Trimming the Hedges

The Inflation Tsunami

2009-07-29T14:31:00.000-04:00

It's in America's best interests for the dollar to depreciate. It will stimulate trade and demand for American goods. Don't be surprised if in a year or two the dollar to euro conversion rate is 2:1.

Credit Crisis: Episode II: The Empire Strikes

2008-09-24T15:18:00.003-04:00

The $700 billion bailout sets the stage for the third episode, Revenge of the Market Makers.
Actually, episode I should have been called A Phantom Menace? Followed by Attack of the Fed, Revenge, and the rest fits as by that time we won't be in the same Universe anymore anyway:
Episode IV - A New Hope
Episode V - The Empire Strikes Back
Episode VI - Return of the Jedi

Credit Crisis: Episode I: No Hope

2008-06-05T10:49:00.006-04:00

I created a Star Wars crawl on the credit crisis, with the text from this AP story. I think Lucas could do wonders with a movie...

Update: The site was closed due to a Lucasfilm C&A. It was fun while it lasted. Maybe some day Mr. Lucas will charge us only $.99 to make our own. [7/11/08]

Update: The AP story is now gone. I found it, or what I think is the story on http://floridaloanspecialist.wordpress.com (searched for home foreclosures June 5, 2008 associated press on Google). [9/24/08]

WASHINGTON (AP) – June 5, 2008 – Home foreclosures and late payments set records over the first three months of the year and are expected to keep rising, stark signs of the housing crisis’ mounting damage to homeowners and the economy.
The latest snapshot of the mortgage market showed that the proportion of mortgages that fell into foreclosure soared to 0.99 percent in the January-through-March period. That surpassed the previous high of 0.83 percent over the last three months in 2007.
The report by the Mortgage Bankers Association also found that more homeowners slipped behind on their monthly payments.
The delinquency rate jumped to 6.35 percent in the first quarter, compared with 5.82 percent for the three months earlier. Payments are considered delinquent if they are 30 or more days past due.
Both the rate of new foreclosures and late payments were the highest on record going back to 1979.
Jay Brinkmann, the association’s vice president of research and economics, told The Associated Press that the slump in house prices was the biggest factor for rising foreclosures and late payments.
With prices expected to keep dropping, foreclosures and late payments “are going to continue to go up” in the months ahead, he said.
Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.
The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high.
Late payments rose to 22.07 percent from 20.02 percent, the previous high.
The association’s survey covers just over 45 million home loans.
More problems also cropped up with loans to more creditworthy borrowers.
The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payment rose to 3.71 percent, compared with 3.24 percent.
The numbers were higher for prime borrowers with adjustable rate mortgages. The proportion of those loans falling into foreclosures jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.
“The number one problem is the drop in home prices,” Brinkmann said. Declining prices, especially in newer built areas, “are hurting people’s ability to recover when they run into trouble – a divorce or loss of job,” he said. “In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure.”
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.
The housing crisis is at the center of the country’s economic troubles.
After a five-year boom, the market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.
Homeowners with adjustable-rate mortgages were clobbered when their initially low rates reset to much higher ones. That made it difficult, if not impossible, to keep up with monthly mortgage payments.
As foreclosures and late payments climbed, financial companies took multibillion losses when their investments in mortgage-backed securities soured. A credit crisis erupted and spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.
All those troubles have pushed the economy to the brink of a recession, if the country isn’t already in one. Consumers and business have tightened their spending. Employers have cut more than a quarter-million jobs in the first four months of this year.
To bolster the economy, the Federal Reserve made aggressive interest rate cuts. That has helped homeowners facing rate resets on their adjustable-rate mortgages. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank’s rate-cutting campaign that started in September is coming to an end.
The Bush administration has taken steps to help distressed homeowners. It has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
Congress is considering giving government-backed mortgages to thousands of strapped borrowers. The White House has expressed some concerns.
Source: ap.org

Oil

2008-05-23T15:06:00.003-04:00

Oh yeah, and oil would be up to $135 a barrel, which a year from now, will seem pretty cheap, when we're paying $6 a gallon at the pump, and there are riots in the streets that Homeland Security is suppressing. Maybe the conspiracy theorists aren't so crazy after all.

