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            The Rise and Fall of Commodities' Hedge Funds

                                          Pump and Dump

         Oil, Silver, Gold, Food Commodities - It's All The Same.

               COMMODITY EDGE FUNDS ARE DESPERATELY TRYING TO RAISE MONEY NOW.
                                                            THEY MUST SELL EVERYTHING.

                                    
                                                                          by William Schmidt, Ph.D.  
                                 Author of TigerSoft and Peerless Stock Market Timing: 1915-2008  and Nightly Hotline


                          Wall Street Is Not Trusted. But Who Has Confidence in Washington?

                                    It is hard to imagine a set of policies that would more effectively
                       destroy long-term confidence in financial markets than the
                       one Bush, anti-regulation ideologues and Wall Street hipsters have
                       foisted upon the American people since 2000.   Speculative excess,
                       unbridled greed, unchecked de-regulation, rampant cronyism and
                       greed lay behind the Crash of 1929.  We are headed there again,
                       unless an abrupt U-Turn is made by the nation's policy makers.  
                       The administration's obsessive devotion to the principles of laissez-faire
                       has now been matched by massive bailouts, totaling a trillion dollars,
                       for Wall Street bankers.  No wonder wealth is more concentrated
                       than at any time since 1928. 

                                  Will an Obama or a McCain Administration bring a U-Turn?  Can
                       A depression be avoided?   Despite all their talk about more regulation,
                       the bailouts for Wall Street have the approval of Democrats Obama,
                       Nancy Pelosi and Harry Reid and Robert Rubin of CitiGroup.
                       An ugly truth is emerging: a class war against Main Street,
                       the middle class and the working class is now being waged by both
                       political parties' elites.  With real wages declining for workers for
                       30 years, credit supremely tight, and the costs of health insurance and
                       education rocketing up, how can a long recession that amounts to an
                       economic depression be avoided?  

                               
                  
                               Bush has robbed the US Treasury dry.  He has given billions,
                       even trillions, to the Wall Street bankers, private military contractors
                       and oil company executives who put him in office.  Incredibly, one
                       twelth of the nation's entire annual GDP (all the nation's goods and services),
                       has now been ear-marked to save American bankers from the
                       consequences of their own mistakes and greed.  Small wonder
                       confidence has been so badly shaken. 

                               For his final insult, Bush has now turned the job of fixing the economy
                       to the very Goldman Sachs thief (Treasury Secretary Paulson - with
                       a personal net worth of $700 million) who lobbied from 2000 to 2004 for 
                       banking and financial markets' de-regulation and authority for hedge funds
                       to use much greater leverage.  This is EXACTLY what caused the very mess
                       we are now in.  How can confidence be restored by Paulson? 

                                Hedge funds are not regulated.  Hedge fund managers are allowed
                       to take huge chunks of hedge fund profits, but never be liable in any
                       way for the losses they might create for their clients.   In this situation,
                       of course, they took dangerous risks and used too much leverage.  

                               But that's just part of the story.  Commercial banks were allowed
                       to sell home mortgages to others once they were allowed to become
                       investment bankers in 2000.   They hyped, obfuscated, packaged and
                       sold the home mortgages they made and used the proceeds to permit
                       still more unsafe loans.  Lending standards became a joke.  They were
                       nearly unimportant.   Someone else could always be counted on to
                       buy the neatly packaged mortgages. 

                                      Another element in the picture was the freedom of hedge funds to
                       sell short without bothering to even borrow stock, do so on down-ticks
                       and to not have to report their positions, as they would have been obliged
                       to if they were buying shares.  In this unregulated environment, they
                       were seldom accountable.  They could mercilessly try to drive a
                       company's stock down, down, down.  They could spread false rumors
                       about the company they were shorting with very little chance that they
                       would be caught and prosecuted.  The SEC still refused to ban short
                       sales on down-ticks.  All in the name of a "free market".  The truth
                       is probably much more sinister.  SEC Chairman Cox has probably
                       received some special considerations from the hedge funds he refuses
                       to limit.  This we cannot know.  The SEC does not investigate itself..

                                       In all these way,  the anti-regulation zealots have created an
                       investment climate that could not have been better designed to
                       create a financial disaster, had that been their intention all along. 

