Mbeki has responded with the ANC’s request to resign by agreeing. No word as to who will become president in the meantime. Plenty of contitutional issues to address, and from some reports it seems that neither Mbeki nor the ANC fully understand them.
No plan, no idea for succession, global markets in turmoil with risk appetite lower than at many points in the past. Guessing Monday will be a interesting day for the JSE.
The Financial Services Authority (FSA) announced that it will ban short-selling of publicly listed stocks until January 16th, 2009 for the UK market where it is the financial regulator. It will then be reviewed.
From The Financial Times:
Hector Sants, chief executive of the FSA, said: “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.�
The articles I read gave contradictory reports as to whether this covered all stocks or just a subset of financial stocks, but it appears that it may just be financials at this point with the possibility of being extended if the FSA feels it necessary. The decision will also be reviewed in 30 days time.
Limiting short-selling sounds pretty extreme to me. Limiting it for such an extended period? I can’t imagine the impact that this will have on hedge fund operators, particularly in the long/short space. Market neutral funds may need to substitute pair trading for shorting the index. (I’m taking a wild guess that shorting the index or at least going short index futures will still be allowed.)
Yes, I think we’ll blame the massive over-extension of credit, with risk concentrations and the careless selling of large amounts of credit default swaps by insurers on the hedge funds. I call scapegoat alert.
Would you lend money to Country Foods Limited? According to the Z score perhaps you should have participated in the listing in October 2007. Based on their prospectus and audited financial results for the year to September 2007, their Z-score was high within the grey zone, within reach of the coveted “safe zone”. As recently as June this year, Business Report was describing their winning recipe.
Now, with complaints of non-payment from suppliers, a resigned founder and CEO, vague comments about restructuring and now a request to be suspended from the AltX. Not an ideal scenario. The Z-score now? Well into the danger zone based on the interim numbers I have.
The cause of the decreased Z-score? Two primary items account for most of the change. First, from Business Report:
In its first-half profit statement it reported that profit fell 96 percent to R219 000 because of a late crop and power cuts.
The second is the share-price and thus implied market value, down from a listing price of 100c to 15c.
So, the Z-score certainly demonstrates consistency with the change in fortunes of the company. To this extent, it is a success. As for the use of the Z-score to manage a turnaround, the two useful suggestions the formula spits out to the acting CEO?
Because I know I wouldn’t have thought of that without the Z.
Back-testing proponents proudly show the empirical base of their approach. No parametric fitting or theoretical assumptions here. “We use the actual history of the markets to assess our risk and define our strategies.”
However, the debate that typically comes up is:
Back-testing over which period?
Do we include the dotcom bubble and burst? What about Black Monday? What about the oil-shocks and stagflation period that “will never happen again because we understand inflation”? What about the other Black Monday (and Black Tuesday and Thursday and sometimes Friday) of October 1929?
Nassim Taleb will happily say that we should, of course, include all those and the events that have not yet happened. He’s a little more quiet on how. (Ok, that’s unfair, he recommends in absolute risk management which strictly speaking doesn’t need to model the worst possible scenario.)
Well, the events of the last year and a bit will change all those back-testing models. Many strategies and positions that seemed relatively safe in a 2006-vintage model will look frayed and dismayed. Northern Rock belongs to Mervyn, Bear Stearns down and out, Fannie Mae and Freddie Mac nationalised, Merril Lynch sold to Bank of America, Lehman Brothers declaring Chapter 11 and AIG down around 80% over a year.
Mark my words, the end may be nigh, but there’s more to come before we get there.
It’s a great time to be living in the markets. Especially if you’re in South Africa with a hefty portion of cash in your portfolio.
American International Group (AIG) fell by more than 30% Thursday as concerns about Lehman Brothers and the credit crunch deepened. This is in spite of many experts claiming (yet again) that with the Fannie and Freddie bailout the end of the credit crunch was in sight.
Standard and Poor’s response:
On Friday, credit-ratings firm Standard & Poor’s threatened to downgrade American International Group Inc., citing the significant decline in the company’s share price and the increase in credit spreads on the company’s debt.
Increasing spreads and decreasing equity value are both good indicators of a deterioration in credit quality. Moody’s KMV model is based on the “Merton Model” approach to estimating probabilities of default by explicitly considering the market value of assets (typically derived through the market value of equity and debt) and the market implied volatility of assets (also derived through the market implied volatility of equity and the level of gearing).
Higher yields on corporate bonds imply higher credit spreads. Unless there is reason to believe that liquidity in AIG’s share has dried up (which would increase the spread but not necessarily indicate a deterioration in default probabilities), this implies the market views the bonds as more risky.
So, S&P’s rerating consideration is sensible to the extent that there is clear evidence of credit deterioration.
But if S&P waits for the market to assess these risks then follows several weeks later with a change in rating, what is the point of the rating agencies in the first place?
Call it what you will, US taxpayers now own Fredie Mac and Fannie Mae.
Fannie and Freddie became so large that their failure would reverberate around the US financial sector, and housing market, eventually spilling over into global financial markets and possibly the global economy. Well that’s the theory. This was the same theory that saw the bailout of LTCM and the bailout/predatory takeover (choose your own spin) of Bear Stearns.
From CNN Money:
“A failure [of Fannie and Freddie] would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance,” Paulson said at a press conference in Washington. “And a failure would be harmful to economic growth and job creation.”
All told, the two firms have racked up about $12 billion in losses since last summer.
The most interesting of these is point 5. Initially, the plan allows for an expansion of loans in order to calm the real estate market itself. However, after that initial phase, both companies will be deliberately shrunk to a size where, presumably, they would be allowed to fail.
This reflects a loss of appetite of the US Government to bail out companies who take on excessive risk because Uncle Sam will be ready to catch them. The S&L crisis of the 80s, LTCM, Bear Stearns and now Fannie and Freddie would otherwise create a stronger risk appetite amongst investors.
Until little more than a year ago, it was widely believed that real estate markets in different countries, different states and different cities were sufficiently unrelated such that having a diversified portfolio of real estate loans or CMBS would provide sufficient protection. Given how all these markets went up strongly together, that was always a surprising conclusion.
Fannie and Freddie’s size, “too big to fail”, ensured that the US Government would almost certainly need to bail them out, and thus bail out the entire industry to a large extent. Perhaps the new US moves will ensure that smaller businesses will recognise their interdependence to the rest of their industry and make decisions with a little more care.
Of course, if the now ex-CEOs of Fannie and Freddie has expressed caution five years ago, they probably would have been fired for not taking advantage of the opportunity.