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 June 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 No. 0-26280
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3782225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
c/o Demeter Management Corporation
Two World Trade Center, 62 Fl., New York, NY 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 392-5454
(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
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MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 1999
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition June 30, 1999
(Unaudited) and December 31, 1998....................2
Statements of Operations for the Quarters Ended
June 30, 1999 and 1998 (Unaudited)...................3
Statements of Operations for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)...................4
Statements of Changes in Partners' Capital for the
Six Months Ended June 30, 1999 and 1998 (Unaudited)..5
Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)...................6
Notes to Financial Statements (Unaudited).........7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.12-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ..................................21-32
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................33
Item 2. Changes in Securities and Use of Proceeds.....33-34
Item 6. Exhibits and Reports on Form 8-K.................34
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
June 30, December 31,
1999 1998
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 70,737,978 63,919,054
Net unrealized gain on open contracts10,583,927 5,299,335
Net option premiums 795,037 225,646
Total Trading Equity 82,116,942 69,444,035
Subscriptions receivable 1,251,434 1,796,051
Interest receivable (DWR) 211,746 205,247
Total Assets 83,580,122 71,445,333
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 513,825 398,976
Accrued brokerage fees (DWR) 405,118 405,606
Accrued management fees 216,820 218,976
Total Liabilities 1,135,763 1,023,558
Partners' Capital
Limited Partners (6,300,903.918 and
6,031,262.407 Units, respectively) 81,550,064 69,67
1,636
General Partner (69,097.028 and
64,937.294 Units, respectively) 894,295 750,139
Total Partners' Capital 82,444,359 70,421,775
Total Liabilities and Partners' Capital 83,580,122 71,445,333
NET ASSET VALUE PER UNIT 12.94 11.55
<FN>
The accompanying notes are an integral part
of these financial statements.
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<TABLE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended June 30,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized 1,731,364 (9,830,185)
Net change in unrealized 5,548,204 (768,472)
Total Trading Results 7,279,568 (10,598,657)
Interest Income (DWR) 634,040 576,426
Total Revenues 7,913,608 (10,022,231)
EXPENSES
Brokerage fees (DWR) 1,275,326 1,044,358
Management fees 690,687 550,265
Incentive fees 7,592 -
Total Expenses 1,973,605 1,594,623
NET INCOME (LOSS) 5,940,003 (11,616,854)
NET INCOME (LOSS) ALLOCATION
Limited Partners 5,876,107
(11,497,259)
General Partner
63,896 (119,595)
NET INCOME (LOSS) PER UNIT
Limited Partners
.92 (2.01)
General Partner
.92 (2.01)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
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<TABLE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized 7,222,069 (5,956,766)
Net change in unrealized 5,284,592 (2,224,767)
Total Trading Results 12,506,661 (8,181,533)
Interest Income (DWR) 1,255,241 1,196,530
Total Revenues 13,761,902 (6,985,003)
EXPENSES
Brokerage fees (DWR) 2,540,783 2,211,493
Management fees 1,376,970 1,160,531
Incentive fees 1,019,759 -
Total Expenses 4,937,512 3,372,024
NET INCOME (LOSS) 8,824,390 (10,357,027)
NET INCOME (LOSS) ALLOCATION
Limited Partners
8,730,234 (10,250,589)
General Partner
94,156 (106,438)
NET INCOME (LOSS) PER UNIT
Limited Partners
1.39 (1.78)
General Partner
1.39 (1.78)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
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<TABLE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S> <C> <C> <C>
<C>
Partners' Capital,
December 31, 1997 5,517,887.455 $58,482,349 $613,232
$59,095,581
Continuous Offering 955,534.433 9,595,412 50,000
9,645,412
Net Loss - (10,250,589) (106,438)
(10,357,027)
Redemptions (540,341.364) (5,392,203) -
(5,392,203)
Partners' Capital,
June 30, 1998 5,933,080.524 $52,434,969 $556,794
$52,991,763
Partners' Capital,
December 31, 1998 6,096,199.701 $69,671,636 $750,139
$70,421,775
Continuous Offering 625,437.180 7,351,975 50,000
7,401,975
Net Income - 8,730,234 94,156
8,824,390
Redemptions (351,635.935) (4,203,781) -
(4,203,781)
Partners' Capital,
June 30, 1999 6,370,000.946 $81,550,064 $894,295
$82,444,359
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
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<TABLE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) 8,824,390 (
10,357,027)
Noncash item included in net income (loss):
Net change in unrealized (5,284,592) 2
,224,767
(Increase) decrease in operating assets:
Net option premiums (569,391) 258,057
Interest receivable (DWR) (6,499) 35,276
Decrease in operating liabilities:
Accrued brokerage fees (DWR) (488) (37,477)
Accrued management fees (2,156)
(15,401)
Net cash provided by (used for) operating activities 2,961,264
(7,891,805)
CASH FLOWS FROM FINANCING ACTIVITIES
Continuous offering 7,401,975 9
,645,412
(Increase) decrease in subscriptions receivable544,617
(476,674)
Increase (decrease) in redemptions payable 114,849
(101,648)
Redemptions of units (4,203,781)
(5,392,203)
Net cash provided by financing activities 3,857,660
3,674,887
Net increase (decrease) in cash 6,818,924 (
4,216,918)
Balance at beginning of period 63,919,054
57,104,003
Balance at end of period 70,737,978
52,887,085
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements include, in the opinion of management,
all adjustments necessary for a fair presentation of the results
of operations and financial condition of Morgan Stanley Dean
Witter Spectrum Strategic L.P. (the "Partnership"). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership's December 31, 1998 Annual
Report on Form 10-K.
