UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
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 33-22864
ML FUTURES INVESTMENTS L.P.
---------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 36-3590615
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Princeton Corporate Campus
800 Scudders Mill Road - Section 2G
Plainsboro, New Jersey 08536
----------------------------
(Address of principal executive offices)
(Zip Code)
609-282-6996
----------------------------------------------
(Registrant's telephone number, including area code)
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___
---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ML FUTURES INVESTMENTS L.P.
---------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
September 30, December 31,
1999 1998
------------- ------------
ASSETS
- ------
Investment $ 17,923,533 $ 21,027,263
Receivable from investment 275,119 116,083
------------- ------------
TOTAL $ 18,198,652 $ 21,143,346
============= ============
LIABILITY AND PARTNERS' CAPITAL
- -------------------------------
Liability-Redemptions payable $ 275,119 $ 116,083
PARTNERS' CAPITAL:
General Partner (1,027 and 1,027 Units) 242,930 247,344
Limited Partners (74,741 and 86,275 Units) 17,680,603 20,779,919
------------- ------------
Total partners' capital 17,923,533 21,027,263
------------- ------------
TOTAL $ 18,198,652 $ 21,143,346
============= ============
NET ASSET VALUE PER UNIT
(Based on 75,768 and 87,302 Units outstanding) $ 236.56 $ 240.86
============= ============
See notes to financial statements.
2
ML FUTURES INVESTMENTS L.P.
---------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF OPERATIONS
------------------------
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- -------------- -------------- --------------
REVENUES:
Trading (loss) profits:
Realized $ - $ (28,397) $ - $ (254,925)
Change in unrealized - 28,396 - (550,739)
------------- -------------- -------------- --------------
Total trading results - (1) - (805,664)
------------- -------------- -------------- --------------
Interest income - (314) - 204,729
Income (loss) from
investments (357,381) 1,689,358 (333,581) 2,434,695
------------- -------------- -------------- --------------
Total revenues (357,381) 1,689,043 (333,581) 1,833,760
------------- -------------- -------------- --------------
EXPENSES:
Profit shares - - - -
Brokerage commissions - - - 351,494
Administrative fees - - - 10,042
------------- -------------- -------------- --------------
Total expenses - - - 361,536
------------- -------------- -------------- --------------
NET INCOME (LOSS) $ (357,381) $ 1,689,043 $ (333,581) $ 1,472,224
============= ============== ============== ==============
NET INCOME PER UNIT:
Weighted average number of
units outstanding 78,246 96,628 82,252 101,735
============= ============== ============== ==============
Weighted average net
income (loss) per Limited
Partner and General
Partner Unit $ (4.57) $ 17.48 $ (4.06) $ 14.47
============= ============== ============== ==============
See notes to financial statements.
3
PAGE>
ML FUTURES INVESTMENTS L.P.
---------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the nine months ended September 30, 1999 and 1998
-----------------------------------------------------
Units Limited Partners General Partner Total
-------- ---------------- --------------- ----------------
PARTNERS' CAPITAL,
December 31, 1997 108,296 $ 23,983,033 $ 402,372 $ 24,385,405
Net income - 1,458,429 13,795 1,472,224
Redemptions (18,916) (4,197,842) (169,251) (4,367,093)
-------- ---------------- --------------- ----------------
PARTNERS' CAPITAL,
September 30, 1998 89,380 $ 21,243,620 $ 246,916 $ 21,490,536
======== ================ =============== ================
PARTNERS' CAPITAL,
December 31, 1998 87,302 $ 20,779,919 $ 247,344 $ 21,027,263
Net Income (Loss) - (329,167) (4,414) (333,581)
Redemptions (11,534) (2,770,149) - (2,770,149)
-------- ---------------- --------------- ----------------
PARTNERS' CAPITAL,
September 30, 1999 75,768 $ 17,680,603 $ 242,930 $ 17,923,533
======== ================ =============== ================
See notes to financial statements.
4
ML FUTURES INVESTMENTS L.P.
