Believe it or not, there were some on Wall Street who wished the market never rallied this week. Plenty of big money managers had bet that stocks would continue their declines. These are the guys who have shorted the banks – and a host of other sectors, for that matter – because the strategy has generated immense returns during this recession. As the bad news poured in, these guys cashed in.
Of course, this was the exact opposite of what retail investors wanted. After all the turmoil and volatility, why would anyone want it to continue? Well, for the reason we just mentioned – money. Cramer, during Friday’s show, exposed the bear raiders behind this type of trading and explained what makes them tick.
This negative attitude is largely held by hedge funds with huge short positions. And if they haven’t yet covered those positions, they’re most likely hoping Treasury Secretary Geithner delivers another limp and vague speech next week. No doubt hedge funds bristled at President Obama’s pro-business statements Thursday and those of Lawrence Summers, director of the National Economic Council, on Friday. The more missteps in Washington, the better the returns for these funds.
Beyond the U.S., hedge funds that make money on the downturn want the entire global economy to slowdown. They’re hoping China’s stimulus doesn’t work, copper prices dip, and oil heads lower. Luckily for us, that’s not happening.
Retail’s better-than-expected numbers this week – if only by a slight margin – were also bad news for the hedge funds, as was General Motors taking a pass on $2 billion in federal aid. Instead, that helped to boost the markets.
In the financials, Bank of America reported that it was profitable, which means the bank will escape Citigroup-style government ownership. There’s also talk of changes to the mark-to-market accounting that’s turning asset-backed paper toxic and weighing down many banks’ balance sheets. And another landmark decision was announced this week: The Securities and Exchange Commission will reinstate the uptick rule. This used to require a stock to tick up in price before it could be shorted, and without it bears have been able to hammer down companies with impunity. The change is bad for the bears, in this case hedge funds, and good for us.
Bernie Madoff’s guilty plea signaled that there might be justice in the world, which restores investors’ faith. Since hedge funds have made their money specifically due to a lack of faith, this turn of events tips the scales back in our favor.
Also, Warren Buffett spent a morning with CNBC this week instead of cowering in his modest Omaha home. That inspires confidence, which again is not what hedge funds want right now.
General Electric withstood a credit downgrade. In fact, the stock was up regardless. The collapse of GE, needless to say, would have had severe consequences, but they might have been profitable for the shorts. That possibility seems to have disappeared.
Analysts haven’t been downgrading stocks the way the bears would like. They’d want Wall Street pundits and experts on TV, radio and in print predicting another depression. It’s not happening, though.
Hedge funds also would have liked to see Friday’s Dow gains much higher. That way a sizable reversal of any kind next week would kill investors’ spirits. But it looks like buyers’ remorse won’t be an issue, in the near term at least.
And lastly, healthy M&A activity, most recently in biotech, also hurts the hedge-fund cause. Takeovers in the sector have totaled $193 billion just in the past month. The new money entering the market will most likely end up in stocks, pushing them higher. And the fact that the acquirers’ share prices also rose might entice other firms to do some buying of their own.
Take it from Cramer, he used to run a hedge fund, and he knows how these guys think. But the market’s recent moves seem to indicate that the funds aren’t getting the negativity they need. Should the big money shift gears and go long – which is likely if the good news keeps coming – then billions and billions of dollars will flood into stocks, possibly pushing the Dow up to 8,000, Cramer said. Hedge funds will have no choice. They’ll need to recoup any the losses incurred for being late to the turn.
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