By DAN DORFMAN
April 4, 2008
What a difference a day makes. Take Tuesday, after the Dow shot up 391.47 points. Immediately, Wall Street’s latest party line, ridiculed by some skeptics, spread from a murmur to a veritable roar that the stock market has bottomed, the worst of the credit and housing crises has passed, and the economic downturn, possibly a recession, will not be as bad as some expect.
Apparently, a lot of investors are buying the sunny scenario, having eagerly snapped up an estimated $3 billion worth of American stock mutual funds over the past week or so. One hedge fund, New York’s Balestra Capital Partners, vigorously disputes such thinking. Based on the firm’s assessment, investors who took part in that $3 billion buying spree are living on cloud nine.
Balestra, a bearish $575 million hedge fund, up from $250 million of assets a couple of years ago, is not to be taken lightly. As of late, its performance is what Wall Street dreams are all about ? up so far this year in a losing, agonizing 2008 stock market, and showing a dazzling 199% increase last year. Late last year, when I caught up with Balestra’s top money manager, James Melcher, his words were was downright frightening. Citing then what he thought were significant dangers for the financial system, he told me, “I would run for the hills; the worst is far from over.” He was right on the money. His investment thesis was simple enough: “The ingredients are in place for the worst kind of a recession, which means it’s the wrong time to own stocks.”
Backing up this strong view, Balestra’s strategy has included shorting stocks and bonds (a bet they would fall in price), notably mortgaged-backed and junk bonds, through the use of derivatives, put options, credit default swaps, and buying gold bullion. That strategy is basically still in effect.
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