Are Hedge Funds a Good Deal?

Seeking Alpha has a nice post looking at hedge fund returns. If you are interested in the sector or curious about how to think about returns across asset classes I recommend it.

Rising Japanese Bond Yields

From Bloomberg:

Japan's 10-year government bonds fell as yields near a 14-month low deterred investors from buying amid signs the world's second-largest economy is growing.

A government report on May 30 will probably show Japan's industrial production gained in April, according to a Bloomberg News survey. The economy in the first quarter expanded at more than twice the rate forecast by economists.

Hard to see why this trend wouldn't continue. To change it I think you would need to see a hard landing in China.

Marc Faber on Currencies, Commodities

From the Bloomberg:

Once the US economy deteriorates, the Fed "will go back to the old medicine, which is essentially to print money and the dollar will weaken again," Faber said in an interview with Bloomberg News yesterday. "Compared with the euro, the Asian currencies are very, very inexpensive."
...
``The foreign exchange market will anticipate this easing beforehand'' resulting in a drop in the dollar, said Faber, adding that he was a ``reluctant'' holder of dollars.

Some investors and traders disagree. Fifty-nine percent of the 54 strategists, investors and traders surveyed globally on May 20 said the dollar is poised for its longest winning streak against the euro since 2000 on expectations the U.S. currency's three-year bear market has ended.
...
Faber is also betting on gold because it has become cheaper compared with commodities such as crude oil.

Today, one ounce of gold, trading at $417.60, is worth about eight barrels of oil, according to Faber. In 1998, when oil fell to less than $11 per barrel, gold was trading at about $285 an ounce. That's equal to about 26 barrels of oil per ounce of gold.

``You should be long gold and short oil,'' Faber said. Commodity markets ``aren't particularly attractive.''

Hard to disagree with any of that. I would not hold dollars right now - even "reluctantly".

The EUR/JPY chart I put up just before the strong U.S. retail sales numbers still seems very relevant.

Reading the Market Bounce

From the FT:

Are investors risk-seeking or becoming more risk-averse? The recent rally in equity markets suggests the former; the fall in Treasury bond yields and the widening of credit spreads suggests the latter.

I am not sure I would read too much into the equity bounce. Stocks got held underwater for several weeks before staging this rally. Markets never move in a straight line and it is really the new highs and lows that have meaning.

Certainly with the mixed economic data it doesn't hurt to keep an open mind but I am not sure a rally reflects risk-seeking so much as relief.

If Toll Brothers can make new highs I would take it as a sign that any bear bets have to wait.

South Korea Intervenes

Yes, they did say yesterday that they were done.

Details from the FT:

The Bank of Korea on Thursday backtracked on its comments that it did not plan to intervene further in the foreign exchange markets, after precipitating a sharp fall in the US dollar overnight.

Currency traders said it appeared that the central bank in fact bought dollar-denominated assets on Thursday morning, less than 24 hours after Park Seung, the governor, told the Financial Times that he did not "anticipate" doing so.

Baffled about how this would happen. It is not that difficult to give an interview and repeat stock phrases. Probably doesn't mean much over the short-run as traders will just be left ignoring all comments. In the long-run the loss of credibility could really limit the bank's options.

I've got to wonder if it is not some sort of bureaucratic foul-up, either on the intervention or the statement. Seems like somebody needs to lose a job over it.

* Update 10:20 - Brad Setser's thoughts:

What is going on? It sure seems like the Bank of Korea (the central bank) and the Ministry of Finance (if not the entire government) are in somewhat different places. The Finance Ministry is worried about any slowdown in growth, and Korea's export growth seems to be slowing. This policy dispute just played out in a very public way.

An Inflation Hawk

Capital Spectator sounds more hawkish than I am:

Nonetheless, the preference for seeing as inflation as yesterday's worry suddenly finds new popularity. It must be stated too that this optimism is built in no small degree on the house of energy and the expectation that the price rally in oil is now behind us.

Definitely good for a read. I am more of a slowing-growth-due-to-rising-risk-premiums dove but even if that proves correct oil prices can still cause inflation problems this fall or next year based on increased emerging market demand.

Tim Duy Weighs In

From Economist's View:

Why do I keep harping on the necessity for a significant slowing in growth before the Fed changes course? Just look at yesterday's comments by Fed Governor Donald Kohn, speaking to the Australian Business Economists: "... if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace." And "The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run." And, if that wasn't clear enough, "[W]e have not yet finished this task." These are remarkably candid remarks, and imply a high degree of confidence in the continuance of existing policy. The recent bearish feelings on Wall Street are clearly not receiving much validation in the inner circles of the Fed.

In reading these thoughts, I can't help but think about the FOMC's policy shift in January of 2001. Following the flow of statements from Dec 19th, to January 3rd, to January 31st the commitee shifts from "everything is fine, there is nothing to see here" (my flippant summary) to a call "for a rapid and forceful response of monetary policy" (their words this time). I bring this up to show how quickly the Fed is willing to change its mind when the data hits them with a 2x4.

At this point signalling an end to the hikes could relaunch the commodity rally (dollar fall) and bring about inflation but if we arrive at the June meeting with oil in the low 40's it seems to me the risks are tipping towards slower growth. The Fed doesn't know any better than anyone else if April's market moves are just volatility or a trend change so they lean towards maintaining the status quo. No harm no foul if they get it wrong in the statements leading up to the next meeting. Kohn can just change his mind.

Oil in the low 40's and credit spreads wider than today's levels, which seems very likely, and I expect the Fed will be done in June. A lot can happen in a month and a half though.

South Korea Says "No Mas!"

From the FT:

South Korea's central bank will not intervene any further in foreign exchange markets, the governor of the Bank of Korea said on Wednesday in comments likely to unsettle financial markets.

"I believe that we now have sufficient reserves to secure our sovereign credibility, so I do not anticipate increasing the amount of foreign reserves further," Park Seung told the Financial Times. South Korea's foreign currency reserves stand at $206bn the fourth largest in the world.

Mr Park said: "We now need to take more consideration of profitability, and I think we're at a stage where we need to manage our reserves in a more useful way."

This will be harder to shrug off than Norway's sales.

Greenspan Staying?

Calculated risk picks up the news that Greenspan may stay a few months longer than expected. Not sure I see the logic in that but I guess I should be used to that.

Equities, Bonds, and Inflation

I imagine we are making near term highs in the equity markets. Maybe slightly above here over the next 4 days and then a pullback. Maybe to 36.20 in the QQQQ. I am chucking out some of my longs with plans to kick the rest out tomorrow. Maybe we are into a topping process that leads to some good long term shorts but I would say it takes a couple of weeks and will be staying flat on equities and watching.

I am going to start building a long bond short in here. Going to go slow as it seems like the dollar might need to top out to create any real weakness.

I don't see this mornings inflation number as a problem and generally just see it lagging the PPI top. I don't see how that top can get taken out without a massive reversal in commodities. Those charts are disaster zones and probably need to base for 2 months. If I am wrong and that rally relaunches I would reconsider my view that inflation fears peaked in March and are headed lower.