... is to 'freeze' investor money even though they want to cash out



(snip)""Financials are 21% of the market weight. That sector is in trouble. Trying to bottom fish in it is taking great risk. That means one out of five dollars in US market cap is off limits."

- quote from article by David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors

Contagion Gives Goldilocks a Haircut

"Sub-prime woes are now causing hedge funds to lock out their investors who seek to extract their cash." That is spreading and there are many funds that are frustrating their investors. You do not see this until it surfaces in a public release.

Yesterday I flew on a plane next to an investor who is chasing $3/4 million that he cannot extract from two funds. Both cases are currently private. I won't report the details but I can attest that this type of story is common."

We are also seeing signs of how this disease spread around the world. Australian and UK funds have surfaced with lock outs. Their problems were tied back to US sub-prime woes.

We have not yet seen public evidence of counter party risk failure in derivatives. It is too soon.

We believe that will come as some of these players in the financial sector get re-rated. Remember that auditors have to certify these values and or make notes about them.

Some of this paper is worth 50 cents on a dollar and is carried at book value and not market value. At market value many of these firms are insolvent. That is coming.

It is important to distinguish this housing and housing finance cycle from the savings and loan crisis of yesteryear. Then we had a federal insurance program that was honored by federal funding. We had an active lender of last resort (The Fed) who is responsible for the integrity of the banking system. That was then. The cost then was several 100 billion.

This time it is much larger. And this time the lender of last resort is on the sidelines

Therefore the Fed will not have to act as lender of last resort. Instead the Fed will watch this entire process of a risk adjustment occur. Those who expect the Federal Reserve to step in and bailout hedge funds or housing speculators are wrong. It won't happen. Furthermore, if it did happen, the Fed would undo years of work to get inflation as low as it is.

We expect that the process of adjusting this sector will take another two years. Housing prices are headed lower. Housing finance for new borrowers will be more difficult to obtain. Lenders are raising credit standards. Meanwhile we are going to watch the re-rating of trillions of debt. That means the debt multiplier in the United States is temporarily impaired.

There are implications if we are correct

The US economy is more leveraged now than at any time in its history. Aggregate debt is now about 350% of our nation's GDP. Non-financial debt is over 200% of GDP. And any benefits of the very low interest rates of a few years ago are gone or quickly fading. It takes more and more units of debt expansion for each unit of additional GDP.

Our conclusion is that the US economy is in for a stretch of below trend growth as this entire process runs its course."(snip)

from and an investor BBS