Failed Auction Rate Securities Seem to be Hurting Blackrock

Blackrock (BLK) is down nearly 7% yesterday, and is approaching its 200 day moving average ($180), so I am beginning to rebuild this position (again, slowly). This normally slow moving, quiet financial firm is down about 20% in 2 weeks. I am going to increase this position from 0.6% to 1.2% of the fund by adding here near $182. Since it could easily break this very important support level, I don't want to go overboard, but this is one of the few financial based firms in America I trust, and it has been unscathed by the credit issues thus far, but as things degrade in theory, no one will be completely spared.



I've called the credit contagion a big "web"; we simply don't know all the places the damage will show up. As discussed this weekend, we saw auction rate securities failing to fund last week, and this appears to be hurting closed end funds, of which Blackrock is a major player. As each week passes we seem to learn of a new credit derivative or acronym that seems to be blowing up. Quite amazing all these things function in the background for years on end and we never notice them, but in a credit/finance based society, so much is based on the flow of capital behind the scenes.

• Some top U.S. asset managers that offer closed-end funds are warning their investors of lower returns as the credit crisis has severely disrupted trading this week in an instrument they rely on to borrow and boost fund returns.
• Closed-end funds, unlike traditional open-end mutual funds, issue a fixed number of units and trade on exchanges. They borrow by offering preferred securities with short-term maturities of 7 to 28 days. New interest rates are set through an auction process.
• This week, the auctions failed as the institutional and wealthy individual investors that usually snap them up have stayed away due to growing concerns about the credit markets. Banks that normally step in to buy unsold securities also backed out because they are already saddled with vast amounts of various securities whose values have tumbled with the credit crisis.
• Nuveen, BlackRock Inc (BLK) and Eaton Vance Corp (EV) are among the leading players in the closed-end funds market.
• Nuveen said the failed auctions affected at least 25 different fund sponsors. Its funds could see higher borrowing costs, hurting returns, and if the disruptions persisted, Nuveen may have to look for "potentially less favorable" avenues for borrowing, it said.

How long this remains an issue is an open question; again it's a crisis of confidence along with destruction of capital. All these write-offs of billions seems to be shrugged off by equity markets but it's real money even if the numbers are starting to numb people... after all what's another $5 billion among friends. But each billion has leverage against it, so it caused a cascading effect. Great on the way up; but destructive on the way down. Quite the soap opera. We'll see how Blackrock reacts; if things deteriorate we could see downside risk to $150s.

EDIT @ 12:42 PM: From the offices of "Better to be Lucky than Good" we have Blackrock responding to market rumors (have you read what a quality CEO Mr Fink is?) - it is quite nasty however, how these hedge funds can start rumors and cause a downfall in share price in anything related to financials ;) Stock quickly rebounds up to $190.

Blackrock said it has no material exposure or losses related to subprime assets or collateralized debt obligations, the company said in a statement Tuesday, responding to rumors and speculation of further losses from CDOs and subprime exposure. It noted that although it is company policy not to comment on market rumors, it decided to make an exception due to "the unusual nature of certain rumors circulating in the market place and inquiries the company has received." BlackRock also denied any knowledge of a Department of Justice investigation of the company.

Disclosure: Long Blackrock in fund; no personal position