---------------------------
(A Delaware limited partnership)
--------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the opinion of
management, the financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
of ML Futures Investments L.P. (the "Partnership" or the "Fund") as of September
30. 1999, and the results of its operations for the three and nine month periods
ended September 30, 1999 and 1998. However, the operating results for the
interim periods may not be indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1998 (the "Annual Report").
2. INVESTMENTS
As of September 30, 1999 and December 31, 1998, the Partnership had an
investment in MM LLC of $17,923,533 and $21,027,263, respectively.
Total revenues and fees with respect to the Fund's investment are set forth as
follows:
For the nine months
ended September 30, Total Brokerage Administrative Profit Income from
1999 Revenue Commissions Fees Shares Investments
-------------- -------------- -------------- -------------- --------------
MM LLC $ 1,076,971 $ 1,308,901 $ 37,397 $ 64,254 $ (333,581)
============== ============== ============== ============== ==============
For the nine months
ended September 30, Total Brokerage Administrative Profit Income from
1998 Revenue Commissions Fees Shares Investments
-------------- -------------- -------------- -------------- --------------
Chesapeake LLC $ 870,260 $ 270,588 $ 7,731 $ 118,361 $ 473,580
MM LLC 2,834,551 661,733 18,908 444,269 1,709,641
SJO LLC 551,017 260,867 7,454 31,222 251,474
-------------- -------------- -------------- -------------- --------------
Total $ 4,255,828 $ 1,193,188 $ 34,093 $ 593,852 $ 2,434,695
============== ============== ============== ============== ==============
For the three months
ended September 30, Total Brokerage Administrative Profit Income from
1999 Revenue Commissions Fees Shares Investments
-------------- -------------- -------------- -------------- --------------
MM LLC $ 63,359 $ 414,187 $ 11,834 $ (5,281) $ (357,381)
============== ============== ============== ============== ==============
For the three months
ended September 30, Total Brokerage Administrative Profit Income from
1998 Revenue Commissions Fees Shares Investments
-------------- -------------- -------------- -------------- --------------
MM LLC $ 2,600,520 $ 500,530 $ 14,302 $ 396,330 $ 1,689,358
============== ============== ============== ============== ==============
During the second quarter of 1998, the Partnership withdrew its investment in
Chesapeake LLC and SJO LLC.
5
Condensed statements of financial condition and statements of operations for MM
LLC are set forth as follows:
MM LLC
------
September 30, 1999 December 31, 1998
------------------ -----------------
Assets $ 104,792,599 $ 125,332,558
================== =================
Liabilities $ 2,593,473 $ 4,949,082
Members' Capital 102,199,126 120,383,476
------------------ -----------------
Total $ 104,792,599 $ 125,332,558
================== =================
MM LLC
------
For the three months For the nine months For the three months For the nine months
ended September 30, 1999 ended September 30, 1999 ended September 30, 1998 ended September 30, 1998
------------------------ ------------------------ ------------------------ ------------------------
Revenues $ 356,464 $ 6,112,547 $ 14,430,272 $ 15,738,047
Expenses 2,331,302 7,824,068 5,049,934 6,237,337
------------------------ ------------------------ ------------------------ ------------------------
Net Income $ (1,974,838) $ (1,711,521) $ 9,380,338 $ 9,500,710
======================== ======================== ======================== ========================
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), effective for fiscal
years beginning after June 15, 2000, however, the Fund has adopted the Statement
effective January 1, 1999. This Statement supercedes SFAS No. 119 ("Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments")
and SFAS No. 105 ("Disclosure of information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk") whereby disclosure of average aggregate fair values and contract/notional
values, respectively, of derivative financial instruments is no longer required
for an entity such as the Partnership which carries its assets at fair value.
Such Statement sets forth a much broader definition of a derivative instrument.
The General Partner does not believe that the application of the provisions of
such statement has a significant effect on the financial statements.
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 underlyings,
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 a future, forward, swap or option contract, or other
financial instrument with similar characteristics such as caps, floors and
collars.
As of June 1, 1998, the Partnership invested all of its assets in MM LLC. The
Parnership is thus, invested indirectly in the trading of derivative
instruments.
