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We told you today would be down.
After yesterday’s rebound, stock plunged today in the most violent expression of recent market volatility. All the usual suspects are blaming the biggest drop since mid-February’s nose-dive, traders on tighter credit markets, word of a continuing housing slump, and the price of oil, which shot up past $73-a-barrell for the second time ever.
Ninety-seven percent of S&P 500 stocks fell in what may be may be the big drop on this week’s rollercoaster. The S&P fell 35.42, or 2.33% to 1482.66. Twenty-nine of the stocks that make up the Dow Jones Industrial Average closed lower for the day. The Dow dropped 311.50, or 2.26% to 13473.57. The Nasdaq Composite Index fell 65.94, or 2.49% to 2582.23. We could see further decline before any substantial rebound, but many see today’s dive as corrective after the effective explosion of the credit bubble.
The numbers at the close actually represent a sizable rebound for the indexes, which down even lower earlier in the day. At one point, the Dow was down 430 points.
Check for the earliest English speaking market news at FT Alphaville.
Archive for July 2007
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The Wall Street Journal reports that the yen hit a three-month high against the dollar today. Combined with the yen’s rise against other currencies and volatility in global markets, investors rushed to unwind yen carry trades.
Many market oracles contend that the fine difference between a boom and its busting rests on movements in the yen carry trade. The yen carry trade is borrowing in countries with low short-term rates like Japan and investing in higher yield assets in nations with higher rates, like the US. As long as exchange rates stay constant, you net the difference in interest rates. Compounded by leverage, you net considerably more.
When the yen rises sharply against the dollar (check), and US Treasuries dip (check), huge losses can result from carry trades (in 1998, this was a major reason for the LTCM collapse). Carry trades are major source of cheap funding and global liquidity, and a sudden unwinding in the carry trade creates a feedback loop that augments existing credit concerns and often results in negative movements in equity markets.
Stocks Plummet on Credit Worries [Wall Street Journal]
Yen Gains as Carry Trades Unwind [Wall Street Journal]
McDonald’s CFO Matthew Paull is trading in the pinstripes for corduroy, leaving his lucrative finance career for the somewhat less lucrative world of higher education. After fourteen years under the refulgent golden arches, Paull will begin teaching economics and finance part-time at an unspecified university in San Diego next year while continuing to serve on the Best Buy board of directors, CFO.com reports.
Before compiling BigMac projections, Paull “fell in love” with teaching at the University of Illinois, but “couldn’t support the lifestyle that I enjoy on a teacher’s salary.” This calls to mind Dealbreaker’s Tuesday poll: “Would you be working in a field other than finance if you could make the same amount of money?” 70.9% responded affirmatively, suggesting that the “passion for corporate finance” is largely synonymous with “passion for pecuniary remuneration.”
Why McDonald’s CFO Is Heading for Academia [CFO.com]
Analysts are telling Kohlberg Kravis Roberts & Co to scrap its plans for an initial public offering, saying tighter credit markets make the private equity firm a less attractive investment than it appeared to be just a few months ago.
We have certainly come a long way since last spring, when Henry Kravis was instructing the world about the “golden age” of private equity. (More recently, George Roberts, Kravis’s cousin and partner at KKR, told a German magazine that he expects returns on buyouts to “significantly” from where they’ve been. “The coming years will be harder, no question,” Roberts said according to reports.)
“They should absolutely, unequivocally, withdraw the IPO,” David Menlow, president of research firm IPOfinancial.com, tells Reuters.
Offerings from hedge funds and private equity shops pose a special dilemma for analysts at investment banks. Because they are involved in so many deals, private equity firms pay lots of fees to investment banks. And this can put pressure on analysts to give favorable ratings to the companies.
Covering hedge funds and private equity firms may also renew conflict-of-interest concerns Private equity-related fees, including those from advising and underwriting, accounted for $15.6 billion, or 20 percent of total global investment banking revenue last year, according to data provider Dealogic.
“The greatest challenge one faces as an equity analyst looking at Blackstone is the fact that they are one of the largest investment banking clients,” said Hintz. “It isn’t going to make you very popular if you put an ‘underperform’ on them.”
Not surprisingly, many of the analysts who are calling for KKR to pull its IPO work for independent firms that don’t suffer from fee-related conflicts.
