wundr

Game Over for U.S. Oil, Natural Gas ETFs?

One of the biggest problems with commodity ETF's is that they often only trade the front/near month contract. Retail investors often buy them without fully understanding how futures really trade. Roll yields due to contango/backwardation are not even considered.

While it seems to be a given that in the future commodities will become more expensive due to supply/demand. However, the belief in rising future commodity prices could become self fulfilling. Traders are buying ETF's, creating an artificially high price due to forced futures buying. They are essentially creating a high price from speculative buying, not due to the fundamentals of short supply/high demand.

UNG has had a major influence in keeping up the price of NG. If it were not for UNG NG would be trading much lower NOW due to market fundamentals. There is currently an excess of NG with low market demand. If the 12 month NG ETF comes to fruition the effect of ETF speculation may be even greater on further month NG contracts. It will roll into contracts 12 months out (talk about contango). They are rather thinly traded at this point but the ETF trading should increase the volume, possibly significantly. Futures traders will exploit this issue by trading the contract before the roll creating another example of the USO effect.

Relatively speaking, though, hedge funds and major institutions still have a much greater effect on the prices than ETF's do.

Why the Dow Is Headed to 6000

Hard to say how high or low things will go.
Might need about 4-6 more earnings cycles to make a decent call.

Since November there has been a lot of institutional buying, setting up a decent base at the current levels. There has to be a good impetus for them to sell and stay out. Let the traders take it down and buy on the dips. At the same time there is no fundamental reason for the market to go up from here. I wouldn't be a buyer at the current levels. Everything is at a price that needs to be confirmed by actual earnings.

Unrealistic government spending will have an intermediate term impact to keep the economy going. If it weren't for all of the government intervention the DOW would have already hit 6000 (for what its worth as an indicator). The chart would be looking like the great depression. We'd be at the end of the first bear market rally and preparing for the next drop.

We're still in a recession and it's effects have not been fully felt yet. If the government(s) are unable to spend their way out of it there will be another big drop down the road. At that point there may not be a lot of upside, or money, left.

Absurd Inverse and Leveraged ETF Product Whining (Updated)

True. Leveraged funds only trade percentages. Percentages that can add up to a quicker change in a short period of time. A quick 50% change in the underlying would drop the index in half. A 2x fund could, in theory, hit zero.
Do you think the small negative changes over time will eventually be more than the small positive percentage changes?
Be interesting to see what the NAV of some of theses funds in will be in 10-15 years.

That is probably why the best way to trade leveraged funds is take the short side.
If you expect the underlying index to go up short the inverse 2x; if shares are available.
Decay is less and a long term decline may be inevitable anyway.

Absurd Inverse and Leveraged ETF Product Whining (Updated)

One of the biggest problems with individual investors is that they may buy a leveraged ETF without really understanding what it is.

They see 2x or 3x and think, "Hey, I can make a bunch! Two times more money by buying SSO than buying SPY, AND its CHEAPER! All I have to do is wait for the market to go up and I'll make twice what I would make with SPY!"

What they fail to understand, without proper DD, is that it is only twice the DAILY return of the change in the underlying index. Unfortunately, they hold it for an extended period and it doesn't perform like they thought it should have.

I do question a certain design issue associated with them. A close look could lead you to believe that they are made to trade to zero over time. A downward move can take more of a toll than an upward move benefits. Eventually the NAV nearly always declines over time. Its in the prospectus of many of them, often hidden in a potential gain chart. As long as you're only trading for a current trend (whatever time line you choose) you're fine. Has anyone found one that doesn't fit this declining NAV scenario?

Another Mortgage Modification Proposal - Why?

>You don't think there are enough houses on the market? You might try a new approach to your search, like maybe opening your eyes.

No. Prices are still above what the local labor market can afford in many places.

>Maybe people actually can't walk away; in most states, people who put 20% down are still in negative equity and if they walk away will be saddled with the difference.

