Friday, November 30, 2007

Features of the week

Lots to share in this Friday's edition of, "Features of the week". Let's get started!

1. International equity returns YTD. Nice table and world map courtesy of TickerSense.

2. Iceland is the best place to live, according to a UN study.

3. Bloomberg crafts a lengthy profile of hedge fund star James Simons, founder of Renaissance Technologies LLC.

4. Paulson & Co. earnings beat those of Citadel, as John Paulson tops Bloomberg's list of highly paid hedge fund managers.

5. Death of inflation is a dangerous delusion, writes John Kemp.

6. Who really pays the taxes in America? The rich, baby.

7. Financial Sense Junior Gold Mining Index review, by Frank Barbera.

8. Robert Prechter talks to Bloomberg about the markets and inflation/deflation.

9. Capitalism: Derailed, Dumbed-down, or Deceased?, asks Rob Kirby.

10. Is art a good investment? Matisse Capital reviews recent speculative returns.

11. China is not decoupling from the US, according to CLSA economists.

12. Does the current financial crisis vindicate the economics of Hyman Minsky?

13. Bear Mountain Bull tips us to some not-so-free-market aspects of the recent home lending accords.

14. Peter Munk, founder and chairman of Barrick Gold, speaks with FT.com's "View from the Top" about gold, mining, sovereign wealth funds, the world economy, and investors Steven Schwarzman and Oleg Deripaska.

Watch the interview here. Parts one and two.

Have you enjoyed this week's posts? If so, please take a moment to bookmark Finance Trends Matter and share our site with a few friends. Thanks, and enjoy your weekend.

Thursday, November 29, 2007

Quote of the day

Leonard Read (1898-1983) on presidential election campaigns:

"Not only will [an] office-seeker resort to expediency to attain office, but, once in office, his very enterprise will prove a handicap to the nation…A man who seeks and secures public office…will try to make it a bigger and more powerful office. Government should not be so expanded…Men in government, therefore, should be those who aim at making government as unnecessary as possible. Contraction, not expansion, should be the aim."

Quote taken from Read's 1948 book, Pattern for Revolt.

The quote and the book are both discussed in the Mises blog post, "Following Leonard Read's Pattern". Have a look.

You can also read the book online in PDF format.

Wednesday, November 28, 2007

Commercial property bubble?

Commercial property may be headed for trouble, at least as far as the bond market is concerned.

Bloomberg reports that action in the derivatives market for commercial mortgage securities is reflecting increased worries of default risk and investor skepticism over the sector's strength.

Excerpt from, "Deadbeat Developers signaled by Property Derivatives".

In the bond market, commercial property investors are about as creditworthy as U.S. homeowners with subprime mortgages.

``Commercial real estate is a full-blown bubble that feels very much at a bursting point,'' said Christian Stracke, an analyst in London at CreditSights Inc., a fixed-income research firm.

``There's a fairly toxic mix of factors at work.''

The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd. Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.

Sentiment is turning on the once hot commercial property market.

I don't know if this is a case of piling on by traders and the media after investor Andrew Lahde, recently noted for his firm's stellar subprime short-driven returns, voiced his dour outlook on commercial property-backed loans. Or could it be that this market's number really is up?

Well, I'm no expert here, but let me introduce you to someone who is.

Meet Sam Zell, noted property investor and recent seller of Equity Office Partners (to Blackstone for $39 billion).

Zell spoke to Bloomberg in a 21 minute interview segment earlier in the year about the sale of EOP to Blackstone, and the property market in general.


He was gracious about not calling a top in the property market after completing the EOP deal, noting its merits from the perspectives of both sides in a seperate interview with FT.com.

In fact, he recently offered the opinion that rents from commercial property represent "income from bricks and mortar" that investors will increasingly want in the future. Zell also said that the monetization of real estate assets is a trend that has only started.

So there you have it. One seasoned investor's view of the long-term trends affecting commercial property. Does this mean that current worries over the state of the commercial property market will prove to be nothing more than a prelude to a short-term shakeout?

Monday, November 26, 2007

Hedge fund's 1000% subprime bet

Here's another interesting update to last August's, "Subprime: winners and losers" post.

