Comments on Mack Frankfurter's articles RSS Syndication from SeekingAlpha.com http://seekingalpha.com/author/mack-frankfurter/articles http://seekingalpha.com/article/97217-moral-hazard-and-the-aggregate-wealth-portfolio?source=feed#comment-265105 265105 Thu, 25 Sep 2008 15:04:48 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-244367 244367 Wed, 03 Sep 2008 09:06:55 -0400
For every buyer of a futures contract there is a seller. Additionally, both longs as well as shorts put up the same amount of margin to establish a position. Further, commodity-linked ETFs and other "securitized" commodity products are derived from futures contracts.

Here is a mind experiement to explain the thesis:

Let's assume there is one short seller who puts up $6k margin to control 1 contract/$100k short position. Let's also assume that there is one long offsetting this short who has fully funded his long position (ie, invested $100k) and purchased an ETF. For argument sake, let's say that the ETF provider who is backing the ETF buys 1 futures contract/$100k long position (requiring only $6k margin) versus the short seller previously mentioned and leaves the $94k balance in cash.

This is essentially an asymmetrical situation...

Now, if margin requirements are raised, who is going to have to come up with more $$$ to cover the requirement?

The short seller... he/she will have to either cover the position (that is, buy the contract causing upward pressure on prices), or he/she will have to come up with more money to maintain the position.

Meanwhile, the long ETF position which is fully funded will not be impacted in anyway, and he/she can remain long without having to come up with additional funds as he/she already put up $100k.

BTW, citizen782 understands the inside joke and is correct in his additional analysis.

As a final comment, let me explain why I wrote the article.

First, it was to highlight the potential distortions that securitized commodity-linked products have on the proper functioning of the futures market. Some of the responses here reflect misunderstandings of how futures markets work and how securitized commodity-linked products are derived from such markets.

Second, I wanted to point out the how improperly vetted legislation (eg, raising margin requirements) could cause price distortions. Enough time has passed since writing this article, and there has been sufficient documentation in the financial press of short term spikes related to short covering to validate that certain 1-2 day spikes were related to hedge fund short covering in oil. However, there is insufficient empirical data to relate how an increase in margins may have had an impact, although the NYMEX did raise margins on oil a few months ago.]]> http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-206770 206770 Wed, 16 Jul 2008 09:12:09 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-195517 195517 Sun, 29 Jun 2008 20:22:25 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-187395 187395 Tue, 17 Jun 2008 20:34:31 -0400
Of course it Would. If a speculator with 60k to put into Crude oil futures(enough to hold 1 million dollars worth of Crude off the market today) had the margin requirement for Crude Oil jump to 60% over night, they would still have only 60K to invest but could then only buy/hoard 100k worth of Crude. The title of this article is completely bizarro.]]> http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-183602 183602 Wed, 11 Jun 2008 15:14:27 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-181811 181811 Mon, 09 Jun 2008 09:39:12 -0400 That's the bigger factor isn't it? If your thesis is wrong based upon Dr. Spurgins hedging response function and it is not what's causing prices to rise then increasing the margins should in fact result in a dramatic drop per barrel. Also, even if there was a short covering rally, who's to say that might not be the temporary pain (shot in the arm) necessary to bring market prices on futures back to reality?]]> http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-175609 175609 Wed, 28 May 2008 20:15:20 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-175605 175605 Wed, 28 May 2008 20:09:54 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-175019 175019 Wed, 28 May 2008 06:11:59 -0400
Take gold for instance. I have none in my possession and do not invest in any gold futures, stocks etc. I consider gold to be a waste of money. Others disagree. I can do without gold. Gold does not affect my standard of living. On the other hand, water is important to me. I have lots of it. No one can push the price of my water to $130 per gallon. But in the western US, water is not as plentiful in some areas so it is more expensive if you need it.

The world needs oil for a lot of things. The more expensive oil is the more expensive food is. Shame on those who are causing supply disruptions and refuse to admit that it is wrong.

Finally, I am already using the sun to heat water. The setup to do this cost me about $24.00 and a little time. I will not have to use oil for heat or hot water for seven months. I am building a solar collector to see if it will heat my house for two or three additional months. Eventually, others will do the same. It will take time to solve my countries problems. I am working on it.

One last thought for ship shape and bristol fashion: I have been a sailor for 35 years. Most sailors I know are helpful people and go out of their way to help a mariner in distress. It's a talent that seems to be lacking in the investment community. Greed seems to be more important. A well run ship is run well for everybody.

