Nice Article on FT about the increase in restrictions or even ban of futures trading in commodities market. http://link.ft.com/r/S4XZQQ/U0V0Y/LSNJA/EI814/ULQ55/JY/h Views?
Undecided on more regulation of commodity futures markets, but after reading Michael Masters tetimony regarding potential cause of commodity price increases I am definately for closing of loophole to the commodity exchange act of 1936. I dont know much about this field, but Michaels arguement was pretty convincing. Good reading http://hsgac.senate.gov/public/_files/052008Masters.pdf
He’s absolutely right. Hedge funds I have been associated with have wildly exceeded position limits by simply using swaps. You trade them exactly the same way you trade futures because you are simply asking a bank to buy futures contracts and hold them for you (obviously it’s not set up that way but it’s the economic reality). The FT article makes a fine case that futures markets don’t intrinsically cause price problems. The “hoarding” from index speculation discussed by Masters probably does. I hope Congress listens to him.
But JDV, I have seen a lot of HF’s shorting the hell out of anything energy related. Surely it’s a two way street?? Perhaps they are like the people shorting the NASDAQ in early 99, but they exist nonetheless. Good Economist editorial on this in last week’s edition
Yeah, Greg Mankiw posted a few links to this issue on his blog.
CFA_Halifax Wrote: ------------------------------------------------------- > But JDV, I have seen a lot of HF’s shorting the > hell out of anything energy related. Surely it’s a > two way street?? > > Perhaps they are like the people shorting the > NASDAQ in early 99, but they exist nonetheless. > > Good Economist editorial on this in last week’s > edition Someone has got to be shorting to provide liquidity to everyone going long. I wouldn’t short energy at any price (unless I could pump it out of the ground and deliver it), but obviously someone will. I don’t even think the skew is pronounced enough. Do you actually know any names of any funds that are massively short energy that you would like to post?
Yeah, I was thinking about this when there was another post on speculation and commodities a few weeks back. Joey made the point that in the futures markets, there is a long and a short position that balance out, and no commodities actually change hands to drive up the spot price (though if demand is very lopsided, arbitrageurs might start accumulating or selling the spot if bid/ask spreads go out of their no-arbitrage zones.) So then how would speculators drive up prices. Well, if you actually try to accumulate the spot itself, either directly, or through index funds and possibly ETFs, that would reduce available supply and drive up the price. This would assume that the index funds or ETFs aren’t using futures to replicate holding spot. I think the real worry about futures is just how they can be used to create enormous leverage if not handled carefully. After 1929, stock margin requirements were increased substantially, but the advent of these futures contracts (and potentially swaps and options) just created ways to get around those regulations, and reintroduce 10:1 and 20:1 leverage into the system again. I can see regulators getting very interested in examining that aspect of futures.
Keep on dreaming… Ignore yestereday’s oil inventory report and the fact that people in the U.S. reeled in their driving by a mere 2% over the last 4 weeks despite $4+ gas. It’s easier to blame the hedge funds and the government. I just sold my oil put for a whopping $500 profit and I would go long now but I’m too stupid. Nancy Pelosi is involved so I figure I’ll just watch them screw up what’s left of our capitalist markets that do such a wonderful job of making sure every gas station has plenty of gas for us to burn up.
JoeyDVivre Wrote: ------------------------------------------------------- Do you actually > know any names of any funds that are massively > short energy that you would like to post? Why would I ever do that in a million yrs and potentially open myself up for suit. They’re out there. I’m not saying they’re “massively” shorting it, but they have significant short exposure all the same.
If you had proprietary info you wouldn’t (or shouldn’t). If you know it from some public source, why not?
Virgin, I agree with you about energy being a long term trend upwards, and that you should be strategically long, and I think that the China/India demand story is a real driver, even if it’s not everything. However, I can see arguments for being tactically short energy. Someone (Joey, I think) pointed out that the rise in price is so fast that it doesn’t match the increase in demand or any decrease in supply. Commodity prices don’t incorporate future growth expectations the way stock prices do, so we don’t have discounted future prices. It’s just supply and demand. My personal feeling is that a lot of money has been pulled out of equities and needs a place to park while the subprime, housing, and recession work its way through the system. US Treasuries are at risk of falling behind inflation, TIPS yields are low, Credit has nice yields but is volatile, equities are in bear territory for at least a little while, real estate is a mess. So a lot of this money is going into one of the few performing asset classes left - Commodities, and energy, food, and metals, is the one that’s been performing best (and some EM equities too). Now these commodity prices are probably going to have a trending rise for fundamental reasons over the long term, but the moment some of these other asset classes start to look more attractive, I think a bunch of people are going to be selling their commodity positions and reallocating back to other asset classes, and that’s likely to bring commodity prices down in the short term. When will that happen? How high will it go before it does? I don’t know, and I’m not going to risk my lunch money on it, but it’s a sound reason to be tactically short, even if you are strategically long in commodities/energy/whatnot.
It’s not a public source. Case closed.
bchadwick Wrote: ------------------------------------------------------- > So a lot of this money is going into one of the > few performing asset classes left - Commodities, > and energy, food, and metals, is the one that’s > been performing best (and some EM equities too). > How about renewable energy infrastructure, or any infrastructure for that matter (ports and rail particularly should do well with increased trade, increased energy costs). Farmland speculation has already begun up here. I’d imagine it’s it no different in Brazil where the sugarcane industry is thriving. There are lots of places to make money off of oil while not taking the crazy risk of being long in $140’s region.
