Tuesday, May 4, 2010

Readings and my reactions

Here are selected readings from the past few days and my reaction to them:

Is this the tipping point for Peak Oil? Matt Simmons, the author of Twilight in the Desert, has asserted numerous times that when Saudi oil production rolls over, then we are looking at the peak of global oil production as there is little chance of replacing Saudi production. Now Khalid al-Falih, head of Saudi Aramco, has warned that Saudi Arabia will start to wane in the coming years as domestic demand surges and spare capacity drops.

What's the difference between a single hedge fund’s hiccup and a hedge fund strategy's return? Zero Hedge reports that market neutral funds are getting “carted out feet first” and cites the performance of the Highbridge HSKAX Index:
The Highbridge HSKAX index just suffered its biggest drop since March 2009. Market Neutral players are getting carted out feet first…

Actually, HSKAX is actually a fund, not an index. Here is the performance of the HFRX Equity Market Neutral Index. While performance has hit an air pocket, the chart below shows that drawdowns are not that serious and market neutral funds can’t be characterized as getting “carted out feet first.”

Is a crowded long threatening the bull run in equities? Further to my last post about the fragility of the financial system, the combination of excessive bullishness stock sentiment and bearish bond sentiment is highly worrisome for equity bulls. Alan Abelson noted in Barrons:

Alan Newman, a crack technician, and chief cook and bottle washer at newsletter CrossCurrents, offers another intriguing contrary-sentiment indicator in his latest commentary. It’s based on investor preferences in mutual funds, and he credits some Rydex charts on the Decisionpoint Website with supplying the necessary info.

Recently, Alan relates, money-market and bear-fund assets both fell to multiyear lows, while bull- and sector-fund assets mounted to their highest levels since the October 2007 market peak. Currently, he reports, there is roughly $7.50 in bull and sector funds for every $1 in bear-market fund assets, which he calls “the most ridiculously one-sided sentiment we have seen since the tech mania convinced folks that no price was too high to pay.”
The Barrons Spring 2010 Big Money poll also shows an unbelievable reading of 1% of institutional money managers bullish and 78% bearish on the safe haven of US Treasuries.

As a confirmation of the cautious view from the sentiment indicators, Mark Hulbert also reported excessive bullishness among short-term Nasdaq market timers. All these signs point to likely corrective action by the stock market in the near term.

Sell in May...


keithpiccirillo said...

Good observation on the ZH piece.
They are designed to tread water for a reason....to protect.
At these index levels perhaps Hussman and Andrew Lo's funds will have the last laugh in avoiding the eventual dreaded draw down.
Jeff Saut has chimed in on his interest in the VIX as well.

Autore del blog said...

I am surprised you even waste your time reading ZH =)

market folly said...

Hey Cam, nice post. Was just going to mention that M/N funds have been hurt as of late most likely because they're very long equities. Given the recent pullback and increase in volatility, this seems to be the source. It's interesting because other fund strategies have been selling equities, reducing net long exposure and even putting out shorts. M/N funds though had increased their net long exposure over the past few weeks based on CFTC data etc. Go through BofA's report and you'll see what I mean: http://www.marketfolly.com/2010/05/macro-hedge-funds-net-short-us-equities.html

Keep up the good work as always, I enjoy reading.