Northern Rock - Example of Panic Selling?

chump said:
No , it isn't overlooked at all. Indeed it is basic accounting to match type of loan to type of investment in maturity terms. Indeed that is exactly why these institutions are where they are right now. All evidenced in recent times where short term rates were higher than long reflecting their activity rather than the fundamentals of risk reward which says time and money equals risk ...basically sum it up ..they have been flipping money...which is fine just like flipping property ,but it all assumes that the recent price movement continues unabated and therefore that there will still be the same number of buyers and sellers to deal with down the road. Greater fool theory is....
Albert ,we both know the way to get out is to make sure you're gone whilst most people still think there's something in it for them and indeed there is ,but it isn't worth chasing..we know that ,but institutions like NR management do not ,or should I say they might know it ,but they let their need to be always in the market over ride commonsense. Chumps.

LOL...let me repeat for option holders ;)
IMO...when I consider the co-ordinated central bank activity this appears to me to be nothing more overall than manouvering to ensure that the overall misallocation of investment get's spread thinner rather than being concentrated in an handful of institutions. It buys them time to let them offload and reduce their current risk level ,BUT I would say it has little to do with the underlying fundamentals of whether will be growth ,or not ,because at this point that is already setdown by the change in psychology on how money will be supplied and demanded. In other words it will be a thinner market anyway and that would be far more dangerous were institutions to go into that with the same level of risk.
edit...and if it isn't clear yet let me spell it out a little more...rallying out of a 'crisis' into a triple witching in terms of buyng time to spread and reduce risk is not my idea of subtlety.
Click to expand...

Sounds like re-arranging the deckchairs on the Titanic! ;)
 
I don’t trade UK instruments or these sorts of timeframes currently, but it’s interesting to review the technicals for NRK. All of this in hindsight obviously. But, it only takes a few hundred thousand hindsights to develop a half decent foresight or two.

Back in early March this year, there was a break down through the bottom of a rising channel which had been forming over the previous 6 months from an all time high in the previous month which occurred on diminishing volume. The break also comprised a failed double-bottom. There was gradual unloading on increasing volume with a gap down in mid-June. So all this stuff was in the technicals long before the climax of the last week or so which took you from just over £6 to last night’s £1.85 (now well below runoff value by the way).

Even more interesting, significant short selling started in March with apparently only 20% of that attributable to hedgies, who quite possibly are more likely to be into the fundamentals than most, and 60% investment banks who also employ an FA or two between them. So 80% of the short sellers at that time were professional institutions all of them undoubtedly enjoying a personal relationship with the good and the great of NRK (as with other companies in the index and those up and coming of course). They took a view on the NRK business model and the likely development of the global credit market. Primarily fundamental I would guess, possibly with a bit of TA thrown in too.

Well done if they trousered the decline from £11. However, that was only 80% of those short selling at that time. This indicates there were a few clued up non-aligned (LOL) bods picking up on the situation from a purely technical perspective early enough to make a few squid on this as well. Well done those lads & lasses. It’s what it’s all about.
 
http://www.telegraph.co.uk/money/ma...VCBQWIV0?xml=/money/2007/09/21/cnnrock121.xml

Obviously ,the reporting facts are open to confirmation ,but in effect this is pretty close to what I thought would be the outcome. Treasury say's it isn't nationalisation as they'd have to own it...bollocsk ....you can effectively 'own' the decision making process without owning the business in a legal sense...and that is what we have here.
Now all that's left is to see which group are averaging into this...there's certainly one on the horizon ,but I wouldn't expect their aggregate price to be where they have already bought.

Tony,
If you could see liquidity drying up on you earlier this year and you wanted to be able take out the cork held by the central banks what would you do ? Just a thought ,but as you already mentioned the source of origination for the funds going short NR ,it's a thought worthy of consideration. Bit like Hyenas eating their wounded ...LOL...to benefit the remainder of the pack.
 
chump Tony said:
hi chump, yep, agree. what im going to say is clearly hindsight, and as such it should be seen. i dont follow UK shares, and i most definitely dont follow UK banks. this case got my attention when it became a "bank in crisis" given my background.

I honestly dont know if the FA chaps could really see a liquidity crunch in the market so much far the line, but what was written all over were interest rate expectations and what the BOE would do with interest rates.

I think this is where a bank analyst would have known that a business model like this one would be at risk. and by risk, i mean profitability. i really doubt that in their mind there was the concept of "lets short it till they bust :p " and instead thought it was a "this is a short because profits will suffer bigtime".
Click to expand...
 
"Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position."

Rule 4 from Gartman's rules..

I think Northern Rocks plunge has exceeded what anyone would expect from a FTSE 100 company 12 to 2 GBP. At each stage of this drop you'll have stop losses triggered etc, bottom pickers flushed out and people who just feel that in waiting for it to recover from 2 to 12 (haha) would be too exhausting on their time and emtions so it's best to just cut (and maybe realise that a company whose bottom line is based on current
money market rates bears a lot more risk than a firm who hold bricks and mortar assets
or cash).
 