The Financial Times has reported that Lahde Capital, a Santa Monica based hedge fund, has made more than 1000% on its short positions in the US subprime loan market this year. This makes it "one of the world's best performing funds of all time".

Here's more from FT:

Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil. The fall in the value of subprime-linked securities has boosted a group of funds which spotted the problems in advance.

The decision to use derivatives to short, or bet against, low-quality US home loans taken by a select group of hedge funds last year appears to have become the most profitable single trade of all time, making well over $20bn in total so far this year. John Paulson’s New York-based Paulson & Co, the biggest of the group with $28bn under management, is said by investors to have made $12bn profit from the trade already.

Lahde Capital is now among the handful of funds that have become publicly recognized for their outsized returns from subprime market positions.

We mentioned Paulson & Co.'s savvy bets in the subprime market in an earlier update post entitled, "Excellent timing: John Paulson". Check out that profile if you haven't already.

What's interesting about Andrew Lahde's position is that he expects similar problems in the market for commercial property backed loans.

He also feels the entire banking system is suspect due to unrealistic accounting of assets, and has moved some of his profits into gold "and other precious metals".

I found this especially noteworthy; to me this says that Lahde is "smarter than your average bear"/fund manager. He is obviously aware of worldwide inflation due to excess money creation, and hopes to hedge against this risk.

See the FT article for more on this, as well as FinAlternative's article, which also focuses on Lahde's new Short Credit Fund.

Friday, November 23, 2007

Features of the week

What's happening with the dollar, Asian currencies, and the Gulf (GCC) currencies? How does $100 oil fit in with the falling US dollar? Will the US economy and consumer spending power through higher energy prices, or will an impending bear market in US stocks signal a weaker economy ahead?

The answers to these questions are here, in our, "Features of the week".

1. The stock market closed higher on Friday, with the DJIA rallying to 12980.88 in a holiday-shortened trading session.

Holiday shoppers are out in force. But watch out for that Dow Theory sell signal, which could foreshadow a coming bear market.

2. Gulf parties over $100 oil, and wonders it what to do about its currencies.

3. Investors Khiem Do and Jim Rogers discuss the strength of Asian currencies and the recent weakness in the US dollar.

4. Gold shares may beat bullion, says investor Trevor Steel, of Baker Steel Capital Management.

5. Jim Wyckoff thinks the Countinuous Commodity Index (CCI) charts might be signaling a coming correction in the commodity markets.

6. The Continuous Commodity Index (CCI) explained.

7. Are we finally beginning to see a decline in the art market?

8. Carbon capitalists grab gas from pig waste.

9. Three steps to protect your investment funds.

10. Scenes from Zimbabwe's hyperinflation. Hat tip to Mises blog.

11. The future of the commodity price boom, an Austrian perspective.

12. Ron Paul expects to raise $12 million in the 4th quarter. Here's a recent clip of Ron Paul on the Tonight Show with Jay Leno.

Thanks for reading, and remember to bookmark Finance Trends Matter. Enjoy your weekend.

Wednesday, November 21, 2007

Fannie and Freddie go south

Fannie Mae and Freddie Mac shares continue to fall after posting big losses on Tuesday.

Worries over the financial condition of the two lenders, both government-sponsored enterprises, deepened on Tuesday after Freddie Mac reported a third quarter loss of around $2 billion dollars.

Here's the latest on Wednesday's action from Reuters.

Shares of Freddie Mac (FRE.N: Quote, Profile, Research) fell as much as 9.5 percent on Wednesday after analysts slashed their price targets on the stock, saying an unexpectedly wide third-quarter loss may make it tough for the No. 2 U.S. home funding company to inject the liquidity needed to rescue an ailing housing market.

Government-sponsored enterprises Fannie Mae (FNM.N: Quote, Profile, Research), the largest U.S. home funding company, and Freddie Mac have been hit by mounting losses as home foreclosures continue to climb and the credit crisis drains the value of mortgages they own.

Our "Jive Turkey" award goes to the Wall St. analysts who have once again stepped in after the fact to lower their price targets in line with recently pummeled share prices.

Goldman Sachs analyst James Fotheringham cut his price target on Freddie by two-thirds to $24, lowered his earnings estimates and said the company might face a further decline in the fair value of net assets in coming quarters.

