MAJOR PAPERS:

• The Wall Street Journal reported that after years of rapid grows, many hedge funds are shutting their doors or merging with others, as expansion has dramatically slowed. As a result, the industry is being dominated mostly by big firms, such as Och-Ziff Capital Management Group LLC (NYSE: OZM), D.E. Shaw & Co., and Paulson and Co.
• Shares of Ctrip.com International Ltd (NASDAQ: CTRP), China's major Internet travel booker with about 58% of the country's online travel business, have dropped about 30% in the last six weeks alone creating a possible buying opportunity, according to the Wall Street Journal's "Heard in Asia". Travel in China is expected to grow solidly in the long-term and Ctrip.com said it expects revenue to grow 30% for the three months ending June 30 from a year earlier.
• In a move that could potentially usher in a new phase in the credit crunch, the Financial Times reported that The Goldman Sachs Group Inc (NYSE: GS) is said to be close to finalizing a plan to restructure a $7B investment vehicle formerly run by Cheyne Capital, a London-based hedge fund.

• The Washington Post reported the proposed merger between XM Satellite Radio Holdings Inc (NASDAQ: XMSR) and Sirius Satellite Radio Inc (NASDAQ: SIRI) was under fire yesterday by senior members of the Congressional Black Caucus, who said the deal does not provide enough opportunities for minority-owned programming.

Newspaper wrap-up: Hedge fund industry dominated by big firms originally appeared on BloggingStocks on Tue, 17 Jun 2008 08:00:00 EST. Please see our terms for use of feeds.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

Merrill, Lynch (NYSE: MER), Lehman Brothers (NYSE: LEH) and Morgan Stanley (NYSE: MS) are on the watch list at Standard & Poor's, the ratings agency that can make raising money very expensive for companies that get downgraded. Of the three, Lehman appears the most shaky with many expecting it to report a loss for the first time since it went public. Word is that the firm is trying to raise $3 billion to $4 billion to keep its capital base healthy. It's out there competing with many banks and insurance companies working on the same thing. Merrill Lynch already has its money in the bank but may need more.

The real problem all these firms have, along with all financial institution money raisers, is that they are loaded with securities they can't sell. They're called mortgage-back securities or Collateralized Debt Obligations (CDO's) or SIV's (Structured Investment Vehicles) or some other acronym. They all mean the same thing: no buyers anywhere at any price. It reminds me of the high inflationary days of the 70's when selling a 30-year bond was impossible. The joke was: What's the difference between a long term bond and VD? You can get rid of VD.

Continue reading Comfort Zone Investing: Big brokers, big troubles

Comfort Zone Investing: Big brokers, big troubles originally appeared on BloggingStocks on Sat, 07 Jun 2008 10:30:00 EST. Please see our terms for use of feeds.

With this morning's market rising in spite of news of Credit Suisse (NYSE: CS)'s $2.8 billion write-down and the potential for $203 billion worth of additional Wall Street write-downs on various "structured investments", I began to wonder whether investors have already discounted all the bad news and the market will start to rise.

The Credit Suisse write-downs drew praise from analysts for their reflection of the strength of its risk management but they also shocked investors who sliced 9% of its stock. Credit Suisse took "fair-value" reductions -- an estimated price when no market price is readily available -- of its "structured credit trading positions" of about $2.85 billion. I am not sure why analysts praised Credit Suisse because it's not all that different from any firm struggling with how to value illiquid securities.

Meanwhile, UBS estimated that the world's largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles (SIVs), leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail -- and this assumption will soon be tested.

Continue reading Has the market discounted all the bad news on Wall Street write-downs?

Has the market discounted all the bad news on Wall Street write-downs? originally appeared on BloggingStocks on Tue, 19 Feb 2008 10:35:00 EST. Please see our terms for use of feeds.

It seems as though every week, the public is forced to learn another one of Wall Street's strange names for a surefire deal that couldn't miss. But the reason we're learning about those strange names is because -- contrary to promises -- the can't miss deals are shutting down -- taking Wall Street's credibility down along with them.

