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8:30 AM EST Thursday, March 20, 2008: Am I "stupid" money? Is the commodities boom over for now?

In recent years, we've learned three things about the search for the "perfect" investment::

1. There remains huge monies chasing too few opportunities.

2. As the "opportunities" get discovered, money pours in and the "opportunities" boom in price.

3. Then they get "undiscovered" (or a new one gets discovered) and their prices fall.

The key is timing. Get in early. Get out early.

Does this investment philosophy now apply to commodities? I was thinking along these lines as I watched my favorite commodities drop substantially in the past two days.

Is now the right time to take some profits? The answer is Yes.

Is now the right time to get out of commodities altogether? I'm not sure. You can draw some trendlines.

The top one is a 50-day moving average. It shows we're close to breaking through. The bottom one is a 200-day moving average. We're a ways from breaking that one.

I was mulling this commodities thing this morning when this piece in today's New York Times popped up:

Commodities: Latest Boom, Plentiful Risk
The booming commodities market has become increasingly attractive to investors, with hard assets like oil and gold perhaps offering a safe hedge against inflation, as well as the double-digit gains that have fast been disappearing from the markets for stocks, bonds and real estate.

Undeterred by the kind of volatile downdrafts that sent oil plunging 4.5 percent Wednesday, to settle at $104.48 a barrel, large funds and rich individual investors have sent a torrent of cash into this arcane market over the last year, toppling records for new money flowing in.

Small investors are plunging in, too, using dozens of new retail commodity funds to participate in markets that by one measure have jumped almost 20 percent in the last six months and doubled in six years.

But this market, despite its glitter, offers risks of its own, including some dangerous weaknesses that are impairing the ability of regulators to police fraud and protect investors. Commodities are also vulnerable to the same worries affecting the rest of Wall Street, where on Wednesday the Dow Jones industrial average plunged almost 300 points, erasing more than two-thirds of Tuesday’s steep gains.

Moreover, the biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets.

As in those markets, an evaporation of credit could force some large investors — especially hedge funds speculating with lots of borrowed money — to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.

“Right now is a very scary time” for commodity market regulators, said Michael Riess, a director of the International Precious Metals Institute, a consultant to commodities investors for more than 30 years. “It’s not a question of overregulating or underregulating. It’s a question of just being swamped by volume, volatility and a dramatic shift toward speculative interests.”

Developments on Wall Street in the last few days underscored the new risks. Both Bear Stearns and its prospective new owner, JPMorgan Chase, are important clearing brokers that process and guarantee their clients’ trades in the commodities markets.

Officials at the exchanges where those trades occur had to monitor Bear Stearns’s financial situation carefully throughout last week to ensure that its cash shortage did not affect its commodity positions or those of its clients.

Walter L. Lukken, who heads the federal agency that regulates most commodity markets, said his staff had been able, so far, to cope with both the markets’ growth and the recent tremors from Wall Street.

"Even with the enormous volume coming through,” said Mr. Lukken, acting chairman of the Commodity Futures Trading Commission, “we think we have gotten a very good handle on the market. You can’t catch them all, of course, and you worry that something will get past the goalie. But we have been able to scale up the regulatory monitoring system to deal with increasing volume.”

Regulators and exchange officials take comfort from the rising commodity prices, which reduce the risk that lenders will grow nervous about their collateral and withhold new credit. Despite a broad commodities sell-off yesterday, a Commodity Research Bureau index remains almost 40 percent higher than a year earlier.

But it has been a roller coaster: commodity prices can record daily percentage changes that dwarf typical movements in stocks. Yesterday, when crude oil gave back some of its 85 percent annual gain and gold dropped almost 6 percent after an annual gain of 44.5 percent, the Standard & Poor’s 500-stock index fell 2.4 percent, leaving it down 7.4 percent over the last year. On its worst single day over the last year, it fell 3.2 percent.

So stock market investors seeking these formidable gains will find themselves on unfamiliar terrain. The heart of commodities markets is the so-called cash market, a “professionals only” setting where producers sell boatloads of iron ore, tanker ships full of oil and silos full of wheat for immediate use.

Wrapped around that core are the commodities futures markets. Here, hedgers and speculators trade various versions of a derivative called a futures contract, which calls for the delivery of a specific quantity of a commodity at a fixed price on a particular date.

Futures contracts trade both on regulated exchanges and in the immensely larger but less regulated over-the-counter market, where banks and brokers privately negotiate futures contracts with hedgers and speculators around the world.

