Sovereign Wealth Funds -- The New LBO?

In the first have to 2007, LBOs provided a strong upward lift to stocks. As soon as an LBO was announced in one area of the market, the rest of the sector would rally in anticipation of further deals. As soon as the credit crunch started LBOs ground to a halt and have yet to come back. But, have sovereign wealth funds replaced them?

Last year felt like a bear market. We made three-quarters of our performance on the short side. If you were short credit you did well, and if you were long credit you did badly. If you were in RIM, Apple and Google it didn't feel like a bear market. This year, because investor-sentiment figures are so bearish, the stock market probably won't do much again, but on balance will end higher. We will make more money on our longs than our shorts.

Also, whereas leveraged buyouts provided a lot of support for stocks in early 2007, sovereign wealth funds could do the same in '08. Last year these funds invested about $60 billion in the U.S., mostly in financial companies. After all, money is a worldwide commodity. This year such liquidity will provide support to industrial companies. I am optimistic for the year, although the first half will be tough.

Consider the fact that numerous writedowns in the financial sector have been accompanied with news of capital injections from foreign investment pools. Consider today's news from Citigroup:

Citigroup Inc. posted a huge fourth-quarter net loss, hit by $17.4 billion in subprime-related write-downs.

The bank announced plans to sell another $14.5 billion in preferred stock and said it will cut its dividend 41%. The company also plans to sell non-core assets

.....

A new round of investments announced Tuesday includes $12.5 billion of preferred securities. The Government of Singapore Investment Corp., or GIC, will buy $6.88 billion, which follows the government fund's plan to invest $9.6 billion in Switzerland's UBS AG. Other investors include former Chairman and Chief Executive Sandy Weill and Prince Alwaleed bin Talal bin Abdulaziz Alsaud, already one of Citi's biggest investors.

Will these funds eventually pour so much money into the financial sector that they stem the bleeding and slow the sectors fall? While that hasn't happened yet it may be possible further down the road.