                                        Paulson has long been dead-set against trying to cool the bubble in
                       commodities, just as Greenspan had steadily opposed trying to
                       contain the housing bubble.   "Wall Street profits should not be
                       contained."   Like Greenspan, an earlier backer of the bank deregulation,
                       Paulson consistently maintained that commodity and stock prices
                       should be left to themselves.  "There was no need for the government
                       to intervene in financial markets", he stated time after time.  The
                       economic outlook was rosy as ever. There would be no recession. 
                       As a result, he did not lift a finger to prevent the bankruptcy of
                       Lehman Brothers in September 2008.  When Freddie Mac and
                       Fannie Mae failed, the US government nationalized them, because
                       these two entities owned $5.5 trillion in home mortgages and
                       the US Government has long implicitly guaranteed them.   Paulson
                       changed his laissez-faire approach with the collapse of AIG.  This
                       insurance giant was closely linked to hedge funds.  If they started
                       selling their assets, even more hedge funds might fail.  So, he stated
                       "AIG was too big to fail" and the US bought an 80% interest in it.

                                The financial debacle among hedge funds we are seeing now
                         has had far-reaching ripple effects.   While hedge funds were set
                         up exclusively for very wealthy and experienced investors, it is
                         average investors who typically are now suffering the bulk of the
                         financial distress caused by the failures of so many hedge funds.  

                                 Financial stocks and commodities' stocks make up a heavy
                        percentage of the SP-500 and DJI-30, which so many mutual funds and
                        ETFs have endeavored to match.  For years, small investors have been
                        told to simply "buy and hold" these investments.  "Never sell until, you
                        retire." "The market cannot be timed".  This they were told by the
                        "experts",   who it turns out were only the unthinking salesmen of the
                       very firms who pushed for de-regulation and the prime beneficiaries
                       of the unregulated boom.  Conveniently, they swept out of sight the
                       rocky, roller-coaster years, 1929-1941 and 1966-1982.  Small
                       investors were no to quickly buy and sell, like the hedge funds
                       did.   What hypocrisy!   It seems that each generation forgets the lesson
                       that markets are highly cyclical.  

                                                           The Dangers of Excessive Leverage

                                Billion dollar hedge funds have used their leverage to buy hundreds
                      of billion dollars' worth of commodities and securities.  Even so, the prices of
                      commodities like Wheat, Corn, Crude Oil, Natural Gas and Silver collapsed
                      in the Summer of 2008, even as the hedge fund chiefs doubled down their bets,
                      a tactic they had often used successfully in the past. 

                                                            The Dynamics of "De-Leveraging"

                               A wider financial disaster was now hiding in the shadows.  When
                      the hedge funds' efforts to prop up prices on the decline failed in July
                      and August, it was mostly because prices were just too high and
                      beyond the reach of world consumers.  When they double-downed in
                      September,   they were blind-sided by the take-overs of Freddie Mac
                      and Fannie Mae, the bankruptcies of Lehman Brothers and Washington
                      Mutual, the government takeover of bankrupt AIG and the near-bankruptcies
                      of Merrill Lynch and Morgan Stanley. 
                              When there was no rebound, these hedge funds started to panic. 
                      Prices fell disastrously.  Because of the over-leveraging, margin and
                      new collateral calls came quickly.  Word leaked out that big funds were
                      selling big positions under duress.   The polite term was "de-leveraging". 
                      Rumors spread and stock brokers front-ran the hedge funds' Sell orders.
                      Other "rogue" hedge funds smelled blood.  They used their extra leverage
                       to sell short the very stocks and commodities that the troubled funds
                       had to unload.  And now they could sell on down-ticks, thanks to the SEC
                       and Chairman Cox.  As prices dropped, good stocks had to be sold
                       along with the bad.  Nothing could escape.  Other over-leveraged hedge
                       funds were caught up by the same dynamics.  As losses mounted,
                             articles started appearing. This made investors want out.  Redemptions
                        rose.   Expectations of rising redemptions rose.  More stocks had to be sold. 
                        Seeing prices fall much more quickly than normally, regular buyers
                        withdrew their buy orders and chose to wait for the decline to stop.  This
                        just made matters worse.  Such were and are the dynamics of the 2008
                        financial panic. 

                                         

A generation later, in 2008, silver like many other commodities is doing
                the same thing, going down, down, down.  Will it have to drop 75%
                and fall below $5/ounce, as it did in 1980?  In many ways, the commodities'
                bubble of 2008 is much bigger than in 1980.

                                                            
                                                          Tiger Crude Oil: Boom and Bust

                           Crude Oil broke its uptrtendline and its blue 50-day ma. while still above 130,
                  Red and Blue Sell signals flashed from TigerSoft.  TigerSoft's Accumulation Index
                  was in negative territory.  Our Opening and Closing Power Lines were both falling.
                  This is the bearish of combinations.  The black 200-day ma is violated straight away.
                   Prices do not get back above it and are hit with renewed selling.  Technical conditions
                   do not get better.  A 12-month low is made.