1. Organization - Morgan Stanley Dean Witter Spectrum Strategic
L.P. is a limited partnership organized to engage primarily in
the speculative trading of futures, forward and options
contracts, physical commodities and other commodity interests,
including foreign currencies, financial instruments, precious and
industrial metals, energy products, and agriculturals
(collectively, "futures interests"). The Partnership is one of
the Morgan Stanley Dean Witter Spectrum Series of funds,
comprised of the Partnership, Morgan Stanley Dean Witter Spectrum
Global Balanced L.P., Morgan Stanley Dean Witter Spectrum
Technical L.P. and Morgan Stanley Dean Witter Spectrum Select
L.P. The general partner is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Dean Witter
Reynolds Inc. ("DWR") and an unaffiliated clearing commodity
broker, Carr Futures Inc. ("Carr"), provides clearing and
execution services. Both Demeter and DWR are wholly-
<PAGE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
owned subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW").
The Trading Advisors to the Partnership are Blenheim Investments,
Inc., Willowbridge Associates Inc. and Allied Irish Capital
Management, Ltd. ("AICM"), (collectively, the "Trading
Advisors"). On March 4, 1999 Stonebrook Capital Management, Inc.
("Stonebrook") was terminated as a Trading Advisor and was
replaced by AICM effective May 1, 1999. For the period March 4
through April 30, 1999 the Partnership was credited with interest
income on 100% of the assets formerly allocated to Stonebrook and
was charged no fees on such assets.
2. Related Party Transactions
The Partnership's cash is on deposit with DWR and Carr in futures
interests trading accounts to meet margin requirements as needed.
DWR pays interest on these funds based on a prevailing rate on
U.S. Treasury bills. The Partnership pays brokerage fees to DWR.
3. Financial Instruments
The Partnership trades futures, forward and options contracts,
physical commodities and other commodity interests, including
foreign currencies, financial instruments, precious and
industrial metals, energy products, and agriculturals. Futures
and forwards represent contracts for delayed delivery of an
instrument at a specified date and price. Risk arises from
changes in the value
<PAGE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999. The
Partnership elected to adopt the provisions of SFAS No. 133
beginning with the fiscal year that ended December 31, 1998.
SFAS No. 133 supersedes SFAS No. 119 and No. 105, which required
the disclosure of average aggregate fair values and
contract/notional values, respectively, of derivative financial
instruments for an entity which carries its assets at fair value.
The application of SFAS No. 133 does not have a significant
effect on the Partnership's financial statements.
The net unrealized gain on open contracts is reported as a
component of "Equity in futures interests trading accounts" on
the Statements of Financial Condition and totaled $10,583,927 and
$5,299,335 at June 30, 1999 and December 31, 1998, respectively.
<PAGE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The $10,583,927 net unrealized gain on open contracts at June 30,
1999 and the $5,299,335 net unrealized gain on open contracts at
December 31, 1998 related to exchange-traded futures contracts.
Exchange-traded futures contracts held by the Partnership at June
30, 1999 and December 31, 1998 mature through September 2000 and
March 2000, respectively.
