UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to__________________
Commission File Number 0-19511
MORGAN STANLEY SPECTRUM SELECT L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3619290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management Corporation
330 Madison Avenue, 8th Floor
New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant?s telephone number, including area code (212) 905-2700
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No___________
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
of ?accelerated filer and large accelerated filer? in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer___Accelerated filer____Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2007
<caption>
PART I. FINANCIAL INFORMATION
<s> <c>
Item 1. Financial Statements
Statements of Financial Condition as of March 31, 2007
(Unaudited) and December 31, 2006 2
Statements of Operations for the Quarters Ended
March 31, 2007 and 2006 (Unaudited) 3
Statements of Changes in Partners? Capital for the
Quarters Ended March 31, 2007 and 2006 (Unaudited) 4
Statements of Cash Flows for the Quarters Ended
March 31, 2007 and 2006 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6-13
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations 14-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 24-37
Item 4. Controls and Procedures 37-38
Item 4T. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 1A.Risk Factors 39
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 39-40
Item 6. Exhibits 40-41
</table>
<page> <table> PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
<caption>
March 31, December 31,
2007 2006
$ $
(Unaudited)
ASSETS
<s> <c> <c>
Equity in futures interests trading accounts:
Unrestricted cash 444,669,679 472,088,633
Restricted cash 36,454,716 64,801,445
Total cash 481,124,395 536,890,078
Net unrealized gain on open contracts (MS&Co.) 13,801,359 11,039,855
Net unrealized gain (loss) on open contracts (MSIL) (450,804) 921,756
Total net unrealized gain on open contracts 13,350,555 11,961,611
Total Trading Equity 494,474,950 548,851,689
Subscriptions receivable 4,926,569 4,725,710
Interest receivable (Morgan Stanley DW) 1,760,959 1,858,406
Total Assets 501,162,478 555,435,805
LIABILITIES AND PARTNERS? CAPITAL
Liabilities
Redemptions payable 6,762,225 7,988,976
Accrued brokerage fees (Morgan Stanley DW) 2,596,082 2,727,852
Accrued management fees 1,144,564 1,196,492
Total Liabilities 10,502,871 11,913,320
Partners? Capital
Limited Partners (18,324,892.852 and
18,501,387.237 Units, respectively) 485,324,036 537,667,844
General Partner (201,460.769 Units) 5,335,571 5,854,641
Total Partners? Capital 490,659,607 543,522,485
Total Liabilities and Partners? Capital 501,162,478 555,435,805
NET ASSET VALUE PER UNIT 26.48 29.06
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<caption>
For the Quarters Ended March 31,
2007 2006
$ $
<s> <c> <c>
INVESTMENT INCOME
Interest income (Morgan Stanley DW) 5,264,283 4,384,809
EXPENSES
Brokerage fees (Morgan Stanley DW) 8,078,508 8,016,810
Management fees 3,558,181 3,812,789
Total Expenses 11,636,689 11,829,599
NET INVESTMENT LOSS (6,372,406) (7,444,790)
TRADING RESULTS
Trading profit (loss):
Realized (43,051,851) 18,024,678
Net change in unrealized 1,388,944 9,392,866
Total Trading Results (41,662,907) 27,417,544
NET INCOME (LOSS) (48,035,313) 19,972,754
NET INCOME (LOSS) ALLOCATION
Limited Partners (47,516,243) 19,753,668
General Partner (519,070) 219,086
NET INCOME (LOSS) PER UNIT
Limited Partners (2.58) 1.03
General Partner (2.58) 1.03
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Quarters Ended March 31, 2007 and 2006
(Unaudited)
<caption>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
<s> <c> <c> <c> <c>
Partners? Capital,
December 31, 2005 19,420,800.627 527,198,790 5,803,552 533,002,342
Offering of Units 689,035.900 19,337,299 ? 19,337,299
Net Income ? 19,753,668 219,086 19,972,754
Redemptions (1,045,481.946) (29,340,994) ? (29,340,994)
Partners? Capital,
March 31, 2006 19,064,354.581 536,948,763 6,022,638 542,971,401
Partners? Capital,
December 31, 2006 18,702,848.006 537,667,844 5,854,641 543,522,485
Offering of Units 588,365.194 16,541,509 ? 16,541,509
Net Loss ? (47,516,243) (519,070) (48,035,313)
Redemptions (764,859.579) (21,369,074) ? (21,369,074)
Partners? Capital,
March 31, 2007 18,526,353.621 485,324,036 5,335,571 490,659,607
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<caption>
For the Quarters Ended March 31,
2007 2006
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<s> <c> <c>
Net income (loss) (48,035,313) 19,972,754
Noncash item included in net income (loss):
Net change in unrealized (1,388,944) (9,392,866)
(Increase) decrease in operating assets:
Restricted cash 28,346,729 (24,275,865)
Interest receivable (Morgan Stanley DW) 97,447 (199,315)
Decrease in operating liabilities:
Accrued brokerage fees (Morgan Stanley DW) (131,770) (93,011)
Accrued management fees (51,928) (41,283)
Net cash used for operating activities (21,163,779) (14,029,586)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from offering of Units 16,340,650 16,158,055
Cash paid for redemptions of Units (22,595,825) (32,064,622)
Net cash used for financing activities (6,255,175) (15,906,567)
Net decrease in unrestricted cash (27,418,954) (29,936,153)
Unrestricted cash at beginning of period 472,088,633 475,166,952
Unrestricted cash at end of period 444,669,679 445,230,799
<fn>
The accompanying notes are an integral part
of these financial statements.
