Barclay Group – July 2010

Absolute Returns – July 2010

Autumn Gold – July 2010

Option Selling Strategy (OSS)

Barclay Group – July 2010

Absolute Returns – July 2010

Autumn Gold – July 2010

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By Tom Sellen

(Dow Jones)–Not that he’s contrarian, but Craig Kendall and his staff have a way of viewing the markets that sets them apart from traditional investors.

“So many people ask where is the next value play,” said Kendall, president of Financial Commodity Investments, Inc., based in Herndon, Va. “Another way of looking at it is to ask what stuff is currently way overvalued.”

Financial Commodity Investments offers two funds, an Option Selling Strategy fund and a Credit Premium Program fund, both of which are designed to make money by collecting premiums off derivative contracts that are sold.

One needs to look no further than the U.S. stock market for an example of Kendall’s philosophy of overvalued trading. The slowing U.S. economy is limiting investment opportunities in equities because they are viewed as expensive in the current weak environment. Those opportunities will increasingly be viewed as “way overpriced” once investors realize they will not make large and quick returns as they had in the past, he said.

Though companies will grow, they will do so at a much slower rate, making it virtually impossible for investors to meet their original growth targets, he said. Investors will continue to exit equities, leading to further losses.

However, “those that invest ‘outside the box’ realize that positive returns can also be achieved even during overvalued conditions,” said Kendall.

He launched the OSS fund in 2004 and the CPP in 2006. The funds trade a diversified group of liquid commodities, evening out and buffeting against potential risk that would likely be amplified if they were trading just one or two markets. The funds’ strategy incorporates both chart-based and fundamental inputs. (While Kendall said he is happy to discuss his trading strategy, he added that there is a risk in trading and stresses past performance is no indication of future results.)

Gaurav Gupta, portfolio manager, says the OSS fund focuses on selling naked options on liquid commodities, including gold, silver, soybeans and livestock. It targets positive returns of 1% to 3% a month.

Fund tracker BarclayHedge ranked the OSS fund a top-20 performer during the five years ended March 2010.

The CPP is also an options selling program, but it sells vertical credit spreads and targets stronger monthly returns of 3% to 7%. Instead of seeking options that are further away from the money, the CPP gets closer to the money and hedges all positions against adverse price movements.

An example of a vertical credit spread: selling August crude $90 calls and simultaneously buying September crude $100 calls, with the premium collected equal to the difference between the premiums on the two options. Like the OSS program, the CPP looks to sell spreads in commodity markets that have above-average volatility.

Extreme volatility, like the kind that wreaked havoc among hedge funds and markets in 2008, also hurt Kendall’s funds. The OSS fund lost 23.02% that year, while the CPP gained just 6.94%.

The funds have since bounced back. The OSS fund has gained 21.57% in 2010 through June, data from Barclay Hedge showed. In 2009, the fund saw returns of 38.9%.

The CPP fund is up 9.37% this year through June, after being up 29.04% in 2009. By comparison, the Barclay CTA Index, an industry benchmark representing the performance of commodity trading advisers, is down 1% through June.

Since the Dow Jones Industrial Average is down 10% from the late-April highs, Gupta said it’s best to avoid equities and invest in cash instead. “The [equity] market could drop another 15% from here,” he said.

Speculation that the U.S. economy could sputter into a double-dip recession and the increased fear of deflation–after a string of weaker-than-expected manufacturing, home sales and jobs reports–mean that commodities will likely suffer due to decreased demand, he said, adding that is another reason to be in cash.

Gold has often been viewed as a safe-haven investment in times of economic strife, and the market did vault to record highs in June, but traders have recently dumped the yellow metal and sought out cash investments instead.

“If you listen to CNBC there’s a lot of people saying to invest in gold, and obviously gold has gone up quite a bit in the last two years,” said Gupta, “but I think a top in gold would be close as well.”

An astounding 85 percent of growth leaders entering into a recession will emerge weaker, according to new research.

Only 9% come out stronger.

What do business do wrong?

• Firms that cut costs faster and deeper than rivals had the lowest probability — 21% — of pulling ahead of the competition post-recession.
• Businesses that invested aggressively more than competitors had only a 26% chance of becoming leaders after the downturn.

What works? A careful balance between the cutting costs and new spending, according to Harvard Business School researchers Ranjay Gulati and Nitin Nohria, and Northwestern University’s Franz Wohlgezogen who studied 4,700 companies during the last three recessions.

