"Sometimes the best trades are the ones you don't make."
ecrire re: ["Very hard to follow: what effect do you expect Bush approval ratings to have? This Hedge Fund was reported to be SHORT, not long Nat.Gas futures. As you expect a recession which,in theory.(I stress theory) is an unfavorable climate for most commodities, do you suggest just stay in cash, short gold and oil or what?"]
Okay people -- lets get up to speed:
ecrire -- good questions... I didn't mean to be completely cryptic...just brief and a little bit cryptic.
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re: Bo Collins and the collapse of the "Mother Rock" hedge fund.
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Takeaways & lessons learned:
Collins was the former Senior VP and head trader for El Paso energy. He was also the former President of the NYMEX.
The "Mother Rock" hedge fund was started with $7 million and had a reported $450 million under management during the funds +20% return last year.
Collins was no neophyte and a point that can not be lost is that this longtime Natural Gas bull correctly read the speculative disconnect between supply:demand and prices...and went strongly short.
So if he was "right" on the fundamentals for going "short" -- then what led to Mother Rocks collapse?
-- greed
-- excess leverage
-- excess speculation
-- excess risk
Lessons learned?
"Pigs get fat, but hogs get slaughtered."
"Always be early to the party...but, never, never, EVER be caught hanging around at last call."
It's always good to have both a healthy fear and respect for the market... especially ones with violent manic/depressive swings in both market price and sentiment.
Last December I thought we had one of the more blatant disconnects of the entire commodity cycle in Natural Gas....a speculative move resulting in a textbook perfect "discrepancy between price and risk."
Some may say I left a lot of money on the table and should have rolled the contracts over and rode Gas down into the "fives."
Coulda, shoulda, woulda... doesn't put money in the bank.
--> 40% moves in 20 trading days do.
This is a market in which both bulls and bears need to fear and respect the other side of every trade.
It's been widely speculated that much of Mother Rocks problem came from the "Evil Empire" -- a.k.a. Goldman Sachs.
MotherRock Cries Uncle (Energy Hedge Fund implodes)
By Matthew Goldstein, Lauren Rae Silva and Melissa Davis
Staff Reporters
8/3/2006 1:59 PM EDT
URL: thestreet.com
["The prime brokers for MotherRock are ABN Amro (ABN) and Goldman Sachs (GS) , according to the hedge fund's marketing literature. But a spokesman for the Dutch-based bank disputes the hedge fund's claim, saying ABN Amro served only as a clearing broker for MotherRock.
Do you still wonder why you hear again and again and again about -- Goldman being the "one" firm that will consistantly trade directly against it's own clients?
I'll give you three guesses and the first two don't count... over just who led the turn against Nat Gas last December.
Last year Collins & Mother Rock were high riding bulls as reported by this Wall Street Journal article which spoke volumes as to the degree of high flying speculation and manic trading that exists in "Gas Vegas."
(I'll "bold" a couple of items of note (vbg).
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Ann Davis,
“The Energy Trading High Wire – Big Profits Lure Rich Investors, But Wild Rides Rattle Them; Making Wagers in ‘Gas Vegas’,”
The Wall Street Journal, March 21, 2006. Page C1
Sky-high prices have made energy trading look like easy money. Look again.
In recent months, Credit Suisse Group and Lehman Brothers Holdings Inc. have piled into the business, witnessing the billions of dollars that competitors at Goldman Sachs Group Inc. and Morgan Stanley have made as Wall Street's two top commodities players.
Numerous hedge funds -- including the $2 billion-plus Old Lane LP being launched by former Morgan Stanley executives Vikram Pandit and John Havens -- also are joining the fray on behalf of wealthy clients trying to profit from swings in the prices of crude oil, natural gas, electricity and even pollution-emissions credits.
The activity is reinvigorating some markets that dried up in 2002 after energy-trading behemoth Enron Corp. collapsed. Competition to hire traders away from power utilities and oil-trading desks is intense.
Some of the new investments have resulted in home-run profits, but painful strikeouts show that energy trading is as tricky as it is popular.
