Yesterday we asked why had the markets turned so violently against U.S. futures exchanges (see “The bloom is off the rose”) as the CME Group, New York Mercantile Exchange (Nymex) and Intercontinental Exchange (ICE)had all lost more than 20% in recent weeks. They all rebounded somewhat today even as the broad indexes continued to drop but the bear market has prompted one exchange leader to change his plans.
It took just 17 days to wipe out the entire gains of 2007 in the Dow Jones Industrial Average as the market on Thursday continued its downward plunge in 2008. The Dow whipsawed on Wednesday balancing bad news with the likelihood it would lead to more aggressive cuts by the Federal Reserve Bank. Perhaps today’s washout is evidence that people are finally looking at the underlying bad news instead of just how it might affect interest rate policy.
The exchange space has represented the hottest equity sector in recent years but it has come under some pressure the last few weeks, particularly U.S. futures exchanges. CME Group is down more than $130 since it made its all time high close of $710.75 on Dec. 21, about 20%; the Intercontinental Exchange (ICE) hit a low on Wednesday of $144, $50 below the all time high of $194.92 set on Dec. 26, a drop of approximately 25% and the New York Mercantile Exchange dropped $30 or about 20% from Dec. 26 and about 15% from Monday’s high!
The end of year announcement that a consortium of 12 investment banks and market participants plan to launch a new futures exchange to compete with CME in 2008 may have put pressure on CME stock but this is the original gang that couldn’t shoot straight (with a few notable exceptions). Why would anyone assume that this attempt will end any differently than past ones?
This morning, the Securities and Exchange Commission (SEC) ruled in favor of the Chicago Board Options Exchange (CBOE) in their plea to eliminate former Chicago Board of Trade (CBOT) member’s CBOE exercise rights. The CBOE/former CBOT members fight will now move on to a Delaware court, where CBOT members have filed suit against the CBOE on the equity issue. At a luncheon for journalists in Chicago yesterday, CBOE Chairman William Brodsky called the SEC ruling the next-to-last stop to the end of the line for the CBOE’s demutualization process. Interestingly, both the CBOE and CME Group said they’re happy about today’s development. Shortly after the SEC ruling, CME Group released a statement saying “We are pleased that the SEC agrees with CME Group that the merits of our claims reside in the Delaware courts. The ruling clearly emphasizes that the state court’s decision takes precedent in preserving the exercise and property rights of CBOT members.” In CBOE’s statement on the news, Brodsky said, “CBOE applauds the Commission for addressing the exercise right issues with certainty, clarity, and specificity.” It’s funny that both sides are cheering the ruling and declaring victory.
Timing is everything, and today the Chicago Board Options Exchange (CBOE) found itself with a room full of journalists the day before what could prove to be a fateful moment in the future of the exchange. On Wednesday morning, the Securities and Exchange Commission (SEC) is expected to act on CBOE’s proposed rule change that would eliminate former Chicago Board of Trade (CBOT) member’s CBOE exercise rights, an issue that has been hotly contested for years and could be worth millions to everyone involved.
In December 2006 the CBOE board announced the rule filing, stating, “upon completion of CME Holdings’ acquisition of CBOT, CBOT members no longer would qualify to become or remain members of the CBOE through the exercise right.”
William Brodsky, chairman and CEO of the CBOE, said that the decision could be “the second to last stop,” on the road to demutualization of the exchange. Final decisions and details will be the responsibility of the Delaware court, where CBOT members have filed suit against the CBOE on the equity issue. The Delaware court has postponed the case until the SEC announced its decision on the rules change.
A couple of beleaguered investment banks are getting much-needed jolts of capital infusion today. Merrill Lynch will receive a $6.6 billion boost from Korean Investment Corp., Kuwait Investment Authority, Mizuho Corporate Bank in Japan, TPG-Axon Capital, the New Jersey Division of Investment, the Olayan Group, and T. Rowe Price. Meanwhile, Citi, which reported a $9.8 billion fourth quarter loss, cut its dividend 40% and announced the layoffs of thousands of workers, will pick up $12.5 billion in new capital from a private placement and public offering of preferred shares. The write down mania due to the subprime crisis put investment banks in a tailspin in 2007, and things aren’t getting much better so far in 2008. On Jan. 11, the Financial Times reported another beleaguered investment bank, UBS, which for its part plans to raise $17.2 billion in fresh capital pending a shareholder vote, said that 2008 was “likely to be another generally difficult year.” (Shocker!)
The moves are another example of just how serious this credit crisis is and indicate that we are far from knowing its full effect. On the positive side, if you are trying to find one, the banks appear to be beginning to mark their books appropriately rather than simply hoping overpriced securities return to unstainable levels.
In late December, a consortium of 12 financial institutions announced plans to launch a new electronic futures exchange, and apparently CME Group is not taking this challenge lying down. Yesterday, CME announced product enhancements aimed at creating “a more liquid, efficient and competitive marketplace,” according to a statement. CME will begin allowing block trading, expected to begin Feb. 4 and subject to CFTC approval, for certain CBOT interest rate products. CME also plans to reduce the minimum tick size for the 30-year U.S. Treasury bond futures contract and both the 5-year U.S. Treasury note futures and options on futures. So what’s the first product expected to be launched by the new exchange? You guessed it: U.S. Treasury futures.
For more on the new futures exchange, check out the February issue of Futures magazine.
Now you’ve gone and done it.
Crude oil finally crested the $100 per barrel mark; and today the long forecasted recession appears to have finally manifested, what with the unemployment rate increasing to 5.1%, the highest level in two years, and the anemic 18,000 new jobs reported this morning.
I would like to take a moment though to suggest that it’s probably not the end of the world. In many ways, $100 crude is just a big fat round number, and because we had never hit it, $100 became an important psychological target. And much like the four-minute mile, people have been watching, waiting and trying to hit that mark for years – eventually it will happen. But a more important number might be $105, or even $110 per barrel, which is probably closer to the inflation adjusted high from 1980. And another very important factor is the country’s oil consumption as a percentage of gross domestic product. In 1980, energy accounted for 15.13 cents of every dollar of U.S. productivity. Now it is only 8.75 cents.
What does that mean? As a country, and including industry, we are almost twice as efficient in our energy usage. And that’s not my opinion, that comes from the Energy Information Administration.
The Dow Jones Industrial Average suffered its worst opening day performance in history as it started out 2008 by dropping 220 points this Wednesday. Whether that foretells what will happen in 2008 is hard to say.
The way the Dow opened 2007 was somewhat analogous of the year overall as the cash Dow settled slightly higher after being up more than 100 points at one point, down more than 60 at another point with a 175 point range on its first day of 2007.
