United States equities have taken a beating recently after a full-scale market correction. A market correction is generally identified as a fall off of 10% or more. It would appear that the depressed equity values would be a great opportunity for vulture funds, funds that prey on companies with greatly depressed values, to pounce on under priced United States stocks. However, the over $600 billion of vulture money circulating globally has seemingly been cautious as we’ve only seen a few large vulture investments recently. Their reluctance to invest large quantities of their capital now, displays a sense that United States equity markets could fall even further. It has been found that 50% of corrections lead to a 15% drop from recent market highs. Another 54% of those 15% drops lead to a 20% market fall off which is the technical definition of a bear market. Buying distressed assets going into an economic slowdown can be quite risky as the timing can be difficult. Clearly the vulture funds have reason to believe that United States Equities have room to fall.
While many vulture funds are sitting on large piles of cash, there have been a few notable vulture investments quite recently. This past week Citadel, one of the United State’s largest hedge funds, invested $2.55 billion in E-Trade. E-Trade recently fell on hard times due to failures of its federal savings and loan division in their investments in mortgage backed securities. E-Trade is trading around $4.82, which represents a 79% year to date drop in stock price.
Abu Dhabi’s investment arm recently pumped $7.5 billion into Citigroup, a stock that has fallen on hard times recently due to the credit crunch. Citigroup stock recently dropped as low as $29.60 which was 48.1% off of its 52-week high of $57.00. Citigroup is now dealing with the departure of former CEO Chuck Prince and a $100 billion super fund as an attempt to bail out the structured investment vehicle market. Thus, Abu Dhabi’s investment comes at a volatile time for Citigroup when cash will likely be helpful in their operations. In addition, the investment shows a growing influence of Arab oil producing countries in the United States.
The United States credit crunch caused great problems for foreign countries in addition to domestic firms. Northern Rock, a British financial institution, is a great example as it is trading around 9.4% of its 52-week high. Northern Rock has borrowed between 25-29 billion pounds after being forced to seek emergency loans by the British government. Northern Rock is the target of vulture funds in addition to buy-out shops and a consortium led by Richard Branson of Virgin. Firms that have expressed serious interest include: Cerebrus Capital Management, JC Flowers, and Richard Branson’s consortium. JC Flowers, a United States buy-out shop, seems to have the best offer, offering to repay 15 billion pounds of loans immediately followed by repayment of 10 billion pounds of loans by the end of 2010. They have even said they will raise their offer; however, they require the cooperation of the British government.
The vultures are also preying on the greatly depressed United States housing market. Domestic housing prices are greatly deteriorating, and the vultures think that they can get fire sale prices on homes that are selling for 50 cents on the dollar. While the investments in the housing market may be great, funds partaking in these investments will likely have to wait awhile to cash in. Experts do not project a market rebound until 2010-2011. Thus, the funds will have to refurbish and rent the homes that they purchase until the houses that they have bought are selling for what the funds believe the homes are worth.