Thursday Outlook: SWFs Making a Splash

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Includes: DIA, GLD, IEF, QQQ, SPY, USO
by: David Fry
“There’s talk on the street, it sounds so familiar.
Great expectations, everybody’s watching you.
People you meet they all seem to know you.
Even your old friends treat you like you’re something new.

Johnny-come-lately, the new kid in town,
Everybody loves you, so don’t let them down.
Where you been lately? There’s a new kid in town.
Everybody loves him, don’t they? Now he’s holding her
And you’re still around, oh my my.
There’s a new kid in town,
Just another new kid in town.”
~ The Eagles

As market props go, we’ve experienced in recent years the so-called Greenspan Put, helicopter money, private equity, and more recently heavy central bank liquidity injections. But perhaps nothing can compare with the new Sovereign Wealth Funds [SWFs] in terms of potential impact.

First came a China deal with Blackstone, followed in short order by the UAE and Citigroup, Singapore and Merrill Lynch, and now there’s talk of the mammoth Saudi SWF entering the game from this FT.com article. It’s said by both Merrill Lynch and the IMF that funds in SWFs could exceed $10 trillion in the next few years. This would approximate or exceed the amount of money in US mutual funds.

Thus far SWFs have been dribbling out some loose change to troubled financial institutions and getting good deals in return. This has irritated current shareholders who either don’t like the sweetheart deals SWFs are getting or feel that perhaps a rights offering to existing shareholders would have done the trick and been more equitable. They probably felt that would’ve been too time consuming and hard poor fellows. One thing unique about SWFs is all these countries are not democracies [Singapore included] and therefore not accountable to anyone for their decisions and actions.

So, as long as the US runs these trade deficits with China given their managed yuan and has no viable energy policy these funds will continue to exercise growing influence and power. Today’s market action is notable for the tape painting vested interests are conducting to keep year-end bonuses and performance pegged. Oh, you say that’s a violation? You’re right, but it goes on nevertheless.

Volume was holiday light and breadth fairly flat Wednesday:

Investors don’t seem bothered by the spike in oil prices or mixed holiday retail sales either:

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