Below are the weekly link summaries for the usual groups: commodities, derivatives, hedge funds, private equity, quantitative finance and financial engineering, and trading. Hopefully you find some articles that you may have passed over, but might be interested in reading. Have a good week.

Commodities

Limited trading gains dampen corporate wheat purchases
Harish Damodaran - Business Line
* There is a cutback in demand for wheat from India this year as many companies got burned when the price of wheat did not keep rising, and sold off quickly. Many corporations in India that use wheat have large stockpiles left over from the previous year.

Soaring freight costs add to price of basics
Javier Blas - Financial Times
* Freight cost for basic commodities are rising as the Blatic Dry Index rose to an all-time high, increasing inflationary pressures on countries importing natural resources, in particular India and China. One of the main reasons is a surge in demand for iron ore in China, but consumption is high for nearly all commodities. Analysts are finding that there are not enough new vessels entering the market to match the increases in demand. Port delays are also rising across the globe, adding another element to drive shipping prices higher.

European Coal Rises to Record on Limited Supply, Power Demand
Alistair Holloway - Bloomberg
* Interesting article on how coal for delivery in Europe has rose to record levels as global supplies become limited. Demand from India and elsewhere is increasing as these countries need coal for new coal-fired power stations being built across the globe. Of particular interest is the quote: "We are in a long-term pattern because the world is building a massive amount of coal-fired generation. Current supply is definitely running under global demand.'' The need for coal is also strong in the European Union, where the 27 nations in the union use coal for about 30% of their power. Given that a lot of the coal comes from the U.S. and elsewhere, hauling costs are currently accounting for as much as half the price of delivered coal.

Bears begin to separate the wheat prices from the corn
Javier Blas - Financial Times
* A discussion of how wheat and corn prices, which have at times risen together, have been diverging in price as corn continues to increase in price, while wheat prices decrease. Analysts expect them to begin tracking each other at some point. The key is to determine whether it will be wheat going back up, or corn correcting and selling off. Given that there have been record harvests of wheat in the Northern hemisphere, wheat is expected to continue to fall in price. Nonetheless, the amount of corn in the ground, on a percentage basis, is still below average levels, suggesting that prices will not selling off.

Derivatives

Libor Alternatives Used for Liffe Futures Contracts
Nandini Sukumar - Bloomberg
* Problems with Libor are causing some to look for alternatives. As it turns out, the NYSE Euronext's Liffe derivatives market will begin trading contracts on alternatives to the Libor. The Liffe's contracts include futures based on the euro overnight interbank average, a borrowing rate calculated by the European Central Bank, along with contracts on the sterling overnight interbank average, calculated by the Wholesale Markets Brokers' Association. ICAP Plc is also planning a U.S. alternative to Libor called the New York Funding Rate, based on an anonymous daily survey of at least 24 banks.

Futures suspension fails to trim commodity prices
The Economic Times
* The government of India has suspended futures trading in soy oil, chick peas, potatoes and rubber for at least four months. Last year India banned futures trading in rice and wheat, each in an effort to reduce inflation. Critics feel the ban will simply make the problem worse by shutting down the market-pricing mechanisms, essentially encouraging traders into the country's unregulated black market, further reducing tax receipts and causing even more unpredictability in prices.

Swaption Volatility Rises Amid Risk of Higher Revision in Libor
Liz Capo McCormick - Bloomberg
* The volatility on options for U.S. interest rate swaps increased as investors became worried that the benchmark for borrowing costs may be adjusted higher, causing an increase in hedges against changes in rates. Swaption volatility tracks options on interest rate swaps with maturities of 1 to 10 years. The increase in volatility is due in part to the current issue with the Libor rate, increasing the number of people interested in using swaptions to hedge interest rate risk. The swap spread has contracted about 27 basis points since it reached 112.56 basis points on March 7, the biggest contraction since November 1988, reflecting an improvement in the opinion of the interest rate market as to where the U.S. economy is going. Interestingly, the spreads have contracted also in part as fixed-rate corporate bond issuance increased, given that there has been more corporations using bond issuance to raise capital. Much of this fixed rate paper gets swapped back to Libor. The increase in fixed-to-floating swapping has caused tightening of the swap spread.

