Cannon Trading Futures Blog: Daily Support and Resistance Levels

Subprime Uncertainty Fans Out

Bear's Hedge Funds
Are Basically Worthless;
More Bond Fire Sales

By KATE KELLY, SERENA NG and MICHAEL HUDSON

Investors in two troubled Bear Stearns Cos. hedge funds that made
big bets on subprime mortgages have been practically wiped out, the
Wall Street firm said yesterday, in more evidence of the turmoil
in this corner of the bond market.

Bear said one of its funds was worth nothing and another worth less
than a 10th of its value from a few months ago after its subprime
trades went bad, according to a letter Bear circulated and to
people briefed by the firm. The Wall Street investment bank --
known for its bond-trading savvy -- has had to put up $1.6 billion
in rescue financing.

Shares of Bear fell slightly yesterday in regular trading but then
slid nearly 3.5% after hours. At 4 p.m., the stock was at $139.91,
down 40 cents or 0.29%, on the New York Stock Exchange -- and then
in after-hours trading dropped $4.86 further to $135.05.

The revelations marked another anxious day for subprime investors.
As a market index that tracks the performance of subprime bonds hit
new lows, signs emerged that the pain experienced by Bear's
hedge-fund investors is being felt by investors around the world.

Wall Street firms yesterday circulated at least a dozen lists of
subprime-related bonds they planned to hastily sell to investors.
Some of the assets were from a fund managed by Basis Capital, a
large hedge-fund manager based in Australia, and were put on the
block by Citigroup Inc. and J.P. Morgan Chase & Co., according to
people familiar with the matter.

Basis Yield Alpha Fund last week informed its investors it had lost
around 14% in June. Another fund, called Basis Pac-Rim Fund, was
down 9.2% that month. Basis said the declines came after bond
dealers abruptly marked down the value of the securities, which it
said were "otherwise fundamentally sound."

Investors are struggling to place values on assets tied to subprime
home loans. Because some of these instruments aren't actively traded,
investors worry that they are holding securities on their books at
values that are no longer accurate.

"The Funds' reported performance, in part, reflects the
unprecedented declines in the valuations of a number of highly
rated" securities, Bear brokers wrote in a letter disseminated
to clients yesterday.

Last week, Moody's Investors Service and Standard and Poor's, the
two big credit-rating services, knocked down their assessments on
hundreds of mostly lower-rated subprime-backed bonds.

Delinquencies and defaults have been rising on subprime mortgages
-- which are taken out by borrowers with shaky credit backgrounds.
Some of these mortgages were subject to fraudulent loan
documentation when they were written.

The problems haven't filtered into the stock market, which hit new
records yesterday. But the mortgage-bond market is filled with
uncertainty, and investors show signs of aversion to risky corporate bonds, too.

"Right now things are starting to come unglued," said Charles
Gradante, co-founder of hedge-fund consultant Hennessee Group.

The net value of assets in Bear's highly indebted fund, High-Grade
Structured Credit Strategies Enhanced Leverage Fund, is wiped out,
according to people familiar with the matter, who were briefed on
the contents of a late-afternoon call with brokers. The net value
of assets in its other, larger, less-leveraged fund is roughly 9%
of the value at the end of March, these people said. The net-asset
value represents the value of an investor's holdings after debts
have been paid.

The funds invested in mortgage-backed securities and
collateralized-debt obligations, which are bundles of bonds. The
funds also made other bets in the debt markets through various
derivative investments.

In March, before their sharp losses, the enhanced-leverage fund
had $638 million in investor money, while the other fund had $925
million.

The funds' net values, which took more than two weeks to calculate
because of the fluctuating values in the market for risky, or
subprime, mortgage securities, came amid another tumultuous day
for the broader mortgage market.

The ABX index, which tracks the performance of various classes
of subprime-related bonds, hit new lows yesterday. In the past
few months, the portions of the index that tracked especially
risky mortgage bonds with junk-grade ratings had been falling.
But now, the portions of the index that track safer mortgage
bonds, with ratings of triple-A or double-A, are also falling
sharply.

The portion of the index that tracks triple-A subprime debt issued
last year has fallen about 5% in the past week. The portion of the
index that tracks low-rated triple-B bonds is down more than 50%
this year.

Investors have been buzzing for days, trying to explain the latest
losses in the ABX index, which signaled a deepening panic in the
mortgage market. Several factors have been at play, including the
ratings downgrades.

It also could have been related to mortgage-backed-securities
holders' hedging of positions by making bets against the index.
Or it could have been because speculators are betting the
subprime woes will worsen.

The index isn't a perfect indicator of the health of these
securities, because it represents only a narrow slice of the
subprime-bond market, and it isn't widely traded. Nevertheless,
investors are watching it closely.

"The decline in the ABX indexes has been significant, and
certainly some people are panicking and shorting it further
because many assets they own are going down in value," says
Alan Fournier of hedge fund Pennant Capital, which has been
betting against the subprime market.

Several traders said Calyon, the investment-bank division of French
bank Credit Agricole SA, was active in the market. In a May
conference call, bank officials said some of its dealings in
collateralized debt obligations -- which are bundles of bonds
sometimes holding subprime mortgages -- had "suffered from the
crisis" in subprime. It could have been forced to hedge against
exposure by taking positions that pushed the index lower.

A Calyon spokeswoman said in a statement that the firm doesn't
have any "direct exposure" to subprime home-equity loans, though
it is involved in warehousing asset-backed securities that are
used for CDO transactions that Calyon arranges.

In the statement, spokeswoman Virginie Ourceyre said the
asset-backed securities market "has been volatile since the middle
of the first quarter. Since then, Calyon has not originated any
new ABS CDO deals." She added that Calyon has been "actively
managing its credit-trading books."

The U.S. Treasury bond market had a jumpy day as subprime worries
lingered. Prices ended lower as investors remained cautious ahead
of Federal Reserve Chairman Ben Bernanke's testimony before
Congress today and tomorrow.

At 3 p.m., the benchmark 10-year note was down 9/32 point, or
$2.8125 per $1,000 face value, at 95 18/32. Its yield rose to
5.078% from 5.043% Monday, as yields move inversely to prices.
The 30-year bond shed 16/32 point to yield 5.161%.

"There's the fear that Bernanke is going to be once again hawkish
over the next few days," said Tom di Galoma, managing director
and head of Treasurys at Jefferies & Co., referring to concerns
that the Fed chief could continue to stress the risks to the
economy from inflation.

Sincerely, Ilan Levy-Mayer, M.B.A Vice President Cannon Trading Co Inc. http://www.cannontrading.com http://www.E-Futures.com ilan@cannoncapital.com Yahoo IM ilanlevy1970 310-859-9572 800-454-9572 Fax 310-859-0547 9301 Wilshire Blvd. Suite #515 Beverly Hills, Ca 90210 The finest compliment I can receive is a referral from a trusted client. * Important Please Note: Trading commodity futures and options involves substantial risk of loss. The recommendations contained in this letter is of opinion only and does not ensure any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.--