July 13, 2009 Stock Market Recap


This post is by from Trader Mike


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I was beginning to wonder if the bounce scenario I laid out in the last recap was going to come to pass. The market was acting very heavy the last three sessions and it seemed that the market would work off its oversold condition by going sideways. I’m not sure if it was the bullish analyst talk about GS and other financials or just hopeful bulls rushing in ahead of earnings that caused today’s rally. I suspect it was the latter given the broad advance — all sectors were up today except for hospitals and transport which were down slightly.

The Nasdaq continues to look the best of the major indices. It was able to recover from early selling and climb back over its 50-day moving average.

The technical pictures for the S&P 500 and Russell 2000 are very similar. Both are in well defined downward-sloping channels. But before they can attempt to break free of those channels they will need to conquer their 50-day moving averages.

Trend Table

A lot of upgrades today but the “ups” for the S&P and Russell are very solid yet IMHO. I’ll feel better about them once (if) they break out of their downward sloping trend channels.

Trend Nasdaq S&P 500 Russell 2000
Long-Term Up Up(+) Up(+)
Intermediate Up(+) Down Down
Short-term Up(+) Up(+) Lat(+)

(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend

*** I’m simply using the indices’ relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

Will the Chinese Keep Saving?


This post is by from Brad Setser: Follow the Money


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This is Rachel Ziemba of RGE Monitor where this post also appears.

In a recent post, Jeffrey Frankel asks will the U.S. Keep Saving? noting that despite the recent increase in the U.S. savings rate, the demographics of the U.S. (as well as those of Japan and Europe) will contribute to a reduction in savings. He argues that despite the fact that wealth losses will boost savings rates, the dis-saving of the retired population will keep the savings rate relatively low, if higher than the pitiful rates of recent years.

The companion question, whether the Chinese will keep saving is equally of importance. Whether the Chinese stimulus is able to boost private consumption ahead will be critical to global and Chinese demand. So far Chinese consumption has held up and even grown slightly from a weak base –as illustrated by retail and auto sales. Yet one reason that the Chinese economic reacceleration is fragile is because it is uncertain where the new production in China’s factories will be consumed. Chinese domestic demand still seems weak and overpowered by some structural incentives to save.

In the near term U.S. savings rates, which reached 6.9% in May, seem destined to keep climbing as U.S. consumers retrench. This could contribute to slower growth in the so-called export-led economies which had grown reliant on exporting demand.

One outcome of the financial crisis has been a narrowing of global economic imbalances, as illustrated by the reduction in the Chinese trade surplus and a reduction in the corresponding deficits of countries like the U.S.. The combination of a sharp fall in consumption across the globe and withdrawal of credit, partly accounted for swift reductions in some countries. I wrote last week about the narrowing of the surplus of oil-exporters. All in all, surpluses and deficits might be smaller given the reduction in credit available even as the increase in government borrowing leads to higher long-term interest rates. This narrowing is likely despite the fact that reserve accumulation seems to have restarted in Q2. Setting aside China which will report reserves data at some point over the next day or so and adjusting for valuation, reserve growth was about $40 billion in the quarter of 2009. While this is much smaller than in the heyday of 2007, it is the first quarter of positive reserve growth since Q3 2008. Yet, there are some signs that we will not return to the earlier pace.

The U.S. current account deficit has been narrowing for some time and has fallen from 6.6% of GDP at the end of 2005 to 3.7% at the end of 2008 and the IMF estimates that it will fall further to 2.8% of GDP over the course of 2009. With U.S. consumers buying less (the savings rate rose to 6.9% in May 2009), Chinese producers need to find new markets.

The Chinese current account surplus was $420 billion in 2008 and is likely to be smaller this year. The Chinese trade surplus (the largest component of the current account) was about $100 billion in H1, but one month (January) accounted for almost half. The absolute level of China’s trade surplus has shrunk, to about $13 billion in April and May and just over $8 billion in June. While the greater cost of China’s commodity imports (watch for more on this tomorrow) accounts for part of this narrowing surplus, it may reflect a sign of things to come should Chinese exports stabilize at a weak level in the absence of external demand.

Should export-oriented “surplus” countries like China keep saving and keep trying to export demand, the reduction in imbalances could actually exacerbate the global economic contraction or contribute to a more sluggish recovery. The high savings rate or rather artificially low cost of capital in China has contributed to misallocations of capital that will be difficult to reverse and will take some time.

