Good afternoon,
The Surrealist, René Magritte was born today in 1898. Despite my rationality, I feel sometimes as though we’re living in Surreal times. In his “Son of Man” painting René Magritte tries to illuminate the fact that “Everything we see hides another thing, we always want to see what is hidden by what we see.” The bowler hat wearing businessman with the apple in front of his face feels a lot like what’s happening in the market. A senior trader I know has said “there’s a bottom in here somewhere.” Can someone please eat the apple?!
As we enter into the family time of year, I am glad to see Fannie and Freddie suspend foreclosures through the holidays. After yesterday’s Initial Unemployment Claims, I thought Christmas would surely be stolen by the Grinch.
“I’m from the government and I’m here to help you.” The government bushwhacked the market yesterday. Yet, we’ve seemingly responded well to knowing who some of the new players are going to be in ’09. Ironically, the banks that were forced to take TARP funds have all declined an average of 48.5%. If that’s a rescue, please stop helping me.
Napalm and rocket fuel smell an awful lot alike. The S&P 500 has declined by more than 40% only once before in the past 207 years… Thus far, 2008 has not been that proverbial hundred-year flood, but rather the two-hundred year flood. This suggests a better than 99.5% probability that such an event is unlikely’. The “fear bubble” will also burst.
Sources: Proprietary PIA Merrill Lynch Research, Art Cashin – UBS,. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 21, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.
Saturday, November 22, 2008
Friday, November 21, 2008
The Cheshire Cat 11/20/2008
`Cheshire Puss,' [Alice] began, rather timidly, as she did not at all know whether it would like the name: however, it only grinned a little wider.
`Would you tell me, please, which way I ought to go from here?'
`That depends a good deal on where you want to get to,' said the Cat.
`I don't much care where--' said Alice.
`Then it doesn't matter which way you go,' said the Cat.
`--so long as I get SOMEWHERE,' Alice added as an explanation.
`Oh, you're sure to do that,' said the Cat, `if you only walk long enough.'"
I don’t know if it was Alice, the Cheshire Cat or the Mad Hatter that lead today.
We are really testing democracy shaping our world versus capitalism being the prevailing force. Right now we’re without a rudder. While I respect the one president at a time theme I believe it is hurting us in the short term. Could the weakness be attributed to the fact the market isn’t sure it can wait until January 20th for a solution ? It’s my understanding from a senior trader that these questions are beginning to become topics on the floor.
Recessions start their turn around in the midst of some of the most troubling news. We are certainly facing that. GM and Ford could go into bankruptcy. I believe the fear and uncertainty we’re seeing is a result of the fact that the American Economy as we know it has never been without an automotive industry. (Ironically, GM is one of the few green spots on my screen!) We are facing that possibility now. I continue to be disappointed in the posturing. If I’m going to give you some of my hard earned money, what are you going to do with it, how long will that last, why will it help? This isn’t sexy but it is tangible information with which to make a good decision.
Going back to something I said in mid-October, history tells us when we are presented with circumstances that are entirely new we don’t always believe we will recover. A quick example is when Kennedy was assassinated the market only dropped 2.9%. We had experienced an assassination as a nation and so we knew we would recover. When Nixon was impeached the market dropped 45% because we’d never had that experience before. However, I’d like to point out that even between the shifts of capitalism and democracy our economic resilience continued. This time will not be any different.
Don’t overlook the good news – last Thursday the S/P500’s dividend yield was higher than the 10 year T-Note yield for the first time since 1958. This alone is not a buying signal but is evidence that good news is out there. This is part of the history we’re living and making. (Peter Bernstein has a great commentary on this if you’re interested.)
The market is heavily oversold. The market has moved past questioning profitability into questioning survivability. Stay calm and reasoned. Ignore rumors. Keep you eye on the ball.
From the technical corner: First target is: DJIA 7400 and then 7000. Comparable S/P500 levels are: 700 or 680. I would have preferred we stay above 780.
