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TheStreet Open House

Red Coat Is Going? Red Coat Is Going?

SAN FRANCISCO -- A terrible year for so many investors is coming to a close in a fairly benign way. More stocks rose than fell, while major averages ended uniformly higher for the second straight session today. The Dow Jones Industrial Average rose 0.6%, the S&P 500 gained 0.4% and the Nasdaq Composite added 0.7%.

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But a few days do not a year make, and there will be repercussions. Talk in the hedge fund community this week -- where few are on vacation, by the way -- is that Red Coat Capital Management is one potential victim of this year of living dangerously. One twist is that it wasn't tech stocks alone that wounded (perhaps mortally) the Manhattan-based hedge fund, but ill-fated bets on entertainment and consumer stocks.

"They had a highly leveraged product that came unglued," said one hedge fund source, who requested anonymity. "This is one example of stuff that's gone on this year that's not too good."

Kenneth Londoner, CEO and partner at Red Coat, denied reports that his fund has suspended redemptions and/or is planning to shutter its operations shortly after Jan. 1. He called such scuttlebutt "completely untrue" and "completely unfounded."

Despite Londoner's adamant denials, I'm reporting on the rumors because I recall the repeated and steadfast denials from Tiger Management before that hedge fund giant eventually succumbed early this year. Second, there's no denying that Red Coat capital struggled in 2000.

Londoner declined to discuss Red Coat's individual holdings or overall performance. But based on the fund's top holdings at the end of the third quarter, Londoner's characterization of the past year as "challenging" would seem to be a classic under- or misstatement, assuming the fund did not bail out of these positions.

The fund's top position at the end of the third quarter, according to Bigdough.com, was 2.6 million shares of LodgeNet Entertainment (LNET), which was down 38.7% for 2000 heading into today's session (where it rose 11.5%).

Other of the fund's largest holdings, and their year-to-date performances through yesterday, include: 2.9 million shares of Liberty Digital (LDIG), down 94.1%; 1.9 million shares of Disney Internet Group (DIG), down 81.9%. Another position, Cutter & Buck (CBUK), which was added in the third quarter, according to Red Coat's SEC Form 13F-HR, has fallen 33.2% during the fourth quarter.

Metro-Goldwyn-Mayer (MGM), down 32.1% for 2000 and 43.6% since closing its acquisition of Mirage Resorts on May 31, was also one of Red Coat Capital's biggest holdings as of Sept. 30, according to Bigdough. But sources familiar with the fund say it has since exited from the position. If true, that could partially explain MGM's recent struggles, given that Londoner's stake was 1.4 million shares on Sept. 30.

Londoner acknowledged that Red Coat has suffered redemptions, but expects to enter 2001 with between $100 million and $125 million of capital. Londoner refused to comment on the fund's peak size, but Bigdough.com reports that it was $273.6 million as of Sept. 30. Sources say the fund's peak was substantially higher still.

In the Footsteps of Giants

The situation at Red Coat seems to have some similarities with what transpired at Julian Robertson's Tiger Management.

Like Robertson, Londoner hired high-priced talent but insisted on running the majority of the fund's assets himself, sources familiar with the developments say. And like Robertson, the sources say Londoner failed to follow his own preset rules about selling stocks that have fallen by a given percentage, choosing instead to press his bets. That may explain why Red Coat suffered despite also having big positions in stocks such as McKessonHBOC (MCK) and Chubb (CB), each of which is up more than 50% this year.

Finally, Londoner's fund is facing an exodus of the aforementioned high-priced talent, similar to what transpired in the denouement of Robertson's Tiger.

Londoner confirmed that those planning to leave Red Capital shortly include Richard Swift, a cable, media, lodging and specialty retail analyst, and John Fleming, a financial services analyst, who are planning to start their own hedge fund. David Wolf, a gaming analyst who joined Red Coat from Oppenheimer Capital at the beginning of this year, is leaving to join SAC Capital.

Swift and Fleming did not return phone calls seeking comment. Wolf is on vacation.

Londoner denied that the aforementioned are leaving because he refused to share the ball, suggesting they all are leaving on friendly terms. Unprompted (I swear), he compared the situation with that of Tiger Management, where several employees left over the years to start their own hedge funds.

