The Market

• Markets are down as profits are taken in what some may view as an overbought market.
• General Mills (GIS) is down 8%, despite guiding earnings higher.  Traders are focusing on the quarter which clearly disappointed.  And, there is concern that branded cereals are being hurt by store brands.  I hate averaging down and won’t do it with GIS.
• I bought more Citi for a trade and even got into AIG, may you forgive me.

Sidebar

Come the Revolution

The Bastille is about to be stormed by those who have not had the opportunity to be overpaid.  Without justification to any of this let me help explain how this works.  The amount of money collected in investment pools is staggering.  It began with the ERISA act of 1973 (I believe).  As companies deferred responsibilities to the employee for retirement funds the numbers of money managers exploded.  In the 70’s there were, perhaps 500 major mutual fund shops and fewer hedge funds.  Now there may be more hedge funds than mutuals, perhaps 10,000.  No one forces an investor to hand their money to a hedgie, it is done in the pursuit of out performance.

No, here is the rub.  Hedge fund managers are usually paid a 2% management fee, just for showing up in the morning.  And, he get this no matter how he performs.  And then a 20% performance fee.  Usually, the hedgie must outperform a benchmark.  Lets say the S&P, for this discussion.  Many, many funds have at least $1 billion under management.  So, for coming into the office this manager is paid $20 million.  His overhead may be $1 million, at the most.  AND, if he outperforms the S&P he gets 20% of the profits.  In a good year our boy does better than the market, lets say he is up 20% for the year.  That is a $40 million bonus.  Some funds charge as much as 50% of the profits but those are few.

So, dear reader, it is the norm for fund managers to make millions.  You may not like it and you may want to police it, but there it is.  Until recently, it was usual for equity research analysts at hedge funds to make $10 million while the manager, the one who pulled the triggers, makes $100 million.  John Paulson made $1 billion for himself while making $3 billion for his clients; in one year.  Convertible bond traders routinely made $1 million a year.  Bond traders made much more.  Who did you think bought those houses in the Hamptons, the condos in NYC and London?

To pay the rogues of AIG $1 million or $4 million is not unusual.  But how much did they make for AIG?  In my experience it was not unusual to hear of bond, derivative or bond traders making $50 million for their companies. These traders could go elsewhere, indeed many already have, and make $1 million or more.  So, it is not really the AIG bailout money being used that bothers people most (although egregious) it seems to be anyone making that kind of money.

This may all be part of the new order. Guess what bothers me is the new anger; it seems all of a sudden Washington realized Wall Street was making gazillions for generating, what Washington believes, to be little economic progress.  How, they say, does generating personal and corporate wealth benefit society?

This new anger scares me but perhaps I should get accustomed to it.

BTW, hedging is not a dirty word.  My long positions are hedged with an inverse ETF.

Off to my tutoring charges, more later.