Something Is Not Right: October 2008

Saturday, October 18, 2008

Hedge Fund Redemption

"The big picture is the economy is just starting to deteriorate,'' said Mark Kiesel, executive vice president at Pimco, who runs $180 billion in corporate bonds. ``We still think there are a lot of redemptions and hedge fund liquidations coming.''

Hedge funds may be forced to dispose of half their $135 billion in high-yield loans to fund redemptions, Stephen Antczak, a UBS credit analyst in Stamford, Connecticut, wrote in an Oct. 10 report to clients. That may send loan prices as low as 60 cents, he said.

``The de-leveraging that we're witnessing will probably continue,'' said Paul Scanlon, team leader for U.S. high yield and bank loans at Boston-based Putnam Investments LLC, which manages $55 billion in fixed income. ``My sense is that's not turning around in the very near term.''

See full article at: Bloomberg.com: Exclusive:

Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Investors withdrew a record $43 billion from hedge funds in September, according to TrimTabs Investment Research, which has been tracking the data since 2000. The industry had declines of 9.4 percent this year through the end of September, according to Chicago-based Hedge Fund Research Inc., the worst year in two decades.

For buyers to lose money on some top-rated bonds backed by mortgages on offices, hotels, apartment buildings and other commercial properties, the circumstances would have to surpass the worst conditions on record, according to Darrell Wheeler, global head of securitized strategy at Citigroup Inc."

Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Commercial-mortgage securities rated AAA that require an unprecedented three-quarters of the underlying loans to default for any loss of principal are trading at about 70 cents, according to New York-based Citigroup.

``We're not at these prices because of the fundamentals: We threw those out the window a year ago,'' he said. ``This is strictly people want to sell something to raise cash, and it's easy to sell these CMBS because it's a liquid market.''

Yields on AAA commercial mortgage bonds were at a record 620.7 basis points over benchmark swap rates on Oct. 15, up from 47.8 basis points a year ago, according to Bank of America Corp. A basis point is 0.01 percentage point."

Tuesday, October 14, 2008

Bloomberg.com: Economy

Bloomberg.com: Economy: "Oct. 15 (Bloomberg) -- The Bank of Japan said it will offer lenders as many dollars as they want, joining European counterparts in attempting to lower borrowing costs in money markets and freeing up credit worldwide.

The central bank will provide dollars at fixed interest rates for an ``unlimited amount against pooled collateral,'' it said in a statement late yesterday. It also announced measures to improve companies' access to cash, expanded the range of Japanese government bonds it accepts from lenders, and suspended a program of selling shares it bought from banks between 2002 and 2004.

The Bank of Japan's supply of dollars comes from a swap agreement with the U.S. Federal Reserve. Last month the two central banks agreed to swap as much as $120 billion for yen. The increase to unlimited dollar supply came a day after the Fed removed caps on swap lines with the European Central Bank, Bank of England and Swiss National Bank."

Bloomberg.com: Economy

WASHINGTON - SEPTEMBER 19: A statue of the fi...

Bloomberg.com: Economy: "Oct. 14 (Bloomberg) -- Treasury Secretary Henry Paulson urged banks getting $250 billion of taxpayer funds to channel the money to customers quickly to halt a credit freeze that's threatening to bankrupt companies and hammer the job market.

``Leaving businesses and consumers without access to financing is totally unacceptable,'' Paulson said in Washington. He rolled out the emergency program after a crisis of confidence in the financial system last week spurred the biggest stock sell- off since 1933. Paulson told companies getting the government funds to ``deploy'' the money in loans.

The Treasury chief was forced to change tack from an initial plan to buy distressed assets from banks after the financial panic caused banks to hoard cash and send money market rates to record levels. In its biggest effort yet to halt the 14-month credit rout, officials will also offer guarantees on new bank debts and start purchasing commercial paper in two weeks."

Bloomberg.com: Economy

Bloomberg.com: Economy: "Fragile Banks" The Treasury also said it is working

on another element of its plan that will specifically address banks that may be on the brink of failure. Those banks will face different guidelines than healthier firms who take part in the asset-buying and capital injection programs."