Market Risk
Derivative instruments involve varying degrees of off-balance sheet market risk,
and changes in the level or volatility of interest rates, foreign currency
exchange rates or the market values of the financial instruments or commodities
underlying such derivative instruments frequently resulted in changes in the
Partnership's net unrealized profit (loss) on such derivative instruments as
reflected in the Statements of Financial Condition or, with respect to
Partnership assets invested in Trading LLCs and in MM LLC, the net unrealized
profit (loss) as reflected in the respective Statements of Financial Condition
of the Trading LLCs and MM LLC. The Partnership's exposure to market risk is
influenced by a number of factors, including the relationships among the
derivative instruments held directly by the Partnership, or indirectly through
the
6
Trading LLCs and MM LLC, as well as the volatility and liquidity of
the markets in which such derivative instruments are traded.
The General Partner has procedures in place intended to control market risk
exposure, although there can be no assurance that they will, in fact, succeed in
doing so. These procedures focus primarily on monitoring the trading of the
Advisors selected from time to time by the Partnership or MM LLC, calculating
the Net Asset Value of their respective Partnership accounts, Trading LLC
accounts or MM LLC accounts as of the close of business on each day
and reviewing outstanding positions for over-concentrations both on an Advisor-
by-Advisor and on an overall Partnership basis. While the General Partner does
not itself intervene in the markets to hedge or diversify the Partnership's
market exposure, the General Partner may urge Advisors to reallocate positions,
or itself reallocate Partnership assets among Advisors (although typically only
as of the end of a month) in an attempt to avoid over-concentrations. However,
such interventions are unusual. Except in cases in which it appears that an
Advisor has begun to deviate from past practice or trading policies or to be
trading erratically, the General Partner's basic risk control procedures consist
simply of the ongoing process of Advisor monitoring and selection with the
market risk controls being applied by the Advisors themselves.
Credit Risk
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the exchange is pledged to
support the financial integrity of the exchange. In over-the-counter
transactions, on the other hand, traders must rely solely on the credit of their
respective individual counterparties. Margins, which may be subject to loss in
the event of a default, are generally required in exchange trading, and
counterparties may require margin in the over-the-counter markets.
The credit risk associated with these instruments from counterparty non-
performance is the Partnership's net unrealized profit included on the
Statements of Financial Condition or, with respect to the Partnership assets
invested in Trading LLCs and in MM LLC, the net unrealized profit included in
the respective Statements of Financial Condition of the Trading LLCs and MM LLC.
The Partnership has credit risk in respect of its counterparties and brokers,
but attempts to control this risk by dealing almost exclusively with Merrill
Lynch entities as counterparties and brokers.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
MONTH-END NET ASSET VALUE PER UNIT
-------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
-------------------------------------------------------------------------------------------------
1998 $229.37 $231.94 $232.21 $219.61 $222.70 $222.90 $223.22 $235.41 $240.44
-------------------------------------------------------------------------------------------------
1999 $237.81 $240.67 $239.59 $242.21 $240.30 $241.20 $241.69 $240.05 $236.56
-------------------------------------------------------------------------------------------------
Performance Summary
January 1, 1998 to September 30, 1998
- -------------------------------------
January 1, 1998 to March 31, 1998
The Fund's positions in the global interest rate markets were profitable during
the quarter. In Europe, an extended bond market rally continued despite an
environment of robust growth in the United States, Canada and the United
Kingdom, as well as a strong pick-up in growth in continental Europe.
7
Gold prices drifted sideways and lower as Asian demand continued to slow and
demand in the Middle East was affected by low oil prices. Initially buoyed on
concerns about a U.S.-led military strike against Iraq, crude oil fell to a nine
year low, as the globally warm winter, the return of Iraq as a producer and the
Asian economic crisis added to OPEC's supply glut problems.
Trading results in stock index markets were mixed, but profitable, despite a
strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Results in currency trading were also mixed, but unprofitable. In
particular, the Swiss franc weakened versus the U.S. dollar.
