Risk is how investors makes profits in the stock markets. Just two weeks ago, the huskers on Wall Street were all yelling we were in a new economy that will be fueled by corporate mergers and consolidations as well as buy backs and this would go on forever and forever. This was a silly lie. Another hedge fund, a really big on, the Man Fund of Ireland, is now dying. The herds of investors who keep markets alive are now spooked and running like hell for cover as the lions of Bankruptcy stalk and kill them, one by one.
July 27 -- European stocks headed for the biggest weekly decline since March on mounting concern financing difficulties in the credit markets will stifle mergers and acquisitions.
Deutsche Bank AG and Man Group Plc led a drop in financial shares. Valeo SA, Europe's third-largest maker of car parts, and computer-services company Cap Gemini SA slipped after earnings missed analysts' estimates.
Another hedge fund in trouble, a bigger fish. As Bear Stearns discoved, having outside the main group hedge funds does not isolate risk and destruction, it probably makes it worse. This is because if a financial house spins off various funds which they still run, if any of these collapses, they can't hide it within the organization. It is out there in the open for all to see! And all seeing people then run like hell from the parent organization.
All the stupid schemes cooked up to 'spread risk' also spread risk by contaminating everything with risk. Investors must be risk-adverse when risks lead to bankruptcy. Pulling out before the whole house burns down is the art of investment. Just like selling in the housing market, timing is important. It is better to take the potential loss of some extra profits and sell an asset just before a turn than to hang on, overprice it and then get stuck. Many houses for sale these days are overpriced. The market turned back at the beginning of 2006. Most professional home builders cut prices and sweetened deals to get out before the fall was obvious to everyone.
The builder's association spokespeople would always talk about how good things were, how the bottom already was past, etc. This wasn't to boost the hopes of builders, they knew their numbers and knew the loss of 'traffic' was killing them. They know how long these things take to unwind. The happy talk was insurance: to fool customers and to fool competition. Competition always lurks in capitalism. It is the power of capitalism. Competition+labor+resources=wealth. Ordinary people who are home owners innocently put their houses on the market setting the price too high and swiftly, housing surplus builds.
Hope springing eternal, despite no buyers and no 'traffic', they read about how much houses sell in their communities and keep the prices high while the professionals unload all their excess stock by ruthlessly cutting prices to move properties. This is how Wall Street works, too: the professionals unload while their spokespersons talk about optimism and how there is nothing wrong, it is a good time to buy.
In the teeth of an obvious downturn brewing for the last 1 1/2 years, all the happy talk people have been nearly hysterical, trying to trick investors who are not professionals, into believing all was well and the world was going to go into a super-boom, bigger than the one caused by 1% or lower interest rates. This, in the teeth of a rising headwind of hurricane force as all world central banks except for Japan raised interest rates higher and higher due to excess 'liquidity' which is French for 'banks making money out of thin air using their magic wands.'
The world is awash in cash. Global liquidity is a phenomenal force. Some economists like the Conference Board's Gail Fosler call it "the garden of Eden"--low interest rates, lowish inflation. Only intermittent volatility, new record peaks in many markets. Money is being made hand over fist.
One amazing factoid: Central banks bought more securities than the Treasury issued in 2006--a total of $320 billion according to Brad Setser, a former Treasury official who follows the money flows better than anyone.
Some central bank economists believe there is a shortage of fixed income product in the world. That's right. You heard it here first. A shortage. Meaning there's not enough bonds to satisfy pension funds and insurance companies worldwide. No wonder interest rates are so low.
Interesting, isn't it? $320 billion extra 'securities'? I would suggest, they aren't all that secure. Actually, nothing is totally 'secure.' Not even the Bank of Japan! History is littered with the corpses of zillions of past 'securities' that ended up worthless. Whole nations can and do go bankrupt. Some empires go bankrupt. This usually causes vast historic changes and ever-bigger global wars. Up until just a year ago, the extra $300 billion in securities went into real estate. That option is now shut so it is groping about, seeking a way of existing. Pieces of paper sitting in banks not being lent to home owners are sad puppies and usually go for less than the rate of inflation.
