http://www.cnbc.com/id/15840232?video=698017587&play=1
If any of you know me well you know my total apathy for sell side equity research analysts. They serve some purpose but people use them not to think and in general they tend to crowd together which makes their opinions less useful. I have hanging on my wall a New Century Financial Corp upgrade by UBS two days before they declared bankruptcy. I typically do not like to read sell side research reports or talk to analysts. If you have never looked at an industry they can be useful to talk to.
Anyway Meredith Whitney is a sell side analysts who has not walked with the crowd and has been the first to call the financials debacle. She received death threats when she said Citigroup's dividend would be cut last fall. It was cut a couple of months later. Great interview with her on CNBC. She is saying we are no where close to bottom and is calling for massive dividend cuts across the board.
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Kaspar, found this interesting little snippet - I guess some people just never learn?
http://online.wsj.com/article/SB120658664128767911.html?mod=djemEMU
Given that LTCM went bust by leveraging up to its eyeballs, you would think you would be a bit more careful from then on...but I guess not!
Thanks. Yeah it was on the front page of C1 of the WSJ today. Crazy isn't? Who would have given him money to begin with? They do have some amazing rules with the fund though. You can't take more than an 1/8 of your money out per quarter!! Wow. At least they were less leveraged this time. Compared to something like 40 to 1. It was only 14 TO 1. Ha, obviosuly John doesn't have psychological issues with losing other peoples money.
40 to 1, 14 to 1... if a client comes to see me and wants to talk about leveraging into equities, I advise them not to do it if the borrowing makes up more than 50% of the total asset value, which is more like 0.5 to 1.
Being comfortable at being leveraged at 14 to 1 and above really is a wholly different outlook on life I guess.
Well, they are not investing in equities so it is a little different. He was investing in "safe" AAA mortgage back securities and GSE paper. Same with Thornburg and same with the Carlye fund that went bust. Showed that even that was to much leverage.
I do not use recourse leverage. .5 to 1 is still to high for me. If I want leverage I get it through options. Borrowing money to buy stuff can cause real problems when it forces you to make you to sell something you woulnd't otherwise sell because of margin calls.
At LTCM, they specialized in relative value arbitrage. This fund down 28% is called the Relative Value Opportunities Fund, so I guess they are doing the same stuff. Probably not as simple as being long GSE paper and short Treasuries planning on the spread to come in. However that spread moved around a lot during the time they were in trouble.
As you are suggesting, if the margin call doesn't get you, the redemptions might. The 1/8th a qtr limit helps I suppose.
From the article.
His funds' losing positions have included mortgage securities backed by Fannie Mae and Freddie Mac, trades tied to municipal bonds and triple-A-rated commercial-mortgage-backed securities, according to the letter. Those bets have eaten into his returns this year, particularly as hedge fund Peloton Partners LLP and Carlyle Capital Corp. unloaded many of the same securities as they spiraled toward demise.
I agree it is probably not as simple as being long GSE but a common practice on Wall St has been to short the BBB and A back mortgages and go long the GSE paper or some similar type of trade. Well the GSE paper moved massively downward compared to what any model would have predicted in late Feb in March and so messed up those relative trades.
That 1/8 limit I think is very important. Unlike Bear Stearns where the cash was demanded all at once you know the maximum your fund will have to give out in redemptions is 1/8. That adds all kinds of flexibility as you hope for the market to stabalize.
Yeh redemptions are a huge deal for everyone, hedge funds, mutual funds, and even the money market funds. Even the best MMFs would have problems if they had to liquidate quickly.
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