However expansionary fiscal policies in these countries and a reallocation of capital within these countries, could in the long-term contribute to reducing internal and global imbalances. Chinese officials seem cognizant of the need to rebalance the domestic economy even as some of their policies seem to operate at cross-purposes.

While government incentives are contributing to an increase in some purchases, Chinese consumption (and that of other emerging economies) may find it very difficult to pick up the slack from a U.S. consumer that is spending less. However, Chinese fiscal stimulus does seem to be doing more to potentially boost domestic demand. Yet the effect of some of these incentives could diminish over time and there is of course a risk that Chinese production could add to global overcapacities in the absence of an increase in domestic demand.

In the Wilson Quarterly, Michael Pettis argues that whether or not the Chinese start consuming more, their savings rate will drop from the 50% marked in 2007. Either Chinese policies will contribute to more private consumption or the reduction in global demand will lead to reduced growth, limiting savings.

So what would be the package of consumption-led growth?

Eswar Prasad details how China and other Asian savers might rebalance their domestic economy through removal of the policies that suppressed domestic demand. These are largely long-term in nature including the development of China’s capital market to increase the return on domestic assets and patching holes in the social safety net.

The massive credit extension in China, which rebounded in June 2009 after slowing slightly in April and May suggests that the cost of capital in China remains well below global costs. This distortion raises the risk that non-economic projects are being financed to meet bank quotas. Thus there is a risk that even as Chinese officials try to take some steps to support domestic demand, other policies might add to the misallocation of capital, contribute to asset bubbles (especially property). Meanwhile, some Chinese investors are worried about future inflation. The blunt policy tools continue to be hard to manage.

The raft of Chinese data to be released over the next few days may give us some more clues as to the trajectory and possible risks ahead

peHUB Second Opinion 7.13


This post is by from PE Hub Blog: Buyout Deals


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The Sun’ll Come Out Tomorrow? Today was a rough news day for the already beat-up Sun Capital Partners. First, the Journal reported that Kellwood, its largest investment may file for bankruptcy. Then the Post reported that its second-largest investment, which already filed for bankruptcy, will lose an imperative deal because Sun Capital “starved the company of research dollars” under its ownership. Then we have this stinger: Sun Capital founder Marc Leder has seen his dirty laundry aired in the Palm Beach Post, which reports that his wife, who admits to having an affair with her tennis coach, wants more than the $100 million he has offered her in a settlement, claiming he is worth more than $400 million.

The New Criterion for MBA Admissions: Amid a tight MBA labor market, B-school admissions decisions increasingly hinge on applicants’ ability to land a job upon graduation. (BW)

McKinsey’s Cracked Crystal Ball: Its 2009 predictions about the future of private-equity and hedge funds might be as inaccurate as its 2007 predictions. (Moneybox)

Fundraising Gossip: Updates on some Australian funds from the Carried Interest blog… (CI)

Fundraising Facts: Apollo is raising $600 million for a Commercial Property REIT. (Bloomberg)

Deal Journal Asks: Ready to Call Bottom in the M&A Market? (Short answer: No.) (DJ)

Memes: Here’s that Cornell study on the way news travels (from blogs upwards or from papers downward?) (Cornell)

Goldmans “True Blood” Moment: Should Goldman Sachs save CIT? Will it? (Reuters)

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Steven Brill Tries Clearing the Air — and His Reputation — Around Clear Pass Debacle


This post is by from PE Hub Blog: Human Resources


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Steven Brill, founder of the company whose “Clear” system allowed members to pass quickly through airport security, has never been a shrinking violet. It should come as no surprise then that Brill is publicly distancing himself from the company’s failure, just months after being pushed out by venture capitalists who invested over $50 million.

“There are different measures of success,” Brill said in an interview today with the Atlanta Journal-Constitution. “One is business success. And the other is this: Did you handle yourself in each situation with integrity and were you there to answer questions when it succeeded or it failed? I’m very proud of all of that in my life.”

Brill, who’s suing the company over a 2008 salary dispute, added that if his case “goes forward, it will come out in court, and it will all be pretty clear.” (I gather the pun was unintended.)

“It certainly sheds some light on how much I knew and how much I had to do with their current problems,” he said.