Bloomberg.com: Economy

Speculators knock OPEC off oil-price perch

Bloomberg.com: Economy: "The Treasury's stock buying program will begin with nine banks, which it didn't name. People briefed on the matter said $125 billion will be disbursed in days: Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co. and a combined Bank of America Corp./Merrill Lynch & Co. each will get $25 billion, while Morgan Stanley and Goldman Sachs Group Inc. will get $10 billion each. Bank of New York Mellon Corp. said it will receive about $3 billion and State Street Corp. said it's getting $2 billion."

Bloomberg.com: Economy

Bloomberg.com: Economy: "About 100 or fewer of the 7,000 U.S. banks with less than $10 billion in assets may consider taking advantage of the program, said Camden Fine, president of the Independent Community Bankers of America, a Washington trade group representing about 5,000 banks.

``The headline in the local paper that everybody's going to read is, `Local Bank Seeks Government Assistance,''' Fine said in an interview. ``That doesn't look real good to the folks in the local towns.''"

Bloomberg.com: Economy

NEW YORK - OCTOBER 07: Traders work on the flo...

Bloomberg.com: Economy: "The Fed said in a separate statement that its previously announced program to buy commercial paper will start on Oct. 27. Officials haven't indicated a limit for the total size of the fund."

Monday, October 13, 2008

Commodies Likely to Continue Fall

Oct. 13 (Bloomberg) -- The record 39 percent decline in commodities since July 3 is nowhere near finished, if history is any guide.

The Reuters/Jefferies CRB Index of 19 commodities from coffee to silver would have to drop another 37 percent to reach the trough of the 2001 recession and 35 percent for the 1998 slide, when crude bottomed at $10.35 a barrel. The measure is 28 percent above its lowest during the economic contraction that ended in November 1982. Copper, after its biggest weekly loss in two decades last week, is still triple 2001 levels.

While tumbling prices of oil, nickel and soybeans already crippled stock markets from Moscow to Sao Paulo and sliced Alcoa Inc.'s profits by 52 percent, investors say rising stockpiles of copper and slowing energy demand mean prices will continue to fall. The U.S. slowdown will last more than a year and be deeper than any in three decades, according to Harvard University economist Martin Feldstein, a member of the committee that charts American business cycles.

``This downturn is going to make 2001 look like a walk in the park,'' said Tim Mercer, chief investment officer of Hong Kong-based hedge fund Musashi Capital Ltd., who sold all his commodity investments in July. ``This is the bursting of a 25- year asset-credit bubble. People have really stopped spending money, everywhere.''

Tech sales down $170B next year?

Image representing Intel Corporation as depict...

Oct. 13 (Bloomberg) -- Intel Corp., Microsoft Corp. and the technology companies that so far have escaped the credit crisis relatively unscathed will lose out on as much as $170 billion in sales next year as the crunch catches up with them.

Corporate spending on computers, software and communications equipment may be little changed or fall as much as 5 percent next year as the lending freeze spooks clients, said Jane Snorek, an analyst at First American Funds in Minneapolis who has followed the industry for 13 years. It would be the first decline in the $3.41 trillion market since 2001 after the dot-com bubble burst.

``Business kind of stopped dead in the last two weeks,'' said Snorek, whose firm owns Microsoft and Intel stock among more than $100 billion in assets. ``People are pushing off orders and saying, `I have no idea if we're going to have a global meltdown, so I'm not going to buy anything right now.'''

Worst crisis in 50 years?

"This is the worst crisis I've seen in my 50-year career,'' William Rhodes, senior vice chairman of Citigroup Inc. in New York, told fellow bankers in Washington yesterday. "We still have to deal with the effects on the real economy here and elsewhere.''

Portrait shows Florence Thompson with several ...

Oct. 13 (Bloomberg) -- The world may be heading for its worst recession in a quarter of a century -- if it's lucky.

A steep slump looks likely as the credit squeeze crunches economies from the U.S. to Singapore and panic engulfs global financial markets.

