Wednesday, June 11, 2008

Saut: “The Big W?!”

From Jeff Saut of Raymond James: Paraphrasing comments by Ken Dupre a particularly bright portfolio manager at the Muhlenkamp organization:

The two most important market trends I see today:

1) Banks and brokerages are being forced to de-lever as they bring their SPE (Special Purpose Entities) on to the B/S (balance sheet):

  • Increased margin requirements are forcing hedge funds to de-lever.
  • De-leveraging will lead to a decrease in consumer, corporate and commercial real estate credit.

This will cause decreased spending for consumers, poor credit businesses and commercial real estate.

2) Legislation:

  • CNBC talked about legislation adding margin requirements to CDSs (Credit Default Swaps, a $45 trillion world market). Many in the commodities market have been using some form of CDS instead of commodities futures because there currently are little to no margin requirements. If rules for CDSs are changed, it would force a lot of selling of commodity CDSs.
  • There are also possible legislative limitations on commodity trading, which would produce similar or add to CDS requirements.
  • It is clear to me that the increase in asset allocation (money flow) to commodities by pensions and the public has been a major contributor to the driving of higher oil and other commodity prices. And if commodity buying dries up (prices looking awfully high), there should be one strong down draft.

Note: The Big W in the title refers to an earlier part of Mr. Saut's article discussing potential shapes of the economic decline and recovery.

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