BBC News reports that another hedge fund has closed down thanks to its failure to bail out of the oil speculation trade that boosted oil to a peak of $147 in July. This is yet another piece of evidence that people like Hank Paulson, who insisted that record oil prices were due to supply and demand, were either being less than honest -- particularly since his former employer Goldman Sachs Group (NYSE: GS) was a big beneficiary of this speculation -- or ignorant of reality.

The hedge fund in question this time is Ospraie Fund, which invested in commodities like oil and gold. It "has lost 38% of its value since the start of the year." Gold is down 22% to $800 from its $1,030.80 an ounce high in March. Oil has tumbled 25% to $109 since peaking in July, according to BBC News. But 1440 Wall Street suggests that the biggest commodity culprit in Ospraie's demise was copper's tumble. The lesson here is that if a sufficient number of big money speculators get together and decide to, say, short the dollar and go long commodities, there will seem to them to have safety in numbers.

But when the government started investigating the cause of spiking oil prices, the trade got very unprofitable very fast. As I posted, the Commodities Futures Trading Commission (CFTC) recently found that 81% of oil trading volume was driven by speculation. Then we witnessed the failure of SemGroup and the indictment of Optiver Holding for manipulating energy prices -- those funds who were too slow to reverse their positions and got creamed.

Continue reading Lehman-backed hedge fund fails as oil play peters out

Lehman-backed hedge fund fails as oil play peters out originally appeared on BloggingStocks on Wed, 03 Sep 2008 09:55:00 EST. Please see our terms for use of feeds.

During July, the prices of oil exploration and coal stocks mentioned in my newsletter tumbled precipitously. For example, Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU) lost roughly a quarter of their value by the end of July and Ultra Petroleum (NYSE: UPL) and Southwestern Energy (NYSE: SWN) which had been up over 40% through June ended July up a relatively paltry 4% and 11% respectively.

I find this interesting because it violates one of the basic theories I have about what moves stock prices. This beat-and-raise theory says that if a company beats earnings estimates and raises its guidance, then the stock will rise. Otherwise it will fall. In the case of these four companies, each of them with the exception of Ultra which did not report, reported doubling or tripling of earnings and raised their guidance.

So why did their stocks fall? In the case of the oil and gas companies, it could be because of declining oil prices. Those peaked at $146 a barrel and recently traded at $127. But I am not aware of any diminution in the price of coal for which demand is strong due to Chinese and Indian infrastructure investment among other factors. Coal is used to make steel and to fire up power plants.

Continue reading Is the commodity bubble bursting?

Is the commodity bubble bursting? originally appeared on BloggingStocks on Sat, 02 Aug 2008 18:00:00 EST. Please see our terms for use of feeds.

MAJOR PAPERS:

• The Wall Street Journal's "Smartmoney Stock Screen" looks at eight companies whose valuations make them ripe to buy, and they also may be in the sites of corporate buyers. The big eight include Asbury Automotive Group Inc (NYSE: ABG), Crane Company (NYSE: CR), Scholastic Corporation (NASDAQ: SCHL) and The Scotts Miracle-Gro Company (NYSE: SMG).
• The Wall Street Journal's Walter Mossberg said in the "Personal Technology" column that he cannot recommend Apple Inc's (NASDAQ: AAPL) MobileMe, as it has "too many flaws to keep its promises".
• The Wall Street Journal also speculated that the collapse this week of SemGroup LP, which is the parent of SemGroup Energy Partners LP (NASDAQ: SGLP), may have played a role in the 14% drop in crude oil over the past 10 days.
• In a move that could take advantage of the gap in the financing markets, The Goldman Sachs Group Inc (NYSE: GS) raised $10B to invest in loans backing leveraged buyouts. The fund will reportedly buy senior loans, the Financial Times reported.

• Former American International Group Inc (NYSE: AIG) chief Hank Greenberg is reportedly in settlement talks with New York Attorney General Andrew Cuomo over charges that Greenberg improperly inflated corporate books to show improved profits, the New York Post said.

Newspaper wrap-up: Stocks to buy that might also be taken over originally appeared on BloggingStocks on Thu, 24 Jul 2008 08:35:00 EST. Please see our terms for use of feeds.