Bear Stearns analyst David Hochstim cut his price target on Fannie Mae from $75 to $70.

Credit Suisse analyst Moshe Orenbuch cut his price target on Freddie Mac to $27 from $45 to reflect the company's limited capital flexibility.Fannie Mae fell nearly 1 percent on Wednesday.

Paul Miller, an analyst with Friedman, Billings, Ramsay, who downgraded Freddie to "underperform" from "market perform" and slashed his price target to $20 from $55 on Tuesday, said he expects the company to raise up to $5 billion but is unclear on how and in what form it will raise capital.

And so on...

Frankly, this whole GSE business puzzled me, as I could not figure out why such startling irregularities at Fannie and Freddie were ignored by investors, who consistently shrugged off late filings and accounting problems at the two firms.

Having never been more than a casual observer of these companies, I had to wonder: was I missing something?

Yesterday's carnage was no surprise to investor Jim Rogers, who spoke with Bloomberg about the problems at Fannie Mae and Freddie Mac.

According to Rogers, who is still short the two lenders, no one is sure what is going at Fannie Mae or Freddie Mac. He also feels that the problems from the subprime lending mess will take years to clean out.

Watch this interview clip to hear more.

We'll see you on Friday. Happy Thanksgiving, gang.

Monday, November 19, 2007

Government and Big Business

You may have noticed a theme running through some of our recent posts on noted investors John Paulson, T. Boone Pickens, and Warren Buffett.

Take a look. It turns out that every one of these posts details the point at which an investor's self interest meets with government regulation. Often to the benefit (or planned benefit) of the investor/business, and at the expense of other individuals, such as yourself.

Now, this theme was apparent in the recent posts on Boone Pickens' foray into the water pipeline business, and Paulson & Co.'s perceived efforts to influence bankruptcy and mortgage legislation for the benefit of their remaining subprime market positions.

However, this theme was not so apparent in our post on Warren Buffett and his continued support of the estate tax. At least, it was not apparent to me until I did some extra reading shortly after making that post.

It turns out that self interest is well represented in Buffett's stance on inheritance taxes, at least according to some observers who feel Buffett's position is a logical outgrowth of his company's investments in life insurance and annuities and his interest in family-owned businesses as acquisition targets for Berkshire Hathaway.

We can argue over the legitimacy of these arguments in each of these instances, but the issue is plainly hanging over them. In a practical sense, we see that businesses and investors seek to use and influence government regulations and legislation to their benefit. They just don't like to advertise that fact.

Having said that, perhaps you will be interested to read the essays, "Government and Big Business", by Christopher Mayer, and, "The Snare of Government Subsidies", by Gary North.

Both articles make some interesting points about the marriage of business and government. Here's a particularly telling excerpt from North's piece:

The idea that businessmen are strong defenders of the free enterprise system is one which is believed only by those who have never studied the history of private enterprise in the Western, industrial nations.

What businessmen are paid to worry about is profit. The problem for the survival of a market economy arises when the voters permit or encourage the expansion of government power to such an extent that private businesses can gain short-term profits through the intervention into the competitive market by state officials.

Offer the typical businessman the opportunity to escape the constant pressures of market competition, and few of them are able to withstand the temptation. In fact, they are rewarded for taking the step of calling in the civil government.

Something to consider the next time someone tries selling our "mixed economy" as a model of the "free enterprise" system.

Still, the situation is not a hopeless one. North concludes his essay by reminding businessmen to first, "avoid sniffing at the bait" of government subsidy, as a matter of principle.

If principle is not enough, he reminds them that the strings attached to government subsidies become chains over time. So, it is better for individuals (even those who are simply pragmatic, rather than principled) to understand this chain of events ahead of time.

Have a look and consider these arguments for yourself.

Friday, November 16, 2007

Features of the week

Gold, energy, real estate bubbles, Hong Kong and US dollars, global languages, and charity. That's just some of what you'll find in today's edition of, "Features of the week". Enjoy!

1. Seeking truth from facts. How big is China's economy, really?

2. Jim Rogers says get out of the US dollar, and rains on Bernanke's parade.

3. Gold may easily rise to $1000, says Marc Faber.

4. Ron Paul: A seller of ideas. Great story from the Chicago Tribune.

See also, Reuters' article, Ron Paul's maverick stand enlivens election.

