Unhinged Fund Alert!

17

Fund: Bear Stearns Asset-Backed Securities Fund
Affiliation: Bear Stearns
Size: $900 M
Status: suspended redemptions
Losses: ?

Unhinged Fund Update

Did the media report an 8% loss for Sowood Capital in July? Try 50%+.

Fund: Sowood Capital Management LP.
Size: $3 B.
Losses: $1.5 B +.
Status: Closing.

#16

#16 is here!

Fund: Sowood Capital Management LP. Affiliation: independent. Size: $3 B. Status: positions taken over by Citadel Investment. Losses: at least 13% in June and July.

Fund: Yield Strategies Fund. Affiliation: Absolute Capital Group Ltd. Size: $177 M (together with sister fund) Status: Redemptions suspended. Losses: substantial (half of fund was mezzanine CDO's, so probably nothing left).Fund: Yield Strategies Fund NZD. Affiliation: Absolute Capital Group Ltd. Size: $177 M (together with sister fund). Status: Redemptions suspended. Losses: half of fund was mezzanine CDO's, so probably nothing left. Fund: Basis Yield Alpha Fund. Affilliation: Basis Capital. Size: $1 B. Status: unable to meet margin calls. Losses: 14% in June.Fund: Basis Pac-Rim Rund. Affiliation: Basis Capital. Size: $1 B. Status: unknown. Losses: 9% in June.Fund: Dillon Reed Capital Management.Affiliation: UBS.Size: $1.2 B (at least)Losses: $300 M (at least)Fund: High-Grade Structured Credit Strategies Enhanced Leveraged Fund. Affiliation: Bear Stearns. Size: $638 M. Status: nothing left. Losses: $638 M.Fund: High-Grade Structured Credit Strategies Fund. Affilliation: Bear Stearns. Size: $925 M. Status: closing. Losses: at least $842 M.Fund: Caliber Global Investment. Affiliation: Cambridge Place Investment Management. Size: $908 M. Status: closed. Losses: ?Fund: Horizon ABS Fund L.P. Affiliation: United Capital Markets. Size: $900 M. Status:redemptions suspended . Losses: ?Fund: Horizon Fund L.P. Affiliation: United Capital Markets. Size: $620 M?Status:redemptions suspended. Losses: ?Fund: Horizon ABS Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Fund L.P. Status: redemptions suspended. Losses: ?Fund: Horizon ABS Master Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Master Fund L.P. Status: redemptions suspended. Losses: ?Fund: Galena Street Fund. Affiliation: Braddock Financial Corp. Size: $400 M. Status: closed. Losses: $100 M. Fund: Queens Walk Investment Ltd. Affiliation: Cheyne Capital Management. Size: $91 M. Status: closed or threatened. Losses: ?Fund: Brookfield Securities. Size: $19 M. Status: closed. Losses: $22 M. (technically a broker/dealer, not a fund, but included because they closed due to trading losses on subprime-backed CDO's).

Unhinged Fund Alert!

#'s 14 & 15 !

That didn't take long. Here's the link from Bloomberg. Here are the funds:

Fund: Yield Strategies Fund. Affiliation: Absolute Capital Group Ltd. Size: $177 M (together with sister fund) Status: Redemptions suspended. Losses: substantial (half of fund was mezzanine CDO's, so probably nothing left).

Fund: Yield Strategies Fund NZD. Affiliation: Absolute Capital Group Ltd. Size: $177 M (together with sister fund). Status: Redemptions suspended. Losses: half of fund was mezzanine CDO's, so probably nothing left.

