Posted on 07/11/2007 9:48:01 PM PDT by bruinbirdman
Junk bonds have suffered a second day of mauling on Asian, European and US markets as investors shun risky credit, raising the risk of contagion for stock markets.
Europe's iTraxx Crossover index, which measures risk appetite for low-grade corporate bonds, had the sharpest rise since the index began.
Marcus Schüler, director of credit at Deutsche Bank, said the sudden rise in the cost of money for risky deals and leveraged buyouts was serious: "We've now reached a point where the worries are spreading to other parts of the capital markets and, for example, people in equities are starting to wonder about financing conditions for new deals. I've never had so many requests to add people from all areas to my distribution lists on the credit market," he said.
It is believed that, unlike the dotcom bubble in the late 1990s, the epicentre of the current one is in the credit markets, while stocks have been well-behaved. But this is highly misleading.
Morgan Stanley says the price-to-earnings ratio of smaller and mid-size stocks - such as on Europe's MSCI index of 600 stocks, or America's Russell 2000 - have been pushed to an all-time high of around 20 on the belief that they may be targets for private equity predators armed with cheap debt. The larger stocks have less of a premium because they are deemed too big for such takeovers.
Twelve deals have already been pulled over the past fortnight and a further $300bn are now in doubt. Gunnar Stangl, a bond strategist at Dresdner Kleinwort, said a "large glut" of loans with minimal covenants were now hanging over the markets and would have trouble finding buyers.
The hardening mood has meant KKR is having to accept more stringent terms and higher interest rates on the £9bn in debt refinancing for the Alliance Boots takeover.
James Carrick, a strategist at Legal & General, said we are entering "historically dangerous territory" for the markets; the sudden tightness in bonds was similar to conditions in autumn 1987, a month before the crash, and again just before the 1991 recession and the dotcom bust.
In essence, a credit crunch at the lower end of the debt markets can all too easily set off a vicious circle of slower growth and ever higher credit spreads, ultimately hitting the real economy.
The latest turbulence began when rising default rates in the US sub-prime mortgage industry (now 13.8pc) caused the near collapse of two Bear Stearns hedge funds, which exposed that up to $1,200bn (£590bn) worth of sub-prime debt packaged in securities may be falsely priced.
Deutsche Bank estimates that $90bn of investor money has already been lost since the bubble burst. The ratings agencies have since been downgrading these risky bonds, triggering further losses. Moody's has downgraded 399 sub-prime bonds from 2006-vintage, while Standard & Poor's has 612 securities on negative watch.
Federal Reserve governor Kevin Warsh said yesterday the debacle posed no serious danger to the US economy. "There are certainly losses, but they don't appear to be raising, at this point, systemic risk issues," he told Congress.
OH MAN that sooo true LOL!
I’ve seen some analysts saying this sub-prime fiasco will leave a $250B hole in our economy.
Ruh Roh! Bonds suffer in Asia. Nust be the Chinese Junk!
So, in these cases, should the Fed and Treasury be echoing the BS of the investment banks and Wall Street (while the really knowledgeable and rich run for cover), or should they be telling the truth and starting a full-scale stampede?
Confucius say, Buy Heap Chinese Employee Slaving Bonds.
Hedge fund investors are mostly institutions and very wealthy individuals.
Today my junk bond fund was up ein pfennig. My investment grade fund was down. Go figger.
Then again all the bonds I own outright are still paying the same interest and the value at maturity hasn't changed.
yitbos
As of last year, the US economy, as measured by GDP, was $11 trio, so a $250 b hit is about 2.2%, and, btw, the hit will not occur all at once, but rather over 18 months, more or less.
Ah, I know what you're going to say. You're about to make the ''cockroach'' argument, to wit, where there's one bad loan that we see, there are 30 or 50 others we don't see.
Poppycock. Only the greedy (read: Bear, Stearns et al.) investment bankers have bundled the stupid sub-prime mortgages into investment (haha) products. Merrill's exposure is tiny, same as the dirtbags at Goldman. ING and Paribas aren't playing, nor is Barclay's, and the Japs of course haven't the tiniest interest in sub-prime ANYthing.
The net of it all is that: A) the dollar is going to take a hit, and B) the world financial oligopoly won't miss a beat.
So, to profit from this (and you're a bit late, but there's still profit to be made), buy Sterling or Swiss (and, IMNNHO, write calls against the long position), or arb Euribor and Eurodollar.
Or not. Your choice. This is just another banking screwup, as occurs about once a decade. Remember ''sovereign loans'' in the 1970s? Remember the overleveraging of real estate by S&Ls in the 1980s? ... You get the idea, I'm sure.
FReegards!
Thank you for that. I agree the P&Ls for the Investment Banks will not be affected because the losses get passed onto the bond holders. They merely faciliate the underwriting and issuance as a service. However, their stocks have taken a huge hit in the last two weeks. And they are cheap to begin with in terms of multiples.
Your strategy on currency and arb is intriguing. I have never traded currencies. Is there an easy way to self-initiate without too much trouble? What’s the timeframe on the profit opportunity?
TIA
And the solution is, BUY AMERICAN!
Even if it costs a little more in cash, it will keep us free.
Freedom cannot be price shopped. When consumers use instant gratification as their scheduling device and the apparent price as their sole criteria, they follow a bread crumb trail into the wicked witch’s gingerbread house.
Candidly, though, until you understand the difference between spot and futures, you **REALLY** don't want to do this.
Not being patronising here, not at all. But, m'friend, you have to understand what's what, and who's who, in these mkts BEFORE you plank down your capital. A lot, an unfortunately large lot, of people don't ... and most of them have rued their actions.
