6 replies to this topic

[nimblebear]

Who do you believe ? 1. "This whole subprime/CDO [collateralized debt obligation] crisis is spilling over to other parts of the financial sphere," said Paul Biszko, senior emerging markets analyst at RBC Capital Markets. "LBO [leveraged buyout] financing is being shut down. Private equity deals are not going through. That is being reflected in reduced risk appetite." "This is a broad emerging markets sell-off," Biszko said. "Everything is down today." 2. Fears are growing that troubles in the subprime mortgage market are spilling into other areas of the financial sphere, with major bond deals postponed on Wednesday and the reported suspension of redemptions from an Australian hedge fund on Thursday. 3. The market for Collateralized Loan Obligations has almost shut down in recent weeks, making loans for leveraged buyouts and corporate borrowing harder to sell, experts said Thursday. CLOs are packages of leveraged loans that are sold by investment banks to hedge funds and other institutional investors. Roughly $100 billion of the vehicles were issued in 2006 and about $58 billion were sold in the first half of 2007, according to Steven Miller, managing director of Standard & Poor's Leveraged Commentary & Data. The fast-growing market helped fuel the leveraged buyout boom in recent years, which in turn has been a major driver of stock market gains. However, that trend has stopped abruptly in recent weeks, Miller and others said. "It's absolutely shut down for any new CLOs in the last two weeks," said Kingman Penniman, president of KDP Investment Advisors, an independent research firm focused on high-yield bonds and leverage loans. Existing CLO deals continue to progress, Miller said, "but the market for brand new deals getting a financing line and warehousing has shut." "That's very important," Miller added. "The CLO market has been the cornerstone of the leveraged loan market. Lower demand from CLOs means it's harder to sell loans." The problems in the U.S. subprime mortgage market could spiral out of control into a global financial crisis, economist Mark Zandi said Thursday. With a "high level of angst" in the financial markets about who will take the losses from more than $1 trillion in risky mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis, said Zandi, chief economist for Moody's Economy.com. A global meltdown is not likely, but the risks are growing, Zandi emphasized in a conference call with reporters following the release of a new study on subprime debt that concludes that the housing crisis could be deeper and last longer than investors now believe. Read the latest data on home sales. And it could spread. "Mounting mortgage delinquencies and defaults now pose the most serious threat to the global financial system and economy," Zandi said in his report. "If there is a fault line in the global financial system, it runs through the U.S. housing and mortgage markets," he said. 4. The problems in the U.S. subprime mortgage market could spiral out of control into a global financial crisis, economist Mark Zandi said Thursday. With a "high level of angst" in the financial markets about who will take the losses from more than $1 trillion in risky mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis, said Zandi, chief economist for Moody's Economy.com. A global meltdown is not likely, but the risks are growing, Zandi emphasized in a conference call with reporters following the release of a new study on subprime debt that concludes that the housing crisis could be deeper and last longer than investors now believe. Read the latest data on home sales. And it could spread. "Mounting mortgage delinquencies and defaults now pose the most serious threat to the global financial system and economy," Zandi said in his report. "If there is a fault line in the global financial system, it runs through the U.S. housing and mortgage markets," he said. 5. "The dramatic deterioration in the mortgage market suggests at least the possibility that the credit crunch in the mortgage finance industry could become as bad as in the bad old days of the 1970s and 1980s," Hatzius wrote. Zandi used another historical comparison: the Asian financial crisis of the late 1990s. "Unlike the financial crisis of a decade ago, however, global capital would likely flow away from U.S. markets, not to them, as the genesis for the crisis lies within the U.S. financial system." oooorrrr.... This clown: 6. Treasury Secretary Henry Paulson, an old Wall Street hand himself, tried to reassure markets with a mid-afternoon televised pep talk. Lenders and borrowers should exercise more "discipline," he said, and he repeated his view that any problems in the subprime market would be "largely contained." ................................. I think the markets spoke pretty clearly today. Sell first; ask questions later. So which hedge fund will be next ? Who will be the next dominoe ? With a "high level of angst" in the financial markets about who will take the losses from more than $1 trillion in risky mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis, said Zandi, chief economist for Moody's Economy.com. .................................. This whole global equity boom has been driven by one thing - cheap, easy money. When spigot gets turned off (as in credit markets shutting down), it'll be interesting to see how equity markets react. MAR

[beta]

"Unlike the financial crisis of a decade ago, however, global capital would likely flow away from U.S. markets, not to them, as the genesis for the crisis lies within the U.S. financial system."

This is the key point, IMO. Direction of money-flows.

The guy who heads the China operations of a major financial center once told me that money flows change directions every 8-10 years. During the IMF crisis, money poured in from Asia to the US as a "safe haven," setting off the boom in US treasuries.

But this time is different, since "If there is a fault line in the global financial system, it runs through the U.S. housing and mortgage markets."

Put yourself in the shoes of a wealthy USD-bagholder. Where will you store your wealth ?

Wealthy people do not disappear, they simply change asset classes.

[ogm]

"Unlike the financial crisis of a decade ago, however, global capital would likely flow away from U.S. markets, not to them, as the genesis for the crisis lies within the U.S. financial system."

This is the key point, IMO. Direction of money-flows.

The guy who heads the China operations of a major financial center once told me that money flows change directions every 8-10 years. During the IMF crisis, money poured in from Asia to the US as a "safe haven," setting off the boom in US treasuries.

But this time is different, since "If there is a fault line in the global financial system, it runs through the U.S. housing and mortgage markets."

Put yourself in the shoes of a wealthy USD-bagholder. Where will you store your wealth ?

Wealthy people do not disappear, they simply change asset classes.

Put yourself in a position of money manager .. Lets say you survived the subrime crisis. Where do you put the money to work right now ? You can't just sit in cash, and bonds aren't yielding much again...

I think the best thing to do, is to start picking up high yield stuf.. The stuff that was hugeley popular for 3 years, and now you can't give it away.

When yield spreads were low, everyone was chasing the high yield to pick up 0.25%, now the spreads are 3+%. The difference is that right now no one wants to touch that stuff.. Maybe thats the place where you buy 8-9% yielding funds, dividend payers and so on ? Not when the spreads were low.

I think there is a lot of opportuniteis created by the carnage in the bond land. Its just a matter of finding them. And then a few month from now the fear will go away, and everyone will start chasing yield again... BECAUSE THEY HAVE TO. Its their job to perform and deliver returns. They can't sit in cash.

[ogm]

Here is the simplistic version of a credit cycle.

[JAP]

But Larry Cudlow says sub primes were never a problem. In fact, he's had the CEO of Countrywide on his show several times and he agreed!

[pdx5]

Sub-Prime effect on economy in general and housing in particular would have been contained if, S-P loans were limited to low priced houses only. But that is not the case. A year ago, it was not hard to get a half million $ mortgage even if your credit rating was sub-par. So, how can the sub-prime be contained when it affects houses in a broad spectrum of price ranges? When a house goes in foreclosure, it affects all houses in its price range. There is some good news however. The percent of loans in the S-P category is small, and therefore housing will recover from the downtrend. I am giving it another year.

[Trend-Shifter]

Maybe another shoe to drop.... 401K funds typically have a "managed income fund" as a STABLE investment. Similar funds as trading account settlement. In the prospectus it states that they TRY to keep a value of 1, but it is not guaranteed. They also state that the fund portfolio can contain "mortgage backed securities". What happens if these funds change value? What will Joe 401K or those in 'sorta cash' in their trading accounts do?