The Partnership is subject to the credit risk associated with
counterparty non-performance. The credit risk associated with
the instruments in which the Partnership is involved is limited
to the amounts reflected in the Partnership's Statements of
Financial Condition. DWR and Carr act as the futures commission
merchants or the counterparties with respect to most of the
Partnership's assets. Exchange-traded futures and futures-styled
options contracts are marked to market on a daily basis, with
variations in value settled on a daily basis. Each of DWR and
Carr, as a futures commission merchant for all of the
Partnership's exchange-traded futures and 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
and futures-styled
<PAGE>
MORGAN STANLEY DEAN WITTER SPECTRUM STRATEGIC L.P.
NOTES TO FINANCIAL STATEMENTS - (CONCLUDED)
options contracts, including an amount equal to the net
unrealized gain on all open futures and futures-styled options
contracts, which funds, in the aggregate, totaled $81,321,905 and
$69,218,389 at June 30, 1999 and December 31, 1998, respectively.
With respect to the Partnership's off-exchange-traded forward
currency contracts, there are no daily settlements of variations
in value nor is there any requirement that an amount equal to the
net unrealized gain on open forward contracts be segregated.
With respect to those off-exchange-traded forward currency
contracts, the Partnership is at risk to the ability of Carr, the
sole counterparty on all of such contracts, to perform. Carr's
parent, Credit Agricole Indosuez, has guaranteed to the
Partnership payment of the net liquidating value of the
transactions in the Partnership's account with Carr (including
foreign currency contracts).
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - Assets of the Partnership are deposited with DWR as
non-clearing broker and Carr as clearing broker in separate
futures interest trading accounts. Such assets are held in either
non-interest bearing bank accounts or in securities approved by
the CFTC for investment of customer funds. The Partnership's
assets held by DWR and Carr may be used as margin solely for the
Partnership's trading. Since the Partnership's sole purpose is
to trade in futures interests, it is expected that the
Partnership will continue to own such liquid assets for margin
purposes.
The Partnership's investment in futures interests may, from time
to time, be illiquid. Most United States futures exchanges limit
fluctuations in certain futures interest prices during a single
day by regulations referred to as "daily price fluctuations
limits" or "daily limits". Pursuant to such regulations, during
a single trading day no trades may be executed at prices beyond
the daily limit. If the price for a particular futures interest
has increased or decreased by an amount equal to the daily limit,
positions in such futures interest can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures interests prices have occasionally
moved the daily limit for several consecutive days with little or
no trading. Such market conditions could prevent the Partnership
from promptly liquidating its futures interests and result in
restrictions on redemptions.
<PAGE>
There is no limitation on daily price moves in trading forward
contracts on foreign currency. 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 from promptly liquidating unfavorable positions,
subjecting it to substantial losses. Either of these market
conditions could result in restrictions on redemptions.
Capital Resources. The Partnership does not have, nor does it
expect to have, any capital assets. Future redemptions,
exchanges and sales of additional Units of Limited Partnership
Interest ("Unit(s)") will affect the amount of funds available
for investment in futures interests in subsequent periods. Since
they are at the discretion of Limited Partners, it is not
possible to estimate the amount and therefore, the impact of
future redemptions, exchanges or sales of additional Units.
Results of Operations
For the Quarter and Six Months Ended June 30, 1999
For the quarter ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $7,913,608
and posted an increase in Net Asset Value per Unit. The most
significant gains were recorded in the energy markets during
April and June from long futures positions in crude oil and its
refined products, unleaded gas and heating oil, as oil prices
increased after another unexpected drop in U.S. crude oil
supplies and signs of growing demand for gasoline. In the global
<PAGE>
interest rate futures markets, gains were recorded during May and
June from short U.S. interest rate futures positions as domestic
bond prices fell in reaction to a higher-than-expected rise in
the Consumer Price Index and amid fears of a tighter Federal
Reserve monetary policy ahead of the Federal Open Market
Committee meeting in late June. In the metals markets, gains
were recorded from long copper futures positions as copper prices
soared during mid-April to the highest level since late December
on a wave of fund buying and during June on news that a major
U.S. producer would cut back production. These gains were
partially offset by losses recorded in the currency markets from
short Japanese yen positions as its value temporarily
strengthened relative to the U.S. dollar during mid-June on
stronger-than-expected gross domestic product data from Japan.
