Nothing To See Here

Manifesto

The President’s Working Group on Financial Markets (PWG) – A.K.A. the Plunge Protection Team (PPT), depending on your outlook – has released guidelines on regulating hedge funds. Or did they? The strongest language there consists of phrases like “maintain and enhance", "consider the suitability", "commit sufficient resources", and my favorite, demanding they "work together" with regulators and supervisors; so it would appear that the Treasury Department, SEC, and Federal Reserve want to watch hedge funds about as closely as the DoD has Halliburton. With these funds now controlling over $1.2 Trillion in assets, and recent stories like Amaranth Advisors which lost $6 Billion in less than a week, the potential to seriously impact the functioning of markets is clearly there. It seems irresponsible that the Federal Government has backed away from even requiring large funds to register with the SEC, leaving these groups with little public scrutiny.

Interesting in the context of the following facts from the WSJ:

• The New York Stock Exchange said today that margin totaled $285.61 billion in January, up from $275.38 billion in December and passing the previous peak of $278.53 billion. That high was set in March 2000, as the Nasdaq Composite Index hit its apex — and tailed off from there.


• The VIX, commonly known as the “fear index,” is hovering around 10, a low point, suggesting a lot of carefree folks out there these days. This level is often a turning point, a calm before the storm, so to speak.


• The Treasury yield curve inverted months ago, suggesting a recession was on the way. Although it hasn’t happened yet.


• The Dow industrials, transports and utilities all closed at new highs on the same day last week — something that became a routine occurrence in just two years, 1929 and 1986, both preludes to big market falloffs.


• The current rally is now the third longest since 1900 without a 10% correction.

Maybe this time is different.