Below are some links of interest for 8/14/09, just in case you missed them. Some have already been posted to Twitter.

• U.S. foreclosure activity hits a new record in July, increasing 7% from June and 32% for the year (Financial Times). The increase is being blamed in part on a lifting of previous foreclosure moratoriums.

• Retail sales fell 0.1% in July, even with the Cash for Clunkers program being considered - although August may include more data (WSJ). There were large declines in housing-related retailers and electronic stores. Stripping out autos, retail sales dropped 0.6%. Yet, there were some gains. Auto and parts sales increased 2.4% in July. In addition to autos, health and personal care stores, restaurants and bars, clothing, and mail order and Internet retailers were also up.

• The Federal Reserve plans to conclude its purchases of $300 billion in U.S. Government debt by the end of October (WSJ), in what may be both an admission that the Fed believes that the worst is over, and also a way to begin allowing long-term rates to move up, even as it plans to keep short-term rates near zero for the foreseeable future.

• Unemployment duration just keeps getting longer, even in good times (The Financial Ninja). This is increasing the need to emergency unemployment compensation (second The Financial Ninja article).

• Hotel occupancy fell 7.5% to end the week at 65.9%. RevPAR (Revenue per available room) for the week decreased 16.5% (Calculated Risk). Given that peak travel time is passing us by, this is not good news.

• When looking at quarterly report for Regions Financial, one wonders if the company is insolvent, even though the government says it is well capitalized (Bloomberg). Of course, that has not stopped investors from valuing the company near $6 billion. Meanwhile, looking at CDS market, 5-year protection written on Region's tier-2 debt is trading at spreads of 722bp over swaps (Reuters - Felix Salmon). What this implies (to Salmon) is "that bonds are the new stocks, and stocks are the new call options." Bonds are now giving you a high return for high risk. On the other hand, stocks run the risk of being wiped out entirely in return for the leveraged possibility that your investment could multiply in value in a matter of months. Of course, none of this seems to bother the stock or its investors. In the face of the Bloomberg story, the stock was up 7.9% Thursday, along with a 3.1% increase in the KBW Bank Index - much to the amazement of Michael Panzner (Financial Armageddon).
  

• Weak retail sales data caused an early correction in the futures market Thursday morning, but the market still rallied back on essentially no news (The Pragmatic Capitalist). This comes as rail data was also weak (second The Pragmatic Capitalist article). Is the market resilient or complacent? Is the move just short-covering and/or hedge fund managers trying not to get left behind?

• Based on available trading data, there seems to be a disconnect in short interest volume readings. The BATS short volume reading is accounting for over 46% of total volume, much more than the short interest data disclosed by the NYSE and Nasdaq ( Zero Hedge).
  

• Bespoke Investment Group has a list of the most heavily and least heavily shorted Russell 1,000 stocks. Chipotle Mexican Grill (CMG), and not surprisingly, AIG, top the most shorted list. CMG is still up 46.35% YTD. Of interest is that the average 2009 change for the most heavily shorted stocks, i.e., more than 20% of float, is 26.23%, almost double the gain for the overall market.
  

• In general, as the market has been moving up, the short interest ratio on the S&P 500 has been dropping, signaling a possible topping formation (The Disciplined Investor).
  

• The Pragmatic Capitalist worries that a weak hurricane season could cause crude oil prices to fall, dragging the stock market with it.

• The Coppock Curve technical indicator is continuing to rise and act bullish (Trader's Narrative). Then again, the S&P 500 would have to fall 200 points below 780 for the curve to stop climbing, so we could get the much talked about August/September correction before continuing to move higher later in the year, as some are expecting.
  

• The ratio of insider buying to selling transactions is 10 to 136 ($60.1 million buys to $1,146 million sells). There have been over $2.1 billion in insider sales over the last two weeks (Zero Hedge).

• Looking at inter-market returns YTD, crude oil is the best performer in 2009 - up almost 60%, followed by the Nasdaq - up 27% YTD, and the CRB Commodity Index - up 15% YTD (Afraid to Trade). The S&P 500 has risen 11% during the same period.

• In what seems to be daily hedge fund data, the Financial Times takes its turn reporting how traditional strategies such as equity long-short and convertible arbitrage continue to be the best hedge fund strategies for the year. Emerging market and fixed income arbitrage strategies are also doing well. Dedicated short sellers, not surprisingly, are getting killed. As the market continues to trend, black-box commodity trading advisers (managed futures) are once again generating interest after what has been a difficult year (Reuters). Anyone seen a SuperFund commercial lately?
  

• Looking at a recent 13-F, the John Paulson portfolio is heavily weighted towards three sectors: gold, financial stocks, and health care (The Pragmatic Capitalist). This basically results in three bets on seemingly different macro themes, possibly betting on re-inflation (gold, health care), while at the same time speculating on a recovery (banks).

• Researchers Mokoaleli-Mokoteli, Taffler, and Agarwal test whether sell-side analysts are prone to behavioral errors when making stock recommendations, as well as the impact of their investment banking relationships on judgment. The authors find that new buy recommendations on average have no investment value, whereas new sell recommendations do have value, although it takes time for the information to be assimilated by the market. Interesting research, and somewhat intuitive - or at least it should be. It looks like buy recommendations involve selling, and sell recommendations involve selling, ......., just different kinds (Bull Bear Trader).
  

• The MarketSci blog provides a nice breakdown of the quant analysis blogosphere into three components - situational analysis, mechanical strategies, and academic thinkers - and provides references for each.
  

