By the way we TOPPED

As we topped in late July the bounce of the last week has convinced most people we are out of the woods.

Yesterday the markets topped, again (wave 2), and that includes my beloved REITs.

Hang on this can get quite nasty.

MIND POWER

Last night I went to talk by John Kehoe's protégé Robin Banks.

The talk was about 'being happy' and I can honestly say that the talk was entertaining, thought provoking and motivational. Robin ended his talk by saying that motivational talks have a poor track record of lasting beyond the actual talk - they are typically feel good sessions.

I have not read the book Mind Power so it will be unfair of me to criticize the book, I will confine my critique to the Robin Banks presentation last night 5 September.

Whilst the talk was informative and convincing I feel Banks left the audience in the lurch; to be fair he did give 1 tool we could take away to help us achieve our objective of happiness. To this regard he speaks about responding to bad things with a dramatic "….. that is so fascinating!"

So in short I think the strategy he provided us with will once again amount to nothing but a feel good talk because putting the ideas in to practice is the crux, but he doesn’t equip us with tools to implement.

Now I may be unfairly critical because he speaks about a 4 week course which includes practical exercises.

I would like to suggest what I believe the talk is lacking in.

The subconscious mind is far stronger than the conscious mind, therefore the only way to develop a strategy of change is to work through the subconscious mind in conjunction with the conscious mind.

Here is where neuro linguistic programming (NLP) comes into the picture; working with just 1 mind is a waste of time as the self control and discipline required is beyond most of us. The way to effect change is to re-programme the way we think subconsciously together with conscious programming.

In conclusion if Robin Banks programme is combined with NLP I think people will walk away changed people FOREVER.

Too Much Analysis???

Let me say that for some reason when I am making money and the markets are working in my favour I seldom keep up to date with my daily journal. However, when I am in the headlights or I am in two minds about a position I write like someone possessed.

It is at these times (going through one since last week) where I cannot stop analyzing every emotion and trying to define the meaning of life. Is this an advantage or disadvantage?

I think to myself Hedge Fund Manager XY, YZ & AB are real pro's and they never seem phased or 'waste' too much time getting deep and worrying about the stuff I contemplate. They seem to just get on with the job. Am I a sabotaging my chances with all these thoughts.

Let me try and answer this myself.

Firstly, I am not just your average guy, I am an intellectual, I ask questions and I have PhD in Economics to show for it.

Secondly, I am extremely competitive and driven to succeed. So part of all the analysis is to help formulate a strategy to beat the next guy or lets just call it the market.

Thirdly, I am someone committed to being a better person, and part of that commitment is better understanding all the things that make me tick, under all circumstances.

Fourthly, I am human and part of being human is finding fault in the things we do, so over analyzing is just part of being human.

Fifthly, the guy who is a pro definitely analyzes his situation and is honest with his mistakes, but the pro doesn’t dwell on his mistakes he gets on with the show.

Lastly, I have chosen a style that takes time to manifest. I am a medium to long term value trader therefore my calls are almost always early and I have to endure periods of stormy seas. Yes I could block all self analysis out and hope that my original work is what will save the day but that isn't necessarily the answer. In short I have chosen a style that requires patience and yes, analysis, so that when I make mistakes I can learn from them and hopefully never do them in the future. Also the greatest tool in my trading style is my brain and its ability to track my emotions. If I never kept a detailed analysis of my thoughts I would have no means to monitor and improve myself.

AAHHHH that feels better.

Mickson

EXTREME HYPE - OOHHHH this is going to end badly.

