Futures markets serve as a hedging devise for commodity producers and processors. In a perfect world of balanced supply and demand, commodity processors would contract directly with producers for future inventory needs at negotiated prices. In the real world, there are nearly always more producers wanting to sell than processors willing to buy, or visa-versa. This gap is bridged by speculators who step in to assume market risk—as temporary buyers or sellers—in exchange for a profit opportunity. If they did not exist, speculators would need to be invented in order for futures markets to function. Continue reading
A few weeks ago, the Financial Times of London announced an expansion in coverage of the commodity sector. This week they published an article cleverly titled “Commitment to accuracy of CFTC data in doubt,” discussing the impact of inaccurate large trader reporting by Newedge from March through May 2011 (for which the CFTC fined the broker $700,000). Continue reading
Insider Money is a general investment letter covering longterm outlooks for the economy, stocks, bonds, gold, and oil. I am amused when I see articles on those got it right, having foreseen this or that aspect of the financial crisis. Insider Money subscribers have experienced few surprises over the past eight years, having been forewarned (repeatedly, and well ahead) of virtually every facet of the economic crisis. Not just years in advance, but with specific timely advice. It takes a lot longer, for instance to liquidate real estate holdings or a bond portfolio than to sell a stock portfolio. Timing is everything. Insider Money serves two priorities, but in a specific order. My first concern is return of your capital. My second priority is return on your capital.
Quoted By GENE EPSTEIN in Barron’s
David Chow in the Washington Post has dug up some figures on the involvement of Sovereign funds in commodity indexing. He states that the funds involved did not originate from commodity profits (e.g. Middle Eastern sovereign funds reinvesting oil profits). Since the bulk of Sovereign funds originate from commodity profits of one type or another, and predominantly oil profits, it seems likely that there is more of this type of investment then Chow has uncovered. There is little transparency in the unregulated swap market.
Of course if oil producers are buying oil futures through swap dealers it amounts to shilling–running up prices with leveraged purchases of paper oil.
The debate over the cause of record high commodity prices rages through Congress and the media, not to mention high-fuel-price demonstrations and food riots reported in dozens of countries. Unfortunately, this debate has generated more heat than light. Fundamental “supply imbalances,” “Chinese and Indian demand,” and “the plummeting dollar” are the rallying cries of the bulls. Those hurt by high prices point fingers at commodity speculators. Both cases have merit. Who is right? What, if anything, should Congress do?
There are definitive, obvious answers to both questions. First, the blame must be laid at the feet of speculators who have been allowed to run amuck by the Commodity Futures Trading Commission (CFTC), the very agency charged by Congress with preventing excess speculation. Why am I convinced that speculators are to blame? The answer will be obvious to fans of tv’s Dr. House. We can eliminate causes for which there is no ready cure; including supply shortages, Chinese and Indian demand, and the weak dollar. Ignoring the distraction of causes with no quick fix, we can focus on the one factor that has a prescription: excess speculation.
Monday, June 30, 2008
A Simple Old Reg That Needs Dusting Off
By GENE EPSTEIN
Fixing the inflation problem.
IN ITS STATEMENT ACCOMPANYING ITS DECISION last week to leave the short-term interest rate unchanged, the Federal Open Market Committee expressed concern about "the upside risks to inflation," specifically mentioning the "continued increases in the prices of energy and other commodities."
Meanwhile, the Homeland Security and Governmental Affairs Committee held Capitol Hill hearings on "Curbing Excessive Speculation in the Commodity Markets."
The connection between the two events was little noticed but is direct: Something can be done about the higher prices of food and fuel — the source of the inflation that concerns the Federal Open Market Committee. Much as I hate to agree with any politician who blames the speculator whenever goods get too dear, which usually amounts to shooting the messenger, Homeland Security Committee Chair Joe Lieberman unfortunately had a point when he accused speculators of "artificially inflating the prices of food and fuel futures."
On June 26, 2008 the Commodity Futures Trading Commission posted an ominous "CFTC Emergency Authority Background" on its website. I have to tell you that if this is meant to "telegraph" their intentions, it would not likely be positive for commodity markets in general, and petroleum markets in particular. In my humble opinion, this action may be a prelude to invoking emergency powers to restrict commodity buying, and thus lower prices.
Of course, the laws of unintended consequences pertain. Some commodities have daily trading limits. If a bearish shock were to hit these markets, bulls have to potential to be locked in adverse positions as prices fall day after day without any significant trades taking place. I have been there. It ain’t fun.
If the CFTC simply wants to panic the market, this is a good start. Read the advisory at: http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/cftcemergencyauthoritybackgrou.pdf
The New York Times reported that the CFTC is set to announce new policies on Monday, June 2. There are no details available, except that the Commission is not expected to enact sweeping changes recommended by me and others. Read the Times article here: http://www.nytimes.com/2008/05/31/business/31cftc.html
This announcement does have market-moving potential if it is perceived as restricting the buying activity of commodity index traders. I cover the CFTC’s current and historical policies regarding CITs on pages 9 through 13 of my book, The Commitments of Traders Bible. To recap, the Commission has been most accommodating to these long-only commodity “investors” represented by the largest swap dealers. They have granted wholesale exemptions from speculative trading limits imposed on traditional commodity and hedge funds. Last fall they announced their intention to drop limits altogether for long-only commodity indexers. (This idea has since been put on hold.)