• New Morningstar 5-star stock: SunPower Corporation (SPWRA).

In their paper "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance and Accounting, authors Mokoaleli-Mokoteli, Taffler, and Agarwal tests whether sell-side analysts are prone to behavioral errors when making stock recommendations, as well as the impact of their investment banking relationships on judgment. The authors find that new buy recommendations on average have no investment value, whereas new sell recommendations do have value, although it takes time for the information to be assimilated by the market. They also find that new buy recommendations are distinguished from new sells both by the level of analyst optimism and conflicts of interest (no surprise there). Of interest, successful new buy recommendations are characterized by lower prior returns, while successful new sells do not differ from their unsuccessful counterparts in terms of these measures.

Interesting research, and somewhat intuitive - or at least it should be. New buy recommendations involve selling, and sell recommendations involve selling, ......., just a different kind.

Below are some links of interest for 8/13/09, just in case you missed them. Some have already been posted to Twitter.

• Imports were up in June, in part due to a spike in oil prices. Exports were also up in June. On a year-over-year basis, exports are off 22% and imports are off 31% (Calculated Risk).

• The duration of unemployment chart is getting scary, and at record levels (Trader's Narrative). Can you say jobless recovery?

• Statistics indicate a recovery with no jobs, no pay increases, and therefore no increases in tax receipts for struggling state and local governments (Washington Post).

• As of April, less than 13% of the largest 1,100 hedge funds had reached their high water mark, while more than 18% were more than 30% off their peaks (WSJ). Even after the recent market run, more then 70% of hedge funds have not recovered from 2008 losses, making it difficult for firms to generate extra fees, pay bonuses, and retain talent.

• Natural gas hedges that locked into higher prices helped a number of companies report better than expected earnings, but this could be harder in the future if speculators have a more difficult time participating in the market going forward (WSJ). This is certain to affect "cash-flow certainty" for companies, affecting not only their ability to manage risk, but their ability to provide some level of stability to consumer energy prices.

• Even if the efficient market hypothesis does not get in your way, it is not that simple to technically and fundamentally trade your way to being "really" rich, ......., but "merely" rich is possible (Abnormal Returns).

• If revenue growth is to have a V-shaped recovery, shouldn't CapEx spending increase? Zero Hedge looked at the data. Not only is CapEx spending not increasing, it is continuing to fall.

• The Baltic Dry Index has been down nine of the last ten trading days (The Financial Ninja). There is suspicion that China has pretty much completed their commodity restocking.

• World stock market capitalization is up another $4 trillion in July (Carpe Diem).
  

• Are option flash orders the next big thing to worry about (WSJ)? Maybe not (Daily Options Report, here and here).

• Has the no volume bear market rally finally ended? The Pragmatic Capitalist believes so, and lays out the case why. The 50% move in the S&P 500 is somewhat typical for a secular bear market rally - declining volume, low quality asset gains, little leadership, and the move has been swift. With no volume confirmation, negative seasonal trends, no real catalysts in view, and extreme bullish sentiment, the market may be ready for a correction.

• Don Fishback ran some numbers and found that the average return of the S&P 500 during earnings season was -0.11% (Don Fishback's Market Update, HT marketsci tweet). So why are stocks and index options more expensive going into earnings season? It could be explained by how far each period's returns deviate from the average. In fact, market returns during earnings season do not really resemble a bell curve.

• During the second half of July, the NYSE experienced a 10.27% decline in short-selling positions not closed out, while the Nasdaq had a more than a 5% fall in short interest (WSJ).

• In a challenge to iShares, Vanguard has filed a registration statement with the SEC to offer seven bond index ETFs, illustrating in part current trends, and how investors are looking more towards corporate bonds (Bull Bear Trader). While some investors are simply chasing returns, others are looking for new ways to diversify away from equities.

• The natural gas ETF, UNG, has decided to not issue new units on worries of new stringent CFTC rules (WSJ). The shortage of shares may continue to cause the fund's value and price to diverge.

• Actively managed quantitative strategies currently account for 9% of all U.S. equity AUM, as automation is becoming a competitive necessity (FINalternatives).

• A forthcoming academic paper from SUNY professors Greg Gregoriou and Razvan Pascalau suggests that the optimal number of underlying hedge funds within a fund of hedge fund portfolio may actually be as low as 6-10 (All About Alpha). Among other conclusions, the paper demonstrates empirically that the number of hedge funds included in a FoF has a negative and significant impact on the volatility of returns, while having less of an impact on actual returns.

• Bob Prechter of Elliott Wave International is quite sure the next wave down will be bigger and the March lows will break (The Big Picture).

• After calling the bottom in March, Doug Kass is bearish again (TheStreet.com) since cost cuts and fiscal stimulus are limited, cost cuts threaten the consumer, the net worth of individuals has been damaged, the credit shock will continue, the outcome of the Fed monetarist experiment is uncertain, a housing recover will be muted - there are no other drivers right now, commercial real estate is just now entering its downturn, municipalities may not provide the necessary economic stability, and taxes will be rising, along with health and energy bills, further hurting the consumer.

• Money managers collectively have 18.5% of the long portfolios in the Financial sector, 16.8% in Technology (Bespoke Investment Group). Utilities and Telecommunications round out the bottom at 3.0% and 2.9% respectively.