In the 1970s, when we had similar financial problems, it went to gold, raising the value to spectacular heights.
July 27 (Bloomberg) -- The risk of owning corporate bonds increased by the most ever in Europe and Asia on concern banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts, according to credit-default swap traders.
A sell-off in the U.S., Asia and emerging markets extended to Europe, where the cost to protect company debt approached the record high in 2005 when General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings. Deutsche Bank AG's risk premium jumped to five times the amount on June 1.
Investor wariness caused more than 40 companies worldwide to reorganize or abandon borrowing plans in the past month. The retreat forced banks to take on $20 billion of LBO loans they had planned to sell for Kohlberg Kravis Roberts & Co. and Cerberus Capital Management LP this week.
And this is bad in the long run. Bankers eating their own is sort of capitalist cannibalism. They got to eat new flesh, not each other. Indeed, the frenzy of pouring money into ventures that were pure cannibal in-feasting, corporations shape-shifting like mad, brought great profits to the financial houses but it was doomed to have a bad ending. Which we are beginning to see. The rush of IPOs has now collapsed and the latest one, Blackstone, is hosing its investors who are now desperately trying to sell. And unlike the housing market where people can put their pathetic houses up for sale for 10 years at a pop, in the stock and bond markets, you put it up for sale, it drops the price of all others instantly. The feedback-system is absolute! You can't make up a price, you hope for a sale at whatever anyone bids.
This is the old fashioned way of selling stuff. It is bascially a minute by minute multiple auction. This is why the floors of all the bourses look like near total chaos with everyone shouting and waving pieces of paper. Or using cell phones and computers these days. The chaos and uncertainty of the stock market is its strength. All attempts at controlling this wild beast, instead of taming it, cause it to turn into Godzilla. Supressing the time-honored emotional as well as crafty planning of gamblers playing with futures always ends up burning down the entire futures house. This is why all these stupid mechanisms created by brokers and financiers who don't want to be bothered with the chaos of attracting and interacting with a host of diverse investors always fail so spectacularly.
I happen to have some fondness for the classic system. I would hope real conservatives would support protecting this system instead of conspiring with rich people to prevert this system and tame is so they make money all the time, no matter what. Damn the investors.
July 26 -- The risk of owning bonds of Wall Street firms soared and their stocks plunged as concerns escalated that investment banks will be hurt by losses from subprime mortgages and corporate debt.
Credit-default swaps on $10 million of Goldman Sachs Group Inc. bonds jumped as much as $18,000 to a record $85,000, according to broker Phoenix Partners Group in New York. Bear Stearns Cos. credit swaps surged as much as $29,000 to $110,000, also a new high. Lehman Brothers Holdings Inc. climbed as much as $24,000 to $104,000. Goldman shares declined as much as 7 percent, Bear Stearns fell as much as 7.5 percent and Lehman dropped 8.3 percent.
``You have a stampede of the animals away from the watering hole,'' said Scott MacDonald, director of research at Aladdin Capital Management in Stamford, Connecticut, which manages about $20 billion in assets.
The 'animals' who are stampeding have a name: investors. The guys who have their hands on the levers of the economic system have to please these animals. Investors are at the base of this organization and like wild creatures, they know when the lions are trying to eat them and they move in a herd for self-protection. They were lured to the watering hole by the Bank of Japan and the Federal Reserve who filled this hole with lots and lots and lots of pretty liquidity, a wonderful lure for thirsty critters! The surface waters were the super-low interest rates and the wellspring of this pool of liquidity is the trade deficit.
Heh. The crocodiles of the financial world ---who speak Chinese right now--hunt in the dark. They prefer to have no one know their own financial wealth. Bottom feeders seek opportunities and falling markets are filled with lots of prey.
