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Missing Lehman Lesson of Shakeout Means Too Big Banks May Fail (Bloomberg)

by Parsimony Research on September 8, 2009

Bloomberg: Missing Lehman Lesson of Shakeout Means Too Big Banks May Fail

The warning was ominous: “Massive global wealth destruction.”

That’s what Lehman Brothers Holdings Inc. executives predicted before they filed the biggest bankruptcy in U.S. history. “Impacts all financial institutions,” read one bullet point in a confidential memo prepared for government officials obtained by Bloomberg News. “Retail investors/retirees assets are devastated.”

The message didn’t get through. Two dozen of the world’s most powerful bankers, brought together by Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Bank of New York President Timothy F. Geithner the weekend of Sept. 13, 2008, to devise a rescue plan for Lehman, were too busy saving themselves to see the larger threat.

…

One year later, policymakers haven’t learned the lesson of the bankruptcy, said Richard Bernstein, CEO of Richard Bernstein Capital Management LLC in New York and former chief investment strategist for Merrill Lynch.

Rather than break up institutions such as Bank of America Corp. and Citigroup Inc., or limit their expansion, the U.S. has given them billions of dollars in tax incentives and loan guarantees that enabled them to grow even bigger. To protect against a bank collapse touching off another freefall, President Barack Obama has proposed regulatory changes that rely on the wisdom of bankers and government overseers — the same people who created the conditions that led to Lehman’s bankruptcy and were unable to foresee its consequences.

“Designating certain institutions as too big to fail, and not having a thorough regulatory process to match, practically invites another catastrophe,” Bernstein said.

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Closely Watched Buffett Recalculating His Bets (NY Times)

by Parsimony Research on September 8, 2009

NY Times: Closely Watched Buffett Recalculating His Bets

Excerpt (click on the link above for the full version)

Warren E. Buffett has two cardinal rules of investing. Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.

Well, a lot of old rules got trashed when the financial crisis struck — even for the Oracle of Omaha.

At 79, Mr. Buffett is coming off the worst year of his long, storied career. On paper, he personally lost an estimated $25 billion in the financial panic of 2008, enough to cost him his title as the world’s richest man. (His friend and sometime bridge partner, Bill Gates, now holds that honor, according to Forbes.)

And yet few people on or off Wall Street have capitalized on this crisis as deftly as Mr. Buffett. After counseling Washington to rescue the nation’s financial industry and publicly urging Americans to buy stocks as the markets reeled, in he swooped. Mr. Buffett positioned himself to profit from the market mayhem — as well as all those taxpayer-financed bailouts — and thus secure his legacy as one of the greatest investors of all time.

When so many others were running scared last autumn, Mr. Buffett invested billions in Goldman Sachs — and got a far better deal than Washington. He then staked billions more on General Electric. While taxpayers never bailed out Mr. Buffett, they did bail out some of his stock picks. Goldman, American Express, Bank of America, Wells Fargo, U.S. Bancorp — all of them got public bailouts that ultimately benefited private shareholders like Mr. Buffett.

If Mr. Buffett picked well — and, so far, it looks as if he did — his payoff could be enormous. But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter again. After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Mr. Buffett is warning that the economy, though on the mend, remains deeply troubled.

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Barclays Said to Repackage Top-Rated Bonds From Downgraded CDO (Bloomberg)

by Parsimony Research on September 3, 2009

Bloomberg: Barclays Said to Repackage Top-Rated Bonds From Downgraded CDO

Sept. 3 (Bloomberg) — Barclays Capital repackaged a portion of a $1 billion collateralized debt obligation managed by Highland Capital Management LP that was downgraded in July into new securities with the highest credit ratings.

Barclays Capital is selling $77.25 million of securities backed by leveraged loans with AAA rankings from Standard & Poor’s and Moody’s Investors Service, said a person familiar with the offering who declined to be identified because the deal is private. The bank also created an $18.8 million piece rated AAA by S&P and a $250,000 unrated slice, according to the bond agreement.

Banks are turning downgraded securities into new investments with top credit ratings, seeking to create more valuable debt to sell or to restructure investors’ holdings. New York-based Barclays Capital is modeling the financing structure after so-called re-REMICs, which bundle mortgage bonds into new securities that may offer investors an additional layer of protection, or collateral, from downgrades.

“Critics of this practice have argued that it appears to be the creation of something from nothing — in effect ‘alchemy,’” Moody’s analyst Leonid Mogunov wrote in an August report. “Such repackaging can in fact produce at least one class of notes more creditworthy than the underlying CLO tranche,” he wrote.

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BP Makes ‘Giant’ Oil Discovery in Gulf of Mexico (Bloomberg)

by Parsimony Research on September 2, 2009

Bloomberg: BP Makes ‘Giant’ Oil Discovery in Gulf of Mexico

Sept. 2 (Bloomberg) — BP Plc, Europe’s second-largest oil company, reported a “giant” discovery at the Tiber Prospect in the U.S. Gulf of Mexico that may contain more than 3 billion barrels, after drilling the world’s deepest exploration well.

The well is located about 250 miles (400 kilometers) southeast of Houston, the London-based company said today in a statement. It was drilled to approximately 35,055 feet (10,685 meters), greater than the height of Mount Everest.

The latest discovery will help BP, already the biggest producer in the Gulf of Mexico, boost output in the region by 50 percent to 600,000 barrels of oil equivalent a day after 2020. It’s equal to about a year’s output from Saudi Arabia, the biggest exporter in the Organization of Petroleum Exporting Countries, as well as coming close to matching the U.K.’s entire proven reserves.

“It will take a while to develop, the second half of next decade, but it’s very important,” Jonathan Rigby, an analyst at UBS AG in London, said in a telephone interview.