Barclays gets loan -> no problem then NRK -> Pandemonium

what is the difference between NRK asking for a loan from the Bank of England and Barclays? Why was there not a run on Barclays?

relevant articles:
On Friday 31 August 2007 http://news.bbc.co.uk/1/hi/business/6971731.stm
"Barclays needs central bank loan"
Barclays says that a "technical breakdown" in the UK's clearing system forced it to borrow £1.6bn from the Bank of England.
It is the second time this month that the bank has tapped into the central bank's emergency credit line, sparking fears it is facing a cash crisis.
But the UK bank insisted it was "flush with liquidity".


but On Thursday, 13 September 2007 http://news.bbc.co.uk/1/hi/business/6994099.stm
"Northern Rock gets bank bail out"
"The Bank of England has agreed to give emergency financial support to the Northern Rock, one of the UK's largest mortgage lenders, the BBC has learned.
However this does not mean that the bank is in danger of going bust, Business Editor Robert Peston says. "
 
Hi shortorlong

I think perhaps you have answered your own question. "The BBC has learned the BOE has made an emergency lone to NR". No doubt the announcement by the BBC was accompanied with a degree of drama befitting a movie starring Dame Judie Dench.

This was the trigger. By the time this story broke Joseph Soap on the street had become aware of the issue. When Barclays borrowed the story was perhaps in it's infancy.

It's a similar theme as the general public always buy shares at the top of a bull market.

Cheers

Nut
 
Nut said:
Hi shortorlong

I think perhaps you have answered your own question. "The BBC has learned the BOE has made an emergency lone to NR". No doubt the announcement by the BBC was accompanied with a degree of drama befitting a movie starring Dame Judie Dench.

This was the trigger. By the time this story broke Joseph Soap on the street had become aware of the issue. When Barclays borrowed the story was perhaps in it's infancy.

It's a similar theme as the general public always buy shares at the top of a bull market.

Cheers

Nut
Click to expand...

I think the risk / reward ratios are quite different. Not just a story. NR's liabilities are not covered by deposits but by wholesale borrowing from the market and by a much greater margin than other mortgage lenders.

Also, I think the news said Barclays was able to pay its loan back next day. Will NR be able to pay back its loans and if so when?
 
NR dividend..flock of suitors...

as i said.... "you can effectively 'own' the decision making process without owning the business in a legal sense...and that is what we have here." ...Applejuice just checks the mail for BOE.
 
£7.82 Billion unsecured loans underwirtten by the Government.

I now know what they were all really queuing for...
 
It'll be interesting to see what impact it will have on NR when the BoE finally decide to withdraw this extraordinary support.
 
jacinto said:
support???? you mean the temporary capitalisation it gave it, right?
Click to expand...
Yes. Although I believe it's phrased more delicately along the lines of 'NR having the ability to draw on a BoE emergency facility' (without the normal conditions as applied to all other institutions being applicable...). Nothing so coarse as ‘capitalisation’, my dear chap.

I see nothing wrong with hot-footing it along to your nearest branch and obtaining for yourself a massive and totally unsecured loan – while stocks (arf!) last.
 
TheBramble said:
Yes. Although I believe it's phrased more delicately along the lines of 'NR having the ability to draw on a BoE emergency facility' (without the normal conditions as applied to all other institutions being applicable...). Nothing so coarse as ‘capitalisation’, my dear chap.

I see nothing wrong with hot-footing it along to your nearest branch and obtaining for yourself a massive and totally unsecured loan – while stocks (arf!) last.
Click to expand...

tony, I myself (edit: should read we, not I) did one like it when our banking crisis was only a liquidity crisis (we didnt know how bad the "asset quality" problem would become). at least we called it the way it is supposed to be called.

a) Deposit Guarantee = free (depends if there is a commision) put option on the assets written by government

b) Loan that is junior to deposits = "bond" that moves down the liability side approaching the capital part (accounting wise)

c) if NR goes bust, shareholders are wiped, but hey, guess what, government wrote a put on the assets :p, so, its "bond" actually has an implicit convertible option ;)

We called it "Programme for Temporary Capitalisation" and it was accounted for in that precise way. not Debt, not Equity, but in between (quasi-equity) but we all knew what it meant if the bank went under.
 
Last edited:
The sub-prime issue may not yet be over, I wonder if this might start a flight to safety. ie monies moving from other UK Banks or foreign for that matter to NR.

Cheers

Nut
 
TheBramble said:
It'll be interesting to see what impact it will have on NR when the BoE finally decide to withdraw this extraordinary support.
Click to expand...

Apprently under EU rules they have 6 months of support as it is considered emergency help. So in 6 months government must remove the guarantee and the BoE apparently must remove their funding.... Not sure how accurate this is... Anyone ?

NRK continues to be volatile. Small investors must be getting burnt at every turn by hedge funds... hedge funds must be gettting burnt by hedge funds.

Why were people buying at over 260 when Branson has said his offer will be lower than this AND the number of shares will double, effectively halfing the value of the current issues.
I did half expect the price to go over 300p today, thankfully all the small investors have done their buying and it is back to the funds to sell sell sell......

Valuation of NRK is still below current market price and supposedly if Virgin take over the share "might" be worth about 250p in 3 years or so....
 
A bit annoyed by this personally.

IB haven't allowed me to short NRK for over a week now!
 
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