November 24, 2009


1) S&P 500 -0.3% after the EU close - closing +1.4% at 1106. US equities spurred by global strength, an unexpected surge in Existing Home Sales and some dovish Fedspeak, albeit on light volumes, NASDAQ and NYSE volumes are tracking -20% below 30-day averages. Telecom Services (+2.6%) outperforming. Consumer Discretionary (+0.9%) and Retail (+0.9%) underperforming.
2) Quarterly Hedge Fund Trend Monitor - net exposure has increased to 40%, highest since 4Q07 - hedge funds long/overweight Materials, Tech, Consumer Discretionary - underweight Financials & Industrials. David Kostin: (i) This report focuses on hedge fund positions at the start of 4Q and the meaningful changes from the previous quarter. The report is based on an analysis of 684 hedge funds with $604 billion of long stock-specific equity assets and an estimated $363 billion of short positions. (ii) Hedge funds net exposure climbed to 40% in 3Q, from 31% in 2Q09 and 17% in 3Q08, the highest since 4Q07. During 3Q, hedge fund long portfolios increased by 21% and short assets rose by 5%. The equity market appreciated 16% during the quarter, suggesting that hedge fund net exposure increased as a result of active equity buying as well as short covering. (iii) As of September 30, hedge funds owned 3.8% of the Russell 3000, up from 3.6% last quarter and 2.8% in 4Q 2008. Hedge fund ownership of small caps is more pronounced, totaling 7.0% of the Russell 2000, up from 5.8% as of 4Q 2008. (iv) From a sector point of view, hedge funds have got the largest net exposure to Tech (21% of total net exposure), Healthcare (14%) and Consumer Discretionary (13%), and the smallest net exposure to Utilities (2%), Consumer Staples (6%) and Industrials (6%). From a market-relative point of view, hedge funds are net overweight Materials (560 bp), Consumer Discretionary (320 bp) and Telecom Services (290 bp), and net underweight Financials (-500 bp), Industrials (-440 bp) and Consumer Staples (-360 bp). (v) Our hedge fund VIP list (Bloomberg: GSTHHVIP) consists of stocks that appear most frequently among the top ten holdings within hedge fund portfolios (see first attachment, p. 7, Exhibit 9). This basket lagged the S&P 500 by 1,147 bp during 4Q 2008 (-41% vs. -30%). Since then, the VIP basket performance has reversed, outperforming the S&P 500 by 1,368 bp year-to-date (39% vs. 26%). (vi) Our “most concentrated” hedge fund basket (Bloomberg: GSTHHFHI) consists of the 20 most concentrated stocks in terms of the share of market cap owned in aggregate by hedge funds (see first attachment, p. 9, Exhibit 11). This basket outperformed the market by 713 bp in 3Q 2009 (+23% vs. +16%) and 4,744 bp YTD (+73% vs. +26%). Since November 2008, when hedge fund redemption pressures began subsiding, our basket of “High Concentration” stocks has outperformed the market by 7,773 bp (+129% vs. +51%).
3) Large increase in existing home sales in October - but largely due to deadline for the expiration of the homebuyer tax credit. Existing home sales increased +10.1% mom in October (+23.5% yoy) vs consensus +2.3%. Sales of existing homes were bound to increase as the deadline for the expiration of the homebuyer tax credit approached. Although the homebuyer credit has subsequently been extended, we expect home sales to give back some of the extraordinary increases posted in recent months -- almost 20% in the past two months alone and almost 30% since May. The surge in sales, combined with an unusual drop in number of units on the market, cut the months supply of unsold units on the market to 7 months in October from 8 in September.
4) Small gain in Euroland Flash PMI - but still upside risk to our 4Q GDP growth forecast. The Euroland Flash Manufacturing PMI increased slightly to 51.0 in November from 50.7 in October, consensus was for 51.2. The PMI data are now consistent with GDP rising by about 0.5%qoq in Q4 -- an upside risk to our forecast of +0.2%.
5) Spot iron ore price into China have recouped August/September losses and are now printing new 2009 highs - but largely driven by freight costs. Seaborne spot iron ore prices into China have recouped all of the losses that occurred during the August/September sell-off and are now trading just above the previous 2009 peak (see second attachment, p. 1, top-right chart). We estimate that higher Capesize freight costs account for ~70% of the rise in CFR values into China since late September. If we strip out freight, the implied spot FOB price ex-WA is still well below levels seen in early August.

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