Fisking Michael Masters

Part I: Talking his big book of airlines

Michael Masters, principal at and founder of hedge fund firm Masters Capital Management LLC, says...“Witch hunts aren’t good for anybody, including the government,” he says. “It’s a waste of resources.” [Emphasis added].
Hedge Funds Flee Tax Haven in Virgin Islands, Hounded by IRS
by Ryan J. Donmoyer
Bloomberg Jan. 25 2007

One of the unquestionable stars of the energy price witch hunt has been one Michael Willingham Masters. His view that commodity speculation by financial investors is largely responsible for driving crude oil to new records won widespread, and largely uncritical, coverage after his May 20 appearance before the Senate Committee on Homeland Security and Governmental Affairs.

And why not? It’s not every day that a hedge fund manager calls Evil Speculators! on hedge fund managers (among others). Especially at a Senate hearing where grandstanding on the back of carefully winnowed possibly facts is strictly prohibited. But it all does raise a few questions about who Michael Masters is—because he certainly wasn’t a household name, even in the hedge fund household, before his 15 minutes kicked in—how he climbed aboard the bully pulpit, and what his motives may be for lifting his head above the parapet behind which most hedge fund managers prefer to quietly lurk.

Mr Masters?

I have been successfully managing a long-short equity hedge fund for over 12 years and I have extensive contacts on Wall Street and within the hedge fund community. It’s important that you know that I am not currently involved in trading the commodities futures markets. I am not representing any corporate, financial, or lobby organizations. I am speaking with you today as a concerned citizen whose professional background has given me insight into a situation that I believe is negatively affecting the US economy. While some in my profession might be disappointed that I am presenting this testimony to Congress, I feel that it is the right thing to do.

Concerned citizen he may be, but hardly a disinterested one. What he never got around to mentioning was that, according to his most recent US Securities & Exchange Commission 13F-HR filings, his hedge fund portfolio is at least knee-deep levered long in US airline stocks and General Motors.

Over the jump, some numbers doubtless contributing to Masters’ distress at crude oil prices.

Masters is, or more precisely was on Mar. 30, big on stuff that goes down when crude oil prices go up, with large positions, the vast majority in call options, in AMR Corp (AMR), the parent of American Airlines, Delta Air Lines (DAL), General Motors (GM), UAL Corp (UAUA) and US Airways (LCC). The airlines accounted for a juicy 20 percent of his declared 13F-HR portfolio on Dec. 31, 2007; he added the GM position in the first quarter, bringing his energy-sensitive holdings to 30 percent of the 13F-HR portfolio by Mar. 31 2008, the latest date for which information is available.

Over the same period, the total value of the portfolio declined 35 percent, from $1.38 billion to $905 million.
The following table shows offers some hints as to how well Masters is “successfully managing” that little allocation in his long-short hedge fund: 
 

[Google Docs is not playing well with Tripepad; the complete spreadsheet can be seen here.]

It should be noted that the consistently miserable performance of these particular holdings may not reflect the actual performance of these stocks in the Masters portfolio; the 13F filings are snapshots, and do not record any trading around the positions. As well, most of the holdings are in the form of call options that will, in percentage terms, behave differently to the underlying stock depending on the strikes and volatility.

That said, however, it's very clear that Mr Masters, protestations of independence and good faith notwithstanding, most definitely has a dog in the energy price witch hunt.

To be continued

Masters Capital Management LLC
SEC Form 13F-HR

Mar. 31 2008 (filed May 15 2008)

Dec. 31 2007 (filed Feb 15 2008)

Testimony: Michael W. Masters

Senate Committee on Homeland Security & Governmental Affairs
May 20 2008

House Committee on Energy & Commerce
Subcommittee on Oversight and Investigations
Jun. 23 2008

Comments

[Barry Bannister]

You are exactly correct. Masters benefits personally from guiding policy - his GM and Airlines will soar if he is successful. He seeks to persuade financial neophytes in Congress to ban i-banks from being treated as commercials when engaged in swaps for investors. But indexation is not "speculation," and commodities ARE an asset class [Read (a) "Facts & Fantasies About Commodity Futures - Yale University Center of Finance" (b) Jim Rogers "Hot Commodities" and (c) my research cited on pages 20-23 of Roger's book, available on his commodity index fund Bee Land website]. So long as equity indices (S&P, NASDAQ) are declining relative to commodities, investors will seek the uncorrelated asset. In fact, astute law firms representing class action plaintiffs may soon sue fund managers (Prudent Man standard) who do NOT own commodities. Why? Because the commodity asset class is available and uncorrelated with their lagging financial asset portfolios. If Masters persuades Congress to "do something" about hot money it won't address rising energy prices - it would only prolong the agony rather than allow it to build to a rapid climax. You see, the reason oil is rising is to persuade non-G7 developing country resource holders to invest in new supply via the greed motive. If they don;t, and Asia and other regions outside the G7 continue to modernize, oil markets will be tight for a long, long time.

