Downside Hedge Fund Bets On S&P500 Highest Since 2008 | ZeroHedge

by Tyler Durden on 24/08/11


Who says hedge funds are ambivalent about the current market? As of last week, they have not been

more bearish on the S&P since

before Lehman. From SocGen: "Hedge funds have opened the biggest net short positions since early 2008, concentrated on the most liquid segment of the market, i.e. the S&P 500. Meanwhile, positioning on small caps hardly moved (slight increase in net shorts on the Russell 2000). Surprisingly, they actually stuck to their net long positions on Technology (Nasdaq)." As usual, the amusingly named "hedge" funds defy their purported nature (as in, to

hedge), and merely pursue momentum, and should be more appropriately called "career risk" funds as the only variable is doing precisely what everyone else is doing: remember - to get a bonus at the end of the year, you don't have to outrun the market, you just have to outrun the biggest institutional fool out there. "Hedge funds have closed their net short positions on 10-year Treasuries and strongly diminished their net shorts on the long end (30Y), as recession fears have crunched expectations for higher bond yields, and endorsed by the Fed's announcement that it will keep rates low until at least 2013." Hedge fund infatuation with metals continues: "Hedge funds' enthusiasm for gold and platinum remains strong, as indicated by the high net long positions on these metals. Meanwhile, net long positions on base metals (copper) have been strongly reduced. Net long positions on crude oil remain relatively stable, less impressed by the perceived recession threats." Expect to see numerous short covering sprees until the end of the year, even as the market continues it secular decline back to fair value somewhere around 400.

Full article at

http://www.zerohedge.com/news/downside-hedge-fund-bets-sp500-highest-2008

BD

Oil Price - the long term bet !!

Oil for me is black gold and sooner or later is going to run out of supply, which would then lead us either to cut consumption (or stop consumption) or look for alternative means of energy for running out cars (Solar/hydro energy? May be?). Here are few reasons why I think so.

Peak oil theory

People have argued it long and are still arguing whether the oil production has peaked in 2005-2006 and we are on the verge of consuming what is left only for few years. There are evidences of large water reservoirs getting disappeared in OPEC region especially Saudi Arabia, leading us to believe that OPEC is pumping water in the field to take out oil. This would in turn mean that OPEC is struggling hard to maintain the production growth.

Oil Budget Deficit or OPEC Quota

10 of the 12 countries in OPEC 12 are producing within there quota’s which were decided years ago (see latest Oil report of May 2010), now these are the countries where Oil is the only official business income for the government to balance the budget and most of these countries are ~70-80% dependent on it. This would make a case of arguing that it’s not really the quota’s which is limiting there production, its there I inherent capacity to produce which cannot be enhanced. Think of this as other way, why didn’t a country like Iran or Nigeria produce more when oil was near $140, which would have solved there problems of deficit for years to come.

Most of the oil rich countries now need a price of around $40-$50 at least to balance there budgets and many of them have a marginal cost of producing an additional barrel at $60-$70.

Is it Speculation or demand driven price rise

Well, some people have long argued that oil price is about 60% speculation, while other says it’s purely a demand supply driven case though there might be little bit impact due to financial transactions. However, CFTC has already argued long back about the case (see this report ) still we seem to have the same notion. I do agree that commodities are an alternative class of assets and prove to be a measure for diversification in this crisis; however that’s true for the entire commodity complex and not just for oil. The only way to take a long exposure of oil or to protect yourself through the adverse price movement (in case you are a consumer) is through futures. Also looking how India and china are growing and there demand numbers peaking, why do we have to blame the entire price rise to financial markets?

Oil Spill

Does it mean something for me? Am I concerned about the environment now? Well honestly, this Deepwater disaster in USA (GOM) caused headlines around the world estimating the loss to the environment, damage to life, etc but yet there are so many other countries where this happens on a regular basis yet no one notices the same. This is largely because all the new discoveries of oil are in unconventional places in countries which are politically unstable, and where oil is the backbone of the economy and big oil giants just bend the rules.

Nonetheless, this disaster might lead to renewed curbs on offshore oil drilling for the near term, which was removed not so long ago by the house due to increasing demand of oil. We can see the visible impact of this spill on the longer term prices of oil.

Deja Vu all over again?

The elephant or so to say "bear" in the room today, (recent market free fall) might be construed as a possible parallel to the 2008 but here are few reasons, it might not turn out to be the same?

