Posts from — June 2007
Latest Subprime Victims – Certainly More to Come
From Yahoo:
The turmoil in the global credit markets claimed another victim on Thursday as Caliber Global Investment, a London-listed fund, said it would sell its assets and return capital to investors following losses related to risky US subprime mortgages.
…
Also on Thursday, Carlyle Group, the US private equity company, delayed at the last minute the flotation in Amsterdam of an investment fund dealing in residential mortgage-backed securities in order to cut the offer price because of market volatility.
June 29, 2007 No Comments
Wealthy Are Pulling Out of Hedge Funds
From the WSJ.
According to Cap Gemini and Merrill Lynch’s World Wealth Report, issued Wednesday, the rich cut their exposure dramatically to “alternative investments” — a class that includes hedge funds, private equity, structured products, venture capital and currencies.
In 2005, the world’s financial millionaires (those with investible assets of $1 million or more, not including primary residence) had 20% of their investments in alternatives. In 2006, they cut that exposure in half — to 10%.
June 28, 2007 No Comments
How Many Hedge Funds Beat the Market After Fees?
Harry Kay featured in this New Yorker article provides some answers:
Kat followed through on his hedge fund skepticism by conducting two hedge fund related studies. The first, published in the June 2003 Journal of Financial and Quantitative Analysis, looked at the fee-adjusted returns of 77 funds from 1990-2000 in relation to returns generated by market benchmarks with similar risk profiles. The result – 72 of 77 funds failed to outperform the benchmark.
The second, posted online as a working paper in 2006, looked at more than 1,900 funds and generated a similar result. Only 18% of funds beat the designated benchmark, and the most successful funds had declining returns over time. The after-fee alpha was negative in the vast majority of cases.
June 27, 2007 1 Comment
The Problem With Government Statistics
For good reason, the economist Murray Rothbard warned about the State collecting economic statistics. He knew that who ever collected the numbers would have incentive to politicize them (eg COLA). And besides manipulations the State would use the statistics as an excuse to expand its reach in order to “manage” the numbers.
Laws, of course, do not create prosperity. A national gain in prosperity comes from an increase in capital which leads to increased productivity. The State, since it generates no income, can only leech off of this.
The bureaucrats have fallen for the same delusions as the journalists. Journalists believe that they are more than just glorified stenographers, that they create news rather than report it. In the same way, bureaucrats think they create prosperity rather than just report on it.
Taking credit for the achievement of the free market is a double edge-sword. When the growth stops and inflation rises, somebody will be held responsible. The public has been trained to believe that the economy is the State, so blaming the bureaucrats when things slowdown is not much of a stretch. So the blind public and the idiot politicians have a symbiotic relationship in the manipulation — they will both ignore reality as long as the official numbers show things are getting better. This leads to the numbers being further and further off base until they are nearly useless for analysis.
Fortunately Walter Williams of www.shadowstats.com tracks the numbers and corrects for politically driven manipulations. His latest report has some surprising conclusions:
Real unemployment right now—figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression—is running about 12%. Real CPI right now is running at about 8%. And the real GDP is probably in contraction.
June 26, 2007 No Comments
Gartman – BOA About to Break
This graphic is from The Gartman Letter. Guru Dennis Gartman finds BOA near a technical breaking point:
June 25, 2007 No Comments
Diamond Index
FT reports on this long over-due instrument:
Investors who fear that high diamond prices may not be forever will soon have help at hand.
Bankers and diamond experts are to launch two initiatives in the coming days to create the world’s first derivatives contracts linked to diamond prices.
The move could inject new price clarity into the diamond market, which has been one of the most secretive and opaque corners of the global commodities sector. Also, this could give consumers more bargaining power when buying diamonds.
June 22, 2007 No Comments
The irony of “private equity”
Now KKR wants to IPO?
In my opinion, Blackstone was just in time. I wonder if Blackstone quietly passed some money to help Bear Stearns take the hit for its two blown-up CDO funds.
A loud ‘pop’ in the market for CDOs would ratchet up bond yields yet again, squeezing Blackstone’s bottom line and badly marring its IPO.
I have a feeling Blackstone’s IPO is not going to go very well. The US Congress is threatening to pass a “Blackstone bill” that would ratchet up tax rates on private equity (bringing it in line with the corporate income tax). Blackstone will probably pay Congress off hire a bunch of lobbyists with very good connections and derail the bill, but the risk is still there, and the bond market seems close to a tipping point.
