So now we add BNP Paribas' hedge funds to the list of calamities. The dollar and the yen are generally higher, stocks look to open lower and the ten year treasury yield is much lower.
In my blogging of late I have tried to convey a sense of caution and that financial problems take a long time to work themselves out. It is unlikely that the BNP Paribas news will be the last of the credit market big stories.
There were one or two comments that suggested buying the last dip was the right trade. For some people, strategically it might have been (here I am not picking on anyone in case the market finishes down which is not a given based on recent volatility) but, to repeat myself, things that mess will the financial sector are a big deal and trying to trade around them is not right for most folks.
One aspect of my job is to know when to overweight volatility and when to underweight volatility. Late in the cycle and with a financial something or other that is an easily definable and visible threat is a time to underweight volatility--in the context of managing other people's money.
I think that most individuals do not want the volatility and for now most of the juice seems to be in the financial sector. I have disclosed being very underweight domestic financials for a long time. Look at a financial sector ETF against the SPY for the last couple of weeks. The simple act of underweighting that sector reduces the volatility.
I don't know if it is too late to do that now or not (but I don't think so) but something similar will happen in the future with this same sector or another one and hopefully you can be better prepared for that even if you are on the wrong side of the financials now.
Wikinvest Wire
34 comments:
ugly open this morning
but the yen seems to be topping next to 0.00850
so i expect some bounce coming
maybe a double bottom on the ES futures or a dip lower to stop out all the new longs then a bounce
I remember looking at bond funds for the IRA and a lot of them were loaded with mortgage backed stuff. I was like "Oh hell no. I'm not going near mortgages. That won't end well." This was 2005.
Why did all these hedge funds and other alledged smart money get involved with this toxic sludge?
Quite a different bubble then the tech bubble when it was us retail guys in over our heads.
Drip, Drip, Drip
This will continue for a while IMO
The sky will not fall, but that does not mean it will be pleasant either.
This is unrelated to the BNP posting, but I have a quick question for you Roger as I have found your blog to be very insightful. Which portfolio management software do you recommend? I am a Portfolio Manager with a small RIA, and am already familiar with Frontier Analytics and Advisory World. I'm looking for something with a little more power. Any feedback would be appreciated. Thanks.
BNP Paribas said there was a total 2 billion dollar problem in three funds.
So the ECB injects 130 billion in liquidity today.
Did the ECB panic or am I missing something here?
I don't have a software to suggest. We have some program that we spent $25k on that I was never consulted. I have no direct interface with it. I tell my colleague, Mary Beth, what I need and she knows how to get it right away. I work from home and the software is at the office.
BNP a couple of billion? ok, but controlling how much notional value? $2 billion with no leverage is different than $2 billion levered 100 times (picking a number that has to be too big.
Also German Bank IKB (i think that is the name had some sort of problem last week. I don't even think BNP is the second one.
Anon 10:00
Here is a good short video on the subject:
http://www.marketwatch.com/tvradio/player.asp?guid={A36046CF-3362-45B1-836D-7296B52E2D69}
But could this influx of liquidity in Europe be somewhat inflationary?
Correct me if I'm wrong but BNP says it only has a 'valuation' problem in it's funds ; it can't assess the value because of illiquidity in the mortgage market (due to the subprime crisis no doubt).
Roger, how credible is this? Or are they close to going belly-up and just trying to postpone the inevitable?
Philippe,
from my perch in the mountains I can't know, of course but close to belly up? I doubt it. BNP's stock was down 3.8% a few minutes before the French close (per a graphic on CNBC Europe). The funds themselves going to zero seems unlikely in the general sense. Funds don't often trade themselves to zero, every once in a while, yes but not often.
In the middle of the event getting bids to either value the portfolio or actually unwind is always difficult which might be what is going on as it appears they own some real toxic stuff.
From a real world fundamental view a fund losing half its value is not the thing, the thing is how it dominoes and I don't know what that will look like.
Roger,
Realistically how levered can these funds be? 5, 10 times?
I still think there is a big disconnect from BNP's stated 2 billion total problem and the ECB injecting 130 billion.
of course maybe when all the other banks heard all you want at 4% maybe they just backed up the truck.
BTW this is BNP FUNDS that are having problems the BANK is SAFE. Maybe it might hurt income and the stock price a little, but no need to worry about BNP Paribas
no argument from me. in addition to the german bank i mentioned a dutch bank NIBC (I think) also had problems.