• S&P 500 YTD returns by sector (Value Expectations). Technology, Consumer Durables, and Basic Materials are leading the way with 39.73%, 36.77%, and 32.82% average returns, respectively, while the Financial and Utility sectors are bringing up the rear at average returns of 10.81% and 5.87%, respectively. The Applied Finance Group's Value Expectations (VE) interface provides sector expectations for the S&P 500 (Value Expectations).
  

• From the latest update of the four bear recovery comparison (check out the chart at dshort.com), it appears that the S&P 500 lows in 1974 and 2002 market sustained recoveries. The Dow low in 1929 failed 11 months later. The current market is now 47% above the March 9 low, and has outperformed the 1974 and 2002 rebounds over the same period. Doug Short ask: Will the rally continue to show resilience? That is the question.

• New Morningstar 5-star stocks include Cisco Systems (CSCO), ExxonMobil (XOM), and Regions Financial (RF).

• American Association of Individual Investors (AAII) sentiment survey results (as of Aug 6): Bullish 50% (rose above long-term average of 38.9%), Neutral 14.84%, Bearish 35.16% (rose above long-term average of 30.0%). It looks as if investors are jumping off the fence.

• Even though the Dow Theory is giving bullish signals - since both the Dow Industrials and Dow Transports are moving above previous significant highs, signaling that the primary trend is bullish and stock price are likely to move higher - the signal may not have occurred since the corrections that followed the May and June highs failed to retrace even one-third of the rise since the March lows. As mentioned Monday, Jeff Saut just thinks it is a contrarian indicator.
  

• Points taken from the battle of the Dr. Doom's (Bull Bear Trader) and the recent Nassim Taleb interview on CNBC (Bull Bear Trader).
  

The battle of the Dr. Doom's on CNBC (CNBC Video), between Marc Faber and Nouriel Roubini, was uneventful, but did provide some interesting comments. While Dr. Roubini views are pretty well known, even if he is currently a little less pessimistic, Dr. Faber's views may not be as well known, and are worth mentioning. Some observations from the Faber portion of the interview include the following:

• There was a bull market in assets from 2002-2007, along with a weak dollar. In 2008, we had the opposite - a strong dollar, with all assets going down except for bonds. Now, in 2009, assets have rallied, especially in emerging markets as the dollar has weakened.
• For the next couple of months we should see the dollar recover as assets correct downward.
• The dollar will strengthen not because the U.S. economy is the best, but because it is the least cyclical. As the dollar strengthens, global liquidity will tighten.
• As liquidity tightens, growth will begin to disappoint, and emerging markets will become vulnerable, especially after being a favorite of momentum investors who may flee the trade.
• Nonetheless, even with slower economic growth, markets may still go up given that there are a number of worldwide central bankers who are nothing more than money printers and continue to feel the need to intervene when prices go down (except for crude oil).
• To exit this cycle, we may still need a crisis to cause us to fully change behavior and clean the system. Therefore, a total breakdown of the system is likely ahead of us (even if 1, 5, or 10 years away) since we have not let those who caused the problems fail. We cannot continue to provide bailouts that do not help the average person.
• Nonetheless, the Fed and other central bankers will most likely leave rates too low for too long, as household deficits continue to increase.
  
• Finally, when asked what would have happen if central banks would not have stepped in to stop the credit and market collapse, Faber believes that the market would have dropped more, but the system would be healthier, in part because the debt load on taxpayers would be less.
  

Nassim Taleb was interviewed on CNBC's Squaw Box Wednesday morning (CNBC Video), along with Nouriel Roubini. Some observations from Taleb include the following (the first one still worth repeating, especially given the recent market moves and short covering, the remaining ideas being essentially repeats from other interviews/columns):

• Short-term markets mean nothing. They are driven by the marginal buyer/seller.
• The risk and problems that we had before - debt, poor leadership - are still there.
• Converting private debt to public debt is just causing more problems.
• Structural problems have not been addressed.
• Too much reliance / susceptibility to forecast errors for the recovery, budget, and debt forecast.
• Policy makers are still not working on the main problems and there cures, just the symptoms.
• We are continuing to reward those who got us into our current problems.
  
• Nouriel Roubini is usually correct, except for wanting to reappoint Federal Reserve Chairman Bernanke (comment after some praise - to easy, just cannot help himself).
  

In a challenge to iShares, Vanguard has filed a registration statement with the SEC to offer seven bond index ETFs (Investment News). Three of the ETFs will invest in U.S. Treasuries (1-3 year, 3-10 year, and longer dated), three in corporate bonds (1-5 years, 5-10 years, and long dated), and one in MBS. Each of the ETFs comes with an expense ratio of 0.15%. The company is trying to take advantage of current investment trends, one of which has investors moving into corporate bonds (Forbes). Bonds funds in general have received $58 billion in May and June, up from $19 billion over the same two months last year. The junk-bond market itself has climbed 40% this year. While some investors are simply chasing returns, others are looking for new ways to diversify away from equities after the market sell-offs in the second half of 2008 and first quarter of 2009.

Below are some links of interest for 8/12/09, just in case you missed them. Some have already been posted to Twitter.

