More Government Market Manipulation on Its Way? 11 comments
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Didn't we learn a thing or two last year when the SEC banned short selling and the market continued to tank?
From the WSJ:
Oil-market analysts question the idea that speculative investments have pushed up prices. They attribute the current volatility to uncertain prospects for economic recovery, and the long-term rise to an oil industry that has struggled to boost supply in response to the surge in demand from China, India and other developing economies.
"The spread of daily oil-price movements around the monthly average is because no one has a clear expectation of what the future price is going to be," said David Kirsch, an oil-market analyst at PFC Energy. "Putting limits on financial investment is only going to have a limited effect on overall volatility."
In Congress, though, there is growing consensus that investors could be distorting prices. A recent report from the Senate Permanent Subcommittee on Investigations blamed speculators for driving up wheat prices in recent years, and recommended the CFTC enforce position limits on index traders in the wheat market.
In a statement, CFTC Chairman Gary Gensler said the agency will hold a public hearing to gather views from consumers, businesses and market participants on proposals to impose limits on trading in energy future contracts. The CFTC's proposed rules would also require hedge funds and swap dealers to report holdings -- including those traded over-the-counter and at overseas exchanges -- in a separate and routine way.
Energy traders say they are concerned that the regulations could stunt trade, increase costs in the marketplace and potentially scare away some players. "Speculators play a crucial role in the futures market by providing liquidity to hedgers," such as oil producers and airlines, said Addison Armstrong, director of exchange-traded markets at TFS Energy Futures, a Stamford, Conn., broker. "Traders don't want rules that are going to change the game."
The interventionism represents a significant shift for both the CFTC and the U.K. government, both of which have previously taken a more free-market approach and stopped short of calling for action on speculators. "Where there has been unfair speculation or abuse of the market then we would be prepared to act," Mr. Brown said in a briefing with journalists.
Mr. Brown and his French counterpart called on the International Organization of Securities Regulators to look at improving transparency and the supervision of oil-futures markets. An umbrella organization for global securities regulators, IOSCO helps to set international standards and advises national bodies on regulation. In March, it set out guidelines on how regulators can beef up their supervision and enforcement of commodities.
The French and British leaders hope to get backing for their drive at the summit of the Group of Eight leading industrial countries that begins in Italy on Wednesday.
Politicians around the world are worried about the effect of rising oil prices on the recovery potential of their recession-hit economies. In recent weeks, companies in various industries have complained that the rise in oil prices has, or will, hurt their profits.
Can anyone define "speculators" for me? Can anyone tell me what the price of oil "should" be based on fundamentals? Can anyone tell me what variables go into that fundamental analysis? I ask because I have no idea. Why?
The price of oil takes into account (among others):
- Current supply / demand
- Expected future supply / demand
- Geo-political considerations (will Israel attack Iran, will Chavez nationalize every oil co. etc)
- China's future needs
In order to be able to say "this is the what the fundamental price should be" means that we can answer those questions with a high degree of accuracy. If we are off, for example, on what the future demand will be based on US consumption in November, then the current price of oil is either too low or too high.
Since we know the quality of economic predictions decreases as the time from their date increases, how can we really with any intellectual honesty say "demand will be x" in November or early next year?
If I think it is going to be 10% higher than today and I buy the ETF USO to have exposure to oil, does that make me an "oil speculator" or an "investor" because I view the current price as too low based on my expected future fundamentals?
The problems abound. First we have what seems to be a discernible trend to demonize a group of people because we do not like the outcome and because it helps the government take action. Second, there is the arrogant opinion that the government can fix all ills and dictate the actions of the market. Third, this will fail because when investors are not able with confidence to understand the rules under which they invest, markets break down.
We saw proof of this last year with the short selling ban . Investor confidence fled and while there was no short selling, there were also no buyers due to this lack of confidence. What happened next is that as prices fell, the selling of shareholders increased and the lack of buyers caused markets to crater.
What will happen to this current proposed rule? Well, the easy thing would be for the UNG/USO ETFs to simply split. Place half of assets in a separate entity, tied to the same commodity and then rule averted because no one entity would control too much of the futures market. Has anything fundamentally changed? Nope.
The only thing different would be yet another reason for investors to fear the market and what government may decide to do to it on any given day... that is the worst thing of all .
Disclosure: Long UNG
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This article has 11 comments:
This lesson was learned in the 1920s and forgotten.
