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Aug. 1, 2020, 10:01 a.m. EDT

The Fed treats investors like ‘foolish children’ by propping up stocks despite ‘dreadful fundamentals,’ hedge-fund heavy Seth Klarman says

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By Shawn Langlois, MarketWatch


Bloomberg
Seth Klarman, founder of the Baupost Groups. Photographer: David Paul Morris/Bloomberg.

‘Investors are being infantilized by the relentless Federal Reserve activity. It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene. When the market has a tantrum, the benevolent Fed has a soothing yet enabling response.’

That’s Seth Klarman, the billionaire behind hedge-fund giant Baupost Group, trying to explain the current market climate in a letter to investors cited by Bloomberg News Thursday.

“Surreal doesn’t even begin to describe this moment,” he said, adding that investor “psychology is surprisingly ebullient even though business fundamentals are often dreadful.”

Klarman, who said his fund has recently had a strung stretch as a net seller, continued the comparison saying, “As with the 30-year-olds still living in their parents’ basements, we can only wonder whether the markets will ever be expected to make it on their own.”

As of June 30, Baupost kept 31% of its portfolio in cash, Bloomberg News reported, that’s up from 26% in the month prior, due to the fund’s unloading of a portfolio of mortgage-backed securities and one corporate debt holding, as well as net stock sales.

Baupost has been boosted by gains in EBay /zigman2/quotes/204653455/composite EBAY +0.71%  , PG&E /zigman2/quotes/202583141/composite PCG -0.77%  , Liberty Global /zigman2/quotes/205000522/composite LBTYA -2.31%   and Viacom /zigman2/quotes/200340870/composite VIAC +0.10% to name a few mentioned in the letter.

As for Thursday’s trading session, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.44% was down almost 300 points, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.42% was also firmly in the red. The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.11%  , however, was moving higher.

/zigman2/quotes/204653455/composite
US : U.S.: Nasdaq
$ 73.41
+0.52 +0.71%
Volume: 4.96M
July 29, 2021 4:00p
P/E Ratio
17.80
Dividend Yield
0.98%
Market Cap
$49.66 billion
Rev. per Employee
$807,559
loading...
/zigman2/quotes/202583141/composite
US : U.S.: NYSE
$ 9.08
-0.07 -0.77%
Volume: 54.62M
July 29, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$18.16 billion
Rev. per Employee
$769,542
loading...
/zigman2/quotes/205000522/composite
US : U.S.: Nasdaq
$ 25.74
-0.61 -2.31%
Volume: 1.39M
July 29, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$14.88 billion
Rev. per Employee
$520,874
loading...
/zigman2/quotes/200340870/composite
US : U.S.: Nasdaq
$ 41.69
+0.04 +0.10%
Volume: 6.83M
July 29, 2021 4:00p
P/E Ratio
9.21
Dividend Yield
2.30%
Market Cap
$27.07 billion
Rev. per Employee
$1.14M
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
35,084.53
+153.60 +0.44%
Volume: 223.67M
July 29, 2021 5:13p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
4,419.15
+18.51 +0.42%
Volume: 2.01B
July 29, 2021 5:13p
loading...
/zigman2/quotes/210598365/realtime
US : Nasdaq
14,778.26
+15.68 +0.11%
Volume: 3.48M
July 29, 2021 5:16p
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Shawn Langlois is an editor and writer for MarketWatch in Los Angeles. Follow him on Twitter @slangwise.

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