China to Develop Currency Derivatives This Year, Official Says
Li Yanping and Judy Chen - Bloomberg
* China has announced that it will continue with its plan to develop existing currency derivatives this year. The derivative products are being produced to help exporters and importers within China hedge their currency risks. The yuan, foreign exchange swaps, and forwards are already being traded.

Hedge Funds

A Commodity Hedge Fund in Every Pot
Paul Kedrosky - Seekingalpha.com
* Click on the link to the article to see the growth rate of commodity hedge funds. It will not continue forever (as humorously mentioned by the author), but does show the recent growth in such funds. Not sure if this is a sign of a top or not.

Gas Deposit Lures Hedge Funds
Eric Baum - WSJ
* A discussion of how hedge funds are betting on the three companies, Chesapeake Energy, Petrohawk Energy, and Goodrich Petroleum, buying land and drilling for natural gas in parts of Arkansas, eastern Texas, and northwest Louisiana. Some funds are placing bets on all three companies as each scrambles for land and mineral rights, while others are placing their bets (and investment dollars) on the two smaller companies, and not the larger Chesapeake, assuming the smaller companies will be able to get more bang for their buck if the estimated reserves come anywhere close to being realized.

Private Equity

Clawback Rule Takes a Bite
Peter Lattman - Deal Journal, WSJ
* Interesting article about clawbacks. In short, a clawback is an investor protection that prevents a company from performance fees and forces them to refund already booked performance fees to investors when unrealized investments fall in price below the stated minimum return. The firm can recover fees if the firm earns positive profits on future deals, essentially digging itself out of a hole by clawing back, causing the clawback accural to disappear.

Fears of private equity talent vacuum
Martin Arnold and Lina Saigol - Financial Times
* A discussion of how some of the largest banks in the world are getting rid of their private equity groups, which is causing some concern that there will not be the proper expertise available regarding financing on leveraged buy-outs when the market eventually corrects. While financing LBOs for private equity is very profitable for banks, many feel that it will be a number of years before a profitable level returns, therefore they are timing staff in the meantime.

ICICI Seeks $3 Billion for India Private Equity, Property Funds
Sumit Sharma - Bloomberg
* ICICI Bank, which is the second biggest lender in India, plans to raise up to $3 billion for two private equity funds as it competes with U.S. firms. ICICI joins Blackstone in seeking opportunity in India. Private equity fund investments in India were seven times more than that investment in China in Q1 of this year.

Why U.S. Highways Are Falling Into Private Equity Hands
Heidi N. Moore - Deal Journal, WSJ
* An article about private equity bidding for transportation assets, including KKR's recent bid for assets in Pennslyania. If you don't like toll roads - too bad. You are likely to see more of them in your future.

Quantitative Finance and Financial Engineering

Amaranth Founder Maounis to Start New Multistrategy Hedge Fund
Katherine Burton - Bloomberg
* Nicholas Maounis, whose hedge fund Amaranth Advisors collapsed after a $6.6 billion loss in 2006, is developing a new fund. The fund, called Verition (Latin for truth), will initially utilize three strategies: quantitative (uses computer models to pick trades), bonds and loans, and special situations (focusing on convertible bonds issued by companies going through corporate events). Maybe the talk I have been hearing about the death of my beloved quantitative funds is true. Just kidding. Really.

Trading

Is A Low VIX A Short Trigger?
Quantifiable Edges
* Interesting analysis of using the VIX as a short trigger. From the blog Quantifiable Edges: "Over the last 10 years, owning the S&P 500 when the VIX was more than 10% below its 10-day moving average was significantly more profitable on average than owning it when it wasn’t. Let me repeat that. Owning the S&P 500 when the VIX was more than 10% below its 10-day moving average was significantly more profitable on average than owning it when it wasn’t. To illustrate I ran a study: Short the VIX on a cross of the lower 10% envelope of the 10-day moving average. Cover when it moved back above this envelope. From 5/98 until now there were 87 such trades. The average lasted just over 3 days. The S&P actually GAINED 91.09 points in the 272 days that this was in effect. That is an average of about 0.33 points per day. In the other 2,379 days the market only managed to gain 184.22 points – about 0.08 points per day. In other words, the market actually performed over 4 times BETTER when the VIX was stretched more than 10% below its 10-day moving average. Also, when this VIX-stretch was active the S&P made nearly 1/3 of its total gains in only 9% of the time." Interesting indeed. This follows a comment by Adam Warner at the Daily Options Report blog stating that: “Also, oversold VIX does not provide as good an indicator as overbought. Outright fear tends to lead to big turns, outright disinterest can just linger.”

