Hedge Fund Redemption Song

Must hedge fund redemptions put pressure on stocks in the first quarter? That's the presumed wisdom as the gating the hedge funds have put in place has to run its course eventually. I know it has worried me for the most obvious hedge fund plays: infrastructure (Fluor (FLR - commentary - Cramer's Take), Foster Wheeler (FWLT - commentary - Cramer's Take), Nucor (NUE - commentary - Cramer's Take)), as well as the stocks that managers are hiding in (General Mills (GIS - commentary - Cramer's Take), Procter & Gamble (PG - commentary - Cramer's Take) and the like).

But I am thinking we may be missing something. What's been held back, what the hedge funds haven't sold as we learned from Goldman Sachs' (GS - commentary - Cramer's Take) conference call, is the stuff that's illiquid -- mostly the toxic or shrinking bank loans, commercial real estate loans, and residential mortgage-filled collateralized debt obligations.

If anything, I bet the stock portions of the sales have probably been made. I think the managers have made a major mistake: They sold the good stuff to fund the bad, betting that the bad would come back to life. But it hasn't. It has only gotten worse, and without a government trading desk to increase transparency and tighten spreads, it will be those markets that are in trouble again -- like they have been all year.

It is possible that there are hangovers from the hedge funds, but -- amazingly -- those who were margined out or had to return funds earlier may actually be gone. Meanwhile cash has built on the sidelines and it is entirely possible that the worst of much of the forced redemptions is now over.

So why not be really bullish? First, go read Doug Kass' unbelievably good article about the "not so fast" element of the bullish calls here. Is there any doubt that Doug has the hottest hand in the firmament this year? (Too bad that the folks in Palm Springs fell in love with Madoff voodoo instead of giving the money to the other money manager in their midst with real numbers.) In other words, the issue is pretty clear -- the stocks are rebounding from their beaten-down lows, but the fundamentals have declined, in some cases radically, in the interim.

I also think many of the companies that the hedge funds blew out have no dividend protection and dividends, as I have been saying over and over again, are crucial to any capital appreciation in 2009.

These two items -- the end of redemptions and the decline in the fundamentals -- offset each other. In other words, the hedge fund redemptions for 2009 are probably overestimated as a worry, but the fundamental declines expected are probably understated. That's the recipe for the do-nothing stock market I am anticipating in 2009.

Random musings: Everyone questioned the decision by the Chinese to load up on low-yielding U.S. Treasuries. Whoops! They are sitting on huge gains!

At the time of publication, Cramer was long GS, FWLT, GIS and PG.

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