Behind the Market Headline News

In my previous post on Q2 SEC quarterly filings from a limited numbers (182) of available hedge funds, we noticed that hedge funds had significantly over-weighted energy and material sectors, two of best performing groups among the 10 S&P sectors. It might be purely coincidental but we can not help to ponder the implications for these two tumbling sectors. As today (8/27), almost 1000 hedge funds filed their last quarter's 13F based according to Bloomberg . The screen below from Bloomberg shows that hedge funds as a group places their biggest bets on energy as we discussed previously. Considering the short term natural of their holdings, it should not surprising many that the unwinding process of energy names will continue in the current quarter. We probably won't see much improvement until the end of next month when the "window dressing" is finally over.

Speculators maintained a net long position of 11,659 crude futures contracts at NYMEX markets according to this Friday's CFTC release, ended three consecutive weeks net short positions since 7/22 (see the first chart below, green circle). Considering the CFTC data were as market closed on Tuesday (8/18), one day early than $11 plus up and down movements on Thursday and Friday, if there are any indications, it certainly points to more turbulence ahead. Popular media stories attributed the $5 gain and $6 loss of light sweet crude price on Thursday and Friday to dollar and geopolitical factors (Georgia, Russian conflicts and cold war rhetoric ), and thin volumes could also exacerbate magnitude of pricing movement. Dollars and geopolitical tensions have been part of equations that drive crude prices, but the relationships may be in a non-linear fashion and much more complex than headline news indicates. The Georgia and Russian conflicts began two weeks ago, crude price did not show

The turmoils at FNM and FRE created great anxieties and opportunities for both equities and debt TRADERS. The newly passed housing rescued packages by the Congress and signed the President essentially changed the "implied" to "explicit" US government backings on both quasi agency's outstanding debts. Their spreads to US treasuries have tightened in last few weeks. However, the most liquid 15 yr and 30 yr fixed MBS from Freddie and Fannie were under great pressures in last few days. Using 10 yr swap rate as benchmark, FNCI (15 yr Fannie MBS TBA) was priced to 5.50% with spread of 78 bps, that was 4 times of historical 10 year average (see the first chart). FNCI was traded at the cheapest level since 1998. The 78 bp spread to the swap was about four sigmas of the mean. FNCL (30 yr Fannie MBS TBA) was also trade at the lowest level that we have not seen in the last decade (second chart). Comparing to other investment alternatives, current fixed MBS prov

There were 182 hedge fund managers filed form 13F with SEC as Thursday (8/7/08) for Q2 according to Bloomberg. On aggregate level, one of striking similarities among hedge funds were heavy overweight on energy sector comparing to S&P. There were no surprises that hedge funds also significantly underweighted financial and consumer sectors in the second quarter, and maintained neutral stands among other major sectors. Was the 4% overweight on energy sector a major driver of 20% sector gain (based on XLE) during the 3 month period? If it was not the ANSWER, there was no questions that gorging of energy names by the deep pocket hedge funds were one of forces contributing to one of dramatic energy bull run until the end of second quarter. We are looking at the rear mirror of hedge fund manager actions, but today's energy related commodities wreck probably won't end soon considering many hedge funds might continue their unwinding energy positions and asset class re-allocations.

Speculators held net short positions first time last week since March, 2006. According to this Friday's CFTC data, speculators were still leaning on the bearish side in crude futures markets. The speculator's overall positions were net short of 660 contracts (see chart below). The chart shows that speculator's long (green line) and short (red line) positions as well as light crude futures prices (shaded column) since Jan/06. Speculators build the second highest long positions (263,300 contracts) two months ago (5/13), just 1,000 shy from the all-time high (264,400) reached exactly 1 year ago (7/310/7). However, the long positions never broke out above 264,500 even though crude reached all time high of above $147 in early July. In fact, speculator's sentiment became bearish (or most likely locking-in gains and off to summer vacation) since reached the second highest level and began to close out their long positions and accumulated short position bets about 2-3 months a