Agricultural commodity markets provided profitable trading results overall. Live
cattle and hog prices trended downward throughout the quarter. Cotton prices
moved mostly upward during the quarter, but prices dropped off sharply at the
end of March.
April 1, 1998 to June 30, 1998
As swings in the U.S. dollar and developments in Japan affected bond markets,
the Fund's interest rate trading during the quarter resulted in losses,
particularly in Eurodollar deposits and U.S. Treasury bonds. Early in the
quarter, Treasury trading was range-bound, as concern that the economy might be
overheating was balanced by the potential impact of the Asian recession.
Additionally, Australian bonds and bills saw a dramatic drop in prices in early
June, as dollar-bloc currencies remained under pressure versus the U.S. dollar
due to the Japanese/Asian crisis.
Metals and energy trading also resulted in losses. The depressed gold market
weakened further following news of a European Central Bank consensus that ten to
fifteen percent of reserves should be made up of gold bullion which was at the
low end of expectations. Despite production cuts initiated by OPEC at the end of
March, world oil supplies remained excessive and oil prices stood at relatively
low levels throughout the quarter.
Results in currency trading were unprofitable, as the Japanese yen weakened
during June to an eight-year low versus the U.S. dollar. Trading results in
stock index markets were also unprofitable, as the Asia-Pacific region's equity
markets weakened across the board. In particular, Hong Kong's Hang Seng index
trended downward during most of the quarter and traded at a three-year low.
Agricultural commodity trading produced losses. The U.S. soybean crop got off to
a good start which contributed to higher yield expectations and a more
burdensome supply outlook and soybean prices traded in a volatile pattern for
the second half of the quarter. Sugar futures maintained mostly a downtrend, as
no major buyers emerged to support the market. Similarly, coffee prices trended
downward, as good weather conditions in Central America and Mexico increased the
prospects of more output from these countries.
July 1, 1998 to September 30, 1998
Fund performance in July was essentially flat. In August and continuing
into September, financial markets in general were characterized by a flight to
quality that resulted from uncertainty over Russia's solvency, continued
weakness in Asia, and concerns that recessionary conditions would spread to the
United States and Europe. These factors, combined with generally less liquid
market conditions, led to a marked widening in bond credit spreads and a broad
sell-off in world-wide equity markets. Managed futures funds exhibited strong
non-correlation to world markets in August and again in September, generating
significant profits on the long side of interest rates and the short side of the
commodity markets.
Interest rate trading was particularly profitable during the quarter in
positions in Eurodollars, German and Japanese bonds, and U.S. Treasury notes and
bonds. The growth rate of the world bond market declined to its lowest level
since 1987 at 7.7%, down 4.0% from the last peak in 1993. Global investors
poured funds into such instruments as U.S. Treasury issues and German Bunds,
staging a major flight to quality. As a result, there was a significant widening
of credit spreads on a global basis. Global fund managers also increased their
already-overweight exposure to U.S. Treasuries to a record high. The impact of
these events was that in September, the yield on the Japanese 5-year bond fell
to .67%, an all-time low, German 10-year Bunds fell to 3.89%, representing
almost a 100-year low, and the 30-year bond in the U.S. dropped to its lowest
level on record.
The Fund profited from its currency trading during the quarter with
significant gains from short Japanese yen and Canadian dollar positions, as well
as long Deutsche mark positions. In the currency markets, Japan's problems
spread to other sectors of the global economy, causing commodities prices to
decline as demand from the Asian economies weakened, in turn putting pressure on
Canada's commodity-sensitive currency. In Germany, the federal election resulted
in a shift to the left, as Chancellor Helmut Kohl, after sixteen years in
office, lost to Gerhard Schroder. Surprisingly, this promoted a continued
strengthening of the Deutsche mark versus the U.S. dollar.
8
As U.S. equity markets declined in July and August, the Fund profited from
short positions in the S&P 500(R), most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment,
and the Fund incurred modest losses in the stock index sector during September,
but remained profitable for the quarter overall in these markets.
Energy trading also resulted in gains for the quarter. Short crude oil positions
proved profitable for the Fund as prices remained under pressure from excessive
physical availability. Unleaded gas positions also generated strong profits for
the Fund.