And just for a moment of humor – If it’s the end of the world you don’t need to plan for it, it will only happen once and at least you have a front row seat!
Sources: Proprietary PIA Merrill Lynch Research, Art Cashin – UBS, Louis Carroll – Alice in Wonderland. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 20, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.
`Would you tell me, please, which way I ought to go from here?'
`That depends a good deal on where you want to get to,' said the Cat.
`I don't much care where--' said Alice.
`Then it doesn't matter which way you go,' said the Cat.
`--so long as I get SOMEWHERE,' Alice added as an explanation.
`Oh, you're sure to do that,' said the Cat, `if you only walk long enough.'"
I don’t know if it was Alice, the Cheshire Cat or the Mad Hatter that lead today.
We are really testing democracy shaping our world versus capitalism being the prevailing force. Right now we’re without a rudder. While I respect the one president at a time theme I believe it is hurting us in the short term. Could the weakness be attributed to the fact the market isn’t sure it can wait until January 20th for a solution ? It’s my understanding from a senior trader that these questions are beginning to become topics on the floor.
Recessions start their turn around in the midst of some of the most troubling news. We are certainly facing that. GM and Ford could go into bankruptcy. I believe the fear and uncertainty we’re seeing is a result of the fact that the American Economy as we know it has never been without an automotive industry. (Ironically, GM is one of the few green spots on my screen!) We are facing that possibility now. I continue to be disappointed in the posturing. If I’m going to give you some of my hard earned money, what are you going to do with it, how long will that last, why will it help? This isn’t sexy but it is tangible information with which to make a good decision.
Going back to something I said in mid-October, history tells us when we are presented with circumstances that are entirely new we don’t always believe we will recover. A quick example is when Kennedy was assassinated the market only dropped 2.9%. We had experienced an assassination as a nation and so we knew we would recover. When Nixon was impeached the market dropped 45% because we’d never had that experience before. However, I’d like to point out that even between the shifts of capitalism and democracy our economic resilience continued. This time will not be any different.
Don’t overlook the good news – last Thursday the S/P500’s dividend yield was higher than the 10 year T-Note yield for the first time since 1958. This alone is not a buying signal but is evidence that good news is out there. This is part of the history we’re living and making. (Peter Bernstein has a great commentary on this if you’re interested.)
The market is heavily oversold. The market has moved past questioning profitability into questioning survivability. Stay calm and reasoned. Ignore rumors. Keep you eye on the ball.
From the technical corner: First target is: DJIA 7400 and then 7000. Comparable S/P500 levels are: 700 or 680. I would have preferred we stay above 780.
And just for a moment of humor – If it’s the end of the world you don’t need to plan for it, it will only happen once and at least you have a front row seat!
Sources: Proprietary PIA Merrill Lynch Research, Art Cashin – UBS, Louis Carroll – Alice in Wonderland. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 20, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.
Tuesday, November 18, 2008
Where's your GPS?
Today’s history has an international flavor which seems apropos with China having a stimulus package, the G20 convening this week and Pirates making the headlines. Interestingly, in 1876 Spain approved a bill to establish democracy, certainly the cultural shift we’re experiencing today. In 1889, Harper’s Weekly featured a cartoon about the open door policy towards China. The Pirates fascinate me! They seem to have a better GPS system than current market conditions.
Let’s look at what our GPS is toggling to tell us.
