Finance Trends Letter

"I'm forever blowing bubbles, Pretty bubbles in the air They fly so high, nearly reach the sky Then like my dreams they fade and die." I'm Forever Blowing Bubbles - Jaan Kenbrovin & John William Kellette 1919. W ith all the talk about financial bubbles these days, we might start to get comtemplative and ask ourselves a couple of basic questions. First, what is a bubble? And second, have the conditions that define a bubble been shown to exist in one or more areas of the economy? Are we in fact living in a "bubble economy" , or is the term being indiscriminately applied to any phenomenon where rapid growth and speculation have been observed? Let's begin by defining our terms. A financial bubble is properly defined as a situation in which the market for an asset or valued object has been taken over by rampant speculation, with increasing disregard for the underlying economic fundamentals. In Manias, Panics, and Crashes: A History of Financial Crises ,

Professor Harry Kat of London's Cass Business School says investors can earn greater returns at a fraction of the cost by replicating hedge fund performance. In, "Hedge-Fund Returns Can Be Matched Without Fees" , Bloomberg gives us the low down on Kat's findings. Synthetic funds would have outperformed 82 percent of the 2,000 hedge funds and 500 funds of hedge funds studied by Kat, a former head of equity derivatives at Bank of America Corp. Most of the gains generated by hedge funds were eaten up by fees, typically 2 percent of a portfolio and 20 percent of profits, he found after studying 15 years of monthly fund results. ``In most cases, managers aren't good enough to make up for the massive fees that they charge,'' said Kat, a professor of risk management at Cass, part of London's City University, in an interview. ``The combination of excessive fees and minimal opportunity in the market makes alternative investments really doubtful in terms of thei

A recent trip to China is the inspiration behind this recent article by Bruce Feirstein in the New York Observer. An excerpt from "Bargaining in Beijing" : The last time I was here, two years ago, the thing that struck me was the number of cars and trucks on the streets of Beijing, and the realization that we (as Americans) were going to be in competition for oil. But this time, I was struck by something else: a sense of Chinese invincibility. In the English-language news, there’s almost no mention of the war in Iraq, the mid-term elections or North Korean nukes; it’s as if they’re side issues (think of Americans covering Britain’s Boer War in 1880) and tangential to the future. It’s the Chinese century. And however an important trade partner we may be, we represent the past. Have a look. It's a short piece, and an interesting account of one traveler's experiences and observations.

This is just a heads up for anyone who hasn't heard the latest Financial Sense Newshour broadcast. This week, Jim Puplava interviews Matthew Simmons , Chairman of Simmons & Company International. The topic: a critique of the recent CERA report , which claims oil supplies are plentiful and that a peak in production with ensuing decline curve will resemble an "undulating plateau". Check it out.

Interview with Dr. Marc Faber from Howestreet.com, entitled, "World Fiscal Reality Check" . Enjoy the video for the insights expressed by Dr. Faber and for the refreshing break from financial fantasy land.

From the Big Picture blog, Barry Ritholtz on "The Return of M3" : Last year, we lamented the passing of M3 reporting . This broadest of money supply measures had shown a discomforting increase in liquidity, far greater than what M2 was revealing. At the time of the M3 announcement, we suspected the Fed was attempting to cover their tracks, disguising an ongoing increase in money supply and an unstated "easing" in Fed bias. Since that time, we have learned: the Treasury Department was also adding liquidity -- a duty they have assumed, in part, in addition to the same performed by the Fed. Indeed, based on the credit growth data Doug Noland published last month ( October Credit Review ), it appears that the Fed has – despite increasing interest rates – actually eased over the last two years. Barry also mentions the websites where M3 figures are being reconstructed from publicly available data. One such source is the excellent Nowandfutures.com (see "Key Stats (

Are credit and ample liquidity (aka cheap money) the driving factors behind the recent spate of merger and buyout deals? We asked this question back in March in a post entitled "Mergers and global liquidity" . All the usual reasons for doing deals still applied (savings, "synergies", empire building, etc.), but it seemed that the recent upsurge in M&A and buyout deals has been fueled by something else: in a word, credit. Well now comes news that the most recent deal binge has, in fact, been financed through easy and cheap debt. In yesterday's Financial Times (November 21, 2006 print edition), John Authers looked at the deals done in the previous 24 hour period and asked, "where did yesterday's rash of deals come from? The answer is the credit market". Authers went on to say that because of low borrowing costs, it is now cheaper for companies to finance themselves more cheaply through debt, rather than equity. This, being opposite from the usua

