28JAN09:
Q1-09 DOW: 8900
Q2-09 DOW: 7250
Q3-09 DOW: 5810
Q4-09 DOW: 3960
CITI NATIONALIZED
OBAMA GETS SICK 27AUG09:
Mini Crash 21SEP09 Predicted correctly:
Bailout=Bonuses
Demise of Bear Stearns
Demise of Lehman Bros.
Demise of AIG
Subprime would cause problems
Date of 2007 crash
CRAs were to blame
G20 riots were a party
Northern Rock run
Northern Rock Nationalization
HBOS and RBS demise
UBS really was Useless
When the US goes on vacation the rest of the world is supposed to stop. But it doesn't.
Today's news, a game of two halves, looks at the up and coming world debt-fest credit-crunching crash; and how hedge funds are raising more (Goldman that is), enjoying m&a, listing and generally eating more Turkey than Fidelity.
The credit crunch continued to take its toll on the financial world yesterday as two French banks were forced to buy out a monoline bond insurer and concerns reverberated about the unprecedented shutdown of the $2.8trn (£1.4trn) covered-bond market.
Banque Populaire and Caisse d'Epargne, which control the French lender Natixis, will inject about $1.5bn into CIFG, Natixis's monoline insurer, to shore up its credit rating.
The credit crunch has threatened the survival of monolines, which provide guarantees for the structured securities whose losses triggered the market crisis. If the credit ratings of CIFG and other monolines were downgraded, the securities they guarantee could have their ratings cut, triggering a fresh sell-off of the assets.
Moody's and Fitch are reviewing other top-rated monolines to see if they have enough capital to justify their ratings. Without the guarantees the monolines provide, $2.4trn of securities could fall in value and some issuers would be unable to find buyers.
The monoline rescue came as industry sources said the closure of the market for covered bonds - intended to allow stability to return - could have the opposite effect. Traders and issuers of the bonds, which are backed by mortgages, have shut the market until Monday after pricing became unsustainable. They hope the closedown will allow stability to return. The European Covered Bond Council, which represents traders and issuers of the securities, has for the first time advised banks not to trade, after rates demanded by buyers rose to the highest for at least 12 years.
An industry source said: "It is not necessarily disastrous, but the securitisation market has closed and this is another leg gone. To have a commission that is responsible for trading in a market to suspend it for such a long time is pretty much unprecedented. Suspension of a market could endanger confidence in that market."
Fintag says Times are tough and getting tougher. The leverage on all my funds is being scrutinised ever more, it has been reduced and the collateral levels increased. Investors don't want to be anywhere near fixed income (fixed in the very loose sense of the word) and although hedge fund returns are looking good, their high long exposure to in-denial equity markets is causing concern. All is not well, but not as bad as the long only world where redemptions are the order of the day.
Governments are implicitly propping up many businesses hoping that things get back to normal. Unfortunately, they are still waiting and the longer they wait the worse it gets.
LOMBARD STREET RESEARCH: CREDIT CRUNCH GRINDING EVER FINER
he opaque black hole of losses at the heart of the dollar markets can not be penetrated by the outsider's gaze, but the signs are that conditions are worsening fast. While the publicly quoted financial institutions have gone quite a long way down the road of acknowledging mortgage derivative losses, not a squeak has been heard from hedge funds, though they have massive exposure. Hedge fund investors know that the devil will take the hindermost: to the extent they can cash out before the hedge funds have disclosed their losses on CDOs, etc., they may escape their share of them - leaving their share of the losses to the guys left holding the baby. Meanwhile, hedge funds are no doubt sliding out of as much exposure as possible - and selling anything else they can get value for.
563.jpgThe most toxic of the BBB-minus abx indices was 07-1 (with prices from January) and that is now off more than 80%; at which level it seems to have settled for the past two weeks, after a rocky early October in which it fell by a third. The AA 07-2 issue (starting July) also fell by a third during that period, from 90 to 60, but has carried on down by another third to below 40 now. As this started life after the late-June Bear Stearns fiasco, for supposedly AA prices to take such a beating is extraordinary.
Though we have been mostly accurate in foreseeing these trends, something clearly seems to be going on that we will not know about for a while yet - if ever!
The condition of the banking system is clearly suffering a further de-rating, to judge from the further rise in the Ted spread in the past couple of weeks. At a 1½% differential, Libor is at a premium to T-bills only matched since the glory days of Paul Volcker the Inflation Terminator during the Great Crash in the stock market in 1987. Are we heading into 1982 - the worst recession since the war - or the revivalist, highly leveraged boom-bust of 1988- 91? The deflationary alternative looks more probable.
