Hedge fund liquidations have pulled down stocks and commodities alike. They are now sitting on some cash, and that may help the stock market find its legs, said MF Global Research Senior Interest Rate and Equity Analyst Nick Kalivas (See a sample of his 11/17 morning comments below).
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Financial Market Comments From MF Global Analyst Nick Kalivas
Hedge funds are flush with cash. How much more are they going to sell? The market may be sold out.
There’s an interesting story on Bloomberg which suggests there has already been a large liquidation. I think there has been fear of more liquidation by hedge funds, but it already looks like there has been heavy liquidation. Story highlights below:
Hedge-fund manager David Tepper entered the third quarter with $3.1 billion of U.S. stocks and exited with $648 million, selling most holdings to reduce risk and raise cash as carnage spread across the financial markets. “We moved a lot out early because we didn’t want to lose money,” said Tepper, 51, president of Appaloosa Management LP in Chatham, New Jersey. The firm, which switched some money to bonds, has between 30 percent and 40 percent of assets in cash.
At Tudor Investment Corp., the Greenwich, Connecticut, hedge-fund group founded by Paul Tudor Jones, 13F holdings fell to $453 million from $5.7 billion. Jones said markets face more selling from managers. “Our concern now is less over year-end fund redemptions, as record cash balances have already been raised in anticipation, but with prospective fund closures,” Jones, 54, said in an Oct. 31 report to his clients. “This latter event represents a tipping point at which a fund’s call on the market for liquidity goes non-linear.”
SAC Capital Advisors LLC of Stamford, Connecticut, said its holdings were $7.7 billion as of Sept. 30, down from $14.4 billion at June 30. Founder Steven Cohen, 52, had about half the firm’s assets in cash in mid-October, after his main fund fell 5 percent through September. Louis Bacon’s Moore Capital Management LLC said the value of its 13F securities fell 69 percent to $1.4 billion, while at Jana Partners LLC, a firm overseen by Barry Rosenstein that makes activist investments, they fell to $2.1 billion from $5.9 billion. Both firms are based in New York.
Jeffrey Vinik, who once ran the Fidelity Magellan Fund, disclosed that his Boston-based Vinik Asset Management LP held $1.8 billion at
Sept. 30, down from $11.8 billion at June 30. “Movements in financial markets were so volatile, so unpredictable and so seemingly detached from fundamentals” that many hedge-fund managers “didn’t feel they had an edge,” said Doug Peta, an independent market strategist in New York. “The best thing they could do for their investors was to pull back entirely until markets returned to more of a sense of normalcy.”
8:25: NY Post story
Hedge funds have been rushing in recent weeks to sell risky bond and stock assets ahead of yesterday’s deadline for investors to withdraw money from their beaten-up funds. The withdrawals ahead of the Nov. 15 deadline, the first since the October markets meltdown, could lead to the shuttering of up to 25 percent of the 7,000 hedge funds, industry insiders say.
Speaking at the Futures Industry Association Expo in Chicago today, Commodity Futures Trading Commission Acting Chairman Walter Lukken said we must take the “necessary steps to repair the financial system and regain America’s trust and confidence in our markets.” He said “courageous regulatory reform is needed” that involves scrapping both the CFTC and SEC in favor of an “objectives-based regulatory system consisting of three primary authorities: a new Systemic Risk Regulator, a new Market Integrity Regulator and a new Investor Protection Regulator.” Read full text of his speech.
Also speaking at FIA Expo, Dennis Gartman, Editor and Publisher of the Gartman Letter, said given a Democratic president and Congress, there is no question we are going to face “a huge increase” in regulation. He’s not sure what it will be, but said those in the futures industry “will survive it.” He also said it’s “abundantly clear without a doubt we in a serious recession” and predicts the nation’s unemployment rate could rise to as much as 8% before we start to pull out of it.
Lind-Waldock Senior Account Representative Tony Klancic offered a primer on futures trading and the gold delivery process as part of an article for ResourceInvestor.com. Tony’s piece comes after Gene’s commentary, which is summarized below.
Got Gold Report – How to Buy Physical Gold and Silver on the COMEX
By Gene Arensberg 24 Oct 2008 at 07:25 PM GMT-04:00
Think the futures price of metals is too low? The Got Gold Report reports on how to buy and actually take delivery of gold and silver metal from the futures markets that have savaged the price of them so much. If the COMEX is determined to under price its physical metal, then they ought not to mind seeing it leave their warehouse for the popular physical market.
As we know, last week was an historical one for the stock market. We saw a freefall, even as the Federal Reserve and other central banks made unprecedented, coordinated interest rate cuts. The December S&P 500 index was lower last week by over 18 percent as it extends this month’s plunge. Year-to-date, the S&P is down about 38 percent. The focal point is on the global credit clog, but fear and panic are driving the markets. As fears of a big global recession spread, crude oil fell $16 last week, under $80 a barrel. Just a few months ago, it was at $147. How quickly things change.
As far as the S&P 500 futures, this morning, stocks are embracing the result of a weekend meetings among a consortium of global leaders to shore up the financial system. Plans included the guarantee loans between banks through 2009 and allow governments to buy stock in distressed financial companies. The European Central Bank, the Bank of England and the Swiss National Bank announced they would lend unlimited amounts of dollars to banks. The Federal Reserve announced that in order to provide broad access to liquidity and funding to financial institutions, it and the Bank of England, the ECB, the Bank of Japan, and the Swiss National Bank are taking further measures to improve liquidity in short-term U.S. dollar funding market.(more…)
Congress passed the $700 billion financial bailout last week, but the enthusiasm in the stock market was short-lived. People are worried about the price that will have to be paid, and the possibly of a not just a small recession, but a big one. Economic data is gloomy, and the stock market is taking a hit. The S&P 500 is now down about 25 percent on the year. This thing is ugly, and technicals are signaling further possible losses.
