I am in Orlando, Florida today to appear as the Keynote speaker at the 2012 Money Show. A search for a nearby bank took me to the surreal suburb of Celebration, a city developed by the Disney people during the mid-1990's. Created to evoke small town USA circa 1940, the berg tastefully replicates an America from the bucolic past, with wide parks, period street lights, white picket fences, fluttering American flags, and some of the strictest design review and zoning restrictions in the country.

Today, Celebration suffers from a foreclosure rate that is double that found in the rest of Florida. Disney was able to realize fantasy prices for its pixie dust sprinkled homes, about 30% more than equivalent property in the surrounding area. It wisely unloaded its ownership of the downtown commercial property to a California based investor group, which is no doubt regretting its move. The downward spiral began shortly after that. Prices are now thought to be 60% off their 2006 peak.

When the sheriff went to evict one unfortunate homeowner, they were held off at gunpoint for 14 hours before he took his own life. Another unfortunate resident was recently found bludgeoned to death. There is a sad irony that investors who drank the most Kool-Aid during the real estate bubble chose to live along the Southern edge of Disney World. Today, Mickey Mouse seems to be saying 'Rent, don't Buy.'

 

 

 

But That's Not What the Broker Told Me

Legendary Fortune Magazine editor, Winslow Jones, created the first hedge fund out of a shabby office on Broadway Avenue in New York City in 1948, and generated monster returns over the next 20 years. He got the idea of a 20% performance bonus, now an industry standard, from ancient Phoenician sea captains who kept a fifth of the profits from successful voyages. Jones must have had an historical bent.

Then came the second generation titans, George Soros, Julian Robertson, and Michael Steinhardt, who made their debut in the sixties. I count myself among the third generation along with Paul Tudor Jones and Louis Bacon, who launched funds in the late eighties, when there were still fewer than 200 funds and $25 million was still considered a lot of money. The really big money showed up in the nineties when the pension funds found them.

After that, we suffered through the many ordeals that followed, including the collapse of Long Term Capital in 1995, the Amaranth blow up in natural gas in 2006, the Lehman Brothers bankruptcy in 2008, and John Paulson?s 50% draw down in 2011. Today there are over 7,000 hedge funds, thought to manage some $2.2 trillion which dominate all financial markets.

Hedge Funds Do Have Their Advantages

Economists were left speechless with Friday?s report of the January nonfarm payroll, which came in at an amazing 243,000, more than double the consensus expectations. It was the sharpest improvement in the data since April. Analysts have become inured to bad data that a mediocre report sounds like The Second Coming.

The headline unemployment rate plunged from 8.5% to 8.3%, and is now down an eye popping 0.5% in two short months. Unemployment is now at a three year low. More importantly, it was the second month in a row where the report delivered a major upside surprise.

The private sector led the charge, with new hiring accelerating from 220,000 to 257,000. Average hourly earnings increased by 0.2%. While most nonfarm payroll reports are a confusing jumble of contradictory statistics, this one was almost universally good. Is this the beginning of an important new trend? Are the good times here to stay?

I am no so quick to leap to that conclusion. Past economic recoveries have seen 400,000 jobs added monthly at this stage. The economy needs to add 150,000 jobs per month just to keep up with natural population growth. Never mind that a far larger portion of these new jobs are earning only minimum wage than in the past, far lower than the incomes that went into this recession. Union assembly jobs are out and burger flipping ones are in. The overall net drag on the economy is large.

In fact, this rate of job growth is contestant with an economy that is growing at a 2.0%-2.5%, nicely matching my own prediction and that of the congressional Budget Office. On the other hand, the stock market is reacting as if the GDP was growing at a 4.0% rate, far higher than reality. When it wakes up to reality, the reaction could be harsh.

Let me tell you what I am taking great pains not to do here. I am not trying to cherry pick the data in order to support my own fundamentally cautious view. I am not looking for the clouds within the silver lining. I see perma bulls and perma bears do this all day long, usually with grievous results. Your net worth suffers as a result. The challenge here is to look at the data alone, and ignore the spin, hype, and emotion.

I see the nonfarm report as far more likely to set up a ?sell? of risk assets than a ?buy?. Look at the charts below and tell me that I am wrong. Are those double tops on the S&P 500 and the Russell 2000? Only the NASDAQ disagrees.