One of the fallacies about our recent turbulence is we’re in uncharted territory, that we have no historical precedents for the uncertainty, volatility or panic. Ned Davis Research has some great charts on this (http://www.ndr.com/invest/public/publichome.action)! As I mentioned previously, each new crisis looks unique when in fact they are not. In 2007 our market was characterized by a rich valuation and overbought conditions. I like what Dr. John Hussman has to say on where we are: No thoughtful investor "calls a bottom" in the markets. Stocks are undervalued here, but they could decline further. Economic conditions are poor, but may be over or under-reflected in stock prices. Investors will find out over time, and the ebb-and-flow of information is slow enough to allow very large market fluctuations in the meantime. Current market conditions are extremely compressed, to the extent that the market could soar by 30% even in the context of an ongoing bear market. At the same time, investors remain skittish, and we should allow for fresh weakness into next year or perhaps a wide and prolonged trading range. We continue to have something of a line-in-the-sand at the October lows…”
In keeping with those thoughts let me reiterate that all market conditions present opportunities. The 1970’s brought us Intel, Microsoft, Southwest Airlines, Fed Ex and Apple. All of whom are here today and have proven to be profitable investments. Yet no one looks to the 70’s as a time of great stock market highs !! Keep a disciplined buy/sell process in place. Veterans like Warren Buffet and Jeremy Grantham have a good handle on historical data and they embrace the concept that stocks are a long-term stream of future cash flows. Take Toyota, for example, they were willing to take it in the chin from Wall Street’s analysts for the last 4-5 years and now they are cleaning GM’s clock. My point is investors need to get beyond looking at quarterly returns and focus on what’s on the horizon. Get ahead of the curve and look for trends. Ignoring the paralyzing fear in our markets today is a clear way to take part in those long term streams of future cash flows.
The stock market is a discounting mechanism. Any plan you had even 6 months ago is flawed and needs revisiting. Re-assess growth – if you’re down with the market (38%) you have to come back 66% just to break even. Look to constantly align your risk in proportion to the return. Our primary activity is not to identify tops and bottoms. If you manage risk and correlation (in that order!) return is a natural by-product.
Look to drive down your marginal tax bracket this year. Beware of capital gains distributions in your mutual funds – YES, they are coming even if you are down 40%! There are ways to prevent this. But you have a limited window left !
Sources: John Maudlin, John Hussman and Merrill Lynch Research – QuEST Report 17 Nov 2008.. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 18, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.
Let’s look at what our GPS is toggling to tell us.
One of the fallacies about our recent turbulence is we’re in uncharted territory, that we have no historical precedents for the uncertainty, volatility or panic. Ned Davis Research has some great charts on this (http://www.ndr.com/invest/public/publichome.action)! As I mentioned previously, each new crisis looks unique when in fact they are not. In 2007 our market was characterized by a rich valuation and overbought conditions. I like what Dr. John Hussman has to say on where we are: No thoughtful investor "calls a bottom" in the markets. Stocks are undervalued here, but they could decline further. Economic conditions are poor, but may be over or under-reflected in stock prices. Investors will find out over time, and the ebb-and-flow of information is slow enough to allow very large market fluctuations in the meantime. Current market conditions are extremely compressed, to the extent that the market could soar by 30% even in the context of an ongoing bear market. At the same time, investors remain skittish, and we should allow for fresh weakness into next year or perhaps a wide and prolonged trading range. We continue to have something of a line-in-the-sand at the October lows…”
In keeping with those thoughts let me reiterate that all market conditions present opportunities. The 1970’s brought us Intel, Microsoft, Southwest Airlines, Fed Ex and Apple. All of whom are here today and have proven to be profitable investments. Yet no one looks to the 70’s as a time of great stock market highs !! Keep a disciplined buy/sell process in place. Veterans like Warren Buffet and Jeremy Grantham have a good handle on historical data and they embrace the concept that stocks are a long-term stream of future cash flows. Take Toyota, for example, they were willing to take it in the chin from Wall Street’s analysts for the last 4-5 years and now they are cleaning GM’s clock. My point is investors need to get beyond looking at quarterly returns and focus on what’s on the horizon. Get ahead of the curve and look for trends. Ignoring the paralyzing fear in our markets today is a clear way to take part in those long term streams of future cash flows.
The stock market is a discounting mechanism. Any plan you had even 6 months ago is flawed and needs revisiting. Re-assess growth – if you’re down with the market (38%) you have to come back 66% just to break even. Look to constantly align your risk in proportion to the return. Our primary activity is not to identify tops and bottoms. If you manage risk and correlation (in that order!) return is a natural by-product.