KKR should pull its IPO: analysts [Reuters via Washington Post[
Formerly private equity firms irk stock analysts [Reuters]
Tech mentor to the stars (of Silicon Valley) Jim Gray is still missing after drifting off in late January to release his mother’s ashes on the Farallon Islands 27-miles off the San Francisco coastline. The latest issue of Wired takes us inside the man, the myth, and not so much the model of a modern major general.
The story of the high-tech hunt and Gray’s emergence as a programming legend is fascinating and all, but what really gets us is how programming gods delve into the mortal realm to pick up chicks. Hot Scandinavian chicks. The key – Lord of the Rings, proving that once a programming geek, always a programming geek, from Wired:
In 1984, [Gray] met Carnes, an articulate Norwegian-American beauty with master’s degrees in history and education. An avid sailor and hiker, she accepted his proposal on their third date — on his boat, of course. She became an engineering manager in the Valley, and they spent their vacations sailing and reading Tolkien aloud to each other in the wilderness. When they bought the house on Telegraph Hill, they christened their nautically themed bedroom Gondor — the realm of the Ship-Kings.
Courtesy Joel Bartlett
“I fell head over heels in love,” Carnes says. “We’d both been married before, but we met our match in each other. He was intense, I was intense, and we were both raised by single parents. Jim was like a mountain man who was also a brilliant scientist.” She liked to call him Mr. Database.
Of course, it helps when “Mr. Database” has untold millions to throw around. What’s elfish for “sugar daddy?”
Inside the High-Tech Hunt for a Missing Silicon Valley Legend [Wired]
A second Outback hedge fund has become ensnared in the subprime mortgage blip. This time it’s Absolute Capital, which invests in collateralized debt obligations (last week it was Basis Capital). The Sydney-based fund, half owned by ABN Amro Holding NV’s Australian unit, informed investors that it won’t be processing any requests for withdrawals until October 25. The suspended funds are the Yield Strategies Fund and Yield Strategies Fund NZD, which have a combined $177 million under management.
Chief Investment Officer Bill Entwistle said in an interview today, “There are lots of sellers and no buyers, the market has to settle down before we can get some clarity,” which sounds like James Cayne-speak for “We’ve got nothing, join us as we live this lie for a few months longer.” Expect subprime fallout opportunist Blackstone to offer its advice on the matter, for a price.
Second Australia hedge fund suspends withdrawals [Reuters]
Brian Hunter Gets FERC’d
By John Carney
Federal Regulators level $291 million fine against energy trader and hedge fund
This has not been a good week to be Brian Hunter. Yesterday the world’s most famous energy trader got slapped with a lawsuit by the Commodity Futures Trading Commission for allegedly manipulating the markets in natural gas futures. This morning, the Federal Energy Regulatory Commission announced that it would seek penalties amounting to $291 million from Brian Hunter, Amaranth Advisors and another trader formerly with the hedge fund.
FERC seeks $30 million from Brian personally. It has assessed penalties of $200 million against Amaranth Advisors, plus $59 million in unjust profits. The Federal Energy Regulatory Commission this morning laid boot into various Amaranth entities, along with natural gas traders Brian Hunter and Matthew Donohue, seeking “penalties of $200 million for Amaranth, $30 million for Hunter and $2 million for Donohoe. The commission also proposes that Amaranth disgorge more than $59 million in unjust profits, plus interest.
Things could get even worse for Hunter. This morning , for instance, Gary Weiss wonders whether or not Hunter might face jail time. “Hey, I have a question: isn’t market manipulation against the law? Don’t people go to prison for that? Just wondering. After all, it seems to me that what these guys are talking about is a lot worse than insider trading,” Weiss writes.
FERC wants Amaranth, Hunter to pay $291M for manipulation [Market Watch]
Another Regulator Piles on Brian Hunter [Gary Weiss]
We’re not sure why but for some reason this afternoon we found ourselves wondering about trading collars and curbs. This infographic from the New York Stock Exchange is just about the clearest illustration of when the NYSE will put the breaks on a plummeting market. (Or a skyrocketing market, but that’s unlikely to be an issue today.)
The circuit breakers don’t kick in until there is a 1,350 point drop in the Dow Jones Industrial Average. The “circuit breakers” halt trading for varying periods of time, depending on when the DJIA hits the trigger.