Pension Funds `Diversify' Into Commodity Bubble: Caroline Baum
Commentary by Caroline Baum - Bloomberg
* Interesting second half of the article regarding the way pension funds and others are getting around the position limits for speculators. As mention in the article, the CFTC - Commodity Futures Trading Commission, has historically reported the futures positions of hedgers (called commercials, and engaged in the cash market) and speculators (called non-commercials, not engaged in selling the commodity) in its Commitment of Traders report. Speculators, pension funds in this example, can use total return index swaps to get around current positions limits. From the article: "Let's say a pension fund, like the California Public Employees Retirement System, wants to increase its exposure to commodities. Calpers, a speculator according to the CFTC, does a total-return swap with Goldman Sachs Group Inc., a hedger. Goldman promises to pay Calpers the total return on the Goldman Sachs Commodity Index and hedges the swap by buying futures contracts. Calpers's speculative bet on commodities gets recorded as Goldman's hedging in the COT report. In so doing, investors circumvent the position limits on non-commercials." Beyond the regulator issues, the practice causes problems with the reporting of the Commitment of Traders number. Research shows that the swap index positions account for over 41% of the total market capitalization, much more than the positions held by both non-index hedgers and regular speculators.

After recently trashing the stock of Berkshire Hathaway just six months ago in December, Barron's is now making a case for its purchase with an article entitled "Cheap Stock?" To their credit the stock has sold off since December. This comes after an article a few weeks ago entitled "The Next Buffett," which discussed how David Sokol, the chairman of MidAmerican Energy, a Berkshire unit, is now the most likely successor to Buffett to be CEO of Berkshire - and more importantly, how he is probably ready for the job. Not wanting to flip-flop too much, or at least provide some balance, this week's issue also has an interview with Doug Kass, the popular short-selling hedge fund manager who is still bearish on Berkshire stock, and has also reiterated this view for readers.

While the criticism of Berkshire has varied over the years, the issues of the exposure of the company to its insurance business and that of Buffett's age are still often cited as reasons for selling and staying out of the stock. As for the insurance business, its impact seems to show up in October, as seen in the weekly chart below (from stockcharts.com), although this is simply a three year view and anecdotal. Nonetheless, for the past three Octobers, after the annual hurricane and storm season is over - and the quarterly results begin to show how much of the float is left for Buffet to invest, the stock will often have a nice end of the year rally before leveling off or making a slower accent to the next October.


The difference of course has been this year, where the stock has sold off and been more volatile after the December Barron's article, and recent news of other hedge fund managers, such as Kass, taking a short position in the stock. The latest positive article and opinion from Barron's may stem the tide, but many of the short-sellers remain. Even Buffett at the recent "Woodstock for Capitalist" shareholders meeting in May alluded that Berkshire may under-perform (at least its historical self), and there may therefore be better opportunities elsewhere. But then again, Buffett is known for lowering expectations and feigning a sense of weakness, only to later make large acquisitions and investment, such as the recent decision to help finance the Mars acquisition of Wrigley, while taking a small position for himself.

While it is difficult to value Berkshire Hathaway, compared to some other public companies, and even more difficult to predict where Buffett is deploying his capital - at least until the quarterly reports are released, it does appear that the recent sell-off of the stock has taken some of the "Buffett premium" out of the stock. This extra boost to the valuation of Berkshire, simply because of his skill and the brand that Buffett has become, is often cited as one of the concerns for the stock as it relates to both the valuation and Buffett's age. In the past the premium has seemed justified based on past performance, and still does, but if Buffett were to step down for any reason, there is an expectation that the premium will be immediately taken out of the stock. Yet, Buffett appears to be in good health and even better spirits, not to mention remaining active in looking for investment opportunities (not withstanding showing up on soap-operas and CNBC at every chance Becky Quick gets).

Still, some investors are waiting on the sidelines for fear that Buffet will be replaced. This seems silly to me since you are missing out on the opportunity of letting one of the greatest investor of all time put your money to work. Furthermore, what happens if Berkshire is then run by someone else, maybe 1, 5, or 10 or more years from now? Will this give you a reason to jump in? Sure, succession will be more clear, but the management of your money will be less so, regardless of Barron's pick (or guess) for a successor - for CEO, not CIO(s). In a sense it comes down to staying out of the stock while you wait for a pullback and possibly new management, compared to staying in the stock and benefiting from Buffett's expertise, even with a lack of succession clarity. I think many current investors will continue to take their chances.

In the end, maybe the biggest hurdle for Buffett may not be his age, or overcoming the "Buffett premium," or worrying about the next catastrophe that will reduce the investment float. What may be more of a challenge is overcoming the law of large numbers. The company's cash for investment is considerable. To make any dent in the stock price of Berkshire, Buffett has to take a considerable position in an outside company in order for it to register enough to potentially affect earnings and move the stock. This takes time, and certainly offers less flexibility to get in and out at an acceptable price. More than likely this is one reason why Berkshire Hathaway has simply made large equity investments and outright purchases of companies in the last few years, although the recent volatility and credit / housing related sell-offs in the stock market have created more of the values that Buffett looks for, and has resulted in more equity positions - recent purchases include Kraft (KFT) , Ingersoll Rand (IR), Burlington Northern Sante Fe (BNI), US Bankcorp (USB), United Health Group (UNH), Wells Fargo (WFC), and Wellpoint (WLP), along with small positions in Carmax (KMX), M&T Bank (MTB), and Sanofi Aventis (SNY) - see previous post for share numbers and dollar values. Of these position, only the added positions in Kraft and Burlington Northern Sante Fe were large enough to generate any interest on the buy side, and even then, they were adding to already existing positions.

So what is an investor to do? Barron's does provide some guidance by referring to an analysis by the hedge fund T2 Partners. T2 highlights that the intrinsic value of Berkshire has continued to grow steadily and significantly over the last few years. From Barrons:

Meanwhile, for a truly big company -- with a market cap of $190 billion, total assets at last count of $281 billion, total equity of $119 billion and book value per share of $77,014 -- it has been enjoying quite impressive growth, especially where it really counts. The value of investments per share has climbed to $90,343 in 2007, from $52,507 five years earlier; during this stretch, pretax earnings per share, excluding investment income, has quadrupled from the $1,479 posted in '02; and intrinsic value -- which T2 calculates as investments per share, plus 12 times earnings per share excluding investment income -- at the end of last year ran somewhere between $156,300 and $158,700 a share, or comfortably more than double '02's $70,000.

As a result, T2 believes that Berkshire is undervalued by approximately 20%. Furthermore, if you are to assuming a 10% growth rate for the intrinsic value of the company, which is not speculative for Berkshire by any measure, with a business and cash buildup of $6,000 per share over the next year, the total intrinsic value could approach $178,700 per share. Given the current price, this represents a 46% premium on the stock. Going out further to two years, the number approaches $200,000. While short-sellers like Kass will continue to short Berkshire, and give good explanations - such as Buffett's age and lack of a visible succession plan, new hedge-fund competition, new uncharacteristic exposure to derivatives, and waining benefits from the insurance industry - it is difficult to bet against someone with so much cash to deploy, as well as a track record for wisely putting it to work. While the stock has been volatile, and is receiving attention from the short side, it is difficult for many investors to sell at these levels until more of the issues that Kass describes come to light. For the time being, most of the current long investors will no doubt hold, and look for others to join in - maybe in October.

A recent report provided some insight into the changes in equity holdings for Berkshire Hathaway. While important knowledge for Berkshire investors, this report has also become a market news event, given that any signal that the Oracle of Omaha is buying or selling a company you currently own could make for either a pleasant or long weekend, even though the Berkshire stock transactions may have occurred over three months ago.