Bloomberg.com reports that the Sicilian Mafia has lately been involved in increasingly sophisticated business deals as part of a move to launder funds, legitimize itself, and branch out. In "Mafia Loot Financed Aborted Gas Scheme..." , reporter Steve Scherer describes how the arrest of Mafia boss Bernardo Provenzano led to knowledge of the Sicilian Mafia's dealings in the natural gas business. The deal -- which was thwarted by Italian investigators -- highlights the changes in the Sicilian Mafia over the past few years. The Sicilian mob, known as Cosa Nostra, has had a stranglehold on the island's economy since the organized crime families first rose to prominence in the mid-1800s. It's only recently that the Mafia has been in contact with people capable of putting together a legitimate transaction of the scale and sophistication of the Kazakh gas deal -- involving some of the biggest companies in Europe and one of the world's most- sought-after commodities. I

From The Australian article, "Anti-Putin former spy fights for his life" : SCOTLAND Yard is investigating a suspected plot to assassinate a former Russian spy in Britain by poisoning him with the deadly metal thallium. Aleksander Litvinenko, who defected to Britain six years ago, is fighting for his life in a London hospital. A medical report shows he has three times the maximum limit of the odourless, tasteless poison in his body. It is unclear how the poison was administered, but on the day he became ill he had a meal with a mysterious Italian contact. Friends of Mr Litvinenko, a former lieutenant-colonel in Russia's Federal Security Service, are convinced he is the victim of a murder attempt by former colleagues. They regard it as similar to the plot in which a Bulgarian dissident was killed in 1978 with a poison-tipped umbrella on Waterloo Bridge in London. One gram of thallium, a restricted substance in Britain, is enough to kill the fittest of men. And more from Re

Well, when I saw this article that claims world oil supply is still plentiful , I knew that there would be a quick response from the peak oil crowd. Sure enough, The Oil Drum has come right back with a response to CERA's recent report , which predicts that oil supplies "will continue to grow and sustain economic growth". That's Oil Drum's phrasing, not mine, and it's a thread that I'll have to read carefully. Be sure to set aside some time and have a look at this important energy debate.

Very cool interview with art dealer Arne Glimcher at Bloomberg.com. Finance Trends readers will recognize some of the recent themes that crop up in this piece. Here's an excerpt: Kazakina: What's driving the demand for art? Glimcher: The amount of money in the marketplace and the incredible discretionary income. Money has very little meaning to certain people anymore who are making hundreds of millions dollars a year. It doesn't matter if they are paying $80 million for a Pollock. It does not alter their lifestyle at all. It's just, ``I want it and what does it take to get it?'' That's why the auction market is a little bit crazy. We'll have a show of 10 works by an artist, and they'll all sell. And then other people want them, can't get them. One comes up on the open market, and they'll pay twice what they were in the gallery. Do have a look.

Pension and endowment funds are increasingly turning to the commodities sector in a bid to boost their investment returns. Bloomberg reports that the California Public Employees' Retirement System has decided to set up a pilot commodities investment program . Calpers is the largest US public pension, so this decision is likely to carry some weight with the boards of pension and endowment funds across the country. The increased acceptance of commodities as an "asset class" was forecasted by investor Jim Rogers in his 2004 book, Hot Commodities . At that time, Rogers pointed out that an increasing body of academic and professional research had legitimized the case for commodities investment, which meant that investment institutions would increasingly climb aboard. This recent news is evidence of that trend unfolding.

Some tunes for you and me. Enjoy. Duran Duran - "Save a Prayer" The Cure - "The Walk" Echo & the Bunnymen - "Never Stop" Electronic - "Getting Away With It" Dinosaur Jr. - "Start Choppin'" U2 - "Who's Gonna Ride Your Wild Horses"

Ample liquidity and investors' appetite for yield have kept the high-yield debt markets aloft in recent years; investor Wilbur Ross sees changes ahead in the form of higher default rates on junk bonds. In an interview segment with Bloomberg TV , Mr. Ross gives his outlook and tells us why default rates will accelerate from their recent lows. Something you might want to look at and consider if you have any exposure to high-yield bonds through fund holdings, or investments in at-risk industries. Disclaimer : Not a recommendation to buy or sell any security. Consider all such news and opinions as educational material, for informational purposes only. We are not an investment advisor.