Rick Abeyta, a generalist who is also leaving Red Coat to join Swift and Fleming in their new venture, confirmed that there is no bad blood. He declined to comment further on either his new venture or goings-on at Red Coat.

If Londoner continues operations next year, as he says is the plan, sources predict it will be on a dramatically scaled-down basis (inevitable given the declining capital base). Another hedge fund manager suggested Londoner might be better served to go ahead and shut down Red Coat Capital and then "start over again" with a new fund with whatever capital current investors choose to leave in his stead. That way he won't have to worry about recouping this year's losses.

If that sounds fanciful, recall that John Meriwether, who oversaw a far bigger and more serious decline at Long Term Capital Management, is back in the hedge fund game with a new fund.

(More) Housecleaning 2000

As forecast last night, a long overdue update of our periodic report card appears below.

Remember, the performance column assumes an investor held the stocks from the time the call was made through yesterday's close. The reality is that most of the sources (hopefully) altered their portfolios during the intervening period. While that's always true, that's likely more so this time given the market's performance in the second half of 2000 and that these picks are from the third quarter (I did say "long" overdue, didn't I?).

Unfortunately, I wasn't able to catch up with many sources to get updates on how they've dealt with what are some big losers.

I did reach Brian Gilmartin of Trinity Asset Management, who bravely declared that he is still buying the same big-cap growth names as back in early August.

"But we added financials as a much heavier percentage of the portfolios once it became apparent in October that this would not be the standard 10% correction," he said, mentioning Goldman Sachs (GS), Lehman Brothers (LEH) and Morgan Stanley Dean Witter (MWD) as examples.

Another source I reached was Arthur Bonnel, manager of the (ACBGX) U.S. Global Investors Growth fund, which is down 17.2% this year, according to Morningstar.com.

Space constraints prohibit more detail, but Bonnel said he exited all of the stocks listed below by mid-October, save King Pharmaceuticals (KG), which he still owns. In the past two weeks, the fund has retaken positions in TriQuint Semiconductor (TQNT) and Sanmina (SANM), he said.

Look for more on Bonnel's recent actions and outlook for the coming year in a forthcoming column.

Accountability Report Card: 3Q 2000
Date Source Recommendation/forecast *Performance
(in percent)
TaskMaster says...
July 5 Jonathan Joseph, Salomon Smith Barney "The chip sector is likely to see peak capital spending growth rates this year, which has closely correlated with cyclical shipment peaks in the past" (i.e. the chip cycle is dead/dying). SOX: (43.6%) One of the great/gutsy calls of this or any year.
July 5 Richard Whittington, Banc of America Securities. The chip cycle is not dead. Buy: Applied Materials (AMAT). AMAT: (52.6) A lot of folks (me included) challenged "the chip cycle is dead" call. They (we) were wrong.
July 11 Richard Eakle, president of Eakle & Associates Buy: PE Biosystems (PEB);
Medarex (MEDX);
COR Therapeutics (CORR);
Aether Systems (AETH);
Globespan (GSPN);
Maxim Integrated Products (MXIM);
Siebel Systems (SEBL);
Ariba (ARBA);
Network Appliance (NTAP)
** PEB: 2
MEDX: (5.7)
CORR:(20.2)
AETH: (76.5)
GSPN: (73.2)
MXIM:(26.5)
SEBL: (14.9)
ARBA: (38.9)
NTAP: (15.3)
Ouchy.
July 12 Juliet Ellis, Chase Global Asset Management Sell: Atmel (ATML);
Lam Research (LRCX);
Microchip Technology (MCHP).

Buy: Accrue Software (ACRU);
Allaire (ALLR);
Advent Software (ADVS);
Michaels Stores (MIKE);
Stein Mart (SMRT)

