Those #!*+%¤ speculators.
Blame it on the “speculators.” Game of the week in Congress (only because Congress goes on holiday every other). A rational person (but see “holidays” above) would know that most prices rise (falls are “good”) for 25 different reasons. But it is so less strenuous to find one culprit.
Why do the derivatives markets attract these deviates while the stock markets rely on the prudent, cautious, venerable investor? (more…)
We noted earlier this week how a recently released United Nations report on price formation in commodity markets had recommended that government take an active role in attempting to manage commodity prices.
We found this disturbing and pointed out how the report acknowledged some of the fundamental factors behind the recent surge in commodity prices but then ignored them in seeking solutions.
BarclayHedge released its May flash report of commodity trading advisor (CTA) performance this week, which indicated May was a rough month for managers. The report includes managed futures trading programs managing at least $50 million. It was no surprise that May was a tough month for traders as the sharp reversal in the U.S. dollar led many commodity markets to change course abruptly.
The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the United States District Court for the Southern District of New York against three energy trading firms and two individuals charging them with unlawfully manipulating and attempting to manipulate WTI crude oil prices traded at the New York Mercantile Exchange (NYMEX) from January 2008 to April 2008.
When silver dropped precipitously off of its near $50 high at the beginning of the month some people saw it as the bursting of a bubble. Other more constrained analysts saw it as a long overdue correction and or reaction to a reversal in the dollar and would wait for more information before giving the move more significance.
Yet there were others who saw the sharp rise in margin requirements by the CME Group as proof of a conspiracy. Margins did go up sharply but so had price and volatility making silver more risky and thus requiring more money to back positions.
There has been a debate raging for more than three years as to the role of speculators in the ongoing bull market in commodities. It hit a head in 2008 when crude oil spiked to $147, subsided during the credit crisis and is back with us in force.
Henry Jarecki, chairman of Gresham Investment Management, a long-time figure in both cash and futures metals markets and the subject of our May cover story gave a lecture in April at Georgetown University titled, “The Relationship Between Commodity Futures Trading and PhysicalCommodity Prices.” (more…)
Dan Roth, president and CEO of the National Futures Association, talked about regulation and the NFA’s approach to it at the second annual New York CTA Expo. Roth stressed the self in self regulation and said that lack of affective self-regulation leads to bad policy and bad legislation.
This brought up the subject of excessive speculation, which Roth defined as, “changes in the price of commodities that cause pain to voters.”
He acknowledged that this was the political definition and noted the need to educate politicians and regulators, as there is presently excessive specualtion under that political definition. We prompted Roth by pointing out a letter sent to the Commodity Futures Trading Commission (CFTC) by 12 senators last month asking it to raise margins for crude oil speculators.
During the Futures Industry Association’s annual conference in Boca Raton Fl. in March Commodity Futures Trading Commission commissioner Bart Chilton said that it just wasn’t true that that there was no empirical evidence that speculators in general and more specifically the presence of long-only commodity indexes were at least partially responsible for rising commodity prices.
In numerous Congressional hearings the leadership of CME Group and some industry leaders have consistently pointed out that there were no empirical studies linking high prices with speculation. They also pointed out that the CFTC’s own study in September 2008 seemed to indicate speculators were not the problem. A couple of years ago Chilton had promised a more in depth study from the agency on the matter that would indicate something different, but no such study has come forward.
Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and Securities and Exchange Commission (SEC) Chair Mary Schapiro begin an op ed piece in the USA Today with the following: “The missions of the Securities and Exchange Commission and the Commodity Futures Trading Commission are to protect investors and ensure our derivatives and securities markets are as fair, transparent and efficient as possible.”
That line has past CFTC Chairman Philip McBride Johnson a little worried because it suggests that the two agencies are in the same business when they exist for quite different purposes and could reprise efforts to merge the two.
Today the Dow Jones Industrial Average opened lower, coming within 50 points of the May 6 “flash crash” low. The S&P 500 actually took out its low from May 6 (see chart).
When examining what happened on May 6, I wrote a blog detailing all the bearish factors in the equities market. The point being that all these factors were sitting there like oily rags in a garage waiting for a match. The bears were claiming a major top was in place and the bulls knew a significant correction was coming before markets could once again rally. Once the market turned down, presumably due to what was going on in Europe, that scenario was in place. (more…)