Additional losses were recorded during May from long positions in
the euro relative to the U.S. dollar as the value of the European
common currency slid lower due to concerns regarding European
economic growth, on speculation that the European Central Bank
could lower interest rates and on news that the U.S. Federal
Reserve is adopting a tightening bias. In the agricultural
markets, losses were experienced during May from long positions
in soybean futures as prices declined due to favorable planting
forecasts and a bearish USDA supply-demand report. In the global
stock index futures markets, losses were experienced during April
from short S&P 500 Index futures positions as the Dow Jones
Industrial Average and S&P 500 Index reached record highs in
response to an interest rate cut by the European Central Bank
aimed at boosting their region's economy, strong sales at
<PAGE>
domestic retailers and optimism about earnings from financial
services companies. Total expenses for the three months ended
June 30, 1999 were $1,973,605, resulting in net income of
$5,940,003. The value of a Unit increased from $12.02 at March
31, 1999 to $12.94 at June 30, 1999.
For the six months ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $13,761,902
and posted an increase in Net Asset Value per Unit. The most
significant gains were recorded in the energy markets during
March from long crude oil positions as prices climbed higher due
to confirmation of OPEC production cuts and supply concerns
caused by an explosion at a U.S. refinery. Additional gains were
recorded as oil prices increased at June month end after another
unexpected drop in U.S. crude oil supplies and signs of growing
demand for gasoline. In the global interest rate futures
markets, gains were recorded during February from short U.S.
interest rate futures positions as prices dropped in reaction to
Federal Reserve Chairman Alan Greenspan's warnings in
Congressional testimony that a strong economy could reignite
inflation. A higher-than-expected rise in the Consumer Price
Index and fears of a tighter Federal Reserve monetary policy
ahead of the Federal Open Market Committee meeting resulted in
additional gains during May and June. In the metals markets,
gains were recorded from long copper futures positions as copper
prices soared during mid-April to the highest level since late
December on a wave of fund buying and during June on news that a
major U.S. producer would cut back production. These gains were
<PAGE>
partially offset by losses recorded in the global stock index
futures markets during March from short S&P 500 Index futures
positions as equity prices increased in reaction to Wall Street
reaching a major milestone during mid-March, as the Dow Jones
Industrial Average hit 10,000 for the first time. Additional
losses were experienced as the S&P 500 Index reached record highs
during April in response to an interest rate cut by the European
Central Bank aimed at boosting their region's economy. In the
currency markets, losses were experienced during January from
long Japanese yen positions after an intervention by the Bank of
Japan boosted the U.S. dollar against the yen and helped ease
concerns about the impact of a strong yen on Japanese exports.
Losses were also recorded during March from short Japanese yen
positions as the value of the yen increased versus the U.S.
dollar amid new signs that Japan's economy may be on the mend and
speculation that Japanese interest rates may soon rise. Stronger-
than-expected gross domestic product data from Japan during June
also pushed the yen higher, thus resulting in losses for the
Partnership's short yen positions. In the agricultural markets,
losses were recorded during May from long positions in soybean
futures as prices declined due to favorable planting forecasts
and a bearish USDA supply-demand report. Total expenses for the
six months ended June 30, 1999 were $4,937,512, resulting in net
income of $8,824,390. The value of a Unit increased from $11.55
at December 31, 1998 to $12.94 at June 30, 1999.
For the Quarter and Six Months Ended June 30, 1998
For the quarter ended June 30, 1998, the Partnership recorded
<PAGE>
total trading losses net of interest income of $10,022,231 and
posted a decrease in Net Asset Value per Unit. The most
significant losses were recorded during April due primarily to a
spike higher in the value of the Japanese yen relative to the
U.S. dollar amid optimism regarding the Japanese economy. As a
result, losses were recorded from short Japanese yen positions
established during April. In metals, losses were experienced
from long silver futures positions as silver prices declined
during May. In financial futures, losses were recorded from
trading British interest rate futures during June as prices moved
in a choppy pattern. In the commodities markets, losses were
recorded from long crude oil futures positions as oil prices
moved lower throughout a majority of the quarter. Smaller losses
were recorded from long positions in lumber futures during May
and from long soybean meal futures during April. A portion of
the Partnership's overall losses was offset by gains recorded
from long positions in German and French bond futures as prices
in these markets moved higher throughout a majority of the
quarter. Smaller gains recorded during April and early May from
long cocoa futures positions also helped to mitigate these
losses. Total expenses for the three months ended June 30, 1998
were $1,594,623, resulting in a net loss of $11,616,854. The
value of a Unit decreased from $10.94 at March 31, 1998 to $8.93
at June 30, 1998.