The agricultural sector generated profits overall for the quarter. As
commodity markets collapsed in August, profits were generated on the short side
of corn and sugar positions, which offset losses in the soybean complex. The
harvest of the second largest U.S. corn crop on record resulted in prices
dropping to the lowest levels in over 10 years. Prospects for a large production
surplus of sugar kept pressure on the sugar market and also resulted in low
prices. However, in September, the Fund was caught on the long side of the
soybean complex resulting in losses as the U.S. soybean crop increased relative
to the USDA's production estimate as a result of timely rains, which contributed
to lower prices.
In the metals markets, gold prices attempted to move higher against a
backdrop of volatility in major equity markets, increasing concerns about
emerging markets, economic chaos in Russia, weakness in the U.S. dollar, and
increasing worries about global economic conditions. However, gold was unable to
extend rallies and build any significant upside momentum resulting in a
trendless environment and resulting losses in gold positions for the Fund.
January 1, 1999 to September 30, 1999
- -------------------------------------
January 1, 1999 to March 31, 1999
The Fund profited from trading in crude oil, heating oil, and unleaded gas. As
the year opened, the global oil balance continued to show signs of being
lopsided with estimated year-end 1998 inventories at their highest levels since
1984. During January, petroleum stocks rose by 21 million barrels compared with
a typical gain of 6 to 7 million barrels. Then, on March 23, OPEC ratified new
production cuts totaling 1.716 million barrels per day at its conference. These
new production cuts were scheduled to go into effect on April 1 and proved to be
harbingers of higher prices for crude.
Agricultural trading was also profitable overall, as gains in live hogs and live
cattle offset losses in corn positions. Hog prices plummeted due to a glut of
hogs in the market. At the beginning of the quarter, the corn market continued
to struggle despite a stretch of solid export business. The market's negative
sentiment was deepened by ongoing favorable weather in South America which
continued through February, even though there was a sharp reduction in
Argentina's planted area. Lack of enthusiasm for new crop and less than
spectacular demand continued to depress the corn market throughout the quarter.
Interest rate trading proved profitable for the Fund as well, as losses in
Japanese 10-year government bonds were offset by gains in 10-year U.S. Treasury
notes and German 10-year bonds. Early in January, the yield on the Japanese
government 10-year bond increased to 1.8%, sharply above the record low of
0.695% it reached on October 7, 1998. This was triggered by the Japanese Trust
Fund Bureau's decision to absorb a smaller share of future issues, leaving the
burden of financing future budget deficits to the private sector.
Losses in aluminum overshadowed slight gains in copper during the first quarter.
In January, burdensome warehouse stocks and questionable demand prospects
weighed on base metals as aluminum fell to a 5-year low and copper fell to
nearly an 11-year low. Major surpluses in both metals were expected, keeping
prices down, and there was no supply side response to weak demand and lower
prices. However, the end of March showed copper and aluminum leading a surge in
base metals as prices recovered from multi-year lows.
The Fund also suffered losses in currency trading during the quarter, as losses
in Japanese yen overpowered gains in Swiss francs. On a trade-weighted basis,
the Swiss franc ended the quarter at close to a seven-month low, mostly as a
result of the stronger U.S. dollar. In January, the yen had advanced by nearly
35% against the dollar since early in August, and the Bank of Japan lowered
rates to keep the economy sufficiently liquid so as to allow fiscal spending to
restore some growth to the economy and to drive down the surging yen.
Stock index trading was also unprofitable, as losses were sustained in Hang Seng
and CAC40 positions. Also of note, the Dow Jones Industrial Average closed above
the 10,000 mark for the first time ever at the end of March, setting a record
for the index.
April 1, 1999 to June 30, 1999
The Fund profited in interest rate trading from short positions in Euro dollars,
U.S. 10-year Treasury notes and U.S. Treasury bonds as the flight to quality in
the bond market reversed during the first half of 1999 and concerns about higher
interest rates continued to rattle the financial markets.