Brill, a former Newsweek reporter whose prior endeavors have centered on media — he successfully bought and sold American Lawyer magazine after turning it around, he founded CourtTV, and he launched Brill’s content and Inside.com, two properties that flamed out earlier this decade –tells the AJC that he’s surprised by Clear’s closing. He also reveals that he has already moved on to a new pursuit, Journalism Online, a venture that “will permit print publications like newspapers and magazines to use an e-commerce engine Brill and his partners are devising to charge for some online content,” reports the paper.

In the meantime, whether Verified Identify Pass can be revived remains a question. Brill says he still believes in its business model. The company is now facing numerous lawsuits, however, including a recently filed class action lawsuit sure to attract plenty of participants who recently paid the company their annual membership fees and have yet to hear of or receive a refund.

Most of Verified Identity Pass’s capital came last year, when it raised a whopping $44.4 million at a pre-money valuation of approximately $90 million. Spark Capital led the round, joined by Syncom Venture Partners and return backers Lockheed Martin, GE Security, RRE Ventures, Baker Capital and Lehman Brothers.

John Baker of Baker Capital and RRE’s James Robinson were among the company’s board members.

Clear’s more than 200,000 members were granted access to fast security lanes at 17 U.S. airports that scanned their irises and fingerprints, using the company’s technology. They paid $128 for an annual membership fee.

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Don’t Bite The Hand That Feeds


This post is by James Chen from PureVC


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One key concept in business is to take good care of your best customers. In the startup world, a marquee customer can lay the pipeline for further deals with that company as well as serve as a reference to get your foot in the door of new leads. In business when times get rough and the economy is in recession, it is important to hunker down and to think of creative ways to add revenue. Generally, you don't increase fees and rates to increase revenue. Doing so is a great way to get customers to stop using your product. When your customers are having tough times, you don't want to squeeze them. They will leave and never come back. You must get in better touch with your customer and perhaps come out with new products to meet their needs.

Most of the above is pretty intuitive for managers in business. This is in stark contrast to the way local, state, and the federal government is run. Governments like to compare themselves to businesses that have a simple business model – generate revenue through taxes and deploy the capital to services vital to the people. Essentially they have a pretty easy mandate – collect money and spend it. Try not to look dumb by spending more than you collect. Obviously California is having a problem and they look really dumb. And even the Feds look pretty dumb because anybody knows that in a time of fiscal crisis you must cut the fat and cut back on spending and new projects.

So California at this point is looking to increase taxes to make up for the budget shortfall. The White House is even worse as they are looking to create a new and expensive health care plan AND pay for it by taxing the wealthiest Americans. If California was a company and had stock it would surely almost be worthless. If the Federal Government was a company and had stock it would surely be almost worthless as well. When times are tough you get small and cut back. When times are good you lean in. If you are aggressive and well capitalized you can take advantage of the downturn and expand and grow. But most companies used leverage to get where they are today and are not sitting on a bunch of idle capital.

Both California and the Federal Government are well on their way to alienating their major revenue generators, wealthy taxpayers.

If I were running the state or the country I would take a different approach. Create products and incentives to attract customers (revenue generating taxpayers) to the state. Ideally, I would want a predictable revenue stream and I would create a flat tax. I would also want guarantees on that revenue stream beyond just one tax year so I would make tax payers pay their bill over a several year period. Thus like any good business, I would be able to lock in predictable customer payments over several years Continue reading “Don’t Bite The Hand That Feeds”

Level Equity Formed by Ex-Insight Venture Pros


This post is by from PE Hub Blog: Human Resources


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Insight Venture Partners is one of the VC world’s darlings right now, having taken two portfolio companies public in the past month. But peHUB has learned that a partner on one of those investments, George McCulloch, has left the firm to hang his own shingle. Joining him are fellow Insight managing director Ben Levin and senior associate Sarah Haas.

The new firm is called Level Equity, and is based in New York City. No word yet on firm strategy, although both McCulloch and Levin have historically focused on the IT sector. Prior to joining Insight in 2002, MCulloch worked on growth equity deals for Summit Partners in software, semiconductor and communications companies, while Levin concentrated on data networking deals for Greenwich Technology Partners.

“They are good, talented guys who saw an opportunity to scratch their entrepreneurial itch,” says Jeff Horing, a co-founder and managing director with Insight. “It’s actually not a bad time to start a firm, if you’re able to raise money.”