The Property Prance
04 Jul 2007 - Finweek -
IntroSome of the wealthiest property investors in Britain, Europe and the Middle East have hit town ready to bulk up their global portfolios with large investments in prime South African real estate
The bigger players have billions to spend. And they're not averse to aggressively outbidding South African buyers for what they perceive to be highly undervalued commercial and leisure property assets. First prize for most of those investors is to buy directly into single, mixed-use developments that offer a combination of retail, office, hotel and residential opportunities - deals that have the potential to become another V&A Waterfront, Century City or Melrose Arch.
But some are also making a play for JSE-listed companies with sizeable underlying property portfolios: gaming/hotel operators and corporates alike. Foreign investors aren't necessarily interested in the core businesses of such companies - it's more about stripping out the underlying property assets. Talk is that a number of offshore players are keen to get their hands on the large tracts of undeveloped land owned by the likes of Tongaat-Hulett and AECI.
To date, the biggest single property deal in SA involving foreign investors was the sale of the V&A Waterfront to British-based London & Regional Properties and its Dubai partner, Istithmar PJSC, in September last year for R7bn.
Both London & Regional - recently rated by the London Financial Times as the biggest privately owned property company in Europe, with assets of around R100bn - and Istithmar want to increase their exposure to SA property.
Finweek hears that London & Regional is already negotiating an offer to buy another iconic SA development: Melrose Arch. Industry insiders place a value of at least R3bn on the trendy, mixed-use precinct just off the N1 north of Johannesburg.
London & Regional is also rumoured to be one of the suitors eyeing listed casino/resort operator Gold Reef Resorts. Earlier this year, London & Regional was involved in unsuccessful talks with Peermont Global, another SA gaming/hotel operator.
Gold Reef Resorts recently said that it was in talks with three or four "selected" parties that could result in a buyout offer for the entire company. Mvelaphanda chairman Tokyo Sexwale, together with Durban-based businessman Vivian Reddy and US-based casino group Harrah's, are other likely bidders.
Casinos in the Gold Reef stable include Gold Reef City (south of Johannesburg), Garden Route (Mossel Bay), Golden Horse (Maritzburg), Goldfields (Welkom) and a majority stake in Casino Mykonos (Cape West Coast). The deal is estimated to be worth R10bn. It will be interesting to see to what extent SA buyers will be prepared to match or exceed the bids of their offshore competitors.
Meanwhile, Dubai-based Istithmar subsidiary Leisurecorp earlier this month announced it had bought Pearl Valley Signature Golf Estate and Spa in the Cape Winelands. Leisurecorp isn't disclosing what it paid for Pearl Valley or how much it will spend to turn the 170ha development into a major international golfing resort. However, Leisurecorp CEO David Spencer says the acquisition was a "significant" investment, both in terms of the initial price paid and the development plans it hopes to implement.
Spencer says it's likely that Istithmar and its real estate investment arm will be involved in more deals in SA. Says Spencer: "SA is currently one of our leading target markets, partly because of the growth in the country's leisure and tourism sectors and partly because of the boost we expect from the 2010 Soccer World Cup."
Lehman Brothers, one of the US's biggest investment banks and asset managers, has also recently entered the fray via a joint venture with JSE-listed Madison Property Fund Managers. Though the deal hasn't yet been officially announced, a large tract of land on the outskirts of Cape Town has apparently been bought for R500m to develop a mixed-use retail, office and residential precinct comprising bulk space of at least 100 000sq m.
Then there's Kuwaiti developer IFA Hotels & Resorts, which is expected to announce a major acquisition within weeks. It's not unlikely that IFA has its sights on AltX-listed golf estate developer Acc-Ross.
IFA's SA-listed arm already owns stakes in other golfing estates, including Zimbali Coastal Resort (near Ballito on the KwaZulu-Natal north coast) and the Cape Winelands estate Boschendal. IFA also recently entered the Namibian hospitality market in a R550m joint venture with Ohlthaver & List.
Other foreign players include Irish developer Howard Eurocape, which is ploughing R500m into the mixed-use Mandela Rhodes Place in Cape Town's CBD. Offshore private equity funds are also starting to tap into SA's commercial property market.
An Irish consortium recently appointed SA corporate finance outfit and designated AltX adviser Bridge Capital to place around R1bn in directly held office, retail and industrial buildings. Ron van der Bos, who together with Tobias Hegele and Jeremy Clark head Bridge Capital's property asset management division, says they've already bought stock worth R300m on behalf of that client. They're in the process of setting up a second fund for the same Irish client and are involved in talks with other British and European offshore consortiums to set up similar property investment funds.
The list goes on. But why the sudden surge in interest in SA's commercial and leisure property assets?
"It's simple. In global terms our market offers value. And with so much offshore money looking for a home, it was only a matter of time before foreign property investors would turn to SA,'' says Arnold Meyer, ex-Broll CEO and recently appointed MD of London & Regional's Africa operations.
Meyer says foreign players have different perspectives on extracting value and structuring transactions. "So foreign players such as London & Regional view SA as a long-term buy."
That does perhaps suggest why international investors are prepared to pay more for prime properties (think V&A Waterfront) than their SA counterparts.
Meyer won't confirm whether London & Regional is bidding for either Melrose Arch or Gold Reef Resorts, except to say that it's involved in "various discussions with various parties". Though London & Regional is a major player in emerging economies, including Poland and Russia, its 50% investment in the V&A Waterfront was its first acquisition outside Europe.
Meyer says SA, and Africa in general, offer double the growth potential over the next five years than any European property market. He says it's likely that London & Regional could have 20% of its assets in Africa within five years.
Craig Ewin, CEO of Old Mutual-managed SA Corporate Real Estate Fund, says there's no doubt that international property players are increasingly looking at emerging markets as the risk profiles of developing economies improve. Ewin says the general view is that international investors can no longer afford to ignore high growth opportunities in emerging economies.
Says Ewin: "South African real estate offers a huge value proposition. Investment Property Databank (IPD) performance figures show that SA's direct commercial property has outperformed all international markets over the past three and five years. Yet we still offer an average income yield that is 200 basis points higher than any other market included in the IPD benchmark."
Madison Property Fund Managers executive director Mike Flax holds a similar view. He says offshore developers regard SA as cheap compared with other emerging markets. "International investors believe SA is now where Poland was five years ago." Flax says in recent years foreign investors have poured billions into Poland's previously underdeveloped commercial property market, unlocking plenty of upside in the process. The same is bound to happen in SA.
Flax says the V&A Waterfront sale has been a major catalyst for further money flow into SA. "The world has suddenly been forced to stand up and take notice of SA."
But it's not only perceived value that's luring more foreign property players to SA's shores. Phillip da Silva, vice-president of operations for IFA Hotels & Resorts in Africa and the Indian Ocean, says SA's highly developed transport and tourism infrastructure is a major plus for international hotel and resort developers.
So too is security of tenure. For example, Da Silva says that SA is far more attractive than Zanzibar or Mozambique, where property investors can't obtain freehold title.
Van der Bos says that SA's well-developed legal and financial framework should also not be underestimated. Even the language factor plays a role. For example, Van der Bos says German investors feel more comfortable entering an English-speaking country such as SA than neighbouring Poland, where language is a barrier.
However, industry commentators agree that the one factor that could slow the offshore scramble for SA property is a growing shortage of investment stock. But that could prompt more overseas investors to go the indirect route via listed property loan stocks and property unit trusts.
Although some may bemoan the fact that SA's crown jewels are increasingly finding their way into foreign hands, Growthpoint Properties CEO Norbert Sasse says the pros of offshore participation far outweigh the cons. "Increased foreign competition for prime SA property assets will help put us on the map as a preferred global investment destination - which can only be positive for our real estate market." Sasse says some of these international players have the vision, money and skills to turn underutilised assets into world-class developments.
But there's also no doubt that foreign interest will push SA property prices up. Flax says increased competition for SA property - both physical and listed - will result in higher prices and lower yields. "However, the positive spin-off is that the expertise that international players bring to SA can only sharpen the skills of our players."
Ewin agrees: "More international investors vying for SA property must affect prices. But if SA wants to play in the international environment, we can't bury our heads in the sand and think we're still going to control our own market."

WESTFIELD DEVELOPMENT OR DESTRUCTION

I have long been a fan of this group, but I think its size is finally going to hurt this behemoth. If this company was just trying to collect the rentals of its vast, superior shopping centres I would be relatively happy. But in order to grow at a superior rate in line with its history it has embarked on an enormous development pipeline.

After 40 years of growing this company I believe the bet on being able to let the new developments coming on stream in the next 3 – 5 years could see the destruction of a large chunk of this company. I give the chances of a global recession into the period in which these developments come on stream around 60%.

Westfield to Raise 530 Million Pounds With U.K. Fund (Bloomberg)

2007-07-02 02:34 (New York) By Garfield Reynolds and Kathleen Chu July 2 (Bloomberg) -- Westfield Group, the world's biggest shopping center owner by market value, plans to raise 530 million pounds ($1.06 billion) by selling stakes in four U.K. malls, giving it cash to build new projects that offer higher returns. The sale means Westfield has raised more than A$7 billion ($6 billion) this year, according to a statement today from the Sydney-based company. Two investors agreed to buy 67 percent of a fund that will buy the stakes and Westfield will market the remainder to a wider group of potential buyers. Westfield is seeking to tap economic growth in spending A$5.4 billion on the construction of 19 malls and plans to start building additional properties at a cost of more than A$9 billion over three years. New malls can deliver greater returns than existing ones. ``This is part of a very smart funding program where they sell more mature assets at high prices and reinvest the money into the development pipeline,'' said Simon Garing, an analyst at UBS AG in Sydney. ``For every $2 billion they spend on development, they make $1 billion of profit.'' Westfield shares advanced 4 cents to A$20 in Sydney, valuing the company at A$35.5 billion. The new fund, Westfield U.K. Shopping Centre Fund, will have stakes in properties worth about 2.1 billion pounds, including Merry Hill, which is worth 1.05 billion pounds.

SUB-PRIME MARKET - what it spells for the future

Alot is currently being written about the recent "blow-up" of 2 Bear Stern hedge funds that have been baled out of a dramatic collapse by their parent BS.

What has been brought to light is the fact that alot of these strucutres do not trade regularly enough for a mark to market valuation to be applied. Because of this artificial valuations and profits are being expressed to the market.

In order to avoid a market price to be used in the market BS has "saved the day" or have they? I believe they have just put off the inevitable. As sure as night follows day there will be an aftermath and the chances are the effect will not be pretty.

