Distressed investing was one of the best performing hedge fund strategies in 2009, up nearly 43% according to the Hennessee Group—and many experts see continued opportunities in 2010. The recession may have been declared over, but companies and governments are still facing major problems.

Join HedgeWorld and a panel of distressed investing experts as we discuss the outlook for distressed in 2010. We will review the results of our annual HedgeWorld-Dykema Insolvency Outlook Survey, which asks managers for their views on the current state of the distressed world and how they’re positioning themselves for the future. We’ll also talk directly to managers and other experts in the distressed space, including lawyers and turnaround specialists to find out from them how they see things playing out this year.

During this 90 minute program, topics that will be covered are:

An NFC team has prevailed in the Big Show now 23 out of 44 times. When that happens, the Standard & Poor’s 500 stock index has finished the year with an average return of 15%, more than twice the average return delivered by the index when an AFC team wins, said Richard Peterson, Standard &Poor’s director of markets, credit and risk strategies.

But even a better omen is the fact that the New Orleans Saints claimed their first-ever Lombardi trophy. In years in which teams win the Super Bowl for the first time, the S&P 500 has produced an average return of 20%. Furthermore, years in which the Super Bowl is staged in Florida the S&P 500 has returned an average of 17%—more than twice the return when the game is played outside the Sunshine State. It’s unclear what the market does in years when most people felt the commercials weren’t so great.

Head filled with worries of impending doom? Think happy thoughts. You control the option to the memory rights to your glory days, exercise them. We all have that Summer of ‘42 or ‘67 or ‘90….

If you’ve ever done the backpacking-across-Europe thing after college, chances are you ended up on the Greek island of Corfu, at a hostel/hookup paradise called the Pink Palace. I ended up there in October of 1990.

That prior summer I’d banked $3,000 working as a dishwasher and cook at a Martha’s Vineyard café called Among the Flowers, run by a guy named George Gamble. As the summer wore on I was panicky over a pending move to Washington, D.C., where South Buffalo-born James T. Malloy, longtime Doorkeeper to the House of Representatives and a friend of my father’s, had agreed to help me land an internship working in the House press gallery presumably to network with real journalists. To my father’s disappointment, I broke the news by pay phone that the internship had to be put on hold and I was going to travel around Europe.

After starting my trip in Frankfurt, Germany, I eventually ended up at the Palace … where the Ouzo flowed like water, as did an almost San Franciscan communal spirit. If some Australian dude had 3 girls to choose from, he made sure you were introduced to his sloppy seconds. Everyone ate together, like at summer camp, steaming bowls of goulash, and hung out together as a big group at the nightclub following desert and a feat of teeth-strength performed nightly by an old man who amazingly could balance numerous plates on his head with a sizable wooden serving table clenched in his mouth.

What was supposed to be a two-day stop over turned into a week, and as I write this, a snowstorm blowing in, well I dare not think any more it, about the beaches in Corfu, the aftershave-blue water, no I simply cannot think about the other Greek islands (like Paros, where incredibly I ran into one of the Among the Flowers waitresses who was there studying art) … lest I start to get nostalgic or flat out begin to weep.

Who yearns or mourns for Greece?

Not the Germans. Maybe George Soros who said something at the end of Davos to the effect that he thinks the Greeks will figure it out, that the Greek paper tantalized him, so perhaps he can make up for breaking the Bank of England by personally leading an effort to bail out Greece.

Greece is the word, it’s got groove, it’s got meaning.

What, not one of your favorite Frankie Valli tunes? Bullshit.

Don’t deny yourself; embrace it:

I solve my problems and I see the light
We gotta plug and think, we gotta feed it right
There ain’t no danger we can go too far
We start believing now that we can be who we are

Greece makes promises to get it together, like your college roommate Stavros the pirate who promises not to steal cans of tuna from your hiding place in the closet, but the market does not seem to be ready to start believing now.

Still, taking the longer term view, isn’t Greece too big to fail?

Nah.

Sovereign busts happen. The U.S. Treasury and Federal Reserve couldn’t save Greece even if they had the desire or the authority. Greece has to save Greece, Ireland itself, Portugal itself. Sagres—on the Algarve, an enchanting spit of sand straddling both the Atlantic and the Med, the centuries old stone walls of Portuguese explorer Prince Henry the Navigator’s School of Navigation looming in the distance, beers for a dime—itself.