• According to Boston Consulting Group, institutional investors will demand "innovations" such as alternative investments, i.e., hedge funds, private equity, infrastructure, commodities, absolute return, and quantitative products, among others (All About Alpha). The group also mentions that "Perhaps the foremost trend in actively managed products is the continuing shift out of long-only equity allocations."
• Why have hedge funds underperformed the markets? Apparently, some managers are taking money off the table and proceeding with caution after several months of gains (Investment News). Even with good performance this year, hedge fund fees continue to slide (Wealth Bulletin).
• The Fed exit strategy will amount to paying interest on balances held by banks at the Fed (Bearish News). Essentially, when it comes time to tighten policy, the Fed can raise the rate paid on reserve balances as they increase their target for the federal funds rate. Of course, this will in a sense continue to reward the banks for past failures.
• After two years, some believe that we have failed to learn the three lessons taught by the economic downturn: imbalances in global trade and finance have real consequences, debt brings risk, and globalization does not manage itself, but needs guidance (Telegraph UK).
• China's economy slowed a little in July as large banks rein in lending, with volume of new lending in China dropping 77% from a month earlier, as fears of bubbles persist (Financial Times). Chinese exports fell 23% from a year earlier (Bloomberg). Singapore is not slowing down, with GDP spiking 20.7% (The Straits Times).
  
• General Motor's Volt could be a game changer if it gets the 230 miles per gallon that is being advertised - as long as you stay close to home (WSJ).
  
• The KBW bank index hit an 8 month high, up 144% from the March lows (Carpe Diem).
  
• The Congressional Oversight Panel is warning that smaller banks, which hold a greater concentration in commercial real estate, have the potential for much higher defaults going forward (Calculated Risk). Some small banks will need to raise significant capital (Zero Hedge).
  
• Can the PPIP be used to explain the strong rally in AA-rated CMBS (Clusterstock)? Is a new toxic asset bubble around the corner?
• From Comstock (by way of The Pragmatic Capitalist), deleveraging will continue to take a major toll on the U.S. economy and could wind up producing a couple lost decades, not unlike what Japan has experienced over the last 20 years.
• Brazil's coming rebound (Fund My Mutual Fund).
  
• What about the technology sector? Jim Farrish believes that while short-term there is the reason to tighten stocks, long-term (6-18 months) the sector is still in a bullish uptrend (greenfaucet). Any current correction may be an opportunity to add.
  
• Crude oil and gold both bounce of Fibonacci retracements (market folly), for those of you that care about crude, gold, or trading patterns/sequences.
  
• The housing mess is not yet over (The Big Picture). Zillow.com mentions that almost one-quarter of mortgage holders are underwater, with the figure rising to 30% by mid-2010 (Bloomberg). Ginnie Mae and FHA are becoming $1 trillion subprime guarantors, not unlike taxpayer owned Fannie Mae (WSJ).
• More details on Goldman Sach's amazing winning streak (Here Is The City News). Apparently, Goldman lost money on only two trading days during April, May and June. They also made more than $50m on 58 of the 65 trading days in the period, and at least $100m on 46 days. Amazing.
• The Baltic Dry Index has fallen for its 9th straight day (The Big Picture).
• We are all traders now (Trader's Narrative). The average holding period for a stock on the NYSE continues to fall.
  
• NYSE Bullish Percent Index and NYSE Percent of Stocks Above 200 Day MA Index are near 3 year highs (ES and EC Futures Analysis).
• A look at the importance of normalizing put/call ratios, whether they are going up or down (Quantifiable Edges).
  
• Short are decreasing as the average stock in the S&P 500 had 4.97% of its float sold short by the end of July (Bespoke Investment Group), the lowest level since January 30th. The reduction in shorts represents a decline of 17% from the peak levels in July 2008.
• September can be a cruel month for stocks (WSJ).
• Is the money supply (M1) a good indicator for short- and medium-term stock market behavior (CXO Blog)? Maybe not.
• Obama's derivative plan (WSJ).
• Greg Mankiw provides some wonky talk about carbon taxes (Greg Mankiw's Blog).
• Gamma decay and smiles for levered options (Quantivity).
• VIX calls attract some attention (VIX and More).
• Finally, an interesting link (at least to me) of the changes in WSJ dot portraits (Reuters - Felix Salmon).

On average, hedge funds were up 2.44% July and 11.89% for the first seven months of the year according to data from HedgeFund.net (see hedgeweek article). This was the best seven month performance data since 1999, driven in part by the rising equity markets and near record performance in directional fixed income. Convertible arbitrage returned 6% in July and is the best strategy year to date, while managed futures have lagged equity-based strategies. Nonetheless, even with the current out-performance, 54% of funds are still below January 2008 levels.

According to the recent TIM (Trade Ideas Monitor) report, the TIM Sentiment Index (TSI) increased 2.1% week over week to 50.90 on August 6th, compared to 49.84 on July 30th (see last post, and previous post and the youDevise website for additional information on the TIM report). For the last few weeks, the index has been fluctuating just above and below the critical 50 mark, differentiating bullishness from bearishness. The TIM report list the daily change in the TSI as being statistically correlated to market movement 1-3 days forward. Total new short ideas as a percentage of all new ideas sent to investment managers by way of the TIM increased slightly to 33.21% on August 6th from 33.19% on July 30th. Shorts represent 34.96% of broker ideas in August, compared to 40.69% year to date.

As for individual securities in the U.S. and North America, Hartford Financial Services Group (HIG), Novellus Systems (NVLS), and DaVita (DVA) were the stocks most recommended as longs by institutional brokers, while Cablevision Systems (CVC), Hewlett-Packard (HPQ), and Altera (ALTR) were recommended as shorts. The consumer discretionary, materials, and financial sectors had the biggest week over week change in long broker sentiment, while the telecommunication services, consumer staples, and information technology sectors had the largest weekly change in short sentiment.