The credit spread plague is spilling over to junk bonds - so the collateral damage from the mortgage crisis that has blighted private equity since the summer may not ease much soon.
Small wonder the euro hit a new $1.48 high on Tuesday - this is beginning to smell of crisis.
As US retailers prepare for Black Friday, the day after Thanksgiving that marks the start of the Christmas season, festive cheer seems limited.
With US economic growth hit by the downturn in the housing market, and the knock-on credit crisis, recent data has shown a sharp fall in retail spending.
And as US consumers seem less willing or able to spend, most retail analysts expect this downturn to continue.
"The holiday season will be terrible," said economist Ian Shepherdson.
'Further deterioration'
Higher petrol prices and volatile financial markets have also hit US consumers.
The most recent official data from the Commerce Department showed that retail sales rose by just 0.2% in October, compared with September's 0.7% gain.
At the same time, some of America's largest retail firms, such as Macy's, Limited Brands, JC Penny and Nordstrom, have all seen same-store sales fall last month.
"We expect a further deterioration as consumers cut back in the face of soaring petrol prices, falling stock prices and the continued disaster in housing," said Mr Shepherdson, who works for research group High Frequency Economics.
The spectre of a recession in the United States gripped the commodity markets yesterday, causing investors to flee base metals such as copper and zinc while speculators pumped up the price of crude oil and gold.
A wave of hot money pushed oil to within cents of $100 a barrel while gold bullion briefly breached the $800 an ounce mark as investors sought safe havens from inflation and the shrinking value of the dollar.
Mounting concern about the risk of a recession in the US is weighing on the price of industrial metals used in construction and manufacturing. Heavy selling of base metals by funds in Asia, provoked by worries about the US housing market, sent the price of copper tumbling.
The red metal, used widely in the construction industry, fell by 4 per cent to $6.575 on the London Metal Exchange. Zinc, used fpr galvanising steel and in batteries, hit a 20-month low, losing 5 per cent of its value in the flight for safety.
Fintag says ...and more (plus oil is moving to my predicted USD103 by 30th Nov) ...
Fidelity Investments, the world's largest mutual fund company, manages four of the 10 US funds with the biggest investor withdrawals this year.
The company's Growth & Income Portfolio had $10.2 billion in net redemptions in the first 10 months of the year, second most after the Vanguard 500 Index fund, according to data from Morningstar Inc. Fidelity Magellan had $7 billion in outflows, while investors pulled $8.8 billion total from Blue Chip Growth and Low-Priced Stock funds.
Boston-based Fidelity has been hampered by subpar returns at some funds while others are closed to new investors. Net inflows among long-term retail funds of $4.1 billion in the first nine months of 2007 trail Capital Group Cos. and Vanguard Group Inc., according to Financial Research Corp. in Boston.
"Flows tell you where a fund has been for the previous three or four years," Chicago-based Morningstar analyst Russel Kinnel said.
Capital Group's Los Angeles-based American Funds is the best-selling fund company, gathering $57.4 billion in net new money from January through September, data from Financial Research show. Vanguard of Valley Forge, Pa., is next, with $57.3 billion. Financial Research excludes money-market funds, which are short-term investments, from its net sales tally.
Eighty-six percent of Fidelity's actively managed domestic equity funds have outperformed their benchmarks this year, a spokesman said. That compares with 17 percent for the same period in 2006. Closely held Fidelity manages about $1.5 trillion including mutual funds and money-market funds.
Fintag says ...and more (cash is king, although probably the EURO kind). Back to the good news ....
MULTI-STRATEGY FUNDS SURVIVE TURMOIL OF AMARANTH COLLAPSE
When hedge fund Amaranth Advisors imploded with losses of $6bn (€4.1bn) last year, investors re-examined their exposure to multi-strategy funds.
A diversified portfolio is supposed to be a less risky portfolio, and the growth of multi-strategy hedge funds in the past three to four years has been linked to this premise.
But whether such funds have always followed the principles of the model is another question. The collapse of Amaranth came about when chief energy trader Brian Hunter took large positions in natural gas futures that moved against him in September last year, leaving the firm facing $6bn in losses from its $9bn assets under management.
The trades were backed by the assets of Amaranth's other strategies in a process called cross-collateralization, and the whole firm collapsed.
David Escoffier, head of global equities and derivative solutions at Société Générale in London, said: “If the term multi-strategy is a blank check to say you can put all your eggs in one basket then it is not really multi-strategy.”
This kind of contagion risk between strategies led many market participants at the time to predict investors would look to switch out of multi-strategy funds into funds of hedge funds.