Fiscal tightening will be required across the Eurozone:

“Further, while Americans go to insured banks and Treasury securities when they get scared, Europeans exit the currency as they have a lot more history of hyper inflation. That means a non virtuous cycle can set in with a falling euro, making National government funding problematic, which makes the euro continue to fall. This happened a little over a year ago due to a dollar funding liquidity squeeze. The Fed bailed them out with unlimited dollar swap lines and the euro bottomed at something less than 1.30 to the dollar.

“This time it’s not about dollars so the Fed can’t help even if it wanted to. And the ‘remedies’ of tax hikes and/or spending cuts Greece intends to pursue will only make it all worse, especially if undertaken by the rest of the eurozone as well. Fiscal tightening will only slow the economy and cause national government revenues to fall further unless the taxes are on those taxpayers who will not reduce their spending (no marginal propensity to spend) and the spending cuts don’t reduce the spending of those who were receiving those funds.

But it starts with Greece. Come on, Greece, let’s get it together, give us a package, a plan, a press conference, a union concession, a “text the letters G-r-e-e-c-e to…” fundraising campaign, a star-studded “We Are the Greeks” musical recording featuring all of the great Greek singers—Constantin Maroulis, Tommy “the Velvert Throat” Popadopolous from Astoria. Come on, right now, on the weekend of the Super Bowl in the honor of Jimmy the Greek, huddled in a Greek diner eating ambrosia, the food of the Gods, invoking the Titans, forerunners to the Olympians, the original masters of the universe, summoning Atlas the bad-ass muscle head ordered by Zeus to hold up the world on his shoulders for eternity (let’s face it, he’s done a heroic job so far with little complaint). Ah Christ on a cross what am I dreaming? The Titans can’t help Greece, nor can Soros, nor can Geithner, nor Bernanke.

But even if it does default, so? (so? so what? so let’s dance!) The Greeks can look to Argentina and see a perfectly capable post-financial Armageddon country.

Speaking of which did I ever tell you about the trip I once took to Tierra del Fuego?

Formula 44

When I check my pool numbers Sunday I am going to be looking for 4 and 4, not because double fours are decent numbers, they are (24-14, 34-24, 44-34) no I’ve been paying attention to the 44 thing which maybe you have heard about. This is Super Bowl XLIV, Obama is the 44th president, the Saints came into the league 44 years ago, Sunday will mark 4 years and 4 months since Katrina, the Saints won in overtime at 4:44 into the extra session (or 4:45 depending on news sources, although there is still a “44″ in there) and there are some other co-inky-dink tie-ins as well, and truthfully when I first heard about it I wasn’t really interested, that is until I saw yesterday that Peyton Manning and Drew Brees combined for 8,888 passing yards this past season.

Divide that by two and let neck hairs fly. The time-marking obsessed Mayans had a thing with numerology and their algorithms predicted 12-21-12 as the day their calendars officially became obsolete, although I just realized, thankfully, if you add those numbers together you get … 45….

3 Best: Super Bowl performances, by a player on a losing team

(3) Super Bowl XXXVIII
Jake Delhomme, 16 for 32, 323 yards, 3 TDs and no INTs.

(2) Super Bowl XXXIX
T.O., on a broken ankle, nine catches, 122 yards.

(1) Super Bowl XXV
Thurman Thomas, rushed for 135 yards, caught five passes for 55 yards (190 total yards from the line of scrimmage) and a TD, and the catch and run on the last offensive play, scampering, ducking and diving out of bounds as time ran out, setting the Bills up for a 47-yard-field goal that could have won it.

Keith McCullough, former hedge fund manager and the author of just released “Diary of a Hedge Fund Manager” (which I coauthored), had an eight-year career as a portfolio manager, and though he would never be mistaken for Paul Tudor Jones, McCullough made his millions. He always thought he was overpaid when he was in the business, and he says as much in the book.

Nowadays, when he is not writing books, McCullough makes his living doing macro research and disseminating it to his legions of loyal customers, beginning each day with an Early Look’ note that sweepingly contemplates shifting market and political winds taken alongside dozens of data points, everything from copper prices to European monetary policy.

In a recent Morning Note, McCullough commented on his delight in hearing that the bottom-up investor David Einhorn had told attendees at a value investing conference that he had found top-down religion. McCullough was not so much calling out Einhorn but calling attention to him, or rather his change of heart.

Getting people to do hardcore macro research is McCullough’s sort of guiding mission these days. Anyway, Einhorn ended up sending McCullough an interesting point-by-point response, unemotionally and at times humorously rebutting a few points, and conceding a few.