It will start slowly (it already has) and day by day the problem will start to manifest, once it is out in the open (FULLY) it will start to fester, and spread all the way up the risk spread curve until its impact is felt by everyone.

This combined with a general re-rating of residential property will start the spiral that will eventually lead the US into the depths of DEFLATION.

By year end everyone and the hairdresser will know about the sub-prime lending market and its ills.

The Life of a Contrarian Trader

I feel the need after a minor incident today to write a book reflecting on the unhappy thoughts and feelings it takes to be a contrarian trader.

Remember as a contrarian trading a large time frame you are likely to be wrong for lengthy periods of time.

I would definitely like to write a book that is semi-fictional describing the life of a contrarian trader, I think there would be a lot of demand for such a book.

I would make it a little bit tongue in cheek but the overiding idea would be to put across the Behavioral Finance principles I have learnt in a practical and humorous way.

Genius or Fooled by Randomness

Am I getting wiser or am I just a genius?I would like to think I am both, let me tell you a little story. Last week Maurice, Charis and I were discussing ways to massage the data that we are feeding our macro model. You see the problem we have is that the data we use is in different formats, i.e. the index is daily data and then we have macro variables that are daily, weekly, monthly or quarterly in format.Can you see that the statistical information we receive MAY be distorted, so our Professor consultant suggested a couple of weeks ago a method of stretching say monthly data to in fact make it look like daily data. There are various algebraic techniques which I will leave for now, and we are in the process of doing the math.On Monday this week whilst discussing a similar issue revolving around how to identify whether the macro variables do in fact have a relationship with the index, I am pretty good at random problem solving, so guess what I threw a "way out there" idea at the team.I remembered going on a course which covered cycles in the stock markets, it works with mathematical formulae that somehow seem to be able to predict certain cycles. The most common of which is called a "Fourier Cycle Regression." Somewhere in the depth of my mind I could see an inclining of a solution through the Fourier regression technique.Naturally as I most probably would have done, Maurice and Charis shot me down, they had vaguely heard of the formulae but knew very little about it and how it could solve our problem.Today we had a meeting with all the people involved in our model development, and after putting forward our problem; our Professor of Mathematics said I think I have a solution. "We need to run Wavelets through our data using 'Fourier Regression" to see where there is 'noise' in the data so that we can sift the good data from the bad. The technique is called "data mining". An example would be used in Physics; picture a laser gun, it shoots a particle and it splits into millions of pieces, now if you wanted to work out from which whole particle this shard comes from you would run millions of wavelet currents through the particle shards to kind of see which ones belonged to who. (I think this is how it works).

Wow did I feel smart having mentioned this idea!!Now coming to my title was my suggestion on Monday with all its naïveté the work of a genius or was it just the random act of throwing out ideas from the base of my limited knowledge?You see it cannot be genius if I have thrown scores of ideas at different problems with only 1 or 2 striking home. So although I believe I am not quite the fool who is tricked into falling for random luck, however I do believe, the genius may just be in the act of continuing to throw way out ideas at different problems, even with a low strike rate.So in the end am I a genius or am I fooled into the belief that coming up with a genius idea for a difficult problem is enough to make me a genius. Could I be both a genius and a fool at the same time, or can I be a random fool or worse just a fool?I think the answer is firstly that I am no genius, however, that doesn't mean I cannot have moments of genius, such as the time above. The message I think is that by continuing to come up with moments of genius, no matter how rare they may be, puts one the path to becoming a genius. So no I am not fooled by the randomness of my genius, I am however encouraged by the fact that I am on my way to becoming a genius.

Mood of the Day

British Land Profit Triples on Asset Values, Tax Gain (Update1) (Bloomberg)

2007-02-13 02:51 (New York) By Peter Woodifield Feb. 13 (Bloomberg) -- British Land Co., Europe's largest property company by assets, said fiscal third-quarter profit almost tripled as the value of properties increased and it got a tax boost after converting to a real estate investment trust. Net income in the three months ended Dec. 31 increased to 1.5 billion pounds ($2.9 billion), or 285 pence a share, from 508 million pounds, or 97.5 pence, a year earlier, the London-based company said in a statement today. ``We have a full agenda for British Land to cement our position as a flagship of the new REIT regime,'' Chairman Chris Gibson-Smith said in the statement. ``The business continues to make good progress and is well positioned for the future.'' British Land was one of nine U.K. real estate companies to convert to a REIT on Jan. 1, the first possible day. Britain's six biggest property companies will have combined tax liabilities of 3.7 billion pounds erased by changing to REITs. That's about four times more than they will pay in conversion charges. Net asset value, the measure used by analysts and investors to gauge U.K. real estate company performance, rose 3.8 percent for British Land to 1,685 pence at Dec. 31 from three months earlier before charges relating to REITs. The third-quarter results included a charge of 338 million pounds to convert to a REIT, equivalent to 2 percent of its assets, as well as a charge of 77 million pounds relating to debt refinancings. In addition it eliminated deferred taxes of 1.65 billion pounds that it will no longer be liable for as a REIT. British Land prelet 54 percent of a speculative development it's building in London's main financial district known as the City, the company said in a separate statement today. Law firm Mayer, Brown, Rowe & Maw LLP is taking 223,000 square feet in 201 Bishopsgate, which is part of British Land's Broadgate office complex. The firm has an option for a further 61,500 square feet in the 408,000 square-foot building. Central London offices are the best-performing type of U.K. commercial real estate. Offices in the West End, the most expensive in the world, returned 32 percent last year, compared with 18 percent for all U.K. commercial real estate, London-based researcher Investment Property Databank Ltd. said Feb. 1. British Land shares fell 9 pence to 1,679 pence in London yesterday, valuing the company at 8.75 billion pounds. The stock has gained 42 percent in the past year.

[TOP]

Liberty International Profit Jumps on Rising Rents, Values (Bloomberg)

2007-02-14 02:23 (New York) By Simon Packard Feb. 14 (Bloomberg) -- Liberty International Plc, the U.K.'s largest mall owner, said profit quadrupled last year as it opened new shopping centers and acquired Covent Garden market in London while the value of its properties increased. Net income increased to 1.56 billion pounds ($3 billion), or 33.9 pence a share, from 366 million pounds, or 30.1 pence, a year earlier, the London-based company said today in a statement. Chief Executive Officer David Fischel is betting Liberty's out-of town malls, the MetroCentre in Gateshead, will attract more shoppers than rival locations and enable the company to raise rents. In August, Liberty paid 421 million pounds to buy the seven-acre Covent Garden site, one of the main destinations for shoppers in central London. ``We are well placed to continue to prosper and to respond to challenges which lie ahead,'' Chairman Robert Finch said in the statement, announcing a 10 percent increase in the second- half dividend to 17.25 pence a share. Net rental income rose 13 percent to 341 million pounds. An increase in the value of its properties added 587 million pounds to 2006 earnings. Profit from derivatives added a further 164 million pound to earnings last year.