ATML:(33.6)
LRCX:(59.7)
MCHP:(44.8)
ACRU:(93.8)
ALLR: (87)
ADVS:(31.8)
MIKE: (44.9)
SMRT: 13.4
The sell ideas worked better.
July 12 Arthur Bonnel, U.S. Global Investors Bonnel Growth fund. Buy: JDS Uniphase (JDSU);
Adobe Systems (ADBE);
Applied Materials (AMAT) Dallas Semiconductor (DS);
Tollgrade Communication (TLGD);
TriQuint Semiconductor (TQNT);
Sanmina (SANM);
Jones Pharmaceutical (JMED);
King Pharmaceuticals (KG)
JDSU: (52.7)
ADBE: (6.8)
AMAT:(55.5)
DS: (43.6)
TLGD: (76.4)
TQNT: (3.1)
SANM:(20.7)
***JMED:(13.7)
KG: 11.8
More boo-boos. Tough time for the tech growth gospel.
July 13 Stanley Nabi, vice chairman DLJ Asset Management "I think the recovery in the Nasdaq has been too steep, exposing the major stocks in that index to risk once again." Buy: Chevron (CHV);
Exxon Mobil (XOM);
Texaco (TX);
Conoco (COC);
Anadarko Petroleum (APC);
Burlington Resources (BRE)
NDX: (37.8)
CHV: (1.1)
XOM: 11.9
TX: 16.5
COC: 17.5
APC: 52.3
BRE: 5.8
Maybe gray hairs aren't so bad, after all.
July 26 Mark Lapolla, partner Petroscapital Buy: Interactive Commerce (IACT) IACT: (55.7) Wrong time for "concept" stocks.
Aug. 3 Brian Gilmartin, portfolio manager at Trinity Asset Management Sell: Dell (DELL) and WorldCom (WCOM).Buy: Cisco (CSCO),
Applied Materials (AMAT),
EMC (EMC),
Sun Microsystems (SUNW),
and Wal-Mart (WMT).
DELL: (56.7)
WCOM:(63.2)
CSCO:(36.7)
AMAT:(42.7)
EMC: (19.4)
SUNW: (43.6)
WMT: (1.8)
Maybe he should have sold 'em all.
Aug. 4 Alan Skrainka, chief market strategist at Edward Jones

Buy: Texas Instruments (TXN),
Qualcomm (QCOM),
Microsoft (MSFT),
Johnson & Johnson (JNJ)
Medtronic (MDT),
American International Group (AIG),
and State Street (STT).

TXN: (7.8)
QCOM: 40.4
MSFT: (32.8)

JNJ: 6.7
MDT: 9.4
AIG: 12.3
STT: 10.6
Pretty stellar, save 'Soft.
Aug. 11 Joseph McAlinden, chief investment strategist at Morgan Stanley Dean Witter Advisors "What we're dealing with here is a rotation out of growth and into value, momentum that is only going to build as we go through the summer." De-emphasize tech while overweight financials, health care and utilities. SGX: (20.8)
SVX: 3

Philly/KBW Bank Index: 5.1
S&P Healthcare:14.4
DJ Utility Average: 17.1

Right call at the right time. Right as rain (whatever that means).
Aug. 17 Scott Bleier, chief strategist at Prime Charter Predicted a "really good rally" at September's onset, with the Comp eclipsing 4200 and ultimately trading as high as 4600 while the Dow rallies to as high as 11,650. Predicted the Comp would be around 4050 and the Dow near 11,250 the week of Sept. 25. Comp: (35.6)
Dow: (2.3)
Not his finest hour.
Aug. 17 Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray Forecast the Comp would retest its lows just above 3000 within the next six weeks, while the Dow suffers as much as a 1,000-point selloff after hitting 11,500 in the short term. However, believes the "sharp correction" will lead to another "V-shaped" bottom that takes the Comp to 4500 and the Dow to 12,000 by year's end. Comp: (35.6)
Dow: (2.3)
Not his finest hour, part 2. Many folks still looking for the "V"-bottom.
Sept. 27 Sam Ginzburg, senior managing director of equity trading at Gruntal Buy: Novell (NOVL);
Micron (MU);

Sell: Lucent (LU)

NOVL: (42.8)
MU: (27.7)
LU: (52.5)
Again, better to sell 'em all.
Sept. 29 John Bollinger, president of EquityTrader.com Foresees the Nasdaq staying mainly in the lower half of a trading range between 3200 and 5100 for the remainder of the year, with the S&P closer to the top half of its range of 1350 to 1550. Remains most bullish on prospects for mid-cap stocks COMP: (30.9)
SPX: (7.5)
S&P MidCap 400: (4.3)
Call on mid-caps was right. But, oy, those ranges.
* Percent (%) change through 12/27/00. Source: Baseline. ** Through 11/30. Now Applera-Applied Biosystems Group*** Through 8/31. Acquired by King Pharmaceuticals

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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