SYDNEY, Nov 16 (Reuters) – U.S. demand for commodities is starting to show signs of recovery, commodities funds manager BlackRock Investment said on Monday.

Evy Hambro, who manages two of the world’s largest commodities funds, BlackRock World Mining Fund and Gold & General Fund, told reporters during a visit to Australia that commodities markets generally were also normalising.

Seems like my first financial blog run has come to an end rather quickly.

Thanks guys,

-SA

We will only be providing a closing commentary for today as Summer Analyst HQs is actively trying to manage risk and realize our gains.

Dollar Drop Gives U.S. Exporters Biggest Gains: Chart of Day
By Lynn Thomasson

Nov. 10 (Bloomberg) — Shares of U.S. companies getting a majority of their sales overseas are doing the best this year on speculation the dollar’s decline to an almost 15-month low is boosting earnings.

The CHART OF THE DAY shows that shares of Standard & Poor’s 500 Index companies generating more than half of their revenue abroad have beaten those doing business only in the U.S. by 27 percentage points, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York-based research firm. The falling dollar makes American goods more competitive overseas and boosts revenue when foreign currencies are brought back to the U.S.

“Lately, I’ve been really focusing on the multinationals,” said Stefanie Yeager, a fund manager at State College, Pennsylvania-based Vantage Investment Advisors LLC, which oversees $450 million. “The U.S. is just slowly coming out of the recession, so companies that are purely domestic still have their problems. The multinationals are really benefiting from the exchange rate.”

S&P 500 companies getting more than 50 percent of revenue from outside the U.S. have rallied 48 percent this year, according to Bespoke. At the same time, those with only U.S.- based sales rose 21 percent. The Dollar Index, a six-currency gauge of the greenback’s strength, is down 7.7 percent in 2009.

American equities and the U.S. currency are moving in the opposite direction more than ever before. The so-called correlation coefficient using 120 days of data between the Dollar Index and the S&P 500 is minus 0.44, near the level of minus 0.45 reached on July 7. The reading four months ago was the lowest in the currency gauge’s 42-year history.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

A few disclosures – we bought Barclays early on, but did not hold it through the earnings announcement. There were a few reasons for this, but one particular one was the technical trend change in the overall market. We found favorable conditions to sell the stock we bought months back – totally separate from our fundamental view. At Summer Analyst HQs, we buy with fundamentals and sell by looking at technicals.

With that said, because there’s still an uptrend in the market, if we were to be holding onto Barclays still, we’d be looking to sell our holdings over several days to get the most favorable price.

Good night.

-SA

Update: There’s only one strong reason why we’re changing this to a sell – apart from the mediocre results: “Overall, we’re comfortable with the 3rd quarter.” Investing in financial companies, you have to take much of their financial statements with a grain of salt. Their business revolves around financial statements, and they’ve been in the business long enough to know what can be massaged into looking good even when things are mediocre or bad – and I believe they have every right to do that as confidence is the single most important thing for these institutions. I can go out there and work on a dividend discount model with a lot of assumptions, or listen carefully to what they have to say about their own results. Quite frankly, I think the management made a mistake by saying “overall, we’re comfortable with the 3rd quarter.” Comfortable, to me, means they’ve used a masseuse.

It’s extremely critical to examine the tone and language of management reports when determining whether or not it’s a financial firm you want to put your dollar in.

Other indulgence

In equities, Moody’s came out and said AIG has some fight left in them. I personally think it’s still a pretty uncompetitive franchise. Stocks advanced +3.90% from yesterday’s close. Senator Dodd came out with a “draft bill” that obviously needs a lot of work. I have a hard time listening to politicians, but the gist of it is more regulation on derivative products. Credit rating agency stocks didn’t fair too well to the draft bill as the bill apparently allows folks to sue credit rating agencies for “wrong” ratings. It’s a long bill, and a more detailed media coverage will probably come later on tomorrow. Lastly, American Express came out and said that worldwide card spending rose +3% in October.

On the fixed income front, Treasuries sold $25bn 10-yr notes, and it was just as exciting as equities’ action. (Yield 3.470% vs. Exp 3.475%; Bid-to-cover 2.81 vs. Avg. 2.61; Indirects 47.3% vs. Avg. 36.2% (Prev. 47.4%)). The quote I got from traders is that current 10-yrs widened +1bps and 30-yrs +2bps. There were several new corporate issuance, one of them being GE coming out with a 5-yr benchmark. We didn’t get pricing data – more on that later. CDS spreads for financial names are mostly unchanged.