Look to drive down your marginal tax bracket this year. Beware of capital gains distributions in your mutual funds – YES, they are coming even if you are down 40%! There are ways to prevent this. But you have a limited window left !
Sources: John Maudlin, John Hussman and Merrill Lynch Research – QuEST Report 17 Nov 2008.. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 18, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.
Wednesday, November 12, 2008
Right track or roller coaster
After surviving the nation’s first fatal train wreck, Cornelius Vanderbilt swore off railroads for 30 years. (John Quincy Adams was on the same train in the same car.) At the age of 69 Vanderbilt decided to invest in a railroad venture and earned close to $20B in today’s dollars over the next 15 years. Thanks to the loathed railroad industry, Vanderbilt died the richest man in America.
Despite today’s moment in history involving Cornelius Vanderbilt, railroads and the right track, the market looked mostly like a roller coaster yesterday and a solid downside today.
We find our government entertaining more and more murky waters with the restructuring of AIG and Fannie and Freddie. If they choose the automobile industry (like we did in the 70’s) and don’t offer them any incentives to actually be innovative we only prolonging the inevitable demise of the American auto industry. I digress, here is a tidbit from Bloomberg – Land of the Living Dead – Corporations.
Nov. 11 (Bloomberg) -- The revised bailout of American International Group Inc. marks a new phase in the government's effort to shore up financial markets: It's the first time cash from the rescue fund Congress created last month has been committed to a failing company.
The Federal Reserve, which saved the insurer from collapse two months ago with an $85 billion loan, yesterday reduced that loan and offered lower rates, while the Treasury chipped in $40 billion from its bank-rescue fund to buy preferred shares. The new terms represent a departure for Secretary Henry Paulson, who until now has said he only wants to invest Treasury funds in ``healthy'' firms.
Taxpayers are ``keeping the zombie alive,'' said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of research at the Atlanta Fed. ``We keep getting deeper and deeper into these holes.''
The shift is likely to vastly expand political demands for saving dying companies in the name of financial or economic stability. The administration of President-elect Barack Obama may soon have to consider credit or capital injections for other insurers, automakers, even retailers as the U.S. slides deeper into what could be the worst recession in a quarter-century.
Harken back a moment to the Spring. .. yes, oh so long ago. Fears arose that the US was about to embark on the kind of programs that kept Japan mired in a decade of growth. The analogy was quickly snubbed by officials citing where the Japanese didn’t allow bad banks to fail. As Congress reconvenes for a lame duck session to consider funds for autos and the like, it’s beginning to look a lot the shoe’s on the other foot.
November 15th Hedge Fund Window: Mass amounts of chatter and buzz are filling the airwaves about the looming deadline for a year-end hedge fund withdrawals and its possible implications. Jim Brown in his Premier Investor Newsletter.
The Nov-15th hedge fund notice day is also going to be a major event. If investors want to withdraw funds on Dec-31st they need to give notice by Nov-15th. Otherwise their next withdrawal window will be March 31st. In recent weeks 21 top funds have closed the gate on withdrawals. Hedge funds have a provision in their agreements that allow them to halt redemptions if they get redemption requests of more than 20% of their capital. This is called gating and is intended to prevent a run on the fund. Another type of gate only allows 20% of the amount you have invested to be withdrawn in a given period. 21 top funds have announced they were gated. There are probably dozens if not hundreds more that did not make pubic announcements. If funds receive a wave of redemption requests by Nov-15th it does not mean selling next week will crush the markets. It means there could be persistent selling through the end of December as funds raise cash. However, funds have already raised a significant amount of cash with an average cash position today at 30% in anticipation of further withdrawals. This suggests a calm notice date without any upsurge in withdrawal requests could actually result in a positive market as that money is put back to work.