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• Government Action: The government of all nations is much more receptive and active to the idea of bailing out and systematic risk consequences (Lehman crisis). This can be evident from the  New Reform Bill passed by US and EU and the recent bailout of Greece by EU and desperate action by Greece on the ban of naked selling. While we still agree that there are Dangerously over leverage AAA super powers (DOLTAS), but the chances of them bursting are quiet minimal if not low.
•  
• Economic environment: In, autumn of 2008, the common conception was regarding "worst global recession since the 1930s." Today, many people are counting on stimulus package (75% unspent) and foresee this to be major economic boost. Some relief can be seen from the recovering commodities (Oil!!!!) owing to consumption.
•  
• Earnings Forecast: In contrast to the "worst earnings recession since the 1930s" that was taking place in late 2008, Most people are of view that Earnings will be robust in the current year and 2008 scenario is unlikely to repeat.

PE Ratio Thesis : While President Obama said " What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it". Many people are of view that its time again to be a stock pickers market with PE of S&P being close to 12.In August 1982, the PE Ratio dropped below 7 (see chart), in both July 1932 and July 1921 it went below 6.  This would imply that there is further downside of 50% of S&P, if we were to see the same level of PE which isn't the case right now seeing the earnings.

Comments welcome!

You could be teased soon!

End of the financial year in sight. Everyone’s also preparing for their corporate budgets to get set, and of course personal appraisals, ratings and more importantly salary hikes. Yikes!!! They are back, aren’t they? Well, “I am keeping my fingers crossed” you might mutter, but it is all the leading dailies and popular business magazines are saying so. For the record, they all seem to predict between 15%-20% salary hikes over the 2009-2010 salary levels.

So is there a grand merit to be happy? Well not really if you belong to the great Indian middle class. The tax dole that was handed out by the FM in the February 2010 budget will taken away by a host of price hikes that are coming from various sources. Remember “One hand giveth, other taketh away” seems the ‘mantra’ of the UPA government.

Home (A)loan

But the greatest of the shock will come for those who are the most sacred group; termed in the US as “homeowners”. This category is also upcoming in India in a big way over the past 15 or so years, thanks to a host of factors; growing nuclear families; migration from towns to cities (urbanization) and higher workforce mobility (people moving from one city to another due to change in job).

Nothing wrong in creating an asset, in fact, there is a totally a different kind of pleasure owing a dwelling unit for yourself. The problem, however, lies in two aspects; one taking a loan to fund the purchase1 (how else do you own a home, you might ask) and more importantly inability to determine the capacity to pay the loan correctly. The latter is extremely critical because more than 50% of the people cannot exercise judgement while taking the home loan due to the nature of the tenor (a 10 year plus) and any ordinary human’s inability to predict what lies ahead, leave alone for the next 10, 15 or 20 years.

So getting carried away by current disposable income (twin income households are the most vulnerable here), taking fancy assumptions (such as last 5 year salary increments should continue in the next 15 years) and lastly not accounting for even expected changes such as growing family and its needs (kids and their expenses).

All this and you have a disaster in the making.

You could be teased by your bank soon

This could be a reality soon enough (maybe this year or early next year) if you have relied on reckless borrowing to fund that large house and worse still bought it by taking the special interest rates. We are talking about the teaser loan rates offered by a clutch of banks starting with SBI. These loans have clauses such as 8% for 1st year, 9% for second year and third year and floating thereafter. Mind you that people who have already completed 1 year on this scheme (this scheme was launched early last year) will now reset their interest rate by 1% and have already 12 months before the next reset. The worrying aspect is that over the next twelve months, giving the way the rate environment is hardening, all these teaser loans could very well get reset at more than 250-300bps taking the rate charged to 12%p.a. These very banks (SBI and their likes) which looked like angels who provided you with that dream house could turn in demons who are hell bent in making that homeownership like a noose around your neck.

Homeowner could be teased so badly that they might feel like they are molested. Obviously, not all of them could feel the pain of this and only those who have not been prudent in planning for their EMI could face the stick. For the unlucky lot we only have one advise, you guys still have time on your hands, check with your financial planner on what is the worst case scenario in terms of higher EMI payout if the rates rise and how much of the disposable income squeeze do you get. If you are shocked by the result there is hope in terms of restructuring and whole host of options that are there before the tornado strikes.

All the best till then and yes don’t forget to check your finances today for income and expenses of the EMI’s you pay today, because you could be teased tomorrow.

Until next time!!

1 Just 25 years ago when we were yet to reach the sophistication levels with financial products that are offered today, homeownership was mostly self funded with retirement money; families were less mobile and people therefore compromised on the location of the home to suit the budget.