Update: At close to $150 a barrel, $135 sounds cheap! [7/11/08]

The Economy: One Year Later

2008-05-01T15:43:00.004-04:00

If I told you last year that housing would drop, major lenders like Accredited Home Lenders and New Century Financial would be gone, Countrywide would be absorbed into Bank of America, Bear Stearns would be bought at fire sale prices by JPMorgan, investment brokers and banks would write down record losses, the Fed would cut a combined total of 3.25%, finance the Bear Stearns take over, and virtually photocopy money for banks, would you have believed me?

Poole retires, Bullard on board

2008-03-25T14:36:00.002-04:00

St. Louis Fed Names Bullard to Succeed Retiring Poole (Update2)

Bullard's published research indicates that he, like Poole and Fed Chairman Ben S. Bernanke, espouses a numeric inflation goal. A research paper that Bullard co-wrote last year said that ``independent central banks will set low positive inflation targets in economies that possess highly developed financial markets.''

In a research paper titled ``A Model of Near-Rational Exuberance,'' written in March 2007, and revised in January, Bullard and his co-authors said that too much reliance by economists and central bankers on their own judgment has drawbacks.

Drawbacks, yes-- namely, they can't stop relying on their own judgment. If they did, the Fed wouldn't have bowed to market pressures and lowered rates, setting the stage for the impending CPI bubble and the hyperinflation that will follow.

Where Is the Next Bubble?

The next bubble: Priming the markets for tomorrow's big crash

Trimming the Investment Firms

2008-03-23T16:40:00.001-04:00

Last week, the Times had a great article explaining the credit mess to the layperson:
Can’t Grasp Credit Crisis? Join the Club

Today it came out with another good article:
What Created This Monster?

I thought a hedge fund would collapse-- I didn't know an investment firm would.

I disagree with the first article that the crisis has been going on for 7 months (which would mean it started in September)-- I think it started in August with the first big dip in the market.

More news that the crisis is spreading into other areas of credit:
CIT Taps Credit Lines and Talks of Asset Sales

Time to short Visa?
Visa Has a $45 Billion Debut on Wall St.

The trend for IPOs these days is to start them off big, then bleed them [investors] dry:
The Blackstone Group

(Which I always confuse with Blackrock, Inc, which is on the good side of this equation.)

Reminds me of the end of the tech boom.

Finbar Taggit

2008-02-21T19:39:00.005-05:00

Yahoo Finance Tech Ticker had a video on Finbar Taggit, a hedge fund blogger that anonymously corrects incorrect stories in the press about hedge funds. See the video above, or the link for the story.

Some buzzwords:

Rebates
Performance fee
Large ticket
Lock ups
Side letters
Side pockets
Seed capital-- $40MM used to be enough for investors from Goldman Sachs and Morgan Stanley, but now they want to see at least $100MM in your startup fund before recommending you. The average investor won't invest in a hedge fund unless it has at least $125MM in it. As he says, the days of starting a hedge fund with just a laptop are over.
Risk/Reward criteria
Market neutral

He says that contrary to popular belief, the credit crunch that started in August of last year was not due to hedge funds, but caught most of them in the muck with the rest of us. Now hedge funds are not finding many investors due to the "safety issue" of cautious investors, scared of the markets.

August may be a good model for January [Update 2]

2008-01-22T11:00:00.000-05:00

I thought about posting this yesterday. Jeremy Siegel's Yahoo Finance column, "Why Bernanke's Critics Have it All Wrong," posted August 29, 2007, lays out the financial meltdown that started in August. Then, Bernanke surprised the market with a 50 bps federal funds rate cut.

No one likes to call a bottom for fear of being wrong, but the .75% rate cut just announced by the Fed may be enough to float the markets up for another 6 months. I like what Boris Boehm of Germany's Nordinvest said, as quoted in the Times, "There’s an old saying in the market that banks lead us into recession and banks lead us out."

