Tuesday, August 26, 2008
Jefferson County expects to default on its $3.2 billion sewer debt Friday and likely will not enter into another payment extension with its Wall Street creditors, Commission President Bettye Fine Collins said Monday.
At that point, the commissioners likely will authorize attorneys to begin bankruptcy proceedings, she said.
Collins said she had hoped a deal could be worked out without the county filing the largest municipal bankruptcy in the nation's history, but she now thinks that such a deal is unlikely.
Who is insuring this:
When the county defaults, bond insurers Financial Guaranty Insurance Corp. and Syncora Guarantee Inc. are required to cover the payments under an agreement with the county. Both insurers would expect the county to reimburse those payouts in full, as outlined in that agreement.
But this is where it is "different this time". Not only is it different, I think it may be unprecedented in nature. When I look at my Bloomberg monitor each day that contains my 100 most important indices, companies, commodities, bonds, bond spreads, preferred shares, etc, I shudder. The reason I shudder is that my screen doesn't have just one "problem child". It looks like a screen that contains many "dead men walking".
on the GSE's
While I have been expecting nationalization for quite a while, I am intrigued along with my peers and colleagues as to why the bailout is taking so long to accomplish. This is where it gets interesting and dangerous from a systemic point of view. My hunch is that the reason for the delay is that the Treasury Department is "peeling back the onion" on Fannie/Freddie and finding out just how much of a mess the two of them are in.
dead man walking cycle
It is a pattern that is not terribly dissimilar from the emotion charts I like to focus on so much. In the graphic below, I will offer my "recipe for disaster" for a bank or brokerage firm. I would like this cycle to be called, "The Dead Man Walking Cycle".
Monday, August 25, 2008
I found that little data point interesting in a bloomberg article. Not sure what time that is of but Wall St. is entering a stand still. 35% decline is huge!!
Interesting that I didn't get text messages, emails, and phone calls from all my bearish friends complaining that the market is down while Fannie and Freddie are way up when last week I was barraged with such when Fannie and Freddie were way down and the market wasn't following. Like I said last week the base case of the equity get wiped out is a non event at this point I think. What matters is the preferred, debt, and the structure. The common is just a trading vehicle.
Interesting the market is down today. It makes me kind of think that the street was expecting or pricing in some kind of big news over the weekend on the GSEs or Lehman to take out some of the unknown. When that didn't happen the market sold of. Just theorizing.
Friday, August 22, 2008
Illegal immigrants are returning home to Mexico in numbers not seen for decades
Some say illegal immigrants are leaving because a soft economy has led to fewer jobs, causing many laborers to seek work elsewhere.
Others argue that a tough stance on immigration through law enforcement has spread fear throughout the illegal population.
we are not talking small numbers
The illegal immigrant population in the U.S. has dropped 11 percent since August of last year, according to the Center for Immigration Studies. Its research shows 1.3 million illegal immigrants have returned to their home countries.
I feel like I need to qualify this post somewhat so some of my investing friends will still be friends with me. :) I take the view that almost any way of looking at the markets can be a tool at the right point in time. You don't want to be the carpenter that every problem looks like a nail and so you only reach for a hammer when you need a calculator.
Whatever the reason, I really only find technical analysis useful in bear markets and a year ago never looked at it at. The last time I spent a decent amount of time looking at it is back in 2001 and 2002. I find it a useful tool in bear markets. The reason is because correlations of stock prices often go to 1 in bear markets regardless of what fundamentals are. In a bull market, in normal times, stocks usually react on their own merit. They move up and down on an individual stock basis. In bear markets if stocks are going down, usually all stocks are going down regardless of how the company is performing.
Thursday, August 21, 2008
The most amazing thing of all (in my opinion anyway) is that the VIX is down over 4% today. Geopolitical tensions, oil, fannie and freddie, etc etc. are all rearing their flaired Cobra heads and the market reacts by selling down fear. Amazing.
Wednesday, August 20, 2008
I got several emails and texts all days about how great the markets were doing with FNM and FRE down so much. I am not sure they matter all that much anymore. The consensus is that the debt will be backstopped and the common equity will be wiped out. The market knows that and unless perception or reality changes in some form or fashion I don't really think FNM and FRE matter so much. I think it is much more about LEH, AIG, and GS.