No word yet on how much Level Equity is hoping to raise, or if offering documents have even been drawn up. Horing says that the split has been in the works for several months, although a look at the www.levelequity.com domain registration shows that it was snapped up more than a year ago (which could be nothing, or could be something)…

Insight had multiple board members on most of McCulloch and Levin’s deals, so the transitions should be relatively smooth. McCulloch will retain his board seat with Medidata, which went public on June 25 and is trading around 20% about its IPO price.

I’ve left messages for both Levin and McCulloch, but have not yet heard back.

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Former BSMB Pro Launching Moxie Capital


This post is by from Pe Hub Blog: Firms & Funds


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Starting a brand new consumer sector-focused buyout firm in this market would take some real courage. Boldness. Guts. Moxie, even.

I can only assume that’s the inspiration behind Bodil Arlander’s new effort, Moxie Capital. The San Franscisco-based outfit got its start in January of this year. No formal fundraising effort has launched to date, but the firm has looked at a few deals already, passing on one because it was too small, a source said.

Arlander declined to comment on the early stage effort via email.

As a founding partner at Bear Stearns Merchant Banking, Arlander led the firm through successful exits in consumer products companies such as New York & Co., a women’s apparel retailer which the firm made 12x its money on. The firm’s retail arm made a filthy 80x its money on its investment in teen apparel chain Aeropostale.

Arlander left the firm with no stated plans around a year ago, after the collapse of Bear Stearns but before the firm’s private equity arm struck out on its own under the name Irving Place Capital. Also making an exit during the Bear Stearns shakeup was Chief Operating Officer Gwyneth Ketterer, who left the firm to teach at Columbia University’s Business School.

Arlander teamed up with Lauren Cooks Levitan, a former research analyst with Cowen & Co., to launch the firm.

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Finance Leads the Market


This post is by from StockCharts.com - Blogs


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A look at the market carpet for Monday reveals strength in the finance sector. All sectors are up today, but the finance sector shows the most, and the darkest, green on the carpet. From the table on the right, you can also see that four of the five biggest gainers from the finance sector. 

090713carpet

(click this image to see the details)

The Shadow Knows


This post is by from Economist's View


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Awhile back there was some controversy over the role of the shadow banking
system in the financial crisis. Resetting the stage:


Much Ado About the Shadow Banking System, The Hearing
: Occasionally, a blog
post will flower into a wide-ranging debate in what is usually called the
"economics blogosphere." Last Friday's

guest post on regulation
by Mark Thoma triggered just such a debate. I'll
quote the controversial passage at some length:

Deregulation beginning with the Reagan
administration combined with financial innovation and digital technology led to
the emergence of what is known as the shadow banking system. These are financial
institutions that, for all intents and purposes, function just like banks but
are not subject to the same rules and regulations and, in some cases, are hardly
regulated at all.

The development of the shadow banking system is
important because the troubles we are seeing today are not the result of
problems in the traditional, regulated sector of the financial industry. The
problems began in the unregulated shadow banking system.

We need to bring the shadow banking system –
essentially any institution that takes deposits and makes loans either directly
or indirectly – under the same regulatory umbrella as the traditional banking
system.

Dr. Manhattan, an anonymous blogger at The
Atlantic, focused on that middle paragraph in a post called "Sentences
That Don't Compute
," arguing that the crisis was due to problems at
regulated financial institutions, such as AIG, not the shadow banking system.

Brad DeLong

defended Thoma
, drawing the line between commercial deposit-taking banks
(heavily regulated) and other institutions (lightly regulated).

Thoma also responded on

his own blog
, pointing to the fact that AIG's problems, for example, were
caused by the unregulated part if its business – the Financial Products
derivatives-trading business.

Arnold Kling (who usually blogs
here) responded to DeLong at
The
Atlantic
, saying that failures of regulation of commercial banks were also a
problem.

Finally,

Rortybomb
has a careful review of the issues, showing how different people
mean different things by "shadow banking system." Ultimately he sides with Thoma
on this point: money shifted into a sector of the financial system where there
was no backstop against a liquidity crisis – unlike the regulated operations of
the commercial banks, where deposit insurance plays that role. This is a problem
that needs to be fixed.

Mike Rorty follows up today in The Atlantic's business blog with an interview with Perry Mehrling on shadow
banking and its role in the crisis. Mehrling's bottom line for regulators is a "new
Bagehot Rule" for modern markets: Insure freely but at a high premium.

