. August 13, 2007 SouthAmerica: âPanic and the global financial crisisâ When panic sets in, your brain shuts down; not only the logical part of your brain that provides good judgment, but also the creative part that helps you solve problems. A brain in panic is desperate and reckless. But is it âpanic or self-preservationâ when you are trying to sell your assets ahead of the heard, before they create a market meltdown? Here is something to think about: The Central Banks in major financial centers around the world have injected a massive amount of liquidity into the banking system in the last week â now the question is: should these banks lend money to hedge funds, and all kinds of financial institutions that are in a very shaky financial ground? Why should the banks spread this sub-prime financial problem even further? ************* âMarkets fear there is more to comeâ By Katherine Griffiths City Correspondent Telegraph â UK - August 13, 2007 Turmoil is expected to continue in global stock markets as fears abound that some of the world's biggest banks might be sitting on heavy liabilities from the US sub-prime meltdown. US housing crisis deepens Deutsche Bank and Commerzbank are among the latest banks to be caught up in the maelstrom because they are creditors to HomeBanc, the US mortgage company which filed for Chapter 11 bankruptcy protection at the end of last week. BNP Paribas, which sent shockwaves through the financial markets last week when it admitted it had frozen just over £1bn of funds after problems in the US sub-prime market, has also emerged as a creditor to HomeBanc. Regulators and other market participants are searching nervously for where the biggest problems lie after the collapse of several US sub-prime mortgage providers. Gilles Moec, senior economist at Bank of America, said: "One of the big issues is that no one has any real clue of the amount of sub-prime loans which have been purchased by foreigners." The evidence remains anecdotal. Citigroup lost more than $700m (£346m) on credit securities in July, making it one of the bigger casualties. There is speculation that Goldman Sachs has suffered substantial losses in its $9bn Global Alpha hedge fund, while the shares of Man Group, the largest quoted hedge fund in the world, slumped 9pc on Friday on fears its trading strategy based on quantitative modelling has led to a heavy fall in the value of its funds. Man has put its planned US listing on hold. Other financial institutions have seen an opportunity in the market conditions. It's emerged that HBOS, owner of Halifax and Bank of Scotland, offered to buy AAA-rated debt from companies prepared to accept deals valued at about 95p in the pound. All eyes will be on America's Federal Reserve for signs it will repeat last week's cash injection into the banking system to stave off a credit crunch. The Fed's chairman, Ben Bernanke, is coming under pressure to take even bolder action by cutting interest rates. Sources said banks effectively stopped lending money to each other at the end of last week as they shored up their own financial position and sought to avoid extending credit to institutions which might be sitting on undisclosed losses. One banker said the real problem was not the overnight lending market - which has been eased by the capital injection by the Fed and the European Central Bank - but the "term financing" market for loans of about three months. Central bankers by late Friday had restored an uneasy calm to panicky financial markets by injecting a massive and unprecedented $323bn into money markets. Some in the City are frustrated that the Bank of England has taken no action to help ease the strain on banks and other institutions. Sources said there had been several phone calls over the weekend between senior officials at the Bank, the Financial Services Authority and the Treasury, but that the Bank believes there is enough liquidity in the UK to keep the market on track. Alistair Darling, the Chancellor, yesterday flew back from holiday to take charge of the Government's response to the financial instability. Some market watchers believe the FTSE 100, which suffered its worst fall for more than four years on Friday, may test the psychologically significant 6,000 mark this week. Source: http://www.telegraph.co.uk/money/ma...13/cnmarkets113.xml&DCMP=ILC-traffdrv07053100 .
