HEDGEfolios stock performance for 2007 year-to-date (through 02/28/07 close) was up 3.36%.

Over the same time period, the S&P 500 index was down - 0.79%.

At the end of February, the HEDGEfolios universe consisted of 3,685 stocks.

Commentary: Prior to the market selloff on 2/27/07, HEDGEfolios performance was slightly better than the index at 2.80%. Then the power of a market neutral hedging strategy showed its worth when the rest of the market was taking a hit. From Monday’s open until the 2/28/07 close, the HEDGEfolios universe actually showed gains of 0.5%. It has been painful to average 55% DOWN signals since mid-December, but I am extremely happy with how well HEDGEfolios held up under a stressful trading environment.

Past results:

• 2006, HEDGEfolios performance was +25.54% vs. +13.62% for the S&P 500 index
• 2005, HEDGEfolios performance was +19.99% vs. +  3.00% for the S&P 500 index
• 2004, HEDGEfolios performance was +31.19% vs. +  9.00% for the S&P 500 index

Disclaimer: Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to HEDGEfolios. These performance figures have not been audited or verified by an outside party and are NOT in compliance with the CFA’s AIMR Performance Presentation Standards. They don’t net out any transaction costs such as commissions or management fees and are not a total return calculation as I do not include dividend yields or any compounding factor. These performance figures cover a hypothetical portfolio of the entire HEDGEfolios stock universe with an equal weighting of each security. The calculation is simply the cumulative total of all gains and losses from the signals during the period in question.

Yesterday, England’s Prince Charles suggested that McDonald’s (MCD) fast food should be banned to help improve people’s diets. According to press reports - he asked a nutritionist at the Imperial College London Diabetes Center in Abu Dhabi, “Have you got anywhere with McDonald’s? Have you tried getting it banned? That’s the key.” Personally, I don’t dislike the royal, but I don’t care for pseudo-politicians who determine which foods should be banned. By the way, he didn’t single out the UK burger chain named Wimpy but let’s just assume he was not picking on the bigger American target. However, there might have been a show of respect for other royalty by not suggesting a ban on Burger King or Dairy Queen. I respect Prince Charles, his advocacy of organic food and healthy diets to reduce illnesses like diabetes but this was an odd comment. I guess we won’t be seeing Ronald McDonald getting knighted by King Charles any time soon.

You can view David Roche’s interview on Bloomberg Professional. I had hoped it would appear on their website for those of you that are not fortunate enough to have a Bloomberg terminal. Keep checking there as it might show up later.

Here’s the info:

David Roche Sees Yen Carry Trade as `Biggest’ Risk to Stocks
2007-02-28 03:50 (New York)

Feb. 28 (Bloomberg) — David Roche, president of Independent Strategy, an economic and financial consulting firm, talks with Bloomberg’s Catherine Yang in Hong Kong about the selloff in global equity markets, the risk posed to stocks by the yen carry trade, the impact of measures by China’s government to control growth on the country’s economy and financial markets, and Roche’s investment strategy. (Source: Bloomberg)

• 00:00 Role of yen carry trade in global stock drop
• 02:38 “Very conservative” investment strategy
• 03:16 Risk of falling U.S. corporate profit margins
• 04:18 Fed policy; yen carry trade risk to stocks
• 05:35 Emerging-market bonds: “completely mispriced”
• 06:58 Investment in yen, Japan’s economic recovery
• 08:26 Steps by China’s government to control growth
• 10:15 China stock market: “a total bubble”

Many bulls are blaming a lot of yesterday’s problem on the Dow’s computer glitch. That’s so ridiculous I won’t even bother to shoot apart those assertions. Barry Ritholtz did a fantastic job on his site so I’ll just link to that and leave it up to you to decide.  I was also impressed with Ticker Sense and their reconstruction of what the index probably-shoulda-coulda-woulda looked like and you can evaluate that here.  The bulls may want to cry foul that the market would have stabilized if not for the glitch but there is no evidence for that. The bears may want to say it would have gotten worse if the trades had been reported properly prior to the glitch but there is no evidence for that either. We trade on the information we have at that moment whether it is accurate or not. It’s unfortunate that the selling was so heavy that the massively sophisticated computers could not handle the calculations and it’s critical that the exchanges learn how to improve on this situation. Just don’t bitch about the glitch!

Fed Chairman Bernanke has done a fantastic job championing the Goldilocks economy and his past appearances have gone a long way to extend the bull run. Today, he has another chance to come to the rescue and the timing could not be better for the bulls. It isn’t guaranteed that we will head higher on his words, but it’s a good bet.   The Dems have been waiting for the opportunity to bad mouth the markets and the economy so this should be political grandstanding at its finest worst.  I am looking forward to hearing how far he is willing to go when he inevitably will have to discuss Alan Greenspan’s recent comments about a recession. Whenever his past testimony has been interrupted by a reference to the “maestro”, he seemed really uncomfortable but respectful. Today will not be so easy to avoid criticizing Greenspan so he’s likely to take some high road respecting his predecessor but arguing his own case. That’s what he’s supposed to do and I expect the market to respond favorably to it.