Love 'em when they're up, love 'em when they're down

2008-01-17T18:48:00.000-05:00

Citigroup lost $9.83 billion in the fourth quarter.

Merrill lost $9.8 billion in the fourth quarter.

No wait, make that $16 billion.

Yet Merrill paid $15.9 billion in compensation and benefits to 64,200 employees.

Seems like they should have nixed the bonuses and they would have come out even. Glad I'm not a stockholder. Looks like the only industry not accountable to stockholders are the brokerage firms.

And here it is: Goldman, like cream, rises to the top

2007-11-19T07:13:00.000-05:00

Goldman Sachs Rakes in Profit in Credit Crisis
While other firms tumble and fall, Goldman rises with profits from their hedges against toxic mortgage backed securities.

Meanwhile,

Fed fund futures show traders see a 90 percent chance the central bank will reduce its target a quarter-percentage point to 4.25 percent at its Dec. 11 meeting, 67 percent odds of another 25-basis-point cut in January, and a 43 percent likelihood the rate falls to 3.75 percent in March. Policy makers already lowered the target from 5.25 percent in August.

So, unless Bernanke feels like bucking the trend, expect to see further rate cuts, no matter what the other Fed governors say.

Simple, but not easy

2007-11-18T23:48:00.000-05:00

A billionaires' guide to investing.

Hedge funds normally charge fees of 1.5 to 2 per cent of the asset value plus 20 per cent of the return. Their own fees make it hard for them to deliver the goods.

Mr Oldfield quotes the decline of the first hedge fund, A. W. Jones. In December 1968 it had $200 million under management: in September, 1970, that had fallen to $31 million. Later George Soros was to rebuild the reputation of hedge funds but there remain questions about whether they can find the exceptional talent they need and whether clients will pay their fees.

Don't believe the hype

2007-11-18T23:06:00.000-05:00

OPEC Interested in Non-Dollar Currency
Do you believe the behind the scenes leaked news that OPEC members want to support the dollar, or the posturing by Iran's Ahmadinejad and Venezuela's Chavez, who have blatant political motives for creating a new world standard for pricing oil? I'll go with door number 1. Nevertheless, oil will price over $100 this week.

[Added 11/19/2007] Note that this was only the third time that a full OPEC meeting has occurred with all members and states since the committee was formed in 1960. What does that say?

Saudis don't want the US dollar to collapse

2007-11-16T18:32:00.000-05:00

Saudi Arabia Won't Include U.S. Dollar in OPEC Talks
Good thing it was accidentally broadcast to journalists.

86% chance fed will cut rates in Dec: take the pain now or later?

2007-11-16T16:58:00.000-05:00

Fed's Kroszner Says `Rough Patch' Won't Warrant Cuts
This is exactly what I was expecting in September, but instead of holding steady, the Fed cut rates by 50 bps. So now they are saying they want the economy to weather the rough waters of the coming months, and probably all of 2008. The 5-headed monster Fed is testing the waters by letting the Fed governors speak freely. First Poole says that only a calamity would force a change in Fed policy, then the 50 bps cut, then Miskin's the man to watch as his guidance has more closely followed what the Fed did, now Kroszner pops his head above water.

First the recession is imminent. Then there's a 30% chance. Now no one is sure.
One thing may be sure: earnings next year doesn't look too good. However, I'm investing in ROW stocks. That's stocks that sell to the Rest Of the World more than the US.

Hedge fund collapse? Why not banks and brokerages instead? Why not cities and towns?

2007-11-14T22:54:00.000-05:00

Florida Holds $2.2 Billion of Debt Cut to Junk Status
This article goes over the how mortgage-backed securities are threatening some cities and towns that invested in them. But buried at the end is a little history on the collapse of banks and brokerages. Not exactly the hedge funds I was looking for, but tragic enough:

Potential losses by states are part of the subprime meltdown that shook up Merrill Lynch & Co., the world's biggest brokerage, in October. The firm reported a $2.24 billion third- quarter loss and an $8.4 billion write-down, leading to the firing of CEO Stan O'Neal.