5. Government waste? Eliminate it. The Chodorov Principle.

6. Piggybacking Buffett's investments via filings provided nice returns, based on retroactive data.

7. Rest in peace, Hong Kong dollar?

8. 10 reasons to avoid lists. Nice one, Kent.

9. Discover your talents. Nice post from The Kirk Report.

10. Beware of charitable incentive programs designed to make you feel good.

11. Speak globish? English as a global language, and the rise and fall of languages. Fascinating article from FT.

12. Watchdog pulls out of monitoring Russian elections. Cites "unprecedented restrictions" in obtaining Russian visas. Hmmm...

13. FT special report on energy.

14. The Energy Blog on arguments targeted at global warming skeptics.

15. Marshall Loeb on the "Top four financial myths". Uh-oh, a list.

16. BusinessWeek profiles the young entrepreneurs of 2007.

Cheers, everyone. Enjoy your weekend, and thanks for reading Finance Trends Matter.

Thursday, November 15, 2007

View from the markets

We have a couple of recent hits for you from FT.com's "View from the Markets" series.

These recent interview clips with Khiem Do, of Barings Asset Management, and Jim Rogers offer an insightful view of recent financial trends and investing themes worldwide.

In the first series of clips, FT's Andrew Wood asks Khiem Do for his view on subprime issues and the big picture outlook for the Asian economies.

We then hear some very interesting comments from Do on the US dollar and the strength of Asian currencies, and his outlook on the global economy in 2008.

Watch: Part one, part two, part three.

Jim Rogers joined FT "View" for a four-part interview in this second series of clips. As always, Rogers is happy to speak his mind on a number of subjects.

Here we see Rogers talk about US monetary policy and Ben Bernanke's reign at the Fed, the possibility of a short-term US dollar rally, American politics and Ron Paul (!), investing in China and Asia, the outlook for the Renminbi, Sovereign Wealth Funds, and his current views on commodities and emerging markets. Check it out.

Watch: Part one, part two, part three, part four.

Enjoy the interviews, and remember to come back and join us tomorrow for our "Features of the week". See you then.

Wednesday, November 14, 2007

Buffett: don't repeal estate tax

Warren Buffett, that enlightened king of billionaire investors, has voiced his approval for the estate tax (or "death tax" as it's commonly known) and is calling on Congress to maintain the tax, claiming its repeal would be wrong.

From, "Buffett says Estate-Tax Repeal Would Benefit Richest".

Warren Buffett called on Congress to maintain the estate tax, saying that plans to repeal the levy would benefit a handful of the richest American families and widen U.S. income disparity.

Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., told the Senate Finance Committee that advocates of repeal were ``dead wrong'' to call the levy a ``death tax.''

It would be more appropriate to call it a ``death present,'' said Buffett, 77, who is the third-richest person in the world, according to Forbes Magazine. ``A meaningful estate tax is needed to prevent our democracy from becoming a dynastic plutocracy.''

And now, a personal take. I've grown increasingly tired of Buffett's fashionably "democratic", read leftist, approach on political and economic issues.

Buffett is one of the greatest investors the world has ever known, and we all admire him for that, but his apparent need to reconcile his wealth against the needs and wants of society has become tiresome. When I hear him talk about "claim checks" on society and rationalizations for why he bought his company jet, I just want to tell him to stop talking already.

Now that Buffett is advocating the continuation of an estate tax in order to level out what he perceives to be unfair advantages benefiting the inheritors of wealth, it's clear to see that what Buffett really wants is a government that will stamp out inequality and preserve our "democracy" via direct taxation and redistribution of wealth and resources.

``A meaningful estate tax is needed to prevent our democracy from becoming a dynastic plutocracy.'' Heirs to vast fortunes, he said, have already won the ``ovarian lottery'' and shouldn't be further rewarded by the tax system.

From what I've been able to piece together (outside of my wretched public schooling), it seems that America was founded as a republic, one that respected and acknowledged the individual's right to life, liberty and the pursuit of happiness.