Investor Jim Rogers says there are areas of opportunity in India and in the commodity markets, you just have to be careful where you step. In an interview with CNBC-TV18 , Rogers offers his view on some of the opportunities that are present in Asia, as well as some of the danger signs on the road ahead. You will find a small "Watch video" icon at the top of the article, or you can click here to watch the video clip of this interview. Thanks to mprofit.org for highlighting this recent interview.

From Reuters, "Libraries in the sand reveal Africa's academic past" : TIMBUKTU, Mali (Reuters) - Researchers in Timbuktu are fighting to preserve tens of thousands of ancient texts which they say prove Africa had a written history at least as old as the European Renaissance. Private and public libraries in the fabled Saharan town in Mali have already collected 150,000 brittle manuscripts, some of them from the 13th century, and local historians believe many more lie buried under the sand. The texts were stashed under mud homes and in desert caves by proud Malian families whose successive generations feared they would be stolen by Moroccan invaders, European explorers and then French colonialists. Written in ornate calligraphy, some were used to teach astrology or mathematics, while others tell tales of social and business life in Timbuktu during its "Golden Age", when it was a seat of learning in the 16th century. "These manuscripts are about all the fields

Regional tensions and anxiety over the recent drop in oil prices have pushed Gulf markets lower in recent weeks. Gulf Times reports: "Gulf markets in general and the Saudi bourse in particular are negatively affected by the regional political situations, especially the Iranian nuclear stand-off and the fighting in Iraq," said Ali Dakkak, head of Dakkak Financial and Economic Consultants. "They are also psychologically affected by the drop in oil prices. In the Saudi market, a huge amount of cash was withdrawn by major portfolios and some mutual funds," Dakkak said. The seven stock markets in the six GCC states have shed some $600bn of their capitalisation since a severe correction began in September 2005 following some three years of strong rises. For more on how the Middle Eastern share indexes have fared in the wake of last year's drop, see the Gulf Times article link above.

The FT Companies & Markets section carried two articles today on the trend towards mainstream acceptance of hedge funds and private equity. I will attempt to reproduce them here. In, "Fortress to pave way with IPO" , the FT reports that the Fortress Investment Group IPO will be the "first public listing of its kind in the US and will provide a critical test of investor appetite for publicly traded hedge funds". Regardless of whether investors pile into the issue or leave it alone, it seems that hedge funds and private investment groups have left a profound influence on the investment world. The groups have influenced the mainstream investment community with their strategies and philosophies. From, "Hedges begin to blur at the edges" : THE distinction between hedge funds and the mainstream asset management business has become increasingly "arbitrary" as the two industries converge, according to the head of Barclays Global Investors, the world&

Deutsche Borse has launched their CX Commodity Index in a bid to compete with the leading commodity indices, Goldman Sachs' GSCI and the Dow Jones AIG index. There is, however, one key difference between Deutsche Borse's CX index and others, according to Chris Flood's report in Thursday's Financial Times: What differentiates Deutsche Börse's approach is that its CX index is based on trading liquidity rather than a weighting of each commodity in the index on historical production data. For more on the contruction of the index and its unique "dynamic rolling approach", see the preceding article link and Deutsche Borse's CX Commodity Index info page .

John Mauldin's latest "Outside The Box" letter contains an analysis by Stratfor's George Friedman of the US' ongoing involvement in Iraq. See, "Back To Iraq" for that report. Also, if you'd like to subscribe to Mauldin's free email newsletters, you can check out the Investors Insight website and choose what you like.

