Charts in the Babson Style for the Week Ending 7 November

Myron Scholes Takes Another Hedge Fund to the Brink

Bloomberg
Scholes's Platinum Grove Fund Halts Withdrawals After Losses
By Saijel Kishan

Nov. 6 (Bloomberg) -- Platinum Grove Asset Management LP, the hedge-fund firm co-founded by Nobel laureate Myron Scholes, temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October.

The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors. Funds employing a similar approach of exploiting differences in the value of related securities fell 14 percent last month and 30 percent this year, according to data compiled by Chicago-based Hedge Fund Research Inc.

``The suspension is necessary given current market conditions,'' Rye Brook, New York-based Platinum Grove said in an e-mailed statement today. ``Platinum Grove will use this period to consult with its investors and counterparties, determine their future intentions and manage the assets of the fund accordingly.''

Hedge funds are reeling from the worst financial crisis since the Great Depression, losing an average of 20 percent this year, according to Hedge Fund Research. A surge of investor redemptions forced firms such as Blue Mountain Capital Management LLC and Deephaven Capital Management LLC to freeze funds to stem the tide of withdrawals.

Scholes, 67, winner of the 1997 Nobel Prize in economics, was a founding partner in Long-Term Capital Management LP, the hedge fund that lost $4 billion a decade ago after a debt default by Russia. He started Platinum Grove in 1999 with Chi-fu Huang, Ayman Hindy, Tong-sheng Sun, and Lawrence Ng, who had all worked at Long-Term Capital...

Weekly Dollar DX Chart with Commitments of Traders and Dollar VIX

As shown by our proprietary Dollar VIX indicator, currency trading recently has not been for the weak of heart, if ever.

The funds are still net long, but are also holding the smallest short position since we started tracking this number in January 2004.

General Motors is on the Brink of Default and Bankruptcy

Right at the close of trading Fitch and the other rating agencies cut General Motors debt ratings. In particular Fitch was quite specific that GM will either be bailed out or will be forced to default and restructure.

"Given the current liquidity level of $16.2 billion and the pace of negative cash flows, Fitch expects that GM will require direct federal assistance over the next quarter and the forbearance of trade creditors in order to avoid default."

In addition, and perhaps unrelated, AIG has moved its 3Q 08 financial results from after the close of trading on Monday to 6 AM, before the Bell.

Another late Sunday night before the start of Asia trading?

Fitch Places GM's 'CCC' IDR on Rating Watch Negative
07 Nov 2008 3:57 PM (EST)

Fitch Ratings-New York- Fitch Ratings has placed the Issuer Default Rating (IDR) of General Motors (GM) on Rating Watch Negative as a result of the company's rapidly diminishing liquidity position.

Given the current liquidity level of $16.2 billion and the pace of negative cash flows, Fitch expects that GM will require direct federal assistance over the next quarter and the forbearance of trade creditors in order to avoid default.

With virtually no further access to external capital and little potential for material asset sales, cash holdings are expected to shortly reach minimum required operating levels.

GM remains dependent on the capacity and willingness of its suppliers to continue extending trade credit, as the company does not have sufficient resources to finance ongoing operations in the event that trade credit is curtailed.

Over the intermediate term, GM's expanded debt load and debt service costs, when combined with significantly reduced earnings capacity, indicate that material improvement in the balance sheet is unlikely absent a restructuring of the balance sheet. This could eventually take place through a distressed debt exchange.

Fitch believes that direct federal aid is highly likely to be forthcoming, although the amount, timing, structure and term remain uncertain. Without material federal assistance in the short term, Fitch would review the rating for a potential downgrade to 'CC', which indicates that default is probable.

Given the extended cash drains expected through at least 2009 and the need for balance sheet restructuring, provision of federal assistance may not preclude a downgrade to 'CC'.

Deteriorating macroeconomic conditions and the effects of the credit crisis continue to ratchet down retail sales volumes and to expand negative cash flows.

Restructuring costs, other one-off items, and working capital outflows have exacerbated operating losses, factors that will continue to hamper any recovery in the near term. The rationing of retail financing highlights the tremendous capital advantage held by transplant manufacturers, further impairing near-term volume and pricing potential.

In addition, Fitch has placed the following on Rating Watch Negative:

--Senior secured at 'B/RR1';
--Senior unsecured at 'CCC-/RR5'.

General Motors of Canada Ltd.
--Long term IDR 'CCC';
--Senior unsecured at 'CCC-/RR5'.