Futures Blog

Misery loves company

2008-09-05T22:54:47Z

Who knew all the market needed was a sharp increase in unemployment to get going. The Dow Jones and S&P 500 indexes both ended the day in positive territory despite the unexpected jump in the unemployment rate to 6.1% from 5.7%. But all is not rosy. The liberal advocacy group Campaign for America’s Future put out a release Friday noting that “the misery index” has risen to 11.7%, it highest level since 1991. You may recall that the index came into vogue during the 1970s and 1980s political campaigns. The index is a composite of the unemployment rate and inflation using the annual Consumer Price Index. The press release got us thinking. We have chronicled in this space recently how the various methodologies to calculate economic reports by the Federal government have been altered to produce more positive numbers. In the July issue of Futures, we interviewed economist John Williams who keeps up the government’s economic statistics using the original methodology at his firm Shadow Government Statistics (SGS). ]]> going back to 1948 and considerably higher than the highest point in June 1980 of 21.98%. And it is a more accurate comparison given the changes in the methodologies for how inflation and unemployment is measured. To put it bluntly we are at our most miserable point ever. Williams points out that the only reason we are not in the technical definition of a recession is the funny numbers. Ironically it was the Clinton administration who was one of the worst offenders (though both parties and several adminstrations have played with the numbers)and whose alterations to the way the CPI is calculated has allowed the current administration to skirt the technical definition (two consecutive quarters of negative GDP growth) of recession.

Indians Dominate Swiss Futures Meeting

2008-09-05T16:40:17Z

2008 may be the year emerging market exchanges ceased to be footnote participants at the annual Bürgenstock Meeting, sponsored by the Swiss Futures and Options Association (SFOA) and held this year in Interlaken as the Bürgenstock resort undergoes renovation. As always, the host country – in this case, India – was the focus of Wednesday evening's opening panel and Thursday's entertainment; but representatives of the Multi-Commodity Exchange (MCX) and its parent, Financial Technologies (FT) did more than just put on a good show. ]]> National Commodity & Derivatives Exchange (NCDEX), has focused on the Indian market, thus developing products for domestic users in a country where 700 million people work in businesses related to the commodities sector. As reported in Futures Magazine's September edition, MCX is on the brink of launching a pan-African & Derivatives Exchange (PACDEX), which has still not launched and was not represented at this year's event. Interestingly, exchange representatives from Iran to Johannesburg confirm that MCX has been blitzing Africa and the Middle East over the past year in an effort to build alliances and forge partnerships. Futures has long been one of the only western media groups to follow the development of FT and MCX, not to mention the stunning rise of co-founder Jignesh Shah. It's fascinating to see a man come from nowhere with nothing but a grand plan and the will to implement it – and then to see that plan come to fruition. (see October Futures for updated article on the Indian markets). The mainstream press is catching on as well. Fortune Magazine, for example, profiled Shah in a special issue focusing on billionaires under 40, and now lists his wealth at $1.1 billion. We expect that press coverage and wealth – not to mention the network of exchanges he's hooked into – to continue growing over the coming years. Submitted by Steve Zwick in Interlaken

CME Group offers convergence tips

2008-09-05T15:58:25Z

CFTC's April agriculture forum was the lack of convergence between futures and cash prices in the ag markets. In July, the agency's Agricultural Advisory Committee held another meeting about convergence, where Acting Chairman Walt Lukken noted that "Some commercial participants have lost confidence in the ability to hedge in certain of these markets and it is critical that market participants work with the Commission to address this matter aggressively." Today CME Group offered to the CFTC some recommendations to improve convergence in its wheat contract, including increasing storage rates during the period from July through November to 8 cents per bushel per month, adding delivery points and a recommendation that the vomitoxin level for par delivery be lowered from three parts per million (ppm) to two ppm. ]]> The seasonal storage rate and additional delivery locations would be implemented beginning with the July 2009 contract month and the lower vomitoxin level would be implemented with the September 2011 contract month. The recommendations must be approved by the CFTC before they can be implemented. Other CFTC agricultural action this month includes an expected report from the agency on Sept. 15 about whether swap dealers should be reclassified for regulatory and reporting purposes.

