Oil drops as U.S. stock market fall clips rally (Reuters)
Time to start looking for silver linings after yesterday’s market crash drop. Here’s one: the price of crude oil fell, as traders worried that a sinking economy would depress demand for the brown stuff. Of course, this will hurt major US energy companies, which have carried the markets on their back, so many investors wouldn’t be happy with a long-term decline, but at least summer driving season (which is coming to an end) might be more tolerable. Another bright spot: Can you say intersession rate cut?
Nikkei ends at 3-mth low on Wall Street, election (Reuters)
The Nikkei took its cues from the Dow over night and decided to plunge right along with it. Stocks ended at a three-month low , with some blue chips losing more than 5%. The stronger yen, which is freaking everyone out on both sides of the Pacific, didn’t help things.
Is Landry’s in trouble? (Houston’s Clear Thinkers)
It probably won’t come up as a top story on your Bloomberg, but seafood chain Landry’s is the latest company to feel the credit pinch. S&P has lowered its ratings on the company, just as it looks for new financing to replace some expiring notes.
Apparel Maker VF Acquires Jeans and Activewear Brands (NYT)
Do people still wear Seven for all Mankind jeans? We know they were really big during the bubble (the designer denim bubble, that is), but the only time we hear about them now is when we’re walking through Soho and someone has a table set up on the sidewalk where they’re selling them (or knockoffs; we’re never quite sure) at a discount. Either way, the company’s been acquired by VF Corp, which must be a nice exit for the seven-years young firm.
FOREX
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]
Morgan Stanley has taken an internal study over the cost of debt and done some basic math so you don’t have to. The study figures that stock market corrections occur about six months after the cost of debt begins to increase. Since spreads began to widen in February, Morgan Stanley thinks that (let’s see, take the 2, add the 6, carry the 1, integrate by parts… and yup, 8) August could see a 14% market correction, or 2,000 points off the Dow.
Historically, equity markets take a while to pick up on the bad market omens created by higher rates and wider spreads. The eerie similarities between now and the last bubble burst, from the Telegraph:
The current pattern looks similar to the relentless rise in spreads from February to September 2000 when the stock markets finally tipped over… the iTraxx Crossover index measuring risk appetite for high-yield bonds touched bottom at around 170 in February. It has since jumped to 320 – mostly this month – implying a 150 basis point rise in the cost of raising capital.
Morgan Stanley’s internal Cassandras think the correction could begin with the unwinding of the yen carry trade in Japan, significantly impacting global liquidity. The Bank of Japan is expected to raise rates in August.
Morgan Stanley Predicts Correction [DealBook]
Morgan Stanley predicting correction [Telegraph]
Home Depot’s profit warnings yesterday didn’t do much to damage its share price–shares of Home Depot rose about 1% yesterday–probably because the company also indicated that it would be making a bigger than expected tender offer to buy back its own shares for somewhere between $39 and $44 per share. That’s the kind of “we’re looking out for our share price” action that analysts and investors like to see. It also helped that the company could explain away some of the lower earnings with the sale of its supply division for $10.3 billion, and everyone knew that this would hurt the numbers.
But the company also made noises about “weaker conditions in the housing markets” which some are saying helped push the dollar down against other currencies. The Wall Street Journal’s Market Beat blog noted that “the dollar also took a beating amid worry that weakness in the U.S. housing sector, which were renewed by Home Depot’s profit warning… The euro hit an all-time high of $1.3741, and the pound rose to a 26-year high of $2.0273. Europeans aren’t complaining, as the greenback’s pain is a gain for tourists from across the pond.”
In other words, investors think Home Depot’s got a good plan. But they think homes in general are screwed.
Four at Four: Bernanke + Subprime = Selloff [MarketBeat]
China Inc. Runs the Bulls (WSJ)
The Chinese stock market is a castle made of sand built on top of a house of cards, jacked up with maximum leverage. Ok, that’s way to extreme, but the more that gets revealed about who’s bidding up shares, the more worried we get. It’s one thing that pensioners are going into credit card debt in order to play the market. It’s hard to see that ending well. And as the Journal points out, many companies themselves are major buyers on the exchange. After all, if you can do your normal business and get 20% ROI or invest in stocks and get 30% ROI, which would you choose? Duh. Such behavior isn’t really that unusual. It was routine for .com highflyers to get paid in stock, when their customers didn’t have much in the way of real cash, which unnaturally inflated everyone’s profits. Unless the government in China can get that soft landing they’ve been hoping for (ha!), then the unraveling could get really ugly.
Jury in Black trial struggling to reach verdicts (Times Online)
Well this might be disappointing. After nine days of deliberation, weeks of a trial and months and months of a buildup, it looks as though jurors in the Conrad Black trial may come back hung in some way another. Yesterday, the jurors informed the judge that they were having trouble locking down unanimity, although he implored them to keep trying. If they can’t reach a decision, maybe we’ll get a retrial, which would be good, only in the sense that it’d be a second chance to pay attention.