Limiting the dollars is hard, you create trading monopolies.
The only alternative is to remove the secrecy, then the dollars have a chance to fight fair for real value.
The current system will lead to more economy problems as prices continue going crazy. Business cost forecasting is impossible in this market, just try and get a long term plastic supply contract. (Plastic is made from oil, everything is made of plastic, etc.)
Investors fear the market because they have lost their retirement, their future and their sense of security. That is the worst thing of all.
This investor fears the U.S. equity markets because he expects the current administration to interfere with them (e.g. limits on short-selling, limits on speculation, etc.) and to interfere with the U.S. economy (e.g. nationalized healthcare, carbon dioxide taxes, other tax increases, etc.) in ways that greatly reduce the prosperity of the U.S.
The U.S. elected these guys, so the U.S. will get punished. That's too bad, but there are other markets (BRIC equities, commodities, etc.).
> The current system will lead to more economy problems as prices continue
> going crazy. Business cost forecasting is impossible in this market,
> just try and get a long term plastic supply contract. (Plastic is
> made from oil, everything is made of plastic, etc.)
But the current system should allow one to hedge their bets with regard to the price movement of the plastics, at least with respect to the cost of the oil inputs.
If plastics companies, or truck lines, airlines, barge lines etc. want to lock in their prices for oil, gas or diesel they should be able to buy futures contracts now for the months in question. If prices skyrocket, their fuel costs go up, but that loss will be roughly offset by the jump in value of those futures contracts, at least if done correctly.
If prices drop, they'll lose on the futures contracts but those losses will be offset by the drop their actual cost for fuel. It's an insurance policy of sorts. The business or individual can pretty much lock in their future costs for planning purposes.
That's what the hedging/futures market is supposed to be all about, at least as I understand it.
Sure there are people who are basically just gambling on future prices, but they provide liquidity to the market for the people who use it in their day to day operations.
The problems come in when the speculators are irrational, misreading where future prices are headed, and thereby distorting the market. But I don't see where "speculation" is itself inherently evil. It's a tool much like fire, a car or a chainsaw might be. They can be a great benefit if used well, or a danger if misused.
Cramer predicts the lobbyist will begin by reminding congressmen of their political debts and encourage them to oppose reforms. Academics from universities funded by donations from the lobby will publish studies asserting that the futures markets are too deep to manipulate. The media will disseminate these "studies." The powers that be will also claim that regulation caused the current problem, and will not provide a solution.
While the road is a hard one for reformists, the attempt to change the Futures Market must be made since oil is “a national imperative and an economic lifeline,” and must be traded fairly, said Cramer.
----------------------...
Cramer is right on, Thugs have gotten a hold of the markets. Did you see how Goldman Sucks got their weinie caught in the cookie jar?
Kirby
> Doesn't take a rocket scientist to realize that the price of oil
> doubling from a low of $30 in March 09 to $70 in June 09 has nothing
> at all to do with real time supply and demand. Supply and demand
> do not vary more than 5% in a 1 year time frame, but oil prices do
> because it's a speculative investment, just like the stock market.
It may be a speculative investment, but price moves aren't always on a one to one basis with changes in supply and demand. Inelasticity is basically defined as a smaller % changes in supply or demand relative to % price changes. I think most economists would agree that oil has relatively inelastic demand, particularly over relatively short periods of time.
But I think you are certainly right that "speculation" had a lot to do with that price jump in early 2009. But that isn't necessarily a bad thing. If the speculators/investors/... (the futures market) were right that the price would go up in future months, they would have been evening out the peaks and valleys in the oil price movements. Sure they would be raising the prices in what would have been a valley period, but would have also had the effect of dampening demand and increasing supply for when the crunch would come in the future.
Unfortunately in this case, I think the speculators were wrong in their assessment of future prices and will in fact make the price swings somewhat worse than they would have been otherwise. Too many were probably wrong in buying into the "green shoots" economic recovery forecasts for this year.
> If the price of oil were actually linked to real time supply and
> demand trends, you'd see the price of oil become almost rock solid
> over the short term.
But I think the price swings would be more violent over the medium term on average if the futures market/speculators/hed... weren't there.
For instance, had they been correct, and had we had that economic recovery but oil prices were forced to be priced strictly on a daily supply and demand basis, the prices might have gone much lower, raising the risk for oil producers and even more projects would have been canceled or delayed than were this go 'round. Consumers who were buying vehicles (yes, I know the numbers were way down) would have been more likely to go for the less efficient ones so demand would have been stimulated and supply suppressed. Then if the economy grew, as some expected, the jump in prices would have been more severe, perhaps much more severe.
