Peek Into The Future, How Are Hedge Funds Are Positioned?

10-year note:

Currently net short 398.9k, up 40k.

The Fed for all intents and purposes has been preparing the markets for more liquidity to come.

Since late September last year, SOMA (System Open Market Account) holdings have gone up by $258.1 billion, to $3.81 trillion.Back in April 2017, these holdings peaked at $4.24 trillion, up from under $500 billion pre-2008/2009 financial crisis.

This balance-sheet expansion coincided with three 25-basis-point cuts in the fed funds rate in the second half last year to a range of 150 to 175 basis points.The conventional monetary quiver lacks sufficient arrows to deal with potential weakness in the economy.To quote Jerome Powell, Fed chair, from his Humphrey-Hawkins testimony this week, “Some of the uncertainties around trade have diminished recently, but risks to the outlook remain.”

Powell also made it clear that, should the need be, the Fed will resort to large-scale asset purchases – the like of which was witnessed during QE1/2/3.They are playing the wealth effect card – push up the prices of assets such as equities, and through that, positively impact consumer sentiment/spending and the economy.

Thus far, it has worked.This in and of itself is no guarantee that it will work forever.The nightmare scenario is when the Fed continues to expand its balance sheet and stocks stop responding.

30-year bond:

Currently net short 34.3k, down 29.5k.

Major economic releases next week are as follows.Markets are closed Monday for observance of Presidents Day.

The NAHB housing market index (Feb) and the Treasury International Capital data (December) come out Tuesday.

Home builder sentiment fell a point month-over-month to 75 in January.Last December’s 76 was the highest since 77 in June 1999.

On a net basis in November, foreigners sold $41.8 billion in U.S. equities.This looks bad on the surface, except for the fact that the trend has substantially improved, as last April they were selling $214.6 billion worth – a record.

Wednesday has on tap the PPI (January), housing starts (January) and FOMC minutes (January 28-29 meeting).

In December, both producer prices and core PPI ticked up 0.1 percent m/m.In the 12 months to December, they respectively rose 1.3 percent and 1.5 percent.

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