Looking ahead – The support yesterday of 884 was broken and we are skating awfully close to the next support of 865 in the S/P500. If it were to break 845 we’ll start flying the SW flag or in layman’s terms the hurricane flag. October bottoms tend to be more sustainable if history is a good predictor – the Trader’s Almanac indicates that when bottoms straggle into November they are painfully longer.
Since the low of 10/10 we’re stuck in a rectangle. Tomorrow and Friday seem to be days to watch.
Sources: Art Cashin-UBS, Bloomberg, Financial Times, Jim Brown. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 12, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.
Despite today’s moment in history involving Cornelius Vanderbilt, railroads and the right track, the market looked mostly like a roller coaster yesterday and a solid downside today.
We find our government entertaining more and more murky waters with the restructuring of AIG and Fannie and Freddie. If they choose the automobile industry (like we did in the 70’s) and don’t offer them any incentives to actually be innovative we only prolonging the inevitable demise of the American auto industry. I digress, here is a tidbit from Bloomberg – Land of the Living Dead – Corporations.
Nov. 11 (Bloomberg) -- The revised bailout of American International Group Inc. marks a new phase in the government's effort to shore up financial markets: It's the first time cash from the rescue fund Congress created last month has been committed to a failing company.
The Federal Reserve, which saved the insurer from collapse two months ago with an $85 billion loan, yesterday reduced that loan and offered lower rates, while the Treasury chipped in $40 billion from its bank-rescue fund to buy preferred shares. The new terms represent a departure for Secretary Henry Paulson, who until now has said he only wants to invest Treasury funds in ``healthy'' firms.
Taxpayers are ``keeping the zombie alive,'' said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of research at the Atlanta Fed. ``We keep getting deeper and deeper into these holes.''
The shift is likely to vastly expand political demands for saving dying companies in the name of financial or economic stability. The administration of President-elect Barack Obama may soon have to consider credit or capital injections for other insurers, automakers, even retailers as the U.S. slides deeper into what could be the worst recession in a quarter-century.
Harken back a moment to the Spring. .. yes, oh so long ago. Fears arose that the US was about to embark on the kind of programs that kept Japan mired in a decade of growth. The analogy was quickly snubbed by officials citing where the Japanese didn’t allow bad banks to fail. As Congress reconvenes for a lame duck session to consider funds for autos and the like, it’s beginning to look a lot the shoe’s on the other foot.
November 15th Hedge Fund Window: Mass amounts of chatter and buzz are filling the airwaves about the looming deadline for a year-end hedge fund withdrawals and its possible implications. Jim Brown in his Premier Investor Newsletter.
The Nov-15th hedge fund notice day is also going to be a major event. If investors want to withdraw funds on Dec-31st they need to give notice by Nov-15th. Otherwise their next withdrawal window will be March 31st. In recent weeks 21 top funds have closed the gate on withdrawals. Hedge funds have a provision in their agreements that allow them to halt redemptions if they get redemption requests of more than 20% of their capital. This is called gating and is intended to prevent a run on the fund. Another type of gate only allows 20% of the amount you have invested to be withdrawn in a given period. 21 top funds have announced they were gated. There are probably dozens if not hundreds more that did not make pubic announcements. If funds receive a wave of redemption requests by Nov-15th it does not mean selling next week will crush the markets. It means there could be persistent selling through the end of December as funds raise cash. However, funds have already raised a significant amount of cash with an average cash position today at 30% in anticipation of further withdrawals. This suggests a calm notice date without any upsurge in withdrawal requests could actually result in a positive market as that money is put back to work.
Looking ahead – The support yesterday of 884 was broken and we are skating awfully close to the next support of 865 in the S/P500. If it were to break 845 we’ll start flying the SW flag or in layman’s terms the hurricane flag. October bottoms tend to be more sustainable if history is a good predictor – the Trader’s Almanac indicates that when bottoms straggle into November they are painfully longer.
Since the low of 10/10 we’re stuck in a rectangle. Tomorrow and Friday seem to be days to watch.
Sources: Art Cashin-UBS, Bloomberg, Financial Times, Jim Brown. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 12, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.
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