Closing remarks
Today’s closing commentary is short – reflective of the dull trading today. Summer Analyst HQ is expecting a lot more exciting trading tomorrow or Thursday. There’s no clear signal in either direction, and we might end up with a even narrower pivot range tomorrow. Best guess for tomorrow is a narrow opening range and a small rally up towards the middle of the trading hour. Closing will probably be within +/- 3 points of the middle of the day.

See you tomorrow.

-SA

Market statistic updated as data becomes available. We’re opening our doors a little late today due to family reasons. I’ll give you some color on Barclays operating results soon. In terms of trading today, the best I expect to get out of today’s session is a Budda belly upwards. A few new corporate issues today. We’ll update you on the spreads later in the afternoon.

Market News

• Deal to Buy Sun Meets Opposition From EU
  EU probably made the right call in my opinion
• Fed’s Lockhart Says Commercial Real Estate May Weaken Recovery
• HSBC Profit Climbs as Barclays Reports Decline on Bad Loans
• Hedge Funds to Top $2 Trillion in 2010?
• Billionaire Fisher Sees S&P 500 Above 1,300 as Economy Recovers
• Asian Stocks Rise on Export Data; Pound Falls on Rating Concern
• Cisco Sells $5 Billion of Debt in 5-, 10-, 30-Year Maturities
• Treasuries selling $25bn 10-yr notes today – more update on this later

Credit Markets

• Libor Today: 0.27250 (+0)
  Libor Yesterday: 0.27250
• T-note (2-yr): 0.84% (-1bps)
  T-note (3-yr): 1.39% (-2bps)
  T-note (5-yr): 2.27% (-2bps)
  T-note (7-yr): 2.97% (-3bps)
  T-note (10-yr): 3.46% (-3bps)

Commodities and currency

• Crude: $79.57 (+0.18%)
• Nat Gas: $4.477 (-4.13%)
• Gold: $1101.30 (-0.01%)
• Silver: $17.38 (-1.05%)
• USD/JPY: 89.85/89.87
  EUR/USD: 1.4983/1.4985
  USD/CAD: 1.0531/1.0535
  USD/CHF: 1.0081/1.0084
  GBP/USD: 1.6716/1.6719

E-mini S&P 500 Futures

• Daily Pivot (High): 1088.42
  Daily Pivot (Low): 1078.42
  Daily Pivot Range Today: 10.00 (+5.87)
  Daily Pivot action: BULLISH

• Three-day rolling pivot (High): 1083.00
  Three-day rolling pivot (Low): 1065.50
  Three-day rolling pivot range: 17.50 (+10.08)
  Three-day rolling pivot action: BULLISH

• Open-15min Max: 1092.25
  Open-15min Min: 1087.75
  

• Open-1hr Max: 1094.50
  Open-1hr Min: 1087.75
  

Other indulgence

• Korean Navies on Sea Border Exchange Fire
• D.C. Sniper Set to Be Executed
  

There were a flurry of M&A news. Deal volume pick-up is probably a trend going forward into the year-end, and I am still bullish with strong financial names with capital markets activity. I would watch closely for 4Q 2009 Bloomberg’s league table release to see if there were any strong changes in the standing, even though we all know that the league table ranking is rather arbitrary and meaningless. In terms of private equity/LBO, friends from financial sponsors inform us that even though add-on acquisition is the theme going forward for that sector, things are still treading lightly.

On the fixed income front, busy traders/syndicates/capital markets analyst all tell me spreads tightening all across the board in emerging markets, and U.S. high-yield spreads are going lower. There were some new issuance today and one of the biggest was Cisco. Cisco came out with 5, 10, and 30 years – sizing of $500mm, $2.5bn, $2.0bn – rumored to be priced at T+67, T+100, T+130 respectively. I haven’t personally confirmed this. Treasury sales of $40bn 3-yrs went well. (Yield 1.404% vs. Exp. 1.419%; Bid-to-cover 3.33 vs. Avg. 2.82 (Prev. 2.76); Indirects 68.5% vs. Avg. 52.77% (Prev. 48.97%)). Again, active capital markets activity as seen in Dealogic suggest a strong net revenue for many of the major financial names. I continue to be strongly bullish with Barclays, and we’ll get more color on their perfomrnace in 3Q 2009 in tomorrow’s conference call.