Our Founding Fathers risked their lives in order to throw off tyranny and excess taxation, and to build our country on this footing. While many of them loathed the idea of an entrenched aristocracy as existed in Europe, they were also fearful of the realities of what we reverently refer to as "democracy". The founders rightly regarded democracy as a decayed form of mob rule, in which each group fights the other to secure plundered wealth and resources, and the majority imposes its will on the minority.

Now we've reached the stage where even our greatest and most influential capitalists are publicly committed to the idea of wealth redistribution via government confiscation, out of control governement spending, and ever-expanding social welfare programs. It really makes you wonder.

It's interesting, because I just started rereading an excellent book entitled, Buffett: The Making of an American Capitalist.

I must have read this book five times already, but I like to pick it up every now and then and read certain sections over again. Every time I do, I find myself more interested in the passages on Buffett's father, Howard Buffett, a conservative Omaha businessman who was later elected to represent his home district in the US House of Representatives.

Howard Buffett is described as an isolationist, a New Deal hater, and many other things that would seem unfashionable today. But he was also described as "unshakably ethical", and he left all the Buffett children with an understanding of the woes of big government and inflation.

So while it's no big surprise to see Warren's political views veering off from those held by his father, it's interesting to see that he seems to have left his father's lessons on inflation and its ill effects behind.

Buffett said that in the last 20 years, tax laws have allowed the ``super-rich'' to get richer.

``Tax-law changes have benefited this group, including me, in a huge way,'' he said. ``During that time the average American went exactly nowhere on the economic scale: He's been on a treadmill while the super rich have been on a spaceship.''

Warren blames tax laws for the average American's declining standard of living. While this is a popular theme to invoke, it really overlooks the major causes of stagnant and declining real incomes and standard of living: excessive taxation, spending, and inflation.

It's time we examine the wealth and savings-eroding effects of inflation and our ever increasing reliance on debt to finance our country's activities and our personal needs.

For more on this topic, please read Ron Paul's brief and informative discussion of "The Inflation Tax", as well as Hans Sennholz's essay, "The Envy Tax".

Monday, November 12, 2007

Commodity indexes surpass funds

Commodity index investment products are helping mainstream investors ride the bull market in commodities. And as Bloomberg reports, this year the indexes have outperformed the leading commodity focused hedge funds.

Excerpt from, "Calpers beats Pickens as Commodity Indexes Clobber Hedge Funds".

T. Boone Pickens, the billionaire oil trader who predicted crude's rise to $100 a barrel, is lagging behind commodity-index investors for the first time since 2003.

Even California Public Employees' Retirement System, the 75-year-old pension fund that ignored commodities until eight months ago, is beating Pickens. Calpers invested in the Standard & Poor's GSCI Index, up 32 percent this year, while Pickens's BP Capital fund rose 22 percent.

From Dwight Anderson's Ospraie Management LLC to Global Advisors LP, commodities hedge funds failed to anticipate the 58 percent advance in oil and 31 percent gain in gold that powered indexes to their highest levels in two decades. While bullish forecasters at Goldman Sachs Group Inc. and Deutsche Bank AG advised clients to double down on commodities in January, they didn't expect this year's returns.


I have to say, this level of return from the overall commodity indexes was not what I was expecting for this year.

After a four or five year run in the GSCI, I expected a rather muted performance or even the start of an intermediate term correction in the major indices, with the potential for larger gains concentrated in several of the more overlooked individual commodities and commodity sectors.

It turns out Goldman Sachs was right in their 2007 call to "double down on commodities". I was wrong. Congrats to everyone who played it right, including the major pension funds like Calpers, who were highlighted in Bloomberg's recent article.

Whether or not the index players will be able to outperform the leading commodity hedge funds over the longer term is another issue, and it is one that is taken up in Bloomberg's piece.

Still, you have to give it to Jim Rogers and those who predicted the rise of commodity index investing and investors' growing acceptance of these products. They were absolutely right, and the market for these investment products is still growing.

Just last Friday, the Financial Times reported that JP Morgan and BNP Paribas were developing commodity index vehicles that will allow investors to make longer-term bets on commodity prices movements.

It was also noted that S&P had forecast a 20 percent increase in commodities index investment for 2008. Commodity investing has gone mainstream.

Sunday, November 11, 2007

World View

To keep you up to date for the week ahead, a quick overview of some of the larger stories on the world stage, both political and economic.