Here's part of the interview:


Shadow Banking: What It Is, How it Broke, and How to Fix It, by Mike Rorty
:
We hear

a lot of chatter
about the shadow banking system and its crucial role in the
financial crisis. But rarely do we find time to step back and ask the basic
questions: What is shadow banking, where did it come from, how did it operate,
what role did it play in this crisis and how do we deal with it going forward? I hope this Q&A with a very smart professor and
economist at Barnard College Professor

Perry Mehrling
provides answers to each of those questions.

[Mike Rorty:] So let's talk about
shadow banks. What are they, where did they come from, and how did they operate?

We have to appreciate that we are writing history
as it is being made so these are provisional theories. … The shadow banking
system was built up alongside the traditional banking system, using some of
these tools of modern finance we were just talking about like interest rate
swaps and credit default swaps. The idea was to make credit cheaper for the
ultimate borrower and more available, but also to separate the credit system
from the payment system. A lot of the regulation we have on the traditional
banking system is there to protect the payment system, to make sure that when
you write a check on your deposit account, that money actually gets transferred.

The idea of the shadow banking system was in some
way, not only tolerated by regulators, but encouraged by regulators. They
thought, "Let's get some of these risks off the balance sheet of the traditional
banking system. Let's get interest rate risk off the balance sheet of the
traditional banking system. Let's get credit risk off the balance sheet of the
traditional banking system." They thought that would be a good thing. The
traditional banks became an originator of loans which they packaged,
securitized, and then sold to the shadow banking system, which then raised funds
in the money market from mutual funds and asset-backed commercial paper that
they issued to whomever. It was avoiding the traditional banking system entirely
in this regard, and also avoiding all the regulation of the traditional banking
system as well as all the regulatory support of the traditional banking system.

But of course it had the same risks. You aren't
actually getting rid of liquidity risk or getting rid of solvency risk; you are
just moving them into a different place. …

So that explains how the shadow banks evolved.
Now where did the weaknesses start to show up?

There's some controversy about this. It is
certainly true that problems in subprime started to create some anxiety as to
whether or not these assets were really AAA or not. But I don't think that this
can be sustained, the notion that this was just a housing bubble that collapsed.
Because if it was, we'd be done already. As many people said at the beginning of
the crash, "oh [the problem is] just subprime, there's only, say, $400 billion
of that stuff out there, it is not big enough to undermine the entire financial
system." The fact that crisis continues shows that it isn't just a crisis of
subprime, but a crisis of the whole securitization structure, that everything
came into question.

The way this played out is the following. Once
there is any concern about the value of the collateral you are putting up in an
overnight borrowing situation, the first thing the lender does is to alter the
deal, to say "Ok, we'll continue to lend. But just to be on the safe side,
instead of giving you 99 cents on the dollar we'll give you 95 cents on the
dollar." That immediately creates a problem for the shadow bank that is
borrowing. Where are they going to get that other 4%? The way that plays out is
that … collateral value was marked down. You couldn't borrow as much as
you used to in order to carry the underlying security. This became a
self-fulfilling prophesy on the way down, something I refer to as a
"liquidity-solvency downward spiral."

I've told my students for a decade that this new
system would inevitably get tested by a crisis. And when it got tested it was
inevitable that it was going to break. We didn't know where it was going to
break, and the important thing now is to identify where it broke and to fix it
so it doesn't break there again. …

So what can the Federal Reserve do going forward
to try and regulate this shadow banking system?

I use the term "Credit Insurer of Last Resort." And
here's the idea: The

Bagehot Rule
– lend freely, at a high rate, in a crisis – dates from 1873.
That was a good enough rule for the 19th century British economy, an economy
that ran on short term commercial bills of exchange, 90-day paper. You can see
for the new capital markets banking system we have a problem. We have 30-year
mortgages that are the underlying asset that are being turned into 90-day paper
through asset-backed commercial paper, or a
repurchasing
agreement
, or repo, but the underlying asset is still a 30-year mortgage.
That is where the system broke, because those mortgages serve as collateral for
the short term borrowing.

Floating the system with money market liquidity,
which is what the Fed did, didn't solve the problem, because it wasn't getting
to the capital markets. That's why we need a credit insurer of last resort, to
put a floor on the value of the best collateral in the system. I say the new
Bagehot Rule should be: Insure freely but at a high premium.