Nothing surprising in currencies. There’s continued weakness in the dollar. My personal front on this is that there is nothing wrong with a weakening dollar as it will help U.S. exports and bring some balance back to the U.S. as a lot of Asian countries, especially Korea, enjoyed a strong dollar against their local currency in the past quarter. I think the Fed probably just want to control the speed at which the dollar weakens. Speaking of Asian markets, there were some fears of the weakening dollar hurting corporate earnings for major retail names, but equities have shrugged it off suggesting a strong bull trend.

Closing remarks
We’re most likely going to head for another run up tomorrow. I enjoy getting into the guessing game, and my guess is going to be that S&P 500 will have a run up around 1100, retract a little bit, but would either settle around 1100 or power through it by the end of the session. Daily pivot have narrowed a few ticks, and three-day rolling pivot is moving upwards as well. There’s a good potential that tomorrow might also be a trending day – but more on that at around 10:00AM tomorrow after we see some action in U.S. equities.

I’d imagine further tightening in the credit spreads – I haven’t quite followed the credit markets today, so I can’t give you a good guesstimate, but I’d imagine 5bps tightening across the board in financial names won’t be a stretch.

Finally, the dollar will probably continue to weaken and gold continue to rise. There’s a high probability that we’ll see a strong price action in both the commodities and currency market in the next two days. I would watch very closely for technical signals. On that note, I’d like to close by presenting something interesting about Gold vs. S&P 500.

See you tomorrow.

-SA

Market News

• Fannie May Write Down $5.2 Billion in Tax Credits
• Google Strikes $750 Million Deal for AdMob
  Flurry of M&A news Today it seems
• Mortgage-Bond Prices Tumble After Almost Three Months of Gains
• US Auctions $40 Billion in 3-Year Notes at High Yield of 1.404%, Bid-to-Cover of 3.33
• Treasuries Little Changed as Stocks Rise, U.S. Prepares Sales
  Treasuries were little changed as the U.S. prepared to sell $81 billion of 3-, 10- and 30-year debt this week while signs of economic recovery boosted investors’ appetite for higher-yielding assets. The U.S. begins this week’s sales today with a record $40 billion offering of three-year notes. Stocks and commodities rallied and the dollar plunged after the Group of 20 nations agreed to maintain measures to boost economic growth and remained silent on the U.S. currency’s weakness. Gold climbed to a record in New York and London
• Hedge Funds Slipped in October
• Kraft Makes $16.3 Billion Hostile Bid for Cadbury
• Flaw in US Data Overstates Growth, Productivity
• Kraft Bid for Cadbury Is Likely to Go Hostile
  Kraft Foods Inc. is expected on Monday to officially launch a hostile bid for Cadbury PLC valued at roughly £10 billion ($16.59 billion), setting in motion a tussle for control of the famed British confectionary company
• GE, Comcast Agree on NBC Universal Valuation
• Axa Asia Pacific Rejects $10 Billion AMP, Axa SA Bid
  Aussie benchmark index is also up +1.8% (3:35AM EST)
  Hang Seng Index up +1.73% (3:35AM EST)
  Nikkei Index is also up +0.2%; I believe it was in the negative territory when markets opened
• Northrop to Sell Consulting Unit in $1.65 Billion L.B.O.
• Japan’s Bonds Decline as Stocks Gain
  Yields Climb to Highest Since June  Japan’s bonds fell, sending 10-year yields to the highest level in more than four months, as Asian stocks advanced on signs the global economy is recovering; I also want to note that USD/JPY is trading @ 90.10/90.12
• Asia Spreads to Narrow on Falling Defaults, Credit Suisse Says
  Note: General sentiment I’m getting from HK debt market participants are positive; Samurai bond market for foreign issuers is expected to open early 2010(?)
• Moody’s Raises China Outlook to Positive From Stable
  China probably has the best tool in fighting inflation – currency appreciation – and I can only imagine investor appetite increasing for this particular country
• Oil Rises as Hurricane Ida Disrupts Output
• Euro Rises Versus Yen, Dollar Amid Signs Economy Is Recovering
• China’s October Passenger-Car Sales Rise on Stimulus
• Gold, oil, and dollar price action will be closely watched
• “On Monday, the Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices for October will probably be released. This survey was available for the FOMC meeting last week, and tight lending standards and weak loan demand is probably one of the reasons the FOMC expects economic activity ‘to remain weak for a time’”
  More available at Calculated Risk

