Causes Of High Oil Prices: Politics & Market Manipulation.

When is an "oil shortage" not an oil shortage? When there is no rationing and oil is available . Why do we have high-priced oil if there is no oil shortage? We have high-priced oil because market speculators, hedge funds and commodity funds have poured billions into the oil futures market . This has driven up the price of oil and effectively distorted the relationship between actual supply and demand.

The enabling legislation that allows market manipulation was passed in December 2000. It was called the Commodities Futures Modernization Act. It provided for no oversight or regulation for the newly introduced financial derivatives called "swaps". That allowed organizations like Enron to speculate in the futures and energy markets with little or no margin and with "off books" entities. That Enron tailored legislation has been subsequently tailored for mainline investors like CALPERS (California's giant pension fund). The rest is history.

Former Texas Senator Phil Gramm was the lead Senator in introducing the legislation. He is a close advisor to Presidential hopeful John McCain. Look out! Also Wendy Gramm, who just happened to be the head of the Commodity Furures Trading Commission and Phil's wife, some 8 years earlier through an executive ruling exempted Enron from CFTC positions limits and regulations. And the rest is history.

Goldman Sachs is suspected of playing a prominent role in the oil futures price manipulation. Our last two Secretarys of the Treasury were former Goldman Sachs CEOs-Robert Rubin and Henry Paulson. Do you think that Goldman has gotten too big for the country's good?

Buyer Beware: International Equine Acquisitions Holdings

A couple of Wall Street hedge fund managers want to apply their experience in security management to a business plan that invests solely in race horses. International Equine Acquisitions Holdings has raised $40 million since 2003. It wants to raise another $60 million and go public by this years end. I.E.A.H. 's current biggest asset is Big Brown. He's a colt with bad feet who is a good bet to do well in the upcoming Kentucky Derby. He may win.

Hedge funds by definition have postions on the "long" and "short" side of the market. That's so if the market swings either way the hedge fund can hopefully participate profitably with the net of the portfolio outperforming competitors and the market. So Big Brown is the major "long" in the portfolio. If he doesn't do well or his feet flare up again he may have a short career. In that event the "long' will be of no value. There will be no bid. In contrast Wall Street type hedge funds that deal in stocks, bond and commodities usually have deep liquid markets to recover some portion of an investment if things go wrong. Not so with race horses if they can't race anymore.

What is I.E.A.H.'s "short" to offset the market risks of its "long" postions in fragile and largely depreciating race horses? There are none. Maybe it will be the investors who will come up short. Horse racing can be a brutal sport. It's been called the "sport of kings" because it takes wealth to participate and it extends care for animals whether they win or lose. But in fast money investing such as I.E.A.H's business model, horses that don't earn their room and board become a liability. So the poor animal may suffer a miserable fate just because it couldn't make a return on investment.

Hedge Funds & Private Equity: Bite-size Poison

Today "The Wall Street Journal" carried an article titled, " Investors Riding The 'Cash' Rapids". The point of the article was that this time it's different, risk has finally become manageable to the point of being a financial non-event. Why? Because the new template used by fund mangers utilizes the securitization of debt tthat supports investments. So defaults become affordable. The debt is made into bite-sized portions that can be eaten by financial appetites of all sizes. So if the worst happens in an investment, the effects are muffled because of the broadness of the participants.

That's novel. So financial poison is less lethal if more is distributed in smaller doses. But what about the half-life of financial poison? Doesn't it build up in the financial body until a critical mass of poison kills the polluted financial system? Caveat emptor.