Rather like Tennessee Ernie Ford's old song, ''A lot of 'em didn't an' a lot of 'em died''.
Happy to show you around the forex/futures mkts, anytime at your convenience, but you do want to be WELL informed before entering, ok? You can find my phone number on my website; I am **not**, very definitely, a CFA or CTA...I'm just a trader, and a pretty fair one at that.
FReegards, and by all means call if you like, most any business day between 8:30 and 3:00 Central time.
I assure you, the problem isn't buying American. The real problem is FINDING AMERICAN! Dang! we go all over the place and can't find certain items that are made in America anymore. It's truly pathetic and we've exported a dangerous amount of our manufacturing/productive capabilities overseas.
There are plenty of products MADE IN AMERICA. However, most Americans can’t afford them.
There is a very simple and easy one step process for a beginner to make a small fortune trading currencies.
Start with a large fortune.
I'm interested in your take on why the dollar will take a hit. After all, loan defaults hurt liquidity and that should strengthen a currency. My take is that market players figure the Fed will have to lower rates at some point to get things going again, which will weaken the dollar against other currencies where central banks are raising rates.
Old Warren Buffett joke:
How do you become a millionaire?
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Start as a billionaire and buy an airline.
I have been barraged with spam regarding FOREX trading, free promotions, free cash to get started, etc.
When I see that kind of spam, I know it’s an invitation for a person to part with their funds.
I’m no spring chicken to the equities and bond markets. Have never dabbled with currency or commodities. I know those are different beasts.
Spot and futures are different in time, yes? Spot is real-time, futures are like options?
In any event. I can see the dollar will continue to slide as a result of confidence sliding, and confidence sliding can be explained in a thousand ways. I never hedged with gold, but four years ago people I know that were urging me to hedge the dollar with gold, well they did well, but then so did I with investments in equities and trading/hedging with options.
Here’s one of my well-researched long followed speculative picks.
Beacon Power (BCON)
They never made a profit, they are development stage alt-energy/green tech company, doubled in price in the last month, will be a four bagger before end of year. Just bought up (>10%) by David Gelman, that is significant.
Anyone in the electrical grid biz knows they are superior, tested, scalable, approved by CAISO, NYSERDA, PJM, DOE and CEC. They are in a billion dollar niche market with patents and no competition. Their existing competition welcomes them to take over. Yes that’s right, ‘welcomes’ because the existing grid frequency regulation service is provided by fossil fuel generators that can easily be redirected to provide power rather than used for ancillary services.
They will get manufacturing funding from GE Capital.
Short-term at least, say 30-60 days, USD is inarguably on the wrong end of events. Take a look at any chart of the major ccys since, say, 1 June. Euro is setting all time highs (2nd day in a row, too!), Canadian $ 30-year highs, Sterling 50-year highs, even Yen is up a couple hundred pips.
Liquidity is not of concern at this time, or, not to forex traders at least. What the mkt fears is not the losses that investment banks take on CMOs, but that there is another shoe yet to drop.
OK, ''spot''. Spot currency trading is dealing in a 48-hour forward contract of whatever size. What the forex firms, many of them, don't tell the new trader (among other things!) is that, if the trader wants to hold a position for longer than that, he must 'roll' the contract every couple of days. What's wrong with that, you ask?
Here's what. You've doubtless seen the pitches from a number of forex firms, to wit ''no commissions''. Technically, that's true, but in reality it's pure horse puckey. ''Contest risk'', what mkts cost the trader to enter and exit positions, does not consist only of commissions. The bid-ask spread in a mkt can cost the trader far more than a simple commission, and in forex it almost always does. Let's run the numbers.
Suppose GBP/USD (that's the Sterling-US dollar pair) is quoted by your friendly forex broker as 2.0310 bid @ 2.0315. Suppose also that you want to trade 62,500 pounds of Sterling (there's a reason for that number, I'll get to it in a minute). OK, you duly tell your broker ''Buy sixty-two-five GBP/USD'', and he tells you ''sixty-two-five yours!'' (i.e., you're filled. You're filled at 2.0315 in this case).
Depending on how you look at it, you've paid either 2.5 pips or 5 pips of the bid-ask spread. 5 pips on a 62.5 trade is $31.25, and that's your cost of entering the mkt. And, if you wish to hold this position for any length of time, you'll pay another 2.5 or 5 pips every 48 hours.
In futures, contrarily, the trader deals in a contract of variable length, as a rule much longer than spot. Regular contracts at the CME/IMM in Chicago in ccy futures expire on the second Monday of March, June, September, and December. Thus, a typical transaction in Sterling would be ''buy 1 September British Pound at the market'', and, should you execute such an order, you will be the proud owner of 62,500 British pounds (that's why the number above), deliverable to you on the 2nd Tuesday in September, should you choose to hold the contract through to expiration.
Your contest risk in futures is A) a commission (I'm paying $19.82 per contract, commission + floor fees, right now) plus B) some chunk of the bid-ask spread, typically a couple of pips in the active contract, the ''front month'' as we say. This works out to about $32.07 -- but you only pay this figure once no matter how long you hold the trade, and then pay once more on exiting the position.
In short, if you want to trade spot forex, do NOT position-trade it. In-and-out swing trades and scalps only. Or, get eaten alive, over time, by the contest risk. Swing trading and scalping are not my style of trading, thanks very much.
''Commissions'' aside, there are a number of other features of non-interbank (the 'interbank' is where the big boys play) forex trading that are, er, perhaps somewhat less than desirable for the retail trader.
or whatever country it is in which you reside...buy from the production of THAT country.....
Keep saying it!
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