Competing forces: USD recovery and U.S. jobs

2008-09-05T15:19:27Z

Remember last month when the unemployment rate shot up to 5.7% from 5.1%? Well, in August, things continued to deteriorate in the jobs scene. Unemployment increased to 6.1% and nonfarm payrolls decreased by 84,000, with concentrated losses in manufacturing and employment services, interestingly enough. In the past 12 months, according to the Labor Department, the number of unemployed has increased by 2.2 million and the unemployment rate has risen by 1.4% in the past year. ]]> Q2 estimated GDP coming in at 3.3% and the dollar recovery that we have been enjoying. Over the past six weeks, the U.S. dollar index, which measures the strength of the greenback against a basket of six major currencies, has increased to 0.78, up from 0.72. A good show, but most of the dollar’s strength is relative to declining currencies elsewhere as they grapple with inflation and a now global economic slowdown, rather than improving U.S. fundamentals, such as unemployment and inflation. In July, Labor announced that the consumer price index increased 0.5%, and that it was 5.6% higher than this time last year. During our current economic malaise, one of the bright spots in the U.S. economy has been exports; the declining value of the dollar making them more attractive to non-U.S. buyers who get to purchase them on sale. Now our strengthening dollar is now seemingly working against manufacturing, and the result is more out of work Americans.

Unenjoyment day

2008-09-04T23:37:28Z

Suspicion of government economic reports is at an all time high and given our government’s propensity towards happy news, and that we are in the midst of a political convention, traders must be looking at tomorrow’s unemployment report with a certain amount of trepidation. That we are going into the number on the heels of a 344 point drop in the Dow Jones Industrial Average makes things more interesting. Did someone know something? Initial unemployment claims for the week ending Aug. 30 jumped to 444,000, well above consensus estimates, contributed to negative sentiment. But tomorrow is the big one and given today’s move, a slightly better than expected report could cause quite a rally. As someone who followed these reports very closely, I can say that it is not that unusual for the unemployment report to come out completely counter to what initial claims showed. So it would not be proof of some conspiracy if tomorrow’s report is positive. ]]> Gross Domestic Product (GDP) report to get their juices flowing. That the surprise extremely positive GDP report for the second quarter (up 3.3%) may have ruined the Democrat’s convention narrative may raise suspicions. Economist John Williams of Shadowstats.com said this of the GDP report, “The nonsense continued with GDP reporting, today, with the preliminary estimate revision for the second quarter showing annualized real (inflation-adjusted) growth of 3.28%...The numbers reflected an equally unbelievable low second-quarter inflation rate for the GDP deflator of 1.33%, versus 2.56% in the first quarter. The revisions were dominated by highly questionable trade data. This heavily propagandized series now shows near-average economic growth, despite signals of recession in nearly every other economic series.” The government however puts out thousands of numbers and if something funny goes on in one of the headline series, there is a conflict with other numbers. Williams, who was featured in the July issue of Futures, notes that “the Gross Domestic Income (GDI) measure, which is the income-side equivalent (in theory equal, but rarely so in practice) to the consumption-side GDP measure, now is in recession. Deflated by the GDP inflation rate, revised GDI contracted at an annualized real rate of 0.8% in fourth-quarter 2007, contracted at an annualized 0.1% in first-quarter 2008, and grew at an annualized 0.5% in the second quarter.” When we spoke to Williams he had pointed out, by the way, that initial unemployment claims is one of the better indicators. Consensus expectations for initial unemployment claims is down 70,000 to 75,000 and the unemployment rate is expected at 5.7% or 5.8%. AS Sgt. Phil Esterhaus would say, “Be careful out there.”

Gas prices dog Diddy

2008-08-28T14:50:52Z

Sick of high gas prices? Don't worry...Diddy feels your pain. In a video diatribe, the hip hop mogul/purveyor of bling/frequent name-changer reveals that the skyrocketing price of oil has caused him to (gasp!) fly commercial. When Diddy leaves his private jet at home, you know the situation is dire. But Diddy isn't spending his time blaming speculators for the spike in oil like most of Congress, or instituting a hedging program on his fuel like most U.S. airlines. Instead, in true player fashion, he's giving a shout-out to all of his "Saudi Arabian brothers and sisters" asking "y'all to send me some oil for my jet." If his associates don't come through, perhaps Diddy could act as a celebrity witness if, as expected, Congress reopens hearings on speculation in the fall, bringing some much-needed hip-hop flavor to the proceedings. Word.