The prices at which all these contracts trade indicate the potential strength of demand and supply for commodities still in the ground or in the fields. That makes them important to everyone who produces, buys and uses those goods — wheat farmers, baking companies, grocery shoppers, oil companies, electric utilities and homeowners.

Prices here can also influence the values of the increasingly popular exchange-traded funds, or E.T.F.’s, that focus on commodity investments. Born barely four years ago, these funds had net assets of $32.8 billion in January, compared with less than $4.8 billion in 2005.

But as the futures markets have grown, the ability of federal regulators to police them for fraud and manipulation has been shrinking, as a result of legislative loopholes and adverse court decisions. And despite widespread agreement that these regulatory gaps are bad for investors and consumers, they have not yet been repaired. ...

Finally, the commodities market has not yet dealt with what some economists say are inherent conflicts that have arisen as the futures exchanges, which have substantial self-regulatory duties, have been converted into for-profit companies with responsibilities to shareholders that could conflict with their regulatory duties. (For example, shareholders may benefit when an exchange’s regulatory office ignores infractions by a trader who generates substantial income for the exchange.)

By contrast, when the New York Stock Exchange and Nasdaq became profit-making entities, they spun off their self-regulatory units into an independent agency, now called the Financial Industry Regulatory Authority. ...

But some with experience in the commodities market remain nervous about the new money pouring in so quickly.

Commodity trading firms that have survived for any length of time have excellent risk-management skills, said Jeffrey M. Christian, managing director of the CPM Group, a research firm spun off from Goldman Sachs in 1986. Mr. Christian said he was less certain how the newcomers would deal with risk.

“You have the stupid money coming into the market now,” he said last week. “And I think the smart money is beginning to get a little frightened about what the stupid money will do.”

For the entire piece, click here.

Auction Rate Securities (Update):

+ Two more class action suits got filed against issuers of auction rate preferreds -- this time against Wachovia and TD Ameritrade. The suits were filed by the San Francisco firm of Girard Gibbs LLP. There's more on them in yesterday's column.

+ There is increasing pressure to change closed-end funds into open-ended funds. An explanation; Closed end funds trade through the day and usually at a discount to the net asset value. Open-ended funds -- think standard mutual funds -- trade only at the end of the day. If you sell, you get the precise net asset value, as it's at the end of the day. Changing from a closed to an open may improve the changes of us auction rate preferreds getting our money back. This came down on Business Wire yesterday. Business Wire, it should be noted, is not "the press," it's a place anyone and everyone pays money to get their information made public:

Western Investment LLC Issues Open Letter to Directors of Cohen & Steers REIT and Utility Income Fund.

NEW YORK, Mar 19, 2008 (BUSINESS WIRE) -- Western Investment LLC today issued the following open letter to the Board of Directors of the Cohen & Steers REIT and Utility Income Fund, Inc. (RTU)

RTU (the "Fund") recently issued the latest in a series of letters to stockholders that included numerous, and we believe deliberate, misstatements about Western Investment LLC ("Western" or "we"). We doubt you would have permitted these misstatements had you not been beholden to Cohen and Steers for your seats on the Fund's Board.

Had you checked your facts before permitting your Chairmen to issue their misinformed letters, you would have found that:
-- Western has been an investor in the Fund since shortly after its inception - there is nothing "short-term" about our interests.

-- As of the record date for the Fund's Annual Meeting, Western owned over 5% of RTU's outstanding common stock. We are currently the largest investor in the Fund and the largest shareholder you have a fiduciary obligation to represent.

-- Our efforts to have the Fund take action to reduce the double-digit gap between the value of the assets standing behind the common shares and their trading price is not speculation. The discount is not just Western's problem - it is a problem for every Fund investor who may at some time need or want to sell some or all of their shares. At one time or another it could be any investor in the Fund - the entire shareholder population you were elected to, and are responsible for, serving - and we believe it is your fiduciary duty to use all available means to have the market fairly value the Fund's underlying assets. ASSURING STOCKHOLDERS OF A FAIR PRICE FOR THEIR INVESTED ASSETS WHEN THEY NEED THEM SHOULD BE ONE OF THE BOARD'S PRIMARY AIMS.

Were Messrs. Cohen and Steers really out to protect the interests of the Fund's stockholders, we believe they would be working to see that the market price of the common stock reasonably reflected the value of the assets they represent, instead of spending shareholder money fighting to prevent three independent directors from joining the Board.

