Financial Hegemonists

You might think that the news on two hedge funds Amaranth and Pirate Capital doesn't matter to the average person, but I think it does.

Even though they are called Hedge funds, they don't have to "hedge" anything. Many of them make a lot of money by borrowing most of it and speculating on price movements in stocks or commodities. It matters because the bull market has attracted a lot of hedge funds to open. They are pretty much unregulated, so anyone who can attract “sophisticated” investors and borrow money can set up shop.

At least in financial markets, human nature moves between the feelings and actions of “fear” and “greed”. In this cycle “fear” was in mid-2002 when we had the scary Enron and Worldcom debacles and the invasion of Iraq and recently, we hit “greed” when oil reached about $80/ barrel. Now that oil is at $62 /barrel, I’m pretty sure we are now starting back towards “fear”.

Simple example 1:
In Mid-2002 the market is at “fear”.
Hedge fund buys $1 million of stock X and borrows $4 million to buy more of X. The stock increases 30% and because of the borrowed money there’s a 150% return on a $1 million investment. WOW!! “Sophisticated” investors flock to invest in the hedge fund.

Simple example 2:
Late 2006 the market is at “greed”
Hedge fund buys $1 billion of stock Y and borrows $4 billion more to invest in stock Y. Whoops...stock Y goes down 30% and because of the borrowed funds they've lost the $1 billion investment and can’t repay the $ 4 billion loan in full. It’s a 150% loss. HOLY COW!! Margin calls and screams of, "Get my money out of that fund!”

You can imagine that a fund can be a lot more nimble if it needs to sell $5 million of stock in a bull market than if it needs to sell $5 billion in a bear market. The problem is that no one really knows how many other hedge funds opened and decided to make the same exact bet that stock Y would go up. If everyone who borrowed a lot of money made the same bet that stock Y would go up and goes down 30%then we are all in trouble.

Now, imagine a similar scenario but just substitute “home buyers” for “hedge funds”. If too many people have placed the same bet counting on home price appreciation, then we’re all in trouble. I suspect we’ll all find out the answer in about 3 to 6 months.

Alaska - the last frontier

When I used to think about Alaska, I thought about a beautiful rugged state. The license plates read: The Last Frontier. This moniker makes sense because after all, even in the most inhabitable part of Alaska (southeast), there’s 6 months of snow, 5 ½ hours between sunrise and sunset on Winter Solstice and about 12 feet of rain a year. Come on! It's rugged since only about 650,000 hardy people live in an area that is about one third the size of the continental U.S.

So, I decided to take a rugged cruise. Now, I am now one of those 600,000 + people who took a cruise to the Last Frontier this summer. It’s a rigorous lifestyle that includes: sleeping in shifts - 8 hours at night and a nap during the day, eating – grueling dinners, painstaking trips to the nacho bar, countless souvenir shops and best of all – endless beautiful vistas.

My favorite town was Sitka and my favorite vista was the Hubbard Glacier where we stayed 2 hours and watched sheaths of ice crack then break-off and plunge into the bay to form icebergs.

The Inside Passage in Alaska is just like seeing the tip of an iceberg; it looks so tiny on the map. Maybe next time (when I’m in shape), I’ll explore the more frontiery parts of Alaska.

Chocolate Mary

When I first heard about the Fountain Valley, CA chocolate factory worker who found chocolate drippings resembling Mary the mother of God, I chuckled. Ok, I may have guffawed. Then I paused and thought, "Hey, I represent that remark!"

I grew up in a very Catholic household and The Virgin Mary was my mom’s confidant and protector. God rest her soul, my Mom prayed to the Virgin Mother daily, and I swear it worked for her. Mary certainly seemed to answer a lot of tough questions in my mom's life and even helped with small issues like the weather. I can’t recall a single family picnic where it rained.
And I think it’s because the morning of the picnic, my mom would turn the statue of the Blessed Mother, which sat on the kitchen window sill, towards the garden.

Ok, so it doesn't make intuitive sense to me. But, I can’t laugh at Chocolate Mary, because I know that for some people a close relationship to The Virgin makes them a better person.

Oil drunks

Do you ever feel like an oil drunk? I do. The last time I felt this guilty about U.S. oil use was in the early 80's when my eighth grade class had to write essays on "A World Without Oil".

My essay was like most of the others - a doomsday scenario where the oil faucet was quickly shut off and we lived in a dark world similar to Gotham City in the “Batman” movie. There was one boy who wrote a hopeful essay where the world chugged along the same but with solar power and windmill stations where you filled-up your car.

Today, I imagine my essay would still have a doomsday feel to it. It’s hard for me to be optimistic when I know that the U.S. comprises 25% of total world oil consumption and that if the Chinese lived like us, they’d use about 87.5 million barrels of oil per day which is over ten times more than what they use now.

I wonder if that boy who is now a man has written a 12-step program to make us oil independent or if he’s out on the bay driving his speedboat. I need someone to look to for guidance because Exxon predicts that in the year 2030 we will need 60% more energy than we do today.

I'm hoping that today's eighth graders have better answers than we did.

In the palace of truth

You know how they say the Eskimos have 18 words for snow? Well, we Americans probably have about that many words for truth. After all "Truthiness" was selected by the American Dialect Society as the 2005 Word of the Year.

There was a meeting at work last week where a senior manager kept referring to "the palace of truth" when talking about company policy. I think "in reality" would have sufficed, but I guess you kind of bold and italicize when you say "the palace of truth" .

Of course there's the 80-20 rule of truth. RULE: As long as 75-80% of the truth is told then it can officially be labeled "truth" by the FDA or whatever agency handles that kind of thing. I witnessed the 80-20 rule the other day in P.B. when a colleague of mine was on his cell phone describing the day as, "Absolutely perfect, it's 70 degrees, tons of people and we're just watching the waves roll in." Well, that was almost true except that it was completely overcast and a homeless man just took a pee on the sidewalk in front of us.

Today I was reminded that maybe all of this truth stuff or lack thereof isn't really that new. I was intrigued by an exhibition that I saw today at the Getty Center, "Agitated Images: John Heartfield and German Photomontage, 1920-1938". Heartfield took photos from newspapers etc. and transformed them to disclose the "truth" that was being obscured by the mainstream press.
I'm starting to think that the palace of truth may be hard to find, especially since I looked up those 18 Eskimo words for snow and found out it was just a hoax.