. August 13, 2007 SouthAmerica: Is it $ 1 trillion US dollars enough for the central banks to inject into the global banking system to calm down the markets from all the bad news regarding exposure to complex credit derivatives linked to defaulting U.S. mortgages that still to come in the pipeline? Quoting from the enclosed article: âCentral bankers cumulatively have so far injected a massive and unprecedented amount of roughly $400 billion into money markets that had almost seized up in panic over exposure to complex credit derivatives linked to defaulting U.S. mortgages.â Are traders and money managers in Wall Street as superstitious as the average people around the world? Do they consider the number 13 to be an unlucky number? As in August 13. In case today turn out to be another major event such as âBlack Monday - August 13â: Remember, the number 13 has been considered unlucky for a very long time, and by people scattered all over the world. The early Romans thought 13 was a sign of death and destruction. The number of people at the last supper of Christ and the twelve Apostles confirmed the superstition about the number 13 since that time. The fear of the number 13 is called triskaidekaphobia. For example: many hotels have no room 13, and many buildings have no 13th floor. The next time you fly, see if there is a row 13 in the plane. As date, 13 isnât too lucky either, especially when it falls on Friday. That was always thought of as a really bad day to start a new project or to begin a ship voyage. Movers, doctors and dentists say their business drops on Friday the 13th. The good news is that a maximum of three Friday the 13th can occur in a year, and sometimes there is just one. Friday the 13th of any month is said to be an unlucky day. The moon that falls thirteen days after the New Moon in âAugustâ is considered to be an unlucky day. The month of âAugustâ is the only month that itâs name has any specific association with the number 13 and bad luck. âAugust 13â probably is considered to be an unlucky day by anyone who believes that the number 13 is an unlucky number. The color associated with the number 13 is black. ************ âCentral banks add money for 3rd day but calmer mktsâ By Krista Hughes and Jan Dahinten Reuters - Mon Aug 13, 2007 FRANKFURT/SINGAPORE (Reuters) - Central banks in the world's leading economies pumped money for a third day into the financial system on Monday, but in smaller amounts as investor nerves steadied over the dangers of a credit squeeze. The European Central Bank lent out an extra 47.67 billion euros (32.2 billion pounds) in overnight funds, its smallest amount since lending rates shot up last Thursday on fears European banks faced huge exposure to risky U.S. mortgage debt. The ECB noted that markets were beginning to return to normal. Certainly the ECB borrowing rate was back to the central bank's benchmark level and stock markets were rallying. The ECB action followed a $5.1 billion (2.53 billion pounds) injection in one-week funds by the Bank of Japan and promises by Asian central banks to follow suit if needed, helping to support stocks in Asia and Europe. The U.S. Federal Reserve also topped up its market with $2 billion in extra cash on Monday. That was far less than banks requested and way below the $38 billion injected on Friday, the largest amount for any single day since September 19, 2001. The Bank of Canada followed suit and reduced its injection, adding C$670 million, or $638 million in U.S. dollars, down from C$1.685 billion on Friday. Despite signs of markets stabilising, analysts said they were unconvinced the credit turmoil was over and more central bank intervention was likely to be needed on a lesser scale as banks reassure investors about their exposure. "Actions by the ECB and Fed so far appear only to have been buying time," Barclays Capital economist Julian Callow said. "Central banks are doubtless hoping to inject successively less liquidity in each day, that as each day passes more time is bought for the true credit position of financial institutions to be correctly recognised, and therefore for more normal liquidity provision to be restored." Indeed, European money markets were flush with cash in afternoon trade. Overnight money bid was as low as 3.90 percent, compared with 4.6 percent during Thursday's squeeze and below the ECB's benchmark rate of 4 percent. Demand for U.S. dollar deposits, however, remained strong with the federal funds rate at 5.31 percent, 9 basis points above the Fed's target and U.S. deposit rates for Tuesday delivery were around 5.51 percent. Wall Street opened on a positive footing, with the Dow Jones industrials index up 0.58 percent while most European stock indices were up more than 2 percent following gains in Tokyo where stocks ended Monday trading up 0.2 percent. The ECB had sent a reassuring message early in the day. "The ECB notes that money market conditions are normalising and that the supply of aggregate liquidity is ample," it said via its market pages. The ECB said later it was prepared to also add extra funds at its regular weekly tender to help even out markets. Bids for this are due on Tuesday. BIG MONEY Central bankers cumulatively have so far injected a massive and unprecedented amount of roughly $400 billion into money markets that had almost seized up in panic over exposure to complex credit derivatives linked to defaulting U.S. mortgages. The money, however, is temporary and did not flood in all at once, rather the short-term lending to banks is repaid usually the next day. But one central bank taking a harder line, the Bank