Michael Covel: News & Info.

Feedback received the other day:

“Greetings, what will happen with this? I put $100k into each of the top 8 fortune 100 companies and hold for 12 months. What’s your prediction? What will it yield? Thanks.”

I have no idea and nor does anyone else.

An article forwarded in to me:

Arnold’s hedge fund thrives as Amaranth falls
Centaurus gains approach 200% in ‘06, but manager has an enemy in Houston
By Alistair Barr, MarketWatch
Oct 5, 2006

SAN FRANCISCO (MarketWatch) - One man’s trash is another man’s treasure. When Amaranth Advisors LLC was losing $6 billion at the hands of its top natural gas trader Brian Hunter last month, rival energy hedge fund manager John Arnold was busy making millions.

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Cole Wilcox of Blackstar Funds LLC added a comment on this post:

Some concepts that no one ever talks about, including the trend following managers themselves is that there is a very fundamental reason such strategies work. Every trade in every market is a risk transfer process. In the stock market, over the long term the risk transfer is almost always from seller to the buyer, in commodities it changes depending on the term structure because of the flip flop of premium or discount from front to back month contracts, which determines if you are getting a positive or negative risk premium or roll return. The buyers of risk in commodities, who can be either long or short depending on the current term structure require a risk premium to continue to participate over the long run. In commodities you have a risk transfer process from the hedger to risk taker or speculator. Hedgers are buying insurance, which requires them to pay for it. The price of this insurance is the “risk premium” which they must pay to the other side of the trade (speculators). On average trend following works because the trend follower is collecting the risk premium from the hedger because they are usually on the other side of the hedgers trade. My point is that insurance is not free, and this premium is a major factor to why trend followers have been successful in the past and in many cases should be expected to be successful in the future. I view trend following as an insurance business, who’s job it is to collect risk premiums from hedgers and manage portfolio risk at the same time as to survive to continue to collect future risk premiums.

Boone Pickens uses fundamentals to make his decisions. He did tell me though, and I paraphrase, “It was hard to buy gas at $2 a gallon, but much easier to buy twice as much when it reached $3 a gallon.”

I am envious of the 50 years of experience that Pickens has in the energy markets to make his decisions. He does, however, make that big money off of big trends. And 2005 saw energy trends out of this world.

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I mentioned the other day I was meeting with a trader in Dallas. Well, that ‘trader’ corrected me today during the interview. Boone Pickens prefers to be called an investor and doesn’t consider himself a trader. To hear about his +600% for 2005 is simply inspiring. He is the rare man whipping Wall Street when many of his peers have retired. I don’t get the impression Boone Pickens is slowing down - he seems to be picking up speed at 78.

Comments from Edward Talisse describing the inner workings of the large investment banks:

“There is massive confusion and misunderstanding between the concepts of skill and luck. Traders which collected bid-offer spreads for years discovered the painful truth once dealing spreads collapsed. They are left with no skill and no luck. Make sure you always study and keep ahead of the pack. Don’t count on luck.”

“There are very few real risk takers at the big Banks. The real emphasis is on collecting fees, collecting bid-offer spread where available and front running large client transactions. The real risk takers are purged at the first sign of trouble. The best ones go to Hedge Funds. Get out if you really believe you are a great risk taker. There are fewer constraints and bigger rewards outside the big Banks.”

I am in Dallas to conduct an interview with a very good trader. More to follow.