As highlighted in the report, Berkshire Hathaway disclosed that it no longer has a position in Ameriprise Financial - AMP, selling 661,742 shares ($34.3 million), but has added to its positions in Kraft - KFT, buying 5.88 million shares ($182.3 million, giving 138 million total shares), increased its position in Ingersoll Rand - IR, buying 300,000 shares ($13.4 million, giving 936,000 total shares), increased its position in Burlington Northern Sante Fe - BNI, buying 2.96 million shares ($272.7 million, giving 63.8 million total shares), and decreased its position in Iron Mountain - IRM, selling 1.29 million shares ($34.2, giving 3.4 million total shares).

Other new positions include purchases of US Bankcorp - USB (1.05 million shares valued at 33.9 million), United Health Group -UNH (400,000 shares valued at $13.7 million), Wells Fargo - WFC (1.4 million shares valued at $40.6 million), and Wellpoint - WLP (300,000 shares valued at $13.2 million). Berkshire also sold a smaller stake in Trane - TT (60,500 shares valued at $2.8 million), and make smaller purchases in Carmax - KMX (300,000 shares valued at $5.8 million), M&T Bank - MTB (6,300 shares valued at $500K), and Sanofi Aventis - SNY (16,828 shares valued at $600K).

As recently reported by IndexUniverse.com, in the last few months the yields on Treasuries have been rising, while yields on corporate bonds have been falling, signaling a shift from Treasuries to corporate bonds. But does this imply that investors are no longer worrying about the economy and therefore don't feel that they need the safety of Treasuries? Are investors simply sector shifting into corporate bonds? Closer inspection shows that while investment grade corporate bond yields have fallen recently (junk bond yields have fallen more), investment-grade corporate yields have actually remained relatively steady over the last year as Treasuries prices fell and their yields increased. Furthermore, even with the recent sell-off of Treasuries, the spreads between investment-grade corporate bonds and Treasuries is still above historical averages, signaling that there are still better deals in investment-grade corporates and that the sector shift is not complete. Rotation is also being suggested in part due to a belief that if Treasury yields do continue to rise, prices could fall much further and change much quicker than corporate bonds on average given that Treasury yields have been down so much in the last year, suggesting prices have gotten ahead of themselves.

UBS is projecting that crude oil will have a yearly average of $156 a barrel by the year 2012, with the price rising steadily over the next four years, even though they see oil averaging $115 a barrel this year, about $10 less than the recent highs. This is a reversal from earlier coverage which predicted a pullback in oil prices as demand fell in the face of a potential U.S. recession. UBS has also stressed that it believes the increase in prices are mainly due to demand growth (not met by equal supply growth), rather than speculation.

Who does UBS see as benefiting from this increase in oil prices over the next four years? As to the major oil companies, UBS believes Chevron (CVX) will benefit, in addition to Occidental Petroleum (OXY), Apache (APA), ConocoPhillips (COP), and Exxon Mobil (XOM), all of which have buy recommendations. In addition to the major oil companies, UBS has also initiated coverage of oil service, drilling, and equipment firms. Current buy recommendations include Transocean (RIG), Diamond Offshore Drilling (DO), Noble (NE), Ensco International (ESV), Atwood Oceanics (ATW), and Rowan (RDC).

Of the group, the oil services and equipment analyst at UBS prefers Transocean, a recommendation that is due in part to the recent news of Petrobras locking up 80% of the deep water rigs, while also attempting to extend contracts with Transocean for over three more years (see earlier post). Current daily rates are topping over $600,000 a day for leasing deep water rigs, almost three times the average rate of $219,700 just a little over 6 months ago. A number of analysts are also picking up on this story.

Bloomberg is reporting how Petrobras (PBR), the state-owned Brazilian oil company, has leased around 80% of the world's deep water offshore drilling oil rigs. The rigs can drill in water approaching 10,000 feet in depth. Currently, the world has a supply of 21 such rigs that are capable of such depths.

