Hedge funds have been quiet except for the speculation in commodities market in the beginning of the year. The expiration of the Federal Reserve bond buying program raises some speculation but the treasury and bond market have been calm in the month. As investors are hoarding cash and afraid of price drop in equity stock and commodities market, the demand for treasuries and bonds are exceedingly strong. This provides support even on expiration of the bond buying program.
Market focus shifts to the debt ceiling issue. Market participants are mostly expecting a decline in assets price after the expiration of bond buying program. But market remains calm. For the debt ceiling issue, market participants expectation are greatly diversified. And investors are putting the money where the mouth is. Currently, there are more pessimistic investors than optimistic investors. As a result, broad market moves down on speculation. However, market condition can change swiftly as does investors speculation. The short term capital flow in the financial market is driven by cash on the sideline which has high liquidity.
The speculative trading portfolio has been observing the activities of market participants for some time. It can be concluded that market participants activities are very useful information for speculative stock trading. However, in real-world trading environment, traders can be influenced by emotional behaviour and make incorrect investment decisions. Accurate observation of market scenario and logical estimate of market participants strategy can help to improve investment decision.
Experience and knowledge can be acquired by participation in the equity stock market. The speculative trading portfolio maintains the fundamental philosophy that equity stock market has a long term up trend because of technology innovation and improving living standard. This strategy works well in the first quarter when market is rising. However, when marker makers begin to sell at the peak, the speculative trading portfolio suffers continual loss on hope that the decline is only a temporary correction. In fact, the market is highly manipulative and short term equity stock trading based on a valuation perspective is no difference from betting on the throw of a dice. A better approach seems to be based on the model of game theory. The dynamics of market participants is a dominant factor on market movement. It is critical to have accurate observation of market participants activities and to logically deduce the next step of market participants. The odds of winning can be raised to above 0.5 if there is a higher confidence in market movement between trade executions.
Failures in the past are useful to improve the skills for future. For the first half of this year, the speculative trading portfolio is analysed for market observation and portfolio investment decisions. Mistakes are investigated so that they can be avoided or at least to confine the damage in future.
In the beginning of the year, equity stock market had been rising amid incremental buying from individual investors since last October. In March, buying from individual investors were fading gradually. But institutional investors were still holding the equity stock market strongly. The speculative trading portfolio was overall making profit.
In March, market set year high on thin trading. Then market consolidated. The speculative trading portfolio did not perform well in such environment which was ideal for day trading activities. Hedge funds began to heat up the commodities market. World political events and natural disasters created turbulence in the financial markets.
The speculative trading portfolio maintained an optimistic outlook. Market recovered as investors were buying hard assets on fear of inflation. At the end of April, market reached year high and so did the value of the speculative trading portfolio. From this onward, market started a lengthy decline until consolidation at present. Market outlook is still uncertain and market participants have confronting speculations. Day trading volume soars.
Back to May, despite witness of commodities market collapse and the observation of sell-off by market makers in the equity stock market, the speculative trading portfolio was not aware of a sigificant market pullback. A long term positive outlook is a mistake to maintain the holdings in the speculative trading portfolio which should react quickly to market movement.
As market makers set up a plan and were determined to drive down the market, day traders followed. Individual investors began to take profit and herding behaviour was created. The speculative trading portfolio made another mistake hoping that individual investors, who started the rally, would not sell in this market. If market makers and day traders were selling, it would be logical for individual investors to sell in order to protect profit.
In June, after six consecutive weeks of market decline, market makers finally stopped selling. But day traders and individual investors continued to sell for another week. The speculative trading portfolio was encouraged to hold the portfolio based on market makers action.
When market dropped close to the bottom, the speculative trading portfolio made a brave decision to increase holding. The rebound was strong. Unfortunately the trading portfolio was too worry about the sell-off that individual investors may begin panic selling of the core portfolio. Therefore the trading portfolio took profit early. Later it was realized that long term investors bought at the bottom.
The rebound continued for a week. The trading portfolio recovered small portion of the loss in the seven-week drop. Seeing that market makers reverted from selling to buying and the buying frenzy from day traders, the trading portfolio was driven by greed to buy again at the end of rebound. The mistake was due to late response for day trading strategy. After a few days, the rebound would probably end. Market makers, day traders as well as long term buyers were only buying on impulse during the stock consolidation period.
Market dropped again. The trading portfolio took the opportunity. A mistake was repeated, i.e. to liquidate for profit taking too early due to fear. The decline lasts for a week until present and outlook is still uncertain. The trading portfolio still holds stock equities and bull ETF. Bear ETF are liquidated completely.
As discussed previously, investment decision should be made based on observation of market participants activities and projected market movement. Currently, despite a possible debt default, there is not panic selling although investors are selling heavily on speculation and dragging down market significantly. Investors are still holding the core portfolio and use the surplus cash holding to speculate the market. There is support at the level where long term investors enter the market previously. Also market makers are still thin on equity stock holding and no significant position in derivative products for market speculation, either up or down. Individual investors are holding core portfolio with extra holding for short term speculation.
Since equity stock holding in the trading portfolio is comparatively low, there is no intention to liquidate even if market continues to drift down. However, if market participants become panic, the trading portfolio will increase the leveraging to initiate bear ETF position for hedging and speculative trading.
There are a lot of uncertainties in the debt ceiling issue. And market participants may respond irrationally. In the last few weeks, market makers and day traders have significant influence on market movement. The former will unlikely drive down the market due to lack of positions but have cash holding to drive up if condition favors. The latter will use news to manipulate market for quick profit. There may be oscillations and investors trading on instantaneous market movement have to be very responsive.
The trading strategy for the coming week will be reviewed in the next discussion. It is expected the learning process through trial and error can help to improve the trading skills in a dynamic trading environment.