For the six months ended June 30, 1998, the Partnership recorded
total trading losses net of interest income of $6,985,003 and
posted a decrease in Net Asset Value per Unit. The most
significant losses were recorded in currencies from transactions
<PAGE>
involving the German mark as its value moved without consistent
direction during February and March. Losses were also recorded
from short positions in the German mark during April and May as
its value increased relative to the U.S. dollar. Additional
currency losses were experienced from short positions in the
Japanese yen as the value of the yen reversed higher during April
in reaction to a proposed economic stimulus plan for Japan. In
soft commodities, losses were experienced from long sugar futures
positions as sugar prices moved lower throughout the first
quarter. Smaller losses were recorded in metals from long silver
futures positions as silver prices declined sharply during May.
A portion of these losses was offset by gains recorded from long
European bond and stock index futures positions as prices in
these markets moved higher during a majority of the first half of
the year. Additional gains were recorded in agricultural futures
from trading soybean and soybean products during February. Total
expenses for the six months ended June 30, 1998 were $3,372,024,
resulting in a net loss of $10,357,027. The value of a Unit
decreased from $10.71 at December 31, 1997 to $8.93 at June 30,
1998.
Year 2000 Problem.
Commodity pools, like financial and business organizations and
individuals around the world, depend on the smooth functioning of
computer systems. Many computer systems in use today cannot
recognize the computer code for the year 2000, but revert to 1900
or some other date. This is commonly known as the "Year 2000
Problem". The Partnership could be adversely affected if computer
<PAGE>
systems used by it or any third party with whom it has a material
relationship do not properly process and calculate date-related
information and data concerning dates on or after January 1,
2000. Such a failure could adversely affect the handling or
determination of futures trades and prices and other services.
MSDW began its planning for the Year 2000 Problem in 1995, and
currently has several hundred employees working on the matter.
It has developed its own Year 2000 compliance plan to deal with
the problem and had the plan approved by the company's executive
management, Board of Directors and Information Technology
Department. Demeter is coordinating with MSDW to address the Year
2000 Problem with respect to Demeter's computer systems that
affect the Partnership. This includes hardware and software
upgrades, systems consulting and computer maintenance.
Beyond the challenge facing internal computer systems, the
systems failure of any of the third parties with whom the
Partnership has a material relationship - the futures exchanges
and clearing organizations through which it trades, Carr, or the
Trading Advisors - could result in a material financial risk to
the Partnership. All U.S. futures exchanges are subject to
monitoring by the CFTC of their Year 2000 preparedness and the
major foreign futures exchanges are also expected to be subject
to market-wide testing of their Year 2000 compliance during 1999.
Demeter intends to monitor the progress of Carr and the Trading
Advisors throughout 1999 in their Year 2000 compliance and, where
<PAGE>
applicable, to test its external interface with Carr and the
Trading Advisors.
A worst case scenario would be one in which trading of contracts
on behalf of the Partnership becomes impossible as a result of
the Year 2000 problem encountered by any third parties. A less
catastrophic but more likely scenario would be one in which
trading opportunities diminish as a result of technical problems
resulting in illiquidity and fewer opportunities to make
profitable trades. MSDW has begun developing various "contingency
plans" in the event that the systems of such third parties fail.
Demeter intends to consult closely with MSDW in implementing
those plans. Despite the best efforts of both Demeter and MSDW,
however, it is possible that these steps will not be sufficient
to avoid any adverse impact to the Partnership.
Risks Associated With the Euro. On January 1, 1999, eleven
countries in the European Union established fixed conversion
rates on their existing sovereign currencies and converted to a
common single currency (the "euro"). During a three-year
transition period, the sovereign currencies will continue to
exist but only as a fixed denomination of the euro. Conversion
to the euro prevents the Trading Advisors from trading in certain
currencies and thereby limits its ability to take advantage of
potential market opportunities that might otherwise have existed
had separate currencies been available to trade. This could
adversely affect the performance results of the Partnership.
<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 interests. The market sensitive
instruments held by the Partnership are acquired solely for
speculative trading purposes and, as a result, all or
substantially all of the Partnership's assets are subject to the
risk of trading loss. Unlike an operating company, the risk of
market sensitive instruments is integral, not incidental, to the
Partnership's primary business activities.
