|
Page 1 of 261 The repricing of risk continues: The repricing of risk continues: We are currently in a period of repricing risk. This could go on for the whole month of August, as major players in the US and Europe are away on vacation. It could continue even longer. Many of the investment vehicles in trouble won’t be priced until after the end of August and even then, not for several weeks. Some may delay or avoid being priced, especially if there are large losses. If the Bear Stearns experience is anything, it took them 2 weeks to find out the paper was worthless. But let’s not forget that they were using leverage of 10x, which is on the high end. The problem is that many of these investment vehicles (CPDO’s:constant proportion debt obligations, CDO’s: collateralized debt obligations, etc) are created by mathematicians. They aren’t real. I was recently reading that a few rocket scientists at a major European bank figured out a way to get junk bond yields with no risk. They created paper (CPDO’s) and the rating agencies labeled it Triple A so that it could be sold to even the most risk averse investors such as pension funds. This product depends solely on this triple A rating for its pricing and it is not clear if it will be able to hold up under scrutiny, there is certainly no history to rely on. Junk bond yields with no risk - if it sounds too good to be true, maybe it is. Let me be clear: THIS IS SCARY. I was recently reading about how these vehicles can be priced and there are 3 ways: 1. off the model; 2. What a distressed buyer would pay; 3. What a normal buyer would pay. Guess which one the players who own these vehicles will choose - it certainly won’t be number 2. But what the article went on to say was that the Prime brokers (who basically are in some control over the hedge funds) cannot tell the funds how to price the paper but can institute higher margin rates forcing the funds to inject capital to cover potential losses. (Note: Prime brokers are the custodians of the hedge funds and Bear Stearns is one of the largest prime brokers in the US). Let’s look at what we have today: 1. an inexperienced Fed who is focused on inflation, not growth; 2. A global economy with growth in some areas unsustainable (China, in particular); 3. a tightening of rates globally; 4. a vacuum of players due to summer holidays in North America and Europe; 5. the uncertainty of what the losses really are or who has them. We can expect more volatility and more problems until: 1. the losses can be quantified to a point of where the market is satisfied that it at least can put a range on the damages; 2. the players return from vacation and add depth to the markets 3. the backup in loans works its way through the system 4. The Fed comes to the rescue and adds liquidity. Remember, the one thing the stock market hates with a passion is uncertainty. What we expect to happen going forward: We can expect the losses to be quantified to some extent in or around September/October but it could extend all the way until November for the total damage to be estimated. The players will all be back in action with certainty by mid September. It is difficult to forecast how long the backup in rates will take to work its way through the system. In the 1994, it took more than a year for the final damage to be inflicted and it kept showing up in unforeseen places. We see this as the most likely scenario. Excesses always need to be worked off. There is no such thing as no risk. With regard to the Fed, Mr. Bernanke faces a choice of keeping credit relatively tight for now and thus reducing the risk of bubbles for years to come or loosening credit and lowering the chance of an economic slowdown in the next few months. I think that we have seen his choice already. Therefore, we cannot expect much help from the Fed until we have a real full blown crisis. I am not an expert in credit derivatives but I have read about it extensively. Below are some of the facts that might interest you about them: - Size of the market: Although there are no accurate numbers available, figures suggest that new issuance of CDO’s more than doubled in 2006 to $2 trillion, a figure that dwarfs the bond market. CDS’s (credit default swaps) is a market which is now 10x the size of the bond market and it didn’t even exist until recently. Its size is $35 trillion.
- Date of conception: around 1995/1996 a group of bankers got together and came up with the concept.
- Who are the big players: JP Morgan invented the market and continues to be the biggest player with an estimated 22% of the market. Other players include Morgan Stanley and Deutsch Bank as well as some other European banks.
- Growth: a doubling of the market is expected again this year to $4 trillion in CDO’s. No estimates were available for the other markets.
- Risk: Synthetic CDO’s are described as complex derivatives that are ultra risky. In an article on February 12, 2007 I read that more risk was being sold into the market to more investors. At the same time, more investors are buying riskier and more junior tranches of the market. Banks are also competing more aggressively to gain market share and therefore may underprice vehicles in order to capture business. There are fears that a shock may cause a contagion as the markets have never been tested under the scenario of a crisis.
- Reasons for popularity: Investors can make directional bets of a size that are impossible in the illiquid bond markets. The products disperse risk and therefore should allow for credit shocks to be absorbed more easily in a global marketplace.
- Where they trade: These products trade over the counter. Unlike vehicles on listed exchanges, there are no statistics produced for such vehicles. That’s why so little historical data exists.