[TOP]

Property – Asia

CapitaLand Fourth-Quarter Net Rises to S$456 Million (Update5) (Bloomberg)

2007-02-14 01:49 (New York) By Michele Batchelor Feb. 14 (Bloomberg) -- CapitaLand Ltd., Southeast Asia's largest developer, said fourth-quarter profit rose fivefold, better than analysts expected, helped by a rebounding Singapore home market and divestment gains. The stock rose to a record. Net income increased to S$455.8 million ($296 million), or 16.2 cents a share, from S$93.2 million, or 3.3 cents a share, a year earlier, the company said in a statement to the Singapore stock exchange today. That's higher than the S$129 million median estimate of five analysts surveyed by Bloomberg News. CapitaLand and City Developments Ltd., Singapore's biggest developers, are tearing down old apartment blocks and buying more land as the longest economic expansion in more than five years fuels housing demand. Home prices in the city-state rose 3.8 percent in the fourth quarter, the biggest gain in seven years. ``I'm still bullish on the Singapore property market,'' said Winson Fong, who manages $2 billion at SG Asset Management in Singapore, including CapitaLand shares. ``The economy is doing well, unemployment is low. A lot of projects are going on in full stream, I can't see any particular bad news.'' The stock rose as much as 30 cents, or 4.1 percent, to S$7.55, trading at S$7.50 at 2:14 p.m. Singapore time.

[TOP]

India Property Stocks Fall After Cash Limit Is Raised (Update1) (Bloomberg)

2007-02-14 02:30 (New York) By Saikat Chatterjee Feb. 14 (Bloomberg) -- Unitech Ltd., India's largest real- estate developer by value, and other property stocks fell on concern mortgage rates may rise after the central bank yesterday increased the cash reserve limit for banks. Unitech fell for a fifth day, its longest losing streak since Dec. 21. The shares fell 10 percent to 373 rupees at 12:40 p.m. on the Bombay Stock Exchange. Parsvnath Developers Ltd., a builder of houses and malls, shed 2.8 percent to 290 rupees. Ansal Properties & Infrastructure Ltd. declined 5 percent to 672.45 rupees. Starting March 3, banks must keep cash equivalent to 6 percent of deposits, compared with 5.5 percent at present, the central bank said last evening. The measure, which will drain as much as 140 billion rupees ($3.2 billion) from banks, is aimed at containing inflation, the Reserve Bank of India said. ``The cash reserve ratio hikes by the Reserve Bank of India further boosts the likelihood of an increase in home-loan rates,'' Suhas Rema Harinarayanan, an analyst with UBS Securities India Pvt., said in a note to clients yesterday. State Bank of India, India's biggest lender, expects lending and deposit rates to rise following the cash limit increase, T.S. Bhattacharya, managing director of the bank, said yesterday. Higher mortgage rates may crimp demand for homes. ICICI Bank Ltd., India's biggest lender to consumers, plans to increase its deposit and lending rates, V. Vaidyanathan, an executive director, said today. Mumbai-based ICICI from Feb. 9 raised its benchmark lending rate by 1 percentage point to 14.75 percent, the second increase since December. ``The low interest rates had been a big driver for the 46 percent compound annual growth rate in disbursements of home loans over the past five years and the consequent near-80 percent increase in property prices in the past two years,'' Harinarayanan said.

[TOP]

APEXHI the mirror of the US MORTGAGE DEBT STORY

The post below is from a speach John Mauldin delivered in South Africa in January 2007.

What is described below is the exact same story of ApexHi, the way I see it.

Let me give you a preview of a coming scandal, just to illustrate the chase for yields. In the US, about 25% of the mortgages on new homes are what is known as sub-prime mortgages. These are mortgages that are slightly less creditworthy and therefore offer higher interest rates. In the beginning this was a good thing, as first-time owners and those just starting out in life were given an opportunity to own their own homes.

But then came a world of liquidity looking for yield. Investors demonstrated a large appetite for these mortgages. Investment banks would buy those high-yielding sub-prime loans and package them into something called Residential Mortgage Backed Securities. Now, a sub-prime loan is not considered an investment-grade security. But when you put a group of them together into a pool and break them up into various sub-groups or tranches, through the alchemy of high finance, you turn lead into gold. You create high-grade bonds from sub-prime debt. In fact, 80% of those grouped together get a AAA rating, because that tranche gets the first monies paid back to the debt pool. And it probably is pretty safe money. No problems yet.

Then the investment bank starts slicing smaller parts of the pool and eventually ends up with the final 4% getting a below-investment-grade BBB rating. Again, this is all a good thing as it allows investors to buy the risk they want and makes for a more liquid real estate market. But then we start to get cute with alchemy. Not content with turning lead into gold, we start trying to do the magic on sewage.

Investment banks pool all these BBB tranches into yet another pool called a Collateralized Debt Obligation or CDO. The rating agencies have sophisticated models which tell them that with the increased diversification, 87% of these former BBB bonds can now be sold as AAA or AA investment-grade bonds. Only 4% is considered actual BBB debt. So we have taken an original security that is not investment-grade and turned all but less than 1% into an investment-grade bond.
Again, if all those mortgages pay off like they have in the past, then not too much problem. But recent research suggests that as many as 20% of these mortgages sold in 2005 and 2006 are going to default or foreclosure. But the CDOs assume that less than 1% will default. If the number of defaults is even half of that predicted, then someone is not going to get their full capital back, let alone the interest. And we are seeing home foreclosures at record levels in every part of the United States due to the large number of sub-prime mortgages.

Why such a growing default rate? Because investors kept throwing money at mortgage bankers, who found out they could sell mortgages with little documentation. For instance, you could get a loan without actually having to prove your income. So the bankers said, "Let's take the fees and run. Bonuses all around for selling more mortgages." Now there is anecdotal evidence that a small but significant portion of these low-documentation loans had some items that were misrepresented. You know, little things like whether you were actually going to occupy the home.

Who bought these CDOs? Again, my sources say it was primarily Asian and European institutions, which simply looked at the rating on the bond and bought them. There will be lots of finger pointing over this one. Look for massive lawsuits and a major scandal to start up by the end of this year.

Madness Madness Everywhere

You know when every fibre of your being knows that everyone else is mad, but the evidence continues to show you up as the fool, well this is how I feel at the moment.

I open Richard Russells daily letter and it begins,
" January 19, 2007 -- Let's see, what's today's mega-deal? Wait, here it is. Morgan Stanley, the biggest real state investor among Wall Street firms, has just agreed to buy CNL Hotels & Resorts Inc., adding eight luxury hotels and resorts throughout the US, in a transaction worth $6.6 billion. Russell Comment -- Today the retail brokerage business is "small potatoes" for Morgan Stanley. Frankly, I'm almost embarrassed to give a stock order to my broker at Morgan Stanley."

Surely this is unsustainable, each day goes by with another deal announced and each one is done at a price that seems more outlandish than the previous one. Listen to John Mauldin comment on one such buyout (the largest REIT buyout in history) with some help from Charles Dumas from Lombard Street Research,

"Dumas first started talking about the Savings Glut in September 2004. His latest book is titled 'The Bill From the China Shop, How Asia's Savings Glut Threatens the World Economy.' (www.amazon.com)

So why is Sam Zell getting $37 billion at what is under a 5% return on current cash flow?? Because there is money looking for a home and returns. Dumas says US homeowners are borrowing less, so the savings glut means investors have to be and are willing to take less return on their capital. If you are a pension fund or insurance company, you have to put that money to work.

