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2. Goldman Sachs ensnared in corruption probe in China

You have to give William Ackman credit for not clamming up about his losing investments. Unlike many investment managers, he's willing to acknowledge and even elaborate on his bad decisions, which have been plenty as of late.

In an interview with the New York Times, he says this of his Herbalife investment: "It is a certainty that Herbalife is a pyramid scheme. We believe it's harming a population of low-income, principally Hispanic people in the U.S. to benefit a handful of superwealthy people at the top of the pyramid. You should ask yourself: Why are more than 60 percent of Herbalife's distributors in the U.S. low-income members of the Hispanic community? Why are they buying overpriced nutrition products? There's something unusual about this business. This makes no sense."

He is certainly confident. And he's sticking to his guns. That said, he's also a realist. He has adjusted what was originally a $1 billion short bet against the marketing company. In a letter to investors in his Pershing Square fund, Ackman disclosed that the firm "had covered more than 40% of his short position, at least 8 million shares, "in order to mitigate the risk of further mark-to-market losses on Herbalife," as noted by Forbes. To compensate, he purchased long-term derivatives, most likely puts that will still give him plenty of upside if the stock tanks.

If the stock continues to rise, however, he may be forced to retreat just a bit. This battle is far from over.

For more:
- here's the article

Read more about: William Ackman, Herbalife
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By Jim Kim

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3. Morgan Stanley casts doubt on Great Rotation

In these days of aggressive FCPA prosecutions, companies that operate in China, either directly or via affiliates, face stepped up risk. That was underscored recently by the plight of Goldman Sachs, which owns a minority stake in a company that has been caught up in a local corruption probe.

Lei Yi, chairman of Yunnan Tin, among the world's largest producers of the metal, has been charged by local prosecutors in the Yunnan province with accepting bribes worth $3.3 million. Lei allegedly received the bribes in part from Li Hongtao, chairman of Leed International Education Group. "The money had been used to clear the way for Mr Li's company to buy a majority stake in Dianchi College, a private postsecondary institution in which Yunnan Tin held a 45 per cent share," according to the Financial Times, which also notes a connection between Li and Goldman Sachs.

"Leed was formed in May 2008 through a partnership between Goldman Sachs and Beijing National Education Group, Mr Li's original company. The initial size of Goldman's investment was not published, but it invested $41.5m in Leed via a follow-on investment, according to a 2010 record published by AsiaLaw profiles."

To be sure, Goldman Sachs has not been charged. Prosecutors directed charges at Li personally. Still, it's not a comfortable situation to be in. And the bank's risk managers will have to ponder their next steps carefully.

For more:
- here's the article

Read more about: Goldman Sachs, Fcpa
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By Jim Kim

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4. T-bill action: a warning of volatility to come

Since the Federal Reserve Board's decision to hold off on tapering, there's been a lot less certainty about the so-called Great Rotation. Morgan Stanley has weighed in with a hefty piece of research that casts doubt on the theory, sticking to a thesis they developed even when confidence in the theory was at its peak.

"We think the concept of a 'Great Rotation' hugely simplifies the nuanced demand dynamics," wrote the analysts, as quoted by Business Insider. "Based on our bottom-up assessment of investor segments, covering ~$89trn of assets, and the differing regulatory and demographic pressures on investor decision making, we conclude there are significant, and possibly underestimated, structural challenges to a rotation into equities."

The researchers identify two powerful opposing forces. On the one hand, high net worth individuals and retail investors are stepping out of the cash game, finally willing to take on more risk. For some, this means stepping back into the equities game, though it also means a step into money market and fixed income funds as well.

Against the rotation toward equity, institutional investors remain bond prone, as the key imperative still seems to be de-risking, to satisfy a host of demands, including regulatory ones. "Our analysis suggests this group will be a powerful headwind to any longer-term rotation back into equities, offsetting any cyclical re-risking from Retail and HNW investors."

So what to make of this? As interest rates rise, the movement away from bonds will necessarily pick up. But the rotation may be more gradual and nuanced that heretofore thought. A long graceful transition may be the best for all concerned.

For more:
- here's the article

Read more about: bonds, Great Rotation
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By Jim Kim

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5. SAC Capital weighs settlement offer

People have commented as of late about how calm the markets seem as a U.S. date with destiny looms: a default on its massive debts. Any outward calm will likely crumble as D-Day nears without a possible resolution on tap. At some point, people will no longer be able to stick their heads in the sand in the blind conviction that the political process will come to its senses.

When it all goes down, the sort of weakness we've seen lately will look extremely mild relatively.

For a glimpse of the mounting fear, look no farther than the T-bill market.

Various one-month bills mature just after the federal government hits its borrowing limit on October 17, "increasing the still-minimal risk of a delay in payments on the debt," notes MarketWatch. That risk "pushed up the one-month yield by 17.5 basis points Tuesday to 0.330%, its highest level since the fall of 2008…That spike in yields becomes even more extraordinary when considering that the last time the one-month bill yield was this high, the Federal Reserve wasn't holding down its short-term interest rates."

To be sure, longer-dated securities have priced much more firm as of late. But these markets too will react if a solution is not on the table at a reasonably soon date. The T-bill action serves as strong warning as to what lies ahead. The stakes continue to mount.

For more:
- here's the article

Read more about: Debt Ceiling
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By Jim Kim

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