Conclusion: In the last six months, we had one of the biggest gluts of cash and liquidity in history. Money had to find a place to go and it sought out risk at an unprecedented rate and without thinking too much about risk. Cheap money has that effect. Now are are in a tightening credit market. Expect to see more volatility and more repricing of risk for the remainder of the year. Most likely to be impacted: real estate, emerging markets, financials and speculative stocks. We are currently in a period of repricing risk. This could go on for the whole month of August, as major players in the US and Europe are away on vacation. It could continue even longer. Many of the investment vehicles in trouble won’t be priced until after the end of August and even then, not for several weeks. Some may delay or avoid being priced, especially if there are large losses. If the Bear Stearns experience is anything, it took them 2 weeks to find out the paper was worthless. But let’s not forget that they were using leverage of 10x, which is on the high end. The problem is that many of these investment vehicles (CPDO’s:constant proportion debt obligations, CDO’s: collateralized debt obligations, etc) are created by mathematicians. They aren’t real. I was recently reading that a few rocket scientists at a major European bank figured out a way to get junk bond yields with no risk. They created paper (CPDO’s) and the rating agencies labeled it Triple A so that it could be sold to even the most risk averse investors such as pension funds. This product depends solely on this triple A rating for its pricing and it is not clear if it will be able to hold up under scrutiny, there is certainly no history to rely on. Junk bond yields with no risk - if it sounds too good to be true, maybe it is. Let me be clear: THIS IS SCARY. I was recently reading about how these vehicles can be priced and there are 3 ways: 1. off the model; 2. What a distressed buyer would pay; 3. What a normal buyer would pay. Guess which one the players who own these vehicles will choose - it certainly won’t be number 2. But what the article went on to say was that the Prime brokers (who basically are in some control over the hedge funds) cannot tell the funds how to price the paper but can institute higher margin rates forcing the funds to inject capital to cover potential losses. (Note: Prime brokers are the custodians of the hedge funds and Bear Stearns is one of the largest prime brokers in the US). Let’s look at what we h With regard to the Fed, Mr. Bernanke faces a choice of keeping credit relatively tight for now and thus reducing the risk of bubbles for years to come or loosening credit and lowering the chance of an economic slowdown in the next few months. I think that we have seen his choice already. Therefore, we cannot expect much help from the Fed until we have a real full blown crisis. I am not an expert in credit derivatives but I have read about it extensively. Below are some of the facts that might interest you about them: Size of the market: Although there are no accurate numbers available, figures suggest that new issuance of CDO’s more than doubled in 2006 to $2 trillion, a figure that dwarfs the bond market. CDS’s (credit default swaps) is a market which is now 10x the size of the bond market and it didn’t even exist until recently. Its size is $35 trillion. Date of conception: around 1995/1996 a group of bankers got together and came up with the concept. Who are the big players: JP Morgan invented the market and continues to be the biggest player with an estimated 22% of the market. Other players include Morgan Stanley and Deutsch Bank as well as some other European banks. Growth: a doubling of the market is expected again this year to $4 trillion in CDO’s. No estimates were available for the other markets. Risk: Synthetic CDO’s are described as complex derivatives that are ultra risky. In an article on February 12, 2007 I read that more risk was being sold into the market to more investors. At the same time, more investors are buying riskier and more junior tranches of the market. Banks are also competing more aggressively to gain market share and therefore may underprice vehicles in order to capture business. There are fears that a shock may cause a contagion as the markets have never been tested under the scenario of a crisis. Reasons for popularity: Investors can make directional bets of a size that are impossible in the illiquid bond markets. The products disperse risk and therefore should allow for credit shocks to be absorbed more easily in a global marketplace. Where they trade: These products trade over the counter. Unlike vehicles on listed exchanges, there are no statistics produced for such vehicles. That’s why so little historical data exists.
Conclusion: In the last six months, we had one of the biggest gluts of cash and liquidity in history. Money had to find a place to go and it sought out risk at an unprecedented rate and without thinking too much about risk. Cheap money has that effect. Now are are in a tightening credit market. Expect to see more volatility and more repricing of risk for the remainder of the year. Most likely to be impacted: real estate, emerging markets, financials and speculative stocks.
kSNWH3 <a href="http://rbdsxloyjhlj.com/">rbdsxloyjhlj</a>, [url=http://zjxgnbtnegzw.com/]zjxgnbtnegzw[/url], [link=http://ardlvvmcsjoj.com/]ardlvvmcsjoj[/link], http://olhbohnzhygo.com/ child health insurance btpnmr affordable health insurance ctr cheap auto insurance bxsy health insurance florida iqxn buy car insurance online 782 prednisone online tuuc xanax khxu phentermine pills =D tramadol hcl dou ambiencr 8DDD retin >:-OOO cheap propecia tramadol otaxlh xanax >:)) tramadol hcl 827705 ambien dosage 615 carisoprodol kuon tramadol hcl :-((( prednisone yqr valium 8P xanax prescriptions >:-P accutane nvpuot
|