Specifically, the successful companies didn’t slash headcount. Instead, they focused on improving operational efficiency. They also were bigger investors than their rivals in developing new business with investments in R&D, marketing and in plants and machinery.

“The most successful reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets,” the researchers report. “Their multi-pronged strategy is the best antidote to a recession.”

Source: http://cpatrendlines.com/2010/07/27/how-to-emerge-from-this-recession-stronger-than-before/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+cpatrendlines%2FtPxN+%28CPA+Trendlines%29

WASHINGTON — The US economy will improve slowly but more fiscal stimulus probably wouldn’t be effective, former Treasury secretaries Paul O’Neill and Robert Rubin said yesterday.

Rubin, who served under Bill Clinton, said the United States is “going to have slow and bumpy growth.’’ A “major second stimulus’’ might create more uncertainty, he said.

Companies won’t expand until sales improve, said O’Neill, George W. Bush’s Treasury chief: “We are moving forward at a pretty gradual pace. But I don’t think things are terrible.’’

Concern about the deficit has prompted President Obama to urge lawmakers to let Bush-era tax cuts for the wealthiest expire. O’Neill opposed the tax cuts but said lawmakers need to focus on overhauling the entire system.

© Copyright 2010 The New York Times Company

Source: http://www.boston.com/business/articles/2010/08/09/rubin_oneill_reject_more_stimulus/

By Rita Nazareth – Aug 9, 2010

Goldman Sachs Group Inc. lowered its year-end forecast for the Standard & Poor’s 500 Index to 1,200 from 1,250 and reduced its 2011 earnings projection, citing weakening economic forecasts.

S&P 500 companies will post combined profit of $89 a share next year, compared with Goldman Sachs’ prior estimate of $93, according to David Kostin, the New York-based equity strategist. Jan Hatzius, the firm’s chief U.S. economist, lowered his prediction for 2011 growth in gross domestic product to 1.9 percent from 2.4 percent on Aug. 6.

“The weak GDP growth forecast and specter of deflation means top-line sales increases will be hard to achieve,” Kostin wrote today in a note to clients. He raised his 2010 earnings forecast for the S&P 500 to $81 a share from $78.

The S&P 500 has rallied 9.7 percent since July 2 as profit growth that exceeded analyst estimates helped overcome concern the economy will slip into the second recession in three years. Growth in the U.S. slowed to a 2.4 percent annual rate in the second quarter, less than forecast, reflecting an easing in consumer spending, according to Commerce Department data.

Before today, the average estimate of 12 strategists tracked by Bloomberg called for the S&P 500 to rise 20 percent in the last six months of 2010 to 1,242. U.S. earnings will increase 35 percent in 2010, the biggest annual gain since 1988, more than 8,000 analyst estimates compiled by Bloomberg show.

The Federal Reserve may return to “unconventional” monetary stimulus as early as this week’s policy meeting as the U.S. economy continues to lose momentum, economists led by Hatzius wrote Aug. 6. The firm raised its estimate for the jobless rate as growth slows and the “reacceleration in U.S. output” expected for 2011 is made more doubtful by congressional resistance to fiscal stimulus, the note said.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.

®2010 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Source: http://www.bloomberg.com/news/2010-08-09/goldman-sachs-cuts-2010-s-p-500-forecast-to-1-200-on-slowing-u-s-economy.html

“Promoting transparency is at the core of the CFTC’s mission,” CFTC Chairman Gary Gensler said. “The new Traders in Financial Futures reports will provide the public with a better view into the financial futures marketplace. This transparency effort builds upon prior improvements we made to the COT reports and will provide the market with much helpful information. I thank the CFTC staff for their hard work to prepare these new reports.”

For decades, the CFTC has provided the futures industry with COT reports consisting of aggregated large-trader position data to shed light on the changing composition of the markets. The reports are based on a request by Congress for an annual report, upon passage of original enabling legislation in the 1920’s, and have been intensified over time into weekly reports in several formats.

The new TFF report uses the same data that appears in the COT reports, but separates large traders in the financial futures markets into the following four categories: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds; and Other Reportables. The “dealer/intermediary” category comprises the sell-side participants that earn commissions selling financial products, capturing bid/offer spreads and otherwise accommodating clients. The remaining three categories represent buy-side participants. These are generally clients of the sell-side participants who use the markets to invest, hedge, manage risk, speculate or change the term structure or duration of their assets.

