March 13, 2008

Market Comments for March 13, 2008

1) Carlyle Capital was the big story today with its default in Amsterdam. These bone heads had $23 billion in bond positions securited by only $650 million of capital, giving them a leverage of 35 times. Good riddance. Expect a lot more bodies like this to float to the surface. A lot of big milestones were hit today: Gold over $1,000, Yen at Y99, crude over $111. You know things are bad when they call the 'stock report' the 'damage report.'

2) Another thing eroding the muni bond market has been an upsurge in applications by homeowners to have real estate taxes cut because of falling home values. This could erode the revenue bases of municipalities in the hardest hit real estate markets in Florida and California and could snowball.

3) The association of Commercial Realtors predicted that transactions could drop 30-40% this year. The default rate on commercial CMO's will almost certainly increase from last year's low 0.6% rate. Goldman Sachs (GS) is said to be covering shorts in residential CMO's where they made a fortune last year and are putting the same trade on in the commercial area. But industry veterans believe that only recent high LTV deals are at risk, or anything connected with Florida condos.

4) Crude inventories rose by 6.2 million barrels last week, a build three times larger than expected. The price fell from $110 to $107, then shot right back up to $111. This shows you that the oil industry has completely lost control of oil prices and that they have nothing to do with actual supply and demand. It is now completely controlled by hedge funds and the price is going higher. Next stop $120. Bay area gasoline is going over $4 next week and will hit $5 in two months.

5) February retail sales came in at -0.2% versus expectations of +0.6%, indicating that the economy is far sicker than people realize.

THOUGHT OF THE DAY

Of the $1.8 trillion in hedge funds under management, possibly half is devoted to super leveraged bond strategies of many descriptions like those employed by Carlyle. There is going to be a flight by investors from these funds who will be looking for less leveraged strategies to invest in. That means it is a good time to launch a limited leveraged equity oriented hedge fund.