From the Globeandmail.com : The world is facing an energy future that's “dirty, insecure and expensive” unless governments take steps to promote alternatives such as nuclear and renewable energies, the International Energy Agency said Tuesday. “The energy future we are facing today, based on projections of current trends, is dirty, insecure and expensive,” the global energy watchdog said in its 600-page outlook. However, “new government policies can create an alternative energy future which is clean, clever and competitive.” I'm all for it, but just out of curiousity, why do these type of reports always have to be 600 or 1000 pages long? Is it to ensure that noone will read them? Also, if you read the article you'll see that the emphasis is placed on government; government policies need to be created, government action needs to be taken, etc. I see this kind of language in every kind of news report, regardless of the topic. If there is a problem, government will, or should,

Story from Forbes: "Poll Workers Struggle With E-Ballots" . New voting machines confounded some poll workers around the country on Election Day, and a combination of electronic glitches and human error forced some precincts to extend voting hours or switch back to paper ballots. More than 80 percent of Americans were expected to cast some type of electronic ballot Tuesday, which was the deadline for major reforms mandated by the federal Help America Vote Act, passed by Congress to prevent a rerun of the 2000 election debacle. With one in three Americans voting on a machine they had never used before, the effort to improve the integrity of the election system got off to a shaky start in hundreds of precincts from the Rockies to the Poconos. Long lines formed. Forbes goes on to report that while many poll workers and election judges are confounded by the new machines, no major problems have occured. "Lots of fender-benders, but no major tie-ups," said Doug Chapin, di

Here is some very interesting info regarding uranium & solar power. If you're keeping up on the energy debates or investing in alternative energy, you'll want to check this out. First off, Bloomberg reports that uranium is the hot investment theme at a growing number of hedge funds. This will come as no surprise to anyone who's followed the uranium market over the past few years. We've seen a growing interest in the element as nuclear power stages a comeback, and new investment vehicles such as Uranium Participation Corp have given investors a way to play the metal's rise. Paul van Eeden, an early investor in the recent uranium boom, is skeptical regarding continued upside potential for the uranium price. As he explains in an August 16 ROBTV appearance , hedge funds and investment funds have driven the spot price through the roof and this has nothing to do with the fundamentals. By Paul's reckoning, the amount of raw material yellowcake (U308) that nuclear

A bit of a weekend round-up; recent news stories and other items of interest. (1) First off, Bloomberg reports that slave labor exists in the Brazilian Amazon. It's the old story; workers are recruited with the promise of a steady-paying job, only to be trapped into slavery via forced work-off of incurred debt. Modern-day slaves in Latin America aren't bought and sold as slaves were in the U.S. before the Civil War. They're lured from impoverished cities in Brazil's northeast or from the Andean highlands of Bolivia and Peru. Recruiters dispatched by slave camp owners promise steady- paying jobs, Campos says. Once at the Amazon camps, some workers are forced -- at times at gunpoint -- to work off debts to their bosses for food and clothing bought at company stores. Many go months without pay or see their wages whittled to nothing because of expenses such as tools, boots and gloves. Lack of money, an impenetrable jungle and a long distance to get home make it impossible

Art, gold, and the dollar. What do these three items have in common? Well, I don't know that they have a lot in common so much as a common thread running through them. In the following stories, we'll see how the "value", or purchasing power of the dollar can determine the ways in which people allocate their resources. And you don't have to stop at just trading your dollars (or euros, etc.) in for paintings and gold. Some form opinions on the underlying weakness or strength of a currency and use their view as a basis for a currency trade. You'll see, in this post, a high profile example of how difficult it can be to time such a bet. Before we begin, I want to give a quick nod to Richard Russell and his Dow Theory Letters report for the heads up on two of the following articles. Let's start first with this headline-grabbing forecast of the upcoming New York auction season: "Billion-Dollar Record Likely at Art-Jammed Manhattan Auctions" . According

Thanks to 321gold.com for reprinting Richard Russell's recent comments on the ongoing dollar devaluation (through inflation) and the importance of gold. Here's an excerpt from the October 30 edition of Richard's Remarks : A weakening dollar represents a "wake-up call" for gold. Most people don't realize it, but rising gold is a form of dollar-devaluation. It's not an official devaluation, I call it a "free market devaluation". Question -- Why does the US government continue to keep the official price of gold at $42.22 when the free market price for gold is over $600? Answer -- This is the government's way of denying that the dollar has been greatly devalued. It's the government's method of keeping its citizens "stupid" and unaware of what's been happening to its money. Be sure to read the whole thing!