There are a couple of things going on in additon to BNP and maybe the ECB would prefer to act one time instead of a little bit here and there?
Just a guess.
I found a Forbes article:
"According to WestLB analyst Christoph Bossmann, the funds currently are worth approximately 1.6 billion euros ($2.2 billion), with around 30% of assets linked to the U.S. subprime market."
"Analysts did not think the freeze or eventual closure of the funds would have an effect on BNP Paribas's finances, as the investments were off balance sheet and represented 0.2% of the bank's overall 356 billion euros ($488.8 billion) of assets under management."
yesterday i got slightly hammered trying to pick the bottom of the yen drop
finally i got filled as close as possible to the true bottom =) stubborn
thing is the market just sat there way too long and i started getting nervous
as a crutch i start reading the online financial news and Bloomberg had an main article on how hard the yen had dropped in 1 day versus the Euro and i got really nervous and thinned my position - a mistake
today the yen blows away the Euro almost double its last swing and not a word, not a peep
conclusion: even the financial news guys are now feeding us steaming piles horse manure in order to help the carry trade's domino effect on the sub-prime guys
trust no one, especially the talking-heads, just read the tape
so my question is this
how many of these fancy sub-prime financial fellows also got caught double dipping into the fashionable yen carry trade that is also showing some serious pressure?
check the charts, it all started with an unheard of 60k volume hour bar in the September yen futures, almost the daily volume in one hard spike up that hasn't been retraced...
it does seem to be very interrelated
The only disappointment with today's sell off is that I'm having a hard time finding bargains. It seems like things that were already way overbought got kicked down a bit, but everything on my bargain watch didn't get beat up too bad. The last 300-400 point sell off yielded a nice shopping list for the next day. Am I just looking in the wrong place?
Roger,
I still don't understand your trading strategy.
Most successful managers buy on the dips, and sell on the highs.
You bought nothing in the past weeks, and sold SBUX?
SBUX is up big this week.
Isn't this a buying opportunity? And how could you pick a worse stock to sell?
Hmm....
By selling SBUX this week, you actually increased portfolio volatility.
Roger is rather helpful to many people. No one has a crystal ball or is perfect on every trade.
critizing him on SBUX only shows your rudeness and lack of understanding.
Do you cheer him on his winners?
BNP Paribas didn't matter for it's old news about credit marginal credit markets. It mattered because it helped encourage more people to yank their money out of more liquidating hedge funds. Whatever assets hedge funds were holding got whacked. Roughly speaking, the more appeal the asset to global/quant/macro hedge, the more it got whacked today. Most stuff up was the stuff they hate and covered their shorts in. It's totally pointless to listen to the press pretending to explain these moves because of problems in credit markets nobody can see.
My model is down nicely on the year, the pain is seriously hurting my sanity.
Why is everybody acting like a PANIC
Dow is up for the year
S&P is still up for the year I believe
Have we entered a phase where the FED is suppose to guarantee no losses in equities?
Do people understand the inflation associated with this point of view and how worthless are gains in the market will be.
Here I go again:
The residue from the sub-prime issue is that real property can be bought in many areas dirt cheap by any measure of analysis (I prefer Net Operating Income plus Write Offs-certain). If so inclined, rental property is a great way to juice your portfolio.
Regardless of one's view of further erosion of the bond market and companies related to property,
the NOI plus WO-certain presents a compelling total return from appropriate real property investments.
What I found interesting today was that there were some very poor stocks (that were heavily shorted) that were up today. What that means to my small mind? Forced liquidation (buy to close short positions).
The stink is so high--until we find all of the dead bodies we will have a nervous market.
And, for any that believe that our global economy is strong--the credit markets are the Astroglide that keeps things moving smoothly. Those markets have seized up and investors might as well....oh that would be impolite to say!
Anon 1:14,
Is'nt the internet wonderful? You can post nasty barbs while hiding behind the shield of anonymity. Roger provides an educational service and askes for nothing in return. The least you can do is show some respect. If you don't like the content on this blog, remove it from your favorites list and take your negativity elsewhere. Better yet, start your own blog and tell us how you would do it better.
Roger loves to pontificate, usually preceded by "I don't know", or closed with "I'm not sure". Which begs the question, why bother to say anything if you aren't sure.
