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Investors flee Eddie Lampert's fund as Sears slumps

Eddie Lampert's hands-on management of Sears Holdings Corp. has not inspired much hope of a turnaround at the embattled retail giant, despite capturing so much of the billionaire investor's time and capital. Now, some of his long-time hedge fund clients appear to have reached the same conclusion and are heading for the exits.

To meet obligations to investors quitting his flagship hedge fund, Mr. Lampert's ESL Investments has reduced its holdings of Sears common stock, trimming Mr. Lampert's stake in the company (both direct and indirect) to 48.4 per cent from 55 per cent at the end of October. However, falling below majority ownership won't affect Mr. Lampert's control of Sears, his much-maligned operating methods or his strategy of spinning off Sears assets and peddling other valuable jewels to keep the cash flowing.

"We will continue to focus on the transformation of Sears Holdings into a membership-focused company and on creating long-term value for its shareholders," Mr. Lampert said in a statement. "My significant personal ownership in the company is a sign of my confidence and alignment with all shareholders."

But the lack of confidence displayed by his own hedge fund customers, after years of waiting in vain for positive results, had an immediate impact on Sears's stock price, which fell more than 8 per cent on news of the latest filing. Although the stock rallied a bit later in the afternoon, concerns about weak Christmas sales and yet another negative analyst's report, this time from Cleveland Research's Daryl Boehringer, added to the gloom.

The depressing trend of falling same-store sales - the grim tally now stands at 27 consecutive quarters - and lower market share in such key segments as clothing and appliances makes it hard to peddle a better-days-are-coming story. Which, in any case, investors have heard far too many times in the eight years since Mr. Lampert stickhandled a merger of his faltering Kmart chain and Sears, Roebuck & Co.

The clients leaving ESL's main hedge fund won't be rid of Sears that easily. They are taking some 7.4 million Sears shares with them. That's in keeping with Mr. Lampert's normal practice of distributing assets rather than money to those cashing in their chips. For the same reason, ESL has also had to trim its profitable stake in auto retailer AutoNation Inc. in recent months. Analysts noted that one unintended result of the distribution is that many more Sears shares could now become available to short-sellers betting that the once-mighty retailer's downward spiral is irreversible.

Mr. Lampert can continue to keep the share price propped up through the sale or spinoff of large chunks of the better-quality-but-declining assets, including its Sears Auto Centers, clothing retailer Lands' End, Sears Canada and more store leases in prime locations. That will keep the lights on. But it won't turn Sears into a nimble, Amazon-like player - which is what he says he envisions - any time soon, particularly in a brutal environment for even the strongest of retailers.

Just ask Bill Ackman, another shrewd hedge fund operator, who has lost more than $600-million (U.S.) betting on a turnaround at Sears rival J.C. Penney Co.

Sears Holdings (SHLD)

Close: $50.92 (U.S.), down $4.63

© 2007 The Globe and Mail. All rights reserved.

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