"The foundation of the flood of liquidity in the world (Chart 9 below) remains the Eurasian savings glut, now rising again after stagnating between 2005 and 2006. As long as deficit countries have sectors - business, households or governments - willing to borrow and provide the savings glut with a home, the flow of capital boosts asset prices, providing the incentive to borrow. This virtuous circle is the process that has underpinned Goldilocks. The problem is that it means stable, ontrend growth requires rising debt ratios to GDP."

"Ultimately this has to stop. The exhaustion of the debt capacity in US housing was always likely to be the beginning of the end of Goldilocks. It still looks that way - especially as the resumed growth of the Eurasian saving glut means the deficits to be absorbed by borrowers are now larger. But the slowdown in the US economy has not been a straight-line process, and the enlarged savings glut, and capital flow, is having a peculiar effect, in the absence of the previous US housing boom: it is in a sense forcing stock markets (and commercial property) into leveraged booms in order to create borrowing elsewhere, as the US household credit spree fades."

My take on all this madness is that the chickens will come home to roost and there will be a long period of I told you so, I also think this will happen a lot sooner than people currently expect.

The question I am now asking myself is, this madness does not seem any different to the madness of the tech bubble in the late 90's, yet the story seems to be so plausible to the man in the street and of course many fund managers, investors, and analysts.

So I find myself becoming more and more intrigued by the POWER of the herd, as if it was as obvious as it is to me and I am no great maven on the economy and markets then it should be just as obvious to the experts if not more so. The only other option is that this is not madness but the new world order, which would make me mad.

If it turns out to be the latter then I will have to be the one admitting that I was mad in the end as I should have listened to all the experts as well as the evidence at hand (a continually rising stock market and economy).

Bottom line, trading the markets in its current form is extremely difficult and at the end of the day there has to be one result, that being someone is mad, in this case I hope the masses are madder than me.

Mickson

Is the Sure thing ever Sure?

Today we have been bombarded with the news that EOP has been taken out - LBO by Black Rock private equity fund. $39 billion the largest ever real estate transaction.

The fund was the biggest REIT in the US controlled by Sam Zell he we recently hosted in SA, and I had the pleasure of meeting.

Every single analyst report points to this being great for the REIT sector, even though private equity buyouts have been pretty common this year. The above deal was struck at a "modest" 8% premium to market.

My comments are what enables a private equity fund to pay more than market for a major asset. There is only 1 simple answer its ability to borrow large sums of money. There is no value add through management or technology, it is simply being given a license to go BIG on debt.

Now lets take a look at history; recent and not so recent history has proven that being too leveraged has resulted in blood bathes in times of interest rate volatility and or economic downturns.

Why shoudl this time be any different. I believe the numbers coming out of the US via weak GDP numbers and the yield curve inversion point to a coming recession, or perhaps can we postulate a little more gloomily a depression should the housing bubble burst.

The way things look technically from an Elliott Wave point of view is that I can finally see a clear 5 wave move over the last year which on its own without looking at where it features in the broader wave count, towards a healthy 15 - 20% correction.

As the market commentators shout from the bleechers that this is great for the REIT market, I am not so sure they will be right this time, but then again is the sure thing ever sure?????

Doubling Up - Just this Once!!

What do you do when you know you are in a hole, and the one way of possibly getting out is if you double up your position.

Is there a way to do it, knowing that in a sense you are braking some cardinal rules.

I am going to attempt to do it, but under the following conditions:

1. Knowing it is not sound trading practise.
2. Keep a very tight stop loss should the double go against me.
3. Be in the trade for a very short time.
4. Never get myself into a situation like this again.

Lets see what happens.

Professor Shiller is one the great students of irrational exuberance, (an excellent book worth reading) he has also been very bearish on the housing boom taking place throughout the world.

In this letter, I noticed something interesting that we mustn’t forget, and that is the fundamental long term shift in attitude towards housing. The housing correction will come, it may even be similar to the Japanese crash of the late 80’s and 90’s but over time things will more than recover. See the parts I have highlighted.

Take a look ……..

What Are Homebuyers Thinking?

Many places around the world have been in a housing boom since the late 1990’s. As I argued last year, in the second edition of my book Irrational Exuberance , the boom is rooted in speculative investment by ordinary homebuyers, fueled substantially by the worldwide perception that capitalism has triumphed, and that all people must look out for themselves by acquiring property. Convinced that private ownership has become essential to smart living, buyers bid up home prices.

Moreover, the fear that one must get in on the boom before it is too late often drives people to bid up home prices faster now. This certainly seems to be the market psychology in China and India, where rapidly rising incomes and newly successful people are widely expected to put pressure on markets for land, real estate, and construction materials. Real estate booms have been going on in these countries’ major cities for years. In China, despite some signs of weakness – the Shanghai market is down, for example – price growth is still robust in much of the country.

But the boom generated by such beliefs cannot go on forever, because prices can’t go up forever, and there are already signs of a hard landing. In the United States, newspapers and magazines are trumpeting reports in the last few months that the decade-long boom in home prices may be at an end, and that the bubble may be bursting. The psychology has suddenly changed, creating widespread fear of sharp drops in US home prices.

The new futures market for single-family homes at the Chicago Mercantile Exchange (which I helped establish last May with our firm MacroMarkets LLC) is predicting that by next August prices will fall between 6% and 8% in all ten US cities traded.

If home prices crash in the US, the bastion of capitalism, could it destroy confidence and end the boom in other countries? If so, could a worldwide recession follow?

This scenario is a distinct possibility, although there are reasons to be skeptical. Most importantly, the ultimate sources of the housing boom – the beliefs about capitalism and future economic growth – seem solidly entrenched.

The downward price trend in the US market, for example, does not seem to reflect underlying changes in long-run economic confidence. The survey that Karl Case and I conducted in May and June of this year, under the auspices of the Yale School of Management, shows sharp declines in short-term expectations for home prices in the US, but relatively little change in long-term expectations. Most people still believe that housing is a great long-term investment.

Maybe real estate prices are unlikely to fall to pre-boom levels because the fundamental change in perceptions concerning capitalism’s triumph will be longstanding. Changes in people’s fundamental ways of thinking are not easily reversed. Nor, therefore, is their interest in housing as a major speculative investment asset likely to change.

The transformation in investors’ beliefs is striking. Before the real estate boom of the late 1970’s, hardly anyone was worried about rising home prices. A search of old newspapers finds surprisingly few articles about the outlook for home prices. Those that did appear generally seem to be based on the assumption that minor fluctuations in construction costs, not massive market swings, drove the modest home price movements that they noted.