Tobias Levkovich, chief U.S. equity strategist at Citigroup, presented his bullish perspective on CNBC Thursday (see CNBC article).

Source: CNBC Video
Some points from the Levkovich interview include:

• Production rates have to pick-up, and not because final demand is picking-up, but because inventory levels are so low.
• Earnings are a function of production. Top-line growth will pick-up. This will cause the second half GDP to be higher.
  
• Cost controls were not a one quarter phenomenon, but will provide even more operating leverage to the upside going forward.
• Worries of lower consumer spending hurting GDP are overblown. Over the last 30 years nearly all of the growth of consumer spending as a percent of GDP has come from health care expenditures. It is an illusion that we have always had isolated increased spending. When spending did increase, so did wealth. Debt increased $6 trillion, but assets increase $24 trillion over the same time frame.
• While we will see sales growth this year (which is counter to conventional wisdom), 2010 estimates that are calling for a 22% gain in earnings might be a little high.
• Finally, while there is a possibility of a market correction later in the year, an overshoot to 1,100 on the S&P 500 is very plausible. Positive moves in the market will be supported by the strength of Q2 earnings and the probability of second half earnings power.

Mark Axelowitz, director of wealth management at Morgan Stanley Smith Barney, and adviser to very high net worth individuals, was recently on CNBC's Fast Money program discussing trends that he has noticed among ultra high net worth individuals (see CNBC article).

Source: CNBC Video
Just as many investors are jumping back into stocks, essentially afraid that they may have missed the recent rising market, ultra high new worth individuals are more cautious, and appear to be worried about inflation, the dollar, and of course, taxes. This macro-economic perspective has kept the rich from chasing the recent rally, and instead has them investing heavily in fixed income instead of equities as they shy away from diving into the market with both feet. The rich stay rich for a reason. Maybe it is time to pay attention.

According to the recent TIM (Trade Ideas Monitor) report, the TIM Sentiment Index (TSI) fell into bearish territory as it decreased 2.4% week over week to 49.84 on July 30th, from 51.06 on July 23rd (see last week's post, and previous post and the youDevise website for additional information on the TIM report). Nonetheless, the index increased 9.3% on Thursday. New short ideas as a percentage of all new ideas sent to investment managers increased from 28.26% a week ago to 46.92% on Tuesday, then back to 33.19%. Shorts are 36.72% of ideas in July and 40.95% for the year. As result, the index is indicating that while brokers are generally bullish with their new ideas, they have increased their profit taking as the market continues to rise.

As for individual securities in the U.S. and North America, Viacom (VIAb), GSI Commerce (GSIC), and Adtran (ADTN) were stocks recommended as longs by institutional brokers, while Cymer (CYMI), Saks (SKS), and Priceline (PCLN) were recommended as shorts. The industrials, financials, and consumer staples sectors had long broker sentiment for the week, while the utility, energy, and information technology sectors had short sentiment.

There was a great interview with Mohamed El-Erian this morning on CNBC. El-Erian always presents a well though-out, articulate, and accessible perspective on various financial issues. This morning's interview was no different as he discussed the recent market rally and whether the economy is beginning to recover. As for the recent moves in the stock market, El-Erian believes that the run-up in prices, especially the July portion of the equity market rally, is part of a "sugar high," implying a correction is in order. As for the economy, El-Erian believes the current optimism is based on some false assumptions, including:

• Corporate profitability can be maintained with additional cost-cutting. Not true. You need revenue growth.
• The stimulus spending will have a permanent effect. Not true. Just look what happen in China on Wednesday when they decided to cut-back stimulus spending.
• The stabilization of housing is sufficient to get the economy growing again. Not true. A housing recover is necessary, but is not sufficient by itself.

El-Erian goes on to say that what we need is final demand, producing longer-term and sustainable demand sources. We also need to know that deleveraging in the private sector has completed its course. People need to feel comfortable to once again to engage in consumption and investment. Furthermore, the recovery is no longer just about the financial sector. It is about the real economy, in particular wages and employment. Until those recover, we can only have tepid growth, but not the level of growth necessary to turn the economy around. Finally, El-Erian mentions how the helium in the growth balloon is being driven mainly by public debt. For the balloon and growth to stay afloat, you need the private sector to kick-in and take over, as well as have the public sector begin dealing with its debt issues. Simple, to the point common sense. Good stuff as always.


Source: CNBC Video

Below are some links of interest, just in case you missed them. Some may have already been posted to Twitter.

• Economic calendar for Wednesday, July 29th (Briefing.com Economic); Durable Orders at 8:30 AM EST, Crude Inventories at 10:30 AM EST, and Fed's Beige Book at 2:00 PM EST.
  
• Earnings calendar for Wednesday, July 29th (Briefing.com Earnings)

• Small investors in the UK are turning to absolute return funds as they attempt to protect themselves against another downturn (UK Daily Mail).
• Betting on positive GDP. Intrade odds for positive Q3 GDP growth are at 73% (Carpe Diem). On the other hand, even though some are optimistic on positive GDP, those betting on whether a Government run health care plan with a public option will be signed into law by the end of the year is down to 25% (Bespoke Investment Group).
• The recession may be close to being "technically" over, but does that matter? (The Pragmatic Capitalist)
• Don't fool yourself, earnings are in their worst decline in history (Trader's Narrative).
• This seems to be an interesting "recovery" given that all the usual economic/sector suspects are missing in action (Financial Armageddon).
  
• Sam Zell gives his thoughts on real estate (Calculated Risk). CNBC interview with Sam Zell below (CNBC Video).
  
