Archive for Investing

16 May, 2008 | No comments

Hedge Funds Eye Shareholder Moves

Some hedge funds with heavy exposure to complicated, often illiquid securities likely are in for a rough ride in the next few months if investors take out their money.

Many funds’ returns have suffered. Heavy redemptions can deepen losses. The size of any exodus won’t be clear until Sept. 30, the deadline for paying August redemptions.

Some shareholders probably will bail if their funds are hurt by hard-to-price securities. That can make those securities less liquid. Many are linked to the subprime mortgage market.

The average hedge fund was up 0.37% in July, according to Hedgefund.net, which tracks almost 3,500 funds. That left them up 7.74% for the year. That beat the S&P 500 index, which returned 3.64%.

But funds whose strategies focused on the finance sector 37 funds fell an average of 3.88%. That was the worst of all sectors HFN tracks. It left that sector down 5.21% for the year.

Meanwhile, hedge funds that invested in the mortgage sector soared 13.07% on average in July.

Much of that gain was due to the few funds among a total of 15 in that sector that shorted mortgage securities, says Joel Schwab, managing director at HFN.

In May and June, mortgage hedge funds’ average returns were 0.25% and 3.64% respectively, and the range among funds was narrower.

August results won’t be reported until the month’s end at the earliest.

Hedge funds generally don’t let investors exit immediately, as mutual funds do. In the first six months of 2007, hedge fund assets rose 20.4%, to $2.59 trillion. Of that increase, $268 billion is new allocations.

Hedge fund assets have grown from $845 billion in 2003 to $2.6 trillion as of mid-2007. Mutual funds run $10 trillion.

Mortgage Meltdown

The subprime market meltdown didn’t make itself felt until the latter half of July. Several hedge funds had problems pricing instruments where the market all but dried up.

Three BNP Paribas’ funds that invested in subprime-related securities were frozen shareholders could not redeem assets because their net asset value couldn’t be calculated; there were no buyers or sellers.

Hedge funds often require shareholders to wait up to 90 days to take their money out.

Big redemptions can force hedge funds to sell ailing securities. That can push prices down more. It gets worse if a hedge fund has invested in illiquid securities.

Bear Stearns had those problems with two hedge funds. It froze redemptions. Goldman Sachs had to inject $2 billion into one of its funds.

Because of notice periods, some shareholders industrywide won’t be able to remove assets until Sept. 30 at the earliest. In the meantime, some hedge funds have to scramble to raise cash if the market doesn’t rally.

David Friedland, president of Magnum U.S. Investments which manages $500 million in hedge fund money says when hedge funds stop redemptions or can’t cover them, it often is because they can’t price a security and don’t want to risk underselling something.

“With stocks, it’s easy. There’s an exchange and you can get a price,” he said. “With debt securities, it’s different, you have to look around.”

People may prefer to invest in a hedge fund that is diversified and whose manager has been active since 1998 or earlier, Friedland says.

Those who remember Long Term Capital Management, which collapsed that year, are less likely to repeat that firm’s mistake: betting on single market sectors, expecting them to behave exactly as they had in the past.

Now, funds whose underlying instruments were linked to mortgage-backed securities will lose the most, Friedland says. They depended on the housing market staying strong.

An exodus of talent also will hurt, Friedland says.

As returns fall short of certain thresholds, many hedge funds collect zero or smaller fees. Managers and others won’t get bonuses. Many will leave. Some shareholders will follow favorite managers out.

Wider Wariness

“People got upset. Look at Bear Stearns,” said Charles Gradante, managing principal at the Hennessee Group.

Bear’s funds went under despite the firm selling some $4 billion of securities to cover redemptions.

Events like that make investors wonder whether they can always get their money out, Gradante said.

Hedge funds originally were designed to be relative return vehicles, smoothing out market volatility.

But that was before the proliferation of cheap money, complex derivatives and computer tools, which tempted more hedge investors to take risks. Many of those risks have now lost money, Gradante says.

16 May, 2008 | No comments

Bond Prices Up On Weak Housing Data, Lowest Consumer Confidence Since 2005

Treasury debt prices rose Tuesday after data suggesting weaker economic growth supported investor expectations that the Federal Reserve would continue to cut benchmark interest rates.

Data released Tuesday showed a continued deterioration in the housing market, while consumer confidence fell to a two-year low. Also on Tuesday, two major retailers, Lowe’s and Target, issued warnings about earnings and September sales, respectively.

Gains were more pronounced in the shorter end of the Treasury curve, which has a higher sensitivity to changes in interest rates from the Fed.

The two-year Treasury note traded 3/32 higher in price for a yield of 4.00%, from 4.05% late Monday, while the benchmark 10-year note traded 2/32 higher in price for a yield of 4.63%, from 4.64% on Monday.

Data showed last month’s resales of U.S. homes fell a sharp 4.3% to an annualized rate of 5.50 million units, the National Association of Realtors said. Economists had expected an annual 5.49-million-unit pace.

While the drop in sales was not quite as strong as forecast, analysts were surprised that inventories of single-family homes and condos rose 0.4% to a 10-month supply and the highest since records began being kept in 1999.

In another report, home prices in the 10 largest U.S. cities fell 4.5% in July compared with a year earlier, the sharpest drop in 16 years, according to the S&P/Case-Shiller national home price index.

The bad news on the housing front appeared to be taking its toll on consumers. The Conference Board said its gauge of consumer confidence fell to 99.8 in September, the lowest since November 2005.