You could summarize last week as a flight to quality. The markets are in fear mode. As stocks slid, the three-month Treasury bill rate fell to levels not seen since World War II (hitting 0.0203 percent on September 17). The dollar rallied on ideas we in the U.S. are better off than in Europe, which is now feeling fallout in its financial sector. It looks like interest rates will need to be cut abroad as the need for government bailouts has spread to Europe. In Germany, commercial property lender Hypo Real Estate was the latest bailout target, and fears of massive bank withdrawals led Chancellor Angela Merkel to say the government will guarantee savings of private account holders. (more…)
All I can say with some certainty about the market outlook for October is that volatility has exploded—get used to it! We are in historic times. Last month, I thought the stock market might test a bottom, but that we’d largely have a trading affair in most commodity markets. I did not imagine what a rollercoaster ride it would be.
We have faced at an emergency government rescue of the financial sector, which will affect not only Wall Street but also Main Street too. I don’t like to call it a bailout, but everyone knows the figure and it’s huge, $700 billion. Bear Stearns, Fannie Mae, Freddie Mac, AIG, Merrill Lynch, Washington Mutual, I’m not sure I can count all the victims of this financial crisis in the past month. We might have more to come. This emergency measure was needed because credit, the ability to borrow, has frozen up. You may say you don’t care, but you should. It affects us all. And it’s affecting world markets, as the events of the past few weeks have proven we are all tied together in the global economy.
We know that when America sneezes, the world can catch a cold. The U.S. might not have the same influence we had previous eras, but if our economy breaks down, other nations will feel the pinch. The initial financial rescue package spearheaded by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke failed to pass through Congress as September came to a close, and revisions and concessions had to be made. It gives the Treasury authority to buy bad assets from companies’ books, raises FDIC deposit insurance to $250,000 from $100,000, and includes some tax breaks for both businesses and consumers. The revised package got the stamp of approval from the Senate, and it goes now to the House of Representatives for vote Friday, October 3. I think it will pass. (more…)
The Labor Department reported early this morning that the unemployment rate hit a 4-year high of 5.7 percent in July and non-farm payrolls declined 51,000, and given other ills in the economy, market participants don’t expect the Federal Reserve to raise interest rates at its policy meeting next week on August 5. CME Group Fed funds futures show odds of about 93% the Fed will keep its key short-term lending rate steady at 2%, but are pricing in odds of about 58% that the Fed will raise rates at its October meeting.
However, in a Fed watch webinar hosted by CME Group Thursday, MF Global Senior Vice President of Hedge Fund Sales John Brady said expectations of an increase later in the year are tied to high headline inflation numbers, and he felt it it more likely the Fed will continue to sit tight given what could be even more economic deterioration, and eventually resulting deflation, ahead.
“Right now, with headline inflation running at 5 percent, some could argue perhaps interest rates at 2 percent are much too weak…A simple look at the Taylor Rule suggests interest rate policy would be closer to 3.65 percent. Fed policy makers may be anticipating, in terms of keeping a lower interest rate policy, a tremendous slowdown in the economy in the coming 18-24 months…The idea is that Fed policymakers have sacrificed some of their short-term inflation credibility in order to maintain some strength in the domestic economy, but also to keep the banking sector on its feet,” Brady said.
The Australian dollar has come off its 25-year high against the U.S. dollar following four straight gaining sessions, after its Central Bank Governor said the chances of “keeping inflation low over the medium term are good.” Market participants took that as a hint rates may not increase further from the current level of 7.25 percent. Lind Plus Senior Market Strategist Phil Streible sees the pullback as a good opportunity to establish a bullish position in the Aussie dollar, as the currency’s prospects remain strong. Read Phil’s outlook and trading strategy.
Commodity markets are in the news more than I’ve ever seen. And that’s both good and bad. Good that investors are aware of commodity markets and that they should consider including them in their portfolios, be it as an investment or as a speculative venture. Bad that some of the commentators–and some of our elected officials–clearly do not understand the purpose, function or workings of the commodity futures markets.
Speculators are a vital element in futures markets, supplying both liquidity and a counterbalance to the other main group of participants–commercial users who use futures to transfer their inherent business risk. And, when taking futures positions, both groups are doing nothing more than expressing an opinion about where they think the price of a certain commodity, such as crude oil or the S&P 500, will be when that futures contract expires.
Commodity futures markets are thermometers, not the fever that makes the temperature rise or fall.
This article, “Let’s Shoot the Speculators!” by Robert J. Samuelson, and published in this week’s issue of Newsweek, is one of the best I have seen on this subject. Finally, someone who knows what he is talking about.
Darrell Jobman, Editor-in-Chief of TraderEducation.com recently presented a webinar with us on fundamental analysis. The presentation focused on the grain markets and how fundamental analysis plays a role in trading decisions.
If you’re not familiar with the fundamentals of the grain markets, or just looking to brush up and get new ideas, you can check out the recorded webinar below. You can also view our calendar to register for upcoming webinars.
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