February 2, 2008

We finished 2007 with a slight profit of just over 1%.  However, we got off to a good start in the new year, with equities up almost 15% in January.  The markets were erratic last year, with profits accumulating gradually, only to evaporate in a matter of days late February and August and to a lesser extent at the end of November. 

Although futures markets have become more correlated over the years, the markets last year were in virtual lockstep with the US stock market (either positively or negatively).  This is due to the spread of systems trading (now called quantitative finance) through the hedge fund and money management industries.  As with the CTA industry, natural selection assures that over time trend-following strategies will come to dominate, with the dominant players increasingly using similar trading models.  

The recent collapse in stock markets worldwide has provided temporary relief by breaking down some of these tight correlations.  While grains and precious metals have continued to rally strongly and petroleum has held near record levels, the stock and bond markets are pointing toward recession.  At some point these opposing trends will reconcile, but in the meantime we can enjoy a bit of cover.  This situation is reflected in our current ratio of 54% longs (with interest rates counted as opposite) accompanied by positions in 35 of the 40 markets we follow.  It is unusual to see this level of balance coincide with a high level of participation.  However, several markets are currently overextended, particularly the grains and US interest rates, so some giveback of recent gains is anticipated.

Sincerely,

Bill Dreiss, President
Dreiss Research Corporation

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS