Five Things You Need to Know: Hedge Funds Rush to Disassociate From S&P 500, Weirdly Non-Correlated, Savings vs. Investment, Banks Do the Tighten Up, These Numbers Don't Quite Ad Up
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Hedge Funds Rush to Disassociate From S&P 500
Hedge fund correlation to the S&P 500 has fallen significantly since June of last year, according to the latest weekly edition of Merrill Lynch's Hedge Fund Monitor.
- The latest edition of Merrill's Hedge Fund Monitor, written by technical research analyst Mary Ann Bartels and Roxanne Daruwalla, reported that in addition to showing reduced correlation to the S&P 500, hedge fund strategies have also become less correlated between themselves.
- HFM has been tracking hedge fund and S&P 500 correlation closely since the fall of 2005 when diversified hedge funds showed a rolling one-year correlation to the S&P 500 of about 85%.
- Since that time the correlation has fallen slightly, however, to nearly 80% in the second quarter of 2006, and now standing at around 70%.
- And what about short volatility?
- According to HFM, while funds continue to be short volatility (as they have been for most of the past 15 years), the negative correlation was being unwound across virtually all strategies last year.
- Why the reduction in correlation to the S&P 500?
- Well, the answer is simple. In order to compete with other funds for the vast pools of institutional money out there, a hedge fund must show greater diversification and less correlation to the S&P 500, otherwise how can the fees be justified?
- Historically, the average actively-managed mutual fund has had a correlation to the S&P 500 of nearly 85%.
- Interestingly, while hedge funds overall were able to beat the lagging Nasdaq's 9.5% return in 2006, they were beaten handily by the S&P 500's 13.6% return.
2. Weirdly Non-Correlated
Speaking of hedge funds and correlations to the S&P 500, I just happened to notice this weird negative correlation for the fourth quarter between Rick's Cabaret (RICK) and the S&P 500. Why?
- Rick's Cabaret (RICK), we are told, operates upscale adult nightclubs that offer live adult entertainment in New York, New Orleans, Charlotte, Houston, Minneapolis, and other cities, serving primarily businessmen and professionals, including a large number of traders, analysts and money managers in the hedge fund industry.
- Now, take a look at the chart below showing a negative correlation between RICK and the SPX for the fourth quarter.
RICK vs. S&P 500, Q4
- Why? We have a theory.
- Perhaps the combination of normal seasonality (the end-of-year Holiday season featuring more family time and less "business entertaining") and some end-of-year catch-up to the broad market in the fourth quarter of 2006 pressured the stock?
- Fortunately for RICK, January 1 brings a new year, a clean slate and so many potential investor dollars to entertain:
RICK vs. S&P 500, year-to-date
3. Savings vs. Investment
We've covered the negative Personal Savings rate in the U.S. many, many times in Five Things. But not everyone agrees Personal Savings is an important metric.
- An article linked by Minyanville Professor David Miller on the Buzz and Banter yesterday argues that not only is the personal savings rate in the U.S. in-line with the rest of the developed world, but the calculation itself is outdated.
- The Bureau of Economic analysis determines the savings rate by taking income from a single period and subtracting taxes and an estimate of all outlays.
- What is left over the BEA defines as "savings."
- As you know, the savings rate calculated by the BEA has been negative for 21 consecutive months and reached a 74-year low in December.
- Of course, this doesn't mean we have no savings, it simply means we are spending more than we are saving according to the BEA calculation.
- The area of contention over whether Personal Savings is a useful measure revolves around two issues:
1) The BEA does not consider investments in stocks and bonds as savings
2) The Personal Savings rate does not include capital gains, realized or unrealized.
- On the one hand, it seems odd not to include investments in stocks and bonds.
- But we don't think it's odd at all. After all ,savings and investments are not the same thing.
- While most American consider their 401(k) accounts and IRAs to be "savings," and we are routinely exhorted by the financial industry to "save for retirement," the reality is that savings and investment are very different.
- There are many reasons Americans are now conditioned to view common stock ownership as savings, and almost none of them are good.
- The reasons range from Fed policy to the elimination of defined benefits plans with the end result being the death of savings in America, and the complacent view that stock ownership is itself a vehicle for saving rather than a risk venture where the return on investment may potentially but not necessarily exceed alternative investments.
- Investments can involve a loss of capital.
- Savings, by definition, cannot.
- For those two reasons alone, the BEA measurement is absolutely fine.
- In fact, only in the past decade has it been necessary to rationalize away the declining Personal Savings rate as an outdated metric.
- That rationalization is itself the real story here.
- Stop and think about the last couple of times it became popular (necessary?) to rationalize away long-standing metrics - Internet stock valuations and housing price increases.
4. Banks Do the Tighten Up
Speaking of why we might not want to eliminate the word "savings" from the dictionary just yet, more U.S. banks tightened lending standards for home loans in the past three months than in any quarter since the early 1990s, according to a Federal Reserve survey.
- A net 15% of domestic banks tightened standards for approving mortgage applications over the prior three months, the Fed reported in its January quarterly survey of senior loan officers.
- A considerable number of banks said they expect credit quality on home and business loans to deteriorate somewhat this year, the Fed said.
- Nearly 40% of banks said mortgage demand weakened from the previous three months.
- Meanwhile, 33% of banks reported weaker demand for consumer loans.
- Industrial and commercial loan demand was little changed in the past three months, but with more demand of originating from mergers and acquisitions than capital spending needs.
5. These Numbers Don't Quite Ad Up
Here's something that's been puzzling us. Why was General Motors running Super Bowl ads?
- With CBS charging $2.6 million for 30 seconds of commercial time in the Super Bowl (reportedly slightly less for multiple spots) were any shareholders bothered by the fact that General Motors ran not one, not two, but three spots taking up a total of 90 seconds?
GM CEO Rick Wagoner
"I'm telling ya, we're just three Super Bowl ads away from turning this thing around!"
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