The latest of these is auction rate securities (ARSs) -- a $330 billion market for long-term bonds that are supposed to pay lower rates because their interest rates are set through auctions. The New York Times reports that municipalities who issued ARSs are suffering because 1,000 of these auctions failed and instead of paying 3% interest rates, they have to pay 20%. And if that wasn't bad enough, the investment banks that oversee these auctions are refusing to let investors withdraw their money.

Which investment banks are imposing this pain? Goldman Sachs Group (NYSE: GS), Merrill Lynch (NYSE: MER), and Lehman Brothers Holdings (NYSE: LEH) and the problem with ARSs is not limited to municipalities entities such as the Port Authority of New York and New Jersey. Closed-end mutual funds, student loan companies and corporations also issue them.

Continue reading Auction Rate Securities: The latest $330 billion catastrophe

Auction Rate Securities: The latest $330 billion catastrophe originally appeared on BloggingStocks on Fri, 15 Feb 2008 09:05:00 EST. Please see our terms for use of feeds.

MAJOR PAPERS:

• The active ingredient in Baxter International Inc's (NYSE: BAX) generic version of the anticlotting drug heparin, under investigation for four deaths and hundreds of bad reactions, was made in China, the Wall Street Journal reported.
• Structured investment vehicles that provide short term debt to fund the purchases of municipal bonds and student loans are under increasing pressure, according to the Wall Street Journal's "Heard on the Street". Citigroup Incorporated (NYSE: C), JP Morgan Chase & Co (NYSE: JPM) and Merrill Lynch & Co Inc (NYSE: MER) are among the banks that could be affected.

• The New York Times reported that Hewlett-Packard Company (NYSE: HPQ) has settled with The New York Times Company (NYSE: NYT) and McGraw Hill Companies Incorporated's (NYSE: MHP) BusinessWeek journalists related to a spying scandal that stemmed from obtaining telephone records. The involved parties did not disclose the amount of the settlement.

• Mike Zafirovski, CEO of Nortel Networks Corporation (NYSE: NT), said the company would examine possible opportunities to be taken over "when they arise." Mr. Zafirovski did not comment on rumors of a Motorola Inc (NYSE: MOT) merger, Reuters reported.

Newspaper wrap-up: Investigated ingredient in Baxter's generic heparin drug made in China originally appeared on BloggingStocks on Thu, 14 Feb 2008 08:00:00 EST. Please see our terms for use of feeds.

Continue reading Who's afraid of coordinated central banks?

Who's afraid of coordinated central banks? originally appeared on BloggingStocks on Fri, 14 Dec 2007 18:08:00 EST. Please see our terms for use of feeds.

Today's announcement that Citigroup (NYSE: C) will take $49 billion worth of Structured Investment Vehicles (SIVs) onto its balance sheet suggests to me that its new CEO is following a path I wrote about earlier this week -- the first step of which is to take a big bath write-down fast. I think Citi stock will fall further before hitting bottom -- say $15.

Why is Pandit doing this? First, investors give a new CEO a chance to put all his predecessor's mistakes in the past through a write-down -- which generally includes closing businesses and firing staff. Second, Pandit probably realized that the alternative -- a fire sale of securitized assets (the average net asset values of SIVs tumbled to 55% from 71% a month ago and 102% in June) -- would be the lesser of two evils.

Nevertheless -- Pandit's move came with pain attached. Bloomberg News reports that two hours after Citi's announcement, Moody's Corp. (NYSE: MCO) lowered its credit ratings to Aa3, the fourth-highest level, from Aa2, saying "capital ratios will remain low." Citi's capital ratio is likely to tumble far below its target -- causing it to take further capital preservation moves. Specifically, its Tier I capital ratio is likely to hit 6.8% by the end of this year from 7.32% on September 30 -- far short of its 7.5% target.

Expect more unpleasantness -- like a cash dividend cut -- as Citi stock continues to tumble. But I think if it hits $15, it may be worth considering an investment.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in Moody's securities.