On the other hand

2008-08-28T02:10:51Z

newswire story citing a minor shift towards concern over slow economic growth from inflation caused me to look at the release closely. I guess it was there somewhere but darned if I could find it. It is odd that they would abandon their shift from inflation after only just discovering it despite it being apparent for quite some time. But as Economist John Williams noted in the July issue of Futures, “The Fed is not concerned with inflation. It is not concerned about the economy…its primary function is keeping the banking system solvent.” ]]> And raising the Fed Funds rate will not help on that score. So while its new found hawkishness earlier in the summer pushed expectations for a round of tightening by yearend, that expectation has drifted away and now rates are expected to remain at 2% through yearend. And as several analysts have predicted the next move may be another easing. After all, if they can ease with 4.9% GDP and elevated inflation as they did last year, they can ease whenever. While the Fed talks of inflation, Williams points out that the cost of the Fed providing liquidity to troubled banks is ultimately more inflation. But they will worry about that once the solvency crisis is over and we still do not know when that will happen.

Party like it’s…

2008-08-21T00:19:47Z

While out last week on my “staycation”, my wife and I took our three boys to navy pier in Chicago. It was a beautiful summer day in Chicago and the Chicago Air and Water Show was going on, providing some impressive sights and sounds to our trip to the lake. We were disappointed that we could not walk all the way out on the pier because a private party had rented the fancy ballroom at the end of the pier and blocked off the public walkway as well. I noticed that Wachovia had rented the space and made a mental note that things must be improving for the bank. Maybe all those analysts claiming that the worst is over for the investment banks are right after all. If you make the same claim every few months you will eventually be right. they had agreed to buy back $8.8 billion in auction rate securities. Party on. ]]>

Come and get ‘em - free tickets for I.O.U.S.A

2008-08-15T20:20:00Z

Futures magazine has five pairs of free tickets to see the premier of I.O.U.S.A. on August 21 at the Evanston 18. The show time is 7 p.m. This should be quite an event. As much as I’m looking forward to the movie, the live round table discussion that follows should be just as entertaining. Participants will include Warren Buffett; William Niskanen, chairman of the Cato Institute; Bill Novelli, CEO of AARP; Pete Peterson; and Dave Walker, president & CEO of the Peter G. Peterson Foundation and former U.S. comptroller general. The panel will be moderated by Becky Quick, co-anchor of CNBC’s morning news show Squawk Box. To claim your tickets, simply send me an e-mail at cmcmahon@futuresmag.com; include your name and a phone number and FREE TICKETS in the header. To claim your tickets, you will need to pick them up in person at the theater no less than 20 minutes prior to showtime.

I.O.U.S.A.: Documentary or horror flick?