Indeed, hardly anything interesting about home prices was ever reported at all, aside from an occasional comment in an article about something else. For example, an article in The Times of London in 1970 argued that rising home prices reflected the switch to a new British Standard Time (imposed as a three-year experiment in 1968 to facilitate commerce with Western Europe by putting Britain in the same time zone). The article claimed that the change raised costs by forcing British construction workers to perform more of their jobs in relative darkness. Speculative investment behavior was hardly an issue in those rare instances in which home prices were discussed.

To understand the nature of the subsequent shift, consider that it is hard to find anyone today who worries that automobile prices will soar because rising demand in China and India for steel and other materials will push automobile prices out of reach in the future. Though a small group of collectors invests speculatively in antique or specialty cars, the idea of speculating in automobiles just is not in the public consciousness. That is how it was with housing until the late 1970’s.

Now that we think differently about real estate, we will never be the same again. But, of course, housing prices can only rise so fast. High and rapidly rising home prices tend to stimulate new housing supply, which in turn tends to undermine prices. Over a period of years, as people see how much new supply there is, they may begin to revise their view that homes are such a terrific investment, causing a gradual, but eventually significant, drop in home prices.

Indeed, while changes in fundamental perceptions may not occur easily or fast, they should never be ruled out. Urban land prices in major Japanese cities have steadily dropped over much of the period since 1991, as the enormous faith in the miraculous powers of Japanese capitalism gradually faded.

The same kind of erosion in home prices could occur in many cities around the world. All that is required is that growth in housing supply eventually outstrips investors’ faith in capitalism to sustain faster growth in demand.

Overconfidence cuts both ways

I enclose a post from Dr Tharps blog on overconfidence this is a well documented behavioral finance phenomenon.

The point I wish to raise is that I saw a classic case of information over confidence yesterday. The guys in our office attended a presentation with a major money manager in our sector and the guys picked up some market intellegence that the money manager had a new R1 billion to spend which is a sizeable slug of our sector R65b.

Straight away the guys were filled with a sense of over confidence with the information they now had at their disposal. Now I know I am a contrarian, but can you imagine the shock when the market behaves to the contrary of what is expected from spending this new money.

How can it happen?

Firstly, there is a good chance that the information is not "new" or only been for their ears, secondly the market has been running up in the last week, which is perhaps the market anticipating the spending and therefore ala the efficient market it is adjusting accordingly.
Lastly, it is also possible that the new R1b is making up for withdrawls from other investors into the sector, which anecdotally is quite possible as the recent sell-off spooked quite a few retail investors.

So in essence one always needs to do their homework and then once it is done one needs to appreciate that there could always be another answer.

The Problem with Overconfidence

Most of us have a tendency to overestimate how right we are. This tendency does not depend upon intelligence. Nor does overconfidence in our positions depend upon our expertise in a given subject.

Experts may be more knowledgeable about their subject matter than others are, but they are still not very accurate in estimating how much they know. Expertise in technical analysis, for example, has little to do with making money in the markets.

The more information to which one is exposed, the more one tends to be overconfident about his or her positions. Thus, if you are exposed to a great deal of information in order to make a decision about the market, you will be more adamant about your position once you make up your mind.

Unfortunately, most information—especially financial information—has little correlation with price movements. Thus, exposure to a lot of data will probably make a trader much more confident in a position but have little bearing on whether he is correct about the direction of the market movement.

Posted by Van K Tharp on September 26, 2006 01:52 PM

FEAR - Like a deer in the headlights

It has been some time since I have experienced the kind of fear I am currently experiencing in the market.

Once again I am in a weak position as I trade away from my proven method of success and adopt what has proven to be my trading downfall, i.e. LARGE directional bets. These trades are to a large extent ego trades and are not good for me, my trading results and that is that.

I have no problem entering these types of trades on a small basis as they can bring the extra cream we all look for but they cannot be the primary source of my profits.

Lets briefly examine the positions.

The 1st one is an directional put option on the US real estate market. This index continues to make new highs and confuse the best known pundits, so I am in excellent company. The problem is I have had so many hassles with opening a new more efficient account that to a large extent I have traded this account poorly from a being on top of perspective. The details are boring so I won't go into it, once again I am too big relative to my mandate and have chosen to bury my head in the sand to a large extent.

The 2nd one is a call on the selloff of the SA Alsi 40, which like my 1st point has gone against my call and instead of trading it on a shorter basis I have allowed the greed of early success to grow my position into a size I am not comfortable with.

I have decided to trade both positions on a short term basis for now, as both trades seem pretty clear in the short term. My intention is to use hopefully success on the short term side to shrink my position size to a manageable level.

In the even of my short term trades working against me, I need to then look f0r the earliest opportunity to cut the trades.

I don't like being afraid, so let this serve as a warning for other times into the future. Being "nervous" is part of the job and is not the same as being afraid.

Time to be super vigilant, and on top of things.

Mike

The Hexagonal Bee Model

Have you ever wondered why the honey comb cells of a bee are hexagonal. The following idea I heard from a rabbi.

The strongest shape to use in such a structure is a circle, so why aren't bee hives cells made in a circle structure? The answer is that it involves too much wasted space. If the cells were circular then there would be alot of wasted space between each cell.

With this logic one can argue that the best approach would be to build the cells in square shapes as this would be easiest to do and would involve no wasted space. Surely this would be a lot easier than building a complex hexagonal structure?

The answer given is that although a square structure would be most efficient it changes the "ideal" strucutre of a circle too much. The difference between a circle and a square is too great, therefore a hexagonal structure comes as the closest substitute.

From this we can learn a valuable lesson.

Often a theoretical model provides the best solution, but in practise it is often not practical to implement, the principle learnt from the bee cell within the hive, is do not vary the model too far from the original solution. If you need to make changes then do so but always try and keep as close to the orginal model as possible.

It is this principle which I wish to extrapolate into the basis of my theory on Macro-Economics.
Adam Smith's invisible hand has come the closest to describe the perfect market. Let us make changes where necessary but remember not to move too far from the original model.

Monetary vs Keynsian Economics

Thinking back to my university days I remember being touched by the monetarist argument more so than the Keynesian school.

In a nutshell I cannot see how a Central Body (government) intervention can ensure optimal allocation of capital. Therefore in the short term, yes, fiscal spending will produce jobs, and yes it will stimulate spending and kick start the economy but my question is at what cost?

In order for the government to spend it needs to finance this expenditure either by using money from taxes or alternatively by borrowing money. I have no problem with either on the assumption that the government concerned knows how to spend the money. My experience, and the experience of the ages is that any beaurecratic process usually leads to inefficient allocation of capital. To be blunt governments typically WASTE money.

A great example is what is currently taking place in China right now, and what happened in the Asian crisis in 1997. The government financed massive infrastructure development, the problem now is alot of the money spent was unnecessary.

So in the end you will pay in the long term for short term gains. The question Keynesians need to ask is whether it is worth it.

The monetarists take a somewhat more distant approach and only try to influence the economy via interest rates which in turn influence money supply which in turn influences supply and demand.

For now I am in the monetarist camp as I was in university.

Fooled by Randomness

This is just a great story of someone who has fooled the people around him with his random success. Let me be the first to say this guy seems to have amazing talents, and I am sure is greater than the average trader. However, the size of his bets and his success was nothing more than six or sticks.