Why a high premium? If you insure an earthquake,
you are not making earthquakes more likely. The insurance contract is a purely
derivative contract, it isn't influencing earthquakes. That is not true of
insurance of financial risk. When AIG is selling you systemic risk insurance for
15 basis points, that price is too low. People said: "If I can get rid of the
whole tail risk that cheaply, I should load up. I should take more systemic
risk." So the prices were wrong. So the important thing for government
intervention here is to get that price closer to a reasonable rate to prevent
people from creating earthquakes.

Mike

also notes
:

Mehrling has a fantastic paper,

The Global Credit Crisis, and Policy Response
, about the shadow banks and
their role in the current crisis. It’s very accessible to a general reader with
an interest in the subject matter and just a bit of background knowledge and by
far the best explanation of this part of the crisis; I highly encourage you to
read it before or after tackling the interview. He also has

a video of him
presenting the paper, as well as a webpage full

of relevant papers and editorials.
Check it out.

Update: Arnold Kling disagrees based upon the idea that the market will always be one step ahead:

Merhling's solution is for the government to be a risk insurer of last resort.
That sounds to me like Freddie Mac and Fannie Mae, which did not work well at
all. But Merhling says,

the important thing for government intervention here is to get that price closer
to a reasonable rate…
Thus, the insurer of last resort has to charge a very high premium.

With all due respect to Professor Mehrling, I think that this is unworkable.
The market will figure out a way to make the insurer of last resort take much
more risk than it thinks it is taking. That is what the market did to AIG, as
Merhling points out. I see no reason to expect that the government insurer will
always be able to outsmart the market.

Whether that's true or not, to me it says nothing about whether we should add regulation to
close the holes we already know exist – we should – though I suppose
one could counter with an unintended consequences argument. And we
should also close any holes we are able to anticipate. We won't always
stay one step ahead, that's true, but at least we won't fall further
behind.

Update: James Kwak adds:

Merhling’s takeaway point is that there needs to be a “credit insurer
of last resort,” who will insure any asset against a fall in value –
for a sufficiently high premium. This would make it possible for
financial institutions to unload the risk of their asset portfolios in
a crisis, if they are willing to pay enough to do so. The only
institution that would have the credibility to play this role in a real
crisis would be the federal government; as we saw, AIG – the world’s
largest insurance company, remember – was not up to the task. Still,
though, I’m not sure this would do the trick. If I’m a large bank with
a balance sheet full of toxic assets, and I don’t want to pay the
premium that the insurer of last resort is charging, then I go to the
government, say the price is too high, and ask for a bailout. The
credit insurer of last resort would need to be coupled with a
commitment not to provide an alternative form of government support, or
we would end up where we are today.

Update: More from Mike Rorty, Ezra Klein, and Free Exchange.

Beat Down


This post is by from Brad Setser: Follow the Money


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I have a couple of themes on which I wanted to post, but they will most likely have to wait for later. The market, in the words of the E*Trade commercial, is issuing me a bit of a beat down today, and I have to focus on a little risk management. C’est la vie….

Taking out the leverage


This post is by from Deus Ex Macchiato


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The FT has an article today on re-equitisation. The basic idea is that some assets can be structured in such a way as to generate a bond-like series of cashflows, but rather than tranching them into a true bond plus a residual, it can make sense to treat the whole investment as an equity. The key advantage is flexibility: you don’t have to worry about bond defaults if things go badly, giving you more freedom to wait out problems.

The private equity industry has known this for a long time. By structuring an investment as unlisted equity, they have been able to take advantage of good opportunities with uncertain payback horizons. The example the FT cites is a real estate investment, an area which has not historically been favoured by private equity, but these are new times. (Another area where equity like financing is preferred is of course sharia-compliant finance, but that is another story.)

Reequitisation, then, is a logical trend. After the recent turmoil, many investors would be happy with boring, safe investments that beat cash. If zero or low leverage equity investments in cash cow assets provide that, then for a while at least, investors will be buying them with alacrity.

Update. There is an article with a similar theme, albeit dressed up in rather grandiose language, in the FT.

NetFlicked


This post is by from Daily Options Report


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Looks like someone’s expecting Green Shoots in the DVD rental space. This on NFLX, via optionMONSTER (free sub. required).