Buy Citi when it hits $15 originally appeared on BloggingStocks on Fri, 14 Dec 2007 17:16:00 EST. Please see our terms for use of feeds.

New York Times op-editorialist Paul Krugman got one right today. And its Floyd Norris points out why the solution to the problem Krugman highlights could be SWFs (Sovereign Wealth Funds). Krugman does not know how much the financial industry's problems will cost and Norris suggests that SWFs -- government investment funds -- are worth between $2 trillion and $15 trillion.

Krugman's right that the Fed's four attempts to reboot the financial system have not worked because they dance around the most fundamental problem -- nobody knows the depth of the financial hole. If I was in charge, I would find out where all the toxic waste is buried and estimate the amount of capital needed to offset the cost of writing it down. In my view, it makes sense to mark the toxic waste to market and to raise capital at the same time.

Norris points out that SWFs could be part of the capital raising solution -- as they have been in the cases of Citigroup Inc. (NYSE: C) and UBS AG (NYSE: UBS). He also suggests two pitfalls of SWFs as a source of capital. First, they are government controlled which could allow the SWFs to use the resulting power over our financial institutions to further their political ends. Second, whenever a new acronym such as SWF emerges in the financial world -- and there have been plenty including Collateralized Debt Obligation (CDO) and Structured Investment Vehicle (SIV) -- Wall Street will find a way to profit from it in the short-term while sticking the long-term costs on someone else.

Continue reading Krugman gets one right and why SWF does not mean Single White Female

Krugman gets one right and why SWF does not mean Single White Female originally appeared on BloggingStocks on Fri, 14 Dec 2007 10:00:00 EST. Please see our terms for use of feeds.

MAJOR PAPERS:

• The proposal by Citigroup Incorporated (NYSE: C), Bank of America Corporation (NYSE: BAC) and JP Morgan Chase & Co (NYSE: JPM) to shield banks and structured investment vehicles from big losses appears to be losing momentum, the Wall Street Journal reported.
• The Wall Street Journal's "Heard on the Street" reported that though activist investor believes there is nearly $20B in additional shareholder value should Motorola Inc (NYSE: MOT) break up, analysts caution that the company needs to fix underlying problems to maximize the value.

• Countrywide Financial (NYSE: CFC) has been subpoenaed by the Illinois attorney general, according to the New York Times.

Newspaper wrap-up: Countrywide subpoenaed by Illinois Attorney General originally appeared on BloggingStocks on Thu, 13 Dec 2007 08:50:00 EST. Please see our terms for use of feeds.

Bank of America Corporation (NYSE: BAC) announced Monday it closed a $12 billion, enhanced money fund after major clients pulled-out amid losses on complex asset-back securities, including structured investment vehicles, Bloomberg News reported.

The Columbia Strategic Cash Portfolio was closed last week and is being "wound down," Bank of America spokesman Robert Stickler told Bloomberg News. Sticker said the fund's net asset value, which had been $33 billion two weeks ago, was 99.4 cents on the dollar as of Monday.

Continue reading Bank of America closes enhanced money fund after losses

Bank of America closes enhanced money fund after losses originally appeared on BloggingStocks on Mon, 10 Dec 2007 18:28:00 EST. Please see our terms for use of feeds.

Continue reading Proposed Super SIV continues to evolve

Proposed Super SIV continues to evolve originally appeared on BloggingStocks on Mon, 10 Dec 2007 18:02:00 EST. Please see our terms for use of feeds.

The New York Times reports that the market rally last week was due to investor's confidence that the Bush administration is stepping in to bail out the economy. I don't buy this explanation and think that the market moves because of what big investors are doing -- information that does not get into the media. Moreover, based on its track record, I would conclude that the Bush Put -- as I'd call the Times' notion -- is likely to be just as effective as the Mission Accomplished banner he used as a prop in May 2003.