Among the most noteworthy admissions Einhorn makes—and this is a major league hedge fund manager we are talking about, the man some blamed for Lehman’s collapse—is the fact that the Greenlight founder thinks he is, indeed, overpaid.

In his original note, McCullough wrote: “Einhorn and I are about the same age. We both grew up in a hedge fund bubble. For a decade, we were probably both overpaid.”

To which Einhorn retorted: “I can’t speak for you, but even though I have started a valuable business that has created high paying jobs and provided a good value to my customers, I would agree with this. I feel very fortunate.”

Below is McCullough’s original note with Einhorn’s rebuttal comments in italic. It’s kind of a love-in, but very interesting glimpse into the current thoughts of a major hedge fund manager:

“As investors, we can’t change the course of events, but we can attempt to protect capital in the face of foreseeable risks.”
-David Einhorn

Admittedly, when “bottom’s up” we are bottom up investors, but bottom’s up drinkers hedge fund manager David Einhorn proclaimed his new macro mystery of investing faith at the ‘Value Investing Congress’ on October 19, 2009, I was smiling. Our Hedgeyes call this proactively managing macro risk and I do support Mr. Einhorn’s message thanks.

Einhorn and I are about the same age. We both grew up in a hedge fund bubble. For a decade, we were probably both overpaid I can’t speak for you, but even though I have started a valuable business that has created high paying jobs and provided a good value to my customers, I would agree with this. I feel very fortunate. He still runs money and sometimes my mouth and I run my mouth, so I am thinking that he’s probably worth a lot more than me. But what does that mean?

To some in this business, that means a lot. To others, it means nothing at all put me in this group. We all wake up early every morning with a passion to play this game. David’s Greenlight Capital now has its macro views. I have mine. Game on much less conflict here, than you think.

The global macro risk manager’s job in this business is to acknowledge amber flashing lights, before they go red. It’s also being keenly aware of when one of your big “ideas” is everyone else’s too. Measuring consensus is part of any repeatable Red Light Risk Management process.

Embedded in our macro risk management process are 3 dominating Global Macro Themes. We change them quarterly, because the math changes daily. As a reminder, my team’s current Macro Themes for Q1 of 2010 are:

1. Buck Breakout (bullish on the US Dollar; bearish on gold) We are bullish on the dollar vs. the yen, euro, & pound. We like the dollar more than most everything but gold at the moment. Or maybe we just hate it less than the other currencies. We are long various European sovereign CDS.

2. Rate Run-up (bearish on government bonds) agreed at some point, but no real view on this quarter.

3. Chinese Ox In A Box (bearish on Chinese equities; bullish on Chinese currency) I would tend to agree, but have no position and no real conviction. It seems to be working.

I do not know what Einhorn thinks on Macro Themes 2 and 3 but, now that he does macro, he obviously better have a view. That said, I do know that he stands on the other side of me with regards to both the US Dollar and Gold.

In that same speech, Einhorn made the following conclusions about gold:
1. “Of course, gold should do very well if there is a sovereign debt default or currency crisis.”
2. “I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long term value as difficult to assess.”
3. “Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible.”

After being bullish on gold since 2003, and vehemently bearish on what I labeled the “Burning Buck” in early 2009, I do think I have the credibility associated with understanding the bearish dollar/bullish gold case Agreed. There are many aspects to Einhorn’s conclusions that I agree with, but not at every price and every duration. My guess is your current quibble is more about duration than price. I’d be willing to bet there will come a time where you will like gold at a substantially higher price.

Now, if you really want to manage Red Light Risk in global macro, you better manage those two things dynamically—price and duration. I have written about this before, but it’s worth mentioning again. Duration Mismatch is one of the top 3 risks that has hurt me over the course of my risk management career. We need to monitor it systematically and measure it scientifically. Just as I am still trying to learn and improve (like incorporating more macro thinking), I am hopeful to improve here, as well.

Back to Einhorn’s points on gold. On an immediate (TRADE) to intermediate term (TREND) duration (3 weeks to 3 months), gold has not done well in the face of sovereign debt default risks rising. I don’t know. I wouldn’t say my speech was an important date….but since then gold is up a little and the S&P is down a bit. It was about 3 months ago. (Since our actual entry, the results have been much more decisively in our favor) Gold is up a lot in Euros, where the sovereign crisis appears to be at the moment. Now maybe he meant a sovereign debt default crisis in the USA it would do very well in a US crisis and that was my point. My guess is that such an event, if it ever happens, is quite a ways away and would not fit into the thinking of someone investing for 3 months or less and, to be fair, we should give him the benefit of the doubt the benefit of the doubt is always appreciated here until he replies to this. But, so far, with CDS (credit default swaps) in Greece blowing out to 414 basis points last night, gold is still going down not relative to the place where the crisis exists.

