Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Monday, March 05, 2007


Over the weekend, it seems, many people finally got wise to the fraudulent ways of the sub-prime lenders:

NEW down 68.87%
NFI down 40.88%
FMT down 32.38%
IMH down 32.05%
LEND down 25.99%

A one-day dive like that doesn't happen often to a group of stocks. But then, these are strange times in the financial markets, and the housing sector has made for a great game of chicken among fund managers. The truth was out there for anyone who payed attention to the warning signs:

A lot of people had the courage and sense to short these guys and have done very well. It's more interesting, however, to look at who has been buying these stocks since the time bomb first detonated back in August.

Top 10 institutional holders of NEW on 12/31/06:
1. Hotchkis & Wiley 3,948,100 shares
2. Greenlight Capital 3,494,700 shares
3. Morgan Stanley 3,022,884 shares
4. Goldman Sachs 2,640,127 shares
5. State Street 2,116,121 shares
6. New York State Teachers 2,011,750 shares
7. Citigroup 1,937,351 shares
8. Barclays Global 1,618,618 shares
9. Deutsche Bank 1,362,819 shares
10. Vanguard Group 1,257,444 shares

Top 10 for shares of NEW purchased during Q4 2006:
1. Ivory Investment Management
2. Wesley Capital Management
3. Jacobs Levy Equity Managment
4. New York State Teachers
5. UBS
6. Chicago Equity Partners
7. Merrill Lynch
8. Two Sigma Investment Managment
9. BNP Paribas Securities
10. Tewksury Capital Management

SC 13 filing in 2007 indicating more purchases:
Cititgroup 2,845,700 shares held on 2/19/07, an increase of over 900,000 shares when they should have known better. Citigroup has a huge sub-prime lending division of it's own, after all.

Many months ago I read an interesting businessweek article that explains why Citigroup, Merrill Lynch, UBS, Goldman Sachs and Deutsche Bank are all getting burned on New Century and others (GS is in the top 5 holders for NFI & LEND as well):

"More surprising, banks are also regularly agreeing to buy huge blocks of stock from trading clients even when they know they will likely lose money on the trade. It's a high-risk, low-reward endeavor designed to keep clients coming back to pay for more lucrative business in the future. Some executives estimate the dollar volume of such transactions has doubled in the past few years. Yet banks have barely broken even on about 30% of their big block trades this year, according to Thomson Financial (TOC ). That's because the share prices often fall during the time they hold the securities on their books. Even so, "banks are falling all over themselves to bid on blocks," says T. Rowe Price's Brooks. "It's not for the faint of heart."

The sub-prime time bomb is just the first is just the first stage in a chain reaction that will engulf many portions of the financial sector. Look for prime lenders, mortgage insurers, the GSEs, savings and loans, commercial banks and investment banks all to experience their own implosions. They may not all get wiped out entirely or as dramatically asthe sub-prime players, but the damage will be extensive.

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