2008-08-13T21:19:35Z

Until you hear the urgency in Addison Wiggin's voice, you may not think that our $8.9 trillion national debt is an obvious topic for a film documentary, but you may leave the conversation convinced it’s a great subject for a horror flick. The movie I.O.U.S.A., opening Aug. 21, follows Dave Walker, former U.S. comptroller general, and Concord Coalition Founder Robert L. Bixby on their Fiscal Wake Up Tour. For 18 months, at Rotary Clubs, Better Business Bureau luncheons and town hall meetings, they discussed the national debt, its implications and possible solutions to the looming economic danger that threatens the United States. The film also features interviews with “the Mount Rushmore crowd of American economics,” including former Federal Reserve Chairmen Alan Greenspan and Paul Volker, and former Treasury secretaries Paul O’Neil and Bob Rubin as well as Warren Buffett, chairman of Berkshire Hathaway and one of the world’s wealthiest men, to tell the story. “We have the guys who are responsible for the Federal Reserve and heading up budget committees in Congress, and the former Treasury secretaries,” but it’s not just charts and figures, Wiggin says. Read more for info on your FREE TICKETS from Futures Magazine... ]]> In as many chapters, the film explores four deficits: America’s $480 billion budget deficit, the trade deficit, and the personal savings deficit, which was negative for two years in a row, in 2005 and 2006. The last time that happened, Wiggin says, was in 1933 and 1934. “The statistics that are piling up are as bleak as what we saw in the 1930s in the Great Depression.” Finally, Walker addresses what he calls the leadership deficit, which has led to ignorance and apathy on the part of the American people, Wiggin says. “They think these decisions are made by experts in New York or Washington and that it doesn’t concern them. The net is that they abdicate responsibility and they don’t hold people accountable for the decisions that are made.” Wiggin and Bill Bonner, his partner at Agora Financial, have been writing about trends in macro economics and America’s place in the world in their newsletter The Daily Reckoning, as well as their Web sites and other publications, including the 2006 book “Empire of Debt: The Rise of an Epic Financial Crisis,” which provided the genesis of the film. Since 1980 the national debt has become a dramatic feature of the American Economy and a danger to America’s position in the world, Wiggin says. “If you are trying to build wealth and invest in your own futures, that’s one feature of the economy that you can’t ignore.” The film was directed by Patrick Creadon, who created Wordplay, a documentary about the New York Times crossword puzzle – another topic that doesn’t seemingly lend itself to film, but which received solid critical reviews and was shown at the 2006 Sundance and Tribeca Film festivals. I.O.U.S.A. was purchased by the Peter G. Peterson Foundation, named after its founder, former U.S. commerce secretary, who also founded private equity firm The Black Stone Group. Last year Peterson sold 10% of the firm in an initial public offering. “His paycheck on that day was $3 billion,” Wiggin says. “He took a billion of that and started this foundation…. David Walker left the GAO [government accounting office] to head that up, and their first act was to buy the movie from us. And they are using it as a tool to get the message out there. And that’s how we ended up with the premier hosted by Warren Buffet. Pete Peterson and Warren Buffet are long time friends.” The film opens at selected theaters on Aug. 21. Click here for listings. After the showing, there will be a live discussion with Warren Buffett; William Niskanen, chairman of the Cato Institute; Bill Novelli, CEO of AARP; Pete Peterson; and Dave Walker, president & CEO of the Peter G. Peterson Foundation and former U.S. comptroller general. The panel will be moderated by Becky Quick, co-anchor of CNBC’s morning news show Squawk Box. Futures Magazine will be giving away tickets to the premier on August 21, to the 7 p.m. showing at the Century 12 Evanston/CineArts 6, located at 1715 Maple Ave, Evanston, IL. Check back for details on how to get your free tickets.

CBOT vs. CBOE: No cessation of hostilities

2008-08-12T16:33:31Z

Russian military operations in Georgia are winding down, but tensions between former CBOT members and the Chicago Board Option Exchange (CBOE) over exchange right privileges (ERP) remain unresolved. This morning in a CBOE members’ circular, CBOE’s office of the chairman issued a statement that while progress has been made, the agreement, which was to give former CBOT member an 18% equity stake in the options exchange and a cash payment of $300 million to end all claims, had not been finalized. Word is that the agreement is still being held up by infighting amongst CBOT members over the number of people who will qualify for the settlement. The fewer who qualify, the larger the individual payouts would be. The CBOE has the right to walk away from any agreement that does not extinguish equity claims by all former CBOT members. More to come….

CFTC cracks down on forex fraud

2008-08-11T16:33:46Z

The Commodity Futures Trading Commission (CFTC) is stepping up its investigation of fraud in the off-exchange retail forex market with the formation of a retail foreign currency fraud enforcement task force. Since the agency's reauthorization in May, the CFTC has been buzzing with activity, studies and task forces, specifically in the energy arena with its formation of a task force in June to study commodity markets and its recent charges against trading fund Optiver for manipulation in Nymex oil contracts, which came after the CFTC endured Congressional attacks this summer that blamed speculators for higher oil prices. The CFTC now intends to show no mercy on retail forex fraudsters. “This announcement sends a clear signal that the CFTC is on the beat, and that our continued and increased cooperation with law enforcement authorities will help put these forex dealers where they belong – in jail,” said CFTC Commissioner Michael Dunn in a statement.