However, one year on and multi-strategy funds do not appear to have suffered unduly in terms of asset inflows.
According to statistics published by Lipper, net assets under management of multi-strategy funds grew by about 15% from $347bn to $401bn between August 2006 and July this year.
Hedge funds focused on arbitrage between convertible bonds and the underlying stocks could outperform next year amid widening credit spreads and continued high volatility, Lyxor Asset Management said.
Another strategy Lyxor expects to do well in 2008 is "event-driven" where hedge funds pounce on stocks in companies involved in merger and acquisition (M&A) activity, Lyxor said on Wednesday.
Lyxor, part of French bank Societe Generale (SOGN.PA: Quote, Profile , Research), has 72.8 billion euros (52.3 billion pounds) in assets under management of which 25.8 billion euros are in hedge funds.
"Higher volatility and lower correlation between asset classes will favour arbitrage hedge funds," Mathias Ranke, head of Lyxor in Germany, told a news conference.
Despite widening this year, credit spreads -- the difference between yields on corporate and government bonds -- remains moderate by historical standards, suggesting that "risk premiums are not fully discounted," Ranke said.
He saw opportunities for convertible arbitrage, a strategy where hedge fund managers try to generate returns by trading mis-matches in prices between a convertible bond and its underlying equity.
We have an accounting rather than legal background, but have nonetheless read enough hedge fund offering documents to recognise when a few extra "legalise" words here and there push the pendulum further away from the investor and towards the manager.
We actually have a favorite phrase to describe this - "prospectus creep". We're always amazed that the well known legal firms can try their luck with a new clause and, six month later, what initially appeared aggressive has "stuck" and is now standard in pretty much all new offering documents.
As an occasional series, therefore, we thought we'd highlight some of the more amusing "weasel words" the observant can find in a hedge fund prospectus.
Starting out is fund organisational expenses. These are the formation costs which have been incurred even before the first shareholder arrives. They include, incidentally, the attorney's legal bill for drafting the offering document in the first place. We do find it slightly ironic - ahem - that the cost of all that legal effort to draft a tight, indemnified and completely disclaimed prospectus is paid by the investors themselves. Still, what can we do.
We suggest that investors check exactly what can be included in organisation expenses. Legal bills, costs of incorporating the fund, forming the partnership, registering with the Cayman Islands Monetary Authority - fair enough. Sometimes, though, things get sneaky - what about marketing expenses?!!? We are always pleased when the lawyers put this one in - this enables the manager to travel round the world to market to potential investors (whether or not they end up putting in money) and then capitalise those costs as part of organisational expenses. Nice work if you can get it.
More "prospectus creep" at a later date.
Fintag says Organisational costs include everything involved in the formation and on-going running costs of the fund. Most Hedge Funds bill something to their funds. Many invoice everything (Goldman in particular who have a profit center department with the remit of billing everything it can to its funds) except core fund management costs. This is nothing new - the mutual fund world has done this for decades. It is opaque but then so are many private equity LP's - the stuff that goes through them is unbelievable but its standard market practice. That is why the prospectus / OM is full of legal waffle and lack of clarity.
Property derivatives have been on the brink of explosion for years. With tiresome regularity, proponents have proclaimed the efficacy of the instruments and boasted about their numbers. Increased growth rates are a signal of the market's imminent take-off, they have repeatedly cried.
Trading in UK commercial real estate derivatives rose by 70% in the third quarter, according to London-based researcher Investment Property Databank this month.
Derivatives with a face value of £1.7bn (€2.5bn) were traded in the period, compared with just £1bn in the previous quarter. The global notional outstanding value of property derivatives trades also reached its highest point of £11.5bn.
So it came as no surprise when advocates again trumpeted that the market was ready to explode. The difference this time is it might, and it is due to several factors.
First, deals have been struck outside the UK including first-time transactions in Australia, Japan and Italy. Grosvenor, a property development, investment and fund management group owned by the Duke of Westminster, is responsible.
Finance director Nicolas Scarles has experience in pioneering derivatives markets. He has worked at British energy group Centrica, where his responsibilities included establishing the middle office for gas and power procurement and trading.
Centrica was involved in developing standardized documentation for the gas market and also executed the UK's largest weather derivatives trade. Scarles knows what he is doing when it comes to derivatives.
Fintag says Go and ask Morley / ORN Capital. They tried and failed.
The reason this market will not work, despite the spin coming out of the media is that the underlying is illiquid and IPD is a microsoft access database of real estate valuations.