Interesting how this Russia thing is playing out. The ante is definitely increasing. So far the markets (including Europe) are shaking it off. I don't think there will be any military confrontations but there could still be some significant economic fallout yet to come from the tensions.
The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete.
Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.
Growth is still positive at an annualized 2.1% which is down from 19% at the beginning of the year. I had no idea that the growth of the money supply was cliff diving in this manner. There are a few economist who believe that the money supply worldwide is set for a major contraction as central banks are not forced to pump billions in liquidity into their currency to support the U.S. trade deficit since the trade deficit is collapsing on the collapsing U.S. consumer. The theory goes that this will cause worldwide growth to grind to a screeching halt over the next 12 months.
Tuesday, August 19, 2008
Asian investors bought 30 per cent of Tuesday’s deal, compared with 41.3 per cent of Freddie’s five-year sale in May. Asian investors purchased 22 per cent of Fannie’s offering last week compared with 42 per cent of a similar issue in May.
This lack of participation resulted in of course much higher borrowing costs.
Freddie paid 4.172 per cent, a spread of 113 basis points over Treasuries, to sell the $3bn in five-year notes. That compares with a spread of 69 bps, or a yield of 3.751 per cent, Freddie paid to sell $4bn in five-year notes in May.
If the treasury has indeed backed this paper, why would the spreads still be so high? I think it has less to do with the credit quality and more to do with foreign capital sources drying up. Maybe this is just because of the questions surrounding FNM and FRE but if there is something bigger going on here it could have profound implications.
The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.
In an ominous warning, he added: “We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one — one of the big investment banks or big banks,” he said.
Monday, August 18, 2008
Interest-rate derivatives are showing that investors are preparing for another round of turmoil in credit markets amid renewed concern that the U.S. will have to bail out Fannie Mae and Freddie Mac.
The five-year swap spread traded at more than 104 basis points late yesterday. The spread moved above 100 on July 17 for the first time since March, then retreated later in the month. The spread peaked at 116 basis points on March 6, the most since at least 1988, when Bloomberg began compiling data.
This whole discussion below is centered around a core fact. That I believe the markets are overvalued and fundamentally will be heading lower at some point. If that is my premise than it just becomes a timing issue. I am not trading something I don't fundamentally believe. It also wouldn't matter except for the fact that I am looking to place index bets which I don't do very often.
I mentioned in a previous blog I thought the market may have topped last Monday and I am continuing to try and figure that out. The market today did a quiet decline today. What I mean by that is it just started going and kind of eased its way down all day. People blamed on the Barron's piece on the GSE's but I thought that was stupid. Article had what everyone already knew. The market also went down as oil went down which was interesting.
Looking at the markets we are now overbought. The length of the rally has not been as long and looking at the S&P it has not been as violent. I think both are possibly it may be misleading.
The rally has not been as long but I think the bull story is much weaker than it was in the October and April rally as it was in January when the rally was shorter. October was after the Fed first stepped in. Things fundamentally were still alot better and some historical precedent (even if I thought it was flawed) that the Fed saved the day. Then you had the April May rally which was also a long rally and here you once again had the potential for things fundamentally changing if confidence was suddenly restored to the system. The credit markets improved initially. Now it is more like January when you have none of that. Credit markets are hemorrhaging with the CMBX hitting the widest spreads today since this thing started, the ABX at its lows and the CDS spreads widening. Nothing changed in July besides some technical issues with shorting forcing a giant short squeeze. The Merrill Lynch news that everyone herald as a bottom was simply just bad news. You also have world markets crumbling in this latest rally. People will point to oil and the dollar but oil going down (no plummeting) is hardly a sign of strength. So bottom line is the the length and depth of a counter trend rally should be shorter.
What about the violence of the move? Once again I think this is misleading. The S&P 500 has only rallied 8% from low to top compared to moves of greater than 10% previously but dig a little deeper and the rally has been much more substantial and violent. The Russell 2000 rallied 17% (similar to the April rally) but in half the time. The XLF rallied over 35% from top to bottom, by far the biggest rally in the XLF in the counter trend rallies. Why has the S&P 500 been the losing duck? Well it may have to do with energy rolling over. Remember in this rally companies dealing in commodities have gotten slaughtered and that makes up over 20% of the S&P. The Russell 2000 actually has more of its makeup in financials than the S&P 500 does.