``It's certainly going to be the worst since the 1980s,'' says Bradford DeLong, an economics professor at the University of California at Berkeley who worked at the U.S. Treasury
Department from 1993 to 1995. ``The hope is that it won't become the worst unemployment business cycle since the Great Depression.''

Bill Gates - "Fairly Significant Recession" Ahead

Microsoft Corp. founder Bill Gates III said that the U.S. economy is headed for a ``fairly significant recession,'' and that the unemployment rate may peak at more than 9 percent.

Sunday, October 12, 2008

Still Holding Back - Barrons.com

Rare 1934 $500 Federal Reserve Note, featuring...

Still Holding Back - Barrons.com: Interview with Jeremy Grantham, Chairman, GMO

"What about some other trades [that might provide opportunity in this falling market]?

I'm speaking for the asset-allocation unit at the firm. We have been substantially long the safe-haven currencies. We have been very long the yen and somewhat long the Swiss franc and short sterling, which is one of our favorite bets. We have been short the euro for three months, and slightly long the U.S. dollar. One of the paradoxes is, if the world is worse than people expect, the U.S. dollar will outperform."

Still Holding Back - Barrons.com

Still Holding Back - Barrons.com: "Where do you see all of this going?

I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect."

Good Gracious! - Barrons.com

Good Gracious! - Barrons.com: "ALAN TRIPP HAS WITNESSED FAR MORE FINANCIAL SHOCKS than the average American, beginning with the 1929 Wall Street crash, when he was a child. The Bryn Mawr, Pa.-based entrepreneur also knows all about risk: His former company, Product Resources International, specialized in finding ways to commercialize bleeding-edge technologies."

Good Gracious! - Barrons.com

Image via WikipediaGood Gracious! - Barrons.com: "On Sept. 11, his 91st birthday, Tripp ended a 30-year relationship with his financial advisers at Lehman Brothers' private banking division, Neuberger Berman -- just days before Lehman went under. 'I was verbally assured that my assets were safe,' he recalls, 'but I know when things are falling apart, funny things can happen.' He yanked his money and sent it to another bank.

Plenty of other rich investors are just as dismayed, a result of dismal investment performance and mounting concern about the strength of financial institutions. More than 80% of wealthy investors in one survey said they planned to withdraw at least some of their money from their private bank, and more than half plan to dump their banks altogether.

Many of the respondents probably were venting, rather expressing actual plans. But it's clear that private banks -- outfits that cater to the wealthy and are owned by banks, brokerages and others -- haven't been immune to the turmoil of the past year. Assets under management at the top 40 private banks increased just 4.3% in the year through June 30, versus 20%-plus in each of the previous two years, according to an annual study by Barron's. See nearby table for a ranking of the top 40, based on assets in $1 million-plus accounts."

Fannie, Freddie told to buy $40 bln of mortgages a month - report - MarketWatch

Fannie, Freddie told to buy $40 bln of mortgages a month - report - MarketWatch: "SAN FRANCISCO (MarketWatch) -- Federal regulators have ordered Fannie Mae and Freddie Mac to start buying $40 billion of troubled mortgage bonds each month as the U.S. government tries to revive the economy, according to a published report.

A story from Bloomberg News on Saturday reported Fannie (FNM - FRE) began telling bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, Bloomberg said, citing three unidentified people familiar with the situation.
The purchases would be separate from the U.S. Treasury's $700 billion bailout plan, which was signed into law earlier this month, Bloomberg noted."

Economic signs pointing down - MarketWatch

Economic signs pointing down - MarketWatch: "WASHINGTON (MarketWatch) -- The U.S. recession has been nearly forgotten in all the anxiety about the financial meltdown in the past few weeks. For those who care about the fundamentals, however, the coming week will feature a lot of data about the economy, much of it rather depressing."