The futures interests traded by the Partnership involve varying
degrees of related market risk. Such market risk is often
dependent upon changes in the level or volatility of interest
rates, exchange rates, and/or market values of financial
instruments and commodities. Fluctuations in related market risk
based upon the aforementioned factors result in frequent changes
in the fair value of the Partnership's open positions, and,
consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification effects among
the Partnership's existing open positions, the volatility present
within the market(s), and the liquidity of the market(s). At
varying times, each of these factors may act to exacerbate or
mute the market risk associated with the Partnership.
<PAGE>
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt at quantifying the
Partnership's market risk must be qualified by the inherent
uncertainty of its speculative trading, which may cause future
losses and volatility (i.e. "risk of ruin") far in excess of the
Partnership's experience to date and/or any reasonable
expectation premised upon historical changes in the fair value of
its market sensitive instruments.
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. As such, any loss in the fair
value of the Partnership's open positions is directly reflected
in the Partnership's earnings, whether realized or unrealized,
and the Partnership's cash flow, as profits and losses on open
positions of exchange-traded futures interests are settled daily
through variation margin.
<PAGE>
The Partnership's risk exposure in the various market sectors
traded by the Trading Advisors is estimated below in terms of
Value at Risk ("VaR"). The VaR model employed by the Partnership
incorporates numerous variables that could impact the fair value
of the Partnership's trading portfolio. The Partnership
estimates VaR using a model based on historical simulation with a
confidence level of 99%. Historical simulation involves
constructing a distribution of hypothetical daily changes in
trading portfolio value. The VaR model generally takes into
account linear exposures to price and interest rate risk. Market
risks that are incorporated in the VaR model include equity and
commodity prices, interest rates, foreign exchange rates, as well
as correlation that exists among these variables. The
hypothetical changes in portfolio value are based on daily
observed percentage changes in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. In the case of the Partnership's VaR, the historical
observation period is approximately four years. The
Partnership's one-day 99% VaR corresponds to the negative change
in portfolio value that, based on observed market risk factor
moves, would have been exceeded once in 100 trading days.
VaR models such as the Partnership's are continually evolving as
trading portfolios become more diverse and modeling techniques
and systems capabilities improve. It must also be noted that the
VaR model is used to 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.
<PAGE>
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 market category as of June 30, 1999. As of June 30, 1999, the
Partnership's total capitalization was approximately $82 million.
Primary Market June 30, 1999
Risk Category Value at Risk
Interest Rate (1.83)%
Equity (2.41)
Currency (2.98)
Commodity (2.79)
Aggregate Value at Risk (4.88)%
Aggregate value at risk represents the aggregate VaR of the
Partnership's open positions and not the sum of the VaR of the
individual categories listed above. Aggregate VaR will be lower
as it takes into account correlation among different positions
and categories.
The table above represents the VaR of the Partnership's open
positions at June 30, 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. As the Partnership's sole
business is the speculative trading of primarily futures
interests, the composition of its portfolio of open positions can
change significantly over any given time period or even within a
single trading day. Such changes in open positions could
materially impact market risk as measured by VaR either
positively or negatively.
<PAGE>
The table below supplements the quarter-end VaR by presenting the
Partnership's high, low and average VaR as a percentage of total
Net Assets for the four quarterly reporting periods from July 1,
1998 through June 30, 1999.
Primary Market Risk Category High Low Average
Interest Rate (3.75)% (0.31)% (1.97)%
Equity (2.41) (0.23) (1.25)
Currency (2.98) (0.07) (1.89)
Commodity (2.79) (0.46) (1.32)
Aggregate Value at Risk (4.88)% (0.58)% (3.11)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin require-
ments, as such margin requirements generally range between 2% and
15% of contract face value. Additionally, due to the use of
leverage, the face value of the market sector instruments held by
the Partnership is typically many times the total capitalization of
the Partnership. The financial magnitude of the Partnership's open
positions thus creates a "risk of ruin" not typically found in
other investment vehicles. Due to the relative size of the
positions held, certain market conditions may cause the Partnership
to incur losses greatly in excess of VaR within a short period of
time. The foregoing VaR tables, as well as the past performance of
the Partnership, gives no indication of such "risk of ruin". In
addition, VaR risk measures should be interpreted in light of the
methodology's limitations, which include the following: past
changes
<PAGE>
in market risk factors will not always yield accurate predictions
of the distributions and correlations of future market movements;
changes in portfolio value in response to market movements may
differ from the responses implicit in a VaR model; published VaR
results reflect past 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.
