One of the major economic debates on Main Street and in Washington concerns the influence of speculators during oil's record price rise. (Oil currently trades above $140 and is up 100% during the past year, and more than 400% since 2000).
More than one Congressional committee is investigating the role of speculators, who critics say have 'distorted' or artificially boosted oil's price -- driven it higher than a level the commodity would trade at if the price were based solely on supply and demand fundamentals.
New York Times columnist Paul Krugman, while not denying speculators have contributed to oil's record rise, nevertheless offers perhaps the strongest evidence regarding how a commodity's price can rise a great deal, without the influence of speculators. His evidence: iron ore.
This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
Ralph Cioffi and Matthew Tannin were indicted on June 18, 2008. They are accused of a litany of fraudulent activities in connection with the demise of two hedge funds they managed for Bear Stearns.
Cioffi and Tannin are entitled to the presumption of innocence. The obligatory "perp walk," staged for the benefit of the press, is offensive to traditional notions of justice. Not only does it demean and humiliate them, it taints the jury pool and intrudes upon their right to a fair trial.
Nevertheless, the indictment offers an insight into conduct that would otherwise be inexplicable.
Here are two highly educated, sophisticated, fund managers who achieved the American dream -- and then some. Why would they risk it all by, as alleged, misrepresenting the risk of these funds, and their personal stake in them?
The Wall Street Journal reported that after years of rapid grows, many hedge funds are shutting their doors or merging with others, as expansion has dramatically slowed. As a result, the industry is being dominated mostly by big firms, such as Och-Ziff Capital Management Group LLC (NYSE: OZM), D.E. Shaw & Co., and Paulson and Co.
Shares of Ctrip.com International Ltd (NASDAQ: CTRP), China's major Internet travel booker with about 58% of the country's online travel business, have dropped about 30% in the last six weeks alone creating a possible buying opportunity, according to the Wall Street Journal's "Heard in Asia". Travel in China is expected to grow solidly in the long-term and Ctrip.com said it expects revenue to grow 30% for the three months ending June 30 from a year earlier.
In a move that could potentially usher in a new phase in the credit crunch, the Financial Times reported that The Goldman Sachs Group Inc (NYSE: GS) is said to be close to finalizing a plan to restructure a $7B investment vehicle formerly run by Cheyne Capital, a London-based hedge fund.
Investors are taking their money out of hedge funds more now that at any time over the past 10 years, according to the Wall Street Journal. Firms are bracing for the end of June when the next big wave will hit.
First it was a demand for management changes, and now shareholders, including one time director Eli Broad and fund managers Shelby Davis of Davis Selected Advisors and Bill Miller of Legg Mason Inc (NYSE: LM), are again upset with American International Group Inc (NYSE: AIG) and want changes in the boardroom as well, the Wall Street Journal reported.
Spotlight Capital is increasing pressure on Chico's FAS Inc (NYSE: CHS) and said it has been in touch with 25 major shareholders in order to oust CEO Scott Edmonds and unseat board member John Burden, who are accused of having a conflict of interest, the New York Post reported.
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Advanced Micro Devices Inc (NYSE: AMD) denied reports certain of its new dual-core chip, code-named Kuma, have been canceled, according to CNet. A spokesman for the company said that the launch of Kuma, scheduled for the second half of 2008, remains on track.
The economic boom in emerging markets has driven up both the value of commodities and the food production process itself.
Moreover, the long-term trends look good, with out-sized gains likely to stretch for more than five years, if current emerging market economic growth trends continue.
That suggests the sector is likely to continue to attract new investors, and huge investment funds - - not a conventional source of capital for farming, historically - - have already started making bolder and longer-term food-related investments, by buying farmland, fertilizer, grain elevators, and shipping equipment, The New York Times reported Thursday.
One example: the BlackRock fund group plans to invest hundreds of millions of dollars in agriculture, chiefly farmland, from sub-Saharan Africa to the English countryside, The Times reported.
Farms: the new asset class-of-choice
Economist Glen Langan told BloggingStocks Thursday the investment fund / managed fund money flow in farmland and food is the logical next step for agriculture, given the large gains in global food demand projected for the next 5-8 years.
"The equity markets have not fully come to grips with the enormity of his increased demand, but investment funds are beginning to comprehend it, and the money flow toward farms has begun," Langan said. "Think about this - - China and India combined could add about 3-5 million members to the world's middle class each year over the next decade. Those are consumers with money to spend, and they'll consume more food. And that total does not include expanding middle classes in South America, Eastern Europe, and the Middle East."
The "Totally Informal Economics Roundtable" (TIER) met this week. Readers of this space know that the esteemed Roundtable achieves a quorum whenever yours truly and my three astute economist friends from graduate school convene to discuss matters economic... or to celebrate the birthday of one our school-age children.
