Wednesday, October 28, 2015


...and says nothing.  Oh yeah,  while proclaiming no rate hike, they mentioned that the economic picture was clearer (brighter?) and there might be a better chance for a rise in December.  Of course, nobody believed them and the equity markets, after a brief down-turn roared upward once again with the DOW closing up 190.  By the way, whatever economic news that was released today was stinko and after-bell earnings were the same.  The only thing that looked good was oil which, in case you haven't noticed is beginning to feel the effects of a U.S. production drop of some 500,000-700,000 barrels a day since April.  If thou seekest a bubble, look at shale.    The word from my buds in the West Texas town of El Paso is "Ponzi Scheme."  Seems there are no recoverable reserves--you gotta keep drilling new wells to get new production and unless you are at $100 a barrel, it's just too expensive to do that.  Occidental just announced that they are pulling out of the Bakken and Midland c. 2015 is beginning to resemble Midland, c.1988.  If true, there goes a big portion of the new job creation of the past few years which means no rate rise for sure from this politicized Fed.  I wish my buds would tell me what REAL price of WTI should be but I have little hope for that.

Now, The REAL story of the day comes out of D.C.  You've heard of the Carlyle Group, probably the most politically connected financial-whatever-group in the country?  Sure, everyone has.  Carlyle also runs a bunch of Hedge funds and has made, by all reports a ton of money over the years; but not this year, at least at one of the funds.

Claren Road Asset Management, in which I believe Carlyle has a majority and management position, has slipped a bit to the point where it's investors were advised by some to get out while the getting was good.  Of the some $4 billion in managed funds, apparently $2 billion headed for the door.  Ooops, not so fast said Carlyle, we'll let some of you out now ($700 million?) but the rest will have to wait until next year.  Consternation.

Now in some cases with the hedgies if you want in, you have to agree that it may not be in the fund's best interest to let you out in the period when you want to get out (that's invariably when the performance stinks, boys and girls) because EVERYONE will want out at the same time.  This leads to what in the trade is known as "unsettled conditions" which to the less sophisticated means, "We don't have the cash and if we start selling stuff to get liquid we are going to get killed."  Apparently, Claren Road didn't have this type of agreement and just decided that, bugger it, we're not paying until we're ready.  Oh, about the 2% annual fee they charge for the the management of the clients' money?  Well they are going to keep charging that even though the clients don't want their money managed any more.

Let's forget about the ethics of that position for a moment or the speculation on how pis...ah...upset you might be if you were an investor and simply focus on what is happening.

I would think that Claren (Carlyle), like others of their ilk, might have liquidity facilities in place to cover eventualities such as this from established lenders familiar with this business.  This is a big-time, power-broker, super important denizen of D.C.  I find it hard to believe that liquidity facilities were not available to them in size.  But what if they were not?  What does that say?  Were none made available?  Or were they too confident of their own abilities to protect against large redemptions or were the facilities not available?  Or were the terms of usage too harsh as to point of repayment which speaks to the management's assessment of the near-term state of the markets?  Or, was the liquidity of the market so poor that an attempt to get liquid--which surely they must have tested--proved impossible at any price (defined as that which would tank the fund)?   I must say, I'm fascinated by this because I've been waiting for something like this to happen while watching far smaller and far less important funds quietly (and in some cases, not so quietly) close up shop.  This doesn't do the overall market any good; I hope it is not a preview of things to come.   One thing it does point out, however, like the "oil bidnez" as my buds would say, in this environment things can turn on a dime.

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