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Endless Confusion From Europe.

  • Written by Syndicated Publisher 50 Comments50 Comments Comments
    October 12, 2011

    The eurozone sovereign debt crisis worsens and needs fast and decisive action.

    European Central Bank President Trichet warned this morning, “The crisis and stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.”

    At last. Decisiveness. No more kicking the can down the road.

    France and Germany announced over the weekend that they have agreed (again) that eurozone banks will be rescued. As in the past, they didn’t provide any details.

    And now the summit of euro leaders that was scheduled for next weekend has been postponed to October 23. The president of the EU said more time is needed to pursue a “comprehensive” plan that will include a bailout of Greece, a rescue plan for banks, and another expansion of the rescue fund.

    Luxembourg’s Finance Minister said this morning that, “There is no obvious solution. There are several options that must be examined from the technical and political points of view.”

    Meanwhile, Belgium is going to save its failing bank Dexia by partially nationalizing it.

    Greece announced last week that it will not be able to meet the austerity measures eurozone officials have insisted on, but examiners and officials of the Troika (the IU, IMF, and European Central Bank), are deciding today whether they will make the next payment of their bailout to Greece anyway. Of course they will. They aren’t going to risk the blow to confidence that would come from refusing to make the payment.

    Meanwhile, the region is so shaky that Slovakia has the power to nix the previously agreed on plan to expand the crisis fund? Slovakia is voting today on whether to approve the proposed larger bailout fund, and its ruling party is struggling to persuade its coalition partners to vote for the expanded fund.

    No wonder stock markets are rallying in relief over the decisive action in Europe.

    Terrible Quarter For Hedge Funds.

    The third quarter was the worst for hedge funds since the 2008 financial crisis meltdown. According to Hedge Fund Research Inc. the average hedge fund loss was 5.5% in the quarter, producing a loss of 8.7% for the year so far for equity based funds.

    But averages can be misleading. Bridgewater, the largest hedge fund in the world, which uses leverage and goes both long and short, is up 24% for the first nine months, while John Paulson’s Advantage Fund lost 19.3% just in September, and is down a whopping 47% so far this year.

    The problem for hedge funds when they have losses is that it can be a long time before they become lucrative for their managers again.  The typical fee structure for hedge funds is the so-called ‘2 and 20’ package, in which the manager is paid a 2% fee for managing the investors’ assets, and 20% of any profit they make above a ‘hurdle’ which is typically something like 10%. In the typical agreement, if the manager produces a loss, he will continue to receive the 2% management fee, but will not receive 20% of profits until the fund has brought its investors back to even by making back the losses.

    The result is that a fund that loses 25% in a year must make close to 50% to get back to even plus exceed the ‘hurdle’. A fund that loses 40% would have to make close to 100% before beginning to earn the bonus of 20% of profits again.

    Rather than run the fund for just the management fee for what could be several years, most simply return investors’ money to them, close the fund to outside investors, and continue it only to manage their own money.

    There have been a number of them closed so far this year, and I expect we’ll see more such announcements in coming months.

    Mortgage Rates Were 400% Higher Thirty Years Ago.

    Thirty-year mortgage rates dropped fractionally below 4% last week. Exactly 30 years ago, in 1981, they were at what was so far an all-time high, at 18.4%. And still home sales remain in a depression?

    Subscribers to Street Smart Report: In addition to the charts and signals in the premium content area of this blog, there is a very important hotline from last evening, and there will be an in-depth ‘Mid-Week U.S. Market Update’ in the subscriber area of the Street Smart Report Online tomorrow.

    To read my weekend newspaper column ‘Too Many Uncertainties Remain In Place’ click here!

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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