Late-Night Headlines
Bloomberg: The financial crisis that crippled mortgage lenders, shut down leveraged buyouts and ended the era of independent investment banks is bearing down on the $1.9 trillion hedge-fund industry. Managers are bracing for a surge in client withdrawals after average returns fell 8 percent through Sept. 19, the worst first nine months of a year since Chicago-based Hedge Fund Research Inc. started tracking the data in 1990. The volatility in the markets and the prospect of customer redemptions have caused hedge funds to set aside a record $600 billion in cash accounts, according to estimates from analysts at Citigroup Inc. That's almost $1 of every $3 under management. ``It's absolutely the most difficult period in hedge-fund history,'' said Brad Alford, head of Alpha Capital Management LLC in Atlanta, which invests in hedge funds. ``Even some of the best-known managers are looking at their worst years ever.'' Those include Ken Griffin's Citadel Investment Group LLC, a Chicago-based firm that oversees $20 billion; Steven Cohen's SAC Capital Advisors LLC of Stamford, Connecticut, which manages $16 billion; and Dinakar Singh's TPG-Axon Capital Management LP, a New York-based firm with $14 billion of assets. About 350 funds shut down in the first half of the year, a number that may double by year-end, Hedge Fund Research reported.
- More than 150 prominent U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing a $700 billion financial market rescue plan until it can be studied more closely.
- Research In Motion Ltd.(RIMM) forecast third-quarter profit that missed analysts' estimates after boosting marketing to ward off Apple Inc.'s new iPhone and introduce handsets. The shares fell 21 percent in late trading.
- Investors should sell the euro against the U.S. dollar as the risk of recession spreads to Europe and global central banks and sovereign wealth funds buy Treasuries, UBS AG said.
- The cost of default protection on corporate bonds fell as the U.S. Congress neared an agreement on a $700 billion financial-rescue plan. Benchmark credit-default swap indexes in the U.S. and Europe fell for the first time in three days, signaling an improvement in investor perceptions of corporate credit risk. Contracts on banks including Wachovia Corp. and Goldman Sachs Group Inc. also fell.
- The spread between the rate on a two-year interest-rate swap and Treasury yields dropped from a record high after congressional leaders said they're close to an agreement on a $700 billion bailout package for financial institutions to help revive lending and credit markets. The rate charged to exchange fixed for floating interest- rate payments for two years above Treasury yields, dubbed the swap spread, fell 10 percent to 147.38 basis points. It reached a record high of 166.38 basis points yesterday.
- New Zealand's economy contracted last quarter, driving the nation into its first recession in 10 years and adding to the prospect the central bank will cut interest rates to a three-year low next month.
- Commodity investors’ expectations for a rebound in shipping rates are collapsing as Chinese steel mills reduce production and economic growth sputters. Shipping investors, analysts and brokers from NY to Oslo The cost to hire a capsize vessel, most commonly used to carry coal and iron ore, will average an estimated $70,000 a day in the period, down from $84,000 forecast at the start of the week. The price to lease a capsize is falling the most in at least nine years, according to the benchmark Baltic Exchange index. Leasing costs may continue to decline because steelmakers are scaling back production and two of the world’s fastest growing economies, Russia and China “It will just keep going down from here,” said London-based Andreas Vergottis, the research director at shipping hedge fund Tufton Oceanic Ltd. who correctly predicted the plunge a month ago. Prices won’t “find resistance” until they’ve fallen about another 50%, he said Sept. 23.
Wall Street Journal: Scores of hedge funds are trying to decipher how exposed they are to Lehman Brothers Holdings Inc. and are letting investors know how much they potentially stand to lose, which for some funds represents hundreds of millions of dollars. Some of the hedge-fund world's best-known names, including D.E. Shaw & Co., GLG Partners LP and CQS LLP, have exposure to Lehman. Problems facing hedge funds include retrieving assets held with Lehman's prime-brokerage units, which provide trading and lending services, as well as unsettled trades and unwinding credit-default swaps.
- Wrangling among the nation's top political leaders threw the Bush administration's $700 billion bailout plan into disarray late Thursday, despite a dramatic day of negotiations on Capitol Hill that seemed to promise a deal. It was unclear if an agreement would still come together Thursday night: The emergence of a competing plan was threatening to derail a carefully crafted compromise previously taking shape.
- New York state's attorney general, Andrew Cuomo, has expanded his investigation into short-selling of stocks to encompass trading activity in the credit-default swap market, according to a person familiar with the investigation. Mr. Cuomo's office Thursday subpoenaed data from market-data providers. It believes the contracts may have been abused in schemes by short-sellers to spread rumors about a company and profit from their negative bet in the stock market, says the person familiar with the probe.
- Sen. McCain said Thursday evening he is optimistic that an agreement will be reached Friday morning in time for him to make it to Mississippi. "I believe it's very possible that we can get an agreement so that—in time for me to fly to Mississippi," he told ABC News. "But I also wish Sen. Obama had agreed to 10 or more town hall meetings that I had asked him to attend with me. Wouldn't be quite that much urgency if he agreed to do that. Instead he refused," Sen. McCain said.
