Creditflux Newsletter

You know it’s the top of the market when people start touting a product from the front page of the newspaper. Think of those lush bottom-corner ads for Florida condos circa 2007. Or cast your mind back to bullish front page articles about the coming equity booms in 2007, 1999 and, no doubt, 1929.

Lately, you may have noticed a lot of front-page ads and articles enticing pensioners to spend their nest eggs on gold coins and bars. This confirms Fishknife’s personal view that the gold boom has run its course. However, a lot of very smart people, with a better understanding of monetary policy than us, disagree with our view that gold is just enjoying a 5,000 year-long tulip-style bubble, and so we will leave out that example.

But here is a front-page sell signal you cannot ignore. On 12 October (make a note of that date), the Financial Times carried a front page report that Barclays Bank is planning to sell £4 billion ($6.2 billion) of CLOs.

The FT bought the line, no doubt whispered to it over a Canary Wharf latte, that this was a desperate move on Barclays’ part. After all, the newspaper reported, no-one except JP Morgan is buying CLOs. The implication was that poor Barclays was about to be taken to the cleaners by any hedge fund brave enough to put in a bid.

This, of course, is the equivalent of a hardware store’s “mad, mad, suicidal” sale. You can almost see Bob Diamond, as the founder of the chain, starring in his own low budget television commercial (perhaps in an ill-fitting pirate costume, sitting in one of the company’s unsold jacuzzis). “We must be out of our minds,” he gibbers. “At these prices, we are literally cutting our own throats.”

The reality, of course, is that Barclays is being smart, not desperate. It is not the only bank looking to sell CDOs. Secondary CDO market sources report that a growing number of big institutions are testing the water.

And it is clearly nonsense that CLO buyers are thin on the ground. Far from it. Today, it seems that everyone you meet is either setting up a fund to buy CLOs or trying to find a way to slip them into an existing mandate. JP Morgan’s lonely days as the CLO market’s only real buyer are now a distant memory.

The days when there were few buyers of CLOs and many forced sellers are gone. Portfolio liquidations have become a much less important source of supply than big banks, money managers and insurance firms, which are looking to take advantage of the recent dramatic run-up in prices.

These institutions are not selling to crystallise a loss. They are selling assets that were either bought in the secondary market or that have been marked down for accounting purposes. If they get the prices they are hoping for, they will make big profits.

It is no coincidence that Barclays’ prop desk is one of those most frequently mentioned as being active in the secondary CDO market – as both a buyer and seller. A handful of hedge funds such as Goldentree are also names that come up regularly. You can be sure that none of these firms is looking to sell (or buy) from a position of weakness.

At the moment, it is sellers, not buyers, that are in short supply, which is why so many potential investors will have pricked up their ears to hear that Barclays is interested in offloading a few CLOs.

But they should beware. When the mainstream media runs articles saying
it’s a good time to considering buying something, it is usually an even better time to sell it.