of England, said it would not lend cheaply to banks feeling the squeeze from the current financial market turmoil and its standard emergency lending rate of 6.75 percent applied. Investors' main worries are undisclosed losses resulting from toxic debt that could trigger the collapse of banks and funds. It is this concern that has prompted banks to hoard cash rather than lend it to each other in short-term trades as usual, making interbank lending expensive. The major problem appears to be in Europe, where industry sources said central bankers in Europe held weekend talks with bank supervisors and financial executives to assess the dangers from risky mortgage debt to the financial system. Over the weekend, Deutsche Postbank, Germany's biggest retail bank, was the latest big financial institution drawn into the subprime morass when it disclosed 600 million euros ($822 million) in exposure to two investment vehicles run by hard-hit German bank IKB. The ECB on Monday provided funds to 59 banks at between 4.06 and 4.10 percent, just above its 4 percent benchmark official rate, and markets are now backing down on expectations that it will raise credit costs in September. South Korea also started disclosing exposure. Its finance ministry said it was ready to supply emergency funds if credit dried up. The country's banks and insurers have invested $850 million in the U.S. subprime mortgage loan sector, it said. Malaysia's central bank said it was prepared to step in but added it had no specific plans to do so. However, Australia's interbank market showed no signs of stress. The Reserve Bank of Australia (RBA) injection of A$1.52 billion (636 million pounds) in its daily money market operation on Monday was slightly less than average. The RBA rated as low the risk that a credit squeeze could crimp the U.S. economy and drag on the world outlook. Source: http://www.reuters.com/article/marketsNews/idUKL1327105020070813?rpc=44 .
. August 14, 2007 SouthAmerica: The enclosed article is from a British newspaper dated August 14, 2007. Here is Goldman Sachs putting one fire out when it seems that in no time the entire forest will be engulfed on a huge fire. The question is when you stop throwing new money at a lost cause? The new capitalist principle in Wall Street: Make your risky and many times stupid bets â when these bets go sour you can count with the US government to step in for another bail out. Thatâs the new American way and a capitalist system at its worst. *********** âGoldman puts up $2bn after its hedge funds fall by one-thirdâ By Stephen Foley in New York The Independent - UK Published: 14 August 2007 Goldman Sachs has been forced to pump $2bn (£1bn) of its own cash to bail out its in-house hedge funds, after they lost $3bn in a single week. The investment banking titan said that its biggest funds would take on significantly lower amounts of debt from now on - reducing their risks, but also potentially crimping their profits in the future. The damage from the firestorm that swept through large sections of the hedge fund industry last week was only yesterday starting to become clear. Goldman became the first major manager to give details of its losses, saying that three funds had been affected. It has pulled together a band of new investors to rescue the Global Equity Opportunities (GEO) fund, which lost around a third of its value last week, about $1.8bn. Two insurance industry veterans, the California billionaire Eli Broad and the former head of AIG Hank Greenberg, are among those putting in new money. But $2bn out of the $3bn recapitalisation will be Goldman Sachs' own money. The company is rushing to shore up its reputation, for fear that other investors in GEO and other Goldman hedge funds might demand their money back. Executives insisted yesterday that the market turmoil of the past few days created exciting opportunities for those with the funds to stick with their investing strategy. Billions of dollars were wiped from the value of hedge funds that use sophisticated computer programs to make millions of small trades across financial markets. The Wall Street credit crunch has meant that lenders to the funds have been demanding repayment, and the simultaneous liquidation of positions last week sent the computer programs haywire. Returns have since rebounded strongly in percentage terms, but many hedge funds were forced to take money out of the markets and so have not recouped their losses. Another Goldman fund, its $7bn Global Alpha fund, which also has a computer-based trading element, is now down 27 per cent since the start of the year, with half the losses sustained last week. A third fund, North American Equity Opportunities, also suffered. David Viniar, Goldman's chief financial officer, defended the company's $2bn cash injection for GEO. "Given the dislocations, we believe this is a good investment opportunity for us and other new investors, and it will also be helpful to current investors. This is not a rescue." Goldman said it was dramatically scaling back the amount of debt that it uses to improve returns at its funds. For example, GEO previously took on $6 of debt for every $1 of its own funds that it invested in the markets, multiplying the amount of profit it made when things went well. It will now take on $3 of debt for every $1. Barclays is due to inform investors today about the impact of last week's turmoil on its hedge fund business, Barclays Global Investors. It could also set out the measures it has put in place to manage risks at its funds. Source: http://news.independent.co.uk/business/news/article2861779.ece .
