The Wall Street Journal reported today that two Bear Stearns hedge funds with $20 billion invested in deteriorating CDOs are now on the brink of collapse.
The sudden crisis at the funds began when they recently reappraised their losses from 6.75% of assets to 18% of assets. The Journal reports, “The huge revision at least in part reflected conversations Bear Stearns hedge-fund managers had with bond dealers, three of which told them in late April that some of the funds’ assets were worth less than the values stated on the funds’ books, according to a person familiar with the matter.”
This is a worry certain prominent bond market investors have expressed for some time now: that the obscure nature of the CDO market is hiding losses in the multi-trillion dollar industry.
Auctioning off the assets of these two funds will finally give the world accurate prices for the investments they hold. This light being shone on the dim world of CDOs must scare the living s*** out of hedge fund managers. With trillions of dollars of securities out there waiting to be repriced, there are certain to be a multitude of funds facing the same fate as the Bear funds.
As this daisy chain unfolds, there are certain to be ripples in the financial markets, not the least of which is the market for mortgages. And any hiccup there would mean serious ramifications in the already injured real estate market. LIV
The Wall Street Journal reported today that two Bear Stearns hedge funds with $20 billion invested in deteriorating CDOs are now on the brink of collapse.
The sudden crisis at the funds began when they recently reappraised their losses from 6.75% of assets to 18% of assets. The Journal reports, “The huge revision at least in part reflected conversations Bear Stearns hedge-fund managers had with bond dealers, three of which told them in late April that some of the funds’ assets were worth less than the values stated on the funds’ books, according to a person familiar with the matter.”
This is a worry certain prominent bond market investors have expressed for some time now: that the obscure nature of the CDO market is hiding losses in the multi-trillion dollar industry.
Auctioning off the assets of these two funds will finally give the world accurate prices for the investments they hold. This light being shone on the dim world of CDOs must scare the living s*** out of hedge fund managers. With trillions of dollars of securities out there waiting to be repriced, there are certain to be a multitude of funds facing the same fate as the Bear funds.
As this daisy chain unfolds, there are certain to be ripples in the financial markets, not the least of which is the market for mortgages. And any hiccup there would mean serious ramifications in the already injured real estate market. LIV
Just as my fellow blogger, Duncan, suggested a few months ago would happen, Bend is now seeing a seasonal bounce in the local real estate market. The preliminary May numbers bear this out.
According to Farmer Doug (one of the only public sources for local real estate info.): Days on Market declined and prices soared in May taking them back near the record highs of last June.
However, sales declined an stunning 43% from May last year and inventory exploded 197% to a new all-time high. The supply of homes in Bend now stands at over 13 months worth of sales.
Supply and demand is an unbending economic principle that still strongly suggests lower prices are on the horizon (see Bend Real Estate Meets Econ 101). As for the recent rebound in prices, the “dead cat bounce,” is a market principle that is just as well known as the economic one.
Anyone with any experience with markets knows: “even a car being driven by a cat off a cliff will bounce before it hits the canyon floor.”
Just as my fellow blogger, Duncan, suggested a few months ago would happen, Bend is now seeing a seasonal bounce in the local real estate market. The preliminary May numbers bear this out.
According to Farmer Doug (one of the only public sources for local real estate info.): Days on Market declined and prices soared in May taking them back near the record highs of last June.
However, sales declined an stunning 43% from May last year and inventory exploded 197% to a new all-time high. The supply of homes in Bend now stands at over 13 months worth of sales.
Supply and demand is an unbending economic principle that still strongly suggests lower prices are on the horizon (see Bend Real Estate Meets Econ 101). As for the recent rebound in prices, the “dead cat bounce,” is a market principle that is just as well known as the economic one.
Anyone with any experience with markets knows: “even a car being driven by a cat off a cliff will bounce before it hits the canyon floor.”
Bend, meet Toonces…
LIV
Bio: Jesse Felder founded Felder & Company in 2000 as an independent investment advisor. Jesse oversees both the company's proprietary investment research and managed investment accounts. He is also the editor of the company's monthly newsletter "The Felder Report."