A few months after hiring some high-profile Morgan Stanley gas and electricity traders to expand its commodities business, J.P. Morgan Chase & Co. said in January that bad energy bets helped clip fourth-quarter earnings. J.P. Morgan also has been a large buyer, either for itself or for clients, of pollution-emissions credits, the prices of which plunged earlier this year. Hedging strategies may have mitigated losses. Chief Executive Jamie Dimon has said that its energy business last year still made three times what was expected.
The Barclays Capital unit of Barclays PLC, a fast-growing commodities operation, in recent months parted ways with two crude-oil traders over how they had valued how much they had at risk in options, traders familiar with the episode say. A Barclays spokeswoman declined to discuss the departures.
A steeper-than-expected dive in natural-gas prices since December has rattled traders already licking wounds from autumn's jagged market.
.....WHODATHUNKIT?!?!
Gas and electricity bets that went sour in the days before and after Hurricane Katrina cost hedge funds Citadel Investment Group about $150 million and Ritchie Capital $100 million, people familiar with the firms say. Citadel has more than $12 billion under management; Ritchie has about $2.8 billion. The two Chicago-area funds have since hired new energy-trading heads and gained back some of their losses, these people say. A Citadel spokesman says last year's hurricane season was one of the few times the firm's energy business wasn't profitable.
Energy trading is alluring for the same reason it is so risky: volatility.
Unpredictable factors like weather and geopolitical unrest always have driven the cost of energy. But prices of energy futures -- contracts to deliver commodities for a set price at a later date -- are bouncing around like never before, multiplying the opportunities and risks as volatility in other markets falls.
Crude-oil prices rose from the mid-$40s a barrel last May on the New York Mercantile Exchange to $68 in January and closed yesterday at $60.42.
Swings in natural-gas prices have some traders calling that market "Gas Vegas." Natural gas roughly doubled from its summer price after Hurricane Katrina to $14.33 per million British thermal units on Oct. 25, then fell before peaking Dec. 13 at $15.38. It has been on a nearly relentless free fall since, hovering near $6.50 much of this month before a rebound. Yesterday the price stood at $6.835.
"That's like the Dow going from 10000 to 25000 and back to 10000," says Foster Smith, head of U.S. gas and power trading at Deutsche Bank AG. "We've had a colossal round trip in about a 10-month time span."
Being on the correct side of that whipsaw is intoxicating. Amaranth LLC, a $7 billion hedge-fund firm in Greenwich, Conn., made several hundred million dollars trading natural-gas futures and fared well during the decline, people familiar with its activities say. A significant portion of the fund's approximately 18% return last year was because of energy bets, one of its investors says.
Houston-based Centaurus Energy LP, a $1 billion fund founded by Enron alumnus John Arnold, turned a nail-biting December into a blockbuster with a correct bet on natural gas's downhill slide, Wall Street trading officials say. According to SparkSpread.com, a Web site that tracks energy trading, his fund was up 160% for 2005, giving investors a 100% return after fees. Mr. Arnold declines to discuss returns.
"No one wanted to be an energy trader 20 years ago -- it was the least sexy thing in the world," says John D'Agostino, a former executive with the Nymex, the world's main energy-trading market. "Fast forward to today: Investors are lining up at the door. [But] if you're going to invest in energy, you'd better be comfortable with volatility."
In early 2005, Mr. D'Agostino founded energy hedge-fund MotherRock LP with former Nymex President J. Robert "Bo" Collins and former Nymex trader Conrad Goerl. The fund returned 23% in 2005, according to SparkSpread.com.
A big factor in the volatility is soaring demand from developing countries like China and India at a time when production isn't rising as much as it had been and when finding big untapped energy deposits is getting harder. Unrest in energy-rich Nigeria and worries about Iran's nuclear ambitions also play their parts.
Another factor is the surge in investor speculation. Hedge funds are taking ever-larger bets in a futures market that is smaller than the stock or bond markets, and the funds are using borrowed money to maximize their bets, magnifying the impact on prices. They are also trading heavily in short-term futures that call for delivery in just a few months rather than a year or more, a practice that also can push prices around.