. August 14, 2007 SouthAmerica: The Wall Street types are blaming everything in sight right now â even the machines. But not the obvious such as: 1) Their heard mentality. 2) Their incompetence 3) Not understanding the products that they are buying. 4) Greed that goes beyond the understanding of any intelligent personâs minimum amount of common sense. They buy or invest in garbage and then they are surprised when they lose their shirt. (Ex: sub-prime mess) 5) And so onâ¦. ************** âPack Mentality Among Hedge Funds Fuels Market Volatilityâ By LANDON THOMAS Jr. Published: August 14, 2007 The New York Times On Wall Street, there is a rage against the machine. Hedge funds with computer-driven or quantitative investment strategies have been recording significant losses this month. The managers of these funds are the products of the trading desks of the big investment banks, like Goldman Sachs and Morgan Stanley, both of which have investment operations that use computer models. The cross-fertilization has raised fears among some analysts that it is not only the hedge funds that are being hit, but the trading desks at the banks as well. âThese guys all know each other, and they all have the same strategies,â said Ernest P. Chan, a quantitative trading consultant who has done computer-driven research at Morgan Stanley and Credit Suisse. âThey came from the same schools, and they get together for drinks after work.â As the quantitative system has come to underpin the investment approaches of some of the largest hedge funds, its use has grown sharply. Moreover, bankers and investors say, the strategies employed tend to be not only duplicable but broadly followed â the result being a packlike tendency that has helped increase market volatility and, for some hedge funds, has led to losses in the last month. Wild swings in stock prices have become the norm as fears about the mortgage securities market have expanded into the broader markets. Last week, the Dow Jones industrial average was sharply higher on Monday and Wednesday, only to drop 387 points on Thursday, eventually ending the week about where it began. A common thread has often been a rise or fall in prices late in the day, a pattern that many analysts attribute to computer models, which are driving a much larger volume of the trading. Mr. Chan said this predilection for lemming-style buying or selling from investors using similar computer models could turn what would normally be a market setback into a wider contagion. âIf all the models say buy, who is going to say sell? There is just not enough money on the other side,â he said. The problems of these quantitative funds mirror those of the hedge fund industry as a whole â many funds have seen sharp declines in the last couple of months as the credit markets have dried up. Some quantitative funds could potentially have their worst year on record. Despite the large sums of money involved, ranging from $250 billion to $500 billion, according to industry estimates, the club of quantitative investors is a small, exclusive one that bridges the trading desks of investment banks and some of the countryâs largest hedge funds. One might call it six degrees of quantitative investing. Clifford S. Asness, who has a Ph.D. in finance from the University of Chicago, is the founder of AQR Capital Management, a quantitative hedge fund that, according to investors, has had a 13 percent loss so far this month. Mr. Asness is also a founder of Goldman Sachsâs troubled Global Alpha fund, which controls about $9 billion. The Alpha fund has suffered an 11 percent reversal this month, giving it a decline for the year that is approaching 30 percent, sparking speculation that Goldman would liquidate the fund. Goldman calls the speculation âcategorically untrue.