Given the need for increased supply to meet current demand (which is slightly outstripping supply), producers are moving to more deep water exploration. While placing rigs under contract can be expensive, it can also give Petrobras a strategic advantage. Not only will they have more ability to tap resources that may end up being extensive, the company is also forcing competitors to pay higher rents for available rigs, in some cases as much as $50,000 more per day. The contract rates Petrobras currently has in place range from $410,000 to $580,000 per day. Truly amazing. Who is the big winner? Possibly Transocean (RIG), the world's largest offshore driller. Petrobras is attempting to extend its leases with Transocean 3 years beyond current expiration dates.

The rumors are true. Carl Icahn will be making a play for the Yahoo! board. In hindsight, this makes sense. Icahn loves situations where both the current retail investors and big shareholders are dissatisfied. It does not hurt if management is also not appearing to listen to shareholders. Having options, such as buyers or potential merger partners, also helps. In this case, Icahn has all three.

Of interests in the recent news is how Icahn is planning to nominate a full slate of directors, up to 12 in total (Update: Looks like it will be 10). At first blush this looks risky, and potentially less successful, but is also probably a wise and typical Icahn move. If the board is approved, then Icahn can essentially do what he wants with the company, including removing Yang and selling the company to the highest bidder. On the other hand, if the move fails, because shareholders were not that dissatisfied as originally expected, then Icahn can walk away, and hopefully sell shares at or slightly above what he paid for them, letting Yahoo fix its own problems.

Of course, trying to nominate a full board could simply be a strategy to get some, but not necessarily all of the board after a series of negotiations with the current board and management. Nonetheless, he probably needs at least half to influence a board that is seemingly in the pocket of its management, and who at this point appears unwilling to negotiate and accept a reasonable price for their company.

What also may be more important is not the shareholder vote and number of board seats, but whether Icahn can convince Microsoft to come back to the bargaining table. If he can accomplish this, I suspect the large shareholders he needs, along with enough retail support, will fall into line and make the proxy contest successful. But getting Microsoft on board will be tricky. While still probably wanting Yahoo!, Microsoft has publicly stated their intention to move on, and Ballmer is not know for wavering. Furthermore, Microsoft has to think about whether they want a vocal activist in their corner, and whether they want this same activist to eventually own a small, but significant portion of their stock after the sale - assuming cashing out is not part of the deal.

Merrill Lynch is apparently now going to require stock analysts at their firm to issue underperform ratings on at least 20% of the companies they cover. Right now, Wall Street analysts on average only give about 5% of companies an underperform rating. Merrill will also limit buy ratings to 70% of the companies covered, as well as limit neutral ratings to 30%. Analysts at Merrill now recommend sells on about 12% of the stocks followed.

Beyond making few sell recommendations, understanding exactly what underperform means has also be inconsistent between brokerage houses. As a result, Merrill Lynch has also further defined its ratings. Now, underperform will be the lowest rating and will apply to stocks that are expected to have a negative total return over 12 months, or gain the least among stocks in the same industry. Neutral stocks are projected to return up to 10% (doesn't sound neutral to me), while a buy rating will apply to companies that are expected to return more than 10%.

What does this mean? Essentially, 1 in 5 companies that Merrill covers will be a dog. A full 20% of the analysts covering stocks will be looking for the companies that don't quiet make the grade. So why is Merrill Lynch making these changes? Are they bowing to the pressure put in motion by Eliot Spitzer back in 2003? Is John Thain being influenced from his experience at the NYSE? Maybe, but more than likely it is about money, and not just lawsuits. During any volatile market, especially one that has the overhang of housing, credit, and inflation issues, not to mention the potential recession talk, investors and traders are interested in what to sell. Buying is easy, selling is harder. Sell guidance is valuable, especially in our current environment.

But can Merrill make money letting clients know what to sell, especially if those same clients were already advised by the company as to what to buy? Certainly valuable to the client, but probably not as value adding to Merrill. Yet, recent data from Bespoke Investment Group showed that over 10% of the shares available for trading are sold short. Given that over 1/3 of all stocks fall each year on average, providing sell data could be profitable for those willing to paying up for it - i.e., hedge funds. Of course, providing sell data is not without its own cost. Investment banks in the past have been opposed to providing too many sell recommendations, worried that they may offend potential or current clients that they hope to do business with. As such, while being potentially profitable for sale to hedge funds, expect the sell recommendations to also be filtered somewhat, avoiding upsetting the investment banking apple cart.

