September was a headline grabbing month for investors.

  • Treasuries strengthened
  • Housing wilted further
  • Stocks strengthened
  • Commodities (including oil and gold) weakened
  • Some notable hedge funds had remarkable trouble

The financial market’s resilience bodes well for domestic equity and fixed income markets.

Treasury prices continued their rally, bringing benchmark yields to six month lows. The market has been buoyed by investor sentiment that the Federal Reserve’s two-year tightening cycle is over because of a deceleration in economic growth and inflation. The housing slump also deepened as the supply of unsold homes has swelled; an unfavorably large dark mass of unsold homes being pulled off the market is also growing. With low growth and low inflation, the Fed has little reason to raise interest rates and will cut rates in 2007.

Dow nears all time high; S&P 500 is strong, but still 200 points away from its March 2000 high; and the NASDAQ is half its former self. With strong domestic employment, a strong dollar, and no recession in site, equity markets have recovered from their recent summer lows. An increase in risk aversion following protests in Hungary, the coup in Thailand, and claims of corruption leading up to the presidential elections in Brazil have also helped propel relatively safer US stocks. Equity markets will continue to do well through 2007.

Commodities and commodity funds are notably down from their lofty levels earlier in the year as bets in oil, gas, and metals have been reeled in. Notable exceptions are some of the agricultural commodities such as wheat and corn which are up and poised for a strong October. Commodities must be viewed within their sectors – agriculture, precious metals, oil, natural resources – different forces will drive their performance over the short and long term.

Amaranth, Pirate and Vega all grabbed negative publicity for hedge funds. Amaranth Advisors, a one time quickly expanding $9 billion multi-strategy hedge fund made huge headlines when it lost over $5 billion this month in it’s over allocation to the natural-gas and energy sector; it is currently in the process of closing shop. Pirate Capital, a fast growing $1.7 billion hedge fund faces SEC investigation into improper notification of sales, has stopped accepting new money, and lost four of its top analyst/traders. Steep trading losses at Vega Asset Management, down 11% last month from adverse interest rate investments have lead to investor withdrawals, cutting assets to as low as $1 billion, from $6.7 billion in June of last year. The positive upshot from all the negative news has been the resiliency of the financial markets in the face of high profile losses.

Michael Ashley Schulman, CFA
Hollencrest Capital Management