In a recent post, I talked about Bear Stears’ closure of 2 hedge funds that were essentially worthless.
A few days ago, Bear Stearns (BS — hmm, I’m not sure if this is a fitting abbreviation) halted investors’ redemptions from another $900 million Asset-Backed Securities Fund, as worried investors were trying to pull their money out as fast as they could.
Here’s where the fear factor sets in. BS said that only 0.5% of the fund was invested in subprime, or high-risk, loans. Yeah right; maybe so, but once you lose credibility, no matter what you say, investors will assume the worst.
That’s a clear indication that the subprime virus has spread, and will continue to do so, even to institutional investments that may have very little exposure to it. Herein lays the danger that perception may take a hold of reality and pull asset classes down that are not directly related or connected.
Here are some more tidbits from infected parties. Sowod Capital Management acknowledged that it had lost 50% of its value in July and sold most of the assets for fear of not being able to meet margin calls. Australia’s Macquarie Bank said two if its hedge funds could face losses of 25% in July.
It is stories like these that, if continuously fed to the media, will eventually spillover and severely influence stock market direction as well, which may have already happened. This phenomenon is also called reaching a “tipping point,” where the viral effect takes over and feeds on itself.
Again, my point simply is that you need to be alert to any change in investment climate and be ready to pull the trigger on your sell stops should the need arise. Stick to my rule number 1 of investing: Never invest in anything unless you have established clearly defined exit points.