Fund: Basis Yield Alpha Fund. Affilliation: Basis Capital. Size: $1 B. Status: unable to meet margin calls. Losses: 14% in June.Fund: Basis Pac-Rim Rund. Affiliation: Basis Capital. Size: $1 B. Status: unknown. Losses: 9% in June.Fund: Dillon Reed Capital Management.Affiliation: UBS.Size: $1.2 B (at least)Losses: $300 M (at least)Fund: High-Grade Structured Credit Strategies Enhanced Leveraged Fund. Affiliation: Bear Stearns. Size: $638 M. Status: nothing left. Losses: $638 M.Fund: High-Grade Structured Credit Strategies Fund. Affilliation: Bear Stearns. Size: $925 M. Status: closing. Losses: at least $842 M.Fund: Caliber Global Investment. Affiliation: Cambridge Place Investment Management. Size: $908 M. Status: closed. Losses: ?Fund: Horizon ABS Fund L.P. Affiliation: United Capital Markets. Size: $900 M. Status:redemptions suspended . Losses: ?Fund: Horizon Fund L.P. Affiliation: United Capital Markets. Size: $620 M?Status:redemptions suspended. Losses: ?Fund: Horizon ABS Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Fund L.P. Status: redemptions suspended. Losses: ?Fund: Horizon ABS Master Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Master Fund L.P. Status: redemptions suspended. Losses: ?Fund: Galena Street Fund. Affiliation: Braddock Financial Corp. Size: $400 M. Status: closed. Losses: $100 M. Fund: Queens Walk Investment Ltd. Affiliation: Cheyne Capital Management. Size: $91 M. Status: closed or threatened. Losses: ?Fund: Brookfield Securities. Size: $19 M. Status: closed. Losses: $22 M. (technically a broker/dealer, not a fund, but included because they closed due to trading losses on subprime-backed CDO's).

Don't Fight the Trend!

Nationwide, housing-related employment accounts for about 10 percent of the economy. "The 10 percent is a problem, but it's not something that's going to undermine the economy," Zandi said.

These pearls of wisdom (quoted in Reuters) come on a day when the market shows that it clearly does not understand that the housing depression is not a trend to fight. Mark Zandi is the chief economist of Moody's Economy.com. Right now ITB is -5%. CFC -4%, GS -4%, DJIA -235, 10yr Treasuries, +2% (flight to quality), TOL -5%, etc.

This is not the time to look for value in the homebuilders. The thing to consider is the trend. It is still a toddler. It has room to grow much bigger and spread. On top of that, the market clearly has a well-documented history of underestimating the problems.

DHI reported an $824 M loss for the second quarter. It had charges of $1.28 B. That's $4.07 per share. Their book value per share is $20.82. They just lost 20% of book. In one quarter. Does anyone still believe that book value means anything?

Random thoughts...

The thought occurred to me: What is the relationship of collateral to comsumeables with regards to inflation? What prompted me to formulate this question was wondering why Great Britain, with a strong currency, has a bigger inflation problem than the U.S., with a very weak currency.

Maybe the cycle works like this: 1. Money supply and credit is loosened. 2. Collateral values expand, based on the availability credit. 3. Inflation spreads to consumeables if money supply isn't tightened. 4. When money supply is tightened, collateral values (especially bubbles exceedingly dependend on credit) start to shrink. 5. Credit losses prompt credit tightening. 6. If the money supply is loosened to prolong the bubbles, inflation in consumeables skyrockets, because there's nowhere else for the money to go. 7. If the money supply is tightened, we get deflation and falling collateral values will be joined by falling consumeable prices.

Sounds good. However, I'm making several assumptions that I need to think about more. 1. I Assume that consumeables and collateral have a different relationship to credit. Actually, that's a good thing. They better be different. You can borrow against collateral, but not against consumeables. 2. I assume that collateral values are not included in inflation. Granted, but the whole point is to highlight the differences in the behavioral of collateral and consumeables in regards to money and credit. 3. I assume that an increase in the money supply without a corresponding increase in credit affects consumeables but not collateral. This is not necessarily the case. An increase in the money supply will also affect collateral values. However, the consideration of size is extremely important. In the modern credit cycle, the expansion of credit dwarfs the expansion of the money supply. Correspondingly, collateral needs a huge increase in the expansion of the money supply to inflate because it costs so much more than consumeable goods. 4. ??? (don't know, but I'm sure there are more...) I'll try to add to this later. I like it.

Now to attempt an answer to the U.K./U.S. puzzle that prompted this theorizing. This is a tricky one. A strong currency attracts foreign capital, which creates more cash in the system. On the other hand, imports should be cheaper. This cash is what is increasing inflation in the U.K. On the other hand, in an import economy, (the U.S.) a weak currency should increase inflation as the $ buys less. However, in the US, because the currency is weak, credit growth has outpaced money supply. Money, but not credit, flows to overseas investments. In other words, the weak currency emphasizes credit (and therefore collateral prices) at the expense of money supply (and inflation in consumeables). In the UK, the strong currency increases money supply relative to credit. Therefore consumeable prices are out of control. We see the same thing in Australia and New Zealand.

