For the last few months I have been neutral to slightly optimistic about the prospects for the credit market. I thought that we would see 3-5 big problems and then everything would settle down. Now it looks like that was wrong. Today's news -- and the sum total of a bunch of news items -- indicates things are gonna get worse.
From the Street.com
While credit markets have rebounded this week after Citadel Investment Group swooped in Monday to buy the credit assets of Boston-based Sowood, the Sowood story is not so different from the story of the two Bear Stearns (BSC - Cramer's Take - Stockpickr - Rating) hedge funds that collapsed in June.
Sowood was a hedge fund started by a Harvard endowment adviser. I have no idea how the fund has performed overall, but it's obvious that it had some pretty major losses leading to the liquidation. While the news of a quick bidder was good news, there is a fundamental question to ask -- how much more bad bonds are out there? A lot more:
"This stuff is more widely held than just a handful of firms have reported," Peter Goldman, managing director at the money management firm Chicago Asset Management, says of distressed debt. "I would be surprised if there weren't more skeletons in the closet."
And it turns out --
Bear Stearns Cos., already forced to shut two hedge funds that bet heavily on the risky subprime-mortgage market, is now facing big losses in a third fund that has roughly $900 million in mortgage investments, according to people familiar with the matter.
The fund, known as the Bear Stearns Asset-Backed Securities Fund, ran into trouble in July and has refused to return investors' money for the moment, according to these people. One of these people said the redemption requests were postponed in hopes that the fund's assets would rebound in value. The fund contains a range of mortgages, but only a small slice of them that are considered subprime, the area that has given so many firms heartburn in recent weeks. Unlike the two other Bear funds that are being closed, this fund is not leveraged.
The asset-backed fund was up about 5% between the beginning of the year and the end of June according to these people. But faced with a slew of mortgage markdowns in July, its performance appears to have plummeted. It is not known how much, if anything, Bear owns of the fund. Its shares were down about 5% Tuesday, to $121.22.
And that wasn't all the bad news of the day:
American Home Mortgage Investment Corp. confirmed Tuesday that it is facing serious liquidity issues amid a flood of margin calls from lenders and has hired advisors to evaluate its options, including the liquidation of its assets. Its shares fell 86% after being halted for a day and a half.
The Melville, N.Y., lender, whose stock was halted all day Monday and earlier Tuesday pending the announcement, said its lenders have initiated margin calls as the collateral value of some of the company's loans and securities has dropped. The company said it has already received and paid "very significant" margin calls in the past three weeks and has "substantial" unpaid margin calls pending.
The company said it is unable to borrow on its credit facilities at present and was unable to fund its lending obligations of about $300 million Monday. It does not anticipate funding about $450 million to $500 million Tuesday.
According to the Implode-o-meter there are now 105 lenders that have died.
By my calculation we know of 4 hedge funds that have had serious problems in the last month. That's one shy of the maximum amount I though we would see. But we haven't even seen the start of this problem yet:
Rumors are already flying about more hedge funds meeting with huge declines for July, and bid lists circulating through the bond markets.
Bonds are traded off of bid-lists. Whenever a portfolio manager wants to sell a block of bonds, he'll put out a list of bonds he wants other managers to bid for. My guess from the above blocked-off quote is there are a lot of bid lists going around right now.
The result of this is another sell-off in the market.
Let's see what the charts look like. The daily, 5-minute chart shows the damage from the announcement. The only good thing about this chart is the lack of big volume spikes on the way down.
Here's the 5-day, 5-minute chart. We're right back where we were at the beginning of the week.
And here's the three month chart. Again, about the only good thing about today's sell-ff is the volume spike wasn't as high as the end of last week and the SPYs are still above the 200-day SMA.
The bad news -- actually the awful news -- just keeps coming. And that's the real issue here.