Sovereign may sell itself to Banco Santander for $2.53 bln - MarketWatch

Sovereign may sell itself to Banco Santander for $2.53 bln - MarketWatch: "SAN FRANCISCO (MarketWatch) -- Spain's Banco Santander SA was in late-stage talks Sunday to acquire Sovereign Bancorp Inc. in a deal that could be worth as much as $2.53 billion, according to a published report.
A story in the online edition of the Wall Street Journal citing people familiar with the matter reported that a deal could be completed by Monday and that while the details of the transaction weren't clear, Banco Santander could be expected to pay Sovereign's Friday closing price of $3.81 a share."

Bloomberg.com: U.K. & Ireland

Bloomberg.com: U.K. & Ireland: "Oct. 13 (Bloomberg) -- U.K. Prime Minister Gordon Brown's government is set to buy majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc to contain the worst financial crisis since the 1930s, two people familiar with the matter said."

Saturday, October 11, 2008

Greenspan Legacy

The Reckoning - Taking Hard New Look at a Greenspan Legacy - Series - NYTimes.com: "George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003.

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

Switch to Cash?

Your Money - Switching to Cash May Feel Safe, but Risks Remain - NYTimes.com: "It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?"

Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September.

By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.

So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

If you missed that opportunity, you’re hardly alone.

But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.

Friday, October 10, 2008

Insider's Perspective on the Credit Crisis

Amid a deepening international credit crisis and a rapidly decelerating global economy, global real estate markets are feeling the real-time effects of a tightly interlinked world that remains increasingly vulnerable. The markets have shifted from a virtuous cycle to a vicious cycle. The dramatically changing environment began with the U.S. subprime mortgage meltdown 18 months ago and then spread rapidly through the global financial system and now into all aspects of the economy.

Jones Lang LaSalle's capital markets experts share their insights and predictions on the current state of the global economy. Click here for a full report.

For additional information contact

Jack Minter Investment Sales jack.minter@am.jll.com
Kenneth Rudy Corporate Capital Markets kenneth.rudy@am.jll.com
Bart Steinfeld RE Investment Banking bart.steinfeld@am.jll.com

Wednesday, October 8, 2008

MetLife Spooks Investors - Forbes.com

MetLife Spooks Investors - Forbes.com: "Insurance stocks plunged Wednesday after MetLife annouced it would be raising capital, cutting jobs and withdrew its 2008 earnings guidance due to the dramatic downturn in the world financial markets.

In an effort to provide some semblance of certainty to nervous investors, MetLife (nyse: MET - news - people ) pre-annouced its third-quarter results, which it said will be hurt by a drop in investment income and fees due to the turmoil in the global financial markets.

In a separate announcement, MetLife said it would sell common stock to bolster its capital amid rising losses on investments. The offering of 75 million shares priced late Wednesday at $26.50, raising nearly $2 billion.

MetLife also promised Wednesday an unspecified number of job cuts by the end of the year.

By the end of Wednesday's highly volatile trading session, MetLife shares fell 26.8%, or $9.87, to $27.00.

"We are in these unprecedented times," Steve Kandarian, MetLife's chief investment officer, said on a call with investors Wednesday, according to the Associated Press. "I think we're as well positioned as anyone in our industry for these times, but we are not immune, nor is any other of our peers."

Those peers fell accordingly. Prudential Financial (nyse: PRU - news - people ) dropped 6.9%, or $3.22, to $43.29, and Lincoln National (nyse: LNC - news - people ) fell 8.5%, or $2.59, to $27.97.

Insurance companies have been among the hardest hit by the recent turmoil in the financial markets. American International Group (nyse: AIG - news - people ) was bailed out by the government, and investment manager and life insurer Hartford Financial Services (nyse: HIG - news - people ) got a much-needed capital infusion from Allianz of Germany. (See "Hartford Recovers With Help From Allianz.")

The mortgage insurance unit of Genworth Financial (nyse: GNW - news - people ) was downgraded recently by Standard & Poor's after its parent company announced that the unit may be on the block. (See "S&P Docks Genworth Mortgage Insurance Unit.")

Over the past month the SPDR KBW Insurance ETF (amex: KIE - news - people ) has fallen 35.9%.