How about Japan? Does our thesis explain the condition of a weak currency, and an extraordinary campaign of credit and monetary expansion. Absolutely. Because the currency is weak, any monetary expansion leaves the country. In fact, the Yen is so weak that the money is still leaving before it has been created. That is why they still have deflation.

This explains an until now thorny problem and floods it with light: why out beloved central bankers were so happy to devalue the dollar, while at the same time talking tough on inflation. They want a weak dollar so that they can walk their tightrope of keeping credit relatively loose (compared to the rest of the world) without stoking inflation through an increasing money supply.

Housing...

Time to short more homebuilders, to maintain my exposure. Between ITB and CFC, I'm up about 25% on each, so I need to short more to maintain my exposure. I'm thinking of shorting more of the index.

Yahoo reported that:

"Housing is contracting at an accelerating pace, taking out with a vengeance the brief stabilization at the turn of the year," said Ian Shepherdson, chief economist at High Frequency Economics, a private forecasting firm.

This looks to me like a case of just shorting more all the way down. As was said in the UBS analyst report on homebuilders earlier this year, "book value doesn't mean anything." In the 1990 housing recession, homebuilders traded down to 30% of book. Beazer Homes might be approaching that, but it's hardly an average yet.
This quote from the same article shows the idiocy of reporters:

The supply of unsold homes did drop by 4.2 percent in June to 4.2 million, which analysts said was a hopeful sign that the price declines may soon come to an end.

I guess the drop in supply is better than a gain, but the supply versus sales increased to 8.8 months' worth. Ouch!

According to an article from the L.A. Times on Winterwatch, foreclosures are up 799% yoy for the second quarter of '07. The accompanying chart provides more information: during the last housing downturn, foreclosures didn't peak until the END of the housing recession. Bottom line, don't even start to look for a rebound until 2010.

trading too much

Trading has cost me 5% so far this year. That's unacceptably high. So, I bought PCU @ 115.01 to fill in the long side of my portfolio.

I bought PCU instead of RIO for a number of reasons. First, despite tripling in the last 52 weeks, PCU still has the lower P/E ratio. Secondly, RIO brought in 80% growth last quarter, which sets the bar unreasonably high. Thirdly, PCU might not be a takeover target, but its parent, Grupo Mexico might be pressured to protect itself somehow. And finally, there's the dividend which PCU keeps raising.

Now I'm just going to sit on my positions for at least a month. That should give me a couple of ideas for options while I sit on my cash and wait for Tribune (TRB) to drop below $25. If the buyout deal collapses, it's worth $10.

Unhinged Fund Alert!

13

#'s 12 & 13 hit the news a few days ago!

Two funds from Basis Capital in Australia lost 14% and 9% in June respectively. They were unable to meet margin calls at the beginning of this week. What will be left?

Fund: Basis Yield Alpha Fund. Affilliation: Basis Capital. Size: $1 B. Status: unable to meet margin calls. Losses: 14% in June.

Fund: Basis Pac-Rim Rund. Affiliation: Basis Capital. Size: $1 B. Status: unknown. Losses: 9% in June.

Fund: Dillon Reed Capital Management.Affiliation: UBS.Size: $1.2 B (at least)Losses: $300 M (at least)
Fund: High-Grade Structured Credit Strategies Enhanced Leveraged Fund. Affiliation: Bear Stearns. Size: $638 M. Status: nothing left. Losses: $638 M.
Fund: High-Grade Structured Credit Strategies Fund. Affilliation: Bear Stearns. Size: $925 M. Status: closing. Losses: at least $842 M.
Fund: Caliber Global Investment. Affiliation: Cambridge Place Investment Management. Size: $908 M. Status: closed. Losses: ?
Fund: Horizon ABS Fund L.P. Affiliation: United Capital Markets. Size: $900 M. Status:redemptions suspended . Losses: ?
Fund: Horizon Fund L.P. Affiliation: United Capital Markets. Size: $620 M?Status:redemptions suspended. Losses: ?
Fund: Horizon ABS Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Fund L.P. Status: redemptions suspended. Losses: ?
Fund: Horizon ABS Master Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Master Fund L.P. Status: redemptions suspended. Losses: ?
Fund: Galena Street Fund. Affiliation: Braddock Financial Corp. Size: $400 M. Status: closed. Losses: $100 M.
Fund: Queens Walk Investment Ltd. Affiliation: Cheyne Capital Management. Size: $91 M. Status: closed or threatened. Losses: ?
Fund: Brookfield Securities. Size: $19 M. Status: closed. Losses: $22 M. (technically a broker/dealer, not a fund, but included because they closed due to trading losses on subprime-backed CDO's).