9
Stock indices trading also resulted in gains overall for the quarter, as
positions in the Hang Seng, Nikkei 225 and Topix Indices all generated profits
as the equity indices rallied worldwide in April and June.
Trading in the agricultural markets also proved profitable for the Fund. Gains
from live cattle and live hog positions offset losses from short corn positions.
Agricultural commodities, in particular corn, were weak almost across the board
as they are saddled with supply/demand imbalances. In the beginning of the
quarter, continued wetness across the corn belt led to early planting delays.
The energy sector was profitable as positions in crude oil offset losses from
short positions in natural gas and gas oil trading. The focus of attention in
the natural gas markets since the end of winter was the sharply lower than year-
ago storage injection activity. Crude oil prices rallied much higher and faster
than expected following last quarter's ratification of an OPEC/non-OPEC
agreement to cut production by over 2 million barrels per day. Natural gas
prices also rallied sharply over the quarter, reflecting, in part, growing
concerns about a decline in US natural gas production.
Currency trading resulted in losses for the Fund. Gains in Euro trading were
offset by losses sustained in British pound trading and from short positions in
the Canadian dollar. After suffering under the weight of lower commodity prices
and the Asian recession, the Canadian dollar underwent a significant rally in
the first half of 1999, moving up about 3 cents from the end of 1998.
In the metals sector, gains from short gold positions were overshadowed by
losses in copper and nickel trading. Throughout the first half of 1999, gold
prices were in a state of gradual erosion and in early June, prices hit their
lowest levels in over 20 years. Gold continued to show a lack of response to
political and military events such as Kosovo and also lost much of its role as a
monetary asset and flight to safety vehicle. The economic scenario for Asia,
Brazil, emerging market nations and Europe helped keep copper and other base
metals on the defensive as demand receded with virtually no supply side
response.
July 1, 1999 to September 30, 1999
The Fund profited in the energy sector with long positions in light crude oil
resulting in strong gains. Crude oil prices received a jolt owing to a report in
August indicating Russia's plan to cut 70% its fuel oil and gasoil exports for
August and completely eliminate gasoil exports in order to satisfy domestic
needs. Short positions in natural gas trading were unprofitable as high levels
of energy consumption and weather scares throughout the country early in the
quarter added to the bullish tone for the market. However, these losses were not
substantial enough to affect the profitability of the sector overall for the
quarter.
Trading in the metals markets was also profitable as positions in nickel, gold
and aluminum all resulted in gains. Collectively, the base metals sector was a
strong performer this quarter. A major statement from the President of the
European Central Bank was beneficial for long gold positions as it sent gold
prices sharply higher in late September. A key part of the statement was the
fact that the banks have agreed not to expand their gold lending. This initiated
the first bullish bias in years. The Fund's long positions in aluminum trading
were also profitable. Despite a 5-year low in early March, aluminum prices have
gained nearly 25 percent this year. Steady Japanese consumer buying and the
strength in the yen versus the dollar have played a part in this.
Interest rate trading was unprofitable for the third quarter as losses were
sustained in Eurodollar, Japanese 10 year government bonds and Eurobund futures
trading. Long positions in Eurodollar trading were unprofitable given the
speculations of the probability of a tightening bias by the US Federal Reserve.
Eurodollar contracts gave up much of the gains that they enjoyed following the
Federal Open Market Committee's adoption of a neutral bias.
The Fund suffered losses in stock index positions as trading throughout the
quarter was volatile. Though the S&P finished the third quarter by breaking the
post-October 1998 highs, the Fund suffered losses in stock index trading due to
significant volatility globally. For the quarter, losses were sustained in the
S&P, FTSE-Financial Times Stock Index, and the DAX German Stock Index resulting
in losses for the sector overall.
Currency trading resulted in minimal losses for the quarter as profitable
positions in the Japanese yen were offset by losses in Euro currency and Swiss
franc trading. Long yen positions resulted in strong gains as the Bank of Japan
refused to ease monetary policy and investors added to their yen exposure, which
reached a two-year high during the quarter. The most positive sign in Japan was
that, for the second quarter in a row, domestic consumption exceeded that of the
year ago quarter. Losses were sustained in Euro currency trading as it continued
to trade in the same choppy pattern that has been evident for the past few
quarters.