The foregoing VaR tables present the results of the Partnership's
VaR for each of the Partnership's market risk exposures and on an
aggregate basis at June 30, 1999 and for the end of the four
quarterly reporting periods from July 1, 1998 through June 30,
1999. Since VaR is based on historical data, VaR should not be
viewed as predictive of the Partnership's future financial
performance or its ability to manage and monitor risk and there can
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated or that
such losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, such balances, as well as
any market risk they may represent, are immaterial. The
Partnership also maintains a substantial portion (approximately
72%) of its available assets in cash at DWR. A decline in short-
term interest
<PAGE>
rates will result in a decline in the Partnership's cash management
income. This cash flow risk is not considered material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and the
potential losses caused by such movements, taking into account the
leverage, optionality and multiplier features of the Partnership's
market sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are
statements of historical fact and (ii) 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.
<PAGE>
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 as of June 30, 1999, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Interest Rate. The primary trading risk market exposure in
the Partnership is in the interest rate sector. Exposure was
spread across the U.S., Japanese, German and European 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
primary interest rate exposure is generally to interest rate
fluctuations in the United States and the other G-7 countries.
Demeter anticipates that G-7 interest rates will remain the
primary interest rate exposure of the Partnership for the
foreseeable future. The changes in interest rates, which have
the most effect on the Partnership, are changes in long-term, as
opposed to short-term, rates. Most of the speculative futures
positions held by the Partnership are in medium-to-long term
instruments. Consequently, even a material change in short-term
<PAGE>
rates would have little effect on the Partnership, were the
medium-to-long term rates to remain steady.
Equity. The second largest market exposure this quarter
was in the stock index complex. The primary equity exposure is
to equity price risk in the G-7 countries. The stock index
futures traded by the Partnership are by law limited to futures
on broadly based indices. As of June 30, 1999, the Partnership's
primary exposures were in the Nikkei (Japan), FTSE (Britain) and
CAC 40 (France) stock indices. The Partnership is primarily
exposed to the risk of adverse price trends or static markets in
the U.S., European and Japanese indices. (Static markets would
not cause major market changes but would make it difficult for
the Partnership to avoid being "whipsawed" into numerous small
losses).
Currency. The Partnership's currency exposure is 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 in a large number of currencies, including
cross-rates - i.e., positions between two currencies other than
the U.S. dollar. At June 30, 1999, the Partnership's major
exposures were in outright U.S. dollar positions. (Outright
positions consist of the U.S. dollar vs. other currencies. These
other currencies include the major and minor currencies).
Demeter does not anticipate that the risk profile of the
Partnership's currency sector will change significantly in the
<PAGE>
future. The currency trading VaR figure includes foreign margin
amounts converted into U.S. dollars with an incremental
adjustment to reflect the exchange rate risk inherent to the
dollar-based Partnership in expressing VaR in a functional
currency other than dollars.
Commodity.
Energy. On June 30, 1999, the Partnership's energy exposure
was shared by futures contracts in the oil and natural gas
markets. Price movements in these markets result from political
developments in the Middle East, weather patterns, and other
economic fundamentals. As oil prices have broken out of low
price ranges achieved in 1998, it is possible that volatility
will increase as well. Significant profits and losses have been
and are expected to continue to be experienced in this market.
Natural gas, also a primary energy market exposure, has exhibited
more volatility than the oil markets on an intra-day and daily
basis and is expected to continue this choppy pattern.
Metals. The Partnership's primary metals market exposure
is to fluctuations in the price of gold and silver. Although
certain Trading Advisors will from time to time trade base metals
such as copper, aluminum and zinc, the principal market exposures
of the Partnership have consistently been in precious metals,
gold and silver. The Trading Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-
volatile decline in the price of gold over the last 10-15 years.
However, silver prices have remained volatile over this period,
and the Trading Advisors have from time to time taken substantial
<PAGE> positions as they have
perceived market opportunities to develop. Demeter anticipates
that gold and silver will remain the primary metals market
exposure for the Partnership.
Soft Commodities and Agriculturals. On June 30, 1999, the
Partnership had a reasonable amount of exposure in the markets
that comprise these sectors. Most of the exposure, however, was
in the soybean, corn and wheat markets. Supply and demand
inequalities, severe weather disruption and market expectations
affect price movements in these markets.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of June 30, 1999:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in Japanese yen, German marks, British
pounds, Australian dollars and euros. The Partnership controls
the non-trading risk of these balances by regularly converting
these balances back into dollars upon liquidation of the
respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Trading Advisors,
severally, attempt to manage the risk of the Partnership's open
positions are essentially the same in all market categories traded.
