…A huge haircut

Ng0611060921

Natural Gas  NG0611 Source: Prophet
(click to enlarge)

According to Bloomberg’s September 21 piece,
by Katherine Burton and Justin Baer, Amaranth Advisors LLC hedge fund
lost $6 billion or 65% this month on a natural gas long bet.

Amaranth Losses Swell to $6 Billion After Transfer
   
By Katherine Burton and Justin Baer
(An excerpt)

The value of Amaranth’s funds plunged more than $6 billion,
or 65 percent, this month as of Sept. 19, founder Nicholas
Maounis said in a letter to investors late yesterday. The
Greenwich, Connecticut-based firm handed over its energy
portfolio to outside investors and sold unidentified holdings to
stem further losses and “avoid termination of our credit
facilities and the risk of a consequent forced liquidation by our
creditors,” he said.         

“They had to take a huge haircut,” Mark Williams, a
finance professor at Boston University and former risk manager at
electricity trader Citizens Power. “They need to get as far away
from those positions as possible.”         

A few years ago, I was fascinated by a very similar story surrounding the Fed brokered bailout of LTCM.

Long Term Capital Management started operations with the top traders of the Salomon
Brothers arbitrage group, headed by Meriwether; Nobel prize
winners Merton and Scholes; and  former Fed vice chairman Mullins–what
better group could you ask for?

Consequently, banks and investors lined up to hand them their money… $1.25 billion to start with.

The Russian collapse during 1998 blew away their highly leveraged arbitrage deck of cards… This is a BBC report which gives the downbeat mood of the market at the time…

However, what really fascinates me of this story, is what may be
going on right now at Amaranth: the actual takeover by the creditors;
and how the traders from these banks eagerly learned and played LTCM’s
positions to extreme pain to extract the final 100’s of millions of USD
out of this knowledge alone–trading is unforgiving…

But, Amaranth’s failure is not the only crack in the economy that I’ve noticed recently:

  • The slowdown in housing has extended itself into a larger slowdown;
    reflected by the  0.4% decline of the Phily’s economic index, the
    biggest
    monthly drop since January 2001;
  • Stock indexes are going nowhere–why would they rise, with a deteriorating consumer confidence brought about by the emerging economies deflation export?
  • And bonds are rising… hinting a deflationary rather than an inflationary concern; inverting the Treasury yield curve and threatening a recession.

    Yieldcurve060921_1

Treasury Yield Curve. Source: Bloomberg

Oil future prices have been in contango for quite awhile; which also
means large inventories, people have been playing the buy and hold
inventories, to sell at a later date at higher prices. But lately, oil
prices have been going south, mainly,  due to the end of the summer driving season–which I’m sure is nerve wrecking for most
holders of these long inventories…

And, although the threat of a potential Iranian crude production shutin is counter to the downward
pressure on oil prices, I think traders are realizing that the US
government will eventually have to yield or play their cards very
mildly with the Iranians; to avoid a catastrophic meltdown of
the world economy…

Malcolm Gladwell’s remarks in his "Tipping Point" book come to mind;
or, in other words, there’s very little holding back the mudslide of
the US economy; and, when it breaks loose… oil prices will head south
very rapidly…