Natural gas is especially tricky. Economic growth and the commodity's environmental benefits over coal have caused demand to climb in recent years. The blue vapor, shipped via pipelines, is a main fuel for electricity generation -- especially in times of high demand -- and for plastics and fertilizer production. Moreover, nearly 60% of U.S. homes use it for heat. That makes its price especially sensitive to weather.
Gas and electricity traders often bet on the difference in power prices in regions of a country that use different levels of coal and gas. Many bets are based on long-term seasonal trends, but energy experts say last year's hurricanes disrupted these trends. Gas and power prices initially spiked because supply from the energy-rich region was disrupted. But industrial plants in the area were damaged by the storm and stopped operating temporarily, while New Orleans effectively shut down -- driving down demand.
"A lot of hedge funds trade the historics," says Peter Fusaro, co-founder of the Energy Hedge Fund Center, a research and risk-management consulting firm. In 2005, "these financial models were not predictable models."
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This degree of speculation and leverage will always lead to shark attacks when firms like Mother Rock find themselves on the ropes...and "one" firm does it better than any other... "The Evil Empire"...
In a market environment like this -- you must cut losses quicker and take profits faster.
And if you are a hedge fund trader -- you need to take a lesson from Steve Cohen of S.A.C. Capital and impose "omerta"... because once word gets out...and blood is in the water -- it's all over.
...just ask Bo Collins & Mother Rock.
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"Sometimes the best trades are the ones you don't make."
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Back in April & May I pounded the table here on this thread about "not getting greedy"...."taking commodity profits off of the table" and warning that commodites had entered a speculative bubble... that it had gotten "too easy"...and that Cash & Bonds just might be a safe place to sit for a while.
Well here's how that has played out so far:
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To: SOROS who wrote (1502)
5/7/2006 2:56:37 PM
From: SliderOnTheBlack
Read Replies (3) of 2153
..........................SOROS, re: "bubbles"
*** All Speculations end the same... always have, always will.***
"The Bond Market is hated and Cash (USD) is Trash...
And I love it."
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Greed hasn't been good of late.
And given that the Fed is now likely to pause...and historically may begin to cut rates 5, or 6 months from now to fine tune their prior 17 consecutive hikes -- NOW may be a very opportune time to park some money in bonds.
Here's how not getting greedy has played out from May 7th to date:
10 Year Treasury Bond – May 7th to date:
Gold – May 7th to date:
Dow – May 7th to date:
OSX – May 7th to date:
Natural Gas was no place to hide either – May 7th to date:
This market had produced incredibly violent swings of late. We've seen breakouts and equally violent corrections in everything from Gold to Gas.
The HUI cratered from a high of 401 down to HUI 307 in just 7 trading days and ultimately fell a total of 131 points before bottoming at HUI 270.
During this free fall brokers were liquidating goldbugs left and right.
And no wonder... as margin interest (read GREED) in the precious metals and energy sector was as high, or higher than the peak we saw in margin use during the tech & internet bubble collapse of 1999-2000.
The degree of leverage being used and the level of speculation in commodities was widely reported by everyone from CNBC to the brokers themselves.
The HUI 270 low took goldbugs nearly three years back in time and to within 20 points of the November 2003 levels for the index. And the OSX correction to 184 took oilpatch permabulls back to within 40 points of the October 1997 highs... 40 points after nine long years ...luckily for the bulls in the patch -- Iran escalated their sabre rattling and Hezbollah launched rocket strikes into Israel...along with the arrival of 10th hottest month in US recorded history...the usual speculation on the US hurricane season...and the annihilation of the Mother Rock Hedge Fund.
Alan Greenspan's Fed & the Bank of Japan created an unprecedented expansion in the money supply which resulted in a historic misallocation of capital and one bubble after another, from housing to commodities.
But in what may come as somewhat of a revelation to permabulls... global central bankers are in the process of reversing this massive re-flation.
The debt & credit orgy of the U.S. in which consumer spending ramped from the historic 67% of US GDP to 80% is coming to an end. What job and wage growth the U.S. had was led by the construction and finance sectors....which are now taking the brunt of the correction.
There is still over $2,000,000,000,000.00 in adjustable rate mortgage that are going to re-index over just the next 2 years.
Historically, corrections in the wealth effect have a 2 to 3 year lag before hitting the U.S. economy and the markets.
