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West Palm Beach (HedgeCo.net) - The Russian market continued to sell off in October as the global financial crisis continued to wreak havoc everywhere, according to the Pharos Russia Fund, October was the fifth consecutive month of losses for the RTS Index, and its 36% loss was the third worst month in the history of the Russian market after August 1998 (-56%) and May 1998 (-39%).
During the month of October, the Pharos Russia Fund was down 12.9%, the Pharos Gas Investment Fund was down 12.8% and the Pharos Small Cap Fund was down 27.4%. Meanwhile the MSCI Russia Index was down 35.3% over the same period. The Russian government has been extremely pro-active during the crisis with its financing and stimulus packages. Thus far, more than $200 billion has been made available to the banking sector.
The Ruble dropped against the dollar causing the sector to suffer as it was one of the most popular investment themes of the year, with both Long Only funds and Hedge Funds heavily invested into the sector. As Hedge Fund (Emerging Market, Commodities and Global Macro) deleveraging accelerated rapidly during the month, these stocks were aggressively liquidated, causing very sharp price falls.
The last week of October also saw aggressive action from many of the main government actors on the global stage – the US Fed, ECB, IMF, Central Bank of China, Central Bank of Japan and many others all took steps to inject liquidity into their respective financial systems.
In the face of all of this aggressive government action, economic statistics and corporate results continue to paint a very gloomy picture. Again, the bottom line is that while governments and central banks are stepping in with a huge amount of stimulus, the private sector is slowing rapidly and that slowdown may overrun the extensive government efforts to keep the world economy from contracting.
It will take some time before the outcome of this battle to forestall deflation is known, so the next months look certain to continue to be extremely volatile. During this time of heightened volatility, Pharos looks to a few leading indicators to inform their next moves. The oil market needs to stabilize in order to remove pressure on the ruble. Should the oil price remain around $50/barrel or below, then a 10-15% devaluation of the ruble would be useful for stabilizing the Russian economy and its markets. From these levels, both the ruble and equity markets have become extremely sensitive to the oil price.
"We are well aware that these outcomes will take time to resolve, and remain cautious as a result," Pharos says, "Our approach to risk management here is driven by the increase in realized volatility; we size our positions with an understanding that smaller capital usage generates similar market exposures to that seen prior to the crisis. Although today’s global economy is facing some enhanced probability of a calamity, the most likely outcome is that global demand ultimately is restored. Russia will be a major beneficiary of the world being saved."
Alex Akesson
Editor for HedgeCo.Net
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Bloomberg – Komodo Capital Management Pte’s hedge fund outperformed rivals as Chief Investment Officer Angus Cameron employed strategies he developed during Japan’s slump in the 1990s to profit from the global financial turmoil.
The Singapore-based firm’s KC Asia Fund has gained 8.3 percent this year, Cameron said yesterday. Other macro hedge funds, which seek to profit from broad economic trends by trading currencies, bonds and stocks in the region, lost an average of 6.7 percent in the first nine months of the year, according to Eurekahedge, a Singapore-based data provider.
“We traded through Japan during the 1990s,” Cameron, 37, said in an interview. “The strategies that worked then will work now.”
Government bonds “should do well in most markets” as policy makers shift their focus to supporting growth from fighting inflation, Cameron said. Central banks from Australia to South Korea have joined a global effort to cut interest rates, following the year-long credit-market seizure that has toppled some of Wall Street’s biggest investment banks, including Lehman Brothers Holdings Inc.
Bloomberg – Credit markets have fallen so far that they are providing a "once in a lifetime opportunity," and investors are still selling.
Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor’s. Yields on corporate bonds show investors expect 5.6 percent of the market will go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.
While central banks injected $3 trillion into the global economy, credit markets are tumbling because banks are clamping down on lending, forcing investors to unload assets they bought with borrowed money. The Federal Reserve said Aug. 11 that its quarterly survey shows most "domestic institutions reported having tightened their lending standards and terms."
Myrtle Beach Sun News – The financial turmoil has pushed the Obama campaign into the lead, and this is mostly justified. Barack Obama is more thoughtful on the economy than his opponent, and his bench of advisers is superior. But there’s a troubling side to the Democratic advance. The claim that the financial crisis reflects Bush-McCain deregulation is not only nonsense. It is the sort of nonsense that could matter.
The real roots of the crisis lie in a flawed response to China. Starting in the 1990s, the flood of cheap products from China kept global inflation low, allowing central banks to operate relatively loose monetary policies. But the flip side of China’s export surplus was that China had a capital surplus, too. Chinese savings sloshed into asset markets ’round the world, driving up the price of everything from Florida condos to Latin American stocks.
That gave central bankers a choice: Should they carry on targeting regular consumer inflation, which Chinese exports had pushed down, or should they restrain asset inflation, which Chinese savings had pushed upward? Alan Greenspan’s Fed chose to stand aside as asset prices rose; it preferred to deal with bubbles after they popped by cutting interest rates rather than by preventing those bubbles from inflating. After the dot-com bubble, this clean-up-later policy worked fine. Not so with the real estate bubble.