Yahoo! shareholders have until the end of the day Thursday (10 days after the announcement last week of the date of the shareholder meeting) in order to nominate candidates for Yahoo!'s board of directors. As discussed earlier, this short time was no accident, and puts the pressure on shareholders to get together and get organized, or find an high level investor willing to take the lead. If one were to take the lead, it would need to be someone with a large position, someone with the potential to make it larger, and someone not shy about stating their intentions? Who could it be? Any whales fit the bill?

Both CNBC and the WSJ are reporting that Carl Icahn may in fact be the vocal whale that disgruntled shareholders are looking for. Apparently Icahn is considering fighting for control of the company's board, with sources stating that Icahn may have acquired as many as 50 million shares of Yahoo!, or over 3.5% of the company. And of course, Icahn has the capital to acquire more if he wanted to. Again, the timing of the purchases is not totally clear, but it would explain somewhat how the stock has been propped up over the last few weeks.

This of course begs the question: Why does Icahn want control of the board? Does he really think that Microsoft will come back and offer $33 a share once again? Can he convince them to come back? Is there another strategic partner waiting in the wings? Does he want to integrate Yahoo! with Blockbuster and Circuit City? Just kidding about the last one ..... at least I hope. Seriously, other than Google or Microsoft, who could really partner with Yahoo! and add value, and would either Microsoft or Google, even if they were to partner, even pass anti-trust reviews? It is possible that there is a Time Warner / AOL connection, but again, the ability to add value is probably limited. It is really hard to see what his motivation is, other than believing he can get Microsoft back to the table with a +$30 offer, making a nice 20% or so profit in his shares. Otherwise, if it is not Microsoft, it is hard to see other integration possibilities that add value, just as it is hard to see how integrating Blockbuster and Circuit City together builds synergy. But then again, he is Carl Icahn, and he currently has a couple billion or more reason why he knows better than I do. Time will tell.

Reuters and other outlets are reporting that a House of Representatives committee has started considering opening up a formal investigation into energy market speculation. Hedge funds and investment banks are expected to take the most blame during the investigations. Word is that some representatives are discussing the possibility of changing the margin requirements for crude oil and other energy commodities as a way to curb speculation. As with most things Congress gets involved in, the best we can often hope for is that they consider the unintended consequences of any new laws and/or regulation. Even something as simple as raising margin requirements would have the effect of reducing the amount of leverage available to speculators, causing some to move to greener pastures, but it could also have the unintended consequence of making it more costly for companies that truly need to hedge their energy cost exposure. Not only would higher margins potentially tie up more capital for these companies, keeping it from being deployed for more useful purposes, but the increase could also have a negative effect on liquidity - after all, someone needs to take the other side of the trade. It is true that speculators can overtake and artificially drive a market, but they are also necessary to help provide a market for those looking to take a hedging position. As price fluctuations increase, margin requirements should reflect sustained increases in volatility. Nonetheless, simply increasing margin requirements in a hope to eliminate speculation may do nothing more than drive out those who need the market the most.

Bloomberg recently reported how hedge funds run by both Jon Wood and Eddie Lambert are down for the year, in part due to the concentrated nature of each fund. Wood's fund is expected to only invest in no more than 40 companies, but was recently hurt as U.K. Bank Northern Rock Pic and California mortgage company Countrywide Financial suffered losses. Lampert's fund has been hurt by its large stake in Sears Holdings, for which Lambert is chairman.

For many, both investors and managers, concentrated funds are both an opportunity to strike it rich, but also provide the potential to implode quickly. For fund managers, who are often compensated on a 2/20 setup, the potential for 20 percent of a big winner is often too tempting to ignore. If the fund implodes, management will often close up shop given that it will be difficult to get above high water marks anytime soon. Those managers that want to continue on have to worry about investor redemption, unless the fund has long-term lockup provisions in place. Even then, it may still be unattractive for high profile managers to continue on with the existing fund given that their track record may be good enough to raise fresh capital as a new fund is initiated. Yet many investors don't seem to mind, given their knowledge of the risks and track record of the manager. Many of the same investors will follower a manager as he or she closes down one fund and opens up another.