Stock and options trading turned bullish on Netflix today as investors positioned for the movie-rental company to rally this week.

optionMONSTER’s Heat Seeker tracking system detected heavy activity in the July 42.50 calls, with volume surging to 6,428 against existing open interest of 1,758 contracts. The calls were bid up from an opening print of $0.19 to a high of $0.94 at the same time the shares rose on heavy volume.

Now it’s not that unusual to see call activity pick up on a nice rally. But volume almost 4x open interest in a near ATM that expires on Friday? We’ll see.

Quantifiable Edges and Daily Options Report on Volatility


This post is by from VIX and More


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I woke up this morning to find two posts on volatility from fellow East Coast bloggers who have some excellent insights on the subject.

Rob Hanna at Quantifiable Edges has a post up in which he looks at short-term volatility cycles. In What Happens After a Sharp Contraction in Volatility, Rob reviews three day periods of extremely low realized volatility and concludes that three day cycles of extremely low volatility are typically followed by three subsequent days of dramatically increasing volatility, in classic mean reversion fashion.

Adam Warner at Daily Options Report covers several volatility-related issues in Other VIX Gappage, where he discusses gaps in the VIX and his preference for using VXX over VIX to better gauge volatility trends on Fridays.

Both bloggers make superb points about volatility and both are on my daily required reading list for their consistent high quality work across a wide variety of subjects.

Monday links: second stimulus


This post is by from Abnormal Returns


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“But to a degree unique among its peers, Goldman has turned the crisis to its advantage.”  (NYTimes also Big Picture, Clusterstock)

It’s taken some time for Jeremy Siegal’s work to come under scrutiny.  (Crossing Wall Street)

CIT Group (CIT) is GE Capital absent government support.  (Breakingviews, WSJ)

Why bother with energy futures with regulatory uncertainty on the horizon.  (FT Alphaville)

What are they going to do with all that bulk shipping coming on line in 2010?  (Research Reloaded)

Andy Lo, “Institutional investors have to start thinking on a daily time frame, because of the financial arms race that has been developing over the last several years.”   (Pensions & Investments)

“Spending our time trying to second-guess the macroeconomic future is a hopeless task. The next crisis won’t look like the last, we won’t see it coming.”  (The Psy-Fi Blog)

“Of course, you don’t have to be a management consultant to know that simply projecting recent trends into the near future—forecasting by extrapolation—is dangerous, especially today, when volatility and discontinuities are rampant.”  (The Big Money)

Why pass a second stimulus bill when the first one hasn’t even been spent yet.  (Felix Salmon, Free exchange)

The consumer protection agency for financial products is dying on the vine.  (Baseline Scenario)

Is Cheesecake Factory (CAKE) a symbol of what is wrong with American dining?  (Ezra Klein)

Justin Fox podcast on the rationality of markets. (EconTalk)

We used to wonder if we could “untrain” a generation to steal. The answer is yes. Just make it easier to get the content they want and they’ll stop stealing.”  (A VC)

20 finance blogs you might not know about.  (MoneyScience)

How should bloggers get compensated?  (Atlantic Business, NYTimes)

How to crack into the blogging game.  (Felix Salmon, Baseline Scenario)

Why do we continue to elect well-known players past their prime to the baseball All-Star game?  (Newsweek)

Seems apt.  The Chicago Cubs may declare bankruptcy to facilitate a sale of the team.  (Dealscape)

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Riverlake Partners Suspends Fundraising Action


This post is by from Pe Hub Blog: Firms & Funds


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Riverlake Partners has suspended fundraising for its second fund because of the difficult fundraising environment, a source familiar with the firm’s plans told Buyouts.

Fundraising for the Portland, Ore.-based lower mid-market buyout shop has hit a veritable wall since the second half of 2008. The firm had raised $62 million by the end of first quarter of 2008, and firm executives expected to raise about $100 million by the end of the summer of 2008, as previously reported in Buyouts. But to date the shop has raised about $70 million in commitments for the fund, Riverlake Partners II LP. The initial target for the fund was $150 million, though sources said firm executives are comfortable operating below that level, and that the firm had yet to close a deal from the fund.

Our source declined to elaborate on prospects for the fund’s first deal, other than to say firm executives expect to close one within the next several months.

The firm also terminated its arrangement with E.L.K Capital Advisors, a Northbrook, Ill.-based placement agent it retained to help it raise the fund. An E.L.K. Capital executive did not return calls seeking comment.

The firm closed its debut fund at $34 million in 2004. Investors in the second fund include the Oregon Investment Fund.

