Monday, July 30, 2007

Investment banks raising margin requirements on lending to hedge funds -- Forbes, with a comment

Consider this an editorial. I mean, even more so! This is good news. Almost anything to rein in the hedgies, in their reckless attempts to profit by screwing up the financial markets for everybody else, is good news. You have to wonder how much of the current market decline represents the efforts of hedge funds to massively "attack" the financial markets. Who knows?

What else would be good? One thing would be rules to stop naked short selling. Perhaps a rule requiring the shares to be sold short to really exist, on pain of prison. The possibility of a more restricted definition of "accredited investor, as the SEC has been mulling, would be a big plus. Getting radical here, how about a rule allowing the prime brokers or other lenders to hedge funds no higher standing than the investors, or even making them jointly liable to the investors in the fund, if a fund blows up? Or making the fund's owners personally liable if there was wrongdoing involved. Yes, that's radical. We can dream.

Investment banks raising margin requirements on lending to hedge funds - report -


Friday, July 27, 2007

You call that a sell-off? -- MarketWatch

Once in a while you see a statement which is just stunningly strange:

"In general, stocks are not cheap, especially if you consider that corporate profit margins are hitting all-time highs."

If earnings are high, then how is it that stocks are expensive?

Should you care? Should you act if you think stocks are expensive, or cheap? Market timers have no rational basis for expecting to beat out all the other market timers. N-O-N-E. Acting with money without some rational, defensible basis for what you are doing is not rational. Investors, not traders, as a group win. The objective research, as a body of research, bears that out.

Only if you think you have some genuine edge, would you rationally get into trading in general. No disclosed trading strategy has survived rigorous research to see if it works. Perhaps presence of a trading edge explains the existence of brokerage and institutional trading desks. For a brokerage to suggest it is working for you, while it is trading against you, is not my idea of fiduciary behavior. But, as an old friend, the first real portfolio manager I ever knew, once said to me, long ago in the '70s, when I expressed shock at something I had seen, "...but who ever told you that brokers are in business to serve the best interest of their clients?"

You call that a sell-off? - MarketWatch

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Wednesday, July 25, 2007

Subprime lender CompuCredit's nearly $90 million "tied up" at Horizon hedge fund which has blocked withdrawals: NY Post

Interesting reading. "CompuCredit will have to settle for only a percentage of its cash coming back. "

A remarkable comment near the bottom of the article: "Other investors biting their fingernails over the fate of Horizon include several hedge funds that invested with the fund as a way to park excess cash for several months." Now that's a first for me. I had no idea that anyone in their right mind would "park" excess cash in a highly volatile vehicle such as a hedge fund. A rule of thumb for sane investors: Do not expose short-term money to market volatility! If the intent was a deliberate short-term commitment of funds to that investment, while considering other investment opportunities, then, well...

LENDER'S $90M HIT IS ON 'HORIZON' | By RODDY BOYD | Business News | Financial | Business and Money

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Monday, July 23, 2007


I just loved that headline. Whatever happens to the NY Times, there will always be a Post. The margin terms, they-are-a-changing. From one extreme to the other, it seems. Is it possible that the market can sort of fix its' own problems, without the politicians riding in like the Texas Rangers?

HEDGE DOUGH NO GO FUND $$ DRY UP | By RODDY BOYD | Business News | Financial | Business and Money

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Index Universe: Hedge Fund Index Debacle

Good discussion of the problem of hedge fund indexes and their "numbers". Failures such as the most recent, not including the Bear Stearns funds' numbers, which were sort of, well, you know, hard to put together, is not the the only problem. The author, Matthew Hougan suggests that even when there is no gross breakdown in such an index, the performance numbers are not going to be exactly "real-time" in nature, but have something of a "serial correlation" issue. As my daughter might perhaps say, "Ewww".

Breaking News - Hedge Fund Index Debacle

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Saturday, July 21, 2007

'Barclays may sue to recover losses at Bear Stearns' -- MarketWatch

Barclay's was an investor at the now-worthless Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leverage Fund? Well, for Pete's sake. They were also a lender to the fund. A conflict of interest? And they are suing to get their investment back? As a lender, would you expect then to have had more or less information about the status of the fund than the retail investors? This will be interesting to watch.