We'll take a look at the protests and clashes arising out of government-imposed "emergencies" in Pakistan and Georgia.

You'll see a recent interview with James Grant, of Grant's Interest Rate Observer, on Bloomberg TV.

Also, a view of the dollar and the state of national currencies in an era of global inflation.

So let's get started with our first set of stories, which deal with the ongoing political confusion and turmoil in both Pakistan and Georgia. Here's the latest on both.

1. "Tycoon vows to topple Georgia's 'despot'".

GEORGIA’S richest man is to run for president to remove “the fascist regime” of Mikhail Saakashvili, leader of the tiny former Soviet republic.

Badri Patarkatsishvili, the billionaire businessman who helped to finance the “rose revolution” that swept Saakashvili to power four years ago, made his declaration after special forces stormed the studios of his television station for criticising the president.

“My election slogan will be ‘Georgia without Saakashvili is Georgia without terror’, he said.

Read on for more at the link above.

2. "US envoy in Georgia to push for end to emergency rule". More on the current government declared "emergency" in Georgia.

It seems the US is in town to tell Georgia how to run its affairs, but meanwhile I'm seeing quotes of praise from our administration on the manner in which Pakistan is running its own little government crackdown amid "emergency" rule.

Of course, President Musharraf has promised to hold elections, right after he stamps out "militancy" and the opposing media and judiciary. Plus, military courts to try people accused of sedition, treason, and inciting "public mischief". It's all very "democratic".

3. James Grant talks with Bloomberg about banking, credit, and the dollar.

4. We could say a lot of things about Ron Paul's recent exchange with Ben Bernanke on the dollar and the inflation which emanates from the Federal Reserve system.

I think I'll turn that job over to Peter Schiff, who fleshes out these ideas in a recent exchange with Financial Sense Newshour host Jim Puplava.

In this interview, Peter and Jim get into a rare argument over the likely direction that US and European inflation will take. But if you listen carefully, it really seems that they're not arguing at all, and are in fact making some very similar points on the US and global economies, fiat currencies, and global inflation.

Check it out, take it all in, and share your thoughts.

Friday, November 09, 2007

Features of the week

Dollars vs. euros, Ron Paul and the Fed, miracles of nature and science, and more. That's a taste of what's in store for this Friday's edition of, "Features of the week".

1. Buy gold to side-step collapsing dollar, says Marc Faber in his latest commentary for AMEInfo.

2. Paul versus Bernanke on dollar, inflation. Bernanke is the professor and Ron Paul is the unruly "grad student" in this ABC News story.

Video clip and Fed sophistry included.

3. Contrary signals on the dollar/euro? Jay-Z flashes euros and a supermodel attaches a payment in euros clause to her endorsement contract.

4. "The Credit Markets - Tragedy or Farce?". Michael Lewitt's speech at the Bank Credit Analyst Conference centers on the opportunity within the recent credit market fallout.

5. Greenspan absolves himself. Housing, credit bubbles not his fault.

6. Why actors and models love to hang out with Hugo Chavez.

7. Excellent Fast Company cover article on mechanic Jonathan Goodwin, who uses ingenuity to ramp up car mileage and horsepower, while dropping emissions.

8. Where the ego, personal improvement, and investment strategy collide. The Financial Philosopher on, "Becoming Nobody".

9. Scientists discover an extensive new planetary system.

10. Dolphins save surfer from shark. I've always thought that dolphins were the most radical mammals around. And they still continue to help us even after all we've done to them and their ocean environments. Pretty amazing.

Cheers gang, and remember to bookmark Finance Trends Matter.

Thursday, November 08, 2007

Paulson & Co. push subprime bets

In our last post, we talked about T. Boone Pickens' plans to create a Texas water pumping district and a water transport pipeline, whose right of way will be pieced together with the help of eminent domain laws.

Today, we'll focus on another hedge fund manager who may take advantage of some helpful legislation. Legislation that, if passed, could aid his short positions in the subprime market.

We posted an interesting profile on John Paulson and the outperformance of the Paulson Credit Opportunity Fund back in September. For those of you who haven't seen it yet, give it a read. You'll find an excellent interview in which Paulson discusses the firm's highly rewarding subprime bets.

