News&Notes: Hedge Fund Losses, Nov. 10th Fed Auction, Foreclosure Update

Hedge funds lose $100 bln in October - Times Online
Times Online reports as much as $100 bln was wiped off the value of hedge fund assets last month as investors rushed to withdraw their capital and the worst markets in living memory blew a giant hole in performance. Investors redeemed about $60 bln of funds in October, while see-sawing market conditions accounted for the remaining $40 bln fall, according to EurekaHedge, the Singapore based industry research firm. The drop in assets under management means that, worldwide, hedge funds probably manage about $1.6 trln on behalf of wealthy individual and professional institutional investors. This is down from a peak last year of about $2 trln at the top of the hedge fund boom and comes amid predictions that a rash of funds will collapse before the end of the year.

RCM Comment: The above story singlehandedly explains the market collapse in October. Remember that $100 bln does not even include the Mutual Fund industry. It does not include the money taken out of the money-market funds or savings accounts in October. Do not believe what you hear on TV or read in the papers about US$ strength being a sign of world wide belief in the safety of the U.S.. Strength in the US$ is a short-term phenomenon that is purely a function of redemption and repatriation, something we have repeatedly written about in this blog. The above story simply gives you an idea of the magnitude of the situation. When this unwinding phase ends, we should witness a rather abrupt and swift reversion back to fundamental reality. Which is to say, a decline in the value of the US$ and a recovery in hard asset prices led by gold and silver.

Trim Tabs - Massive Selling of Equity Funds Resumes: U.S. Equity Funds Lose $17.8 Billion and Global Equity Funds Lose $9.6 Billion on First Seven Days of November. Staggering $151.8 Billion Pulled Out of Equity Funds since Start of September.

Trim Tabs - Speculative traders seem to be growing concerned that the U.S. will resort to the printing press. The net position of speculative traders on U.S. dollar index futures fell to zero on November 4, down sharply from a peak of 2.3 million contracts on July 29. Note that speculative traders turned bullish on dollar index futures right before the dollar rally began this summer.

On November 10, 2008, the Federal Reserve conducted an auction of $150 billion in 17-day credit through its Term Auction Facility. This was a forward auction designed to provide term funding over year-end--the awarded loans will settle on December 22, 2008. Less than 10% of the available credit was drawn down. Why? Because when cash becomes competitive with short-term credit in terms of return (that is, cash yields zero, short-term credit costs and yields zero) then there is no reason to take risk; you're better off with the cash. Ben pointed his liquidity gun at the market, pulled the trigger, and got...... CLICK. (Courtesy of The Market Ticker blog)

RCM Comment: Banks did not take up the latest attempt of the Fed to lend. The next step for the Fed is "quantitative easing" or printing money and flooding the system. During this phase foreigners should reach the conclusion that the US$ is destined to enter a serious decline and begin unloading U.S.Treasury debt. When the US$ breaks, gold & silver should take off and not look back.

Foreclosures up 25%: RealtyTrac - Reuters
Reuters reports U.S. foreclosure activity in Oct rose 25% from a year earlier, although filings in California fell by double-digit percentage points for the second consecutive month due to a state law slowing the foreclosure process, according to a monthly report by RealtyTrac. Foreclosure filings -- default notices, auction sales notices and bank repossessions -- rose by 5% from Sept to 279,561 in Oct, according to RealtyTrac. That means one in every 452 U.S. housing units received a foreclosure filing in Oct, the firm said in its report released on Thursday. The California law, which requires lenders to contact homeowners and explore options to avoid foreclosure before initiating the process, took effect in early Sept and drove the state's foreclosure activity rates down, at a pace of 31.6% from Aug to Sept and 18% from Sept to Oct. But in Sept, the California law helped drive the national foreclosure rate down, something that did not happen in Oct. "Foreclosure activity in other places rose significantly enough to offset the drop in California," said RealtyTrac Senior Vice President Rick Sharga.

RCM Comment: We will not be anywhere near the end of this crisis until we address the housing market. This story illustrates the problem is getting worse not better. In fact, the numbers would have been worse than 25% foreclosures had California not manipulated the process.