Executives Step Down

The next week, subprime losses reported by Citigroup Inc., which at the time was the largest U.S. bank by market value, led to the departure of CEO Charles Prince.

In June, two bear Stearns Cos. hedge funds holding subprime debt reported losses of $1.5 billion. Bear Stearns fired Warren Spector, the firm's co-president for fixed income and asset management and the bank's stock lost 30 percent of its value in the following two months.

Bernanke: Fed will respond "as needed"

2007-11-08T11:57:00.001-05:00

Bloomberg report.

Fed speaks II

2007-11-07T15:44:00.000-05:00

Lacker says the mortgage crisis isn't over yet. I say just wait until next year's rate cuts. Dissention in the ranks by non-voting members. If it gets much worse you may see more regulation in the mortgage market.
Warsh is waiting for more information.
Poole says we may need more cuts, which worries me, because he was against this before the first one.
Instead of Greenspan, now we have a five-headed monster to deal with when attempting to decode future moves.

Miskin Speaks; Fed outook is as volatile as the markets

2007-11-07T11:42:00.001-05:00

Miskin spoke to the House Small Business Committee. Bloomberg report. Reuters. Looks like he's taking back what he said about taking back the Halloween rate cut. "Wait and see" seems to be the tone of this cautious Fed. Later today we'll hear from Warsh, Lockhart, and Poole, then Bernanke tomorrow.

98% bet that Fed will lower fed funds rate 25bps tomorrow

2007-10-30T14:54:00.000-04:00

Quotes From Fed Officials on Economy

Hopefully they will surprise again with a 50 bps cut. The bursting of the housing and credit bubbles, compounded with China's "irrational exuberance," according to Greenspan, will hopefully inspire the Fed to be more aggressive, but the comments above suggest otherwise. If there is no cut, the market will fall. The 25 bps cut is already priced in. People may take profits if this happens. If it's a 50 bps cut, the market will rally.

$20 billion down the drain. just wait for the blowback.

2007-10-05T18:12:00.000-04:00

Merrill, Citi, Bear Stearns, and JPMorgan write off a massive total of $20 billion
Click the link for details-- don't mind the ads.
Another reason to raise interest rates in the coming years and stick it to the middle class.

They're all just treading water right now...

2007-10-05T17:01:00.000-04:00

I wonder if Bernanke will wait until a democrat is in office before he starts raising rates.

Trichet, Dodge, King May Follow Bernanke in U-Turn on Policy
September 2007 Rewind: Bernanke's Emotional Rescue
Why Bernanke might need India to'Do a China'

I keep thinking of this quote:
"Double digit is something that is likely to happen for a short period of time," from Greenspan.
Greenspan sees double-digit rates

Inflation level, but food & energy up

2007-09-18T15:48:00.000-04:00

From Bloomberg TV:
Since Feb/Mar 2007, when Bernanke said we should watch inflation, prices have gone up:
24% oil
10% gold
75% wheat
Yes, they are not in core consumer price index, but still, in march 2007, the CPI was .1. The last reading was .2.
If inflation is the main risk to the economy, and the cpi has gone up as well as oil and wheat, which are not in the cpi, and oil affects many parts of the economy, how can we not be experiencing inflation?

Well, the fed cut rates

2007-09-18T14:29:00.001-04:00

Fed Cuts Key Interest Rates by a Half Point - Sept 18, 2007 - NY Times.
Federal Reserve Press Release September 18,2007

Fed's surprise move: Flip the discount and raise the fed funds rate?

