Best Forex Brokers: Hedge Funds Extend Trends; Housing's Trend Is Ending

by Wang Y. SEM

Best Forex Brokers:Hedge Funds Extend Trends; Housing's Trend Is Ending

During a week when the CEO and CFO of the Bayou Management hedge fund came out of hiding to plead guilty to charges of conspiracy in misrepresenting their hedge fund's performance since 1997, it's only fitting to look at the role that hedge funds play in the markets. Similarly, in a week when sales of existing homes rose to their second-highest level on record and prices zipped up to a record median of $220,000, it's also fitting to look at how much longer this behavior can persist. Bob Prechter addresses both of these hot topics in his recent August 24, 2005, Elliott Wave Theorist.

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Hedge Funds: The Trend Extenders

In 1983, we predicted a mania for stocks, and we have been well aware of its spread to other markets ever since the Elliott Wave Theorist first coined the term, “The Great Asset Mania,” back in 1996.The Elliott Wave Financial Forecast postulates that the hedge funds are a major mechanism through which investors have extended so many trends. People have created and supported the hedge fund industry to express an extremely optimistic social mood.

Why is this particular mechanism special? Because:

hedge fund managers are paid primarily on profits and
they play with other people's money

If a seasoned investor were buying only for his own account, he would never pay 1240 for the S&P, 680 for the Russell 2000, $450 for an ounce of gold, $65 a barrel for oil or $3m for a house with no money down. But novices don't know better, and managers of other people's money don't care.

The only way that the Russell 2000 index could have climbed to new all-time highs while the Dow, S&P and NASDAQ have lagged so substantially is that hedge funds have been targeting that index because other hedge funds are targeting it. It's herding at its most primitive level; there is little rationalized analysis of companies, just the bulling of an index.

Commodity markets are in the same situation. Oil and copper have made new highs while agricultural commodities languish at low prices. Nevertheless, every mania ultimately ends. There is no free lunch, no endless trend.

Real Estate Reaching the End of Its Trend

Property prices in Sydney have fallen 15 percent. The property market in London has turned soft, with eager sellers discounting about 15 percent. One seller called the market there “dismal,” but he has no idea what dismal is. Dismal is when there are no shoppers, and the only way to effect a sale is to offer a price so low that the lone potential buyer you have managed to locate sees it as a can't-lose gift.

U.S. property prices have held up, but the glut of homes on the market is near a record, and supply is finally catching up not only to occupancy demand, which it surpassed some time ago, but also to investor demand.

Meanwhile, Fannie Mae is limping through investigations of impropriety, and the marketplace is running out of bodies to offer full credit, so the credit engine is sputtering. New credit and new debtors are the fuel of all bubbles, and while credit is still freely available, the supply of potential debtors is exhausted.

When I turned professional in 1975, one of my first tasks was updating P&F (point and figure) charts of individual stocks. I was struck by several issues that had gone from about 100 down to 1/8. They were real estate investment trusts (REITs). Today REITs are selling at insanely high prices. Look for these issues to collapse as they face the double whammy of a resuming bear market in stocks and an emerging bear market in real estate.

Lenders are certain of real estate's magical properties of continuous rise. The lending binge has gone on for so long that when it reverses, repossessions will soar. Before the crash is over, the biggest owners of real estate will be banks.

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