Credit Markets

• Libor Today:
  Libor Yesterday:
• T-note (2-yr): 0.85% (+1bps)
  T-note (3-yr): 1.36% (+0)
  T-note (5-yr): 2.30%
  T-note (7-yr): 3.01% (+1bps)
  T-note (10-yr): 3.51% (+1bps)
  
• Swaps (2-yr): 34.5 (+0)
  Swaps (5-yr): 36.5 (+0)
  Swaps (10-yr): 15.6 (+0)
  Swaps (30-yr): -11 (+0)

Commodities and currency

• Crude: $78.80 (+1.77%)
• Nat Gas: $4.623 (+0.028%)
• Gold: $1106.80 (+1.01%)
• Silver: $17.70 (+1.87%)
• USD/JPY: 90.10/90.12
  EUR/USD: 1.4964/1.4966
  USD/CAD: 1.0649/1.0653
  USD/CHF: 1.0092/1.0095
  GBP/USD: 1.6772/1.6775

E-mini S&P 500 Futures

• Daily Pivot (High): 1065.13
  Daily Pivot (Low): 1061.00
  Daily Pivot Range Today: 4.13 (-2.62)
  Daily Pivot Range Yesterday: 6.75
  Daily Pivot action: BULLISH

• Three-day rolling pivot (High): 1062.79
  Three-day rolling pivot (Low): 1055.38
  Three-day rolling pivot range: 7.42 (-4.75)
  Three-day rolling pivot action: 12.17

• Open-15min Max: 1078.00
  Open-15min Min: 1074.00
  

• Open-1hr Max: 1081.75
  Open-1hr Min: 1074.00
  

Dallas equities (Open/Close – % chg)

• S&P 500: 1,072.31/
  DJIA: 10,020.62/
  Nasdaq: 2,128.46/
• S&P 500 Financial Index: 192.45/
  C: 4.14/
  BAC: 15.29/
  JPM: 43.93/
  GS: 173.68/
  MS: 32.86/
  CS: 57.35/
  BCS: 23.07/
  UBS: 17.02/
  AFL: 42.87/
  IVZ: 23.25/
  BX: 15.23/
  V: 79.86/
  AXP: 37.67/

Other indulgence

• Raw Video: Soccer Player Throws Fist, Pulls Hair (YouTube video)
  “University of New Mexico junior defender Elizabeth Lambert has been suspended indefinitely from the women’s soccer team after her rough play during a match against BYU in the semifinals of the Mountain West Conference tournament. (Nov. 6)” – AP
  

Before I dive into some of the problems that concern me, here’s why I started viewing ETFs in a negative light. Couple months back – back when I was a heavy smoker – I went out for a smoking break from all the monkey work I was doing. I saw two senior-level folks from wealth management unit talking about recommending a buy on SKF in order to hedge one of their clients long-biased exposure in financial names.

SKF is supposed to be a 2X leveraged bear fund of S&P 500 Financial Index. It suffers from all the problems of a leveraged ETF. Over a period of time, it loses its touch with the underlying index that it’s suppose to track due to the inherent flaw in trying to track the index in a leveraged position. But what really shocked me was that seniors from wealth management at a highly respected bulge bracket bank were recommending their clients that they should be buying up leveraged ETFs that are best fit for day traders and scalpers!

Leveraged ETFs
This is the simplest concept to grasp. Leveraged ETFs are inherently flawed in the sense that it is subject to compounding risk. Let’s take a look at the prospectus of SDS – ProShares’ Ultrashort on S&P 500

Correlation and Compounding Risk — A number of factors may affect the Fund’s ability to achieve a high degree of correlation with its benchmark, and there can be no guarantee that the Fund will achieve a high degree of correlation. Failure to achieve a high degree of correlationmay prevent the Fund from achieving its investment objective. The risk of the Fund not achieving its daily investment objective will be more acute when the Index has an extreme one-day move approaching 50%. In addition, as a result of compounding, because the Fund has a single day investment objective, the Fund’s performance for periods greater than one day is likely to be either greater than or less than the index performance times the stated multiple in the Fund objective, before accounting for fees and fund expenses.