To explain this, here's some recent history. In May 2003 George Bush landed a jet on an aircraft carrier and strutted like a peacock in front of a banner blaring "Mission Accomplished." That was over four years ago and that banner still looks like it's premature. By contrast, during the reign of Fed Chair Alan Greenspan, the market formed the concept of the Greenspan Put -- the execution of Fed policies that limited investor's downside risk -- because he successfully bailed out investors for their excesses.

This week my guess is that the market rallied in response to two moves: Fed Chair Bernanke's comments on flexibility -- hinting at further rate cuts on December 11th -- and Treasury Secretary Paulson's announcement of negotiations with banks to keep some mortgage rates from resetting upwards on some of the 1.5 million nonprime mortgages valued at $331 billion that will reset by the end of 2008. Since Bush seems to be coordinating the responses to the latest economic turmoil, I am elevating the market rescue efforts to the Oval Office -- hence the Bush Put.

Continue reading Is the Bush Put's mission accomplished?

Is the Bush Put's mission accomplished? originally appeared on BloggingStocks on Sat, 01 Dec 2007 09:55:00 EST. Please see our terms for use of feeds.

Continue reading Super-size questions remain for Super SIV

Super-size questions remain for Super SIV originally appeared on BloggingStocks on Mon, 26 Nov 2007 16:45:00 EST. Please see our terms for use of feeds.

With the price of Thanksgiving dinner up 11% this year over last, the Fed won't help consumers because it's confident that inflation -- as measured by Personal Consumption Expenditures (PCE) will range between 1% and 2%. Meanwhile, Washington is happy to create lucrative business deals for Wall Street -- in the form of arrangements to manage and keep records of its Structured Investment Vehicle (SIV) bailout.

What is the Fed smoking? I don't know any personal consumption expenditures that are growing at 1% to 2%. The price of oil has quadrupled since January 2001 to $99.29 a barrel, gasoline prices are up 40% since last year, airfares have more than doubled -- a flight from Boston to Florida that cost $300 last year is now $700 -- and the dollar has lost 61% of its value since January 2001. I guess the Fed has decided to define PCE in a way that conveniently confirms its pro-inflation interest rate policy.

Meanwhile, the Treasury Department has backed a Super-SIV plan to bail out banks, such as Citigroup Inc. (NYSE: C) which created the $320 billion SIVs industry and invested the proceeds of SIV-issued commercial paper in now-worthless mortgage backed securities (MBSs).

Continue reading Wall Street turkeys get pardon as Fed lets consumers pay for rampant inflation

Wall Street turkeys get pardon as Fed lets consumers pay for rampant inflation originally appeared on BloggingStocks on Wed, 21 Nov 2007 10:44:00 EST. Please see our terms for use of feeds.

In August I posted on the danger that subprime mortgages pose to people who invest in money market funds. Today, the New York Times reports that several such funds have invested in commercial paper (CP) issued by Structured Investment Vehicles (SIVs) backed by subprime mortgage-backed securities (MBSs). I think all money market funds should start a public information campaign to let people know if they have the SIV virus and if so, what they're doing to protect their customers from it.

Earlier, I posted on all the new vocabulary words I've learned in the last year thanks to the subprime mortgage meltdown. This $1.3 trillion market consists of mortgages to people who can't afford to repay in many cases. Forty seven percent of the loans were made without documentation of the borrower's income -- these are known as liar loans. The subprime mortgages were packaged as MBSs and among the buyers were SIVs -- off-balance sheet entities that use a bank's good credit rating to issue CP to invest in MBSs.

Thanks to the subprime mortgage meltdown, the CP is not worth as much as before so the money market funds that bought it are now forced to break the $1 per share constant value or put money into the fund to make up for the lost value. So far, analysts say that most SIV securities are trading at 97 to 98 cents on the dollar. But if more SIVs are forced to unwind, the resulting fire sale would put pressure on prices.

Continue reading Thought your money market fund was safe? Think again

Thought your money market fund was safe? Think again originally appeared on BloggingStocks on Wed, 14 Nov 2007 10:25:00 EST. Please see our terms for use of feeds.

