Don't get too excited!

Happy Days Ahead!?!?
Another good week on the markets – is this a sustainable upturn or a bear rally?  There are lots of people opining on that so I am not certain I can add anything here.  But it is part of an overall scene and maybe I can help set the stage.

•    Six weeks of up markets
•    Some bank quarterly results are showing strong numbers
•    March Hedge Fund performance was also good news. 
•    Hedge Fund redemptions have reduced for the fourth month in a row

However, you may recall from my post in February that Prime Brokers, along with just about everyone else in the financial services industry are suffering from a reduction in resources of all types.  This includes everything from a limitation of leverage available to funds through to staff on the trading desk that cover their hedgie clients.   So obviously what they try to do is focus on the funds that make the money or have the best potential to do so in the future.

At the same time as resources are being cut, PB’s costs have risen and they have typically passed them on to their clients.  Stock loan fees have increased.  Internal funding rates at PBs are up across the board.  Banks do everything they can to avoid giving cash as collateral, yet at the same time, many lenders are more desperate for dollars then ever.  Further, lenders have tightened their list of securities collateral acceptability, making it more expensive to borrow securities.  An old hedge fund client of mine recently asked me about the good old days when convertible bonds were good collateral.  Now you can see them piled up in the corner gathering dust.  Well, not really, but you get the idea.

So for the majority of end borrowers, stock borrowing fees (along with other PB charges) have increased over the past year to eighteen months. 

Floating in the background are also the twin spectres of increased regulation and short-selling restrictions.  It is unclear at this time the extent to which either ghost will morph into a fire breathing dragon that limits funds’ ability to trade profitably.  What is clear is that whatever happens, it will cost hedge funds money.

But all of that is OK right?  Hedge funds make loads of money, so what are a few incidental extra costs between friends?  Despite the fact that hedge funds have continued to beat the overall markets, their figures aren’t sufficient for most to be earning the share of performance fees.  So we are in a difficult spot at the moment because in a Supply/Demand business, the Demand is driving the profitability of the market.  Anything that makes it harder for the Demand to prosper has an impact on the Supply side.  Costs are going up across the board for everyone involved and my feeling is that this will have a dampening affect on the good news we see in the markets.

Saturday Laughs

However, enough bad news … Time for a bit of humour

In my newsletter I was asking for people’s comments on “Lessons learned from the Lehman default”.  One reader who wanted to remain anonymous sent this in.  Thanks for sending it in Alfonso.

6 Lessons about Lehman

• Don’t p*ss off The Man – you will lose
• If you are an 800 pound gorilla running around wall street, chances are that someone will lock you up in a cage eventually
• If you are driving down Wall Street and find yourself heading towards Sh*t Street, when someone offers you a lift in the opposite direction it’s generally a good idea to take it, and not hold out for “something better” to come along.
• If you used to captain an airliner and are used to high altitudes then you should already know :

• It’s a long way down
• Nothing but hot air is keeping you where you are
• You may think you are flying the plane, but the guy in the control tower has your balls in his hands

• If your name is Dick, try not to act like one – it makes for great headlines at your expense
• Always remember there are a lot of people who work for you in countries where gun ownership is still legal

Wall Street Meltdownv Redux

Also, if you want to get a better understanding of the financial crisis timeline, watch this video.