand. In the current world, a "man made" readjustment, such as a meaningful currency move that significantly devalues the U.S. dollar, becomes increasingly likely.

Update: Despite significant improvement in the corporate credit market, foreign holders of dollar denominated assets have seemingly arrived at the point of saturation. Russia and China have been particularly active in pushing that agenda, but they're hardly alone.
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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

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