Tuesday, October 7, 2008

Bloomberg.com: Exclusive

CHICAGO - JANUARY 16: The Tribune Tower, head...

http://www.daylife.com/image/0ath4Fza1T9AF Bloomberg.com: Exclusive: "Tribune, the Chicago-based media company bought by billionaire investor Zell last year, needs to sell the Chicago Cubs baseball team and improve revenue to avoid breaching its covenants, said Mike Simonton, an analyst at Fitch Ratings in Chicago. Tribune has $12.5 billion of debt and its loans were quoted as low as 37.5 cents on the dollar yesterday, according to S&P. Gary Weitman, a Tribune spokesman, declined to comment.

``We're cautious of how the negotiations would go with lenders if they needed to get an amendment or waiver from the banks,'' Simonton said."

Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Banks for McClatchy, owner of the Miami Herald, demanded as much as 2.25 percentage points more in annual interest to relax the publisher's lending agreements, the Sacramento, California- based company said in a Sept. 30 regulatory filing. McClatchy was paying an interest margin of 1.25 percentage points at the start of the year. San Francisco-based construction-supplier Building Materials agreed last week to pay an extra 3.5 percentage points on $340 million of loans after its earnings fell below targets, according to a Sept. 30 filing.

``We're in a credit crunch and getting those covenants amended will be lot more painful,'' said Andrew Feltus, who oversees $8 billion in high-yield debt at Pioneer Investment Management Co. Inc. in Boston.

Debt rated below Baa3 by Moody's and less than BBB- at S&P is considered junk, or in the case of loans, leveraged. Loans are typically made by banks such as Citigroup Inc. and JPMorgan Chase & Co., which then sell pieces to mutual funds, hedge funds and other institutional investors.

The market for leveraged loans ballooned as banks arranged $956 billion of the debt in the first half of 2007, compared with $549 billion in 2005 as banks raced to finance the record amount of buyouts. The market ground to a halt a year ago as the subprime mortgage contagion spread, making investors"

Bloomberg.com: Exclusive

NEW YORK - FEBRUARY 21: Rev. John W. Moody (R...

Bloomberg.com: Exclusive: "Lenders, reeling from an almost 20 percent decline in loan prices, are punishing borrowers in jeopardy of breaking their loan agreements as the economy teeters on recession. As many as 135 companies are in danger of breaching targets set by their banks, S&P says. Sam Zell's Tribune Corp. and Leon Black's Realogy Corp. may soon trip their covenants, according to Moody's Investors Service, which like S&P is based in New York.

``We would use an opportunity of a company violating a covenant as an opportunity to strengthen our hand, particularly in a deal where the spread is too thin or original terms were too generous,'' said Scott Page, head of the bank loan group at Eaton Vance Corp. The Boston-based firm oversees about $156 billion."

Bloomberg.com: Exclusive

Value of $1 over time - in 1776 dollarsBloomberg.com: Exclusive: "McClatchy Co., Building Materials Holding Corp. and almost 100 other companies across the U.S. are suffering payback from lenders stung by at least $112 billion of losses in the loan market.

Banks and investors who are losing money on the record $1.7 trillion of high-yield, high-risk loans made in 2006 and 2007 are charging borrowers an average of 1.64 percentage points more in interest to amend borrowing agreements and avoid default, according to Standard & Poor's. That's the highest since 1997 and almost eight times more than the first half of last year."

Monday, October 6, 2008

Help! What is Carry Trade

50 yenCurrency Carry Trade: "A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates - which can often be substantial, depending on the amount of leverage the investor chooses to use.

Investopedia Says... Here's an example of a 'yen carry trade': a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar was to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless he"

Saturday, October 18, 2008

Tuesday, October 14, 2008

Monday, October 13, 2008

Sunday, October 12, 2008

Saturday, October 11, 2008

Friday, October 10, 2008

Wednesday, October 8, 2008

Tuesday, October 7, 2008

Monday, October 6, 2008

Top Posts

My Blog List

Subscribe To

About Me

Blog Archive

Labels