With shares in financials and hi-tech getting crushed, I think we are about to see a new trend develop. You’re probably thinking that I will suggest something along the lines of re-branding. Nope. While we did that, I am talking about a change much less cosmetic and much more fundamental. Taking publicly traded companies private. Today’s NY Post (no new revelations on A-Rod/Madonna so I decided to look at the business section) has an interesting report on struggling investment bank Lehman Brothers (LEH) trying to figure out a way to go private.

“According to sources, talks internally centering on privatizing Lehman have gotten very serious consideration after a blistering onslaught of rumors and questions about the firm’s solvency have caused the venerable bond shop to shed more than 79 percent this year.”

Lehman isn’t alone. Israeli hi-tech firm BluePhoenix (BPHX), whose shares have been nailed as well, has mentioned that they are thinking about going private as well.

For companies this is a great situation. They can go private, reset the cap-tables, retain employees- who are currently holding options that even a deep sea diver would have trouble recovering- by issuing new options. Then they can focus on stabilizing their business, getting back to profitability, and then in a few years after this current crisis is a memory, go public in a ‘much anticipated’ IPO. Ultimately, the companies will be back trading at pre-bear market levels. Senior management, who share much if not all the blame for the current debacle, will come out smelling like roses, as their stock will be worth hundreds of millions of dollars.

Sounds good. So who loses? You guessed it. The same people who always get left holding the bag. The INVESTORS. You see, they are the ones who bought into Lehman at $75 a share 12 months ago, and will be lucky to get $15 on a deal of some sort. They heard analysts beat the drum on BluePhoenix at $22 about 9 months ago, and decided to invest, only to cringe every time they hit refresh on Yahoo finance to see if the stock has held the $4 level.

Going private may be a great solution for a company to weather the current market malaise and return to health. Unfortunately for investors, it will be another in a long line of recognized tax losses.

Aaron Katsman, IsraelNewsletter.com

Disclosure: Author’s fund has a position in  BPHX. He has no position in any other stock mentioned as of 7/15/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Aaron Katsman
IsraelNewsletter.com

Volatile markets have impacted even the best of investors. Last week we heard that Warren Buffett had his worst first half of a year in 19 years, and news out yesterday shows that the hedge fund industry didn’t fare much better.

According to a report in Bloomberg: ” Hedge funds declined by an average 0.7 percent in June, bringing the year-to-date loss to 0.75 percent, data compiled by Hedge Fund Research Inc. show. It’s the worst start to a year since the Chicago-based firm began tracking returns in 1990.”

While hedge fund investors lamented the lack of volatility in markets for the last few years, they finally got their wish and, on average, weren’t able to deal with the high level of volatility.

But before we jump on the anti-hedge fund bandwagon, it’s important to note that the average equity hedge fund lost about 3.3% during the 1st half of the year. That thoroughly crushes the S&P 500 which dropped 19% from the October peak. This actually means that the hedge funds are doing what they are supposed to do and be a hedge against falling markets. To often recently hedge funds have become correlated to the market, exactly what they shouldn’t be.

It will be interesting to see the numbers from the mutual industry as well. If actively managed mutual funds also manage to beat the market, it may help slow down the explosive growth of the ETF industry. With investors constantly being told to simply buy and hold ETFs, double digit under-performance within traditional ETFs has burned investors.  This may cause investors to revert to more actively managed accounts.

After all, how many buy and hold investors wish that they would have only lost 3.3% so far this year?

Disclosure: Author’s fund has no position in any stock mentioned as of 7/10/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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