Unhinged Fund Update

We're still at 11 (as far as I know). However, we now have answers to the Bear Stearns' funds. The Leveraged fund is worthless, and the other fund nine cents on the dollar, according to Marketwatch.


# 11

Fund: Dillon Reed Capital Management.Affiliation: UBS.Size: $1.2 B (at least)Losses: $300 M (at least)
Fund: High-Grade Structured Credit Strategies Enhanced Leveraged Fund. Affiliation: Bear Stearns. Size: $638 M. Status: nothing left. Losses: $638 M.
Fund: High-Grade Structured Credit Strategies Fund. Affilliation: Bear Stearns. Size: $925 M. Status: closing. Losses: at least $842 M.
Fund: Caliber Global Investment. Affiliation: Cambridge Place Investment Management. Size: $908 M. Status: closed. Losses: ?
Fund: Horizon ABS Fund L.P. Affiliation: United Capital Markets. Size: $900 M. Status:redemptions suspended . Losses: ?
Fund: Horizon Fund L.P. Affiliation: United Capital Markets. Size: $620 M?Status:redemptions suspended. Losses: ?
Fund: Horizon ABS Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Fund L.P. Status: redemptions suspended. Losses: ?
Fund: Horizon ABS Master Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Master Fund L.P. Status: redemptions suspended. Losses: ?
Fund: Galena Street Fund. Affiliation: Braddock Financial Corp. Size: $400 M. Status: closed. Losses: $100 M.
Fund: Queens Walk Investment Ltd. Affiliation: Cheyne Capital Management. Size: $91 M. Status: closed or threatened. Losses: ?
Fund: Brookfield Securities. Size: $19 M. Status: closed. Losses: $22 M.

investing strategy

My investment strategy for the moment is based on credit. The parts of the market that are facing tightening credit are homebuilders and financials. As the consumer is also under a credit squeeze, retail is also included. The sectors of the market that I am bullish on are foreign commodity stocks. I expect that a consumer crunch will hit manufacturing next, probably in the next six months.

Tribune

bought 1 Tribune (TRB) Jan '08 $25 put for 0.90. (TRBME.X)

I'm thinking that if any deal falls apart, it's this one. Last week the L. A. Times announced that cash flow was down 27%. Also, the deal is very sensitive to credit spreads. When the deal was announced, enterprise value was 9x EBITDA. Now, it's about 9.4. Throw in 100bps for borrowing costs and a 10% loss of earnings, and the deal starts getting very shaky.

Weakness Spreading

This story confirms that weakness has spread to retail and will continue to spread. "Economists still believe that the economy... will come in at a rate of 3 percent or better in the just completed April-to-June quarter." Hmmm... Three straight bad months of consumer sales data makes me doubt that the data will be good. Much of the number will be a reduction in inventories from the first quarter. However, with consumer spending sinking, that will put further pressure on GDP growth throughout the rest of this year.

Bottom line: as much as it pains me to see RIO go from $45 to $53 after I sold it two weeks ago, I'm staying short and avoiding jumping on the bandwagon for stocks that leverage the dollar's decline. I'm still waiting for a scare causing a temporary flight to quality to give me a good buying opportunity.

inflation and interest rates...

Reading the winterwatch today, several thoughts occurred to me.

The first was regarding interest rates rising around the word. The reason that most countries around the world are raising interest rates is because dollars are flowing into their economies.

The second insight I had was that if there's a flight to safety, the dollar will go up.

It seems that everything is a bet on the dollar going down: oil up, carry trade, gold up, DJIA up, metals up, emerging markets, Euro, Pound Sterling, Yuan, Australian $, New Zealand $, etc. A flight to safety will destroy all these bets, and the best thing to hold will be US $. Is it close to the time for a flight to safety? (A real one, not like February or last May) US Treasury bonds are usually a barometer of the demand for safety. Lately, Treasury bond prices have dropped. The flight to safety hasn't happened yet; in fact the bond market is very slightly on the side of a flight to safety. With the recent run up in bonds, the bet on a flight to safety has gotten smaller.