We feel we must take it upon ourselves as stockholders to have you recognize the serious problems the Fund faces, and to take real, meaningful action to solve these problems. We call on the Board to remember its obligation is to the Fund's stockholders, and to ask yourselves the following:

-- Why has the Fund not adequately addressed its persistent discount to net asset value or the liquidity crisis facing the Fund's Auction Market Preferred Shares?

We believe that there are solutions to these problems, yet until now, the Board has been unwilling or unable to address these problems.

One possible solution is for the Fund to sell a portion of its underlying assets, use the proceeds to buy back common stock and redeem the preferred shares, thereby reducing the Fund's discount to net asset value ("NAV"), creating liquidity and increasing yield. Alternatively, a publicly announced program of open market share repurchases, set to go into effect whenever the discount reaches an unacceptable, pre-defined level and limited to a certain percentage of the trading volume, we believe would serve to benefit both holders wishing to sell, by limiting the discount, and holders remaining in the Funds by increasing the NAV.

Furthermore, the assets freed up by this program could be reinvested or used to repurchase the Fund's preferred shares to provide some needed liquidity to preferred shareholders and reduce the Fund's interest expense. MAXIMIZING BENEFIT FOR ALL BY INCREASING NAV AND EARNINGS PER SHARE.

-- Who stands to lose if the Fund were to make accretive stock purchases and proportionate preferred share redemptions as Western proposes?

Management loses, stockholders win. Our plan reduces the assets under management, which in turn reduces the fees collected by management. We are not surprised such a plan has been so viciously resisted by the current Board and the Fund and we believe this explains why when we tried to address the Fund's issues from outside the coziness of the boardroom we met with little success.

-- Why does the Board seem so unwilling to act in the best interests of stockholders?

With the Fund's shares trading at double-digit discounts for most of its history, it should not be terribly complicated to find an acceptable set of solutions that benefits all stockholders. However, we believe a solution has eluded this Board because it is currently conflicted, leaving it beholden to management. Consider:

-- Current Directors serve on the boards of, and receive six-figure annual fees for services from, a total of 21 other funds in the Cohen & Steers fund complex.

-- Mr. Cohen and Mr. Steers serve as Directors and Co-Chairmen of the Fund. They are paid by and serve as Co-Chairmen and CEOs of the Fund's manager.

That is why we have proposed three independent director nominees to be elected to the nine member Board, with no allegiances to the Fund's manager or other Cohen & Steers funds to hinder their decision-making. Since many of the solutions to the discount problem are unpalatable to the Fund's manager - because they necessarily involve decreasing the assets under management and reducing the fees received for management services - we believe that stockholders both need and deserve independent directors in the boardroom to ensure that action is taken to have the market fairly value their investment.

We are now asking stockholders to send a message, and to elect our three nominees to the Board. Maybe then the Board will get the message and take the steps necessary to address the problems facing the Fund. What the Board requires is the will, and an unconflicted voice for stockholders in the boardroom. We are not seeking control of the Fund, but do believe that engaged and attentive shareholder representation whose interests are aligned with all stockholders is required.

+ Calamos issues a Touch Feely statement and says it's having a conference call this morning:

Calamos Investments Seeks to Refinance Auction-Rate Preferred Stock Issued by Closed-End Funds; Announces Conference Call to Address Refinancing

NAPERVILLE, Ill., March 19, 2008 -- Calamos Advisors LLC, a global asset manager, today announced that it is seeking to refinance the leverage on the five Calamos closed-end funds that have issued auction-rate preferred stock (ARPS).

Calamos is in discussions with a variety of market participants regarding new debt financing to refinance a portion of the ARPS. Within the next several weeks, Calamos intends to begin announcing ARPS refinancings, subject to necessary approvals.

"The recent decision by major broker-dealers to withdraw their support of auctions and the resulting failure in the auction rate market has created uncertainty for both our preferred and common shareholders," said John P. Calamos, Sr., CEO of Calamos. "With our announcement today, we are looking to begin to restore liquidity to our auction rate preferred shareholders and confidence to all Calamos closed-end fund shareholders."

Mr. Calamos added, "At a time of unprecedented developments in the credit markets, we nevertheless continue to believe that leverage for our closed-end funds is beneficial to our common shareholders. At the same time, we recognize that the lack of liquidity has created both uncertainty and frustration for our preferred shareholders. We ask our valued clients for their patience as we aggressively work to address their concerns and restore liquidity by developing and securing alternate forms of leverage."

Calamos Investments manages five leveraged closed-end funds with approximately $2.3 billion of auction rate preferred securities outstanding in the aggregate. Calamos will continue to work to provide solutions for the remaining auction rate preferred shareholders following this initial refinancing.