Imagine writing an Interest Rate swap on some valuations that are made up by a surveyor who has a vested interested in keeping the value high (he gets more commission) and inputs them into a private company that takes a commission on the IRS?
Gottex Fund Management, the Lausanne and London-based fund of hedge funds group, this month made its debut on the Swiss Exchange, the latest in a line of alternative asset managers cashing in on a perceived appetite among investors for publicly quoted hedge funds.
Gottex, which has more than $14bn (€10bn) in assets under management, took the unusual step of floating the management company, rather than an individual fund, arguably making it the only publicly quoted, pure fund of hedge funds group.
To date, the estimated 1% of total hedge funds assets that are public is in so-called permanent capital vehicles - quoted closed-ended single-manager funds or funds of funds - and a small number of management companies.
The Swiss fund manager's shares fell on its first day of trading from an offer price of Sfr73 to Sfr69.95 and was last week trading at Sfr65.75. The underwriters have the option to sell an over-allotment of shares. The offering gives Gottex a total market capitalization of $1.9bn.
Mark James, executive director for global markets at ABN Amro, predicts that more fund of hedge fund groups as well as single manager funds will go public as part of an increased flow of funds going to the market. “The sector is growing,” he said.
The number of publicly quoted funds has increased rapidly since 1996. There are 47 permanent capital hedge fund vehicles managing assets of £8.3bn (€11.8bn), quoted primarily on the London, Euronext and Zurich exchanges, according to ABN Amro.
Fintag says It is called cash extraction - although the opportunities are running out and these IPO companies are going to discount very quickly.
On another note, banks want more fees so demand hedgies use their products: financial news says " Funds under pressure to use derivatives more "
Goldman Sachs is aiming to raise $4bn-$6bn for a new hedge fund as the investment bank tries to rebuild its reputation in the hedge fund business, it has told potential investors.
The new fund, run by bank partners Raanan Agus, former head of the proprietary trading desk, and Kenneth Eberts, former head of the US prop desk, will be the first from the bank to focus on picking shares, rather than using computerised, or quantitative, approaches.
If the new fund gets close to $6bn, it will be one of the biggest launches ever, rivalling the $6bn Convexity Capital, created last year by Jack Meyer, former head of the Harvard endowment.
Goldman's fundraising goal is particularly aggressive because investors will not be able to withdraw their money for two years, a lock-up likely to deter many.
Fintag says But will it succeed? Its recent track record is very poor and you locked up for many years.
Of course it will - its Goldman, the IBM of the financial world.
NO LONGER can the credit crunch be dismissed as a blip or an isolated phenomenon. Every other financial wobble since 2003 has lasted just a few weeks. This time, even two rate cuts by the Federal Reserve have failed to do the trick.
Indeed on some indicators, things now look even worse than they did in August. The desire for safety has driven the yield on ten-year Treasury bonds below 4% for the first time since 2005. The gap between the three-month dollar London Interbank-Offered Rate (which banks use to borrow from each other) and the federal funds rate has reached half a percentage point, higher than it was in the summer. According to Manoj Pradhan of Morgan Stanley, two-year swap spreads, another measure of risk aversion, are significantly higher than they were three months ago.
In part, this gap is based on a belief, bolstered by the minutes of the Fed's recent deliberations, that a weakening economy will force it to cut rates again in December. It also reflects concern that banks have yet more bad news to reveal.
But it is not just the banks. Investors are trying to guess where the credit crunch will have the greatest knock-on effect. George Cooper, a strategist at JPMorgan, says: “It seems quite clear that the credit problem is becoming systemic.” For a while investors thought the credit markets were ignoring the reality of strong economic growth; in fact, that growth was the result of previous credit excesses. Now the economy will have to deal with the consequences of tighter lending standards; the subprime effect is starting to be replicated in car loans and may soon crop up in credit cards.
Fintag says ..and back to more doom and gloom. Happy Thanksgiving.
3 comments
ozgerbobble said ...
Buy Gold. If it had kept pace with oil it would $2,000 per ounce by now. Central Banks and Gold ETF's buy the most gold and with more bling required by consumers in India and China it will keep going up. Melt down your jewellery as the end of the world is nigh! ....er....just kidding
23 Nov 07 - 09:56 gmt
anonymous said ...
I don't look good in gold - mind you I don't look good in anything
23 Nov 07 - 14:35 gmt
anonymous said ...
the headline 'great depression' might have started when the financial markets and banks collapsed in Oct '29 but the real depression didn't really take hold for several years beyond - until pension funds and insurance companies began failing. Watch closely for cracks in those two institutions.
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