In any case, I wouldn’t touch Blackstone’s IPO with a ten-foot pole.
On a somewhat related note, I was going over the recent rise in bond yields with a more Wall Street-wise friend. The Chinese government has bought a $3 billion stake in Blackstone — while simultaneously dumping $5 billion in Treasurys over the past month. What’s the deal with that?
June 22, 2007 No Comments
What’s up with Bear Stearns?
The WSJ:
J.P. Morgan Chase & Co., a lender to Bear’s hedge funds, was scheduled to begin an afternoon auction of collateral it held from the Bear fund, mainly mortgage-backed debt. Minutes before the sales were to begin, the firm pulled back. Later, J.P. Morgan came to terms with Bear to eliminate its exposure to Bear’s troubled hedge funds, said a person briefed on the matter. Some traders said the bank might have been forced to settle with Bear because the loans it had put up for sale would have fetched so little in the market.
[...]
Merrill also planned to sell collateral and stopped negotiating with Bear, according to a person familiar with the matter. Due to the mortgage market’s restless state, some of the early prices bandied about for Merrill’s assets were relatively low.
So Bear opened its books to the buyers. The buyers shuddered with horror.
The very good Going Private private equity blog continues:
This brings up some interesting questions: What exactly does a “reserve price” mean in a forced auction of securities made to satisfy margin calls? If, in fact, JP Morgan, was not able to meet its “reserve price” in the auction and therefore held the collateral instead what does this imply for the securities in question? How does one now mark them to market. At the reserve price? At the highest non-accepted bid?
Clearly, there is some pricing information here, but it is obviously not beneficial for any of the parties involved to let that signal leak out if it is so low that it is likely to be damaging- and this seems to be the case.
Now what? It’s screamingly obvious that the other banks also hold huge quantities of CDO’s. They want to buy up Bear’s wreckage of a portfolio off-market so that they don’t have to list their CDO’s as worth a fraction of their former value, which would hit them with margin calls and cause a lot of carnage.
But nobody’s being fooled here.
I guess everyone just runs for the doors now?
A smaller bank with minimal CDO holdings (are there any?) should buy Bear’s stuff on the open market and trigger an earthquake among the big players.
But I’m sure Bear knows it can get some money from the other banks, just to keep the pricing information off the market.
Also, I find Blackstone’s involvement in all this very interesting. Blackstone is surely already getting reamed by last week’s tightening in the bond market. They are also days away from a sexy IPO. It would be very unfortunate indeed for Blackstone to get caught up in this, and ruin such a rosy picture…
June 21, 2007 No Comments
Chinese Reduction in US Treasury Securities – A one off or the start of a trend?
Trading guru Dennis Gartman brings up the issue in his newletter:
The simple truth is that China reduced its holdings of US treasury securities more in April than it has at any time in at least seven years according to the Shanghai Securities News of earlier this week. We tend to believe that, for this is not news that is beneficial to China, and so when we read the report we were struck by that fact. Further, the US Treasury reported that China reduced, net, its holdings of treasuries by $5.8 billion. This is the first such net reduction in its holdings of US Treasuries by China since October of ’05. We do not take this lightly, nor should anyone else, for although Japan remains the largest holder of US treasury securities with $615 billion as of the end of April, China is second with $414 billion in April, down from $419.8 billion in March.
It is unclear wheter they sold securities or let old ones expire and didn’t replace them. Regardless, both could bring the market lower.
June 21, 2007 No Comments
“The yen’s excessive weakness could lead to instability”
The chairman of the Japan Chamber of Commerce and Industry, Nobuo Yamaguchi, yesterday recommended “yen-buying intervention by the Ministry of Finance” to stop the yen’s slide against virtually all other currencies.
Japanese corporations are not normally a hotbed of activism in terms of boosting the yen.
While a lot of people are unhappy with the Bank of Japan’s inability to take the initiative on monetary policy, the spending-addicted Japanese political establishment doesn’t want to hear anything about increasing interest rates, which will cause severe short- (and maybe medium-) term pain for the Japanese economy.
The Japanese parliament extended its current session by a week, which thus pushes back Upper House elections by a week as well. Which, coincidentally, is the last day of the Bank of Japan’s July deliberations, and since Fukui has promised no interest rate hikes until after the July elections, that pushes back interest rate hikes until August.
(Thanks to the Japan Economy News blog for the pointer.)
June 21, 2007 2 Comments
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