Now the pool is muddy and drying up and the beasts milled around in the mud for six months since the brief late February panic when a few lions took out some of these wildebeest investors. The herders assured the herds that all was well, there was still lots and lots of liquidity around the corner and the dark clouds forming were not dust devils but rain. Now, as quite a few dead beasts litter the landscape, the vultures are circling and the hyenas are howling nearby. So quite naturally, the herd of investors bolt, enmass. And they should.
Unless the rulers come up with some system whereby one's investments are totally safe, they must do this. And of course, if investments are totally safe, then where is the risk? No one would gain anything if they didn't risk everything. Trying to fool investors into thinking there is little to no risk is a crime. Depending on them forgetting the past is dangerous. It increases the bolting reflexes.
Here is a few months of news about the most recent hedge fund to see Death's Doors yawn wide:
19 July 2007
Man Group plc announces pricing of $3.8 billion MF Global IPO
Man Group plc today announces that the initial public offering of 97.4 million shares of MF Global Ltd. has been priced at $30 per share raising total gross proceeds of $2.9 billion. MF Global is the brokerage business of Man Group and was formerly known as Man Financial. MF Global’s common shares are expected to begin trading today on the New York Stock Exchange under the ticker symbol “MF”.
The 97.4 million shares represent approximately 80% of the outstanding share capital of MF Global. Man Group has granted the underwriters an option to purchase up to 9.7 million additional common shares of MF Global in the offering.
As previously stated, subject to shareholder approval, the net proceeds of the IPO will be distributed to shareholders in the fourth quarter of the calendar year.
Simultaneously with the IPO of MF Global becoming effective, Kevin Davis, CEO of MF Global, has stepped down from the Board of Man Group plc with effect from today.
Peter Clarke, Group Chief Executive of Man Group plc said:
“The successful IPO of MF Global completes our strategy to focus on the Group’s leading position in alternative investment management. We believe that this focus, combined with our strengths across investment management, product structuring and distribution will deliver attractive and innovative products for our investors and continued strong returns for our shareholders.”
Like a herd of warthogs, they wallowed into the churned up muck around the receeding equity fund pool. They thought sheer mass and speed would carry them past the lurking lions that have already killed a number of hedge funds who ran into the pool before them. They believed their sheer size would save them despite the gaping, bleeding wounds on Bear Stearns.
Listed hedge fund manager Man Group PLC said chairman Harvey McGrath is retiring with non-executive director Jon Aisbitt taking over as chairman on Sept 1.
Aisbitt, a chartered accountant, joined the board of Man Group in August 2003. He has over 20 years' experience in international corporate finance, including being a partner and managing director in the investment banking division of Goldman Sachs.
Goldman Sachs thought they were gods but their stocks are dropping like wingless angels. Everyone in the Wall Street game imagine the guys manipulating the system are really talented people who can manipulate themselves out of difficulties. Instead of realizing they are subject to the logic of the wild herd of investor beasts, they imagine they can move this herd about skillfully. It is easy to do this when the herd of investors are relaxed and trusting. But if they are suspicious and angry, they become impossible to herd. I used to herd huge oxen and lots of sheep. If they were happy, I bang on the feed bucket and they run home and go into their stalls. If they are agitated or unhappy, they run all over the place including right over anyone stupid enough to get in their way. You can't stop them. Man Group is based in Europe. Interest rates there are rising rapidly. Like the Australian groups, they are now very exposed due to this. The housing and merger boom is now over and they are over exposed. Changing officers won't change that harsh reality.
July 19 -- Shares of MF Global, the brokerage unit of Man Group Plc, dropped almost 10 percent in their first day of trading, amid investor concern that financial services firms may suffer from the shakeout in credit markets.
Man Group, the world's largest publicly traded hedge fund manager, raised $2.92 billion yesterday from the initial share sale of MF Global, about 23 percent less than it sought. The stock fell $2.67 to $27.33, at 3 p.m. in New York Stock Exchange composite trading, and earlier sank 9.6 percent to $27.13.