Blue Flameout
How Giant Bets on Natural Gas
Sank Brash Hedge-Fund Trader

Up in August, Brian Hunter
Lost $5 Billion in a Week
As Market Turned on Him
A Low-Profile Life in Calgary
By ANN DAVIS
September 19, 2006

CALGARY, Alberta -- Of all the traders gambling big sums on energy, a
32-year-old Canadian named Brian Hunter made some of the brashest bets and the
fastest money.

Last week, he fell hard, proof of how quickly fortunes can reverse in gyrating
commodities markets.

Here in this bustling new energy frontier, Mr. Hunter headed the energy desk for
a Connecticut hedge fund called Amaranth Advisors. At the end of August,
trading natural gas, he was up roughly $2 billion for the year. Then he lost
approximately $5 billion -- in about a week.

His losses savaged returns for Amaranth, dragging its assets under management
down to some $4.5 billion from $9 billion at the start of September. In
disclosing the losses to investors in a letter yesterday, the fund said it was
aggressively reducing its natural-gas bets, effectively cutting out the majority
of Mr. Hunter's operation. He remains at the fund. (Even as Amaranth was
losing, some gas traders were winning; see article.1)

What hurt Mr. Hunter is what he had ridden to glory for the past year or so:
volatility.


Though unknown in public, he had created a buzz on Wall Street -- a wunderkind
to some, a ticking bomb to others. From a cramped trading desk, he thrived on
big price swings, reaping billions of dollars on price declines and surges
alike. Late last week, he watched with growing alarm as natural-gas prices took
a steep dive, particularly in futures contracts for delivery of gas for this
coming winter. His losses mounted in after-hours trading this weekend.

"The cycles that play out in the oil market can take several years, whereas in
natural gas, cycles take several months," Mr. Hunter said in an interview late
in July, when his returns were looking rosy. "Every time you think you know what
these markets can do, something else happens."

At that time, Mr. Hunter had more than $3 billion of bets outstanding, investors
familiar with the funds' holdings say. Shortly thereafter, a heat wave caused
natural-gas prices to go haywire, then soar. Many traders took hits. One
energy-trading firm, MotherRock L.P. in New York, imploded and decided to close
shop. The lanky Mr. Hunter, however, came out hundreds of million dollars ahead
in August, Amaranth investors says, and continued taking positions some other
traders had abandoned as too risky. He declined to be interviewed yesterday.

Big commodity players bypass the geopolitics of oil for the most-volatile major
commodity: natural gas. The blue-burning fuel heats 52% of U.S. homes and runs
many power plants in peak air-conditioning season. It also is a raw material in
a variety of industries, from fertilizers to chemicals.

Unlike oil, gas can't readily be moved about the globe to fill local shortages
or relieve local surpluses. Forecasts of freezing U.S. temperatures in winter or
heat and hurricanes in summer can send prices jumping, while forecasts of mild
weather can do the opposite. Last December, amid a cold snap, gas soared to a
record $15.378 per million British thermal units on the New York Mercantile
Exchange, or Nymex. This month, prices fell below $5 in the absence of major
hurricanes and with forecasters talking about another warm winter. Yesterday,
gas for October delivery settled at $4.942 a million BTUs on the Nymex, off four
cents.

Backed by borrowed money and a deep-pocketed fund, Mr. Hunter took on more
exposure to certain futures contracts than do some big investment banks
employing more than 100 energy traders, say several traders and ex-colleagues.
He sometimes held open positions to buy or sell tens of billions of dollars of
commodities.

His wins and losses were outsized: He was up for the year roughly $2 billion by
April, scoring a return of 11% to 13% that months alone, say investors. Then he
lost nearly $1 billion in late May when prices of gas for delivery far in the
future suddenly collapsed, according to investors in the Amaranth fund. He won
back the $1 billion over the summer, only to lose that and much more last week.

The whiplash trading in these markets could work to the detriment of energy
consumers. Some consumer advocates, utilities and federal officials say
speculation in the energy markets accentuates the volatility of this staple fuel
and that the increased volatility, in itself, hurts consumers. Volatility makes
it harder for utilities and municipalities to determine the best time to buy
gas for their operations. Many utilities posted losses on gas purchases over the
past year that proved to be poorly timed. They passed on those costs to
electricity and heating customers, even as futures prices were dropping.

But while energy consumers have seen their bills rise, many traders' paychecks
have soared. Mr. Hunter is estimated to have taken home $75 million to $100
million last year.

Mr. Hunter's swift reversal calls into question how well some hedge funds grasp
the risk they are taking in the now-popular energy markets. Vince Kaminski, a
risk-management expert who protested chancy trades while at Enron Corp. and
until recently was at Citigroup Inc.'s commodities desk, said yesterday that
it's dangerous to take giant positions in relatively shallow markets, which
certain months are in gas futures. "This is a typical mistake of inexperienced
and aggressive traders," he said. Mr. Hunter "appeared to have a position that
the entire market knew about. The markets are very cruel." Citing a well-known
epigram, Mr. Kaminski added, "'The market may stay irrational longer than you
can stay solvent.'"

Nick Maounis, Amaranth's founder and chief executive, said in August that more
than a dozen members of his risk-management team served as a check on his star
gas trader. "What Brian is really, really good at is taking controlled and
measured risk," Mr. Maounis said.

When Mr. Hunter began trading natural gas eight years ago, it was far less
volatile, hovering under $2 a million BTUs. Mr. Hunter had grown up in farm
country near Calgary, but his knowledge of gas was limited to summer work on a
rig in northern Canada. He knew markets, though: Unable to afford skiing while
in college, he poured himself into math at the University of Alberta. A
professor of his was a leader in the emerging field of financial modeling and
derivatives.

Mr. Hunter joined TransCanada, a Calgary pipeline company that was becoming a
player in the growing business of trading energy, rather than simply
transporting it. The company would help customers like gas producers lock in
prices for some of the fuel it shipped for them.

Mr. Hunter, then 24, came armed with fresh theories about options pricing, and
impressed his bosses with his ability to spot price anomalies. They gave him
increasing amounts of money to trade with after early successes. Among them: He
convinced them that options in Canadian gas were underpriced as a pipeline from
Canada to Chicago was set to go online and create a greater market for it.

"He helped us prove that mathematically...and it paid off hugely," says Shondell
Sabad, a former colleague there who now trades for a Calgary bank.

Traders like Mr. Hunter make complex wagers on gas at multiple points in the
future, betting, say, that it will be cheap in the summer if there is a lot of
supply, but expensive by a certain point in the winter. Mr. Hunter closely
watches how weather affects gas prices and whether conditions will lead to more,
or less, gas in a finite number of underground storage caverns. Roughly akin to
counting cards in bridge, a trader keeps track of how much gas is injected into
storage and how much might have been withdrawn for industrial and household
use.

Mr. Hunter moved to Wall Street to do the same work for more pay. He joined
Deutsche Bank's energy desk and gained a name trading U.S. natural-gas futures
-- where his wide profit and loss swings provoked a stormy face-off with
superiors that ended in litigation.