</table>
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)
The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Morgan Stanley Spectrum Select L.P. (the ?Partnership?). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership?s December 31, 2006 Annual Report
on Form 10-K.
1. Organization
Morgan Stanley Spectrum Select L.P. is a Delaware limited
partnership organized in 1991 to engage primarily in the
speculative trading of futures contracts, options on futures
contracts, and forward contracts on physical commodities and
other commodity interests, including, but not limited to, foreign
currencies, financial instruments, metals, energy, and
agricultural products. The Partnership is one of the Morgan
Stanley Spectrum Series of funds, comprised of the Partnership,
Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum
Global Balanced L.P., Morgan Stanley Spectrum Strategic L.P., and
Morgan Stanley Spectrum Technical L.P.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership?s general partner is Demeter Management
Corporation (?Demeter?). Effective April 1, 2007, Morgan Stanley
DW Inc. (?Morgan Stanley DW?), which previously acted as the non-
clearing broker, was merged into Morgan Stanley & Co.
Incorporated (?MS&Co.?), which has assumed all of the
responsibilities of Morgan Stanley DW. Upon completion of the
merger, MS&Co. has become the Partnership?s principal commodity
broker-dealer and also acts as the counterparty on all trading
of foreign currency forward contracts. In addition, Morgan
Stanley & Co. International Limited (?MSIL?) serves as the
commodity broker for trades on the London Metal Exchange.
Effective April 13, 2007, Morgan Stanley & Co. International
Limited changed its name to Morgan Stanley & Co. International
plc. The commodity brokers prior to April 1, 2007, were Morgan
Stanley DW, MS&Co., and MSIL. Demeter, MS&Co., and MSIL are
wholly-owned subsidiaries of Morgan Stanley. The trading advisors
to the Partnership are EMC Capital Management, Inc. (?EMC?),
Northfield Trading L.P., Rabar Market Research, Inc. (?Rabar?),
Sunrise Capital Management, Inc. (?Sunrise?), and Graham Capital
Management, L.P. (?Graham?) (individually, a ?Trading Advisor?,
or collectively, the ?Trading Advisors?).
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effective February 1, 2007, subscriptions are allocated among the
Trading Advisors as follows: EMC (10%), Rabar (30%), Sunrise
(30%), and Graham (30%); redemptions are allocated as follows:
Rabar (33.33%), Sunrise (33.33%), and Graham (33.33%).
2. Related Party Transactions
The Partnership?s cash is on deposit with Morgan Stanley DW
(through March 31, 2007), MS&Co., and MSIL in futures, forward,
and options trading accounts to meet margin requirements as
needed. Effective April 1, 2007, MS&Co. pays the Partnership
interest income on 80% of the funds on deposit with the commodity
brokers at the month-end at a rate equal to the monthly average of
the 4-week U.S. Treasury bills discount rate during such month.
The Partnership pays brokerage fees to MS&Co. (Morgan Stanley DW,
prior to April 1, 2007). Prior to April 1, 2007, Morgan Stanley
DW paid the Partnership monthly interest income on 80% of the
month?s average daily Net Assets at a rate equal to a prevailing
rate on U.S. Treasury bills.
3. Financial Instruments
The Partnership trades futures contracts, options on futures
contracts, and forward contracts on physical commodities and
other commodity interests, including, but not limited to, foreign
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
currencies, financial instruments, metals, energy, and
agricultural products. Futures and forwards represent contracts
for delayed delivery of an instrument at a specified date and
price. Risk arises from changes in the value of these contracts
and the potential inability of counterparties to perform under
the terms of the contracts. There are numerous factors which may
significantly influence the market value of these contracts,
including interest rate volatility.
The market value of exchange-traded contracts is based on the
settlement price quoted by the exchange on the day with respect
to which market value is being determined. If an exchange-traded
contract could not have been liquidated on such day due to the
operation of daily limits or other rules of the exchange, the
settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The
market value of off-exchange-traded contracts is based on the
fair market value quoted by the counterparty.