Washington Post – That is the technical economic term that best sums up a day in which the House of Representatives refuses to pass a $700 billion rescue plan pushed by the White House and congressional leaders from both parties, Wachovia is taken over in a deal that will have the government potentially owning 10 percent of Citigroup, a few European banks fail, the Federal Reserve and other central banks are forced to inject an additional $300 billion into the global banking system, the Dow Jones industrial average plunges 778 points, and investors everywhere rush to the safety of gold and short-term Treasury bills.
The basic problem here is that too many people don’t understand the seriousness of the situation.
Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system.
Washington Post – Central banks in the United States, Europe and Japan will consider taking foreign-denominated assets as collateral in an effort to provide liquidity for battered financial markets, the Nikkei newspaper said on Sunday.
Currently most central banks only accept assets denominated in their home currency as collateral, the paper said. If central banks were to accept assets denominated in other currencies, cash-strapped firms would be able to get funds easier, it said.
Six central banks, including the U.S. Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England are discussing a potential rule change, the Nikkei said.
The paper did not quote any sources and no one was immediately available at the Bank of Japan for comment, however BOJ Governor Masaaki Shirakawa said earlier this week the move was under consideration.
Reuters – Hedge fund firm Citadel Investment Group said on Tuesday it had hired two senior sales executives from Merrill Lynch, the investment bank that is being sold to Bank of America for $50 billion.
Chicago-based Citadel, which manages around $18 billion in assets, said in a note that Tobias Gehrke and Anita Nassar had been hired to lead Citadel’s capital development efforts in Europe, the Middle East and Northern Africa.
Nassar worked as head of central banks and sovereign wealth funds at Merrill, while Gehrke led the government institutions group for the firm’s equities and alternatives businesses. A growing number of professionals have been leaving investment banks for hedge funds, which are increasingly seen as a safer option, since the credit crisis began last summer.
istockAnalyst.com- Investors face something of a new landscape in financial markets this week after tumbling oil and food prices eased immediate concerns about inflation, potentially freeing central banks to fight slow economic growth.
The focus, however, will also be on some old stalwarts – a continuing stream of corporate earnings reports and the U.S. employment report for July, a monthly bellwether for the health of the American economy.
The past two weeks have seen major declines on commodity markets, which until recently were booming. They had provided investors with gains but also headaches because of the impact of higher prices on companies and economies.
That has now turned around. Since hitting a record above $147 a barrel on July 11, oil has fallen 15 percent.
Food prices have seen similar moves. Wheat is down 18 percent in the past month while corn has lost 25 percent.
From a broad investor perspective, this can be good news, assuming it continues.
Reuters UK- A near one year-old credit crunch still has plenty of venom and will sting global financial markets and the economy well into next year or even into 2010, a Reuters poll found.
On the eve of its one-year anniversary at the start of August the credit crisis is still spitting out victims and darkening the outlooks from global central banks.
Most of the 87 economists polled from across Europe, the U.S. and Canada said the worst was not over and most felt that the fallout would last for another six to 12 months at least.
The sudden rescue plan for U.S. mortgage finance agencies Freddie Mac and Fannie Mae arranged by the U.S. Treasury and the collapse of IndyMac bank last week has 34 economists forecasting the crisis will roll on for another year or even more.
West Palm Beach (HedgeCo.net)- Barclays Global Investors (BGI) has opened an office in the United Arab Emirates’ Dubai International Finance Centre. BGI has been active in the region since 1998 and currently has assets under management of US$ 28 billion in area.
The office, which is co-located with Barclays Wealth and Barclays Capital, will principally address the growing needs of the region’s institutions – including Government sponsored pension and social security funds, Sovereign Wealth Funds (SWFs), Central Banks and High Net Worth individuals and families.
"The new office is a strategic development for BGI’s Middle Eastern business relationships." David Semaya, Chief Executive, Barclays Global Investors Europe & Asia, said, "We are seeing investors in the region becoming more demanding in their investment strategies."
BGI’s iShares, including its three recently launched Sharia’ah compliant funds, will primarily address the retail market. Islamic finance is a $400bn industry, growing at a rate of over 15% per annum.
BGI is the world’s largest asset manager with over $2.0 trillion in assets under management. BGI’s funds include hedge funds and fund of funds as well as index and active equities and bonds funds.
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News Channel 8- A U.S. Treasury official said Monday the global credit crunch is gradually calming following efforts by the Federal Reserve and other central banks.Clay Lowery, assistant secretary for international affairs at the U.S. Treasury, said the Fed and other central banks have coordinated their actions to protect the financial system from possible disruptions after the U.S. subprime mortgage crisis surfaced last year.
As a result, the availability of credit has improved "modestly," Lowery told the Foreign Correspondents Club of Japan.
He said U.S. financial institutions reported more than $300 billion in subprime-related losses, but that was alleviated by the raising of an additional $200 billion in capital.