This week's the topic was oil's remarkable 4-year run to $135 per barrel.
The TIER agreed that, yes, speculators, traders, hedge funds, and other institutional investors had driven oil to a 'bubble' price or level -- but not due to any conspiracy or coordinated effort to push prices higher.
Rather, the TIER agreed that speculators bought oil futures and other oil instruments: because a) they believe the price of oil is headed higher, and/or b) they believe they'll benefit in some way from an oil-long position.
Hedge funds and speculators reduced positions in oil by 80% as prices rose to records and as U.S. regulators started investigating trading, Bloomberg News reported Monday, citing government data.
Net long positions decline to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27, 2008 from a record 127,491 contracts on July 31, 2008 according to a U.S. Commodity Futures Trading Commission report.
The Commodity Futures Trading Commission announcement of an ongoing and widening inquiry occurs amid a 4-year rise in crude oil prices in which gasoline, diesel, and heating oil prices hit record highs, Reuters reported Friday.
Oil closed Friday up 73 cents to $127.35 per barrel. Oil has risen about 100% in the past 12 months.
Many Congressional officials and consumer groups have been arguing for a systematic investigation into futures prices, asserting that institutional investors and other speculators have manipulated oil prices and driven them "artificially higher."
Others, including economists and oil executives, argue that the price increases have more to do with the sector's bullish fundamentals, including inadequate crude oil production growth amid rising demand.
Oil Analysis: Strong evidence suggests that the bulk of oil's 4-year bullish run is rooted in fundamentals, with the reduction in the global safety cushion -- the spare oil between daily global oil supply and demand -- accounting for today's near-record oil prices. Still, that's not to say a rigorous inquiry would not yield compelling data or new insights. One area of interest that the inquiry will explore: whether oil storage operators have issued misleading information about oil in their tanks to profit from oil trades, Reuters reported Friday.
Oil fell for the third straight day Thursday and neared the psychologically-significant $110 level, as data confirming a sluggish U.S. economy and the rising dollar reduced investors' demand for oil as an alternative investment.
Oil, which had traded as low as $110.80, closed down 96 cents to $112.50 per barrel. Oil hit a record high of $119.90 per barrel on April 22, 2008.
The other major energy commodities also closed substantially lower Thursday. Heating oil closed down about 6 cents to $3.10 per gallon, unleaded gasoline closed down 5 cents to $2.85 per gallon, and natural gas closed down about 25 cents to $10.59 per million BTUs.
The New York Times reports that the highest paid hedge fund manager, John Paulson, made $3.7 billion last year. If you are in the median family, that is 61,157 times more than your $60,500 income. Put another way, on a pretax basis Paulson made 30.6 times more in one hour -- $1.9 million -- than the median family took in all year. To make the list of the top 25 hedge fund managers you needed to earn $360 million last year. Thanks to them and a few others, income inequality in 2007 was at its most extreme since 1928, the year before the Great Depression began.
The top hedge fund managers made money in a variety of ways. They bet that prices of commodities like oil, wheat and copper would rise. But Paulson made his money by wagering enormous sums on a decline in the value of subprime mortgage-backed securities known as Collateralized Debt Obligations (CDO). One of his funds making that bet returned 590% in 2007, and the other handed back 353%. By the end of 2007, Paulson managed $28 billion in assets, up more than four-fold from $6 billion in 2006.
Many of the trends from which these hedge funds profit are coming out of your pocket. The higher commodity prices are squeezing the budgets of people who are paying more for food and energy -- for example, producer price inflation rose 1.1% in March. And hedge funds are among those driving up the prices that you pay for commodities through their leveraged bets. But, as I posted earlier, Paulson profited from the pain of homeowners who defaulted on their mortgages and foreclosed on their homes.
U.S. regular unleaded gasoline prices rose another 5 cents in the past two weeks to $3.32 per gallon, according to a national survey which collects price information from 7,000 stations nationwide. The Lundberg Survey also put mid-grade and super unleaded at $3.44 and $3.55 per gallon, respectively.
Independent energy trader Jim Dietz told BloggingStocks Monday gasoline is being pushed higher largely by the price of oil, even in the face of flat-to-declining U.S. gasoline demand. U.S. consumers "are doing their part to take pressure of prices," but triple-digit-oil prices are providing little incentive for gasoline refiners and wholesales to lower prices. (The oil component accounts for about 50-55% of the cost of a gallon of gasoline.) Oil rose $2 to $108.23 per barrel in early trading Monday. Dietz added that he's presently flat, or has no open oil or gasoline positions.