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Och-Ziff, Bain to Resume Performance Fees in 2010 (Bloomberg)

by Parsimony Research on September 1, 2009

Bloomberg: Och-Ziff, Bain to Resume Performance Fees in 2010

Sept. 1 (Bloomberg) — Och-Ziff Capital Management Group LLC and Bain Capital LLC plan to charge performance fees on hedge funds next year even if they fail to recoup their 2008 investment losses.

Most hedge funds don’t levy the fees, usually 20 percent of profits, until they climb back to their peak value, known as the high-water mark. New York-based Och-Ziff, which oversees $21.5 billion, and Bain’s Brookside Capital LLC of Boston, manager of $10 billion, resume the fees one year after an annual loss, according to investor agreements obtained by Bloomberg News.

Och-Ziff and Brookside risk angering investors, said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP whose clients include hedge funds. Managers have sought to appease investors by easing withdrawal restrictions and providing more disclosure on holdings after losing an average of 19 percent last year.

“Investors can vote with their feet as other managers provide more favorable terms,” Geffner said.

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Bill Gross: Investment Outlook – September 2009

by Parsimony Research on September 1, 2009

PIMCO: On the “Course” to a New Normal – Bill Gross

Excerpt (please click on the the link above for the full version)

This “new” vs. “old” normal dichotomy was perhaps best contrasted by Barton Biggs, as I heard him on Bloomberg Radio in early 2009, when he said he was a “child of the bull market.” I thought that was a brilliant phrase, and Barton is a brilliant phrase-maker. He went on to say though, that his point was that for as long as he’s been in the business – and that’s a long time – it has paid to buy the dips, because markets, economies, profits, and assets always rebounded and went to higher levels. That is not only the way that he learned it, but that is the way, basically, that capitalism is supposed to work. Economies grow, profits grow, just like children do. I think that’s why he said he was a child of the bull market, not just because he had experienced it for so long, but also because economic growth and higher asset prices are almost invariably a natural evolution, much like the maturation of a person. That’s how people grow, and so I think Barton was saying that capitalism just grows that way too.

Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

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Moody’s CLO Interest – August 2009

by Parsimony Research on September 1, 2009

CLO Interest_Aug 09

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Pimco Says Avoid ‘Black Holes’ in the High-Yield Bond Markets (Bloomberg)

by Parsimony Research on August 31, 2009

Bloomberg: Pimco Says Avoid ‘Black Holes’ in the High-Yield Bond Markets

Sept. 1 (Bloomberg) — Pacific Investment Management Co., the world’s biggest manager of bond funds, said investors should avoid “black holes” of the junk bond market as recovery rates drop.

“We’re somewhat more cautious about high-yield bonds,” Curtis Mewbourne, a managing director at Pimco, wrote in an article on the firm’s Web site. “Careful attention to credit selection and avoidance of so-called ‘black holes of credit’ will likely be a critical component to a successful investment strategy.”

Default rates may rise, while recovery rates for defaulted debt have fallen below 20 percent from about 40 percent, Mewbourne said, citing Moody’s Investors Service data.

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Yes, there’s even a risk in Treasuries (MarketWatch)

by Parsimony Research on August 31, 2009

MarketWatch: Yes, there’s even risk in Treasuries – Brett Arends

If you or a member of your family has a lot of money invested in bond funds, you should hear what Thomas Atteberry has to say.

He’s a partner at fund group First Pacific Advisors and co-manager of the successful New Income (FPNIX) bond fund.

His warning? Investors in long-term Treasury bonds and high-grade corporates run a serious risk of losing money in real, inflation-adjusted terms, over the next few years. They may lose money even before you count inflation.

Why?

The yields on these bonds are ominously low. If they reverted to long-term averages, the prices would tumble. You may end up losing more on the falling price than you could earn from the coupons.

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Hussman: A Tale of Two Data Sets – August 31, 2009

by Parsimony Research on August 31, 2009

Hussman Funds: A Tale of Two Data Sets – August 31, 2009

Excerpt (click on the link above for the full version)

Straight to the chase – the U.S. stock market is overvalued, but not severely so. Prospective 10-year total returns for the S&P 500 are uninspiring, but they have been even more dismal for much of the past decade. Market action in the major indices has been clearly strong, as is breadth, but evidence of robust sponsorship is weak – particularly on the basis of trading volume. Several measures of risk aversion have abated, but have been replaced by exuberant investor sentiment, which has not been as bullish since the 2007 market peak. From the standpoint of typical post-war market cycles, there is little to get excited about, but there also does not seem to be a great deal to complain about either. That is, again, if we assume that this is a typical post-war market cycle.

As I frequently note, we try to align our investment positions based on the return to risk profile that we can expect, on average, given prevailing market conditions. Our dilemma here is this. There are two sets of data from which to draw those averages. One would include ordinary run-of-the-mill economic and market cycles using post-war data from the U.S. alone. The other is broader, and includes market behavior, both in the U.S. and in other countries, following major crashes. Extended economic dislocations were typically required before fundamentals durably improved.

Even giving the two possibilities equal weight is harsh, because as I’ve repeatedly noted, post-crash markets have included advances as large, and larger, than we’ve observed since March, but with devastating follow-through. In the current situation, our only choice is to consider the full data set, because we have no basis – whatsoever – to rule post-crash dynamics out in view of prevailing economic conditions. As a result, as things stand presently, we hold a substantial number of index call options (about 1-2% of Fund assets), but are otherwise hedged. The strike prices and expirations of our index calls currently result in a modest effective exposure to market fluctuations. Those call options are in place primarily to reduce the impact of our hedge in the event of further strength from here – to date, they have largely offset what would have been lagging performance due to our continued lack of holdings in financial stocks.

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