Three weeks ago I warned that you should review the holdings of your money market funds because they could be exposed to the mortgage mess. Well, today the Wall Street Journal reports that several money market funds are taking action to shore up their holdings because of exposure to one of the troubled SIVs -- Cheyne Finance LLC, which was downgraded to default status last month by S&P after the SIV went into receivership.

Bank of America (NYSE: BAC)'s money management arm, Columbia Management, is managing two of the money market funds discussed in today's Journal story - SEI Investments Daily Income Trust Prime Obligation Fund and SEI Daily Income Trust Money Market Fund. In my story three weeks ago, I warned about the SIV holdings in Columbia Cash Reserves Fund. I also warned about holdings in other Bank of America mutual funds managed by Columbia. Other mutual funds holding SIVs mentioned in the Journal's story this morning include STI Classic Funds from SunTrust Banks (NYSE: STI) and Credit Suisse Group money market funds.

All this is finally becoming public because S&P took the position that exposure to troubled SIVs like Cheyne Finance LLC was not "consistent with its criteria for receiving its highest ratings for money-market funds." Money market funds are not supposed to invest in low-grade securities. The big fear for investors and government regulators is that losses in these riskier holdings could drive the asset value of a money market fund below $1 a share or "break the buck." The only time that happened was in 1994 after a money market fund faced losses because of the 1994 derivative crisis.

Continue reading Money market funds taking action to avoid downgrades

Money market funds taking action to avoid downgrades originally appeared on BloggingStocks on Tue, 13 Nov 2007 05:00:00 EST. Please see our terms for use of feeds.

How vulnerable is your mutual fund to the ongoing mortgage meltdown? In this series, BloggingStocks contributor Lita Epstein, author of more than 20 books including Trading for Dummies and The Complete Idiot's Guide to Improving Your Credit Score, digs into mutual funds' holdings looking for securities with exposure to the currently shaky credit markets.

The first inkling I got that Fidelity might be tied to the SIV bailout was a story last week in The Wall Street Journal that indicated Fidelity's Prime Money Market Portfolio owned $402 million medium-term notes in Gordian's Sigma Finance Inc. as of the end of August [subscription required]. Taking a closer look at Fidelity Funds, I found two broad market bond funds with significant exposure to the mortgage-backed and asset-backed credit categories now showing signs of trouble.

As of 9/30/2007 Fidelity Ultra Short Bond Fund holds 42.4% of its assets in asset-backed securities, 17.5% in collateralized mortgage obligations and 15.2% in commercial mortgage-backed securities. That's 75.1% of its assets in securities tied to the credit markets that are now showing signs of trouble. While I'm not saying that 75% of this fund's assets are in trouble, what I am asking is, do you really want that much exposure to these markets in this volatile time?

As of 9/30/2007 Fidelity Short-Term Bond Fund holds 23.1% of its assets in asset-backed securities, 13.5% in collateralized mortgage obligations, and 11.6% in commercial mortgage-backed securities. That's almost half of its assets in the most volatile parts of the credit markets. If you do hold these funds, you need to decide if you want this level of exposure to these risky credit markets right now.

In reviewing bond funds this morning, these two Fidelity bond funds were less-diversified than many of its peers. While their yields may be high, you must decide whether the risk is worth it.

Lita Epstein is the author of more than 20 books including the "Pocket Idiot's Guide to Investing in Mutual Funds."

Mutual funds and the mortgage mess: Fidelity Funds originally appeared on BloggingStocks on Mon, 22 Oct 2007 16:03:00 EST. Please see our terms for use of feeds.

The New York Times reports that the recently announced Super SIV plan to buy out Structured Investment Vehicles (SIV) is a thinly disguised effort to bail Citigroup (NYSE: C) out of these poorly constructed off-balance sheet obligations (remember Enron?). It looks to me like the law of large borrowers is drawing the government in to delay Wall Street's inevitable reckoning for the subprime meltdown.

What is the law of large borrowers? If you borrow $100,000 from a bank and you can't pay it back, that's your problem. But if you borrow $5 billion and can't find the scratch, it's the bank's problem. How does this apply to Citigroup?