  
• The Nasdaq vs S&P 500 trend-following strategy (MarketSci Blog).
• PIMCO takes its bond prowess into active management with the PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ). (ETF Trends)
• Microsoft and Yahoo! may be near a new search deal (WSJ). Does anyone care anymore?
  
• Alpha/beta separation does not actually require separating anything (AllAboutAlpha.com).
  
• A negative divergence between energy stocks and the S&P 500 (The Financial Ninja). Energy stocks take a slide on lower consumer confidence numbers (WSJ).
  
• Don't over think light volume rallies (The Big Picture).
• How are SPXU and UPRO being traded? Bill Luby at VIX and More provides some insight.
• SEC issues new rules on short-selling (WSJ).
• CFTC Chairman Gensler considers enacting limits on traders who place bets on energy contracts (WSJ). In other CFTC news, previous reports which had the CFTC blaming speculators instead of supply and demand for the crude oil run-up in 2008 may have been premature.
• Wilber Ross sounds off on FDIC regulations and Tier 1 capital rule requirements, and whether anyone will buy banks again (CNBC Video).
  

Below are some links of interest, just in case you missed them. A few have already been posted to Twitter.

• Economic calendar for Tuesday, July 28th (Briefing.com Economic); S&P/Case-Shiller Home Price Index at 9:00 AM EST, and Consumer Confidence at 10:00 AM EST.
  
• Earnings calendar for Tuesday, July 28th (Briefing.com Earnings)
  

• Hedge funds investing in Asia now appear to be a popular asset class among the wealthy in the region, with AUM expected to rise from $14 billion in 2001 to $160 billion by the end of the year (HFMWeek).
• Jeremy Grantham's quarterly letter (GMO, The Pragmatic Capitalist). Always insightful. This one is no different given his views on China and emerging markets.
• Even with the relatively positive housing news Monday, U.S. efforts to modify mortgages has faltered (WSJ).
• Are there two housing bottoms, one for activity, and another for price? If so, the price bottom may not have been reached yet, even if housing activity is picking up (Calculated Risk, Clusterstock).
• Potential problems with commercial real estate rears its ugly head again (Fortune). As it turns out, banks in the U.S. hold $1.8 trillion of commercial loans, with regional banks set to take the biggest hits. Some large regional banks with exposure include PNC of Pittsburgh, KeyCorp of Cleveland, and BB&T of Richmond, Va., each with more than half their loan books in commercial loans. Ouch.
• Bank failures appear to be accelerating (The Big Picture).
  
• Bank of America plans to cut 10% of its branches (WSJ).
• Lending continues to slow as bankers and borrowers refrain from taking risk (Financial Armageddon).
• There has been a 585% year-over-year change in CMBS delinquencies (Zero Hedge).
  
• The next financial crisis is on its way and will be triggered by commercial real estate, credit cards, and student loans, says Kirby Daley, fromNewedge Group ( The Pragmatic Capitalist).
• The truck tonnage index declined 2.4% in June (Calculated Risk). What does this mean for the recovery?
• "The End Of The End Of The Recession" (Zero Hedge). A pretty detailed macroeconomic presentation from Zero Hedge in collaboration with David Rosenberg, Chief Economist & Strategist at Gluskin Sheff and Associates. The link is a few days old, but worth a look if you have not seen it.
  
• The SEC issued new rules on short-selling that will require more transparency, albeit delayed (WSJ, Financial Times). This comes as the CFCF pins the blame for the 2008 crude oil spike on commodity speculators (WSJ).
• The VIX was up on a quiet day (The Financial Ninja), and looking oversold as equities appear stretched.
  
• Looking at the individual sectors, everything except energy seems overbought (Bespoke Investment Group).
  
• Apparently the FX market is slowing down as Forex trading volume shrinks (Kathy Lien).
• When breaking the S&P 500 into 10 deciles (10 groups of 50 stocks), the two deciles with the most institutional ownership are up the most, while the two with the lowest institutional ownership are up the least (Bespoke Investment Group). Is this institutions standing behind their bets and adding more, simply staying strong during a short squeeze, or something else? Or nothing else?
• The AirShares EU Carbon Allowances ETF (ASO), which gave investors a way to play the cap-and-trade market, is calling it quits and liquidating (ETF Trends).
  
• Traders are not happy with plans to limit natural-gas trades (WSJ), with some market makers considering pulling out of the market.
• Is it dispersion time - the idea being to go long options gamma in individual names or sector specific ETF's, and go short gamma in index ETF's or index options (The Daily Options Report).
• Hedge fund replication for all (Bull Bear Trader, greenfaucet). MIT Professor Andrew Lo discusses hedge fund replication and his SG Global Alternatives A (GAFAX) fund that is available to average investors.
  

Dr. Andrew Lo , MIT Professor and founder of Alpha Simplex, was recently on CNBC's Fast Money program discussing hedge fund replication using a combination of exchange traded futures and currency forwards.

Source: CNBC Video
In essence, hedge fund replication attempts to mimic the betas and returns of either individual hedge fund strategies, or the entire hedge fund industry, using common and liquid exchange traded assets, such as futures, forwards, swaps, and even ETFs. In using such assets to replicate returns, is it hoped that one can not only replicate betas and returns, but do so with comparable or less risk, and of course, less cost that a traditional hedge fund.