Dietz said, typically, when gasoline demand flattens or drops wholesalers/distributors and retail stations lower prices slightly to spur increased sales. That has not occurred so far this spring, despite statistics indicating U.S. gasoline consumption has declined, on a year-over-year basis, for more than three straight weeks.
Another factor that may be helping to keep gasoline at stubbornly high levels in the face of sluggish demand? Hedge/investment funds buying gasoline futures in search of returns, Dietz said. Dietz said an increased number of hedge funds and investments are turning to commodities, and oil/gasoline in particular, as a way "to achieve decent returns, when stocks and other investments can't" due to the hurting U.S. economy.
One of the most intriguing questions amid the stock market's recent slump and the three-year-plus bull run in commodities, especially oil, concerns whether or not investment funds and hedge funds have artificially boosted commodity prices.
One camp argues that hedge/investment funds now have the capacity to "distort" prices beyond what a sector's fundamentals suggest the price should be. Another camp argues that the valuation of "distort" is subjective, and in any case the market will quickly self-correct for the error, when the bubble or trough, ends.
When making arguments before Congress and other groups, the price distortion camp can point to two recent data points to make their case. First: the $23 per barrel rise in the price of oil to $111.80 from about $87 from mid-February 2008 to mid-March 2008. Second: the 14 cent jump in wholesale unleaded gasoline to $2.77 per gallon on April 2, 2008.
Inventory data
Concerning oil, there has been no fundamental change in global oil supply or demand in the past quarter. If anything, demand growth moderated in the period. Further, oil inventories in the world's largest consuming nation, the United States, rose during the period. Still, oil prices rocketed 26% during the period to record highs.
Billionaire investor George Soros believes the current financial crisis is the worst since the Great Depression, and said stocks have not bottomed yet, Bloomberg News reported Thursday.
Soros said the most recent market bottom "will probably not prove to be the final bottom," adding that the current stock rebound will last six weeks to three months as the United States moves closer to recession, Bloomberg News reported.
Further, Soros, in an op-editorial column in The Financial Times, argued that the cause of the market's current problems is a flawed premise: the belief that markets are self-correcting and tend toward equilibrium. They aren't and don't, Soros argues, and the laissez-faire policy creates bubbles, including the most-recent housing bubble, which, in turn, when it started to burst, led to the current credit crunch.
Soros cites deregulation
Soros added that the market's current troubles originated in 1980 when U.S. President Ronald Reagan and United Kingdom Prime Minister Margaret Thatcher led a laissez-faire movement that reduced/eliminated regulation of banks and financial markets, the FT reported.
Watch for more hedge fund closings. They are coming. According to the FT, "Hedge funds are having their worst start to the year on record after March turned into one of the ugliest months for popular strategies and several funds imploded."
The news is bad for the hedge fund managers, but even worse for banks and brokerages that may have loaned them money. Even in a liquidation, these financial firms may not get all of their money back.
Institutional investors, like fund companies, also have money in hedge funds. That could affect the performance they post for their corporate and individual investors. Wealthy individuals often put capital into hedge funds as well.
If the hedge fund debacle gets worse, banks may have to write off the difference between what they loaned and what they got back in liquidation. Just another minefield for money center banks and brokerages.
And the number of trouble spots seems to be growing.
Douglas A. McIntyre is an editor at 247wallst.com.
BlackRock (NYSE: BLK), which is a top global asset manager, is one of the few that has been relatively unscathed in the financial meltdown. The company avoided such things as subprime securities and was quite conservative with client portfolios.
As a result, BlackRock now has lots of flexibility. So, what to do? Well, the firm has put together an IPO filing for a fund of hedge funds (to raise about $500 million). The offering will be on the London Stock Exchange.
Basically, a fund of hedge funds is a platform where managers invest in various hedge funds. True, the fees can be high, but there are some key advantages, such as diversification and improved due diligence. Besides, BlackRock has proved to be a top-notch operator with understanding complex investments. After all, the firm is helping to deal with the management of a big part of the Bear Stearns (NYSE: BSC) portfolio.
Actually, BlackRock's fund of hedge funds is part of Quellos Group LLC, which the firm purchased last year. In other words, it looks like BlackRock may snag a nice return on this deal.
This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
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The economic boom in emerging markets has driven up both the value of commodities and the food production process itself.
Hedge funds and speculators reduced positions in oil by 80% as prices rose to records and as U.S. regulators started investigating trading, 
The 
U.S. regular unleaded gasoline prices 
One of the most intriguing questions amid the stock market's recent slump and the three-year-plus bull run in commodities, especially oil, concerns whether or not investment funds and hedge funds have artificially boosted commodity prices. 
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