All we are talking about is probabilities that we are done making new highs. So fundamentals are not part of the current discussion.
A couple of things to watch. One is the S&P moving below 1274 tomorrow. Another is Goldman. Why? I think traders are watching this very closely. It is right at 160 where it has bounced every time before. It has moved down from 183 to 160 in a week (much bigger move than the markets) and I have heard there is alot of chatter on the trading desks about some problems at Goldman and Goldman breaking 160. If it does that I really think it could bring down the entire markets. I know traders are watching it. You should be also.
I read this Saturday which are last weeks comment from Hussman which I found interesting (I only read his stuff off and on)
With bonds and utilities deteriorating, stock market internals are becoming unusually hostile. This sort of joint deterioration in interest sensitive securities has often provided important warning of steep subsequent losses, as we observed for example in 1966, 1987, and 1990. While the market is still sustaining something of a relief rally from the lows of a few weeks ago, I've noted that hostile yield trends have a tendency to cut such advances short, even when bearish sentiment and oversold conditions would otherwise invite more sustained bear market rallies.
I tend to agree. I actually thought last week Monday may have marked the high point for this rally. It would have been a classic top for a market rally. Huge week up the previous week (actually previous several weeks) followed by a last short squeeze only to get slammed down at the end of the day to finish about flat. The financials then broke down the following three days with the XLF closing below 21. Still to early to tell but it was the first shot of their being a top in the current rally. Since Monday is has just been kind of a battle ground. We had a couple of these such tops in the April / May rally also. One around April 10th and then another around the 5th of May. Who knows, all I am saying was that I went into Tuesday thinking that may have been it which was the first time I had felt that since the current rally started about a month ago. Time will tell.
This is Hussman's latest weekly commentary.
The stock market remains relatively overbought in an unfavorable Market Climate, which continues to pose substantial downside risk. Overbought conditions in unfavorable climates, and oversold conditions in favorable climates, are about the only times when I have any expectations at all about near-term direction. There's a relatively high degree of complacency here, reflected by the suppressed level of implied volatility and the general consensus that bad news has been priced into stocks. But against that, we're seeing a fresh blowout in credit spreads, now extending beyond financials and into a broader range of corporate debt (witness the spike in the ratio of Moody's Baa/Aaa yields). Meanwhile, the persistently high level of new claims for unemployment, along with a wide range of other economic data, is entirely consistent with the thesis that a U.S. recession began in January.
I agree. He goes on to write about the dollar this week and thinks it may have topped. That I disagree with but have no position either way besides being long dollar's because I live in the U.S. I think the dollar could be done going down for awhile though in the long term it will probably be lower.
Saturday, August 9, 2008
Friday, August 8, 2008
I am currently really proud of myself and disappointed with myself. I am proud of myself because yesterday it was very tempting to short. The news was death and fundamentally it added to the compelling case of shorting some more. Well all day I talked myself out of it because it didn't look like anything was different in the markets that it wasn't just a natural pause before more bad news would be bought. On the disappointment side, I had decided that if we get the natural pull down I wanted to sell some covered puts on my short. Well the news was so bad yesterday I couldn't bring myself to do it. So I missed the opportunity.
Today news flow while not as bad as yesterday is also bad. Of course this is the type of market where bad news is bought and horrid news is quietly sold. The Fannie Mae news was not good today. No matter how you slice and dice it there are some financials that should be declining today based on the FNM earnings release. If you read their conference call it is interesting how much they discussed how bad July was. The other interesting thing was in their press release which calculated risk actually pointed out.
[Fannie will be] ramping up defaulted loan reviews to pursue recoveries from lenders, focusing especially on our Alt-A book. The objective is to expand loan reviews where the company incurred a loss or could incur a loss due to fraud or improper lending practices. To achieve this, we are increasing post-foreclosure loan reviews from 900 a month in January to 4,000 a month by the end of the year, expanding our quality-control reviews for targeted products and practices, and are on track to double our anti-fraud investigations this year. We expect this effort to increase our credit loss recoveries in 2008 and 2009.