Should there be a flight to safety? Probably not; there are many things which show a great trend without being ridiculous right now: industrial commodities, global growth, the US stock market. The problems are in homebuilding and subprime mortgage lending. To a lesser extent, we will see problems in hedge funds and the financial sector. However, problems in housing don't necessarily translate into problems for the stock market.

Good and Bad...

Seriously considering BSC puts. They will "announce losses" on their hedge funds on the 16th. In other words, they will show the world how well everything's been swept under the rug. However, if it's really bad, they'll try to get it over with.


So far, it looks like they've hidden most of it, but I'd like to just keep swinging. I know sooner or later I'll knock one out of the park.


KBH options up 76%. Too bad I got the $35's when if I had been early, I would've had the $40 puts worth $4.00+ now.


I'm watching the ABX indices on Markit.com. Here are the top AAA rated bonds:

This is the best performing bond on the index. It's at 99.13 with a coupon of 0.11%. So, it's already lost 8 times the coupon. Ouch.

This is also AAA. It's lost 23 times the coupon. I don't know if the coupon is monthly or above Treasuries or what. I need to figure this out, but this definitely doesn't look like an investment grade product.

I believe these bonds work like the Titanic: the equity tranches fill up with losses first, then the non-investment grade bonds, then the investment grade. The higher rated bonds are no better than the worst; they just have a buffer. Once it's gone, they will sink just as fast as the worst junk.

The ratings agency's are broadcasting which bonds they might downgrade before they do, and delaying downgrades as long as possible. However, lawsuits like the one from Ohio's Attorney General will force downgrades. When the paper is downgraded, insurance co's and pension funds will have to sell the toxic paper. So, why are Moody's and S&P broadcasting the downgrades ahead of time? To allow anyone who can't hold junk bonds to sell, and get better prices than if they are forced to sell. They don't want this to come back and bite them if they can help it.

Unhinged Fund Alert!

# 11

Total Size: $24.1 Billion

This is the latest news to cause shocks to the unhinged fund market. UBS President Peter Wuffli turned in a "surprise resignation." Boy, look at that guy's face!

Fund: Dillon Reed Capital Management.
Affiliation: UBS.
Size: $1.2 B (at least)
Losses: $300 M (at least)



Fund: Bear Stearns Enhanced Leveraged ... Affiliation: Bear Stearns. Size: ~ $10 B. Status: needs bailout to prevent closure. Losses: $1-3 B.


Fund: Bear Stearns not-so-leveraged. Affilliation: Bear Stearns. Size: ~ $10 B. Status: $1.6 B bailout to facilitate "orderly deleveraging process" otherwise known as liquidating. Losses: at least $1.6 B.



Fund: Caliber Global Investment. Affiliation: Cambridge Place Investment Management. Size: $908 M. Status: closed. Losses: ?


Fund: Horizon ABS Fund L.P. Affiliation: United Capital Markets. Size: $900 M. Status:redemptions suspended . Losses: ?


Fund: Horizon Fund L.P. Affiliation: United Capital Markets. Size: $620 M?Status:redemptions suspended. Losses: ?

Fund: Horizon ABS Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Fund L.P. Status: redemptions suspended. Losses: ?

Fund: Horizon ABS Master Fund Ltd. Affiliation: United Capital Markets. Size: included in ABS Master Fund L.P. Status: redemptions suspended. Losses: ?

Fund: Galena Street Fund. Affiliation: Braddock Financial Corp. Size: $400 M. Status: closed. Losses: $100 M.


Fund: Queens Walk Investment Ltd. Affiliation: Cheyne Capital Management. Size: $91 M. Status: closed or threatened. Losses: ?



Fund: Brookfield Securities. Size: $19 M. Status: closed. Losses: $22 M.

Unhinged Fund Alert!

# 6 came in today.

United Capital Market's Horizon ABS fund has restricted redemptions to investors. The fund manages $619 million.

It joins Brookfield Securities ($19M), Queens Walk ($91M), Caliber Global Investment ($908M), Bear Stearns Enhanced Leveraged blah blah blah and Bear Stearns not-so-leveraged blah blah blah ($20Billion), and UBS AG Fund ($?).