Gold is going down because I am right on the Buck Breakout. Yes, as Mr. Buffet pointed out to David We didn’t discuss this. I was relying on his public statements. way back when, there are many risks embedded in evaluating the gold price. But those difficulties work both ways! Today, in terms of measuring the risks of being long gold, the r-square is highest relative to up moves in the US Dollar. I haven’t done the math, but it feels more correlated to equities than the dollar to me at the moment. I suspect that that correlation will break down in gold’s favor at some point.

Managing Red Light Risk is just that. You have to accept that there are many types of investors telling many different types of qualitative stories about what it is that they are bullish on. You also have to accept that Mr. Macro Market’s math will rule the day over all the storytelling I strongly agree with this.

This morning the US Dollar is making a 5 month-high at $78.94. Gold is trading down another -1% for the week to-date at $1083/oz. I am long the US Dollar and short Gold via the UUP and GLD etfs, respectively, and I have a zero percent allocation in our Asset Allocation Model to Commodities.

The long term TAIL of resistance for the US Dollar Index is up at $80.21, and I think it’s going to test that line this year. My long term TAIL line of support for the gold price is down at $997/oz. That’s another -8% of Red Light “foreseeable risk” that these Hedgeyes are calling out for you Mr. Einhorn. I do think we have a different view on duration. I have no idea which way the next $80 in gold will be. If I had a strong view, I would modify my position, as I’d rather buy it back cheaper. Sadly, I don’t and you may well be right. I do have a strong view as to which way the next $500+ will be and I don’t want to give that up just because I might have to temporarily give up a fraction of our gains to date to the volatility gods in the meantime. Welcome to the game of proactively managing macro risk. It’s a full contact sport. I don’t see it as full contact. I am still not betting these things big enough to look at it that way.

Best of luck out there today, and have a nice weekend (de)

Sometimes the dots just line up naturally.

This morning I’m reading the Drudge Report, one of the many news sites I check in the morning as I sip my coffee and two headlines catch my eye:

A Bloomberg story about Harrisburg, Pa., the state capital, considering filing for Chapter 9 bankruptcy protection, and raising taxes, to deal with $68 million in debt payments this year. Pennsylvania Capital Harrisburg Has Bankruptcy Option.

Then there’s this USA Today story about more cash-strapped towns thinking about replacing aging paved roads with gravel roads. Tight times put gravel on the road. Where I grew up, in rural southern Oregon, county road crews would chipseal the old paved roads when they wore out. It was less expensive, and durable. As a motorcyclist, however, I worry about riding the back roads of Michigan and suddenly (and unexpectedly) encountering gravel roads. Two wheels and gravel don’t mix. But I digress.

Then there’s this story about Neenah, the manhole cover manufacturer, declaring bankruptcy. No surprise, one of the reasons the manhole cover maker is hurting is because of “… a drop in public sector spending, a slowdown in infrastructure spending associated with commercial and residential development, and ‘dramatic declines’ in heavy-duty truck, construction and farm equipment markets hurt profit and cash flow.”

Tontine Capital Partners LP owned 58% of Neenah’s diluted shares, as of Dec. 4, according to a regulatory filing cited in the story.

Since I’ve been covering hedge funds, going on 10 years, now, when I’ve told people what I do, it’s always been hard for them to relate to the hedge fund angle. And I always tell them, it’s not as far as you think from where you are to where I am, or where the hedge fund managers are. Income-wise, sure, there’s a giant gap. But this business isn’t so removed from everyday life. At least not every day.

A mildly entertaining, if somewhat simplistic take on pros and cons of bringing back some or all of the provisions of the Glass-Steagall Act. Love the clip at 36 seconds into the video of Sen. Christopher Dodd (D-Hedge Funds*) lamenting the restrictions on capital markets. Someone could use that in a campaign ad against … oh, wait. Never mind.

* - I wish I could take credit for that, but I can’t. FINalternatives beat me to it.