The Partnership?s contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
provisions of Statement of Financial Accounting Standards No.
133, ?Accounting for Derivative Instruments and Hedging
Activities? (?SFAS No. 133?). SFAS No. 133 defines a derivative
as a financial instrument or other contract that has all three of
the following characteristics:
1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in
market factors;
3) Terms require or permit net settlement.
Generally, derivatives include futures, forward, swap or options
contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.
The net unrealized gains on open contracts, reported as a
component of ?Equity in futures interests trading accounts? on the
Statements of Financial Condition, and their longest contract
maturities were as follows:
Net Unrealized Gains
on Open Contracts Longest Maturities
Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $
Mar. 31, 2007 8,513,718 4,836,837 13,350,555 Sep. 2008 Jun. 2007
Dec. 31, 2006 10,738,293 1,223,318 11,961,611 Jun. 2008 Mar. 2007
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership has credit risk associated with counterparty non-
performance. As of the date of the financial statements, the
credit risk associated with the instruments in which the
Partnership trades is limited to the amounts reflected in the
Partnership?s Statements of Financial Condition.
The Partnership also has credit risk because Morgn Stanley DW
(through March 31, 2007), MS&Co., and MSIL act as the futures
commission merchants or the counterparties, with respect to most
of the Partnership?s assets. Exchange-traded futures, exchange-
traded forward, and exchange-traded futures-styled options
contracts are marked to market on a daily basis, with variations
in value settled on a daily basis. Morgan Stanley DW (through
March 31, 2007), MS&Co., and MSIL, each as a futures commission
merchant for the Partnership?s exchange-traded futures, exchange-
traded forward, and exchange-traded futures-styled options
contracts, are required, pursuant to regulations of the Commodity
Futures Trading Commission (?CFTC?), to segregate from their own
assets, and for the sole benefit of their commodity customers, all
funds held by them with respect to exchange-traded futures,
exchange-traded forward, and exchange-traded futures-styled
options contracts, including an amount equal to the net unrealized
gains (losses) on all open exchange-traded futures, exchange-
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
traded forward, and exchange-traded futures-styled options
contracts, which funds, in the aggregate, totaled $489,638,113
and $547,628,371 at March 31, 2007, and December 31, 2006,
respectively. With respect to the Partnership?s off-exchange-
traded forward currency contracts, there are no daily
settlements of variation in value, nor is there any requirement
that an amount equal to the net unrealized gains (losses) on such
contracts be segregated. However, the Partnership is required to
meet margin requirements equal to the net unrealized loss on open
forward currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the
cash balance in a custody account held at Morgan Stanley DW for
the benefit of MS&Co. With respect to those off-exchange-traded
forward currency contracts, the Partnership is at risk to the
ability of MS&Co., the sole counterparty on all such contracts, to
perform. The Partnership has a netting agreement with MS&Co. This
agreement, which seeks to reduce both the Partnership?s and
MS&Co.?s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership?s credit
risk in the event of MS&Co.?s bankruptcy or insolvency.
<page> MORGAN STANLEY SPECTRUM STATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
4. New Accounting Developments
In July 2006, the Financial Accounting Standards Board (?FASB?)
issued interpretation No. 48, ?Accounting for Uncertainty in
Income Taxes ? an interpretation of FASB Statement 109? (?FIN
48?). FIN 48 clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position must
meet before being recognized in the financial statements. FIN 48
is effective for the Partnership as of January 1, 2007. Based on
its analysis, management believes that the adoption of FIN 48
will not impact the Partnership?s Financial Statements.
In September 2006, the FASB issued SFAS No. 157, ?Fair Value
Measurements? (?SFAS No. 157?). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS No. 157 is
effective for the Partnership as of January 1, 2008. The impact
to the Partnership?s Financial Statements, if any, is currently
being assessed.
<page> Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with Morgan
Stanley DW (through March 31, 2007), MS&Co., and MSIL as commodity
brokers in separate futures, forward, and options trading accounts
established for each Trading Advisor. Such assets are used as
margin to engage in trading and may be used as margin solely for
the Partnership?s trading. The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the CFTC for investment of customer segregated or
secured funds. Since the Partnership?s sole purpose is to trade
in futures, forwards, and options, it is expected that the
Partnership will continue to own such liquid assets for margin
purposes.
The Partnership?s investment in futures, forwards, and options
may, from time to time, be illiquid. Most U.S. futures exchanges
limit fluctuations in prices during a single day by regulations
referred to as ?daily price fluctuations limits? or ?daily
limits?. Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures or options contract
has increased or decreased by an amount equal to the daily limit,
positions in that futures or options contract can neither be taken
nor liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
<page> trading. These market conditions could prevent the
Partnership from promptly liquidating its futures or options
contracts and result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions. For the periods covered by
this report, illiquidity has not materially affected the
Partnership?s assets.