Fed fund futures suggest traders are pricing in a 90% chance the central bank will cut rates by 25 basis points at their Oct. 30-31 policy meeting, up from about a 72% chance late Monday.

The five-year note traded 6/32 higher in price for a yield of 4.27%, from 4.31% late Monday, while the 30-year bond traded 6/32 lower in price for a yield of 4.90%, from 4.89% on Monday.

16 May, 2008 | No comments

Futures Point To Weak Open

Futures pointed to more losses at the open Wednesday. The Nasdaq is down 10 points vs. fair value, the S&P 500 -5, Dow -50.

In economic news, consumer prices edged up 0.1% in July, the smallest in eight months and in line with expectations. Core prices, which strip out food and energy, rose 0.2%, as expected. On a year-over-year basis, core consumer prices are up 2.2%.

The New York Empire State Index dipped to a still-strong 25.1 in August from 26.5 in July. Estimates called for a drop to 19.

Before the open, the Fed will release July industrial production data.

The Fed also said it will likely conduct open market operations at 9:30 a.m. Now the central bank didn’t take any action Tuesday, and the fed funds rate is current trading at 4.75% well below the target 5.25%.

Countrywide Financial () dropped about 7% in the preopen. Merrill Lynch cut the mortgage lender’s rating to sell from buy, saying market liquidity woes could further hurt the business.

Thornburg Mortgage () late Tuesday postponed its second-quarter dividend until Sept. 17 and will halt new originations for a few days amid the ongoing credit crisis. But it said it’s not mulling a bankruptcy filing. The lender is looking higher after plunging 47% Tuesday.

The Commerce Group’s () mortgage unit, Bay Finance, would stop writing mortgage effective immediately.

Applied Materials () fell 4% in pre-market trading. Late Tuesday, the chip equipment maker delivered fiscal Q3 earnings, excluding items, above views. But orders fell and it warned of flat to lower orders for the current quarter.

Agilent Technologies () was trading sharply lower in the premarket. After the bell Tuesday, the maker of measurement equipment delivered fiscal third-quarter profit and revenue below views. It also cut its Q4 earnings and sales forecast.

Deere & Co. () edged higher after the farm equipment maker reported better-than-expected fiscal third-quarter earnings. But its sales fell a bit short of views.

In M&A news, Citrix Systems () said it would buy privately held XenSource for about $500 million in cash and stock.

16 May, 2008 | No comments

Phishers try to lure banks, insurers

Phisherstargeted Canada’s leading financial institutions on Wednesday, a federal financial regulator says.

Some banks, insurance andtrust companies received a “phishing” e-mail, purportedly from theFinancial Consumer Agency of Canada (FCAC), the agency said Wednesday.

“We received word from most of the major financial institutions,” spokesman John Kane said.

The e-mail said FCACwas investigating a complaint against their organization, and told therecipients to click on a link to view the status of the complaint.

But the link would send the recipient to a site containing harmful software.

The agency does not send such e-mails, and does not direct people or financial institutions to links on its website, it said in a release.The e-mails “are fraudulent.”

FCAC enforcesconsumer-protection laws and monitors codes of conduct at banks and federally incorporated trust, loan and insurance companies.

16 May, 2008 | No comments

Energy Futures Smash Records As Oil Tops $120 A Barrel, Dollar Falls Again

U.S. crude futures ended above $121, paring gains after rallying to a record high on a weak dollar, supply concerns and a report by Goldman Sachs predicting $150-$200 crude.

Gasoline and heating oil futures hit new peaks as well, but trimmed gains near the close on some demand concerns.

On the New York Mercantile Exchange, June crude settled up $1.87, or 1.56%, at $121.84 a barrel, after trading from $119.33 to a high of $122.73 that eclipsed Monday’s $120.36 record.

From a year ago, prices are up $59.91, or almost 97%.

News that higher U.S. gasoline prices and a slowing economy will cut into U.S. oil demand through the summer driving season much more than previously thought spurred some late selling, traders said.

News that U.S. retail gasoline demand dropped last week, according to data from MasterCard Advisors, also fueled selling near the close.

An expanded Reuters poll yielded a forecast for crude to be up 1.6 million barrels. Distillates were seen up 800,000 barrels and gasoline down 100,000 barrels.

U.S. Energy Information Administration petroleum inventory data is due Wednesday at 10:30 a.m. EDT.

In London, June Brent crude ended up $2.32, or 1.97%, at $120.31 a barrel, a record, trading from $117.69 to $120.99, a new intraday high.

June RBOB gasoline finished up 5.26 cents, or 1.72%, at $3.1055 per gallon, a record, trading from $3.04 to a new intraday peak of $3.1260. The crack spread rose to $8.59, from $8.25 on Monday.

June heating oil ended up 4.70 cents, or 1.42%, at a record $3.3535 a gallon, trading from $3.2883 to a record $3.3712. The crack spread ended at $19, up from $18.90 on Monday.

The dollar fell further against the euro and a basket of six major currencies for a second day Tuesday, after earnings from home mortgage provider Fannie Mae came in weaker than expected.

Goldman Sachs predicted that crude oil could rise to $150 to $200 a barrel on a lack of output growth.

The number of options positions betting on $200-a-barrel oil has tripled since the start of the year, according to Reuters data.

In Nigeria, Exxon Mobil returned output to normal after an eight-day strike, while Shell said output shut by attacks would restart “within days.”

Niger Delta rebels said former President Jimmy Carter had agreed to act as a mediator, if invited by Nigeria’s government, and the group promised to declare a cease-fire if talks went ahead.

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