Also, per a WSJ subscription-only article, Barclays Spars Over Its Losses at Bear Stearns it now seems that some of the investors were not happy with what turned out to be pretty radical levels of leverage employed at the fund, but were trying to juice the returns by borrowing part, perhaps half, of their investment in the fund from a bank. In essence, investing in a hedge fund on margin. I personally just have a hard time working up much sympathy for anyone who would treat their own money with such contempt. How could anybody do that?

Barclays considers options for recovering losses at Bear Stearns - MarketWatch

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Thursday, July 19, 2007

Here's What the Accounting Watchdog Keeps Hidden: Jonathan Weil / Bloomberg

Not in the CPA realm, never have been. The conflicts which can come at those doing audits, who after all do wish to keep their clients, can be serious indeed. Many times investors have been stunned at things which come out after a company gets a "clean", unqualified auditor's opinion. Accounting firms have been sued by investors and others, and in well-known instances have been devastated by the outcome. As investors, whether you invest in stocks of single companies or in mutual funds, you need to know that decisions on direct holdings or underlying portfolio holdings are made based on fair presentations of the financial picture.

Hold that thought, and read this: Opinion

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Tuesday, July 17, 2007

Bear Stearns Warns Hedge Fund Investors of Total Loss -- Bloomberg

Yuck. Total. Loss. Well-hedged, all right. Let's see. SPY, which is about as "plain vanilla" a thing as there is in an investment, is up 27.56 percent over 1 year, according to MarketWatch. Well, I'm sure that the reps who sold these funds to the clients really feel for them. Perhaps they'll take up a collection out of their bonus checks to send out a card. Not to be too negative all the time, but something just stinks about stories like this.

Do not buy investment crap. Perhaps, if you are being pitched a hedge fund soon, you should just write the preceding sentence one hundred times. Worldwide

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'Buyback Boondoggle?' -- Matthew Hougan's blog at Index Universe

I've blogged on this a few times. See, I'm not nuts on this.

A quote: “The decline in dividend increases is disturbing, especially in light of continuing moderate earnings growth and the abundance of corporate cash,” [Howard] Silverblatt [senior analyst at Standard & Poor's] said in a statement. “We believe the present wave of corporate buybacks is contributing to the slower pace of dividend growth in 2007."

Hougan's take: "[They] strike me as tantamount to deferred pay raises for corporate employees. Whereas dividends are paid out to current shareholders, buybacks – by reducing the number of shares outstanding – represent payments to both current and future shareholders ... including the holders of vested and unvested stock options."

His bottom line on this: "It seems like a blatant conflict-of-interest for managers – who often hold large options positions – to make decisions about whether to buyback stock or boost dividend payments."

BLOG IU.COM - Buyback Boondoggle?

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Wednesday, July 11, 2007

Stock buybacks are a good thing, right? -- USA Today

Good article. I noted particularly the problem of "companies announcing stock buybacks from 1981 through 1995 averaged 24% more shares outstanding five years later, says Akhtar Siddique, economist at the Office of the Comptroller of the Currency." The ugliest possibility is that the buybacks were just "camouflage" for the dilution of shareholder value due to outsized stock option plans transferring the stockholders' company and its earnings into the hands of managers and favored employees. Cash dividends are a more honest way to reward stockholders. Of course, when the directors are management and management toadies, then that dilution can be seen as a very good thing. To get a simplistic approximation of the percentage of the annual earnings given away, you have to get into the annual report, find the number of shares reflected in the options grants, find the market value per share, calculate the total current value of that many shares, and compare that number to the company's earnings after tax. You may be shocked.

Stock buybacks are a good thing, right? -

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Wuffli's Exit Is Lesson for Banks, Hedge Funds: Matthew Lynn / Bloomberg Op-Ed piece

So, you're the head of this big diversified financial services firm, see. Now it wasn't so long ago, a few years. And you had been reading and hearing about all your competitors setting up their very own internal hedge funds. You were hearing murmurs around the boardroom, 'where are we on this?' are we missing out on something here, again? so you took the chance, after all, that's what you're getting the very big bucks for, isn't it?

But those losses... man, this has gotten rather ugly. Where are all those guys on the board going to come down on this, now? How am I going to face the clients? The shareholders? The reporters?

Alone. And someone will be held very accountable for this.... Opinion


Monday, July 09, 2007

Cheaters in CNBC's stock-picking game? What a Hoot!

I think it is beautifully ironic. Sublime in its own way.