2007-09-18T13:21:00.001-04:00

I'm researching the viability of the Fed flipping rates & raising the fed funds rate today. Why would they do this? To prevent against inflation while still offering liquidity to banks. Here's the Google Search.
And some results:
Fed holds rates steady - June 28, 2000 - CNN Money
Fed cuts discount rate, stands ready to do more - The mess that greenspan made
Fed Funds Target vs. Effective Funds Rate - Calculated Risk
The T-Bill Message for Bush & Bernanke - August 16, 2007 - Kudlow's Money Politic$
Some Wall Street Journal definitions:
How does the fed keep rates near its target? A primer - August 16, 2007 - WSJ
Explaining the Discount Window - August 17, 2007 - WSJ
And here's a result which may give a clue about what happens when the discount window is lower than the fed funds rate:
Economists React: 'Lifting the Wizard's Curtain' - August 17, 2007 - WSJ

"Prior to 2003, when the discount rate was lower than the funds rate, cutting the discount rate was the most powerful tool in the monetary policy toolbelt. Indeed, prior to 1994, when the Fed began announcing changes in the funds rate target, a discount rate move was the ONLY move that was explicitly announced. Many market participants will think of the discount rate cut in those terms, which is not the correct way to consider it. Instead, this should be thought of as another (indeed, probably the last) intermediate step short of an ease. –Stephen Stanley, RBS Greenwich Capital"

Bernanke's the new sheriff in town-- when he lowered the discount rate after Bill Poole said only a catastrophe would cause the Fed to change monetary policy earlier than their September meeting-- his actions showed his new tactics. Where Greenspan would have lowered the fed funds rate-- the famous Greenspan put, Bernanke may be reverting to the past, when the discount rate was more important.
Will Bernanke revert to considering the discount rate the most important rate? This is a new boss-- the Greenspan era is over-- no more Greenspan put, the book is out and he's coasting. Bernanke is an academic. He may not be in it for the short term like Greenspan. He may not want to be popular and enjoy the public eye. He's less impressed with his public image than his predecessor. It's not all about ego, but-- Greenspan enjoyed the limelight. He liked speaking in riddles and being the most powerful man on the planet. He didn't follow the advice of the group-- sometimes he lowered rates even if the others on the board didn't want to. He followed the Federal Express stock price to feel the pulse of the economy. He made instinctual decisions and most of the time he was right. Bernanke is an academic-- he listens to the group, he uses models. Most likely, he will not follow the historical pattern and make his mark today.
So, with 25 minutes to go-- will Bernanke raise the fed funds rate 25 basis points to 5.5% and lower the discount rate 50 points to 5.25%?

The Fed Will Not Lower Rates

2007-08-21T16:29:00.000-04:00

The Economic Outlook--speech by Jeffrey Lacker of the Federal Reserve Bank of Richmond to the Charlotte Risk Management Association in Charlotte, North Carolina on Aug. 21, 2007 at 12:30pm.
Basically, he said don't look for the fed to cut the federal funds rate soon.
However, that may be just as believable as William Poole's comments that only a "calamity" would justify an interest rate cut, the day before the Fed cut the discount rate.

Countrywide Up on Rumor, Down on News?

2007-08-21T16:26:00.000-04:00

Thrifts Hit by Housing Market Problems
The good news obscured by the headline:

Mortgage defaults are slamming the savings and loan industry, although thrifts should be able to weather the housing market downturn, federal regulators said Tuesday.

CFC is a thrift.
US regulator says watching Countrywide very closely

The Office of Thrift Supervision is very closely monitoring events at Countrywide Financial Corp and has had a consistent onsite examination presence at the California company since it converted to a thrift charter in March 2007, an OTS spokesman said on Monday.

Stocks to Watch: Capital One, Countrywide, KKR, Target, Viacom

Countrywide Financial's (CFC) stock fell 7.6% despite the company's attempts to reassure depositors that their funds were safe at the company's Countrywide Bank savings bank unit

My opinion? Countrywide will fall when Buffet says he's not buying.

Their timing couldn't be any better...

2007-08-20T18:23:00.000-04:00

China Prepares to Dump US Dollars

CFC the next sacrificial lamb?