The specific fund that Dr. Lo helps manage, along with Jeremiah Chafkin and Robert Rickard, is a long/short replication mutual fund named the Natixis ASG Global Alternatives A (GAFAX) fund. The fund is relatively new, with an inception date of September 30, 2008, and has an expense ratio of 1.64% and an initial sales fee of 5.75% - not cheap, but less than your typical 2/20 hedge fund fee structure for longer holding periods. Year to date the GAFAX fund is up only 4.86% compared to a positive 8.74% return for the S&P 500. Nonetheless, the diversification effects of the fund have helped its returns be relatively flat since inception, compared to roughly a 20% loss in the S&P 500 over the same period. Given that the fund is less than one year old, extensive risk-return data is not yet available.

While replication strategies can attempt to replicate either single or multiple strategies, the GAFAX fund is broad-based in that it does not try to mimic one specific type of hedge fund strategy, but instead tries to get the beta and return of the diversified exposure of the entire hedge fund industry. Therefore, such a fund will not report returns that match the top outperforming funds each year, but will also hopefully avoid significant exposure to strategies that may have recently blow-up due to current market or macroeconmic factors. Furthermore, even though the fund is using reported past return data to develop its replication, the lag in performance is not expected to be as dramatic since the fund is modeling more broad-based returns, and once again is not subject to the investment changes of one hedge fund or strategy.

Hedge fund replication has been an active area of research for a number of years, both in academia and industry. It will certainly be interesting to see how such techniques perform outside the labs of academia and closed doors of industry, and whether or not such investment strategies catch on with the retail investing public. If you are looking to learn more about the field of hedge fund replication, there are a number of places to start. First, check out Dr. Lo's MIT homepage and Laboratory for Financial Engineering website were you can download some recent abstracts, publications, and working papers on hedge funds. Second, check out the wonderful blog AllAboutAlpha.com and its various articles on alternative beta and hedge fund replication strategies. The following academic papers - available on the Internet (there are others as well) - will also given you an idea of a few hedge fund replication research approaches and modeling techniques.

Can Hedge-Fund Returns Be Replicated?: The Linear Case, Hasanhodzic and Lo
Alternative Routes to Hedge Fund Return Replication: Extended Version, Harry Kat

A few books on the subject include the following:

Hedge Funds: An Analytic Perspective, Andrew Lo (includes a chapter on replication, content from his papers)
Alternative Beta Stategies and Hedge Fund Replication, Lars Jaeger

Once again, these are just a few resources available on the Internet or at your local bookstore. As mentioned, the field has been active over the last few years, and subsequently has produced a number of good articles, books, and online resources. Enjoy.

Below are some links of interest (at least to me), just in case you missed them. A few have already been posted to Twitter.

• Economic calendar for Monday, July 27th (Briefing.com Economic). New Home Sales at 10 AM EST.
  
• Earnings calendar for Monday, July 27th (Briefing.com Earnings).
  
• Investors await data on GDP and housing this week (Financial Times). Consensus forecast project a 1.5% fall in GDP for Q2, with falling inventory levels and lower production dragging the number down (WSJ). Anything much worse could stall and reverse the recent rally. Calculated Risk finds a little sunshine in some of the recent economic numbers. Nonetheless, even government meddling in the housing market may have its limits (Bearishnews). In somewhat related news, Barry Ritholtz also covers some issues with National Association of Realtors and the use of appraisers (The Big Picture).
• The total amount of loans held by the 15 largest U.S. banks fell by 2.8% in Q2 (WSJ), with more than half of the loans in April and May coming from refinancing and renewing existing business credit, and not from making new loans.
  
• More news about how investors are continuing to move their money into emerging market ETFs (ETF Trends).
• Looking for an ETF with global exposure? Now there are two to choose from, but they are not exactly the same, even though they appear so (ETF Trends).
• Demand for emerging market debt has risen to record levels, offering an encouraging sign for the world economy (Financial Times).
• Are unemployment statistics meaningless? Are spillover effects zero? Econbrowser tackles the questions.
  
• A look on how the "cash for clunkers" is going to work (The Big Picture).
  
• U.S. Pay Czar begins looking to rework / renegotiate contracts deemed excessive. Seven banks and companies, including Citigroup, Bank of America, American International Group, General Motors, Chrysler, Chrysler Financial, and GMAC Financial Services must submit proposals for their compensation packages (WSJ).
• Information Arbitrage takes on the wall street trader compensation model - arguing that the issue is inextricably tied to risk-taking, where the "heads I win; tails you lose" payout paradigm rewards risks taking and places little premium on risk management.
• In an attempt to get its pension back to a solid footing, CalPERS is looking to double down on recent bets as it is considering pouring "billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure. That’s right, he [CalPERS fund manager, Joesph A. Dear] wants to load up on many of the very assets that have been responsible for the fund’s recent plunge." (Fundmastery Blog)
  
• Content is still king. Apple working with record labels to boost digital sales of entire albums by bundling interactive booklets, sleeve notes, etc., with music (Financial Times). Also, the company is planning to offer a tablet-sized computer by Christmas.
• Even videogame makers are now starting to feel the recession, with sales down a record 29% year over year (WSJ). Xbox 360 and Nintendo's Wii sales are down 38%.
• Stocks and corporate bonds are benefiting from the upbeat market mood, with yields on higher-quality company bonds lower - with prices higher (WSJ), as some investors who are not on-board for the "V-shared" recovery are choosing to hedge their bets with corporate bonds over stocks.
• The Relative Strength Index (RSI) has traded 9 days in a row at an extreme RSI(2) reading over 90 (MarketSci). So is this an obvious bearish signal? Maybe not, given the non-normal forces that may be driving the market.
• Has the long awaited Dow Theory bull market signal finally arrived? Apparently so (Investment Postcards).
• Constructing a portfolio wisely and safely by building a macro view (The Pragmatic Capitalist).
• Exactly what are the forces acting on the VIX? VIX and More elaborates.
• A nice summary of links on portable alpha and alpha/beta separation is available at AllAboutAlpha.com.
  
