Legg Mason is one of the leading asset management companies.Its fund manager is the legendary Bill Miller who had beaten the markets for 15 years straight.
Why short?
1.stocks
Bill Miller is very bullish on the economy and had loaded up on financials like C,JPM,ML,FNM,COF,AIG.His top holding also include Aetna,UNH,Sears,Amazon,EBay all of which I am bearish on.
http://quicktake.morningstar.com/fundnet/Holdings.aspx?Countr...
Another way of looking at it is the fund has 20% + representation for financials and consumer services.Both of them are going to be destroyed.A major negative is the near total absence of materials and energy(0%-seriously !)
http://quicktake.morningstar.com/fundnet/Portfolio.aspx?Count...
2.bonds
As if this is not bad enough the fixed income division followed a high risk(oh oh) approach by buying into (close your eyes this is going to be painful to watch) mortgage backed structured investment vehicles.
From a recent Bloomberg article
http://www.bloomberg.com/apps/news?pid=20601213&sid=aKfMf...
"Western Asset's tendency to buy higher-risk debt and avoid U.S. Treasuries backfired in the credit crunch. In its Core Plus fund, the managers had moved more than half of the assets into mortgage-backed bonds last year, and shifted more than 10 percent to high-yield bonds.``By anybody's standard, this is the most extraordinary credit crisis we've seen since the Great Depression,'' said James Hirschmann , Western Asset's CEO, in an interview. ``Everything but U.S. Treasuries has been hit quite hard.''
Western asset mgt is the fixed income division of Legg Mason.
3.There is still money to be made
Everybody knows GM is going to be bankrupt.FNM is in the news for all the wrong reasons.All the easy money is already gone.This stock had not collapsed till now because everybody is expecting Bill Miller to work his magic.
4.A bear market has three phases according to a article I read in financial sense-the first phase is denial,the second phase is characterized by a string of bad news and search for the elusive "bottom" and finally capitulation.I think most people are still in denial of how serious the problem is and are averaging down into oblivion through Systematic investment plans and such like.People are flocking to buy iphones in the States when they are paying for gas and food by pawning stuff or by using stimulus checks.I am young so I haven't lived through a real bear market but from what I read a true bear will be characterised by total revulsion when the subject of stocks are brought up.Many banks and asset management companies will go bankrupt.Indymac is just one of many to come.My point is we are only in the first phase of a prolonged bear market.Asset management companies which flounder at the very start of a bear market are unlikely to survive it.This is because returns will only get worse as the bear progresses into the second stage.This fall in AUM will finally trigger a run since this business is dependant on faith in the manager.This is going to be severely tested going forward.Even assuming there is a turn around(which is very unlikely) the funds will suffer because a large majority of Americans will experience wealth destruction is some form or the other.That is there would be little money for companies to manage.
With a portfolio which is sure to bleed whether it is bonds or stocks,a bullish fund manager and a severe bear market underway LM is a stock suited for short selling.
$34.57 (07/13/08)
