Margin debt at NYSE member companies fell 37.6% for the year through November, down to $201.48 billion (see WSJ article). This is no doubt that some of this reduction came from forced margin call selling over the last few months. While rampant speculation may not reenter the markets anytime some, the reduction of speculative investments, along with past hedge and mutual fund redemption selling, is helping to clear out the excess in the market, allowing it to find a bottom and begin building a base. January is often used as a bellwether for things to come in the markets, and the market action on the first trading day was encouraging - yet one day does not make a market. Nonetheless, January will certainly continue to generate interest as the confluence of a new year, a new president, a new congress, a new stimulus bill, and an unfolding credit crisis continue to intertwine in what will continue to generate some interesting times, not to mention opportunities in the market.
The Yale University Endowment is looking for opportunities in the credit markets and distressed debt, including bank loans, investment-grade debt, and lower-grade bonds (see Bloomberg article). David Swensen, the Yale endowment investment chief, believes that distressed corporate securities will produce "equity-like" returns. He also mentions in the article how corporate governance helped the Yale endowment steer clear of the Madoff investment mess, and believes that others need to take a similar direct and transparent approach to investing. Of interest is Swensen's views on Funds-of-Funds. The Yale Investment chief states that "the reason I don't like funds of funds is that they facilitate the flow of ignorant capital." Of course, the same could be said for most mutual fund investments, and Swensen states as much, stressing that most investors should stick with passive investments like index funds since attempts to outperform the market are usually unsuccessful for retail investors. Yale recently announced that its endowment had fallen 25 percent since June (see previous post), not unlike the 22 percent loss at the Harvard endowment (see previous post). Nonetheless, even with some of the luster off the past outstanding returns from both endowments, each fund is still outperforming the general market - although, with an increasing amount of capital in alternative investments, and an equally shrinking amount in equities, comparing against traditional benchmarks such as the S&P 500 is becoming less reliable.