July 2007

Mike Shedlock (a.k.a. Mish) tends to have a bearish bent, but does good analysis of the macro scene.? He’s got some very good articles about the Bear Sterns hedge fund situation, and what is happening behind the headlines…

Here are some of the high-points:

Losses at hedge funds are being masked by “mark to model” pricing.? That means that their illiquid holdings are worth what the hedge funds say they’re worth, not what they can actually be sold for.? This is important for many reasons, one is that it goes into the monthly balance sheet, which determines bonuses for the hedge fund managers.? Think there’s an incentive to avoid realistic pricing?

State pensions are currently holding large amounts of sub-prime related securities, and will likely see losses in those investments if subprime loans continue to fail.

Normal markets can become illiquid in rare cases (e.g., the 87 stock market crash), illiquid markets have the same problem, but start further down the spectrum of problems.

“The derivatives business is like hell — easy to enter and almost impossible to exit.”

News hit last Friday that Western Digital was going to buy Komag Inc., a maker of hard drive parts. The impressive thing is that the premium paid is small to the price before the news (8%), and is lower than the average price of the last year (the average price can simply be the 200 day moving average: chart).? What a bargain for Western Digital.

I owned some Komag shares a while back as a value-based trade, but the grinding downtrend and my trailing stop loss trigger knocked me out well before it could damage my account capital. ? Ironically, I bought above the $32.25 price that WD is offering for shares, so even had I done the buy-and-hold thing (it was a value play for me, after all) I would still be taking a loss despite being right on the underlying value.

And, of course, someone knew about the deal before the news broke and (illegally) bought a lot of calls…? which doesn’t make sense to me.? The risk of getting caught seems too high relative to the returns…? but one thing I’ve learned is that we can always rely on some speculators not understanding the risks they are taking.

What the hell is my problem?

I can’t find time to write a simple entry in this blog for 8 months while taking on a new job, getting married, going on a honeymoon and moving from the East to West coast? Gosh!

Well, that’s about to change. [incredulous looks…] (more…)

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