China markets held up well last night and as a result, there is a relief reflex coming on today’s open.  Meanwhile, the rest of Asia declined about 2.5 to 3.5% and Europe is still struggling with followthrough losses around 1%.  Birinyi’s take is that past drops were followed by weaker opens and improvement throughout the day.  In this case, it looks like we will get a bounce on the open and the rest of the day will be up to investors.  I know the bulls would be thrilled to get all of yesterday’s  “one-day correction” back in one shot, but I doubt it.   We don’t get “do overs” and if investors did not learn something from yesterday, we are truly in a state of denial that is consistent with manias.   As I wrote last week, I don’t feel the market is grossly overvalued and yet, the lowering of growth rates should not be ignored.  China intends to lower theirs and more importantly, ours is being lowered by market forces.  Today’s release of 4th quarter GDP was revised lower to 2.2%.  Corporate earnings growth declined in the most recent quarter and 2007 is looking at even lower numbers.  Hopefully, yesterday called attention to some of these issues.

On tv and in print, commentators and bloggers have referred to today’s market action as “panic selling.” I know I don’t sound as dramatic as a purveyor of “blood on the street”, but when I look at the chart I see an orderly and consistent downward slope. Forget the data error on the Dow quote around 3:00 and the rest of the day was smooth selling. It was certainly painful, but it didn’t look panicked to me. Whenever we have a selloff, there is a great rush to define it, explain it, justify it, spin it, etc in any way that gives hope to the bullish case. But there is a danger in this optimism and while it may feel good to try to be a good cheerleader, I’ll leave that to others.

My concern on the long side is avoiding losses right now, not making new profits. Without a doubt, today provided opportunities to buy some cheaper shares but what is the hurry? I often say “there are always stocks to buy” and that will be true when there is some clarity about an end to short term selling pressure. Today we had a simultaneous decline in buying power and an increase in selling pressure. Panic selling comes in when there is an absence of buying power and a desire to sell at any price - I didn’t feel that today. Bulls are out there trying to tell you that the market is oversold (no kidding) but once again, “oversold” does not mean sold out. The idea that we can go from overbought to oversold in one day is ludicrous. If you follow Lowry’s research you know that 90% Downside Days are worthy of analysis and they often presage market reversals. However, if you read through their work, you’ll also find that 90% Downside Days are often multiple events and are no guarantee that the market will have a reversal rally immediately afterwards. The market will stabilize but I have no idea when and if you hear someone else throwing around terms like panic selling, 90% days and one-day corrections, please watch out.

Bloomberg just interviewed David Roche of Independent Strategy during their Asian market coverage. Maybe it was the lack of any effort to put an American spin on things or to fit the mold of sensationalized financial media, but I loved his appearance. He was refreshingly blunt and analyzed the global markets and economic factors in ways that were sadly lacking during US coverage of today’s fiasco. It’s likely that most American investors missed the appearance so I am going to ask Bloomberg to rerun pieces of it tomorrow or put some video on their site. No promises - but I’ll let you know if they make it happen. Regardless, it’s worth paying attention to anything David has to say.

If you agree with the Detroit crowd and Europeans who want to pressure Japan into strengthening their currency, pay attention to what happened today. A rapid unwinding of the Yen carry trade will whack this market. If you want China to rapidly unpeg the Yuan, get a clue. Today was a hint of what can happen to the US with small changes in foreign markets. Yes, today was a small change in China (in my opinion.) The big changes came from China’s measures to satisfy US protectionists policymakers over the past few weeks. Listen to John Rutledge, he is extremely clued in to what is happening. I had hoped that Secretary Paulson would be able to keep the politicians out of currency markets, but I fear that is going to be tough. I’ll keep this short - you will not immediately (or ever) save or create US jobs by messing around with exchange rates. You WILL, however, create rapid wealth loss. Today was a sample of what political meddling will do. I am not saying that currency protectionism caused today’s selloff, but I do believe a similar or worse fate will be in store for us if we persist with politicians trying to dictate exchange rates.

It is pretty rare to hear booing at the close, but I guess it was appropriate. I don’t think the traditional clapping and cheers on the bell were from bears, but more a relief that the day is over. I’ll be spending some time going over the market internals tonight because it hasn’t been this devastating since 9-11. Down versus Up volume, decliners versus advancers, etc. will be worth studying.

I am booing today as well. But I am booing at financial media and commentators that are busy saying stupid stuff. Many of these guys have been silent for months about the risks in this market and now they are giving advice on how to handle today’s selloff!?! Others are still spewing their happy horseshit like nothing happened and want you to rush out and buy stocks tomorrow. Listen to yourself and please ignore stupid people trying to sound smart.

Huge amounts of capital have flowed out of US equities and into foreign stocks. That happened for the last several weeks and months, not just today. So I really doubt that China and emerging markets had a one-day flu and that tomorrow will be back to normal. My guess is that a lot of US investors are questioning their recent decisions to chase returns in international equities with mutual funds and ETFs. If they decide to change their mind, it will get much uglier.

I’ll be watching Asian markets until I cannot take it anymore tonight. Chinese investors are mostly retail (not institutional) and they do not have experience with a market going down so I’ll be tuning in to see how they handle the pressure. It’s possible that the Chinese government might intervene in some way but China is not the only market to worry about.