                                     


                                    

                                              THERE's ALWAYS MORE THAN ONE COCKROACH

                                      The collapse of one big firm endangers others.  First, it was Bear Stearns,
                               then Morgan Stanley and Washington Mutual.  Then Fannie Mae, Freddie
                               Mac and AIG had to be bought out by the US Government.  It is not just
                               a matter of shattered confidence.  It is also that these firms' holdings had to
                               be dumped on the market, making market valuations drop sharply for the
                               securities that they are selling.  And that produces more margin calls and
                               under-capitalization notices by the FDIC.  This produced yet another round
                               of selling.  And so  the cycle was self-perpetuating.   

                                     Seldom does only a single commodity crash.  Others commodities
                              soon also drop, out of fear and out of necessity.  Hedge funds and commodity
                              funds get margin calls and they must sell out their other positions.  This puts
                              the same pressure on more and more firms investing in commodities.  Below
                              you can see  that 10 of the 19 commodities topped out in July 2008.

                              Commodity        Fall 2007 Low                    Earlier 2008 Peak           Now - 10/17/2008
                              ---------------------------------------------------------------------------------------------------------
                              Corn (C)                   345.                             754.75 (6/27/2008)                403.
                              Coffee (CC1600)    118.90                         164.60 (2/29/2008)                115.60
                              Crude Oil                   80                              145.10 (7/14/2008)                 71.85
                              Corn                         2000                            3360 (7/1/2008)                   2122.
                              Copper                     287.30                          407.75 (7/2/2008)                 219.45
                              Gold                           72                                99.22                                      77.21
                              Heating Oil             220                               407.66 (7/11/2008)              213.29
    exception          Lead                          80                                98.00 (2/12/2008) hit 62.25   87.48
                              Live Cattle                94                                103.33 (7/1/2008)                 91.05
                              Live Hogs                  52                                78.60 (7/25/2008)                56.30
                              Lumber                     225                               270.10   (8/20/2008)           199.     
                              Natural Gas                 7                               13.39 (7/2/2008)                    6.79   example
                              Oats                          261                               455 (7/3/2008)                  282
    exception          Orange Juice           130                               128.85 (7/1/2008)                83.55  
                              Platinum                    13800                           2276.`10 (3/5/2008)         872.50
                              Silver                        1325                              2068.50   (3/5/2008)         931
                              Soybeans                   920                               1658 (7/3/2008)              894.
                              Sugar                         9.70                              14.13 (8/7/2008)                11.58
                              Wheat                        752.50                          1257 (3/12/2008)            566.25         


                                      Tiger Index of 19 Commodities and Metals 
              

                                   WHAT's A HEDGE FUND?

                             Hedge funds are private and unregulated pools of capital that invest across all markets.  Hedge funds
                             often do not hedge.  They are not more conservative as the word "hedging" might suggest.  Most often, they
                      use complex, aggressive and risky strategies, in seeking higher returns for their wealthy backers. 
                      The most important commonality among hedge funds is how managers are compensated.   Typically
                      this involves management fees of 1-2% on assets and incentive fees of 20% of all profits.    This is in
                      striking contrast to more traditional investment managers, who do not receive a percentage of profits.
                      These compensation structures encourage greedy, risk-taking behavior that normally involves leverage
                      to generate sufficient returns to justify the enormous management and incentive fees.

                                 A HEDGE FUND NEARLY CRASHED THE MARKET IN 1998
                                         
                     US Federal Reserve Board chairman Alan Greenspan acknowledged in 1998 that the collapse of the
                      hedge fund Long-Term Capital Management last month could have brought a huge crisis on
                      Wall Street and global financial markets.  As it was the DJI merely fell 20% in 3 months.
                      Testifying before the US House of Representatives Banking Committee, Greenspan said the
                      $3.6 billion bailout organized by the Federal Reserve Bank of New York was necessary because
                      of the fragility of international markets. :"Had the failure of LTCM triggered the seizing up of
                      markets, substantial damage could have been inflicted on many market participants, including
                      some not directly involved with the firm, and could have potentially impaired the economies of
                      many nations, including our own."   Greenspan warned that had LTCM been liquidated through
                      a "fire sale" of its assets this would have resulted in a "severe drying up of market liquidity"--in other
                      words, a credit crunch that could have rapidly spread, setting the stage for further collapses.

                                  WHAT HAPPENS WHEN MARKETS BECOME ABNORMAL?

