David Fry's Daily Market Outlook

Includes: SPY, XHB
by: David Fry

It was a relatively quiet Monday as most investors are waiting for results from the Fed meeting Wednesday.

Today featured more bad news from homebuilders, and tomorrow we’ll get more with low expectations for housing starts. Then there’s the PPI (Producer Price Index) which will readily be dismissed as old news since commodity prices have tanked.

But, wait; today we got our first news here regarding major losses in a hedge fund. One report states a 35% drop in assets last month, while the referenced Bloomberg item suggests 50%. Most losses (we’re talking $3-4B!) occurred in Natural Gas markets. From the chart you can see what was probably some “forced” selling by the fund to deal with margin calls from their prime brokers. (Note the drop beginning in late August and the subsequent waterfall decline last week -- that’s forced selling!)

Stocks and bonds don’t seem to care very much about these losses (what’s a few billion?), and are just marking time as investors are now as data dependent as the Fed, the team leader.

And, speaking of the “team leader,” there have been plenty of cash injections to the Primary Dealers (SuperBanks and their brokerage affiliates) to keep markets well-lubed.

The other story I found interesting today was the reported drop in capital flows to U.S. markets. According to the report, last month was the lowest since May 2005. So a little more investigating revealed this chart (courtesy of Jesse):

Do I know who from the UK is doing all this buying and why? Absolutely not. Someday we’ll know. The more important question is what would happen to U.S. Treasury should they stop buying? That’s a sobering thought.

Today PowerShares/Deutsche Bank issued their DB G10 Currency Harvest Fund (NYSEARCA:DBV). A description of it can be found here. It’s very strange to me since I was involved at least 15 years ago with a company trying to achieve similar goals utilizing similar methods. Will this work? Despite my experience with the concept, I think it should. But they’re not pursuing the same trend-following methods as my former associate. Instead they’re routinely (frequency of reallocations is difficult to ascertain) buying higher yielding currencies and shorting those that have lower yields, collateralized and perhaps augmented by T-bills. Without leverage the goal must be a yield greater than cash with hedged risk. It sounds rather simplistic, and may not be appealing as a “cash” alternative until a track record of some sort is achieved.

Other than a bounce in commodity prices, markets were quiet today, and will likely remain so until Wednesday’s results from the team leaders.

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