How to Trade the Collapse of US Debt Talks
"The dollar's awfully undervalued at this point," he said. "There's a huge short against the U.S. dollar so you might see a rebound in the dollar index and you might just see a pickup in risk assets in general."
Economos also advised going long on risk assets such as high-quality equities.
"This is probably a time to start looking to get invested rather than shy away from markets and add to very expensive hedges," he said.
Preparing for worst as debt-limit talks drag on
Scrambling to protect themselves against a U.S. default, investors are buying gold and foreign currencies, using derivatives to bet on a stock market collapse and taking out complicated insurance policies.
Consider the assets at the heart of the crisis -- Treasury bonds. You would expect interest rates on Treasurys to rise the closer Washington gets to missing a debt payment. Investors would demand higher rates because of the greater risk they wouldn't get their money back. After Argentina defaulted in 2002, foreign lenders required higher rates.
But some bond traders are betting the opposite will happen. They think nervous money managers could rush into Treasurys if Washington blows past the Aug. 2 deadline to raise the debt ceiling. The buying would push interest rates lower.
Debt Ceiling Deadlock: Why the Markets Don’t Seem to Care
The U.S. is inching closer to default, and in Washington the two sides are digging trenches whose depths rival the Mariana Trench. And yet the markets don't seem to care.
We're not supposed to say that it is different this time, but it is different this time. The 'markets,' to the degree that they have a mind, seem not to be too troubled by the debt-ceiling brinksmanship.
Insiders Selling at Unusually Fast Pace
Bad news, stock-market bulls: Corporate insiders are selling their companies' shares at an abnormally fast pace.
Perhaps the strongest counterargument the bulls can muster at this point is that the insiders are not infallible. That indeed is true. Still, researchers report that they have been more right than wrong.
Soros to End Four Decades as Hedge Fund Leader by Returning Investor Cash
George Soros, the billionaire best known for breaking the Bank of England, is returning money to outside investors in his $25.5 billion firm, ending a career as hedge-fund manager that spanned more than four decades.
Soros’s sons said they took the decision because new financial regulations would have made it necessary for the firm to register with the Securities and Exchange Commission by March 2012 if it continued to manage money for outsiders. Because the firm has overseen mostly family assets since 2000, when outside money accounted for about $4 billion, they decided it made more sense to run it as a family office, according to the letter.
The rule calls for hedge funds with more than $150 million in assets to report information about their investors and employees, the assets they manage, potential conflicts of interest and their activities outside of fund advising. Registered funds will also be subject to periodic inspections by the SEC.
“We have relied until now on other exemptions from registration which allowed outside shareholders whose interests aligned with those of the family investors to remain invested in Quantum,” the executives said in the letter, referring to its flagship Quantum Endowment Fund. “As those other exemptions are no longer available under the new regulations, Soros Fund Management will now complete the transition to a family office that it began eleven years ago.”
Even the Best Investors Get It Wrong. Ask John Paulson
Billionaire hedge fund manager John Paulson has learned that lesson this year.
Zuckerman says Paulson's success may also be contributing to his poor performance.
He's also made some poor investments. Paulson originally bought Bank of America in 2009, near the bottom but has seemingly held on too long. Though he pared back his holdings, Bank of America's 28% slide this year has trimmed those gains.
Paulson's more dramatic loss this year came from a bet on Chinese forestry company Sino-Forest. An accounting scandal with that firm caused the stock to plunge more than 80% last month and took $500 million in Paulson's money with it.
Spring buying boosted home prices for 2nd month
Home prices in major U.S. cities rose for the second straight month in May, propped up by a flurry of spring buyers. But after adjusting for such seasonal factors, prices fell in a majority of markets.
Home sales have fallen in four of the past five years, forcing prices down in most areas. Declining home values have made people feel less wealthy, and they are spending less as a result. That affects consumer spending, which accounts for 70 percent of economic activity.
Return of 20% Home Down Payments Looms
Hopeful homebuyers may soon need to shell out more money upfront before being approved for a mortgage.
The proposed changes are being reviewed by federal regulators, among them the Treasury Department, Federal Reserve Board, Federal Deposit Insurance Corp., the SEC, the Federal Housing Finance Agency and Department of Housing and Urban Development. There is no set timeline for when final decisions will be made.
Corso says he can appreciate the intent, if not the specifics of how the Dodd-Frank Act sought to ensure a safe and stable mortgage market.
"Everybody knows what happened during the frenzy time," he says. "People threw common-sense out the window. The idea was to create a positive incentive for common sense mortgages ... because, at some point the credit cycle will turn, credit will become easier and people will start to push the boundaries. The idea was to say 'Don't do that.' This is a lot safer for consumers -- and much better for lenders -- so just stick with this and forget the crazy stuff."
Worried About the Debt Ceiling? “You Can’t Be Conservative Enough,” WisdomTree CEO Says
Steinberg, whose firm has $13.5 billion in ETF assets under management, says investors continue to diversify out of dollars and into emerging markets and gold. "[But] it's not so much about the debt ceiling but these extraordinarily low interest rates," he says. "Everyone is looking for alternative sources of income."
In fact, there is so little panic among investors that Steinberg notes there's been a pickup in inflows into U.S. equity and fixed-income ETFs in recent weeks.
The reality is nobody really knows how a U.S. downgrade or technical default will play out, which has me thinking of the old market saw: It's better to be out of the market wishing you were in, then in the market wishing you were out.
U.S. Tax Code: An Economic Growth Engine That’s Too Big to Fix
Alas, once the banks start lending again, and make no mistake they aren't, it's going to lead to rampant inflation. Once lending and corporate activity picks up, the velocity of cash will ramp and the money now buffering balance sheets will work against the economy as more dollars chase low inventories of goods predominantly made overseas.
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