2007-08-20T18:19:00.000-04:00

First Wells Fargo:
Wells Fargo to close non-prime mortgage unit

Now Capital One:
Capital One to Close Mortgage Unit

And
Countrywide announcing layoffs

As someone on Yahoo finance said, CFC now in Baghdad Bob mode

Flagged for future reference

2007-08-20T18:17:00.000-04:00

JIM,
I'll say this 1 more time....the HYBRID system
is going to fail us and we will have a giant
crash...might not be this year or next but it
will happen. That and the new no downtick rule
is crazy.
I'm a trader and I see this happen daily in a
ton of different stocks and it will happen in
the overall market. What say you? They need to
do something about this and they need to, at a
minimum, have a backup plan that they don't tell
anyone else about....because they don't want to
look like clowns. We need specialists or a
different system....I can move CAT a point with
no volume if I wanted to. This is the only
thing scaring me about this selloff!!!!!!!
Asked by jnorine

I dont disagree with any of this. The difference is
that i am the only one in the nation willing to go on
national t.v. and say it and then no one backed me up.
Answered by Jim Cramer

Update on the NYSE's hybrid system

Fed cuts rates and saves the world

2007-08-17T16:28:00.000-04:00

Here's a good write up of what just happened:

Five Things You Need to Know: What the Discount Rate Cut Really Means

LTCM II

2007-08-16T15:34:00.000-04:00

John Lonski from Moody's Investors Service compares current situation to collapse of LTCM fund today on Bloomberg's final word.

The Sky Keeps Falling

2007-08-16T13:13:00.000-04:00

More news stories as the market enters into an official correction (10% down).
Maybe a good time to buy Apple stock.

Why Mortgages Blew Up
UPDATE 1-Fitch revises further its CDO ratings methodology
FOCUS: Valuations In Spotlight As Funds Halt Redemptions
Business comment: Fundamentally, it's time to step back from the maelstrom
Asia property retains allure in stormy market
Banks refuse to mark CDOs to the market
`India to benefit as growth continues`
ETFs Tumble On Investor Worries
Sharp sell-offs on Wall Street

Chicken Little Cries Again

2007-08-15T19:07:00.000-04:00

On why good assets get knocked down when markets go bad:
"There's no skill in buying mortgages...The skill was in the credit officer who could get the cheap line of credit," Frank Husic, CIO Husic Capital Management.

Managers sell good assets to raise cash. Tech may get hit by subprime fallout.

Other Articles:
Credit contagion
EDITORIAL - Global financial turbulence; local impact possible
Killer Derivatives, Zombie CDOs and Basel Too?!
Basis Fund Down 80%
'After the Greed, Fear Reigns'
Countrywide Falls, Merrill Cites Bankruptcy Prospect (WOW!)
Mitt Romney Hit by Mortgage Meltdown
Investment fund in Chicago hit by wave of withdrawals

2007-08-10T18:06:00.000-04:00

Panic avoided. We live to trade another day.
Stocks End Amazing Day Little Changed

The Morning News

2007-08-10T09:12:00.000-04:00

Financials hit hard on word of hedge-fund selling
U.S. Stocks Head for Sharply Lower Open
Countrywide Financial Corp. (CFC)
PowerShares QQQ (QQQQ)
Very Scary Things
NY Fed didn't intervene in forex market in 2nd qtr
Wall Street stunned by funds freeze
News & Views: Wall Street stunned by funds freeze
Hedge Funds Pluck Money From Air in $19 Billion Weather Gamble
Bernanke's Bind: No Easy Answers
Countrywide, Accredited Home Lenders, RadNet in focus
U.S. Stocks Head for Sharply Lower Open
Bloomberg news
Supply fears set wheat futures afire
DJ US Wheat Outlook: 6-8c Up On Tech Momentum, Tight Supplies
Markets to Watch 08/10/2007

No one likes a chicken little, even when the sky really is falling

2007-08-09T20:53:00.000-04:00

So BNP Paribas SA, a French bank (actually, one of the largest banks in France), froze three funds that invested heavily in U.S. subprime CDOs (I'm guessing here. They said they could not value the subprime market). For those who don't know what they are, a CDO is a collateralized debt obligation consisting of a bundle of debts, in this case, subprime mortgages, which are themselves bundles of individual mortgages. What's causing the panic is that these bundles of bundles are essentially worthless because in the go-go days of 2005-2007, when people in California, Las Vegas, and Florida were lining up at realtors to buy a home with no money down in the hopes of flipping it for a substantial profit a week later, no one remembered that what goes up must come down, and that when it did come down, those holding the bags of hot potatoes would have to pay.

