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Bear Stearns' Hedge Fund Mess


Brokerage paper has been widening relative to Treasuries of late, but so has everything else, as perhaps it should.

Bear Stearns (BSC) announced that its internal hedge fund mess is worse than expected. When using 20:1 leverage and nuclear waste as the underlying asset, who could be surprised?

Brokerage paper has been widening relative to Treasuries of late, but so has everything else, as perhaps it should. Given the fact that Ginnie Maes (30 year single family 6% coupon for August delivery) have widened out to 125 basis points over Treasuries and BSC paper is a whopping 152 over, I don't see the value of buying finance paper 27 basis points cheaper. Like stocks, I just don't see a great risk/reward.

As for BSC stock, I mentioned the 20 year up trend the other day. Stay tuned. See the chart below on a logarithmic basis. A weekly break of 135 is important. It is 137 in the pre-market this morning.

Click here to enlarge.

I still ask,"'Where would spreads be if international investors weren't buying in record amounts"? Yep, wider, perhaps by a bunch. And secondly, look what happened to Treasuries when international investors slowed their buying (actually, the Chinese were net sellers for the second month in a row). See the chart below of an updated view of foreign purchases of out corporates, Treasuries and equities. They are in a risk-taking mood it seems--at a time when risk is mispriced, in my opinion.

Click here to enlarge.

Oh, and one last thing. Lehman Brothers (LEH), the king of bonds in many people's minds (with a nod to many other friends like Greenwich Capital, etc.) sold $5 bln of its own bonds last week (10 and 30 year bonds). This reminds me of Sam Zell selling his REIT at the top.

The mere fact that they sold that many bonds of that duration strikes me as a potential "watershed event" in credit risk. This really struck a chord with me that they "sold when they could not, when they have to". If you were Lehman, and you had international investors lined up at the door to buy your paper at great levels, wouldn't you sell? I would.

And oh, by the way, those bonds are already getting hit hard (on a spread basis) after the deal came to market. Nice sale, Lehman.
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