Kramer Favors Citigroup as Fed Batters Shorts With Purchases

Boston Provident Partners LP's Orin Kramer
Orin Kramer, general partner of Boston Provident Partners LP, speaks during the Bloomberg Link Hedge Funds 2010 conference at the Guggenheim Museum in New York. Photographer: Jin Lee/Bloomberg

Betting against U.S. stocks may be a losing strategy given the Federal Reserve’s attempt to boost economic growth by driving down Treasury yields, according to hedge-fund manager Orin Kramer.

The Fed said last month that it will buy an additional $600 billion of Treasuries to boost growth, while maintaining its pledge to keep interest rates low for an “extended period.” Since Chairman Ben S. Bernanke suggested in August that he would use the technique known as quantitative easing, the Standard & Poor’s 500 Index has surged 16 percent.

“They believe that by pushing down the risk-free rate, they can push people into risk assets and push up the value of risk assets,” Kramer, general partner of Boston Provident Partners LP and the former chairman of New Jersey’s pension fund, said today at the “Hedge Funds New York” conference hosted by Bloomberg Link. “If you’re short, the fact that the Fed is working against you and the fact that most of the world is somewhat short makes it a little more dangerous to be short.”

Speaking at the same event, Mark Yusko of Morgan Creek Capital Management LLC, which allocates almost $10 billion to hedge funds, said the Fed’s attempt to stimulate the economy through quantitative easing is a “terrible idea.”

“Low interest rates is a sign of economic weakness, not strength,” said Yusko, who is president of Morgan Creek in Chapel Hill, North Carolina. For money managers, “if you avoid QE2 and you don’t pay attention to the impact it’s going to have on your investments, watch out for that iceberg.”

Banks, Metals

Kramer said banks will benefit from the Fed’s program of buying Treasuries, which drives down yields used as benchmarks for mortgages and other instruments. Yusko favors metals producers.

Since the central bank announced the second round of quantitative easing, measures of banks and raw-materials producers have outperformed the S&P 500, while so-called defensive companies, including utilities, telephone companies and health-care providers, have lagged behind the market.

Yusko anticipates high demand for raw-materials and energy producers, and he sees the dollar weakening because of the Fed’s injection of liquidity into the financial system.

“Liquidity creates a wave,” said Yusko. “We’re becoming the carry-trade currency. You’re going to borrow in dollars because we don’t charge any money for it. The money is going to commodities. You’re going to see the biggest commodity bubble in history.”

Notre Dame Graduation

Yusko, whose wife is giving birth in five weeks said when they take their child to “graduation at Notre Dame in the class of ‘33, the dollar will not be the world reserve currency.”

Kramer said he likes shares of Citigroup Inc., the New York-based bank that required a U.S. government bailout.

“You take a bank like Citi, most of their earnings come from developing countries,” he said. “People used to like Citi in the early ‘90s because they said they have this consumer footprint globally that nobody can replicate. Despite everything that Citi’s been through, that’s actually still true.”

Matthew Lindenbaum, money manager and principal at Basswood Capital Management LLC, said he likes Citigroup and also New York-based Morgan Stanley. He spoke at the same event.

“Another financial name I would mention is Morgan Stanley, which is part of my theme of recapitalization, normalization and consolidation,” he said. “They are positioning themselves as sort of the anti-Goldman Sachs. They want to be an investment bank for the customer. They are not trading their own book.”

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