                       Greenspan's testimony pointed to the the strong possibility of future financial collapses. He said
                       LTCM had based its transactions on mathematical models that sought to profit from differences
                       between the current price of financial assets and their historical trend.  By investing vast amounts
                       of capital, borrowed from the banks and other financial institutions, the fund was able to make
                       substantial profits just so long as "normal" conditions applied and the price of financial assets
                       returned to levels predicted by their historical models.  But markets change

                       In the case of LTCM, it assumed that short-term interest rates would tend to rise in the market.
                       However, in the aftermath of the Russian ruble collapse and default in August 1998, there was
                       a rush of capital into US Treasury bonds--the so-called "flight to quality"--that pushed up prices
                       and sent short-term interest rates to their lowest levels in almost three decades. As a consequence
                       LTCM suffered what Greenspan termed "stunning losses," and was forced to liquidate the majority
                       of its capital base.

                                HEDGE FUND PROLIFERATION AND 100:1 LEVERAGE IN THE 1990s

                       Hedge finds using predictive models based on normal market behavior have proliferated.  A New
                       York Times estimated that their number has doubled from 1990 to the end of 1997, and then
                       stood at 4500, while investors' capital in them has increased six-fold to $300 billion. As large as
                       these sums are, they are only partially indicative of the potential impact of hedge funds on the
                       global financial system. In the case of LTCM, for example, the $2.2 billion supplied by investors
                       was used as collateral to buy $125 billion in securities that were then used, in turn, as collateral for
                       derivatives transactions worth $1.25 trillion. 

                      Commodity hedge funds now oversee about $55 billion in 2008, up from $30 billion in 2007 and
                       $14 billion in 2006, according to Cole Partners Asset Management in Chicago, an investor in these
                       funds. 
   
                        California's public employees' pension fund, the world's largest, made its first investment of $1.1 billion
                        into oil and other commodities early 2007.    Other pension funds rushed to get in on the action as
                        the prices of oil, precious metals, corn, uranium and other vital goods rose in early 2008
                        to   record highs.    Montgomery County officials shifted 5 percent of their $2.7 billion pension
                        fund away from stocks and into commodities in 2008. 

                        Commodity markets are not geared to have big funds sitting on long term positions of thousands
                        of commodity contracts for long periods for foods and so on. http://www.brownfieldnetwork.com/

                                 EXAMPLES OF FAILED COMMODITY HEDGE FUNDS

                        Ospraie was the world's biggest commodity-focused hedge fund, with
                    $7 billion under management. It failed in early September.  Ospraie sent a letter to
                         investors saying it was closing its nearly $3 billion flagship fund after a 27% loss in August
                         left it down over 37% for 2008.   According to SEC filings, Ospraie had large positions in
                         Alcoa, Arch Coal, NRG Energy, and XTO Energy, which suffered disproportionate losses
                         this week, after the fund's problems were publicized   Osparie's collapse settled the fate
                         of Lehman Brothers, which owned 20% of it. 
                  
                        What were the main reasons for the failure by a huge hedge fund, like Ospraie that had $7 billion under
                         management?    When commodities dropped they doubled their bet, hoping for a recovery as before. 
                         But it didn't.  They weren't like individual investors.  They were using leverage of 150-200 to 1.  That
                         means they were committing $450-$600 billion.  They suffered from   "front-running" by their agents,
                         brokers putting in their sell orders. .For example, oil's steep drop on Aug. 22 may have been related
                         to Ospraie's efforts to raise capital ahead of Tuesday's letter, where the fund said it plans to disperse
                         40% of its assets to investors by Sept. 30.   When prices kept falling all that leverage worked against
                         them very quickly. And they had to sell even faster. Other commodity hedge funds made a similar
                        mistake with the same bad result.  They, too, got margin calls because of the falling prices.  
                        In commodities,  speculators can buy silver or oil futures with only 7% down.   Sound familiar? 

                        Highland Capital Management LP plans to close its flagship Highland Crusader Fund and the
                        Highland Credit Strategies Fund after losses on high-yield, high-risk loans, and other types of debt.
                        Highland will end up with two funds in the next three years with more than $1.5 billion of assets.

                        Citadel Investment Group LLC, one of the world's largest hedge funds with about $18 billion
                        of assets, told Reuters that September 2008 was the worst month in its history.  Its main fund,
                        the $10-billion Kensington Global Strategies, is down approximately 22 percent for the year.

                       Rumors are circulating Atticus Capital is liquidating positions, although executives at the $13 billion
                       hedge fund deny that's the case, The WSJ reports.

                        $386 million Merchant Commodity Fund, run out of Singapore.

                      MotherRock, a $400 million fund run by the former president of the New York ercantile Exchange,
                      Robert Collins, said in August that it was closing.

                      Amaranth Advisors, which collapsed after it took a $6.5 billion loss on bad natural gas wagers.

                      Sentinel Hedge Fund imploded in August 2007.  A list of its creditors shows how wide the
                      ripple effect is.

Even 

       
c.