There are no known material trends, demands, commitments, events,
or uncertainties at the present time that are reasonably likely to
result in the Partnership?s liquidity increasing or decreasing in
any material way.
Capital Resources. The Partnership does not have, nor does it
expect to have, any capital assets. Redemptions, exchanges, and
sales of units of limited partnership interest (?Unit(s)?) in the
future will affect the amount of funds available for investments
in futures, forwards, and options in subsequent periods. It is not
<page> possible to estimate the amount, and therefore the impact,
of future inflows and outflows of Units.
There are no known material trends, favorable or unfavorable,
that would affect, nor any expected material changes to, the
Partnership?s capital resource arrangements at the present time.
Off-Balance Sheet Arrangements and Contractual Obligations. The
Partnership does not have any off-balance sheet arrangements, nor
does it have contractual obligations or commercial commitments to
make future payments that would affect its liquidity or capital
resources.
Results of Operations
General. The Partnership?s results depend on the Trading
Advisors and the ability of each Trading Advisor?s trading
program to take advantage of price movements in the futures,
forward, and options markets. The following presents a summary
of the Partnership?s operations for the three month periods ended
March 31, 2007, and 2006, and a general discussion of its trading
activities during each period. It is important to note, however,
that the Trading Advisors trade in various markets at different
times and that prior activity in a particular market does not
mean that such market will be actively traded by the Trading
Advisors or will be profitable in the future. Consequently, the
results of operations of the Partnership are difficult to discuss
other than in the context of the Trading Advisors? trading <page>
activities on behalf of the Partnership during the period in
question. Past performance is no guarantee of future results.
The Partnership?s results of operations set forth in the
financial statements on pages 2 through 13 of this report are
prepared in accordance with accounting principles generally
accepted in the United States of America, which require the use
of certain accounting policies that affect the amounts reported
in these financial statements, including the following: The
contracts the Partnership trades are accounted for on a trade-
date basis and marked to market on a daily basis. The difference
between their cost and market value is recorded on the Statements
of Operations as ?Net change in unrealized trading profit (loss)?
for open (unrealized) contracts, and recorded as ?Realized
trading profit (loss)? when open positions are closed out. The
sum of these amounts constitutes the Partnership?s trading
results. The market value of a futures contract is the
settlement price on the exchange on which that futures contract
is traded on a particular day. The value of a foreign currency
forward contract is based on the spot rate as of the close of
business. Interest income, as well as management fees, incentive
fees, and brokerage fees expenses of the Partnership are recorded
on an accrual basis.
Demeter believes that, based on the nature of the operations of
the Partnership, no assumptions relating to the application of
<page> critical accounting policies other than those presently
used could reasonably affect reported amounts.
For the Quarter Ended March 31, 2007
The Partnership recorded total trading results including interest
income totaling $(36,398,624) and expenses totaling $11,636,689,
resulting in a net loss of $48,035,313 for the quarter ended
March 31, 2007. The Partnership?s net asset value per Unit
decreased from $29.06 at December 31, 2006, to $26.48 at March
31, 2007.
The most significant trading losses of approximately 2.6% were
recorded within the global stock index sector, primarily during
February and early March, from long positions in U.S., Pacific
Rim, and European stock index futures as prices reversed sharply
lower after a massive sell-off in the global equity markets that
began on February 27, 2007, following comments from former U.S.
Federal Reserve Chairman Alan Greenspan that the U.S. economy
could be due for a recession. Furthermore, concerns that tighter
credit conditions in China and Japan might dampen global growth
first sent Chinese stock markets plunging before the sell-off
spread to other equity markets. In addition, global equity
prices were negatively affected by sub-prime loan delinquency
concerns in the United States. Additional losses of
approximately 1.9% were recorded in the currency sector,
primarily during March, from long positions in the British pound
versus the U.S. dollar as the value of the British pound weakened
<page> amid speculation that the Bank of England would not
continue to increase interest rates in the near-term. Additional
losses were incurred from long positions in the New Zealand
dollar versus the U.S. dollar primarily during January as the
value of the U.S. dollar reversed higher against the New Zealand
dollar after economic data suggested that the U.S. Federal
Reserve would not cut interest rates in the near-term. During
February, short positions in the Swiss franc versus the U.S.