Demeter attempts to manage the Partnership's market exposure by (i)
diversifying the Partnership's assets among different Trading
<PAGE>
Advisors, each of whose strategies focus on different market
sectors and trading approaches, and (ii), monitoring the
performance of the Trading Advisors on a daily basis. 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. One should
be aware that certain Trading Advisors treat their risk control
policies as strict rules, whereas others treat such policies as
general guidelines.
Demeter monitors and controls the risk of the Partnership's non-
trading instrument, cash, which is the only Partnership investment
directed by Demeter, rather than the Trading Advisors.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in the Partnership's 1998 Form 10-K:
With respect to the plaintiff's consolidated action in
California, on July 1, 1999, the Superior Court of the State of
California, ruling from the bench, denied the plaintiffs' motion
to have their lawsuit certified as a class action, stating, among
other things, that plaintiffs' lawsuit did not present common
questions of fact.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Partnership, Morgan Stanley Dean Witter Spectrum Technical L.P.
("Spectrum Technical") and Morgan Stanley Dean Witter Spectrum
Global Balanced L.P. ("Spectrum Global Balanced") collectively
registered 10,000,000 Units pursuant to a Registration Statement on
Form S-1, which became effective on September 15, 1994 (SEC File
Number 33-80146). While such Units were not allocated to the
Partnership, Spectrum Technical and Spectrum Global Balanced at
that time, they were subsequently allocated for convenience
purposes as follows: the Partnership 4,000,000, Spectrum Technical
4,000,000 and Spectrum Global Balanced 2,000,000. The Partnership,
Spectrum Technical and Spectrum Global Balanced collectively
registered an additional 20,000,000 Units pursuant to a new
Registration Statement on Form S-1, which became effective on
January 31, 1996 (SEC File Number 333-00494); such units were
allocated to the Partnership,
<PAGE>
Spectrum Technical and Spectrum Global Balanced as follows: The
Partnership 6,000,000, Spectrum Technical 9,000,000 and Spectrum
Global Balanced 5,000,000. The Partnership, Spectrum Technical and
Spectrum Global Balanced collectively registered an additional
8,500,000 Units pursuant to another Registration Statement on Form
S-1, which became effective on April 30, 1996 (SEC File Number 333-
3222); such Units were allocated to the Partnership, Spectrum
Technical and Spectrum Global Balanced as follows: The Partnership
2,500,000, Spectrum Technical 5,000,000 and Spectrum Global
Balanced 1,000,000. The managing underwriter for the Partnership
is DWR.
Units are being sold at monthly closings as of the last day of each
month at a price equal to 100% of the Net Asset Value of a Unit as
of the date of such monthly closing.
Through June 30, 1999, 8,979,197.519 Units were sold, leaving
3,520,802.481 Units unsold as of June 30, 1999. The aggregate
price of the Units sold through June 30, 1999 is $95,729,119.
Since DWR has paid all offering expenses and no other 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 "Investment Programs, Use of Proceeds and
Trading Policies" section of the Prospectus included as part of
each Registration Statement.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits - None.
(B) Reports on Form 8-K. - None.
<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 Dean Witter Spectrum
Strategic L.P. (Registrant)
By: Demeter Management Corporation
(General Partner)
August 13, 1999 By: /s/ Lewis A. Raibley, III
Lewis A. Raibley, III
Director and Chief Financial
Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from
Morgan Stanley Dean Witter Spectrum Strategic L.P. and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 70,737,978
<SECURITIES> 0
<RECEIVABLES> 1,463,180<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 83,580,122<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 83,580,122<F3>
<SALES> 0
<TOTAL-REVENUES> 13,761,902<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,937,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,824,390
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,824,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,824,390
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include subscription receivable of $1,251,434 and interest
receivable of $211,746.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $10,583,927 and net option
premiums of $795,037.
<F3>Liabilities include redemptions payable of $513,825, accrued
brokerage fees of $405,118,and accrued management fees of
$216,820.
<F4>Total revenue includes realized trading revenue of $7,222,069, net
change in unrealized of $5,284,592 and interest income of $1,255,241.
</FN>
</TABLE>