â On a smaller scale, Tykhe Capital, another hedge fund that uses quantitative techniques, was down 19 percent in August. The founders of Tykhe are from D.E. Shaw & Company, the giant hedge fund that manages $35 billion via a broad reliance on quantitative, as well as other, strategies and whose founder, David E. Shaw, who has a Ph.D. from Stanford, originally came from Morgan Stanley. Hedge funds as a whole have grown exponentially and now manage about $1.7 trillion, more than double the amount five years ago. In one respect the swoon of these computer-reliant funds is the result of managers, who are faced with a deluge of investor money seeking accelerated returns, using their models to make higher risk market bets by following day-to-day trends. It is an approach that seems to run contrary to the original philosophy underlying a quantitative approach, called statistical arbitrage. Narrowly defined, statistical arbitrage involves a fairly straightforward investment strategy, like the rapid-fire buying of one stock and the selling short of another so as to use the computerâs speed to identify and make money from even the most minute price discrepancies. Such a strategy will generally provide liquidity to the market by buying stocks on the way down and selling them short on the way up. In so doing, it provides a dose of calming, computerized sang-froid to markets in the grip of panic or euphoria. But such strategies rarely promise high returns, so quantitative investors have broadened their computer models to include strategies for investing in more risky areas like mortgage-backed securities, derivatives and commodities. âYou can build a computer model for anything that is tradable,â Mr. Chan said. To some extent, that explains the outbreak of losses in these funds. With many of these new assets being highly illiquid and with the funds themselves having used considerable amounts of borrowed money to enhance their returns, losses have been magnified as worried investors have demanded to pull their money out. In a letter to investors this week, James H. Simons, the founder of Renaissance Technologies, the most highly regarded of the quantitative funds, gave voice to what he described as âunusualâ market conditions. Mr. Simons, who received a Ph.D. in mathematics from the University of California, Berkeley, acknowledged what a difficult month August had been, with his RIEF down close to 9 percent for the month. For an investor who reportedly earned $1.6 billion last year and whose flagship Medallion fund had an average annual return of over 30 percent since 1988, it was a surprising reversal. âWe cannot predict the duration of the current environment,â Mr. Simons wrote. âBut usually such behavior causes first pain and then opportunity. Our basic plan is to stay the course.â Source: http://www.nytimes.com/2007/08/13/b...em&ex=1187236800&en=b59d5cdeafeb7893&ei=5087 .
. August 14, 2007 SouthAmerica: Quoting from the enclosed article: âBut experts do not expect the long-awaited hedge fund blow-up to come from the quants. John Godden, chief executive of IGS Group, the hedge fund consultancy, said: âThe funds will endure short-term pain but youâre not going to get a meltdown of asset values because they remain in the liquid end of the spectrum. Itâs the derivative-linked stuff where you can see the possibility of the values hitting zero.â *************** The Times - UK August 14, 2007 âHedge funds forced into equities fire saleâ By: Christine Seib Goldman Sachs has made the announcement that everyone has been waiting for. The investment bank admitted yesterday that three of its high-profile hedge funds had off-loaded massive equity holdings following days of stock market turbulence. In recent days, whispers at rival fund managers had blamed a fire sale at Goldman Sachs for the devastating downward spiral afflicting global financial markets. The truth is that the bank was not alone. Almost every big quantitative fund using a strategy similar to Goldmanâs â known as an equity market neutral (EMN) strategy â was suffering in its own way. The result has been a rout of one of the most popular types of quant fund. Hedge Fund Researchâs EMN index had lost 7.6 per cent by last Thursday and undoubtedly saw further points shaved off during Fridayâs plunge in equities. EMN funds make their money by identifying investment opportunities in a specific group of stocks, while neutralising their exposure to the sector. They do this by taking long positions on shares that they expect to out-perform the sector and short positions on those that they expect to underperform. The managers of the EMN quant funds set the criteria for the share purchases, based on elements such as price/earnings ratios. Once the parameters are set, sophisticated