In simpler words, let’s say we start a 2X Leveraged ETF today for the Widget Index. The Widget Index starts at 100 for Today. There was a 10% increase in the Widget Index the next day, a 10% decrease in the Widget Index the next day, and a 10% increase two days after. The Widget Index would’ve gone from 100 to 110 to 99 to 108.9. This yields a 8.9% return.  “Theoretically” – or what you wanted for the 2X Leveraged ETF to do was to yield twice that amount – 17.8%. But here’s what actually happens due to compounding risk. It goes from 100 to 120 to 96 to 115.2 – only yielding 15.2%. Step back and think about this for a second if you don’t see why it didn’t yield the theoretical amount that it advertised. Over time, the value of a leveraged ETF goes to 0, and you can see a it in a simple graphical form.

Here you see the S&P 500 in orange, UltraShort in blue, and Ultra in red. None of the leveraged ETFs are tracking what it’s suppose to track.

Bond ETFs and other exotic markets
Let’s get right into the prospectus on this one, and give you an explanation as to the potential harm that these instruments can do.

PASSIVE STRATEGY/INDEX RISK: The Fund is managed with a passive investment strategy, attempting to track the performance of an unmanaged index of securities. This differs from an actively managed fund, which typically seeks to outperform a benchmark index. As a result, the Fund may hold constituent securities of the Index regardless of the current or projected performance of a specific security or a particular industry or market sector. Maintaining investments in securities regardless of market conditions or the performance of individual securities could cause the Fund’s return to be lower than if the Fund employed an active strategy.

INDEX TRACKING RISK: While the Adviser seeks to track the performance of the Index as closely as possible (i.e., achieve a high degree of correlation with the Index), the Fund’s return may not match or achieve a high degree of correlation with the return of the Index due to operating expenses, transaction costs, cash flows and operational inefficiencies. For example, the Adviser anticipates that, under normal market conditions, it may take approximately five business days for additions and deletions to the Index to be reflected in the portfolio composition of the Fund.

FIXED INCOME INVESTING RISK: An investment in the Fund involves risks similar to those of investing in any fund of fixed income securities, including the following: the risk of loss in portfolio value due to market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or inability of the Fund to sell securities at an advantageous price; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates.

Ignoring the first one for now, essentially, the other two most important risks says that a) the ETF might not even be doing what it’s suppose to be doing, and b) fixed income market is not going to be accommodating of any large sell-off or buy whenever the fund might need to – which brings us back to risk #1. ETF is surely NOT a passive investing strategy! Risk #3 clearly states that through the “management” of this ETF – or the attempt to track a index “passively” – there’s a high probability that it will influence the market that it tries merely to track!

This is one of the biggest problems with exotic ETFs that try to track a narrow segment of the fixed income market. The debt market holds characteristics of its own, and trying to apply an equity-approach to investing in the market is just not going to work. The players are different. Many bonds are bought up by insurance companies to match their portfolio and hold on to it until it matures – providing no liquidity. There is no exchange traded futures or options market for segments of the credit market that these ETFs attempt to track, further limiting the tools that the ETF managers could use to better match the performance to the underlying index. To a more math oriented minds out there, here’s a more technical explanation to one of the ETFs based on volatility that I thought was absolutely ridiculous for anyone to buy when they could go out in the futures and options market to better hedge their portfolio against volatility.

Finally, ETFs that track a segment of emerging markets also poses problems of its own similar to fixed income products. Large inflow/outflow of money into these ETFs could potentially distort the comparatively small and illiquid underlying emerging market.

Conclusions
I believe that ETF is a lazy man’s way of investing. I’m not talking about the purpose of the instrument – “passive” investment. I’m referring to the fact that ETFs allow people who don’t know about fixed income and derivative products (futures, forwards, options, swaps, etc.) to engage in unfamiliar markets like a hoard of common stock investors. It is misused by investors and professionals who should be actively managing/hedging their risk or the risk of their client’s portfolio. It’s troubling when investment professionals are suggesting SKFs as a hedge against their client’s portfolio of stocks.

I would stay away from ETFs. Especially with the large inflow of investors piling onto ETFs, I fear that ETFs are changing from a “passive” follower of its underlying index to an “active” participant, creating a small bubble and volatility into emerging markets and other narrow segments that otherwise was doing fine.

Finally – something I tell all my clients – read the prospectus and understand what you’re buying. 99% of the time, the prospectus lists all the problems. It’s your job to understand the risks.