But at the end of the day, its not the pontification that makes investors money, its the portfolio management.
So far in this tumultuous market, Roger has told us he would hedge if the market drops below the 200 SMA, which he didn't follow through on. He sold SBUX, which has since gone up, and he hasn't bought any bargains.
So, all the pontification is swell, but he's not helping out his investors. When the dust settles, this turmoil will have been an opportunity to re-balance. Meanwhile Roger is just waxing eloquent, but not managing portfolios.
"So, all the pontification is swell, but he's not helping out his investors."
Not only are you an idiot but you are a rude idiot.
Roger does not attempt to predict the future. he explains and argues both sides as in a class room. Occasionally he provides his point of view.
We get a chance to learn and explore and occasionally read posts from rude stupid people.
Okay, I'm rude. No need to argue that point.
But nice doesn't fill your wallet, nor does rude.
Portfolio management fills your wallet, and my point is that Roger seems to be going in a weird direction.
He claims to be trying to reduce volatility (which is usually accomplished through a mix of non correlated assets), yet his strategy for managing volatility sure isn't obvious, especially in the last couple of weeks, when volatility has gone way up.
How about waxing eloquent on the topic of portfolio management, and proven strategies for managing risk. So far, Rog has only recommended lightening up on US equities with a double short ETF. I recommend Dalio of Bridgewater Associates or Yale's Swenson if you're wondering where to hear from some experts.
At AA meetings, when someone voices serious discontent with the fellowship, the usual response is "well it sounds like you have the resentment. Now all you need is a coffee pot, and you can start your own meeting.
yes you are rude , but you forgot the idiot part. Roger does not give a recommended portfolio. We are not his investors.
If yo can not even figure that out what makes you think you can manage your own portfolio.
I follow very little of Rogers "advice". I over weight areas I feel are most profitable, but still feel I gain an enormous amount from listening to his perspective.
I do not look for a model portfolio and timing model to boot because I know they will not be here.
Apparently you have not figured that out and seem to be unhappy that the market is volatile and want to blame Roger.
Roger is one of many I respect and learn from while I implement my own vision for my portfolio.
Learning from people like Roger has provided me a 13.5% return so far this year. Not bad in my opinion considering the year so far.
I am extremely happy with his blog. If you can not understand it or benefit from it than I think the problem is with you.
Okay, put the emotional distress on hold girls.
I forgot this is the place to worship Roger; no dissenting views need apply.
The weekend hostage videos are cute though.
Hi Everone,
I like Roger's site because it reflects his thoughts, his reasons and his emotions. This is someone I can relate to because he is not selling any wares or trying to convince you that he is right or someone is wrong. As the wise man or woman says it is not what you know counts but know what you don't know. I would rather hear someone says I don't know where the market is going in stead of giving you a fool-proof plan. If we all can keep our cool we probably can really learn something.
I just wanted to chime in that I like this site because Roger is a talented host and writer who let's people blow off steam on market related topics.
Amusing exchange I must say. I visit Roger occasionally because he brings up some ideas that are missed by others. He doesn't have all the answers and he admits it, which I admire. As for calling someone rude and an idiot for questioning some of Roger's decisions, I think that may be going a little far. I'm sure Roger is mature enough to handle a little dissent. It must be nice for him to see he has such loyal defenders.
When you people talk that hedge funds take their money out..but actually they are using this crash as an opportunity to buy the stocks cheap...
France’s biggest bank BNP Paribas, which has triggered a sharp plunge in the Indian and other global equity markets in the past two days, on Friday purchased shares worth Rs 20.46 crore in a single company here in India. BNP Paribas Arbitrage, a foreign fund promoted by the French banking giant, acquired 1.65 lakh equity shares in Northgate Technologies at Rs 1,240 per share in a bulk deal at the Bombay Stock Exchange. The BSE sensex have witnessed a plunge of 440 points in the past two days, while the stock markets in the US and Europe have also seen sharp decline in the two days, primarily on fresh sub-prime concerns triggered by BNP Paribas’ move on Thursday to suspend withdrawals from three mutual funds. It has freezed withdrawals from three of its mutual funds with assets worth $2.2 billion due to their exposure to the US subprime market.
Here is the link for the full article http://www.stocktips.in/?p=15382
We investors need to be cautious now...
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