Market remains in consolidation period. Market participants are preparing for the next major direction of market movement, a sizable correction or continuation of rally. As mentioned in a post at the beginning of year, hedge funds entered the new year with attempt to sell down the market. But seeing that selling did not generate herding behavior, hedge funds quickly turned into accumulation. With the start of turmoil in Tunisia and spread to Middle East countries, investors find similarities in comparison of the rally in the first quarter of last year and this year. Last year, the rally ended with the flash crash. This year, the rally is stopped by the Middle East crisis at the current moment. It is uncertain whether the rally will resume. Hedge funds speculate that the rally will end and take profit on previous accumulation. This time, oil can be used as a hedge on the bet. A modest amount of other investors and traders follow the selling and the market is dragged down. However, the growing pool of capital sitting on the sideline would absorb the limited selling. There is not significant short selling due to the higher risk of unlimited loss in unfavorable market movement. Investors are more aware of risk mitigation than before the financial crisis.
It may appear that current rally will end with Middle East crisis just like last year's rally which ended with flash crash. However, there are major differences between the scenarios. Last year, liquidity had not taken effect in equity stock market yet. Individual investors were finding safety in money market as well as treasuries and bonds. Wealth effect was restricted to only small proportion of investors participating in the equity stock market. In this year, there is enormous capital liquidity chasing various kind of assets. The wealth effect has spread to the majority of households. Individual investors are leaving money market for the higher return of equity stock market. Therefore when most of the institutional investors trimmed the portfolio due to fear of flash crash, market fell without support. But during current Middle East crisis, although hedge funds selling is followed by some other investors, there is cash waiting on the sideline which is absent during the flash crash. There is buying support when the market retreats.
With continual inflow of capital and wealth effect of equity stock market as well as improving economic indicators and corporate earnings, investors are gaining confidence in equity stock market. The low yield of money market also increases small investor risk appetite against increasing living expense. In addition, most individual investors missed the rally since market bottom in March 2009 until October 2010. Without fear of another bottom, individual investors propel the market to recent high. To avoid the mistake in the 2009 stock recovery, individual investors will stay in the market despite short term oscillation. Institutional investors are also piled up with cash for any opportunities.
The hedge funds sell-off creates an opportunity to increase portfolio holdings at a relatively low level. There is consistent buying on each market correction. After the consolidation period, the outcome is more likely an uptrend because of increasing demand for equity stocks on both asset appreciation and dividend return. In an expanding economy with surplus capital, wealth allocation will favor assets over money market, which is the opposite during financial crisis.
鄭秀文Hedge Funds Scramble as Rivals Exit
Several investors in the funds as well as consultants close to the matter say some investors are looking to put their cash into funds that follow the same "long-short" investment style.
Saudi Arabia's Regime Will Fall, Says Analyst
The root cause of the Middle East unrest, Ghait says, is inequality. Decades of autocratic rule have increased frustration that the vast wealth of the oil-producing countries in the region is in the hands of a small privileged few, and this frustration is finally boiling over.
Social Mood Turns Negative: Markets Will Soon Follow, Robert Prechter Says
"Even though we have deteriorating fundamentals, people are focusing on the optimistic things: 'the economy is expanding, the Fed is savings all the markets,'" he says.
He does have a point, in the face of all this uncertainty and turmoil, the markets are proving to be quite resilient. Tune into CNBC and you'll hear pundits brush off major concerns, saying how the threat of rising commodity prices will drive the Fed to save the day again with another round of quantitative easing; or that any inflation that's emerging is good for stocks.
Warren Buffett Is Bullish ... On Housing: "He's Putting His Money Where His Mouth Is"
"Our elephant gun has been reloaded and my trigger finger is itchy," Warren Buffett declared this weekend in his annual letter to Berkshire Hathaway shareholders.
Buffett also reiterated a pro-American stance in his latest letter: "Money will always flow toward opportunity, and there is an abundance of that in America," the famed investor writes.
Wall Street Bets on Debt That Doesn't Exist
Fresh from Wall Street's alchemy labs: Credit derivatives tied to General Motors Co. debt. The rub is, no such debt exists.
Banks and hedge funds are trading credit-default swaps, which make payments to holders of General Motors bonds in the event of a default. But GM canceled $40 billion of debt in bankruptcy and has pledged to cut its remaining $4.6 billion bank loan to the bone this year.
That is merely a technicality for the banks and hedge funds that have been actively trading the CDS.
Banks, some of which have made loans to the car maker, have been buying the CDS even though it is unclear whether the contracts would cover their debts, according to people familiar with the matter. Hedge funds have been happy to sell the protection, which allows them to make bullish, or "long," bets on the auto maker.
For proponents, the existence of the GM swaps is a sign of a market at work. It also is a reminder of how credit-default swaps can be used as a way to speculate on a company's creditworthiness, rather than purely as a hedge against exposure to its bonds.
S&P 500 May Be Entering a New Phase: Here's How to Play It
Personally, I'm bullish; while I agree with the arguments of the bears, I think monetary policy of 0% interest rates and the prospect of QE3 will send money supply higher. Internationally, the movement away from the US dollar -- via actions like Russia allowing its currency to float more and China seeking a greater role for the Yuan in international trade -- will contribute to dollar weakness, which I think will further fuel a flight into US equities as a hedge against dollar devaluation.
Stock Market Very Risky Now, But We Still Love Apple, Says Jeff Matthews
Back in the dark days of early 2009, hedge fund manager Jeff Matthews (RAM Partners) got bullish on stocks when everyone else was seeing only doom.
(Note: Guest speaker is currently net long in portfolio with hedging.)
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