dollar incurred additional losses as the value of the Swiss franc
reversed higher against the U.S. dollar due to speculation of a
narrowing interest-rate differential between Switzerland and the
United States. Short positions in the Canadian dollar versus the
U.S. dollar recorded losses primarily during March as the value
of the Canadian dollar strengthened after government reports
showing job gains and rising exports prompted speculation that
the Bank of Canada would refrain from cutting interest rates this
year. Within the metals markets, losses of approximately 1.4%
were experienced from long positions in silver and gold futures
as prices moved lower during February and March on concerns that
a slowing Chinese economy would reduce demand for precious
metals. Similarly, losses were incurred from long positions in
aluminum futures as prices fell during January and February due
to a decline in global demand and on news of an overabundance in
supply. Losses of approximately 1.1% were recorded in the global
interest rate sector during late February and early March from
short positions in U.S., Australian, and German fixed-income
futures as prices moved higher in a worldwide flight-to-quality
<page> due to the aforementioned sell-off in the global equity
markets. During March, newly established long positions in U.S.
interest rate futures incurred further losses as prices declined
later in the month amid reduced demand for the ?safe-haven? of
fixed-income investments. In addition, U.S. interest rate
futures prices declined after a stronger than expected government
jobs report. Additional losses of approximately 0.8% were
experienced in the agricultural markets from long positions in
coffee futures as prices fell sharply in January on speculation
that retail price increases imposed by large food companies
during the last quarter of 2006 would curb demand in the United
States. Elsewhere in the agricultural complex, losses were
incurred from both short and long positions in cotton futures
primarily during March as prices moved without consistent
direction amid conflicting news regarding supply and demand.
Meanwhile, long positions in corn and soybean futures resulted in
further losses during January and March as prices dropped after
the U.S. announced plans to seek additional sources for
alternative fuels and the U.S. Department of Agriculture?s
Prospective Plantings report showed corn acreage might be up this
year to its highest since 1944. Finally, losses of approximately
0.1% were recorded in the energy markets during March from short
positions in natural gas futures as prices moved higher after the
U.S. Department of Energy reported that natural gas supplies were
down 15% from a year ago. Elsewhere in the energy complex, short
futures positions in gasoline resulted in losses during February
and March as prices moved higher after data indicated higher U.S.
<page> fuel consumption. In addition, prices moved higher amid
rising geopolitical concerns in the Middle East after the United
Nations Security Council voted unanimously to increase sanctions
against Iran. Prices also rose on news that Iran had captured 15
members of the British Royal Navy in the Persian Gulf, adding to
investor worries about the stability of the world?s oil supply in
the region.
For the Quarter Ended March 31, 2006
The Partnership recorded total trading results including interest
income totaling $31,802,353 and expenses totaling $11,829,599,
resulting in net income of $19,972,754 for the quarter ended
March 31, 2006. The Partnership?s net asset value per Unit
increased from $27.45 at December 31, 2005, to $28.48 at March
31, 2006.
The most significant trading gains of approximately 3.2% were
recorded in the global interest rate futures markets, primarily
during March, from short positions in U.S., European, and
Japanese interest rate futures as global bond prices trended
lower amid strength in regional equity markets and investor
sentiment that interest rates in the United States, the European
Union, and Japan would rise. Additional gains of approximately
2.8% were experienced in the metals markets during January and
March from long futures positions in copper, zinc, and aluminum
as prices strengthened amid news of weak supplies, forecasts for
<page> continued buying by China, and acceleration in demand from
Japan, Europe, and the U.S. Elsewhere in the metals markets,
gains were recorded from long futures positions in silver and
gold as precious metals prices moved higher on persistent demand
from foreign central banks. Silver prices were also pressured
higher after news that a silver-backed Exchange Traded Fund would
soon launch and create greater investment interest in the metal.
Within the global stock index futures markets, gains of
approximatly 2.3% were experienced from long positions in
European and Australian stock index futures as global equity
markets trended higher during the quarter on strong corporate
earnings and solid economic data. A portion of the Partnership?s
overall gains for the quarter was offset by losses of
approximatly 2.8% in the currency sector from long U.S. dollar
positions versus the Swiss franc, euro, and Japanese yen as the
value of the U.S. dollar moved lower during January on
expectations that a string of increases in interest rates by the
U.S. Federal Reserve could possible come to an end. Also pushing
the value of the U.S. dollar lower against its rivals was
speculation that China might move to diversify some of its U.S.
dollar based assets into other currencies. Further losses were
experienced during February from short positions in the Japanese
yen relative to the U.S. dollar as the value of the yen increased
on the release of better than expected Japanese machinery orders
data and speculation that the Bank of Japan might move to tighten
monetary policy in Japan. Additional losses during February were
<page> recorded from short positions in the Swiss franc versus
the U.S. dollar as the value of the U.S. dollar weakened amid
investor concern regarding the massive U.S. trade deficit.
Currency losses were also incurred during March from long
positions in the British pound relative to the U.S. dollar as the
value of the pound finished lower after news that Gross Domestic
Product in the United Kingdom for 2005 was weaker than expected.
