Hedging----The Reflection

(Ed.note; The "Bear Trader's" Comments are Reflection and not market advice) You asked, "After all the hedging such as AIG etc....after the writedown of bonds of Greece by almost 80% and yet NO calling of the hedges to make the owner WHOLE? HUH? How could this be?" Have been thinking about this also. Very much "the dog that didn't bark", eh? Since there is a total media blackout on this one, and without a peep from the hedgies that were supposing to be holding all those Greek CDS, I suspect we are seeing "official government diplomacy" here. The hedgies got the "carrot and stick" treatment with enough "carrot" in the mix that they promised to keep their mouths shut. Most of the money on the other side of those CDS is European Bank money, and as the European Banks are solvent only through "smoke and mirrors" any actual payout had to be, in the end, from the ECB, that is, part of the Euro 850,000,000 recently created by the ECB and loaned to the banks. If the hedgies got a lot of money, and word got out, the Eurozone would come under drastic political pressure. You think the various electorates of Greece, Spain, Italy, Netherlands, etc. facing austerity would be happy to hear that "their" money and social benefits were going to the hedgies? Or in Germany, for that matter? The hedgies probably took an offer of big haircuts but no perp walks on their CDS. The money probably has been payed out by the banks from loans recieved from the ECB. We shall see if there is any media coverage of this to follow. You asked about FAZ and if hedging were baloney. FAZ according to their prospectus promises only to "attempt" a three times inverse of the Russell 1000 financial firms, mostly insurance companies. There are lots of reasons why this is hard to accomplish. The first is FAZ has high ongoing expenses. Secondly as FAZ gets bought and sold FAZ has to radically change it's hedging strategy buying and selling complicated custom contracts with counterparties who cut FAZ no slack of course. Options become more expensive instantly as options change like lightning these days thanks to HAL and his kindred. The result is just when more people buy FAZ it becomes less likely FAZ will perform as the buyer expects. FAZ would work better for the share buyer as a closed end fund except for Joe and Martha Sixpack would wait to long and buy high. They better hope they can beat out HAL to the punch, hah hah. Hedges are possible. Thinking and working on this. The most important thing is that any hedge that works can't have too big a following, too much herd enthusiasm, to much money invested, for it to be effective as a hedge. That is the present hazard in precious metals. In hindsight an effective hedge will look obvious but will be deeply scorned when it should have been bought.

On Coal...Natural Gas...and LNG....The long View

The future of coal. People are not going to give up coal on the long term. The "renewable energy" cant is bogus. Windmills are a 14th Century technology even with modern aerodynamic redesign. Solar is bogus because covering the USA with solar cells and storage batteries wouldn't begin to supply the amount of energy required while the cost of installation and upkeep would be totally ruinous. The same applies to windmills. On the long haul the "anthropogenic global warming" hysteria will blow over since it is faith, not science. Coal will be back and in a very big way. From an investor's viewpoint I suspect we will never live to see it happen. Coal in the ground is another matter, but only the Big Boys can play in this game. Lots of action in this play in Australia lately. Natural gas has always been a feast or famine affair caused by regulator action and changing extraction technology. The current low natural gas prices can't last because the drillers need $4 gas to break even. Right now the drillers owe a tremendous amount of money and must service their debt so they maximize sales even when this looses them money. This cannot last for ever. That this is even possible now is a product of Federal Reserve manipulation of interest rates to absurdly low levels (so the gas guys can service the debt). When you see a full court bull press in the media you have to remember that when you are playing poker if you don't know who is the sucker the sucker is you. (Sorry about that.) Right now there is a glut of gas, the greatest gas glut of all time. Not impossible we will see gas well below $2. Lots of talk about liquid natural gas. To make a difference in the US gas market LNG export capacity will have to be greatly increased. This means new large gas pipelines, liquification plants, tankers, and port facilities. We are talking about a lot of natural gas here. This means years, some real money, and regulatory support. There are plans for a very large new gas pipeline in Alaska parallel to the existing oil pipeline from the north shore to Anchorage with construction of liquification plants and port facilites for LNG tankers. The Canadians are planning a similar project from their arctic fields to a Pacific port. Negotiations are underway between Canada, the US, and Alaska to rationalize these two projects. Qatar has a major LNG liquification plant under construction. Lots of natural gas in the area, this could prove a big deal. A lot of Russian gas reserves in Western Siberia are underutilized and the Russians are mulling exporting LNG from Vladivostok. They can get a lot more for LNG in Japan (since Japan is shutting down its' nuckear plants) than they are getting for pipeline gas from the Chinese. The Chinese are building a very large gas pipeline from Iran into southwest China. India is mad for being cut out of the deal. Lots of gas in the Arctic. Really a bunch. Lots of oil, too, but more gas. This will probably lead to war, perhaps in our lifetimes. Lots of geopolitics here.