Calamos Investments will host a conference call at 10:30 a.m., central daylight time, on March 20, 2008, to discuss the refinancing of the funds' ARPS. Mr. Calamos noted, "We have always prided ourselves on being fully transparent with our shareholders; to that end, we believe both our preferred and common shareholders must be kept apprised regarding the process and timing to refinance the outstanding auction rate preferred securities."

Calamos anticipates high call volume and encourages attendees to access the call via the live streaming audio link Attendees can access the teleconference on Calamos' web site,, or attendees who prefer to participate by phone can access the call by dialing 800.379.3942 or 706.679.7206 and referencing conference ID number 39992940.

+ Bulldog Investors To UBS Fund: Don't Favor Preferred Holders. This piece is reported by Daisy Maxey, the Dow Jones reporter, who has been following the auction rate securities story:

NEW YORK (Dow Jones)--Hedge fund group Bulldog Investors, which has a significant investment in the closed-end Insured Municipal Income Fund (PIF) sponsored by UBS Global Asset Management, said it would be inappropriate for the fund to bail out preferred shareholders. Bulldog suggests converting it to an open-end fund.

Phillip Goldstein, principal at Bulldog Investors, said his firm is concerned about the fund's persistent discount to its net asset value. Goldstein made his comments in a letter to Richard Armstrong, chairman of Insured Municipal Income Fund's board of directors, dated Feb. 21.

Bulldog Investors included a copy of the letter with a recent filing it made to the Securities and Exchange Commission to report that it owned 5.29% of the outstanding common shares of Insured Municipal Income Fund as of March 17.

"We thought this is the best solution to help everybody -- to open-end the fund," Goldstein said Wednesday in an interview with Dow Jones Newswires.

UBS Global Asset Management is an asset management subsidiary of UBS AG ( UBS). UBS declined to comment on the matter Wednesday.

Many closed-end funds issue preferred shares as a way to boost their returns through the use of leverage. For years, these preferred shares were considered by many investors to be safe, liquid investments, and were routinely sold successfully at auction. But in recent months preferred shareholders have found themselves unable to sell their shares as many potential buyers, including the banks that had for years supported the auctions, stopped buying the shares amid a credit crunch.

Bulldog Investors does not own any of the auction-rate preferred shares issued by the Insured Municipal Income Fund, but "is sympathetic to their plight," Goldstein's letter to Armstrong said. "Nevertheless, we believe it would be inappropriate for the fund to bail out the APS (preferred) shareholders who, like the common shareholders, are getting everything they are contractually entitled to receive," it said.

Fund companies have been reluctant to sell any of their closed-end funds' underlying assets in order to provide liquidity for preferred shareholders, saying it would be unfair to their funds' common shareholders.

Goldstein's letter cautions the Insured Municipal Income Fund's board to "eschew any action that would have the appearance of benefiting" preferred shareholders at the expense of common shareholders or the fund as a whole.

The letter also says that Bulldog Investors is concerned about the fund's discount, and "believes the board should consider implementing measures designed to close the gap, including open-ending the fund."

"You've got common shares trading at a double-digit discount, and preferred shareholders have no liquidity," Goldstein told Dow Jones Newswires. "So why not just do the right thing and make everybody whole?"

Unlike open-end mutual funds, closed-end funds sell a fixed number of shares in a public offering, which then trade on an exchange. Many closed-end funds trade at a discount to their portfolios' net asset values, which may frustrate shareholders who want to sell.

Insured Municipal Income Fund traded at nearly a 12% discount as of March 14.

Goldstein said he had received a reply from Armstrong, saying simply that counsel was advising the fund on its fiduciary duty.

Tennis TV Schedule - 2008 Pacific Life Open at Indian Wells: Federer, Nadal, Djokovic, Roddick and Blake are playing. Also Sharapova, Hantuchova, Kuznetsova and Safina. The problem is finding Fox Sports Network on your cable or satellite TV. Clue: Sometimes they hang out with MSG (Madison Square Garden). This schedule is not accurate, but it's the best I can do.

The request
As his wife was expecting their first baby, Rabbi Bloom went to the schul committee and asked for a salary increase. After much consideration, they passed a resolution that when the Rabbi’s family expanded, so would his payslip.

Six children later, it began to get expensive for the schul and they decided to hold a meeting again to discuss the Rabbi’s salary situation. This time there was much arguing and shouting.

Rabbi Bloom could take it no more. He got up and said, “Having children is an act of God.”

The chairman replied, “Snow and storms are also ‘acts of God’, but when we get too many, we wear rubbers.”

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.

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