I chose this group to highlight how this panic evolved. Up until the 19th of July, everyone believed the lies that there was unlimited liquidity available just aching to be captured and spent. The rulers needed to feed these lies to attract the Wildebeest investors to the muddy watering hole. But the actual sale floundered, badly. A 1/4 fall from the goal is significant. This, like all deals, was offered to the big guys first who gave it a pass because they were all scared of the Bear Stearns collapse and were thinking not about drinking from the watery hole but running to the high ground to get a better view of the whole herd. There, they spotted the lions stalking everyone.
These lions are bankruptcy creatures. The blood dripping from their fangs is red ink. They can't be stopped except by eating more assets to give them what they crave: money with interest. This is why, when interest rates rise, they get more and more active. They can't be stopped by printing money, either, for that is double red ink and thus, they get even stronger, faster and more of them.
Man Group, the British hedge-fund firm, priced the initial public offering of its MF Global brokerage unit well below the expected range. The U.S. offering raised $2.9 billion, about $900 million short of its goal. The Financial Times said the low offering price was the “latest sign of nervousness surrounding companies with exposure to the credit markets.”
Are private equity and hedge fund investors getting fed up with Tinseltown? Reuters reports that the funds, which have poured $10 billion into Hollywood films, are losing patience with long wait for profits.
Byzantine movie accounting rules provide that lenders, distributors, theaters and profit participants such as actors and directors, take the first cut of profits, so that a film that clears $100 million at the box office may not immediately return money to its private equity and hedge fund backers.
And July 19th was the high water mark for the party. Note the story about hedge funds putting investor funds into Hollywood. That is totally stupid. Hollywood always hoses investors! Backing movies is a great way to lose excess pounds. Better to go straight to Las Vegas to lose your shirt.
July 26 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said the meltdown in the subprime mortgage market reflects a reassessment of risk that doesn't pose a threat to the economy.
``I don't think it poses any threat to the overall economy,'' Paulson, a former chief executive officer of Goldman Sachs Group Inc., said in an interview today in Washington. ``Risk is being repriced. As we get a broad reassessment of risk, we are getting volatility.''
Snort. Risk is overpriced? Is risk only slightly more than the real rate of inflation? Of course not! When inflation soars, people seek increasing risk. This is why oil price hikes cause stock market collapses several years after the price hikes begin. And Paulson should retire or stop lying. Unlike the liars on Wall Street, he represents our nation, not Goldman Sachs! So he has a duty to tell us the truth! Volatility is risk! If there is no volatility, there is no profits! This is simple capitalism. Sometimes people think they have a sure thing. They bet on Sea Biscuit and win every time! Only the pay off is lower and lower as the top race horse wins. So they begin betting on three legged nags, hoping Sea Buiscuit breaks a leg. This is 'risk'. This is why betting on the Trifecta makes more money than betting on a single race horse. The odds are against winning.
If the trend accelerates, it becomes even tougher for home buyers to get mortgages, pushing home prices lower. It also becomes more expensive for companies and hedge funds to borrow. That could cut off the flow of money into stock buybacks, mergers, and acquisitions, especially the private equity buyouts that have fueled the bull market. "Just like raising rates, this acts as an economic brake," Larkin says.
"People are starting to get nervous," Larkin adds, but it takes a while for these trends to show up. "It doesn't just — boom — happen." Are there lots of other forms of bad debt out there? Are lenders — as Larkin jokes, "using their garage door as collateral?" No one knows. "That's where the risk is," he says. "There's not a lot of transparency here."
When there is no transparency, there is fraud. And risk increases, of course. Magicians love the dark but so do lions. This is why most of their hunting is at night. And Mr. Larkin is lying when he says things don't just go boom. They certainly do. Anyone watching crowds and herds knows all about stampedes and panics. And once they begin, one can't go in the opposite direction. You get run over.