Smaller losses were experienced during March from short positions
in the euro and the Swiss franc relative to the U.S. dollar as
the value of these European currencies moved higher after the
release of generally positive economic data from the euro-zone
reinforced expectations that European interest rates would
continue to rise. Losses of approximatly 0.6% were experienced in
the energy markets during February from long futures positions in
crude oil and its related products as prices declined after an
announcement by Chinese government authorities that China would
place an emphasis on prospecting alternative energy sources in
the future, reports of larger than expected supplies from the
International Energy Agency, and mild weather in the U.S.
Northeast. Further losses in the energy markets were recorded
during March from short positions in the aforementioned markets
as prices strengthened early in the month on supply fears fueled
by news of geopolitical tensions in Nigeria and Iran.
<page> Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards, and options. The
market-sensitive instruments held by the Partnership are acquired
for speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business activity
of the Partnership.
The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities, factors that result in frequent
changes in the fair value of the Partnership?s open positions,
and consequently in its earnings, whether realized or unrealized,
and cash flow. Gains and losses on open positions of exchange-
traded futures, exchange-traded forward, and exchange-traded
futures-styled options contracts are settled daily through
variation margin. Gains and losses on off-exchange-traded
forward currency contracts are settled upon termination of the
contract. However, the Partnership is required to meet margin
requirements equal to the net unrealized loss on open forward
currency contracts in the Partnership accounts with the <page>
counterparty, which is accomplished by daily maintenance of the
cash balance in a custody account held at Morgan Stanley DW for
the benefit of MS&Co.
The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership typically to be many times the total
capitalization of the Partnership.
The Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership?s
market risk is limited by the uncertainty of its speculative
trading. The Partnership?s speculative trading and use of
leverage may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experiences to date
under the ?Partnership?s Value at Risk in Different Market
Sectors? section and significantly exceed the Value at Risk
(?VaR?) tables disclosed.
<page>
Limited partners will not be liable for losses exceeding the
current net asset value of their investment.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partnership?s
market risk exposures contain ?forward-looking statements? within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions on the basis of mark
to market accounting principles. Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.
The Partnership?s risk exposure in the market sectors traded by
the Trading Advisors is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
value of a trading portfolio. The VaR model takes into account
linear exposures to risk including equity and commodity prices,
<page> interest rates, foreign exchange rates, and correlation
among these variables. The hypothetical changes in portfolio value
are based on daily percentage changes observed in key market
indices or other market factors (?market risk factors?) to which
the portfolio is sensitive. The one-day 99% confidence level of
the Partnership?s VaR corresponds to the negative change in
portfolio value that, based on observed market risk factors, would
have been exceeded once in 100 trading days, or one day in 100.
VaR typically does not represent the worst case outcome.
Demeter uses approximately four years of daily market data (1,000
observations) and re-values its portfolio (using delta-gamma
approximations) for each of the historical market moves that
occurred over this time period. This generates a probability
distribution of daily ?simulated profit and loss? outcomes. The
VaR is the appropriate percentile of this distribution. For
example, the 99% one-day VaR would represent the 10th worst
outcome from Demeter?s simulated profit and loss series.
The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments. They are also not based on exchange
and/or dealer-based maintenance margin requirements.
VaR models, including the Partnership?s, are continually evolving
as trading portfolios become more diverse and modeling techniques
and systems capabilities improve. Please note that the VaR model
<page> is used to numerically quantify market risk for historic
reporting purposes only and is not utilized by either Demeter or
the Trading Advisors in their daily risk management activities.
Please further note that VaR as described above may not be
comparable to similarly-titled measures used by other entities.
The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total Net Assets
by primary market risk category at March 31, 2007, and 2006. At
March 31, 2007 and 2006, the Partnership?s total capitalization
was approximately $491 million and $543 million, respectively.
Primary Market March 31, 2007 March 31, 2006
Risk Category Value at Risk Value at Risk
Currency (1.53)% (0.63)%
Equity (0.62) (1.60)
Interest Rate (0.59) (1.67)
Commodity (0.52) (0.57)
Aggregate Value at Risk (1.93)% (2.96)%
The VaR for a market category represents the one-day downside
risk for the aggregate exposures associated with this market
category. The Aggregate Value at Risk listed above represents
the VaR of the Partnership?s open positions across all the market
categories, and is less than the sum of the VaRs for all such
market categories due to the diversification benefit across asset
classes.
<page>
Because the business of the Partnership is the speculative
trading of futures, forwards, and options, the composition of its
trading portfolio can change significantly over any given time
period, or even within a single trading day. Such changes could
positively or negatively materially impact market risk as
measured by VaR.
The table below supplements the quarter-end VaR set forth above
by presenting the Partnership?s high, low, and average VaR, as a
percentage of total Net Assets for the four quarter-end reporting
periods from April 1, 2006, through March 31, 2007.