Be careful of what you hear

2008-08-05T16:22:54Z

wire stories attributed the move to a drop in crude oil. However, crude oil was actually rallying in the pre open hours and at the time equity markets were spiking higher. ]]> While there has been a connection between oil and equities and equities may have been catching up with overnight action the correlation has not been constant as equities fell yesterday despite sharply lower oil prices. There are literally dozens of fundamental factors (as well as technical factors) that can affect price and just because the one you are subscribing to appears to have caused a move doesn’t mean it wasn’t simply a coincidence. This is important as many investors may predict a move in one market based on fundamental evidence in another and take a position in that second market only to find that correlation doesn’t apply. When I worked on the floor, I heard on dozens of occasions a customer say something like this: “this market dropped that means this other market should have done this, but it didn’t.” The customer usually felt something funny was going rather than question his initial assumption. It may have worked for him in the past or he may have just been lucky. Cause and effect in markets is difficult to project and when you apply dubious correlations, it can come back to hurt you, so be careful of what you listen to.

Shorts rule spikes SSFs

2008-07-31T15:35:54Z

On Tuesday, the SEC extended its temporary rule restricting short selling on financial stocks including Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, UBS, Bank of America and others. It remains to be seen what lasting effect the rule will have on the market - the initial action spurred a market recovery - but either way the rule has been a definite plus for OneChicago. The single stock futures (SSF) exchange has taken full advantage of the short selling rule by touting SSFs on the financial giants affected by it - Bank of America, Barclays, Citigroup, Deutche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, etc. OneChicago CEO David Downey says that since the short selling rule was introduced, the exchange has seen some increase in business, especially in Fannie Mae SSFs. "Interestingly we have been taking many calls from traders who are taking another look due to the new rules," he says, adding, "It still remains that the clearing members, ironically the very names that this ruling addresses, still resist letting the customers trade SSF."

State of emergency

2008-07-31T01:09:43Z

Yesterday the Securities and Exchange Commission (SEC) extended its emergency action restricting naked short selling of Freddie Mac, Fannie Mae and 17 investment banks. The initial emergency action on July 15 pulled the market out of a downward spiral that had hit two-year lows. After a substantial recovery, nearly 900 points in the Dow Jones Industrial Average, the market turned south again, retracing the move by more than the notable 61.8% Fibonacci level. The extension spurred another impressive two-day rally. But we have to question where this faith is coming from. Sure it helps to put a bottom below the investment banks but it is based on the notion that “there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets” according to the SEC that described this as “unusual and extraordinary circumstances.” ]]> The Federal Reserve has extended the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through Jan. 30, 2009. It also introduced an 84-day Term Auction Facility to go along with the 28-day TAF. I guess all these major investment bank were becoming embarrassed having to go back every few weeks to uncle Ben and ask for a loan and keys to Fed. This is not the act of a Central Bank that believes the worst of this crisis is behind us. Meanwhile Merrill Lynch has been doing some mighty interesting financial gymnastics of late. The most interesting of which is selling off assets valued at $11.1 billion—as recently as a month ago— for $6.7 billion and loaning $5 billion of that to the buyer as well as being on the hook for it. Doesn’t sound like a great deal to me. And as all this is going on we are being led to believe that the economy is showing improvement. So we decided to go to a more reliable source. Economist John Williams has been exposing the folly involved in government economic reporting for years on his Web site Shadowstats.com. Williams noted in his newsletter today that, “Wall Street continues spinning that the economy is on the upswing, that a recession was dodged. The financial and economic propagandists have been grasping at straws and using "better-than-expected results" strategies in mitigating not only impaired corporate profit reports, but also ongoing, negative economic data. The game is to hype expectations to the downside and then to turn euphoric when terrible results beat expectations.” Williams points to five key series that show or suggest an ongoing and deepening recession. (1) Nonfarm Payrolls - two consecutive quarterly contractions with year-to-year change in contraction as of June. (2) Industrial Production - current quarterly contraction and near-zero year-to-year growth. (3) New Orders for Durable Goods - three consecutive quarterly contractions and current-quarter year-to-year contraction in nominal terms (not adjusted for inflation), with worse results net of inflation. (4) Purchasing Mangers Manufacturing New Orders - two consecutive quarterly contractions. (5) Retail Sales - four consecutive quarterly contractions and two consecutive quarters of year-to-year contraction. Williams says, “Such activity in any of those areas is not seen outside of formal recessions.”