Just for fun, there was a stock-picking "paper portfolio" contest in my class in investments (the CFP curriculum class to prepare for the CFP comprehensive exam,) a few years ago. Being the serious fellow I am, I asked the instructor if the contest wasn't an exercise in bad investing, and would it encourage the class to engage in bad investing? He indulgently and patiently assured me that it was just for fun.

As it happens, my wife happened to see a promo for the recent contest on CNBC with its million-dollar prize, and asked me why I hadn't entered. My answer was the same as before. Even though it is all in fun (I thought,) it still, if I won, would send the wrong message about investing and about me. It is not about utterly disregarding risk in search of maximal short-term gains. Well, what it did was worse -- it lured in some (alleged) out-and-out stock manipulators.

CNBC Calls In a Judge

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Siegel returns from Asia and has thoughts on its' future, and what that means for us

One of the themes of Siegel's book The Future for Investors is international investing, and that US investors need to participate in foreign equity returns in the decades ahead. He has more to say:
Consequences of Asia Rising

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Hedge Fund Manager, Fugitive Berger of Manhattan Investment Fund Caught in Austria

Good! Now let justice be done. Worldwide

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A few thoughts on Ben Stein's latest column.

Ben is someone I would describe as a grand old man of personal finance, who usually retains his perspective when looking at things. You have to like the guy. So what's he saying?

"First, I'm not at all worried about the stock market despite the recurrent panic about subprime mortgage problems and resistance to some loans by lenders in private equity deals (which used to be called, appropriately, leveraged buyouts, or LBOs)." Neither am I. The economy is still just too good, and not looking like 2000 (for example).

Ben rather politely throws verbal ice-water on the hysterical financial media types for all the cat-fits they have had over the sub-prime lending industry's return to sanity: "Subprime is a small sector of the mortgage market...If all [distressed sub-prime loans go] into foreclosure (which is unlikely) ... the real loss might be about .9 percent, or less than 1 percent [of mortgage loans]." He provides enough detail to back this up. The financial media gets awfully lathered up over almost everything. It gets viewer attention but lessens their credibility.

He talks about how traders work, and how he sees their antics as not affecting the market in the longer run. Nicely done, Ben.


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Friday, July 06, 2007

UBS axes Wuffli in surprise shake-up -- FT's Take

Per FT, it was not the hedge fund collapses. but then, further down in the article, "One person close to the situation said that when traders were moved from UBS’s fixed income desk to its new hedge fund business, “we lost all the intellectual capital and the two [businesses] never connected and that caused us to have huge losses. 'We lost all our trading house and as a result the revenue gap between us and Goldman is now $6bn.'

Right. / Companies / Financial services - UBS axes Wuffli in surprise shake-up


Almost missed this one: Long-term care insurance - the shortcomings (USA Today)

Will they pay or won't they? Make certain you understand how the deductible period works; and look out for underpriced premiums which just keep going up, up, and up; heck, just read it. But do note that the chances are more than three times greater that a woman will require LTC for over two years, so if you can only afford LTC insurance for one spouse, consider getting it for the wife.

Long-term care insurance has its rewards but may not be for everyone -

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Monday, July 02, 2007

Bear Stearns Investors Await Tally on Losses -- WSJ

This is ugly: "Investors in two Bear Stearns hedge funds will have to wait until as late as July 16 to learn how much money they have lost." That's to learn what the damage is so far. It did not say that is what they will receive back, or when that will be. As I noted last week, investors in these funds could be said to be locked in like steerage passengers on the Titanic.

Uglier: "Investors are watching the process closely because they believe that other hedge funds also are holding thinly traded mortgage-related securities, and they want to see how far Bear thinks their value has fallen."

And who is invested in all these funds? Pension funds, seeking juiced returns from the large-brained super-traders at the hedge funds. Accredited investors, who are soooo sophisticated. Right. They bought these things. Investors in hedge funds-of-funds, who may not necessarily be accredited investors. Caveat emptor.

Readers of John Mauldin's weekly e-letter got a good bit of detail on the attempted auction by Merrill Lynch of the some of the portfolio holdings of the Bear Stearns funds. No bids on much that was offered. Really ugly. Mauldin's e-letter is free, always good in that it's well written and he actually must be large-brained, not that I agree with all or even most of his conclusions, and viewable on his site, but you have to register. Here's the site.

Bear Stearns Investors Await Tally on Losses -

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