Primary Market Risk Category High Low Average
Currency (1.53)% (0.55)% (1.08)%
Equity (1.95) (0.39) (1.11)
Interest Rate (1.70) (0.59) (1.15)
Commodity (0.75) (0.49) (0.60)
Aggregate Value at Risk (2.40)% (1.73)% (1.98)%
Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio?s aggregate market
risk exposure, incorporating a range of varied market risks,
reflect risk reduction due to portfolio diversification or hedging
activities, and can cover a wide range of portfolio assets.
However, VaR risk measures should be viewed in light of the
methodology?s limitations, which include, but may not be limited
to the following:
<page>
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to
current trading positions while future risk depends on future
positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.
In addition, the VaR tables above, as well as the past performance
of the Partnership, give no indication of the Partnership?s
potential ?risk of ruin?.
The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at March 31, 2006, and for the four quarter-end
reporting periods from April 1, 2006, through March 31, 2007. VaR
is not necessarily representative of the Partnership?s historic
risk, nor should it be used to predict the Partnership?s future
financial performance or its ability to manage or monitor risk.
<page> There can be no assurance that the Partnership?s actual
losses on a particular day will not exceed the VaR amounts
indicated above or that such losses will not occur more than once
in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent
are immaterial.
The Partnership also maintains a substantial portion of its
available assets in cash at MS&Co. (Morgan Stanley DW, prior to
April 1, 2007); as of March 31, 2007, such amount is equal to
approximately 92% of the Partnership?s net asset value. A decline
in short-term interest rates would result in a decline in the
Partnership?s cash management income. This cash flow risk is not
considered to be material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-
sensitive instruments, in relation to the Partnership?s Net
Assets.
<page>
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures - constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading Advisors
for managing such exposures, are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership?s risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation, and many other
factors could result in material losses, as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership at March 31, 2007, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.
<page>
Currency. The largest market exposure of the Partnership at
March 31, 2007, was to the currency sector. The Partnership?s
currency market exposure was to exchange rate fluctuations,
primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency
pairs. Interest rate changes, as well as political and general
economic conditions influence these fluctuations. The
Partnership trades a large number of currencies, including cross-
rates ? i.e., positions between two currencies other than the
U.S. dollar. At March 31, 2007, the Partnership?s major
exposures were to euro, Japanese yen, Swiss franc, Norwegian
krone, British pound, and Australian dollar currency crosses, as
well as outright U.S. dollar positions. Outright positions
consist of the U.S. dollar vs. other currencies. These other
currencies include major and minor currencies. Demeter does not
anticipate that the risk associated with the Partnership?s
currency trades will change significantly in the future.
Equity. The second largest market exposure of the Partnership at
March 31, 2007, was to the global stock index sector, primarily
to equity price risk in the G-7 countries. The G-7 countries
consist of France, the U.S., Britain, Germany, Japan, Italy, and
Canada. The stock index futures traded by the Partnership are by
law limited to futures on broadly-based indices. The Partner-
ship?s primary market exposures were to the DAX (Germany), TOPIX
(Japan), NIKKEI 225 (Japan), TAIWAN (Taiwan), NASDAQ 100 (U.S.),
<page> S&P/MIB (Italy), SPI 200 (Australia), Canadian S&P 60
(Canada), S&P 500 (U.S.), and Hang Seng (China) stock indices.
The Partnership is typically exposed to the risk of adverse price
trends or static markets in the European, U.S., Chinese,
Japanese, and Australian stock indices. Static markets would not
cause major market changes, but would make it difficult for the
Partnership to avoid trendless price movements, resulting in
numerous small losses.
Interest Rate. The third largest market exposure of the
Partership at March 31, 2007, was to the global interest rate
sector. Exposure was primarily spread across European, U.S.,
Japanese, Australian, and Canadian interest rate sectors.
Interest rate movements directly affect the price of the
sovereign bond futures positions held by the Partnership and
indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country, as well as
relative interest rate movements between countries, materially
impact the Partnership?s profitability. The Partnership?s
interest rate exposure is generally to interest rate fluctuations
in the U.S. and the other G-7 countries? interest rates.
However, the Partnership also takes futures positions in the
government debt of smaller countries ? e.g., Australia. Demeter
anticipates that the G-7 countries? interest rates and Australian
interest rates will remain the primary interest rate exposure of
the Partnership for the foreseeable future. The speculative
futures positions held by the Partnership may range from short to
<page> long-term instruments. Consequently, changes in short,
medium, or long-term interest rates may have an effect on the
Partnership.
Commodity.
Metals. At March 31, 2007, the Partnership had market
exposure in the metals sector. The Partnership's metals
exposure was to fluctuations in the price of precious
metals, such as gold and platinum and base metals, such as
aluminum, nickel, copper, zinc, lead, and tin. Economic
forces, supply and demand inequalities, geopolitical
factors, and market expectations influence price movements
in these markets. The Trading Advisors utilize their
trading system(s) to take positions when market
opportunities develop, and Demeter anticipates that the
Partnership will continue to do so.