10
The Fund also was unprofitable in the agricultural markets as losses were
sustained in the hog, coffee and soymeal markets. Agricultural trading began the
quarter with an increase in prices as there was a sharp decline in crop ratings
due to wet conditions in the Eastern Belt during July. This in conjunction with
forecasters' outlooks for additional declines in the weeks ahead helped jump-
start the first major weather scare of the season. As a result, short positions
in soymeal proved unprofitable as there was a sharp upturn in soy prices.
Additionally, long coffee positions were unprofitable as the coffee market
plunged to 5-year lows during the quarter when cold temperatures in Brazil
skirted the major coffee belt and failed to harm trees.
YEAR 2000 COMPLIANCE
As the Year 2000 approaches, Merrill Lynch has undertaken initiatives to address
the Year 2000 problem (the "Y2K problem"), as more fully described in the 1998
Annual Report. The failure of Merrill Lynch's technology systems relating to a
Y2K problem would likely have a material adverse effect on the company's
business, results of operations, and financial condition. This effect could
include disruption of normal business transactions, such as the settlement,
execution, processing, and recording of trades in securities, commodities,
currencies, and other assets. The Y2K problem could also increase Merrill
Lynch's exposure to risk and legal liability and its need for liquidity.
The renovation phase of Merrill Lynch's Year 2000 system efforts, as described
in the 1998 Annual Report, was 100% completed as of June 30, 1999, and
production testing was 100% completed as of that date. In March and April 1999,
Merrill Lynch successfully participated in U.S. industrywide testing sponsored
by the Securities Industry Association. These tests involved an expanded number
of firms, transactions, and conditions compared with those previously conducted.
Merrill Lynch has participated in and continues to participate in numerous
industry tests throughout the world.
Merrill Lynch's business units have developed and tested contingency plans. The
plans identify critical processes, potential Y2K problems, and personnel,
processes, and available resources needed to maintain operations. However, the
failure of exchanges, clearing organizations, vendors, service providers,
clients and counterparties, regulators, or others to resolve their own
processing issues in a timely manner could have a material adverse effect on
Merrill Lynch's business, results of operations and financial condition.
In light of the interdependency of the parties in or serving the financial
markets, there can be no assurance that all Y2K problems will be identified and
remedied on a timely basis or that all remediation and contingency planning will
be successful. Public uncertainty regarding successful remediation of the Y2K
problem may cause a reduction in activity in the financial markets. This could
result in reduced liquidity as well as increased volatility. Disruption or
suspension of activity in the world's financial markets is also possible. In
some non-U.S. markets in which Merrill Lynch does business, the level of
awareness and remediation efforts relating to the Y2K problem are thought to be
less advanced than in the U.S. Management is unable at this point to ascertain
whether all significant third parties will successfully address the Y2K problem.
Merrill Lynch will continue to monitor third parties' Year 2000 readiness to
determine if additional or alternative measures are necessary. Contingency plans
have been established for all business units. Merrill Lynch's year-end balance
sheet levels will depend on Y2K risks and many other factors, including business
opportunities and customer demand.
As of September 24, 1999, the total estimated expenditures of existing and
incremental resources for the Year 2000 compliance initiative are approximately
$520 million. This estimate includes $104 million of occupancy, communications,
and other related overhead expenditures, as Merrill Lynch is applying a fully
costed pricing methodology for this project. Of the total estimated
expenditures, approximately $40 million, related to continued testing,
contingency planning, and risk management. There can be no assurance that the
costs associated with such efforts will not exceed those currently anticipated
by Merrill Lynch, or that the possible failure of such efforts will not have a
material adverse effect on Merrill Lynch's business, results of operations, or
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the
General Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
There are no exhibits required to be filed with this report.
(b) Reports on Form 8-K.
-------------------
There were no reports on Form 8-K filed during the first nine months of
fiscal 1999.
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SIGNATURES
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.
ML FUTURES INVESTMENTS L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 12, 1999 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: November 12, 1999 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
13