Basically in everyday English they will seek money to make them whole on loans that went bad made by other banks that Fannie bought from the banks. Basically a put option back on the banks meaning losses for banks that they didn't think they would have because the loan they made and sold went back forcing them to take the loan back. I don't know what kind of dollar numbers this is talking about but this likely flows back to Countrywide which then likely flows back to Bank of America (Countrywide was the biggest seller of loans to FNM). Bank of America has been on an absolute rocket going from 18 to 34 (now 32.50) in less than a month. It seems like the most insane of all the bank rallies.
So what is going on? Why the big rally? Besides the obvious reasons, you also have to understand Wall St. From mid May to mid July energy was on a tear while financials got killed. What that means is that investing companies that follow an asset allocation strategy saw the percent of their portfolio in financials decline substantially and the percent in energy increase substantially. Well at some point they decided enough was enough and it was time to rebalance. This starts a domino reaction and so everyone rushes to rebalance their portfolios based completly on asset allocation targets, not on fundamentals. So you have money leaving energy flowing into financials and other areas of the market regardless of the fundamental aspects of the trade. This has obviously not run its course and could continue awhile. That is why even if you know a financial is overvalued, it is a really hard short and it is probably better to wait to try to pick your timing better.
Need to play some spades. Only one more hour of this nonsense for a couple of days.
Thursday, August 7, 2008
The Oakland, California, agency that runs toll bridges across the San Francisco Bay is proving that the era of cheap money for municipal borrowers is over.
This week the Bay Area Toll Authority sold more than $700 million of bonds at rates as high as 5.33 percent to refinance debt that cost 4 percent last year. That leaves less money to finance projects, such as bridge improvements.
Do the multiplier affect on this one:
Spread over the $330 billion of fixed-rate municipal debt that JPMorgan Chase & Co. estimates will be sold this year, that translates to as much as $1.6 billion in extra interest costs annually over the historical average.
Probably not all that big by itself but start adding all the billions that are now going to extra interest cost in all areas and you can see the problem.
All this turns into less spending feeding the downward cycle of a beast.
The state lawmakers group found that states are cutting spending on schools and health care, tapping reserves and borrowing to close $40 billion of budget gaps. New York, Virginia and eight other states trimmed spending across the board for the budget year that began in July for all but four states. Seven of the 31 states with fiscal 2009 deficits raised taxes.
All those various roles have given Keough insights on the pitfalls in the business world, which he is now sharing with the rest of us.
“That’s a pretty heavy audience,” Keough said. “People started to really pressure me (to write a book). There was Herb Allen, Warren Buffett. I was cornered.”
Don Keough’s Ten Commandments for Business Failure
1: Quit Taking Risks
2: Be Inflexible
3: Isolate Yourself
4: Assume Infallibility
5: Play the Game Close to the Foul Line
6: Don’t Take Time to Think
7: Put All Your Faith in Experts and Outside Consultants
8: Love Your Bureaucracy
9: Send Mixed Messages
10: Be Afraid of the Future
And the Bonus Commandment:
11: Lose Your Passion for Work —- for Life
What matters most in these ultras is consistency either going up or down. When it gets choppy value erodes quickly. So from August to February you had a steady trend up. No value was eroded and you maybe lost a percentage or two. The risk seems only if the market sticks in one direction. A black swan type event like nuclear fallout or something could be a problem. You will definitely create alpha though.
This article appeared in the WSJ last Friday. Still catching up on things I missed. The article tells about the Batista family and their grab in the cattle industry as the market is being roiled with low beef prices compared to fuel and grain prices. I think they are doing it exactly right and I think over time will be very profitable for them. They are traded on the Brazilian stock exchange and have been falling recently.
Several months ago all you heard was about blood flowing in the streets in the equity markets. I scoffed at such a notion. Well blood looks like it is flowing in the streets in the beef industry. The Batista clan has it right.
Meatpackers are struggling to turn a profit.JBS SA, based here in Brazil's business hub, smells blood, and has set out to assemble a global beef empire. Its premise is simple: Meatpackers, at the moment, are cheap. Demand for beef is rising in developing nations. Beef prices, eventually, are likely to surge as well.
The whole article if you missed it in the Journal is fascinating.
Wednesday, August 6, 2008
AIG said that, excluding one-time items, it lost 51 cents a share on sales of $19.9 billion in the second quarter.
Last year the insurance giant earned $1.77 a share on a topline of $31.15 billion.
