Thursday, June 29, 2006

They Don’t Make Trees at BP

BP has pulled off one of the greatest marketing campaigns in history. Over the last decade, British Petroleum has transformed from an antiquated oil and gas company into an energy powerhouse through several successful acquisitions while “embracing the green movement years before it was cool in the executive suite” according to its CEO Lord Browne.

Recall all the Exxon boycotts during the past year? BP was thought to be the environmentally-friendly alternative to purchase our gasoline.

But it’s becoming apparent that “embracing the green movement” simply involved placing cheery ads about BP's environmental awareness across the nation’s newspapers, while replacing the old BP gas station signs with happier bright signs including green flowery buds implying environmental harmony.

Otherwise, BP’s gas stations and drilling practices appear to operate in the exact same fashion as before (to the detriment of the environment of course).

Greens were so in love with BP’s effective marketing campaign and sunny new gas station signs that “Vanity Fair” featured CEO Lord Browne in its environmental issue alongside fellow greens Al Gore and Julia Roberts.

But the real man behind the curtain is about to be exposed. BP has recently come under heavy pressure for illegal price manipulation and several damaging accidents at its plants.

The Reality

This week, the Commodity Futures Trading Commission and the Justice Department accused BP traders of secretly trying to corner part of the US propane market to “Enron-type proportions.” The CFTC says senior BP management provided its "advice and consent" for an operation that purposely drove up the energy costs of millions of Americans from 2003-2004. A former BP trader has admitted to participating in the alleged conspiracy, and several confiscated audiotapes have backed this claim.

On top of that, BP has been in hot water over a series of refinery accidents and explosions, and its safety record and practices are under investigation.

Not good timing on BP’s part. These illegal activities come at a time when increasing gasoline prices have become a burning political issue this election year. And these concerns are not likely to go away. Just last month, Steven Hawking warned that our days on Earth are numbered, and suggested moving to the moon, Mars and other neighboring stars in the next 10 to 20 years!

It’s amazing what an effective (and deceitful) marketing campaign can cover up.

Thursday, June 22, 2006

Too Busy To Write...

Thursday, June 15, 2006

Is Short Selling Un-American?

I've been bearish on the US stock market for a few months now. Even after the latest 10% slice in the NASDAQ index, I still feel nervous about the near-term prospects of the market as a hole. Interest rates continue to rise, oil prices are at record highs, political turmoil is not going away, budget deficits continue to inflate, and the US trade deficits break records with every passing quarter. But worst of all, in my opinion, is the inevitable housing crash. Keep in mind that housing construction & related industries employ nearly 10% of workers in this country!

Is anything going right?

All this negativity led me to a few interesting "Bear Funds". These mutual funds perform well as stocks decline. The most interesting appears to be the Leuthold Grizzly Short Fund. It's the only current mutual fund that has short positions in 100% of its holdings. As you might imagine, the fund has not performed very well the last few years since the market has recovered from the internet bubble of 2001. But this could be the perfect hedge against a declining stock market for the next couple years, or in any market for that matter.

The largest bearish fund is the Prudent Bear Fund. Similar to the Grizzly Fund, it also engages in some short selling, but not exclusively. Prudent also holds futures & options contracts to profit from market declines. These activities have led to positive gains even during the last few years of the bull market.

But short selling is not as accepted of a practice as it used to be. What was already a difficult and sometimes gut-wrenching strategy has only gotten harder in recent years. Nowadays, more of the companies that short sellers target are fighting back with lawsuits. They also mount sophisticated public relations campaigns against shorts.

And if that weren't enough, there's a new crop of newsletters designed to "squeeze" short sellers. In a short squeeze, investors aim to buy so much stock that the supply used for borrowing dries up and the broker recalls shares already lent out. To return stock, short sellers have to buy them back, forcing the price up. As the stock rises, it can spur other shorts to have to cover their positions, fueling further gains.

Is this criticism warranted? Not at all. It may seem Un-American to profit from a stock's decline, but short sellers help keep valuations of stocks accurate and ensure that capital is allocated more efficiently to the most upstanding companies. There's usually a reason why a company is being heavy shorted: because short sellers see problems on the horizon that the company's investors do not. Enron was heavy shorted before it began its implosion. (OSTK), one of the companies that is suing its shorting counterparts, has been struggling to keep up with its lofty projections, yet continues to blame the short sellers for its stock's decline.

But until this bad stigma passes, it may be a little more risky to invest in these Bear Funds.