Plenty has been written over the years about the so-called Super Bowl Indicator, which historically held that an original AFL team winning the Super Bowl meant bad news for the market, while a win by an original NFL team meant good news. This year, as was the case last year, there are no original AFL teams playing in the game, although the AFC’s Indianapolis Colts are an original NFL team, starting out as the Baltimore Colts.

The “original AFL team versus original NFL team” theory used to hold true a great deal of the time, supposedly hitting the mark 90 percent of the time between 1967 and 1997.

The eight original American Football League (AFL) franchises – the Houston Oilers (now the Houston Texans Tennessee Titans), New York Titans (now the N.Y. Jets) Buffalo Bills (four straight AFC Championships, 1991-94) Boston Patriots (now the New England Patriots), Los Angeles Chargers (now the San Diego Chargers), Denver Broncos, Dallas Texans (no longer a team) and Oakland Raiders – have claimed only 12 of 43 Super Bowls, and, moreover, various factors, such as teams changing conferences or cities, as well as expansionism, has muddied the waters so that the SBI has in recent years morphed into more of an NFC versus AFC exercise.

According to markethistory.com, an NFC victory does appear to indicate a bullish market to come. Meanwhile, an AFC win appears to be statistically inconclusive.

The following appeared on markethistory’s web site two years ago, and makes for interesting reading:

Super Bowl XLII (42) was won by NFC team the New York Giants on Sunday evening, the first time since 2003.

Q: How has the S&P 500 Index performed in the past after an NFC team has won the Super Bowl?
A: According to the 21 previous occurrences of this event, EventEdge indicates that SPX has shown a strong bullish edge that peaks 93 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Friday, 1 February 2008, since the event occurred on Sunday) is Monday, 16 June 2008. SPX rallies in 86% of the cases (18 of 21) by an average of 9.5% relative to the close on the event date. The average of the 3 declines is -2.8%. The overall return of the 21 cases is 7.7%, which, based on the close of SPX on Friday (1395.42), provides a target price of 1502.87.
Looking out as far as the year’s end, we see that the SPX has rallied in 85.7% of the time (18 of 21) by an average of 16.3% which projects out to 1622.87. The three declines averaged -5.2%.
Contrast the bullishness of the SPX in the upper chart below after NFC wins to the flat response of the markets, overall, when the AFC wins (lower chart).
See Big Blue Wrecking Crew Wrecks Patriot’s Perfect Season for details on how the market has responded in the past when on two occasions the Giants have won the Super Bowl.
We published a story on this in 2003 when the Tampa Bay Buccaneers won the title for the NFC last, and the SPX gained 29.1% by year’s end.
Gibbons Burke is editor of MarketHistory.com.

So, here’s how it works in Chicago. Guy gets “probed” by Feds, guy gets charged by Feds, guy pleads guilty. Many other guys start losing sleep over what kind of deal the first guy might have cut to obtain more lenient sentence in plea deal. Tossing and turning over coffee shop conversations that may or may not have been recorded, phone chats…. Happens over and over here, most recently yesterday.

I’m gettin’ that same sense in the Galleon case. The good news for Raj Rajaratnam is that the government has blown nearly as many of these cases as they’ve nailed. Odds of Raj jail time stand today at 55-45 for.

Maybe it’s just me, but watching Paul Volcker testify on Capitol Hill today I immediately thought of Carl Reiner. Have you ever seen them in the same place at the same time? Just sayin’.

Volcker

Reiner

A reasonably good CNBC interview by Steve Liesman with former Treasury Secretary Henry Paulson. In this first of a five-part interview (why do in one part what you can do in five?), Paulson opens by recounting his fear in a Sept. 14, 2008, meeting at which it became clear Lehman Brothers was going down.

There’s an odd and somewhat uncomfortable moment at around 2:20 where Paulson tells Liesman that after composing himself outside, he went back into the room and “pretended he knew what to do.” The producers chose to cut to a shot of both men at this point, and both are smiling at the recollection. Then both men shift in their chairs, the way people do after discussing something difficult for a time, signaling a new direction to the conversation. It is at once both a “Hey, Hank Paulson is human” moment and a “Holy crap, even the Treasury Secretary, a Wall Street veteran, was scared” moment.

Humanizing, and a bit scary. Certainly worth watching.

Liesman I think misses some opportunities for follow-up questions, or maybe they were just edited out. After that initial clip, the segment devolves into a CNBC studio discussion that includes Andrew Ross Sorkin.

The other four segments were to air throughout the day.