Sears’ sales woes cut into investor patience (Chicago Tribune)
Investors pushed down shares of Sears yesterday, after the company warned that sales growth would come in below expectations. The warning and the response were a rare setback for Eddie Lampert, often described as the next Warren Buffett. Frankly, we’re a bit surprised at the way investors reacted to the news. As Lampert has pointed out in the past, if you think something’s wrong with the health of Sears, it’s you who’s messed up. It’s you that’s got something wrong in the head. Take heart, Eddie. For every seller yesterday, there had to be a buyer, someone who actually “gets it”.
A wrong remedy by the US (People’s Daily Online)
Not that this should come as much of a surprise, but an editorial in China’s People’s Daily newspaper comes out opposed to potential steps taken by the US to limit trade with China. It specifically calls out Democratic Senators that have sought a “punishment” for China’s manipulated currency. The editorial even cites the New York Times opposition to a trade war, although if anything, that just proves that the Times provides aid and comfort to the enemy. China, we jest.
Home Depot Cuts Forecast on Unit Sale, Housing Market (Bloomberg)
Nobody’s really been predicting anything good for Home Depot, whose fortunes are tied in with the overall housing market. But in case people needed it spelled out for them, the company announced lowered forecasts, to the tune of a 15% earnings drop. So obviously there isn’t as much building going on, but what’s going to happen to the home-improvement boom? You know. At some point in the last 5 years, it suddenly became really hip to get handy with respect to home improvement. That’s why Home Depot opened a location in Manhattan, because installing showerheads and kitchen counters suddenly became a popular yuppie exercise. Heck, even sawing up two-by-fours gained a certain appeal.
Apple plans cheaper, Nano-based phone (Reuters)
Analysts are already starting to guess what the next iterations of the iPhone are going to look like. Yesterday, someone came out and confidently predicted a phone-less iPhone, which would be a…. iPod? Basically, but with a wide screen. Now it’s being predicted that the next iPhone will have a similar form factor to the Nano, which is a little hard to believe, seeing as the wide screen and the scrolling seem to be at the core of the iPhone’s appeal.
Hedge Fund Performance Heated Up Slightly in June (Dealbook)
Hedge funds turned in a solid June, averaging gains 1.11% for the month. That’s great, but these statistics are pretty much rubbish no? After all, what the hell does it mean to take the average performance of a group that includes things like Bear Stearns’ CDO bet and leveraged investments into emerging markets (which were the best performers as a class). An average really don’t mean squadoosh, as they say.
China Executes Former Head Of Food Safety Agency (WSJ)
China has executed the former head of the country’s food safety agency for corruption and dereliction of duty. Seems a bit harsh, but given all of the problems that the country’s been having on the food safety front, you have to have figured that some heads were going to roll (rimshot!!). Ok, that may have been in poor taste, though certainly killing the guy was much worse. Meanwhile, China’s trade surplus hit a new record in June, confirming that, well, foreign trade is a really big deal to their economy.
Dutch Economist Henry Kat, profiled in a recent New Yorker feature, was skeptical that hedge funds produce alpha after 2 and 20 (or much higher for the average fund of funds (3 and 30) or funds run by a secret cabal of international quants and a chain smoker), which doesn’t make us feel that bad for thinking the same.
Kat was former head of the equity-derivatives desk at Bank of America but wasn’t down with ‘waking up at 5am, getting on the train and spending all day in the office for 25 years.’ This means that he’s not a complete nutjob, which is reassuring. Kat now settles for less than a hundred thousand pounds a year as a professor.
Kat followed through on his hedge fund skepticism by conducting two hedge fund related studies. The first, published in the June 2003 Journal of Financial and Quantitative Analysis, looked at the fee-adjusted returns of 77 funds from 1990-2000 in relation to returns generated by market benchmarks with similar risk profiles. The result – 72 of 77 funds failed to outperform the benchmark.
The second, posted online as a working paper in 2006, looked at more than 1,900 funds and generated a similar result. Only 18% of funds beat the designated benchmark, and the most successful funds had declining returns over time. The after-fee alpha was negative in the vast majority of cases.
How do hedge funds convince rich investors otherwise? For starters, they exaggerate, demonstrated in a 2005 paper by Malkiel and Saha (a Princeton Prof and a NY investment analyst). The study showed that funds are usually telling fish tales when talking about past performance and that hedge fund returns in aggregate are skewed by the mysterious disappearance of imploded funds from databases. Factoring dead or missing funds into the picture, Malkiel and Saha found that hedge funds made an average return of 9.32% from 1996-2003, instead of the 13.74% average return of funds in published databases. Another study (Brown, Goetzman and Liang) suggested that fund of fund fees negate what is generated in above market returns.
More after the jump…
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