Speculators: Use 'Em or Lose 'Em

By Jon Najarian

When we're talking about the stock market, in some circles speculation is a dirty word. I find that strange, as in so many other aspects of our economy speculators are not demonized. Spec homebuilders for instance, take on the risk of acquiring land, securing financing for the structure, building the home, and selling the package at a profit if everything goes right.

At times the spec homebuilder invests time and money only to find that the value of what they've built is not what they've invested, which has been the case for most spec homebuilders for the last 18 months. But being rewarded for taking risk is what America is all about, isn't it?

"It is abundantly clear that large-scale, institutional investors speculating in the energy markets continue to act as the driving force behind energy prices," Sean Cota, treasurer of the Arlington, Va.-based Petroleum Marketers Association, said this week in prepared testimony to the Commodity Futures Trading Commission.

CFTC Chairman Gary Gensler said in a letter to lawmakers earlier this year that speculators contributed to an asset bubble in commodities in 2008. That conflicted remarks by his predecessor, former CFTC Acting Chairman Walter Lukken, who testified to Congress on Sept. 11 that there wasn't "strong evidence" that traders were driving up prices.

CFTC Commissioner Bart Chilton said on CNBC this morning that the previous observations by Lukken were influenced by politics, without a full review of the facts. The August report "will be better, and we will not try to spin it and say speculators had no role, like we did last year," Chilton said in another interview today on Bloomberg Television.

So the new CFTC chairman and his most outspoken commissioner are blaming speculators. Whom do I blame? The CFTC!

I believe that turf wars between CFTC and the Securities Exchange Commission--one governing commodities trading, the other securities markets--are what has thrown off the balance of supply and demand. The imbalance is the result of these two turf warriors refusing to allow a securitized crude oil product to come to market. Instead of a legitimate securitized exchange traded fund, we have ETFs like the U.S. Natural Gas Fund (UNG) and the U.S. Oil Fund (USO) mimicking the prices of natural gas and crude oil respectively through futures.

As any futures trader knows, futures contracts are not perpetual instruments and must be rolled as they are about to expire. This breeds rampant manipulation as the marketplace knows that these futures must be sold in the expiring month and rolled to longer-dated contracts.

To listen to some pundits and politicians, that same speculation in the commodities themselves, such as crude oil, should be curtailed. I disagree and submit that, if we throw up too many roadblocks to speculation in oil and other commodities, they will simply migrate to other countries where governments would be only too happy to see millions of contracts traded and taxed.

In fact, given the banking and payment systems in place in Antigua--all but been abandoned because of Sir Robert Allen Stanford's fraud case--I would guess that the idea may be floating (pardon the pun) right now!

(Chart courtesy of tradeMONSTER)

Comments

[ScroogeMcduck]

If the governments meddling continues at this pace 10 years from now they'll be telling us what to eat and where to shit.

2009 Aug 11 02:23 PM

[BullnBear]

Great overview, I like the fact that you have called out the potential for this trade to migrate to other countries where the heavy handed politics are such that this could all become far more speculative than anything that is currently taking place.

I believe that if you get enough political agenda laden hands into the market we are going to loose a great deal more than we will ever gain. The unfortunate side to this is that most of the players involved will only see this in hindsight but will of course apologize as only they can while moving on to the next action item in the agenda.

On a side note I appreciate the fact that you and your brother are on CNBC from time to time but I unfortunately haven’t figured out how to cut out everything else in between in order to get your insights and updates from the options world, etc. If it wasn’t for you guys being on that network from time to time I’m not sure that I would have any use for it other than the HD version of the scroll/ticker.

2009 Aug 11 02:37 PM

[dieuwer]

Did some math on the October options.
Total open interest on calls is 388737, open interest on puts is 537213 with majority of options around $13-14. Smells like naked short indeed!

2009 Aug 11 03:12 PM

[Prudent Man CFA]

Collectivists hate speculators and risk takers. But, they like to expropriate their wealth. The individualist is a threat to the statist, bureaucratic, economist, academic, politicians, and all of the other parasites. The independent thinker knows their scam.

Is there any material good or service that wasn't created by a risk-taker? I don't think people with the Wright Brother's attitude, aptitude and courage look for job security or Socialize Health Care and looked forward to becoming wards of the collectivist State.

Who are the creators of wealth in the U.S. today? Goldman Sachs, the most insidious of the parasites?

2009 Aug 11 03:28 PM

[FiaPoko]

They've been telling us what to eat for years.


On Aug 11 02:23 PM ScroogeMcduck wrote:

> If the governments meddling continues at this pace 10 years from
> now they'll be telling us what to eat and where to shit.

2009 Aug 11 04:03 PM

[Longinvestor]

It seems like a BS complaint that speculators drive up the price of a commodity. If one needs the commodity, one should buy it directly and hold it until used up. The speculator is dealt out...and so is the government.

2009 Aug 11 06:27 PM