OBAMA 08]]> http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-174803 174803 Tue, 27 May 2008 20:08:42 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-174350 174350 Tue, 27 May 2008 08:16:22 -0400
www.tickerspy.com/memb...]]> http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-174332 174332 Tue, 27 May 2008 07:40:59 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-174331 174331 Tue, 27 May 2008 07:38:52 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-174313 174313 Tue, 27 May 2008 05:31:44 -0400
The problem is, that people just don't want to face facts. I guess that's why Rome fell.

Is it possible, that a new kind of fungus affects wheat prices? Oh no, it must be speculators.

Is it possible, that all the good iron ore and copper mines are already in a mature phase. So now mines with lower grades have got to be brought online, which makes these minerals obviously more expensive.
Oh no! It must be speculation!

The same thing would be true for oil and a lot of other stuff.

On top of that: People are stuck in the past. They really have trouble to accept, that once 'savage' economies like China are becoming a force.

If we don't start to face facts and make the necessary changes, we will fall like Rome.

Burning witches never saved a problem, it only calmed down the mob.]]> http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-174307 174307 Tue, 27 May 2008 04:45:40 -0400 http://seekingalpha.com/article/78899-raising-margin-requirements-may-spike-oil-prices-higher?source=feed#comment-174305 174305 Tue, 27 May 2008 04:34:21 -0400 http://seekingalpha.com/article/75032-the-commodity-conundrum-securitization-and-systemic-concerns-part-iii?source=feed#comment-160904 160904 Fri, 02 May 2008 16:18:17 -0400 http://seekingalpha.com/article/75032-the-commodity-conundrum-securitization-and-systemic-concerns-part-iii?source=feed#comment-160440 160440 Thu, 01 May 2008 22:23:18 -0400
I hate to be an Internet Crank, but SPELLING, sir!

I think, for example, you'll find the word you want in your introductory paragraph for all three sections has been "elicit" - "to draw out or entice forth" - not "illicit" - "illegal". ]]> http://seekingalpha.com/article/75032-the-commodity-conundrum-securitization-and-systemic-concerns-part-iii?source=feed#comment-160209 160209 Thu, 01 May 2008 14:01:19 -0400
I think DBA/B/C series uses the actual future contracts. GLD should also be backed up by actual gold locked up somewhere in a HBC vault in London, although nobody has ever done an audit of it.]]> http://seekingalpha.com/article/75032-the-commodity-conundrum-securitization-and-systemic-concerns-part-iii?source=feed#comment-160162 160162 Thu, 01 May 2008 12:43:48 -0400
But, if what I read results in the loss of trust in the commodities markets, then maybe I should liquidate the ETF's for the time being and hold cash until this problem is resolved.

I would appreciate any advice from other readers as to what may be the best course of action at this time.]]> http://seekingalpha.com/article/75032-the-commodity-conundrum-securitization-and-systemic-concerns-part-iii?source=feed#comment-159946 159946 Thu, 01 May 2008 06:51:43 -0400 http://seekingalpha.com/article/74513-the-commodity-conundrum-securitization-and-systemic-concerns-part-i?source=feed#comment-159016 159016 Tue, 29 Apr 2008 21:36:14 -0400
While I think that some of the rise in commodity prices is justified in terms of supply/demand, to say that derivatives trading has thrown gasoline on this fire would be the understatement of the century. All of the governmental reports, from the EIA to the IEA show inventories of all products within to slightly above the five year averages and effective spare capacity of 2.3-2.5 million barrels per day. This coincidentally, is the least tight the oil market has been since the Iraq war in 2004. More oil projects are in the pipeline and new drilling equipment is being built to meet demand. Additionally, any supply forecast that tries to predict market conditions beyond 2-3 years would be somewhat unreliable and maybe understated somewhat because companies tend to play their cards close to the vest in order to prevent others from getting in on their oil finds.

As a land acquisition manager for a major homebuilder, this market reeks of the same kind of bs that Wall St pulled with the real estate market.

While we all might be rooting for a commodities bubble to burst, I think that the unintended consequences might be far worse than $120 oil. If this market were to unwind rapidly, it would cause a fundamental breakdown to the counterparty risk models set up by Wall St, leading to more horrific writedowns and lots more pain for the financial industry and a bigger credit crunch than the one we had prior.

The deflationary problem with all of this is that the fed can't print enough money to resolve these market problems. Trillions of dollars of writedowns are far more deflationary than the billions that the fed can give banks

]]>