Given that the lag effect of the Feds 17 consecutive rate hikes is still 6 months away from impacting the US economy.... the likliehood of a U.S. recession is very strong.
Another item that speculative commodity bulls seem to ignore is the fact that "bad loans" are now over 40% of China's GDP.
The degree of hot money and speculation in China now exceeds the levels that brought on Japan's collapse.
Can you say -- Deja Vu?
Tic-Toc...when, not if.
China's banking system is beyond Enron & World Com.
Remember both Enron and World Comm had lot's of cash flow... lot's of "reserves."
Should America's economy rollover...which looks likely, given 17 consecutive Fed rate hikes and the fact that it was created by a historic reflation and an unprecedented debt & credit orgy... a significant correction, or slowdown in China seems probable.
Of note, unlike prior US recessions... there is no safety net of savings in which to tap into...as the U.S. has had a negative savings rate for some time now.
ecrire, you questioned -- the "theory" that a US recession would be an unfavorable climate for commodities.
This run in commodities has exceeded historic norms. It's now long in the tooth in both time and the tape.
Here's reality as I see it:
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"My God's are not your God's"
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There’s a reason I’ve been repeating the quote below from famed Chess Master – Savielly Grigorievitch Tartakower:
"The mistakes are all waiting to be made."
And the reason is this...
Traders seem to be suffering from poker mania and "all in-itis." They think they have to try to trade every market move and seemingly are willing to go "all in" on every other trade.
I simply don't understand this mindset.
For example:
The HUI goldbugs index has exploded from the December 2000 lows of 35 to the recent peak of HUI 401.
That's an incredibe 11 fold return.
Just how much upside relative risk -- can possibly still exist?
It's the same for "Gas Vegas."
Nat Gas collapsed from it's speculative insanity of $15+ in December to the $5's here of late.
WHY in the hell was Bo Collins still levered and "all in"?
One word.... greed.
Greed and a lack of fear and respect -- for the other side of the trade.
The later in the cycle we get... the more traders had better respect both history and the other side of the trade.
Historically, when commodity stock corrections occur they nearly always occur without warning.
Maybe these charts will ring a few bells:
OSX 135 to 45 -- May thru August 1998
A collapse of 90 index points for a - 67% loss in 3 months:
OSX 135 to 58 -- June thru Sept 2001 – the now infamous “June Swoon” of 2001: A collapse of 77 index points for a loss of -57% with the majority of it in less than 30 days:
XNG 260 to 160 – May thru Sept 2001
A collapse in the Natural Gas E&P stock index of 100 points for a -40% loss:
…but, that was just the first wave in the Nat Gas collapse --- here was the 2nd wave:
XNG 205 to 105 -- May thru July 2002
A collapse of another 100 index points for a 50% loss in 7-8 weeks:
Even the newest generation of goldbugs who weren't in the market during the 1980 Gold & Silver "bubble" have selective memories too:
In both 2004 and 2005 the HUI Goldbugs Index brought brutal, near 100 point index shakeouts...here's the first. about a 40% collapse from the HUI 240's to the 160's in only 20-some odd trading days:
And for goldbugs -- this is THE posterchild chart vis a vis speculation:
I do not worship at the alter of momentum.
My gods are not their gods.
I liked gold back in late 2000 when it was ridiculed, written off and laughed at... languishing at the bottom of a brutal 20 year bear market.
I like it a bit less...later in the commodity cycle when the natural maturation of the cycle creates laggards like Palladium and even Silver -- which become irresistable risk:reward rotation plays and indeed outperformed gold by a 2:1 margin from last August until late this spring.
For example, gold will need to run to $900 to match the run of palladium from $200 to $400.
Presently the agricultural commodities may represent the later cycle rotation plays.
The bottomline is this, whether long, or short:
Live by momentum -- die by momentum.
...just ask Bo Collins & the Mother Rock Hedge Fund.
One final thought:
Old time baseball great Wee Willie Keller had a saying:
"Hit 'em where they aint."
In trading... be early, be right and be levered -- where they aint...and never, ever, EVER be caught hanging around at last call -- when & where they are.
Later,
SOTB |