Citigroup is the biggest sponsor of SIVs, and now that nobody wants to buy the subprime mortgage-backed securities (MBSs) backing the SIV's Commercial Paper (CP), Citigroup can't afford to write down its capital to account accurately for the loss it faces when it is forced to buy back its deeply underwater SIVs.

Continue reading Is the Treasury's Citigroup bailout plan cratering?

Is the Treasury's Citigroup bailout plan cratering? originally appeared on BloggingStocks on Fri, 19 Oct 2007 09:54:00 EST. Please see our terms for use of feeds.

Banks are looking for your help. They want you to help bail them out of the mess they created - short-term notes (commercial paper) in funds called structured investment vehicles (SIVs). As expected, Citigroup (NYSE: C), J.P Morgan Chase (NYSE: JPM), and Bank of America (NYSE: BAC) announced their intention to set up a $100 billion dollar "Super SIV" that will buy the current SIVs with the hopes of freeing up some cash so commercial paper can start flowing again. Estimates are that $400 billion is tied up in SIVs and the inability of banks to refinance this short term debt has stalled the credit markets since July.

The U.S. Treasury Department helped to put this fix together, but is not backing it financially. The biggest problem with these SIVs is that they are held off the books and those banks left holding the bag could be in big trouble. Citigroup, whose been leading the charge to set up this "Super SIV," also holds the biggest share of the SIV pie.

Treasury Security Henry Paulson's playing dumb. He told reporters yesterday [subscription required] after an event at the University of Texas at Austin, "The regulators didn't have a clear enough visibility with what was going on in terms of these off-balance-sheet SIVs," according to a report today in the Wall Street Journal. Wow. Wasn't he ever involved in the sale of these things when he was Chairman and Chief Executive at Goldman Sachs? Could he have given the regulators some clues when he got to treasury, if he really believed that? He did signal changes in regulation may be coming to prevent this type of disaster in the future.

Continue reading Banks looking for brave investors to bail them out

Banks looking for brave investors to bail them out originally appeared on BloggingStocks on Tue, 16 Oct 2007 11:21:00 EST. Please see our terms for use of feeds.

Finally some possible good news: There may be a solution to the credit crisis caused by shaky subprime mortgages. Citigroup (NYSE: C) is leading the charge to piece together a pool of funds with other big banks that would financially back as much as $100 billion in shaky mortgage securities and other investments, according to the Wall Street Journal. Talks to work out this solution started three weeks ago at the U.S. Treasury Department, which is playing a crucial role in making this happen. Success in putting this fix together may be announced as early as Monday. Two other key players in these talks are Bank of America Corp. (NYSE: BAC) and J.P. Morgan Chase & Co. (NYSE: JPM), which don't have SIVs but would earn fees in helping to arrange the fix.

Citigroup CEO Chuck Prince is desperately trying to save his skin with this bailout, which is reminiscent of the bailout for Long Term Capital Management in 1998. What exactly is it that is being bailed out? They're called SIVs (structured investment vehicles). Essentially SIVs are short-term debt used to raise money to buy high-yielding assets, such as securities tied to mortgages or receivables (money due from customers of mid-size businesses).

Citigroup, which is the largest player in SIVs, holds nearly $100 billion in SIVs, and globally there are $400 billion in SIVs as of Aug. 28, according to Moody's. If the banks that hold them have to write them down, we haven't seen anything yet. There could be an even broader credit crunch, which would hurt the economy even more than the pain we already feel. In August, banks holding SIVs had difficulty rolling over their short-term debt, which seized up credit markets until the Fed stepped in and encouraged banks to borrow money by reducing the rate at which they could borrow it.

Continue reading Banks to the rescue: A plan to back mortgage secuities and prevent fire sales

Banks to the rescue: A plan to back mortgage secuities and prevent fire sales originally appeared on BloggingStocks on Sun, 14 Oct 2007 10:10:00 EST. Please see our terms for use of feeds.