Friday, June 22, 2007

Bear funds still weighing on market

Issues surrounding the two troubled Bear Stearns hedge funds are still the primary cause of bond and equity market concern. Any other stated reason for today's decline is secondary.

It's troubling to hear so called pundits who have the time to be interviewed by Bloomberg radio, CNBC or other news outlets during the market day make their observations. They are not alarmed. They speak of the issues in the CDO market as just limited to the 2006 "vintage". They are relaxed in a "it's all in a day's work" sort of way. When these lightweights are acting so savvy, it's time to stay worried.

Merrill Lynch was reported yesterday to have pulled back from selling the CDO collateral that they had taken from the Bear funds with the exception of a few pieces of the higher rated paper. That was seen as good news on the surface, and as constructive market participation by Merrill. Forget that. Self interest rules Wall Street. If Merrill pulled back from selling the securities, it's because the prices they could get were so dismal that holding was the only rational strategy. That is troubling, and the real market participants know it.

The Bear funds issue will certainly be digested by the market, with some heartburn. If other funds in the opaque hedge fund world show up with similar problems, this shake-up of fixed income markets could continue for a while. Remember, Bear is one of the leading bond houses on the street. Maybe they felt that their expertise gave them the ability to manage a high risk, high return strategy with low tier CDO's. In light of market events, they failed. If other funds have been following the same path, without the market leading expertise of Bear, this hiccup may get extended. That would be negative of course. Will it happen?

We don't know yet.

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