A consensus estimate of analysts who follow the company expected earnings of 63 cents a share and revenue of $31.49 billion.
A couple of pretty funny comments I read in comment sections at other blogs.
Alright already, we get it. Lot's of "great" news after the close today, expect a huge rally tomorrow. We get it, thanks. No mas (I live in California, practicing my spanish just in case we have to sell it back).
Daughter: "Daddy, don't you think about your retirement?"
Father: "Sweety, I have AIG. I don't have to think about my retirement!"
Now when things sound this good they almost always are so if anyone can think of any reason why this is somehow flawed let me know.
The next thing I want to look at is arbitraging it. Can you short the ultra and arbitrage gains where you are almost eliminating risk??
The second half of the trip was a cruise down the coast line. As we headed south we started seeing the sun which was nice. In Ketchikan I did over 1/2 mile of zip line hundreds of feet in the air from tree to tree. I also stayed up dancing until 3 in the morning every night before heading to the midnight buffet. I love cruises.
The trip was incredible but honestly to long. I decided I just can't be away like that for 2 weeks with limited internet access for the fund (Iwas on the internet most days through my cell phone but still). I need to buy a laptop I guess (which still wouldn't have helped that much on this particular trip). As amazing as the trip was there was something about getting back to Texas. It was awesome to feel hot as I walked to the car from the Austin airport (I was almost always a little cold), eating at taco bell on the drive home from the airport (versus king crab, lobster, steak, escargot, caviar, etc on the ship, I mean you pay for it right? You got to eat it all), and seeing stars (it was almost always daylight this time of year up there 20 hours + and when it was dark usually cloudy). I love traveling but I love my home state.
Tuesday, August 5, 2008
Many Chinese have been expecting a post-Olympics economic slowdown, but it has already started and the Games have not even begun. Chinese factories reported a plunge in new orders last month. Exports are barely growing.
But this is what I find really interesting
For example, after letting China’s currency rise sharply against the dollar in the first half of this year, China’s central bank has actually pushed it down against the dollar in each of the last four trading days, including a decline of 0.13 percent on Monday. This is helping to preserve the competitiveness of Chinese exporters in foreign markets, although at the risk of angering the United States and other trading partners.
That could have broad ramifications if that is a new policy to keep down their currency.
If you have all the major industrial central banks in the world lowering interest rates, while simultaneously the Fed is hawkishly about to raise rates, that in itself will perpetuate the flow of money. Funds will flow into the U.S. and out of the rest of the world. That forces the central banks around the world to continue to lower interest rates, chasing the flow down. And the Fed is poised to continue to raise rates as more and more funds chase the higher yield.
Disagree with this
Think further beyond about the ramifications of the potential of $1.5 trillion USD flowing into the U.S. banking sector. Wouldn't that be attractive to bank's balance sheets at the very moment that the world's #1 financial sector needs capital at all cost? If the world's biggest financial sector were to be propped up by a continual flow of funds into their banks, then the U.S. will be poised to move forward out of its current economic malaise flush with capital coming in from abroad. And beyond that, the world's largest economy will then pull any other country out of recession.
The latest from Oaktree. It is really a very good letter. I tend to agree with almost all of it and strongly recommend reading all of it. Thanks goes to Pete.
Finally, I want to provide a word of caution regarding expectations for recovery. I hear predictions that things will come back next year. Earlier this month, for instance, an elevator news display cited a forecast that home prices will rise 4% in 2009, almost offsetting 2008’s decline.
People have become conditioned to expect V-shaped declines and recoveries. We saw quick downs and ups in the markets or the economy in 1987, 1990, 1994, 1998 and 2002. But it doesn’t have to be that way. Those of us who were in this business in the 1970s know different........That means that in order to be part of the investment industry in the ‘70s, you pretty much had to have your job by 1969. And that in turn means you had to be at least 21 by 1969 . . . and sixty or older today. There aren’t many of us still working.
First, let’s consider financial institutions and the housing market. In recent years, as everyone knows, the former combined with the latter to create a bubble based on the combination of leverage, innovative structuring and heedless buying. Institutions and housing have been gravely hurt, and they’re likely to bring harm to additional sectors of the economy. For their downward spiral to be arrested, I see four things that have to happen:
· Home prices have to stop going down.
· Home mortgages have to be made available.
