Predator vs. prey. That's how it has been right now. Stocks are being buffeted by a titanic war between hedge funds that own stocks that are under fire and other hedge funds that sense blood and are eager to break them.
I know it seems preposterous. How can, for example, Valeant (VRX) be going down because of its holders, not its business? How can Energy Transfer Partners (ETP) be crushed endlessly even as it might be stealing Williams (WMB), a critical pipeline company that could be the best thing the company's ever done? How can the best of the biotechs be mauled day after day when so many are doing what's been right for so long?
The answer lies in the holders, hedge funds that have often borrowed money to make levered bets on the stocks they love and are now under fire from other hedge funds who smell blood. It's almost as if these kinds of stocks have become zebras, defenseless in the face of the marauding lions, and there's really no contest.
Valeant's the best case in point. Here's a company that's a classic roll-up. It buys and buys and buys companies, with debt, slashes research and development and then raises prices, which is why it has attracted the ire of everyone from Hillary Clinton to Congress, where some members have presented Valeant with a subpoena to try to figure out how it can take prices up 200% to 500% for some older drugs that have no real generic competition and think they can get away with it.
It's having an impact because Valeant issued a report yesterday talking about how it's all systems go, but the stock got hammered 16% anyway.
Now we know the high-yield market, the one that Valeant must tap to continue buying companies, has been pretty much tapped out for this kind of credit.
But more important, the company, which doesn't buy back shares or pay a dividend, has no defense from hedge funds that are pushing it down trying to break other hedge funds with huge positions in the company's stock. Hence how it could fall 100 points from its high even as nothing has really happened here other than the political glare.
I am not going to make a case for Valeant. It doesn't do what I like, which is create value via research and development and grow the company organically with anything other than price increases, as far as I can tell.
Instead, I am going to tell you a story. In 2008, hedge funds got wind that I was underwater and in trouble with my investors and was getting some serious withdrawals. That was all true.
I had a heavy concentration in some regional banks. The positions were public because my fund owned more than 5% of them. Almost every day, I would come in and the stocks would be down, pressured relentlessly by hedge funds seeking to break my fund. I even knew who was doing it. I was prey, not the banks.
Fortunately, some of the banks stepped up to buy back stock. Unfortunately, I had to sell some at very low prices. You can read all about the climactic crushing in Confessions of a Street Addict.
Suffice it to say that my flailing hedge fund was the reason these stocks were hit. The same is now happening to the oil and gas master limited partnerships, particularly Energy Transfer Partners, which I have been buying for my charitable trust and remain a buyer of and the big roll-ups like Valeant, Horizon Pharma (HZNP), Allergan (AGN), Sun Edison (SUNE), XPO Logistics and Platform Specialty Products (PAH).
If you own these, take heart. The quarter's almost over. I don't think the redemptions to the hedge funds were as brutal as mine were, which almost annihilated my fund and brought me a lot of unwanted publicity. And if you liked the stocks higher, you should like them now at these lower prices. Understand, though, they are defenseless because of their capital structures and their weakened shareholders. That may be too much for many to stomach, though, and all I can say is buckle up. Because of the precarious state of your fellow owners, the pain may not be over.