Posted on 09/26/2006 5:18:54 AM PDT by PajamaTruthMafia
Those obnoxious hedge fund managers and their super-rich investors think they’ve been trapped in a nightmare this month.
They haven’t. They’ve been trapped in a movie.
Namely: a 2006 remake of the old Eddie Murphy and Dan Aykroyd classic, “Trading Places.”
In the film, two tycoons expect an orange juice shortage and try to corner the market.
When it turns out there is no shortage, the price collapses in panic selling and they lose their shirts.
This time it’s oil, not OJ. But it works the same way.
Amaranth Advisors, a Connecticut hedge fund open only to the super rich, just lost a huge chunk of money - $6 billion - on oil and gas prices. And it’s not alone.
The word in the markets is: Don’t be surprised if we hear about more Amaranths in the coming weeks.
One money manager downtown told me, “We’re clearly in panic-selling mode. God knows where this might level out. We’re in the hands of fools here - including all the Wall Street firms who are now denying they were ever bullish of energy.”
The reason: Hedge fund managers were busy all summer buying up energy stocks and futures. They were anticipating another Katrina-style hurricane, and another fuel shortage.
No Katrina, no shortage. And they were left holding the bag.
The result? Panic, and a price collapse. Funds are rushing to sell before anyone else. And they’re losing billions.
How bad is it?
Oil futures: $61 per barrel, down from a summer peak of $78. Gas futures: $4.52 per 1,000 cubic feet, down from $9.25. Shares have collapsed across the sector. It’s a bloodbath.
What does this mean for you?
I spoke to a handful of money managers who really know what’s going on. Their take? They are watching like a hawk, and getting ready to buy energy stocks.
These may yet fall further, they warn. Especially if there is more panic selling. But some are already starting to look pretty cheap.
Their picks? Canada’s Suncor (SU, $66.14), ConocoPhillips (COP, $57.33), Chesapeake Energy (CHK, $28.73), and Devon Energy (DVN, $60.64).
For those who like to sleep easy, exchange-traded energy funds like State Street’s “Energy SPDR” (XLE, $50.35) or the Global S&P Energy Sector iShare (IXC, $97.32) invest in a basket of stocks. I have some money in IXC.
Naturally, these are bargains for the brave. They may get cheaper still. Ditto if the whole stock market tanks - and it might. You wouldn’t want to bet all your chips, least of all at once.
But these are conservative, well-managed companies and you can buy them at sale prices. History is pretty clear: On a long-term view, that’s where the ordinary investor can make money.
Everyone is afraid to buy. And where two months ago the mainstream business media was breathlessly quoting predictions that oil was about to go to $110 a barrel, now they’re breathlessly saying it’s going to $40.
Do you think the bull market in oil is over?
Maybe . . . if you think two billion Chinese and Indians are going to stop building shops and factories, buying cars and installing air conditioning.
And remember: Even after the 1973-1974 energy crisis sparked widespread conservative changes, worldwide oil consumption still went up by 11 percent over the next five years.
It took a second crisis in 1979, and a global recession, to reduce global consumption.
Temporarily.
ping to self
My tactical reserve is still good for a couple of weeks.
After the BS last year, I made sure I could go through August and Labor Day without the necessity of buying petroleum. If they are not looking out for me (moderating the price through long term contracts and carrying moderate inventory), I sure as heck am willing to try to stick it to them.
I did my bit - new furnace that is 30% more efficient and a new car that gets at least 12 mpg more than my old one.
Where's the pic of the tiny violin?
We're supposed to feel sorry for these guys? They're part of the reason oil prices were artificially driven up to such high prices this summer. Jerks.
You should top off your reserves while the prices are low, i am sure they will climb as fall progresses
I can see you've never traded futures G-Man. Your statement is absolute horsecrap. When you go short you only make money when it goes down. When it goes up, you lose. Down can only go to zero, but up can go up forever, that is why going short can be extremely risky.
That is one reason energy prices went up so much. The perceived risk in the middle east made traders afraid to go short, so price went up as the longs were in control.
The fact that the energy markets are now retreating is a sign that the traders perception of risk is changing. I interpret that as we are winning in the middle east and the tide has turned.
It works kinda like the electron election markets that show the GOP will likely hold the house and senate. It is people betting with their real money, not just spectators.
From what I've heard, a lot of the hedge funds were able to jump ship before it got too bad...in fact, one of the reasons oil went down so much so fast was because the fund managers saw the writing on the wall and dumped everything. I suppose some of the funds just missed the boat on this one. Sucks for them.
So when a bunch of out-of-control traders drive the cost of a barrel of oil from $25 to $65 – it constitutes an extra $189,000,000,000 a year that goes from you to OPEC and other non-US producers. When it turns out that those traders overpaid for 3 months worth of oil by $20 a barrel, that’s $23b that isn’t coming back anywhere, it just goes up in smoke as the prices fall.
Very, very simply: The trader paid $77 for a barrel of oil and sent the cash (the cash that Amaranth feels very bad about losing) to Saudi Arabia in exchange for a barrel of oil. Now he finds that he can only sell it for $60. That is a real, actual, irreversible (because someone is going to consume it) loss of $17. There is no “winner” on the other side of the trade; just a nation full of suckers (oops -- I meant to say voters) who let things get so out of hand.
http://energy.seekingalpha.com/article/17391
Amaranth is just the tip of the iceberg, with $6b in losses in 2 weeks. It seems that they were controlling 20% of the natural gas contracts. 20%? Who controlled the other 80%? Logic would dictate that those funds lost $24b dollars -– they just haven’t told anyone yet. $30b is starting to sound like some money isn’t it?
He's a loser, no matter what the market does.
The market is not just the producers. Traders also have inventories. So in your hypothetical, Short sellers potentially win in that trade. They sell future contracts at $77 and fill the order at $60. The Shorts get slaughtered when they sell at $60 and have to fill at $77.
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