News that Moves: Brokerages Tighten Hedge Fund Financing & Eastern European Currencies Crumble

RCM Comment: As I write this note the equity markets are down over 3% across the board with financials leading the way. At the same time, Gold and Silver prices are called higher by over 3%. Those of you who are part of the Fortune's Favor Family of Funds, follow this blog, or are members of our website know that today is an eminently successful day.

O.K., our moment of felicity has passed. Let's get to the business at hand: Many different stories are being bandied about in the financial media trying to explain today's action. I submit the following two stories as catalysts for the move and humbly suggest they are in essence what is moving the markets today.

Brokerages tighten hedge fund financing - WSJ
The Wall Street Journal reports brokerage firms are reducing financing and other services to hundreds of hedge funds, in a move that could accelerate the shakeout among these heavy-hitting investors. Under financial pressure, securities firms are dividing their hedge-fund clients into lists of those they consider best able to weather the financial turmoil and those they're less sure of. The result is that more funds may have to merge, find other financing at higher cost or close. The squeeze, described by a range of brokerage-firm and hedge-fund officials, takes different forms. For instance, they say firms have reduced financing for the flagship fund run by John Meriwether, a founder of Long-Term Capital Management, the fund whose near-collapse caused a brief market crisis in 1998. The move has forced Mr. Meriwether's Relative Value Opportunity fund -- down 42% in 2008 -- to reduce its borrowing to finance trades, putting pressure on returns. Mr. Meriwether, whose firm is called JWM Partners LLC, declined to comment. RCM Comment: I find this story extremely disturbing for two reasons: 1) This action by the banks seems to be setting up a vicious cycle. It would appear that banks are failing to see the interconnected nature of the hedge fund industry. The "less sure of" funds will be forced to liquidate, which will put pressure on the "weather the turmoil" funds that own similar assets, which in turn will lead to a growing number of "less sure of" funds. Did you follow that reasoning? This action basically leads to the continued unraveling of the hedge fund industry. This unraveling caused violent swings in the markets during the 4th quarter of 2008. 2) During Q4 of '08 and particularly in December, funds suspended redemptions to slow down mass liquidation, which helped stabilize the markets. However, the next window to redeem is rapidly approaching (end of Q1). We would not be surprised at all to see violent swings increase as we get closer to the end of March. The banks' decision to "tighten financing" will only throw fuel on the redemption fire.

Eastern European currencies crumble as fears of debt crisis grow - Daily TelegraphThe Daily Telegraph reports that Hungary's forint fell to an all-time low on Monday, and Poland's zloty slumped to the lowest in five years, on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40% fall of the zloty against the euro since August. The mushrooming crisis has already started to spill over into Germany's debt markets, lifting credit default swaps on German five-year bonds to a record 70 basis points. A report by Moody's released on Tuesday said the region's banks were coming under severe stress as the property bust combines with a rising debt burden. "Local currency depreciation is a major risk to East Europe banks," it said. There are contagion worries for Western banks that have lent $1.74 trillion to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries. The region needs to roll over $400 bln in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue programme from the International Monetary Fund and the European institutions. RCM Comment: This story is a main reason for the surge in the price of the U.S.$ and Gold today. That's right. You read it correctly. The US$ and Gold are going up together. Those of you who have been reading this blog for the last few months will recall we have listed this behavior as a key signpost on the road to higher Gold prices. We have relentlessly stated we will know we have entered an explosive stage in Gold prices when the metal advances against all currencies at once. Please hold on to the bar...