Tuesday, July 31, 2007

We've Still Got Problems

From the WSJ:

Sowood Capital Management told its investors that the hedge-fund firm suffered dramatic losses of more than 50% this month and that it will wind down its two funds -- becoming the most high-profile player to be cut down by the troubles roiling many parts of the bond market.

The losses dropped the Boston hedge-fund firm's assets to about $1.5 billion from what had been $3 billion, the firm told investors in a letter. Sowood, which was started by Jeffrey Larson, who helped pick investments for Harvard Management Co. before launching his own hedge-fund firm, said it will distribute its remaining cash to investors, closing down the hedge-fund firm.

.....

The Citadel transaction, likely worth hundreds of millions of dollars, is a sign that for all the recent troubles in the markets, and losses at a number of big investors, there remains ample money on the sidelines waiting to step in to buy cheap assets. That is potentially bullish for the markets.


And from the WSJ:

GMAC Financial Services, General Motor Corp.'s part-owned financing arm, reported a 63% drop in second-quarter profit as its Residential Capital LLC home-lending unit weighed on results, though the losses from the unit narrowed markedly from the first quarter.

The company, which significantly scaled back its nonprime portfolio during the quarter, said it expects continued improvement in earnings performance in the second half.

"We are encouraged to see that the aggressive risk-mitigation initiatives implemented in the first half of this year have reduced ResCap's losses -- quickly and significantly -- despite increasing challenges in the U.S. mortgage market," said GMAC Chief Executive Eric Feldstein.


We're going to be hearing stories like this for the foreseeable future. The question now becomes will these stories have an impact on trading sentiment? There is no firm answer for that. On one hand, the markets are now more braced for news like this, but on the other hand there is a limit to how much bad news a market can take. Add to that the temperamental nature of the investing public -- especially during volatile news periods -- and you have a rough patch ahead.

I've said that I expect the markets to weather the subprime storm, but there will be at least 3-5 big casualties. Now we have two big casualties.

The last sentence in the first article is key. So long as illiquid funds can be purchased by vulture investors, we'll be fine. Note how quickly that transaction occurred. My guess is there were a few harried back-phone calls, but everything eventually ended up OK.