In his first two years at the bank, Mr. Hunter generated $17 million in profit
in 2001 and $52 million in 2002, according to a complaint he later brought in
state court in New York. By 2002, he pulled down $1.625 million in salary and
bonus and began supervising the gas desk.

In December 2003, just as his group was close to closing the year up $75
million, things went badly awry. In a single week, they had losses of $51.2
million, he said in his suit. He blamed "an unprecedented and unforeseeable
run-up in gas prices" along with "well-documented and widely known problems
with" Deutsche Bank's electronic-trade-monitoring and risk-management software,
which he said hurt traders' ability to extricate themselves from bad moves.
Deutsche Bank denied its systems were to blame.

Mr. Hunter argued that even though the desk as a whole lost money, he personally
made trades that netted the bank $40 million that year. He and his natural-gas
colleagues got no bonus. By February 2004, relations had soured to the point
that supervisors locked him out of the trading system and made him an analyst,
moving him off the desk. Mr. Hunter left in April and subsequently sued over the
withheld bonus and claimed Deutsche Bank defamed him. It denied the
allegations. The suit is pending.

Mr. Maounis, the head of Amaranth, took a chance on Mr. Hunter. Amaranth was one
of the first hedge funds to build an energy desk soon after the demise of
Enron, under the leadership of former Enron energy trader Harry Arora. Messrs.
Arora and Maounis hired Mr. Hunter and initially kept him on a tight leash. Mr.
Maounis says the firm knew of Mr. Hunter's history at Deutsche Bank but did
extensive checks and found "nothing that made us uncomfortable."

Mr. Arora was relatively conservative and sought to make diversified commodities
investments. He brought Mr. Hunter along and the energy group posted steady
returns of 30% to 40%, say people familiar with its operations.

Mr. Hunter wanted to make bigger bets in his main market, gas. He had an ability
to keep calm with huge bets on the line and markets were going berserk. In July
2005, for instance, he was in Calgary at Stampede, a rodeo festival, when the
gas market began moving erratically. Mr. Sabad, his former TransCanada
colleague, says Mr. Hunter got on the phone a few times but didn't panic or
trade from his hotel room. "He asks himself, 'Do I still like my position?' If
he does, he adds more," Mr. Sabad says.

Around that time, Amaranth agreed Messrs. Hunter and Arora could separate their
trading "books" and each control his own trades. Then late last year, the
double-whammy of Hurricanes Katrina and Rita made Mr. Hunter a hero at Amaranth
and a minor legend on Wall Street, as he made $1 billion for Amaranth.

Mr. Hunter trolls for what he calls "mispriced" options -- that is, the chance
to buy or sell something at a price that appears farfetched to the market but
that Mr. Hunter sees as a distinct possibility. Leading up to the hurricanes,
Mr. Hunter had built a complex portfolio of options, among other bets, based on
the idea that gas could get extremely expensive in the early fall. An option to
buy gas at, say, $12 cost very little in summer 2005 because gas was then
trading at only $7 to $9. When gas soared to $13 after hurricanes ravaged Gulf
of Mexico production, such options such as these, which he had been buying,
soared in value.

His success was a rebuke to his ex-colleagues at Deutsche Bank, where lawyers
were wrangling with him over his request to take depositions from former
superiors, even as he was banking big trading profits. It also was hard for Mr.
Arora, still his boss but not the rainmaker. Mr. Arora eventually left to start
his own hedge fund.

It was vindication for Mr. Hunter. In its annual Christmas card, Amaranth
referred to its energy-market winnings by quoting Benjamin Franklin: "Energy and
persistence alter all things." It sent out toy antique gasoline pumps.

Amaranth agreed to let Mr. Hunter trade from his hometown of Calgary, where he
began with the fund's blessings to build an even bigger portfolio. A world away
from New York gridlock, he zoomed to work in his new gray Ferrari, or
occasionally a Bentley, which he tells friends is better in snowy Calgary
winters. Besides the cars and a new house he is building in a wooded area, he
keeps a low profile. Some of his pick-up-basketball buddies don't even know what
he does. Though he consented to several interviews for this article, he
wouldn't allow a photo.

From his desk on a trading floor, Mr. Hunter monitored dozens of "instant
messaging" tabs from brokers and pored over weather screens. Six traders traded
were there on a recent day this summer, in a space crammed with boxes of KitKats
and Hershey bars, microwave popcorn and bags of running clothes. The only fancy
touch was a basketball signed by Michael Jordan encased in Lucite.

Bruno Stanziale, a former Deutsche Bank colleague now at Societe Generale, works
with energy companies that need to hedge, or sell forward, their production. In
an interview in July, he contended Mr. Hunter was helping the market function
better and gas producers to finance new exploration, such as by agreeing to buy
the rights to gas for delivery in 2012. "He's opened a market up and provided a
new level of liquidity to all players," Mr. Stanziale said.

Mr. Hunter saw that a surplus of gas this summer could lead to low prices, but
he also made bets that would pay off if, say, a hurricane or cold winter sharply
reduced supplies by the end of winter. And he was willing to buy gas in even
farther-away years, as part of complex strategies.

Buying what is known as "winter" gas years into the future is a risky
proposition because that market has many fewer traders than the contracts for
months close at hand. Deals for those far-away months are done in
over-the-counter transactions that can be hard to exit. In May, his team's
position fell nearly $1 billion when the prices of far-forward gas contracts
took a steep dive -- much as they did last week. In this case, a number of gas
producers suddenly sold more gas than Mr. Hunter expected.

By summer, Mr. Hunter appeared to be proving doubters wrong. Amaranth's overall
fund gained around 6% in June, was roughly flat in July, and gained 6% in
August, according to investors.

Although Mr. Hunter had fared well in that period, many traders say Mr. Hunter
was acquiring positions that were too large to get out of if the market turned
-- including a bullish bet on winter gas. Amaranth won't detail its positions or
his trading strategy, so it is unclear exactly what caught Mr. Hunter unaware
last week. However, in recent weeks, people familiar with the transactions say
Amaranth bought MotherRock's gas positions in an attempt to cancel out some of
its trades and reduce its market exposure.

Expectations of a warmer-than-average winter are rising. Last week, the National
Oceanic and Atmospheric Administration said the El Nino weather phenomenon has
formed in the Pacific Ocean. That typically means warmer winters in the U.S. and
lessens the threat from hurricanes in the Gulf of Mexico. All this, and the
recent fall in crude oil, helped to devastate gas prices.

Amaranth has scrapped plans relayed only a month ago to investors to offer them
a separate energy-only portfolio to invest in. Congress, meanwhile, is jumping
in to debate whether hedge funds are to blame for all the volatility.

The Commodity Futures Trading Commission argued in a 2005 report that hedge fund
trading didn't increase volatility and even improved the functioning of the
markets by giving energy companies more trading partners. But a recent report by
the Senate Investigations Committee warned that the energy markets were badly
underpoliced. It cited an explosion of trading on electronic trading systems and
over-the-counter platforms over which the CFTC has no authority -- and in which
Mr. Hunter and other big traders are extremely active.