computer programs take over the business of trading. Until last week, City wisdom held that the funds were incapable of producing heavy losses. One leading fund of hedge funds manager expects EMNâs difficulties to hit the reputation of quant funds as a safe harbour for investors. âPreviously they had a reputation of being good protection because they couldnât make a loss,â the fund manager said. âPeople know now that thatâs not trueâ. But experts do not expect the long-awaited hedge fund blow-up to come from the quants. John Godden, chief executive of IGS Group, the hedge fund consultancy, said: âThe funds will endure short-term pain but youâre not going to get a meltdown of asset values because they remain in the liquid end of the spectrum. Itâs the derivative-linked stuff where you can see the possibility of the values hitting zero.â Equity quant funds have made strong, stable returns over the past few years, which has attracted the interest of large multi-strategy hedge funds. Big players such as Tykhe Capital, Goldman Sachs and Renaissance Technology have been allocating growing sums to EMN, with increasingly ambitious leveraging. According to Hedge Fund Research, investors pumped an additional $2 billion into ECM funds in the second quarter, taking the total amount invested to $40.7 billion. In recent weeks, prime brokers have begun to make margin calls â asking their hedge fund clients to put up greater collateral in order to secure their credit lines. To cover their margin calls, the funds were forced to sell some equity assets. Most had invested in the same stocks, concentrating on value investments. Jerome Berset, an analyst for Capital Management Advisors, the fund of hedge funds, said: âAs those big players with huge leverage started to unwind their positions, covering shorts and selling longs, short names started to rally and longs started to fall and it started to hit the market.â Once the market started to fall, hedge fund managers were pushed to sell more and more equities, at ever-decreasing prices, in order to obtain the cash they required. âOnce one guy starts deleveraging, they all have to, and they try to do it more quickly than their neighbours,â a fund of funds manager said. Source: http://business.timesonline.co.uk/t...ectors/banking_and_finance/article2253682.ece .
. August 15, 2007 SouthAmerica: Fasten your seat belts. Are you ready for the rollercoaster ride? Here we go again!!!!!!!!!!!!!!! http://finance.yahoo.com/intlindices?e=asia .
. August 16, 2007 SouthAmerica: Here is some food for thought: âHerd behaviorâ describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks, and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events, episodes of mob violence and even everyday decision making, judgment and opinion forming. Psychological and economic research has identified herd behavior in humans to explain the phenomena of large numbers of people acting in the same way at the same time. Large stock market trends often begin and end with periods of frenzied buying (bubbles) or selling (crashes). Many observers cite these episodes as clear examples of herding behavior that is irrational and driven by emotion -- greed in the bubbles, fear in the crashes. Individual investors join the crowd of others in a rush to get in or out of the market. âPANICâ is the primal urge to run and hide in the face of imminent danger. It is a sudden fear which dominates or replaces thinking and often affects groups of people or animals. When the âPanicâ button has been pressed - and the herd gets spooked â let the herd stampede begin. Reality check: http://finance.yahoo.com/intlindices?e=asia .
. August 17, 2007 SouthAmerica: Yesterday the market was a real roller coaster in the US - the market went from 343 points down to a closing of only 15 points down. If they try to do that once again, donât miss the opportunity and as soon as the bargain hunters show up with their cash get the suckers, and sell everything that you need to get rid of. The one good thing about the US equities market is that you almost always find a sucker willing to buy the stuff that you want to dump. Even when you know that the current carnage will continue at least for the near future. Reality check: http://finance.yahoo.com/intlindices?e=asia .