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Michael Masters - The Commodity Speculator Crusher?

Michael Masters, the hedge fund (Masters Capital Management LLC.) manager, made some headlines in the Hill and markets for his champions that speculators cause skyrocket high prices for commodities from agricultural grains to metal zinc. Media has raised the questions regarding Mr. Masters's motive because of his investments concentration in transportation. I pull out the his q2 13F regulatory filings via Bloomberg (see the chart below from Bloomberg), it is interesting to note that he increased weights on industries and utilities, two sectors by 6.1% and 5.8% respectively over 1st q this year. Not surprisingly, two of his top 5 holdings, Delta and US Ariways, make up 33% portfolio. During the quarter, US Airways positions were increased from 2 millions to 4 millions shares, and Delta was almost double the positions too (from 1.05 to 2 millions shares.) I guess the pain must be unbearable when the benchmark crude rocked to over $140 from less than $100 during the quarter. Certainly it is not his best interest to see crude oil going higher and stay there.




On the surface, Masters's conflict interest certainly does not serve him well in the argument. But then we can not ignore the fact that commodity market dynamic have evolved in terms of market participants and operations. I have serious doubts when a single factor or variable was cited as the cause or reason for price movement in equity or commodity markets, or any other form capital markets. There is no question that speculation/investment in commodities, more precisely, the rising demand from alternative investment vehicles (physical commodities and related instruments) since late 90's, have morphed commodities from dull pure raw material that was driven by supply-demand and economic cycle into something more "magic" investment instruments with a great potential appreciation. We would expect that commodities were primarily driven by supply-demand when the market participants were dominated by producers and end-users a decade ago, but commodities have draw more financial institution investors and speculators. For example, the total contracts of crude oil futures from speculators doubled to about 400,000 in early 2004 from the end of 2001, and over 800,000 in early 2006 and doubled again to over 1,600,000 early this year (see the chart below.) The dismissals of increasing speculation activities in commodity market and its impacts on the extreme violent movements of commodity at least in the short term, probably overlooked the simple facts. The question is not if but how to quantify the impacts. But history has demonstrated repeatedly that government intervention is wrong medicine for curing oil dependence.












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