It would seem to me that "the system" isn't necessarily broken, but that abuses in the system could/should be addressed. If hucksters were pushing investors into these instruments who had no business being there they were violating the fiduciary responsibility they had for investing their funds. For instance, pension plans and grandparents' IRAs probably shouldn't be investing heavily in these futures contracts, particularly if they aren't savvy about the risks or the market fundamentals. But that's a separate issue than trying to stop "speculation".
> Cramer elaborated on Tuesday's rant during which he called the futures
> market a "farce."
> While the road is a hard one for reformists, the attempt to change
> the Futures Market must be made since oil is “a national imperative
> and an economic lifeline,” and must be traded fairly, said Cramer.
> ----------------------...
>
> Cramer is right on, Thugs have gotten a hold of the markets.
-----
It's rather ironic that Cramer himself has been accused of blatant front running, naked shorting of stocks before disseminating stories to journalists and on his show hammering the companies he previously shorted, and doing so with a consortium of thugs.
I don't exactly like how this story in "The Daily Kos" starts out with an apparent defense of Obama & his administration, and it may be a left wing site for all I know, but the allegations appear to be from credible sources and would seem to be worth keeping in mind, even while perhaps taking it with a grain of salt:
www.dailykos.com/story...
(Mark Mitchell's original piece): www.deepcapture.com/th.../
"The story begins when a very highly respected journalist and business editor for the Columbia Journalism Review, Mark Mitchell, decides to look into allegations made by the CEO of Overstock.com, that some top hedge fund managers, in cahoots with a circle of financial analyst and reporters, had conspired to make a lot of money by betting short on companies and then systematically destroying those companies by spreading false negative information about them and employing other tactics such as flooding the market with "phantom shares" to drive down a stocks value.
...
This is where a short seller sells stock that they haven't actually borrowed yet. There are loopholes that allow shorters to do this legally, but those loopholes have allowed the practice to be abused - which is illegal. Therefore, it is quite easy to fraudulently put on the open market shares of stock that do not, nor ever will, exist. These phantom shares do nothing but crash the value of a stock and therefore make legitimate short transactions highly profitable.
I have analyzed well over a thousand stories written by this clique of journalists. The vast majority of them were sourced from a small group of short-sellers who are also friends of Cramer. Other popular sources for this group of journalists include convicted felons, mobsters, dubious private investigators, crooked lawyers, hired stock bashers, and gun-toting goons – most of whom are tied to the Cramer constellation of short-sellers.
Some of the stories written by these reporters are accurate enough. But many are not. The journalists misconstrue data with seemingly purposeful intent. They exaggerate and obfuscate. They publish innuendo or merely repeat, Deus Optimus Maximus, the words of their hedge fund and criminal friends.A single negative story by one of these reporter-thugs can send a company’s stock tumbling by more than 50% — pure profit for their hedge fund sources, who of course sell the company short (often right before the articles are published). Meanwhile, an overwhelming majority of the companies targeted by these journalists will also be the victims of phantom stock selling and other shenanigans.
...
To fully appreciate the Jim Cramer angle a little journey to his past is in order. This is from Cramer himself:
"We had it down to a science in 1992: my wife would pick stocks that technically looked ready to go up, or she would keep track of merchandise to see what was down to tag ends. She would then generate a list of stocks that could move quickly on good news. Jeff would then go to work calling the companies to try to find anything good we could say about them. I would call the analysts to see I they were hearing anything. When we found a stock that looked ready technically to break out, or where the supply had been mopped up, and Jeff found something positive at the company, and I knew the analyst community didn’t know anything positive, we would load up with call options and common stock and then give the good news to our favorite analysts who liked the stock so they could go do their promotion. That would get the buzz going and we would then be able to liquidate the position into the buzz for a handsome profit." (Confessions of a Street Addict, page 61).
This is Cramer's big secret. He figured out early that the way to make money betting on stocks was to rig the game - control the news and you control a stock's value. Now he has his own TV show.
Nicholas Maier worked for Cramer until 1998. He quit and wrote a book about it called, Trading with the Enemy: Seduction and Betrayal on Jim Cramer’s Wall Street (New York: HarperCollins, 2002). Here's an excerpt showing that Cramer was into naked short selling early on: ...