CNBC.com:
- Hedge funds executives have told CNBC that several Wall Street firms are marketing a new hedging product that would allow them to "short" stocks—even those on the banned short sale list. The new "product" is being pitched to major hedge funds today to gauge their interest—it's unclear if any funds have agreed to implement it. Citigroup(C) officials have been among those pitching the new shorting technique—which involves the use of derivatives. An official there who spoke on condition on anonymity said the technique is still in the discussion stages.
MarketWatch.com: The chief executive of ethanol producer Poet sees U.S. ethanol producers potentially replacing nearly all the country's gasoline supply by 2030 on higher corn yields and the rise of fuel made from corn cobs, wood chips and switchgrass. Poet has begun construction on a pilot-scale cellulosic facility that later this year will make ethanol out of corn cobs. Broin said that the company remains on track to commercialize the process in 2011 with hopes that corn cobs could be turned into 5 billion gallons of ethanol a year.
Morningstar.com: Corporate executives and traders seeking an edge have a new "must read" - weekly short-position reports from hedge funds and other large money managers. Readers are expected to pounce on the reports - provided they can get them. The Securities and Exchange Commission retreated from issuing them immediately, and hedge funds are pressing to keep them confidential.
Washington Post:
- Gasoline shortages hit towns across the southeastern United States this week, sparking panic buying, long lines and high prices at stations from the small towns of northeast Alabama to Charlotte, N.C., in the wake of Hurricanes Gustav and Ike. In Atlanta, half of the gasoline stations were closed, according to AAA, which said the supply disruptions had taken place along two major petroleum product pipelines that have operated well below capacity since the hurricanes knocked offshore oil production and several refineries out of service along the Gulf of Mexico.
FINalternatives:
- Pickens’ BP Capital has seen its hedge funds shed about $1 billion this year, costing Pickens himself $270 million that could have been spent on more television commercials flogging “the Pickens Plan.” The firm’s commodity fund, which started the year with $600 million, is down 84% through August, while its $2 billion energy stock fund is down almost 30%. But Pickens is optimistic that the funds, which have shifted into a neutral stance to minimize losses, can turn things around. “Oil likely will finish the year around $120 or $125 a barrel,” he said.
Reuters:
- Mexico's America Movil is set to start selling Apple Inc's (AAPL) iPhone in Brazil on Friday but does not expect to have enough of the hugely popular devices to meet demand, an executive at the company's Brazilian unit said on Thursday.
Financial Times:
European truckmakers have been surprised by a sharp drop in western European orders in recent weeks as the fallout from the global financial crisis brings to an end an extraordinary growth period for the sector. After years of being spoiled by rapid growth rates, the heads of several commercial vehicle companies and suppliers this week painted a more somber picture at the world's biggest truck fair in Hannover.
- Morgan Stanley(MS) lost close to a third of assets in its prime brokerage last week, amounting to hundreds of billions of dollars, as hedge funds panicked after the collapse of Lehman Brothers (LEH) and moved to rival banks. The losses, confirmed by several people familiar with the business, will deal a big blow to Morgan Stanley as its prime brokerage - the world's biggest - is one of its most profitable and successful businesses.
- Economic nationalism is on the rise in China, the European Union trade commissioner said on Thursday, as he strongly criticised the restrictions faced by foreign companies investing in the country. Peter Mandelson said investment by European companies in China was falling despite the country's growth. He said the EU might take up some of the obstacles to investment at the World Trade Organization.
- Pressure is mounting on the Bank of England to lend billions of pounds to the money markets for terms of at least three months to prevent what traders describe as an unprecedented market collapse. Traders said bankers were so fearful of extending cash to a possibly insolvent counterparty that lending for anything longer than overnight, even when backed by high quality collateral, had nearly halted.
- Hedge funds and other investors are responding to the clampdown on short selling by calling for the reinstatement of the "uptick" rule, which they claim provided ample protection against speculative attacks on stocks. The so-called uptick rule was scrapped by the Securities and Exchange Commission last year. It allowed short selling only when the last tick in a stock's price was positive. This rule was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear run.
- JPMorgan Chase(JPM) will acquire deposits and some branches of Washington Mutual (WM) following the takeover of the sixth biggest US bank by US regulators late on Thursday evening, people familiar with the matter said.
South China Morning Post:
- PICC Property & Casualty Co. said Chinese housing prices may drop as much as 50% over the next few years, citing the insurer’s asset management arm. Property prices have “gone far beyond what people can afford” and the nation’s housing bubble is “on the verge of ending,” citing Ling Xiuli, a senior researcher at the company. Shimao Property Holdings Ltd., a Chinese developer, yesterday cut its sales target for this year by 20% to $2.05 billion on falling demand. Shimao also lowered its sales targets for next year and 2010 by about 30%.
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8:30 am EST
- Final 2Q GDP is estimated to rise 3.3% versus a prior estimate of a 3.3% gain.
- Final 2Q Personal Consumption is estimated to rise 1.7% versus a prior estimate of a 1.7% increase.
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BOTTOM LINE: Asian indices are lower, weighed down by shipping and commodity stocks in the region. I expect US equities to open lower and to maintain losses into the afternoon. The Portfolio is 100% net long heading into the day.
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