Weekend Link Summaries - 5/3/08

Commodities

"Copper Caper: Thieves Nab Art To Sell for Scrap"
Sarah McBride - WSJ
* Thieves are stealing sculptures that are cast in bronze, of which copper is a main ingredient. Manhole cover, pipes, and wiring are also missing as copper prices approach $4 a pound.

"Corn Ethanol Loses More Support"
Siobhan Hughes, Ian Talley, and Anjali Cordeiro - WSJ
* Members of Congress and Governors asking that ethanol requirements that were recently mandated be scaled back. Good luck in an election year, but it is a start.

"Turmoil leads to new index for US munis"
The Economist
* Discussion of how the Fed cuts are doing little to reduce borrowing costs but are contributing to the soaring commodity prices. On the plus side, due to the falling dollar, when you exclude oil, the U.S. current-account deficit has fallen to an eight-year low of 2.4% of GDP. How has the Fed contributed (per the article): 1.) With lower rates, the Fed encouraged speculation in commodities since inventory cost were reduced, 2.) Lower rates fostered a weaker dollar, increasing the price of dollar-denominated commodities.

"Grain Companies' Profits Soar As Global Food Crisis Mounts"
David Kesmodel, Lauren Etter, and Aaron O. Patrick - WSJ
* The food and agriculture story is not new, but what is interesting is how not only are the food producers feeling the pinch, but some farmers themselves are also starting to get squeezed as they are paying more money for seeds, fertilizer and farm gear. Like the gold rush, it is not always the commodity sellers or the miners, but those selling the pick axes that can still realize profits as commodity prices go higher. Companies such as Monsanto, Potash, Agrium, and Mosaic, etc., are still doing well - although the stocks may react a little differently given their huge run-ups. Is there too much speculation? Of interest: "Total index-fund investment in corn, soybeans, wheat, cattle and hogs has increased to more than $47 billion, up from about $10 billion in 2006..." Money is certainly flowing, and demand is still strong. It will be interesting to see how the stocks hold up.

"Commodities jump, but losses raise concerns of downturn"
Stevenson Jacobs - The Associated Press
Increased talk about the potential downturn in commodities. Of interest in the article: "... investors are funneling money out of gold exchange-traded funds, or ETFs, which sell shares backed by gold bullion. The biggest gold ETF in the U.S., streetTRACKS Gold Shares, has shed 83 tons of gold since March, roughly half the amount it acquired during the metal's run-up beginning late last year." Pretty amazing. Gold speculation truly does usually end in tears. Large funds appear to be running towards the exits. Even with increased demand, gold may still suffer loses as speculators get out. On the other hand, demand in food commodities will continue and will help to reverse any recent corrections. People need to eat (and fill up our cars with ethanol - at least until mandates are reduced). Recent corrections in the food commodities may allow these assets to build a base, filter out some speculation, and provide a little more clarity as to direction.

"Prospecting for Junior's Gold"
Matt Whittaker - Barrons
* Junior miners (no, not young miners, but small mining companies) are becoming attractive, not only because of the flexibility they have in downturns/correction, but because they are takeover targets as the majors look for ways to increase market share and juice profits. Of course, with higher potential return comes higher potential risk, including political risk and an inability to absorb high production cost as efficiently.

Derivatives

"Turmoil leads to new index for US munis"
Saskia Scholtes - Financial Times
* A new index of derivative products are being developed to protect against defaults in ....... hold your breath ....... the munis. Pretty unbelievable how times have changed. Of course, the problems with the monolines did not help the situation.

"There's triple A and there's triple A"
Alphaville - Financial Times
* Interesting article showing the effects of both Loss Given Default (LGD) and Probability of Default (PD) or Default Rate (DR). Looking at both, the level of loss is more dire for AAA rated debt, forcing triple A debt to be broken into various junior and senior levels (tranches). Another example of the problems and considerations necessary when considering either mark-to-market or mark-to-model accounting. BTW, read the article comments - highlights how confusing everything is.

Hedge Funds

"Hedge Funds Muck In Down On The Farm"
James Mackintosh and Kate Burgess - Financial Times
* Many hedge funds are beginning to invest in, and outright buy, farms. The move is being made in an effort to take advantage of rising commodity prices, which most feel are here to stay, at least for a while. A few funds also feel that buying farms and having a window into their operations and will give their traders an edge for having information that comes straight from the horse's mouth, figuratively speaking (but not far off). Are farm ETFs next?

"A New Face of Hedge Funds Isn't Shy"
Gregory Zuckerman and Jenny Strasburg - WSJ
* Profile of David Einhorn, the 39-year old manager of Greenlight Capital. Kind of seems more like a 9-to-5 job.

"New funds cut fees to counter old losses"
Alphaville - Financial Times
* Somewhat related to the previous article, hedge funds managers are now waiving fees until they again reach the high water mark. This is unusual only in that it is counter to a recent trend of just closing shop and starting over again. Maybe the legal issues are making some managers nervous.

"Hedge Fund Fees Shrink as U.S. Pensions Make Direct Investments"
Katherine Burton - Bloomberg
* Hedge fund investors, in particular pensions who have been nervous about investing directly in single hedge fund, are moving away from funds-of-funds. The move essentially allows the pension funds to remove the extra layer of fees. Given that funds-of-funds have mixed results, this may be a smart move.

Quantitative Finance and Financial Engineering

"The new fact of 130/30?"
AllAboutAlpha.com blog
* 130/30 funds not just about quants, but also being used or considered by fundamentally-managed trading-based funds.

"Cudgle Over the Quants"
Megan Barnett - Portfolio.com
* Quants and others are being sued as they leave one hedge fund to work at or start another. When big money is involved ......

Trading

"A New Wave of Vilifying Short Sellers"
Jenny Anderson - NY Times
* As with many bear markets or market downturns, Congress and others start pointing fingers at the shorts. Of interest in the article is the statement: "On the New York Stock Exchange, short selling is running near record levels. Just over 4 percent of all the shares on the Big Board were sold short as of March. That figure, however, excludes many rapid trades made every day. Market makers, for example, often go short to ensure customers’ orders are filled quickly. And most hedge funds take short positions to offset their other bets in the markets. So, in all, short selling probably accounts for a quarter or more of all trading." Yes, and some days selling totals more than buying. Maybe we should get rid of that too. Of course, hedging and market maker activities (at least the legal ones) are not usually what people are worrying about. The problem is the pump-and-dumpers, but as Jim Chanos said: "Show me the evidence."