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.