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Thursday, September 13, 2007

Bill Gross The Ninja

I don’t expect much action now as the over hyped Fed meeting on September 18th draws ever nearer. I must say PIMCO’s Bill Gross is quite the financial ninja:

Pimco's Gross Exited Commercial Paper in August, Holdings Show: “Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., sold the fund's remaining holdings of commercial paper last month as demand for short-term corporate debt dried up.

The $104.4 billion Pimco Total Return Fund had none of its assets in debt carrying the ratings given to issuers of commercial paper at the end of August, according to data published on the Newport Beach, California-based firm's Web site. As recently as April the fund had 20 percent of its assets in debt carrying the highest commercial paper ratings.”

That is one hell of a large position to move in such a timely manner. I’m impressed.
Gross last month said the asset-backed commercial paper market “is basically history.” For a while at least…

Bank of England Relaxes Deposit Restrictions to Spur Lending: “The Bank of England relaxed restrictions on the amount of money financial institutions need to hold with the central bank, encouraging them to lend more to each other as it tries to reduce overnight borrowing costs.

Commercial banks, which agree to hold a specific amount of money at the Bank of England at the end of each month-long maintenance period, can now undershoot that target by 37.5 percent and still earn interest at the benchmark interest rate, the central bank said today. That compares with a previous restriction of 1 percent.”

Still struggling with the moral hazard dilemma, the BOE is digging deep into its bag of tricks in an attempt to bring down the overnight lending rates between banks.

“The U.K. central bank's actions contrast with the more activist stance of the European Central Bank and the U.S. Federal Reserve.”

Overnight Euro Libor Drops as ECB Vows to Help Market (Update1): “The overnight rate banks charge each other for euros dropped after European Central Bank executive board member Gertrude Tumpel-Gugerell said the bank will continue to support ailing money markets.

The ECB yesterday injected an extra 75 billion euros ($104 billion) for three months to ease a credit drought. Global borrowing costs have surged because lenders are wary of providing cash to institutions that may have undisclosed losses from U.S. subprime mortgages. The squeeze has all but closed the market for commercial paper, forcing banks and institutions to raise ever more money in the interbank markets.”

I’m really starting to get suspicious here that something unpleasant is lurking in the shadows. The ECB has been injecting monster amounts of liquidity while the other central banks have injected far less and far less frequently.

Bernanke Spurns Greenspan Quick Fix, Seeking Data, Deliberation: “Alan Greenspan trusted his instincts. Ben Bernanke trusts the MAQS.

For the past several days, the MAQS -- a group of analysts in the Federal Reserve's Macroeconomic and Quantitative Studies unit -- have run a series of what-if scenarios on the U.S. economy that will play a critical role in next week's interest- rate decision.”

For the future of US and global economic stability, I can only hope that Bernanke will act more like the BOE’s King and less like Greenspan. News like this, suggesting calm deliberation and long run planning, coming out of the Fed is encouraging. The Fed under Bernanke appears more disciplined…

KKR May Delay First Data Loan Sale on Terms Dispute (Update1): “Kohlberg Kravis Roberts & Co. may delay the sale of loans to finance the $26 billion takeover of First Data Corp. until next week after failing to agree on terms with bankers, people close to the negotiations said.

The First Data sale is the biggest to be attempted since rising U.S. mortgage defaults led to the highest borrowing costs for LBOs in four years. The planned sale is being watched by bankers and buyout firms as a gauge for how $320 billion in debt committed for pending buyouts may fare. Banks would have to hold the loans and bonds if they can't be sold to investors.”

Failure of this transaction, or some of the other large ones, WILL knock quite a few points off equity indices as valuations are re-adjusted downwards. Conversely, IF First Data gets done, it will show a significant vote of confidence.

“Demand for LBO debt has evaporated, with more than 50 bonds or loans abandoned or reworked since June. Investors are balking at debt without covenants, or restrictions, that give them greater power over a company's finances.”

Goldman Global Alpha Fund Fell 22 Percent in August (Update1): “Goldman Sachs Group Inc.'s Global Alpha hedge fund fell 22.5 percent in August, its biggest monthly decline, on losses from currency and stock trades, according to an update sent to investors.

The fund, managed by Mark Carhart and Raymond Iwanowski, has dropped by a third in 2007 and 44 percent from its peak in March 2006. Investors notified New York-based Goldman last month that they plan to withdraw $1.6 billion from the fund, or almost a fifth of the assets as of July 31.”

That is some serious pain both in terms of returns and redemptions. Another month of redemptions and the fund will further have to adjust positions in what could still be a less than ideal market.

“Goldman Alpha's biggest loss in the month stemmed from the managers' decision to sell Japanese yen and buy Australian dollars. The so-called carry trade unraveled when the Australian dollar fell 6 percent against the yen in August. The managers' investment in equities, including stocks in the U.S., Norway and Finland, declined 4.7 percent.”

THAT was a CROWDED TRADE. Everybody and his mamma were in that exact same position. I’m surprised that the super hedgies at Goldman didn’t see this one coming. They are supposed to be the best ever at this game…

U.K. House Prices Decline for First Time Since 2005 (Update1): “U.K. house prices fell for the first time since 2005 in August after five interest-rate increases in the past year discouraged buyers, the Royal Institution of Chartered Surveyors said.”

Just as things look like they can’t get any worse in the US, the UK is showing the first signs of its own real estate bubble topping out.

“Higher borrowing costs are nevertheless increasing the burden on consumers already shouldering a record 1.3 trillion pounds ($2.6 trillion) in debt. A gauge of interest from new buyers dropped the most since August 2004, RICS said.

“Affordability is at its most stretched in over a decade, said RICS's Perry. “Many will worry that rising mortgage repayments will prove a step to far.””

Housing prices have more than tripled in less than ten years. Some of the blame can be attributed to a shortage of housing. However, shortage or not AFFORDABILITY is a must.