This, combined with the unwinding of the Yen carry-trade (a system of making money by borrowing funds from a country with a low interest rate and putting the money in higher interest vehicles in another) is causing a tightening of liquidity in the markets. Liquidity is a measure of how easy it is to buy and sell stocks for a profit, and convert it to cash. Liquidity is tightened when you can't sell for as much of a profit, because no one wants to sell for a loss, so you have to hold and wait for your positions to go up again, only, this takes time, and time is the enemy of liquidity.

So this economic environment is limiting the profits and sustainability of hedge funds and hedge fund profits. The Dow went down over 350 (almost 3%) today and the Nikkei is already down over 350 (2%).

Cramer had a fit, the Fed added a sentence to their statement that said they recognised that there is a credit problem, but they wouldn't change the rates, but followed the European Central Bank by adding money to the market. The Bank of Japan, not to be left out, just joined in.

Also, if that weren't the worst of it, Countrywide Financial (CFC), which was touted as being able to survive this row, has announced that the mortgage situation is "unprecedented." They were down 12% in the aftermarket. Lord only knows what will happen tomorrow.

Sources:
Dow Sinks 387 on Renewed Credit Concerns
Countrywide: Mortgage market 'unprecedented'
Japanese Stocks Drop on Concern Subprime Losses Will Spread
BNP Paribas Freezes Funds as Loan Losses Roil Markets (Update5)
Bank of Japan Adds Biggest Amount of Funds Since June (Update1)

Time to Short BSC, GS, JPM, MER, UBS, WM, BAC

2007-08-03T17:18:00.000-04:00

Time to short the financials-- they've been riding high for too long on too much liquidity. Unfortunately, it's going to go down before it goes up. We are in a similar situation to when Bush the first was campaigning for office-- except the time frame has been lengthened. Instead of being a lame duck president for one year, Bush the second will be a lame duck for two, and even though the President doesn't determine the economy, the market doesn't know that. High volatility and frightening drops will keep coming until long into 2009, when a democratic win may bring back the market highs of the late 90s.

Hedge Funds Behind Late-Day Stock Moves

Will Citadel Fall?

2007-08-02T14:35:00.000-04:00

micaiah2004 on the Beazer Homes (BZH) message board says that Citadel puts alot of liquidity into the market, but warns that it could fall as well. Nicholas Yulico writes in The Street that Citadel upped it's stake in BZH to 5.7%.

Sowood fund Assets Gobbled Up by Citadel

2007-08-01T14:59:00.000-04:00

The assets of the Sowood fund, which recently lost over $3 billion
as reported in Reuters, was gobbled up by Citadel, which also grabbed
Amaranth's assets. With hedge funds, it is a matter of time and liquidity before
they make or lose money. The article goes on to say that Ken Griffin,
the manager, can wait out the bad calls and ultimately make money
on the positions. If hedge fund managers weren't so impatient, they
would eventually make money on all their positions as long-term
investors. But not everyone is as patient as Warren Buffet.

Amaranth Accused of Manipulating Gas Prices

2007-08-01T14:37:00.000-04:00

The Sydney Morning Herald reports that the Commodity Futures Trading Commission has filed in US Court for the Southern District of New York a civil enforcement action against Amaranth, accusing the former hedge fund of manipulating natural gas prices. The Amaranth fund bought futures contracts for natural gas in 2006, betting that prices would rise in the cold winter months.
But the winter was not cold, prices fell, and the fund lost over $6 billion.
Also reported on Bloomberg.com.