[mano appapillai]

If you have a point to make, it should be based on his testimony only.
Facts only.

You blew this one and hurt your credibility big-time.
m

[Bob]

I agree with Rich L. We all have a dog in this hunt who cares if Mr. Masters does too, I watched his testimony on CSPAN today, and it was very believable. I believe I have shifted the bad guy from the oil companys to the banks and financial institutions (ie. Speculators). If McCain or Obama got behind this, and pushed the passage of this legislation through Congress they will have won the election....

[Lou]

Having heard Mr. Master's testimony and subsequently read a transcript of the same, I found your criticism of him and his testimony interesting, but fatally flawed. I kept looking for something in your commentary that would counter the documentation and statistics that he provided; but all I saw was an ad hominum attack.

Whether or not he has a "dog in this (supposed) witch hunt" is of little concern to me as long as his thesis is supported with FACTS.

Are you suggesting that this is a witch hunt because you feel that index speculation is not driving the price of energy commodities? Or is your "dog in this hunt" the only basis fo your criticism. Either way, do like Master's did and support your position with facts or just shut up!

[Relaity]

Lee,

The trading pattern makes great fundamental sense: Federal Reserve bailout of the banks is making dollar worth less, and making all commodity prices go up in dollar terms. It's a replay of the 70's, only worse this time.

The top fiduciary duty of the retirement funds is the presevation of capital for their subscribers. Ultimately, the retirees will need bread, gasoline and heating oil for retirement, not pieces of green paper that may become completely worthless. They are only doing what's their duty trying to keep their portfolio value up with the prices of bread, gasoline and heating oil.

Accusing the pension funds of hoarding is just silly. Futures market was invented to avoid hoarding the underlying physical assets. They have to sell at each expiration, so they are not hoarding anything physical. They are just saving up future claims on those goods that their retirees will need in retirement . . . which is exactly what they are supposed to do. If Congress ban retirement funds from accummulate those future claims, they will have no choice but to hoard the physical commodities. Or at least those clueful enough to be worried about their own retirement will stop contributing to retirement funds and buying physical themselves.

[tw]

It would have added to his credibility had he disclosed his positions, but who in this business doesn't essentially talk their book regardless of where or who they are pitching?

This "juicy" tidbit does not however refute his assertions which remain compelling; and although unverified, require as careful exploration as his interests.

The real issue is: do we really want congress to speculate about how to deal with speculators?

[Lee]

I wondered what Soros was doing testifying before congress until I realized he has minions everywhere and he simply ordered his congressional underlings to invite him.

[Lee]

RichL, You need to put sarcasm tags on stuff like that or some people will miss the joke and think you really are nuts.

[RichL]

If you see a trading pattern that makes little fundamental sense, you would have a position also. Do you really think that oil should be going up when the economy is doing poorly? Do you think that it is a good idea for Calpers to raise their stake in holding commodities, thus raising the price of gas and food for their own retirees? Do you think that it makes sense to allow Calpers and other institutions to have off-exchange positions that aren't subject to position limits?
Do you think that physical commodities like wheat, which have a limited shelf life, can be as liquid as stocks?

Buying stock futures raises stock prices due to offsetting hedging by traders. The same thing happens in ALL other commodities. If the average Indian spends 80% of his income on food, is it ethical to cause food prices to rise so you can hoard for "investment" purposes? Only the ideologues at the CFTC, in support of Bush-style free markets, would think so.

[prmco]

He certainly does have a dog in the hunt, an axe to grind, or any other stupid cliche you may wish to post. But what's the difference? We all are in the same boat if we drive a car, fly in a plane, we have the same dog if we own anything but an energy stock. You attempt to demean him, but Soros said the same thing as did Michael Gallagher, former commission of the CFTC, as did the head of OPEC.

So what are you trying to say if not some sort of smarmy smear.