· Financial institutions have to stop experiencing incremental write-offs.
· Financial institutions have to be able to raise additional capital with which to rebuild their balance sheets.
The problem I see is that each of these four things is dependent on the occurrence of another – a classic chicken-or-the-egg problem. Write-offs won’t stop until home prices stop going down. Prices won’t stop going down until mortgages become available. Mortgages won’t become available until lenders can raise capital. And capital won’t be freely available until write-offs stop coming. Which will happen first, facilitating the others? What will cause it to happen? When?
These things will happen, of course. Maybe for reasons we can’t foresee. Maybe for no apparent reason. And maybe just because things got so bad they couldn’t get any worse. I go through this only to show why I don’t see an easy or quick solution. But then I’m rarely an unbridled optimist.
Assumed 10 days of gains and losses of:
Day 1 = -8.33%,
Day 2 = 9.09
Day 3 = -8.33
Day 4 = 9.09
Day 5 = -4.17%
Day 6 = 8.70%
Day 7 = -8%
Day 8 = -13.04%
Day 9 = -5%
Day 10 = 10.53%
This gives a total return for the actual index of -12.50%
The results assuming $200,000 short bet in the index or inverse and $100,000 in the 2x inverse .
If you short the index you make 12.50% or $25,000
If you do the 1x inverse you make $11,613.30
If you do the 2x inverse (once again $100,000 investment) you make only $3,571.34 or only 3.571% even though the index declined 12.50%!!!!!
It has to do with the math of the investments. The most shocking thing for me is that even the 1x inverse under performs a straight short. That is crazy.
If anyone wants the excel model (which graphs the performance over the 10 days) email me and I will shoot it your way.
Bottom line - don't invest in inverse funds.
Oil fall is also helping the market which I called (am I making any money off of it, ha, no). The stupid thing is that the fall is most probably demand destruction which shows very weekly on the economy. 6 months ago you saw headlines like Market Follows Oil Rise as Global Growth Story Still in Play now oil is falling and it is supposed to be very bullish. Plus it is only back to levels from mid May.
Anyway the best I can tell we have erased all the oversold conditions from several weeks ago but not really overbought yet. We have been in a choppy range and tried to break that range to the upside today. If successful probably means hello 1300 on the S&P.
Monday, August 4, 2008
I heard that July was the worst month for energy and commodity funds in 35 years!!! Wow!! Incredible.
Mildly interesting FAQ on exchange traded notes in the WSJ. They are different than ETFs and carry some baggage. I am long the meat ETN. The two big issues for ETNs is credit risk and taxable issues. Concerning tax issues this article does not make it sound as bound as I have understood it to be. Still totally unclear to me though I think they main tax problems are with currency ETN's.
A: An ETN, by contrast, is unsecured debt of the issuing firm, usually with a maturity of 10, 20 or 30 years. It isn't backed by a specific pool of assets.
For investors, the difference essentially means that, if an ETF were to be liquidated, investors would get their share of the stored assets. ETN investors, however, would stand in line with other creditors of the firm, getting their money back only if there were funds left over after the secured creditors were paid.
As Bear Stearns Cos. was struggling in mid-March amid rumors of a possible bankruptcy-court filing, some holders of its BearLinx Alerian MLP Select Index ETN sweated bullets. The ETN -- which tracks the 50 most prominent energy master limited partnerships -- traded, but volume was thin. Teetering as its stock price plunged, Bear Stearns agreed to be acquired by J.P. Morgan Chase & Co. The deal was completed May 30. J.P. Morgan says it is hopeful that interest in the ETN will improve.
Q: What is the tax treatment of ETNs?
A: As Barclays explains on its iPath Web site, ETNs generally should be treated as "prepaid contracts" for tax purposes. That means investors should recognize capital gains or losses upon the sale, redemption or maturity of their ETNs, although certain types, such as single-currency ETNs, are taxed as ordinary income. "Unlike mutual funds that may be required to make taxable distributions to shareholders, the iPath ETNs currently available will not make taxable distributions," it says. "This enables investors to control the timing of taxable events related to their investment in iPath ETNs." Barclays adds that the Internal Revenue Service and U.S. Treasury are actively considering the tax treatment of instruments such as iPath ETNs, so it could change.
Sunday, August 3, 2008