The Tasgall Group

I had the good fortune of spending some time in a waiting room this morning where today’s Wall Street Journal was available for reading… and since I don’t subscribe to the WSJ I will have to paraphrase what I read in one of the cover stories…

Stocks and bonds rallied yesterday on the comments from Federal Reserve Governor Richard Fisher who said the economy is strong despite a slowing housing market and right now inflation is the biggest risk. […] The comments led to expectations that the Fed is done raising rates.

Am I wrong, or am I the only person who read “the economy is strong” and “inflation is the biggest risk” as preparing the way for another rate hike? When the economy is strong, that means it should be able to handle the impact of more hikes without too much trouble. If inflation is a worry, then the Fed could/should raise rates to stop it from getting out of control.

Am I missing something here? It’s just like with the last 7 FOMC rate hikes, everyone was convinced that the Fed was going to pause despite all the messages to the contrary. The market cheerleaders kept singing the same song, almost verbatim despite being wrong 6 times in a row…

[Note that I’m not saying the Fed should raise rates, but rather the reaction to Fisher’s comments was unusual…]

I’d like to look at the technical situation in the gold markets and compare the current correction to the market situation back in 2002. Hopefully we can learn something, and maybe even anticipate the direction of the gold market a bit… I’m not going to cover the fundamental story, or why we want to own gold… that’s a topic for another post…

There are many a gold bug that think that gold will travel in a straight line — straight up! They buy at any price, and expect the world to fall apart on any given day. It would all be a lot easier if the price of gold moved in a straight line, but alas, we have to deal with reality here.

Price changes in gold can be violent, and it’s incredibly painful as you expect prices to go straight up, when in reality they go down by 21% in a two week period as the HUI index did from 9/11 to 9/21.
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As I’ve noted in the past, Natural Gas has been trading very low lately for a variety of reasons. With a seasonal pattern of bottoming in September, I’m interested in looking at how to invest in the potential upside of this essential commodity.Importantly though, my view of the futures market for Natural Gas is not very accurate… Not surprising, you need to look at the other futures contracts, not just the most commonly cited front-month.

When you look at the other futures contracts, you will notice that the prices are in cantango, which is not a big surprise when you think about it. Here are the prices from Friday: (more…)

No, not that big “O”, but rather the company that trades under the ticker “O“, Realty Income Corp. That was the most surprisingly bland name of the one letter ticker symbols that I recently reviewed out of curiosity… (more…)

So the conspiracy nut inside of me wants to talk about Amaranth, and how they are the first domino in a long line of dominos…

Maybe pension funds and other less aggressive investors will realize that they don’t really want the added risk that comes from investing in hedge funds, and start to pull their money out of hedge funds, broadly and without any distinction… With decreasing assets in hedge funds, many have to start liquidating their positions and de-leveraging… Prices start to fall since most hedge funds have a long-only bias (a side effect of the Bernanke/Greenspan Put?), and their selling causes prices to fall despite the lock-up periods they have forced their investors into… and prices begin falling across the board with stocks and commodities (remember, pricing happens at the margin)… we see liquidity disappear more convincingly than a David Copperfield magic trick… spreads widen, and a sharp downturn begins…? The markets panic, and the bottom falls out… (The sky turns to fire, the sea turn to blood…)

But then I snap myself out of it, and realize, Amaranth was a HUGE fuck-up, but they still met their margin calls. Sure, they lost $6 billion or 65% of their assets, but their brokers cut them off before they presented a risk to the entire financial system… unlike LTCM where the brokers were blindsided by how much exposure they had, and had to have the Federal Reserve twist their arms until they dealt with the situation.

The risk of failure was born by those that could bear it. The failure wasn’t paid off by the public at large in the form of higher taxes like the Savings & Loan crisis back in the early 80s… The burden wasn’t hoisted on unsuspecting employees who had all their 401(k)s invested in the company stock (Enron)…

So, have we progressed to the point where we can survive the failure of a significant player in the markets? Can we rest easy knowing that we’ve learned a lot since 1998 when LTCM imploded?

Or maybe, just maybe, those who are currently bearing the risk will realize that it might be more risk than they originally anticipated… and then they start to pull their money out of hedge funds…

I came across some interesting observations while doing some research on the historical prices of the AMEX GoldBugs Index (symbol HUI). The HUI is made up of the 15 largest unhedged gold producers in the world, and is one of my primary ways to track gold stocks in the aggregate.

As gold has wobbled and fallen quite rapidly lately, the HUI is moving quite a bit too. Over the last few trading days, it has seen quite a bit of volatility including several single day moves of more than 3% (up or down) and a single day of -7.6% (9/11/06)!

How common is this? looking at the 10 years of data since the index was created, there have actually been 49 days where the index moved up or down more than 7%. (For the gold bugs out there, there were 37 up days and 12 down days.)

Out of the 2500 trading days, a full 10% of the trading days exceeded a 4% move! (A full 60% of those days were UP days.)

Most amazing, there were 2 days where the index spiked defied all adjectives by moving higher by more than 15% including the largest single day gain of 24% back in September of 1999 when God himself smiled on the gold bugs and 15 central banks suspended their gold sales all at the same time…

The largest single down day for the index was -12.6% in July of 2002 when something happened that was important to gold, but not important enough for Google to find it some 4 years after the fact…

And almost by definition, indexes are typically much less volatile than individual stocks, so imagine how much individual gold stocks are moving!

Here’s another hedge fund manager who likes to play it loose in the energy markets… but this fund’s losses are much bigger than the MotherRock implosion back in August.

Amaranth Advisors, a hedge fund with $7.5bn under management, has warned investors that its main funds are down 35 per cent or more this year after big losing bets on natural gas prices.

“We are in discussions with our prime brokers and?.?.?.?are working to protect our investors while meeting the obligations of our creditors,” Nicholas Maounis, Amaranth’s founder, said in a letter to investors.

And their selling may also be the cause of much of the downward pressure in the Natural Gas market (some speculate the situation is affecting the gold markets too): (more…)

In case you guys hadn’t read the news, my old friends at ICE (Intercontinental Exchange) are buying the NYBOT (New York Board of Trade). The price of ICE was up 15% in Friday’s trading when the news was announced…

I remember back in the day, a question came up of why does ICE even exist? There are quite a few different answers… all with varying roots in reality. (more…)

If you’re going to buy something with all your hedge fund profits, why not buy a congressperson?

Top hedge fund managers are pouring money into U.S. political campaigns ahead of November’s congressional elections as the government considers what to do about the lightly policed hedge fund industry.

-Reuters

You can see the last 20 years of the Nikkei on Yahoo.com.

I also found this chart in Financial Reckoning Day, where the authors try to draw parallels between the Japanese situation 15 years ago with the one in the US now (or was in 2003 when the book was written). (more…)