• Finally, Nouriel Roubini believes Ben Bernanke deserves reappointment (Economist's View). Nonetheless, he is still bearish ........ I think. As for Bernanke, it appears that most of the motivation for his moves came from not wanting to be the Fed Chairman presiding over the second great depression, even though it made him angry to bailout the very bankers that made the mess in the first place (WSJ). Yes, it made us angry too. The Pragmatic Capitalist also chimes in on whether or not Bernanke should be reappointed - let us say that the PG is not quite on the same page as Roubini (The Pragmatic Capitalist). Michael Panzner believes that the moves show that we did not learn enough much over the last two years (Financial Armageddon).
  

According to the recent TIM (Trade Ideas Monitor) report, the TIM Sentiment Index (TSI) decreased 0.3% week over week to 51.06, after decreasing 5.3% from 54.03 to 51.19 one week earlier (see last week's post, and previous post and the youDevise website for additional information on the TIM report). The TSI remained close to the neutral 50 value all week. Nonetheless, for the five trading days ending July 23rd, the number of new long ideas as a percentage of new ideas sent to investment managers did increase to 71.74% from 61.37% one week earlier. To date, longs represent 64.23% of ideas in July and 58.98% this year.

As for individual securities in the U.S. and North America, Phillips-Van Heusen (PVH), Darden Restaurants (DRI), and Potash (POT) were stocks recommended as longs by institutional brokers, while Qualcomm (QCOM), Perrigo (PRGO), and Williams-Sonoma (WSM) were recommended as shorts. The consumer discretionary, consumer staples, and energy sectors had long broker sentiment for the week, while information technology, health care, and utilities had short sentiment.

Tadas Viskanta, editor of the excellent blog Abnormal Returns, has put together a nice summary post (Closing the loop) on the new Covestor Investment Management (CVIM) model introduced by Covestor.com. In addition to providing his uniques perspective, additional comments from myself, Erick Schonfeld at TechCrunch, Zack Miller at New Rules of Investing, and Mebane Faber at World Beta are also provided. Check out the post if you are still interested in learning more about the model (Closing the loop).

Below are some links of interest (at least to me), just in case you missed them. A few have already been posted to Twitter.

• Economic calendar for Friday, July 24th (Briefing.com Economic).
• Earnings calendar for Friday, July 24th (Briefing.com Earnings).

• Wake up, we are in a depression, whether we want to admit it or not. So says bears Eric Sprott and and David Franklin (Infectious Greed).
• A little moderation in emerging market indexes, or anything for that matter, might be in order (Random Roger).
• As a trader, sometimes you just need time to recover from a loss (TraderPsyches).
• Some questions and answers on using Bollinger Bands (VIX and More).
• Ten myths regarding the subprime crisis (Clusterstock).
  
• America runs on small business (Carpe Diem).
• 229 billion reasons to squeeze the market (Zero Hedge) - there is a big supply of Treasuries coming to market next week.
  
• No business pickup for UPS in July (Clusterstock). Profit fell 49% to $445 million (WSJ). The company then forecast Q3 earnings below analyst's views. It would seem that the transportation companies would have to show some real pickup in demand before the economy can finally begin recovering, but the recent UPS guidance was not too encouraging. More in the "lower declines" and "some stabilizing" camp as opposed to "new demand" camp. Of course, that did not stop the market rally on Thursday. The job of halting the market was left to Microsoft.
• Bill Miller's Leg Mason Value Trust fund (LMVTX) is up 20% this year through July 21, with 55% of the fund in technology and financial services, both of which he sees as leaders in the next bull market (WSJ). Impressed? Actually, some are getting tired of hearing about Miller's comeback (Clusterstock).
  
• Warren Buffett's option to buy shares of Goldman Sachs has earned Berkshire about $2 billion on paper, or about a 40% return (Bloomberg). Maybe Buffett is not washed up just yet.
  
• Even with the rally, the AAII weekly sentiment survey still has the bears outnumbering the bulls (42.4% to 37.6%) (Bespoke Investment Group).
• On Thursday, someone made an options transaction involving 720,000 options contracts on the SPDR Trust Series 1 (SPY). The options transaction is one of the largest, and represents half the volume traded on the SPDR fund on a daily basis. The investor appears to have entered a one-by-two put spread using December options with strikes of $95 (bought) and $82 (sold twice). Wow. See post, and original WSJ article.
• Did Matt Taibbi cost Goldman Shareholders $800 million by making it a PR nightmare if they were to cancel half of their warrants? (Clusterstock)
• Breadth at an extreme as the 10-day advance/decline lines for the S&P 500 is well into overbought territory (Bespoke Investment Group).
• New correlation index being offered - CBOE S&P 500 Implied Correlation Index (VIX and More, Daily Options Report). The index uses a tracking basket of the 50 largest components of the SPX as measured by market cap.
• Does the semiconductor leader / laggard strategy have a flaw in logic? (MarketSci Blog)
• The deflation story/case told in pictures (Traders Narrative).