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Minyan Mailbag: Market Forces

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

John,

This may hardly be news but thought I'd pass this along. I had a chat yesterday at a firm that nurses a pretty large number of hedge funds.

The gist when discussion came around to ETFs was this: The short interest, this contact claimed at least, at the firm was almost all hedges.

This means everyone is long, but taking on very large non-speculative short positions.

As I just opined to Todd, perhaps this is in part 'mystery solved' as to the absence of rallies and the 'compression' he is speaking of. Is it possible that the hedgies themselves in taking on both increasing exposure and hedges have caused the very absence of a rally they seemed dependent on?

That is, if the community is big enough, and all are acting in the same manner [which is not irrational per se] where would the unhedged long liquidity [or short for that matter] come from? Would this be enough to cause the noise trading we seem to be seeing?

Minyan Foo

Minyan Foo,

This is what I described in my analysis the other day of the large and persistant short interest figures: They have become systemic and have very little relevance to sentiment.

Although the underlying psychology of markets changes little over time, the structure of the market does. Hedge funds are part of that.

Another part of that, where I continue to argue with some of the brightest market students, is my belief that markets are being "controlled" to a larger degree than ever by direct central bank involvement. This includes the equity markets in the U.S. (we know that the Japanese government has consistently intervened in their equity markets for over a decade).

The anecdotal evidence is overwhelming in my opinion, from spikes in the money supply to spikes in the tick data at the most critical of times.

This "intervention" merely has a cumulative effect once market forces over-take this manipulation.

Regards,
Prof. Succo

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