Like the COT reports, the TFF report provides a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The report is published in futures-only and futures-and-options-combined formats. The TFF report will be published concurrently with the legacy COT. The TFF report, however, is not a disaggregation of the COT data for the financial markets. The traders classified into one of the four categories in the TFF report may be drawn from either the “commercial” or “noncommercial” categories of traders in the legacy COT reports. The CFTC also plans to soon release four years of historical data for the new report.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Financial Bill”) into law. Set forth below are certain aspects of the Financial Bill which impact investment managers to hedge funds and private equity funds.

The Financial Bill revises one of the definitions of an “accredited investor” under the Securities Act of 1933 (“1933 Act”).   Specifically, in determining if a natural person is an “accredited investor” who meets the $1 million net worth test, the value of such person’s primary residence must now be excluded from the $1 million net worth calculation.  Previously, a natural person’s primary residence (net of any mortgage) was included in calculating a natural person’s net worth.  The other definitions of “accredited investor” under the 1933 Act are currently remaining the same.  This change in definition is effective immediately.  As a result, we urge you to contact us as soon as possible as the Confidential Private Placement Memorandum and Subscription Documents for any investment funds you manage will need to be revised for this new definition of “accredited investor”.  Please note that, absent further guidance from the Securities and Exchange Commission (“SEC”), we currently believe that the new “accredited investor” definition only applies to (i) new investors in your hedge funds and (ii) existing investors in your hedge funds that make an additional capital contribution.  We do not currently believe that you need to recertify existing investors in your hedge funds that are not making additional capital contributions.  Likewise, with respect to private equity funds, if an investor has already made a capital commitment to the fund, we do not believe that subsequent draw-downs of capital by the fund from such investor will require you to recertify such investor.  However, as with hedge funds, any investor that is making a new capital commitment to the private equity fund would need to meet the new definition of “accredited investor”.

Under the Financial Bill, the Investment Advisers Act of 1940 (“Advisers Act”) will also be amended to require many investment advisers that are currently exempt from registration with the SEC to register.  Generally, the Financial Bill requires all investment advisers to hedge funds and/or private equity funds that manage $150 million or more in assets to register with the SEC.  Importantly, the “private adviser” exemption which many hedge fund and private equity fund managers relied upon in the past is being eliminated.  The “private adviser” exemption enabled an investment adviser to avoid SEC registration if it: (i) did not act as an investment adviser to a registered investment company or business development company; (ii) had fewer than 15 clients (counting each fund as 1 client); and (iii) did not hold itself out to the public as an investment adviser.  Please note that the SEC will need to issue additional guidance on numerous aspects of the Financial Bill relating to investment adviser registration and coordinate their efforts with various State regulators.  Unlike the change in the “accredited investor” definition set forth above, the new rules under the Advisers Act will become effective on July 21, 2011.

Barclay Group – June 2010

Absolute Returns – June 2010

OPTION SELLING STRATEGY (OSS)

Barclay Group – June 2010

Absolute Returns – June 2010

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Natural Gas Market Commentary, by FCI - Going into the June 04 trading day, we knew we had observed a major upside breakout in July natural gas the previous day with volume quite active, although there was some short covering by large speculators. Technicals had suggested an intermediate bottom was in place, although fundamentals disagreed. Fundamentally, we had large supplies and questionable demand. The weekly natural gas storage report had shown an injection of 88 bcf with total storage at 2357 bcf or 14.9% above the 5 year average. For the prior month natural gas storage had increased 362 bcf. The market had recently closed above the 9 day moving average, supporting a short-term positive trend. Although the RSI was nearing 70+, giving some indication of a potentially overbought market, natural gas managed to rally and close on June 04 at $4.819.

By the following week, the EIA weekly storage report showed an injection of 99 bcf, bringing total storage to 2456 bcf or 14.4% above the 5 year average. For the week of June 07 to June 11, price action was disappointing to natural gas bulls.

By June 16, 2010, with natural gas managing to put in fresh highs the night before, it appeared that natural gas was due for a decline. A potential tropical storm east of the Western Antilles was downgraded to having a 10% chance of developing into a tropical storm and natural gas didn’t get the positive mention from President Obama in his Presidential address as may have been expected; people were expecting the president to shift the US more towards alternative energy sources; perhaps traders were buying on the rumor and selling on the news.