Time To Start Re-Risking?

Daily State of the Markets 
Wednesday Morning – July 14, 2010  

When the debt mess really started to hit the fan (and the markets) in mid-April, the newly minted term “de-risking” became all the rage in the hedge fund community. After having their heads taken off in 2008, the guys and gals who were supposed to be able to make money in all environments have been doing everything in their power so as to not be fooled again. (If memory serves, the average hedge funds lost something on the order of -25% in 2008 when all those academic algorithms designed to make money – no matter what – blew up.) However, after a nearly two-and-one-half month correction and a drop of -16%, it appears that the hedgies might be thinking about putting some of that “risk” back on the books.

Since the financial debacle that was 2008, stocks are no longer referred to in the fund community as stocks, equities, or something as mundane as “companies.” No, nowadays, anything that can go down – a lot – is referred to as a “risk asset.” So, since hedge funds were falling all over themselves “de-risking” their portfolios in April and May, it is logical to assume that those funds might be “re-risking” now that it appears the recession that everyone was so sure of a week and a half ago appears to have been either postponed or cancelled altogether.

If you find it odd that professional investors appear to be acting like windsocks these days and changing strategies based solely on which direction the economic breeze is blowing, you are not alone. It has become fairly clear lately that the game isn’t about picking stocks or finding values; it’s about playing the current view of the macro environment.

Two weeks ago, it was assumed that the U.S. economy was absolutely, positively heading for recession. As such, there was a fair amount of de-risking (and a great deal of short selling) going on. But now that we’ve heard from the likes of Alcoa, CSX, GE, and Intel, well, it looks like it is time to “wax on.”

In case you were traveling with the family, on the golf course, or at the beach, Tuesday’s joyride to the upside, which pushed the venerable DJIA up another 147 points, was sponsored by Alcoa (AA), CSX (CSX), and later in the day, GE (GE). In short, Alcoa, who never seems to report a good number, beat earnings and increased their estimate for global aluminum demand for the year. CSX told those listening to their conference call that their customers continue to want to ship stuff from point A to point B. And GE told an audience on CNBC that things weren’t half bad out there.

Now toss in Intel’s (INTC) report and comments suggesting that PC demand remains strong, and the message from this as of yet very young earnings season becomes quite clear: a recession isn’t even on the horizon for these bellwether companies.

So, for those fund managers who had de-risked, it may be time to consider doing some re-risking. For those investors who had put on big short positions betting on Armageddon II, it might be time to consider running for cover. And for anyone with cash on the sidelines, it just might be time to consider looking at the long side. But then again, since we are all windsocks these days, it might be a good idea to see which way the economic winds are blowing before making any big moves.

Turning to this morning… Intel’s strong earnings numbers helped Asian market move higher overnight. However, renewed worries about the bank stress tests in Europe have put a damper on results across the pond and have also pulled down the futures here in the U.S.

On the economic front… The Commerce Department reported that Retail Sales fell in the month of June by -0.5%. This was below the consensus for a decline of -0.2%. When you strip out the sales of autos, sales were down by -0.1%, which was in line with the consensus. Sales for the month of May were revised higher to show a drop of -1.1%. Ex-autos, May sales were revised downward to -1.2% from -1.1%.

Finally, just for tun, try smiling at everyone you meet today…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +1.76%
  • Shanghai: +0.82%
  • Hong Kong: +0.64%
  • Japan: +2.71%
  • France: -0.66%
  • Germany: -0.16%
  • London: -0.72%

   

• Crude Oil Futures: – $0.66 to $76.49
• Gold: – $5.90 to $1207.60
• Dollar: higher against Yen and Euro, lower vs Pound
• 10-Year Bond Yield: Currently trading lower at 3.10%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -1.7
  • Dow Jones Industrial Average: -11
  • NASDAQ Composite: +9.7  

Wall Street Research Summary

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