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Strategies & Market Trends : Classic TA Workplace -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (15122)	9/30/2001 3:20:32 AM
From: UnBelievable	Read Replies (2) \| Respond to of 209892

The Commercial Short Position Shown In The COT Reports Is comprised for the most part by institutional investors who are attempting to hedge market risk, rather than by individuals who are looking to profit from the futures investment directly. An example might be an investment manager who had decided to borrow in the short term to process redemptions with the expectation that they would be able to effect the necessary security liquidations in the future at higher prices. These institutions do not make money by taking positions in the market rather they are compensated for managing other peoples money. Their focus is more on performing the necessary investment transactions in the manner that will be most profitable for them without actually exposing themselves to investment risk. When they make a decision to meet distribution needs by borrowing the money to pay the distribution, and liquidating the necessary securities over a period of time in the future, they have in effect assumed a long position with regard to those securities. By selling futures short they are able to hedge that risk. The exact amount of money which must be invested in futures is determined by risk models which determine given specific assumptions about future market variations the amount of futures exposure that must be secured to ensure that the probability of loss associated with the transaction is with the managers tolerance. When used for hedging the investment in futures must be thought of an expense, much like insurance. The manager expects to have a loss on the futures because they expect to have a gain on the primary transaction, which was the deferral of necessary liquidations. In this most recent situation the vast majority of the firms which are usually inclined to engage in these types of activities determined that the risk of significant future market declines was such that it did not make financial sense for them to engage in the transaction. In effect the cost of the insurance (the short positions they would have had to take on to bring their total exposure down to their risk tolerance) was greater than the expected profit they could make by borrowing to meet immediate liquidation needs and deferring the actual liquidation. To get the liquidity into the system in therefore became necessary for the Fed to make the loans in such a manner that indemnified these borrowers from the risk of significant market declines. Once the risk of market declines was removed by the Fed the Commercials no longer had the need to hedge this risk by maintaining a short position in the futures. The manner in which the Fed provided these assurances to these lenders does not make it possible to determine the extent or duration of these commitments. A fact that will make future interpretation of the COT numbers somewhat less useful than they have been in the past. I think that at least over the next few weeks or months the relative changes in the size of the short position are going to be particularly difficult to interpret. A change from a net short to net long position, however, would probably be well worth noting.