Having successfully positioned themselves this past year on the short side of the subprime mortgage bond market, Paulson & Co. has recently announced that it has scaled back its bets against subprime backed securities.

Details from Bloomberg:

Paulson & Co. scaled back bets against subprime-mortgage securities, recording investment profits that helped the New York-based hedge-fund manager double assets to $24 billion this year.

``We felt it advisable to lock in most of the gains'' in its merger and corporate event-driven funds, the firm said in a third-quarter report to investors obtained by Bloomberg. Paulson cut holdings of securities linked to subprime home loans by 86 percent across its eight funds in those two strategies.

The firm told investors it expects more profits as home prices decline and delinquencies soar. Its Credit Opportunities funds, with about $8 billion in assets, kept subprime-related ``short'' positions to benefit from that forecast, according to a second report to clients of the credit funds.

Still, as Bloomberg reports, the Credit Opportunites funds have kept some of the subprime short positions on, as Paulson & Co. still expect to see further home price declines and rising delinquencies.

Now here's where the legislation and political angles come in. You may recall that back in October, Paulson & Co. were in the spotlight for giving $15 million to "borrower advocates" who were "backing bankruptcy legislation that would further reduce the value of subprime loans".

It seems that the legislation these groups were advocating would allow bankruptcy judges to forgive mortgage debt exceeding the value of a home, and this change would further devalue securities backed by the loans of subprime borrowers.

These are the class of securities that Paulson & Co. correctly and profitably shorted earlier in the year and of which they remain short (with their scaled back position).

You can read more about this in Bloomberg and BusinessWeek's articles on the subject.

Are Paulson & Co. just providing a service to homeowners in need of legal assistance, or are they shrewdly positioning themselves to profit more quickly from homeowner defaults and debt forgiveness? Tell us what you think.

Tuesday, November 06, 2007

Water: Boone Pickens has big plans

Update: For info on the "Pickens Plan" for wind power and energy, see our July 9, 2008 post, "T. Boone Pickens on America's energy". Thanks!

You might have heard about T. Boone Pickens' plan to capitalize on the South's growing water needs by transporting Ogallala Aquifer water to growing towns and urban areas via pipeline.

But did you know that Pickens' planned water infrastructure will be pieced together using eminent domain laws?

Bloomberg reports on the move to create a water supply district housed on eight acres of Roberts County ranchland that was deeded to Pickens' ranch manager.

The land in Roberts County, a stretch of ranchland outside Amarillo, holds no oil. Instead, it is central to Pickens's plan to create an agency to condemn property and sell tax-exempt bonds in the search for one of his other favorite commodities: water.

Approval of the district is all but certain when Texans vote today in state and local elections. By law, only the two people who actually live on the eight acres will be allowed to vote --the manager of Pickens's nearby Mesa Vista ranch and his wife. The other three owners, who will sit on the district's board, all work for Pickens.

Pickens ``has pulled a shenanigan,'' said Phillip Smith, a rancher who serves on a local water-conservation board. ``He's obtained the right of eminent domain like he was a big city. It's supposed to be for the public good, not a private company.''

Pickens and his allies say no shenanigans are involved. Once the district is created, the board will be able to issue tax-exempt bonds to finance construction of Pickens's planned 328-mile, $2.2 billion pipeline to transport water from the panhandle across the prairie to the suburbs of Dallas and San Antonio.

There's lots more detail and local view in the Houston Chronicle's story on the subject. Be sure to check that out as well, if you have an interest in this story.

As both stories point out, tensions over water use and rights are increasing in America, as parched southern and western areas are eyeing distant sources for their water supply needs.

Water scarcity is a huge global concern as well, with many forecasting increased tensions and fighting over water resources in the years to come.

Pickens' plan to transport water to growing areas seems to fulfill the market demand for the much needed resource, but it does so at a cost. Conservationists are worried about the toll water pumping will take on the Ogallala Aquifer. One also has to wonder how Texas' "right of capture" laws have contributed to the race for landowners to pump and sell water.

And the objections to Pickens' and Mesa Water company's ability to use eminent domain laws to buy right of way for their water and wind power pipeline?

