One Dozen Items That Characterize The Market Now

I’m going to write this post backwards tonight, partly because going from specific to general may make more money for my readers tomorrow. Let’s go:

  1. Did you know that there has been panic in closed-end loan participation funds? No? Well look here. Or look at this Excel file. Here’s the skinny: the average loan fund has only lost 0.47% of its net asset value since 8/10, but the average price has fallen by 6.30%. You can pick up a little less than 6% here, with modest risk, or a little more, if you are clever. Remember that the grand majority of loans here are senior and secured.
  2. The Title insurers have gotten crushed. Here’s to the activists who bought a ton of LandAmerica in the 90s, something I advised against. Title volumes will slow. Wait for the home inventories to crest, and decline a little, then buy a basket of the Title companies.
  3. I have a decent amount of exposure to Latin America in the portfolio. That Brazil and Mexico have been whacked has cost me, even though my companies are conservative.
  4. The winds are blowing. Hurricane Dean is in the Gulf, and may do damage to Yucatan, and after that, oil infrastructure and Texas. Given the late start of the season, I would not begin to suggest that this will be a heavy loss year. Damages from Dean are still uncertain as well.
  5. From the excellent Aaron Pressman, I offer you his insights off of Nicholas Taleb’s book The Black Swan: The Impact of the Highly Improbable. What I would point out here is that when times are unusual, a lot of things tend to be unusual. Credit events tend to be correlated, so when things go bad as in 2000-2002, many seemingly unrelated things go wrong at the same time, often due to correlations in the portfolios of the holders, particularly leveraged ones.
  6. Having seen a decent amount in prime brokerage relationships at a medium-sized firm, I can only say that they are needed but overrated, and the conflicts of interest are significant.
  7. I wish i were managing structured securities again. Buying AAA CMBS at LIBOR + 0.60%. That’s the best since LTCM! Pile it on! Hey, maybe we can lever it?! 😉
  8. Onto credit issues. Fed funds futures are rising in price (down in yield) over the current credit woes. Canadian ABCP participants may have a good solution to their troubles. Convert the claims to longer dated floating rate paper, which can still be held by money market funds. Countrywide cut to BBB+, which effectively boots them from the CP market. Rescap goes to junk, but it should have been there already. If Countrywide survives you can make a lot of money in their unsecured debt. I’ll pass, thank you. I’d rather hold the equity. Anworth is also getting smashed in this environment.
  9. Have you seen the credit summary in the Wall Street Journal?
  10. I had argued at RealMoney that home equity loans would eventually get hit. A non-consensus opinion. Well, now they are getting hit.
  11. DealBreaker.com has chutzpah, particularly on this list of hedge funds that might have blown up.
  12. You can look at it on the serious side or the funny side. Either way, losing money for clients stinks. That’s why I focus on risk control.