Hedge Funds See Gold Supply Deficit

At an informal gathering of hedge fund traders last night, the mood was decidedly gloomy. I noted yesterday that many hedge funds had a horrific May: 1) most were net long going into May, and 2) many had been short volatility. Volatility, as we know, exploded in May, forcing many firms to cover their short positions.

Not only that, traders seemed to have been unprepared for the dollar's rebound, another side-effect of the European debt crisis. That's the issue: the lack of transparency on the European front...traders made it clear they did not fully understand what's happening in Europe, or how far the contagion will trickle through.

Other comments from traders:

1) company comments for the second quarter have been pretty good.

2) several made it clear they had switched their emphasis from U.S. small caps to large caps, due to the higher quality.

3) an active discussion on gold, rare among stock pickers. Noted that sovereign investors coming back to looking at gold as a good reserve asset...now seeing a supply deficit. (Gold futures prices now)

Still, for traders with a fundamental bent, who pride themselves on picking the right stocks, it is once again a frustrating time. "Why bother with due diligence when the macro environment just blows us out?" one trader said.


1) McDonald's reported a 3.4 percent rise in May U.S. same-store sales, but that was less than the 4.3 percent gain expected by the Street. However, the weakness at home was offset by strength overseas. May comps rose 3.8 percent in Asia and jumped 5.7 percent in Europe - as both gains were greater than expected.

Although the fast food company says currency fluctuations will have a negative effect on full-year earnings, it will likely not have a significant effect on its Q2 earnings.

2) Talbots is up 2 percent after Q1 earnings more than doubled analyst estimates ($0.38 vs. $0.16 consensus). Same-store sales rose 2.5 percent and fewer markdowns helped margins jump by more than 12 percentage points to 44 percent. In fact, the women's apparel retailer said that full-priced selling rose 21 percent.

With strong Q1 results, guidance for the full-year is currently ahead of estimates ($0.75-$0.83 vs. $0.73 consensus). However, it may be difficult for the momentum to continue in the near term. Q2 guidance of $0.00-$0.05 falls mostly below consensus of $0.05, while sales are seen growing in the low single digits, below estimates of 5.8 percent growth.

3) Dollar General rises 3 percent after reporting better-than-expected earnings ($0.42 vs. $0.34 consensus). Q1 comps grew a strong 6.7 percent due to rising traffic and solid sales of food and seasonal products.

The discounter raises full-year earnings guidance to $1.62-$1.69 vs. $1.63 consensus and predicts sales growth of 8 percent-10 percent, inline with estimates for 9.8 percent growth.

4) Goldman downgrading deepwater drillers (thanks), saying the current six month moratorium on deepwater drilling could be extended to 12 months, and that rig rates are likely going down as 20 percent of global capacity is freed.

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