Well, to me that just throws another beam of light on the idea behind eminent domain laws and the assumption that takings of property are justified if they are shown to be in the "public interest". How does one properly define "public" versus "private" interest? That's a whole kettle of fish in itself.

For more on Boone's dealings, see Bloomberg's recent interview with Pickens in their "Hedge Hunters" series.

Monday, November 05, 2007

Inflation-driven bull market

Over the weekend I got into an interesting late-night discussion with a friend on a variety of topics, economic and social.

Rather than bore you with the details of our talk, I will instead point you to the first hour segment of last weekend's Financial Sense Newshour broadcast.

Why the FSN broadcast? Well, upon hearing the program on Sunday morning I was surprised to find many of the same late-night discussion topics being covered in the FSN program by host Jim Puplava and guest Robert McHugh.

Let me give you a brief run down of what you'll hear in this FSN program segment.

There was talk of inflation and how it is understated through government's reporting of inflation statistics.

Robert McHugh offered the view that what we are seeing in the US stock market is more of an inflation-driven bull market than one based on true prosperity.

McHugh and Puplava discussed the ongoing squeeze of the average person's standard of living and the rising debt burden for individuals and state and federal governments.

They went on to talk about the idea that rising inflation and tax burdens could, in tandem, wipe out the American middle class.

Some serious stuff. You'll want to listen to the entire first hour segment if you haven't already; there's more discussion of current "inflation era" investing throughout the program.

Friday, November 02, 2007

Features of the week

Hey everyone, hope you're ready to run down some of the week's more interesting stories and market related events.

As promised, we have a lot of news to share on the energy front, plus interviews with a few well known investors and some timeless wisdom to share as well. So sit back and peruse our, "Features of the week"!

1. WSJ MarketBeat on, "The Merrill-Citigroup Bad-News Fiesta".

2. Now problems are starting to emerge for Goldman as well. A discussion of how banks are accounting for "level three" assets. Also, the SEC is wondering how Goldman Sachs managed to manuever so successfully out of subprime danger and deftly short the decline.

Fintag wondered the same as rumors circulated earlier in October.

3. BusinessWeek claims that $800 gold is not likely to surprise anyone. Really? Because I don't recall any of these glossy media outlets predicting it, even as late as 2006.

4. The Big Picture on "benign" inflation and added surcharges. More follow-up here.

5. An interesting email to Fintag on China's long-term game plan.

6. Are oil prices a speculative bubble? Commentary from The Oil Drum.

7. Total chief warns on oil output. Christophe de Margerie, Total CEO, now thinks it will be difficult to reach even 100 million barrels a day of global production.

8. Biofuels: a tale of special interests and subsidies. FT's Martin Wolf.

9. The US dollar continues to slump against the euro following the Fed's most recent rate cut. And yes, Jim Rogers has a few things to say about that.

10. Video of Jim Rogers speaking at a recent London conference.

11. Bloomberg sits down with Michael Steinhardt and Jim Chanos, of Kynikos Associates, in their "Hedge Hunters" profiles.

12. Who is Garet Garrett? Mises Institute's Jeffrey Tucker takes a look at this author's neglected body of work and shares some interesting insights on free markets and the lure of socialism.

Have a great weekend! Thanks for reading Finance Trends Matter.

Thursday, November 01, 2007

Oil prices - a speculative bubble?

Do current oil prices reflect a speculatively fueled bubble? Or is this a market that's finally waking up to the increasingly tight supply & demand picture of recent years?

I've already made
my thoughts known on this issue, so I thought you might like to read some analysis from some of the contributers to The Oil Drum. This will make an interesting preview to some of the energy related items we'll have for you in tomorrow's "Features" post.

Now, most of the crowd at TOD have been pounding the table on a looming peak in crude oil production and higher oil/hydrocarbon energy prices for quite some time.
So if you are a first time visitor to the site, do not be surprised to find a dissmissive attitude towards the official projections of crude oil supply bandied about by the EIA, IEA, CERA, and the like. The members of TOD have little time for their overly optimistic (and often misleading) forecasts.

Here then, is contributer Khebab's post, "Are We In a Speculative Bubble With Regard To Oil Prices?". You'll find some links to additional reading on this subject within the post. Hope you find it informative and worthwhile.