The problem with this whole line of thinking is that the pension funds vilified by Masters as “index speculators” who always go long are more legitimate hedgers than many hedgers in the market. Imagine if you knew that you were going to live to be 89 years old and drive for 15 years post retirement at 10,000 miles per year in a 25 mpg car. You would know exactly how much gasoline you were going to consume in retirement and you could reduce that financial risk to 0 during your working years. That would be pretty smart except that you can’t do that individually. A pension fund can do that collectively however and it’s really good financial planning. That the capitalize the whole thing in futures and swaps markets shouldn’t make a difference in the underlying economics that they are doing exactly what retirement planning is all about. Addressing that with position limits doesn’t seem fair because they are hedging a legitimate definable risk. Virgin - 2% is a start. It takes awhile to change behavior particularly when you are not convinced that $4+ gas is not just a blip caused by speculators that will be shut down by Nancy Pelosi (what exactly has she done with the very important job of Speaker to address any national problem? She is a terrible disappointment to me, but a snappy dresser).
CFA_Halifax Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > > So a lot of this money is going into one of the > > few performing asset classes left - > Commodities, > > and energy, food, and metals, is the one that’s > > been performing best (and some EM equities > too). > > > > How about renewable energy infrastructure, or any > infrastructure for that matter (ports and rail > particularly should do well with increased trade, > increased energy costs). Farmland speculation has > already begun up here. I’d imagine it’s it no > different in Brazil where the sugarcane industry > is thriving. There are lots of places to make > money off of oil while not taking the crazy risk > of being long in $140’s region. Except if you are going to consume it, it might well be a risk reducing trade. Suppose that you were given a weekly allotment of gasoline and plot the utility of it. Those first gallons have huge utility as you absolutely need your car for a few mission critical things (driving to work, driving to the grocery store, etc). What if you are hedging your own personal consumption? Should you buy limited partnership interests in oil drilling equipment or collectively buy oil?
I think if everyone were to start going long oil to hedge their own consumption exposure they would be paying a fat premium for this. I had in the past though that if an index provider of some form could create a formula whereby an investor or business owner/energy consumer could go on to their website (say iShares) and plug in roughly their annual consumption of gasoline, diesel, heating oil etc. and have a rough number spit out at them in terms of the number of shares in an energy index fund needed to be purcharsed (say using their 401K, or RRSP) to roughly hedge their LT exposure to the energy markets via their retirement assets, they would make a mint. Of course the more I think about this, the less practical it seems. It’s one of my more crazy ideas I suppose. I’m not sure if that answers your question???
CFA_Halifax - an enterprising gas station owner could package a similar product, no?
CFA_Halifax Wrote: ------------------------------------------------------- > I think if everyone were to start going long oil > to hedge their own consumption exposure they would > be paying a fat premium for this. > Right - and that’s exactly what’s happening, particularly as people hedge the low end of their utility curve. > I had in the past though that if an index > provider of some form could create a formula > whereby an investor or business owner/energy > consumer could go on to their website (say > iShares) and plug in roughly their annual > consumption of gasoline, diesel, heating oil etc. > and have a rough number spit out at them in terms > of the number of shares in an energy index fund > needed to be purcharsed (say using their 401K, or > RRSP) to roughly hedge their LT exposure to the > energy markets via their retirement assets, they > would make a mint. > But I can absolutely do that if I have a group of 30,000 workers of known ages, affluence, etc… > Of course the more I think about this, the less > practical it seems. It’s one of my more crazy > ideas I suppose. > > I’m not sure if that answers your question???
Yes. They could. Some of the heating oil companies up here have offered programs to lock in the price of fuel (using some futures to ETF’s to hedge no doubt). However rumour is that they won’t be doing this, this winter. Likely due to the insane volatility in the markets. The people I think for this, besides say small family owned trucking companies (my own personal background) are a typical widowed women in say her 60’s or 70’s. I don’t know how many old ladies you know in a northern climate, but any oil delivery guy will tell you love to turn their house into the Amazon in the winter (and the Artic in the summer, but that’s another matter). It’s very common nowadays for them to pump at least $500-$800 with prices as they are into their heating oil bill each month! This, and their gasoline costs, are for the most part their biggest expenses (food too I guess, but in theory we could build a product even for that, but lets keep it simple). Now these people traditionally also have sizable pension assets, much of which are rightfully in bonds (a little Level III). Problem is, their risk expsore to energy has become so ridiculously high that a bond portfolio, which should in theory lose value as energy becomes dearer and drives real inflation rates and bond yields up, is no longer relevant to their financial needs. Perhaps an equity linked bond product could work, I’m not sure. All I’m saying is, if a product existed for individuals to hedge energy exposure, and financial planners would ever help push it (fat chance of that) it could be a hit with certain people with relatievly high liquid assets and energy exposure.
XSellSide Wrote: ------------------------------------------------------- > CFA_Halifax - an enterprising gas station owner > could package a similar product, no? No because of credit risk. You want to have a gas station owner of unknown credit quality as the counterparty on your trade?