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Five Things You Need to Know: Cash Enhanced Fund Now Cash Challenged; Pending Home Sales; MBIA Gets Fresh Cash Infusion; Phrase of the Day: Cash Infusion; Double Entendre Opportunity Mysteriously Escapes


What you need to know (and what it means)!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Cash Enhanced Fund Now Cash Challenged

Bank of America (BAC) is being forced to liquidate a $12 billion enhanced cash fund after losses on structured investment vehicles, according to Bloomberg.

  • Bank of America's Columbia Strategic Cash Portfolio halted redemptions last week after the net asset value fell to 99.4 cents on the dollar, according to Bloomberg.
  • So-called "cash enhanced" portfolios are frequently billed as being as safe as classic money market vehicles, but in recent months some have faced difficulties due to losses on some of the portfolio holdings.
  • The Strategic Cash portfolio was only open to investors with a minimum of $25 million or more.

2. Pending Home Sales

Pending home sales increased 0.6% to 87.2 in October, following a revised higher 1.4% gain in September, the National Association of Realtors reported.

  • The NAR Index of Pending Home Sales increased for the second straight month, but was still 18.4% below the level of 106.8 in October 2006.
  • And the increases follow what were the largest back-to-back declines since record-keeping began in 2001.
  • Pending home sales track signed sales contracts, not closings.
  • These sales usually close in one or two months and are then reflected in the existing-home sales data released by the NAR.
  • Lawrence Yun, chief economist for the NAR, said he believes existing home sales will gradually rise over the next year as "pent up demand" is unleashed.
  • In the meantime, while Mr. Yun awaits the unleashing of "pent up demand," we'll continue to follow the "pent up supply" of housing that is being relentlessly unleashed.

    U.S. Existing Homes Inventory

3. MBIA Gets Fresh Cash Infusion

MBIA (MBI) this morning announced that it has entered into an agreement with Warburg Pincus, the global private equity firm, for an investment of up to $1 billion in MBIA through a direct purchase of the common stock. Short sellers in the stock were then promptly crushed.

  • Warburg Pincus is providing $500 million in cash and committing to another $500 million backstop.
  • Additionally, MBIA said it would be setting aside reserves of up to $500-$800 million against future claims and that it is expecting to take a significantly higher mark-to-market loss against certain assets in the fourth quarter .
  • What does all this mean?
  • First, the added capital is not really "good" news.
  • The capital was added to prevent a reduction in the company's AAA credit rating which would have effectively crushed their ability to conduct business.
  • According to Fitch, the $1 billion infusion in new capital will effectively increase the company's claims-paying resources by that amount, improving its overall financial position, but MBIA was a "low probability" casualty based on the company's ratings anyway.
  • "Fitch believes these reserves and mark-to-market losses will not be isolated to MBIA."
  • In other words, this is still the beginning of the issue, not the end.

4. Phrase of the Day: Cash Infusion

Speaking of the need to raise fresh capital, UBS (UBS) announced a further $10 billion in write-downs linked to subprime-related holdings, but said two foreign investors have committed to providing $11.5 billion to the bank to strengthen capital, according to the Wall Street Journal. And short sellers in the stock were then promptly crushed.

  • While announcing the new writedown and explaining that what the company had previously said would be a profitable year would now likely be a loss for the year, UBS said the Government of Singapore Investment Corp., or GIC, is investing 11 billion francs, while an "undisclosed strategic investor in the Middle East" is contributing two billion francs ($11.5 billion USD total).
  • GIC will own around 9% of UBS following its investment, according to the Journal.
  • "Our losses in the U.S. mortgage securities market are substantial but could have been absorbed by our earnings and capital base," UBS Chairman Marcel Ospel said in a statement.
  • "Nevertheless, it is important to always maintain a notably strong capital position to support the continued growth of our wealth management business, which is the largest generator of value to UBS shareholders."
  • UBS also said it would sell treasury shares, which it had previously canceled, to raise still more capital, and scrap its planned 2007 cash dividend in favor of an all stock issue, according to the Financial Times.

5. Double Entendre Opportunity Mysteriously Escapes

In the latest sign that consumer spending is slowing, the Wall Street Journal reports that plastic surgeons are seeing the hint of a slowdown in demand for breast implants.

  • Breast-implant maker Mentor Corp. (MNT) says its surgeon customers have noticed a drop in patient interest for the implants.
  • Since last November when the Food and Drug Administration approved the return on silicone implants to the cosmetic market after a 14-year partial ban, Mentor's sales have been strong, the Journal said.
  • But the company has detected some disturbing signs at the end of the third quarter.
  • According to Mentor CEO Joshua Levine, some plastic surgeons are seeing a drop-off in patient consultations, which is "usually a little bit of a precursor to lighter surgical calendars maybe 45 to 60 days out."
  • "This whole mortgage credit crisis is making people think twice," Dr. J. Peter Rubin, a Pittsburgh plastic surgeon told the Wall Street Journal.
  • "It's something I've noticed and some colleagues have noticed as well."

Mentor (MNT) Year-to-Date

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