Riverlake is the latest in a long line of firms that have suspended or significantly changed their fundraising goals amid perhaps the most difficult fundraising environment in in recent memory. In April, Jacobson Partners, a New York-based turnaround firm, dropped plans to raise JP Acquisition Fund V LP, as previously reported in Buyouts. The firm raised about $125 million for its predecessor fund. CapitalSouth, a Charlotte, N.C.-based lower mid-market firm began raising CapitalSouth Partners Fund III LP in May 2007, and planned to close on its target of $330 million in May 2008. The firm has so far raised $300 million and has extended its fundraising period, as previously reported in Buyouts.

Riverlake has made seven investments via its first fund, and one exit: a 4x return on Stock Equipment Company Inc., which it sold in June 2006 to Schenck Process of Germany after owning the company for less than three years. Revenues at the company increased by 57 percent, to $66.3 million, under the guidance of Chuck Grant, a Riverlake operating partner, according the firm’s Web site.

Riverlake seeks to invest $3 million to $8 million in companies with enterprise values between $5 million and $50 million and revenue greater than $10 million. Sectors of interest include industrial and consumer products manufacturing, and service businesses. The firm regularly invites its investors to co-invest alongside them in deals.

Read the rest of this story at the website for Buyouts Magazine, where Bernard Vaughan is a Senior Editor.

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THE WEEK AHEAD IN THE DISMAL SCIENCE…


This post is by from The Capital Spectator


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Every economic report these days seems to dispense a crucial piece of the puzzle for deciding what comes next, and this week promises (threatens?) to offer no less.

The question now is whether the stability of recent months is in danger of giving way, pushing the economy once again toward the forces of contraction. It’s been tempting to conclude that we moved beyond that in the spring, thanks to some encouraging numbers. Growth still was a ways off, but at least the recession wasn’t getting any worse, or so it seemed. If anything, the cycle appeared poised for some flat lining and perhaps a modest uptick down the road.

But in the wake of the June payrolls report, which surprised on the negative side, it’s become fashionable once more to wonder aloud if another round of trouble awaits. In that case, do we need another round of stimulus? Several key economic numbers updated this week will offer some pivotal clues.

Meantime, Warren Buffett says it’s time to fire up the stimulus guns once more. But not everyone’s convinced, at least not yet.

On the SEC and CIT…


This post is by from footnoted.org


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CIT GroupThough it’s been awhile since we last footnoted CIT Group (CIT), given the news over the past few days, it seemed like a good idea to take a closer look at their filings.

One of the things that immediately jumped out was the relatively long string of comment letters between the company and the SEC, some of which just appear to be made public relatively recently. First, a reminder on comment letters: corresp are the letters that the SEC send to companies; uploads are the companies’ responses and uploads are the letters that the SEC sends. (Ed note: I don’t know why I can’t keep this straight in my own head!Grrrrr!) For some reason, Edgar always handles corresps as PDF files and uploads as links. And while the letters become eligible for public release 45 days after the issue has been deemed resolved, it doesn’t always work that way, which makes finding comment letters a bit tricky since you really have to be looking for them.

Now, the letters, the most recent of which was dated March 26 which is focused on disclosures in CIT’s proxy statement. Three days earlier, there was this longer letter which raised questions about CIT’s participation in Treasury’s Capital Purchase Program. Be sure to have a cup of coffee in hand before sitting down with this one!

All told, there’s been 13 letters back and forth between the SEC and CIT over the past year, which, trust me on this one, is a fair amount of correspondence, given everything else the SEC has on its plate. Still, until the SEC improves the way it handles comment letters, these incredibly useful documents will remain largely a historical exercise to look at after things start to go wrong, instead of a helpful tool for spotting problems in the past.

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SPY Games


This post is by from Daily Options Report


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If you’re sitting here watching the screens each day you’d likely feel as if market volatility has picked up the past few weeks. I certainly do.

Except it’s not.

The chart above shows 10 day HV for SPY over the past half year, and it has actually started dribbling again towards 15, which is actually as low as that measure has been in the past year.

So what gives?

Well, these measures look at close to close moves and don’t incorporate the intra-day chop. So perhaps the chop has picked up recently? Or perhaps I’m just feeling a volatility uptick that just wasn’t there?

But regardless of the reason, numbers don’t lie, and we still have the unresolved issue of options volatility overpriced vs. stock volatility.