Soft Commodities and Agriculturals. At March 31, 2007, the
Partnership had market exposure to the markets that comprise
these sectors. Most of the exposure was to the soybean oil,
cocoa, live cattle, sugar, soybeans, coffee, cotton, lean
hogs, feeder cattle, wheat, lumber, and orange juice
markets. Supply and demand inequalities, severe weather
disruptions, and market expectations affect price movements
in these markets.
<page>
Energy. At March 31, 2007, the Partnership had market
exposure to the energy sector. The Partnership?s energy
exposure was shared primarily by futures contracts in crude
oil and its related products, and natural gas. Price
movements in these markets result from geopolitical
developments, particularly in the Middle East, as well as
weather patterns and other economic fundamentals.
Significant profits and losses, which have been experienced
in the past, are expected to continue to be experienced in
the future. Natural gas has exhibited volatility in prices
resulting from weather patterns and supply and demand
factors and will likely continue in this choppy pattern.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at March 31, 2007:
Foreign Currency Balances. The Partnership?s primary foreign
currency balances at March 31, 2007, were in Hong Kong
dollars, euros, Japanese yen, British pounds, Canadian
dollars, Australian dollars, Swiss francs, and Norwegian
kroner. The Partnership controls the non-trading risk of
foreign currency balances by regularly converting them back
into U.S. dollars upon liquidation of their respective
positions.
<page>
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership?s open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership?s assets
among different Trading Advisors in a multi-advisor Partnership,
each of whose strategies focus on different market sectors and
trading approaches, and by monitoring the performance of the
Trading Advisors daily. In addition, the Trading Advisors
establish diversification guidelines, often set in terms of the
maximum margin to be committed to positions in any one market
sector or market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash. Cash is the only Partnership investment
directed by Demeter, rather than the Trading Advisors.
Item 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly
report, the President and Chief Financial Officer of
Demeter, the general partner of the Partnership, have
evaluated the effectiveness of the Partnership?s
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act), and have
judged such controls and procedures to be effective.
<page>
(b) There have been no material changes during the period
covered by this quarterly report in the Partnership?s
internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) or in
other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Item 4T. CONTROLS AND PROCEDURES
Not applicable.
<page> PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
There have been no material changes from the risk factors
previously referenced in the Partnership?s Report on Form 10-K for
the fiscal year ended December 31, 2006.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
<table>
SEC
Registration Statement on Form S-1 Units Registered Effective Date File Number
<s> <c> <c> <c>
Initial Registration 60,000.000 May 17, 1991 33-39667
Supplemental Closing 10,000.000 August 23, 1991 33-42380
Additional Registration 75,000.000 August 31, 1993 33-65072
Additional Registration 60,000.000 October 27, 1997 333-01918
Pre-conversion 205,000.000
Units sold through 10/17/97 146,139.671
Units unsold through 10/17/97 58,860.329
(Ultimately de-registered)
</table>
Commencing with the April 30, 1998 monthly closing and with
becoming a member of the Spectrum Series of funds, each previously
outstanding Unit of the Partnership was converted into 100 Units,
totaling 14,613,967.100 (pre-conversion).
Additional Registration 1,500,000.000 May 11, 1998 333-47829
Additional Registration 5,000,000.000 January 21, 1999 333-68773
Additional Registration 4,500,000.000 February 28, 2000 333-90467
Additional Registration 1,000,000.000 April 30, 2002 333-84656
Additional Registration 7,000,000.000 April 28, 2003 333-104005
Additional Registration 23,000,000.000 April 28, 2004 333-113393
Total Units Registered 42,000,000.000
Units sold post conversion 27,798,902.887
Units unsold through 3/31/07 14,201,097.113
Total Units sold
through 3/31/07 42,412,869.987
(pre and post conversion)
<page> The managing underwriter for the Partnership is MS&Co.
(Morgan Stanley DW, prior to April 1, 2007).
Units are continuously sold at monthly closings at a purchase
price equal to 100% of the net asset value per Unit as of the
close of business on the last day of each month.
The aggregate price of the Units sold through March 31, 2007, was
$948,849,303.
Since no expenses are chargeable against proceeds, 100% of the
proceeds of the offering have been applied to the working capital
of the Partnership for use in accordance with the ?Use of
Proceeds? section of the prospectus included as part of the above
referenced Registration Statements.
Item 6. EXHIBITS
31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
<page>
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
<page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Morgan Stanley Spectrum Select L.P.
(Registrant)
By: Demeter Management Corporation
(General Partner)
May 15, 2007 By:/s/ Lee Horwitz
Lee Horwitz
Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Regisrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.