TWS Investments

Dow Target 6,617, October 25, 2009: Here Is Why

Great choice, I agree thoroughly. Though I fear a short in the stock market will wipe out those gains.


On Aug 05 12:53 PM Jason Tillberg wrote:

> I'm also long Gold and Silver.

Dow Target 6,617, October 25, 2009: Here Is Why

The market will not see lows again in nominal terms. When the government turns on the printing press, asset prices inflate. And, in this case, inflate dramatically. In real terms, you may be right, but don't expect the charts to tell you where we will be as the Fed destroys the dollar.

It is foolish to be short when the printing presses are running.

Why It's Crucial to Reduce Leverage in Oil

The paper transaction between two traders is not what I'm worried about. Futures market prices affect real world prices impacting millions of businesses around the world. The excessive leverage is not granted in any other market. Why, in a market crucial to our economic stability, do we allow such leverage? I want speculators, I just do not see the need to offer them 10-to-1 leverage.


On Jul 23 08:34 AM bartpr wrote:

> the futures market is a zero sum transaction. for every winner
> there is a loser. what is the problem with that. contracts that
> are long may be sold as short. one will gain and the other lose.
> there regulators dont want to tlk about the real workings of speculators.
> without them there is no market. who will porvide the liquidity.
> just the seller of oil for future delivery and the buyers of oil
> for future delivery. what is there is a massive imbalance of one
> or the other at a given moment.
> then you will see massive swings in futures prices.

Why It's Crucial to Reduce Leverage in Oil

I would ask then, if the built-in leverage to contracts was 100-to-1, would oil prices have greater volatility? If you don't believe so, then we fundamentally disagree. But, if you grant that, then a reduction from 10-to-1 to around 2-to-1 should reduce volatility.

Thank you all for your comments on my article! I appreciate the interest.


On Jul 21 12:54 PM Ferdinand E. Banks wrote:

> The more speculation, the easier it is to hedge. I can't understand
> how anyone can fail to understand that, because when futures markets
> fail it is because of a shortage of liquidity - the liquidity provided
> by speculators.
>
> And A BARREL FULL, it's nice to see the reference to the tulip bubble,
> but I have some diffifulty equating tulips with a commodity like
> oil.

Why It's Crucial to Reduce Leverage in Oil

Very true, and I concede your point. Though, I am attempting to say that the markets have changed dramatically. Futures were built on forward contracts and delivery was assumed for the last 100 years before 1981 and the development of the cash-settled Eurodollar contract. Exchanges further moved towards cash settlement in all markets in the 1980s and the following increase in traders has brought actually delivery to less than 5%.

This has had some unintended consequences. I am trying to propose a solution that would not hamper business hedging risks yet not give unnecessary leverage to participants simply betting on price movements. I have absolutely no problem with speculation, I just do not understand why we give them 10-to-1 leverage as a basis for the contract. That leverage, I argue, exacerbates price movements in markets crucial to our economic health.


On Jul 21 11:01 AM Jrbarnes wrote:

> I am in the oil business, and when I hedge, I do not take possession
> of the oil that I do a futures contract on, nor do I ship my production
> to Cushing, Oklahoma where contracted oil is stored, nor do other
> oil companies that I know. If my oil does not sell for the price
> that I hedge it for, I sell it at market where it is, and make up
> the difference with the profit or loss from my hedge that month,
> with the net result being that I net the price that I hedged, thus
> keeping my bank happy. Similarly the buyer of oil who hedges, does
> not normally take possession of the oil in Cushing, but buys it in
> the normal course of his business, using the profit or loss on his
> hedge to end up with the net price hedged.

Why It's Crucial to Reduce Leverage in Oil

Clearly I believe it was a result of GROUP THINK. But, as I argue, "speculators are given very high leverage enabling the herd to exaggerate every move in price up or down." It seems to me in a market so vitally important to economic stability, the price swings can hold economies hostage. One way to reduce unneeded volatility is to reduce the embedded leverage.


On Jul 21 05:05 AM A Barrel Full wrote:

> ....Speculators dominate futures markets and fewer than 5% of contracts
> actually result in an exchange of the physical commodity......<br/...
>
> When you want to hedge a price risk, you do not need to enter into
> a contract that actually involves a physical product. You already
> have the product you need, you just don't want the associated risk.
>
>
> So equate the lack of exchange of physical product with speculation
> is wrong.
>
> Working as I do in the oil sector, being immersed in the atmosphere
> that existed in 2008, I don't need to look for bogeymen to blame
> the anomalies on. It was a clear case of GROUP THINK. Everyone really
> thought that oil could only go up. So everyone was building stock
> to sell tomorrow at a better price. When it didn't there was complete
> panic. Everyone sold off inventories, whatever the price.
>
> Intellectually it was on a par with the Tulip buyers of old.

Former 'Black Swan Fund' Traders Now Betting on Hyperinflation

But that is the core of the black-swan-style trade. These guys know it is a tail risk and they are positioning to risk a relatively small sum in order to extract substantial gains if it does occur. This fund would be a great small position in most investors' portfolios.


On Jun 17 08:44 AM jeremiah74 wrote:

> im amazed at the confidence of the hyperinflation camp.
> there is a tail risk for that, which means you could buy some options
> on it happening. but as a core investment strategy to bet on hyperinflation
> is extremely risky - in my opinion
>
> the odds are at best 50-50 to see any kind of inlfation in the next
> few months, and therefore anyone betting on inflation could see his
> positions wiped out by margin calls.
>
> "the sun will burn out one day, but its still a bad trade"

You're Not as Smart as You Think You Are: Psychotherapy for Cyclical Bull Markets

Right, the goal of investing is to make money, not to make the whole move. So many traders forget this obvious point...

Rising Oil Prices: Good or Bad for Stocks?

A restriction of leverage for speculators is probably the easiest way to reduce volatility in the futures markets. It made sense when hedgers dominated the market to allow them to leverage in order to keep their opportunity costs of capital low.

But, as speculators now dominate the market and the vast majority of contracts do not result in delivery, why do we allow leverage? It seems foolish to allow speculators the added leverage in a market as vitally important as our basic commodities. The built-in leverage exacerbates price movements and should be curtailed.

Don't Fight the Trend

Agreed, the charts point to nothing but higher prices. "The trend is your friend."

Monday's Closing Update

Check out market manipulation at www.twsinvestments.com...

Why Government Is to Blame for Market Bubbles

Your claim that bubbles are a manifestation of government failures is largely unfounded. Bubbles result from an overall easing of risk aversion by both government and the private sector. Government is certainly complicit much of the time as regulation is not seen as needed in times of rising asset prices. The expansion is on and it continues until it reaches a tipping point.

The tipping point reverses previously held beliefs and a massive contraction ensues. Risk is repriced across the spectrum and participants are punished for accepting too much risk. The ebb and flow of financial markets cannot be prevented by anyone, bubbles have and always will occur.