Bummer. They may have bought too much, paid too much, and now face a true economic reality. I get the impression here that a few people here think that a house is a short term investment vehicle.
What ever happened to the idea that you bought a small house that you could afford. Raised a family in it, maybe made a small addition or two, and then sold it when the time was right. Now you have people who buy a house, rip out the kitchen, make remodels that really aren't required, and then wonder why they can't make it. This, the same house, where the previous owners may have raised a family of 4-5 kids just 30 years ago. The current owners complain that they don't have enough room to raise 2 kids. Sorry man, no sympathy here. Granite counter tops are not a requirement for life.
The recent idea of 'flipping' has created an unsustainable market. People used to take years to save up and make changes. Now they go out buy a house, throw a bunch of money into it (maybe even used an unrealistically valued home equity loan), and then think that it should sell in a week. The same people often have too many big cars, jet skis, kids in private schools, 52" TV's, well, basically anything they want.
A long term lien could really damper the speculation in housing. Houses in the lien program would not be good 'flippers'. They would appeal more to long term holders that are actually buying a house to live in and raise a family. One that meets their needs of shelter and location to some extent. Exactly the point of the loan program to begin with. Homeowners that do not currently need the help from the Federal government would suffer no penalties at all. They could sell their $400,000 house for $300,000 if they want, or $400,000 when the market comes back, or possibly even $500,000 in the future. No liens.
It is kind of unfair for them to make their payments while subsidizing a person who in 5 years could make a profit selling ahouse for less than what they paid for. Their appraised value would drop. Their ability to sell their house for what they have been paying for would drop. The neighbor would walk away after selling their house to a flipper who could even, maybe, still sell the house for less than the guy who has always been doing the right thing AND paying for his neighbors and the flippers profit.

Another Mortgage Modification Proposal - Why?

>Say an owner’s mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans. Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.

The Treasury loan would be interest-only and would provide the vesting part of the program. For each year that the homeowner keeps up payments on both loans, one-fifth of the Treasury loan would be forgiven.<

Why would the treasury want to forgive part of the loan?

They should make create a lien that follows all future owners until it is paid off. Until it is paid off it could be carried as an interest only loan. The home should be be carried on the books at the total financed amount. If it ever sells for a higher price the Treasury gets paid back for their loan. In the mean time they'd be collecting interest without writing off any part of the loan.

It doesn't seem right for someone to just wait 5 years to essentially get money for almost nothing. If, in 5+ years the housing value went back up to $400,000, and was sold, the homeowner makes $100,000 and the treasury loses. In the lien situation the treasury would get reimbursed in 5-10 (or how ever many) years it takes, for the house to return to the $400,000 price. If, in a few years, the price is $350,000 the treasury would get $50,000 and still carry a $50,000 lien on the next owner. The original owner gets NO profit. Why should they? They would be selling the house for $50,000 less than when they bought it for. It shouldn't become a profit deal for a questionable borrower.

It could also reduce some of the speculative aspect of real estate, one of the reasons why real estate is so high to begin with. The next owner would be buying the house with the knowledge that the first $50,000 over $350,000 would have to be paid to the government.

Of course there is the other alternative. Let the home go into foreclosure and allow the market to place a true market value on the house. Maybe $300-400,000 is still way above the realistic market price. Used to be a $400,000 house was only owned by someone who was well off. Now the high school janitor thinks they can afford one, even though they really can't.

A Complete Guide to Agriculture ETFs

One more ag/energy commodity fund is LSC. It's strategy is to get a long term moving average for each commodity group, determine if the trend is predominately long or short, and then take that position for each commodity group (except for oil which is always long). If all of the trends, positions, and markets line up correctly it has some potential.

The Real Crisis Is Food: Beginning of the Bull for Agriculture

So why are ag commodity prices so low right now?
Is there really the demand right now that is being predicted?
More people doesn't necessarily equate to more food demand unless they can afford to buy it. Much of the predicted growth is associated with a dietary change that is relatively recent in nature. If push comes to shove their 'new' diet can just as easily revert to more traditional eating patterns. Some of the demand associated with the 'new' diet may not pan out as well as some would hope for.
All in all demand will increase due to more mouths but economics and past social habits may limit it to some extent. What will really affect the price is a lack of supply due to regional weather conditions. Poor yields will be the driving factor.

Commodities, Globality and the Next Billion Customers

Globalism will not be good for the average US citizen. The average wage will decline. Jobs will continue to be exported. The dollar will drop in value. $1 an hour jobs will not support huge infrastructure developments required in some countries. More people does not necessarily equate to a huge increase in demand per capita, especially if they still can't afford to buy things. Sure there might be 1 billion more people, but it could just pan out to be 999 million more people living with a hand to mouth basis, trying to eek life in a very expensive world.

5 Reasons Why The Rally Won’t Last

How does a bear market rally end?
Might be watching it in the makings.

Bulls Hold The Line - For Now

Jun 7 09 5 months later:
1. The Obama bounce did not materialize in January but the first stimulus package was passed. The market dropped. The November low was tested and failed on Feb 27 09. A new low was established on March 6 09 @ S&P 667. Since then the market has rebounded with a dramatic up trend. At this point the January high has been retested and is showing signs of resistance. Prices have become a little over optimistic, many equities are showing overbought signals on the RSI and bolllinger band analysis. The rising tide has floated all boats. A correction is due. Will the market drop to test the March lows? Consider:

1. The financial sector has made a dramatic comeback. Credit markets are starting to thaw. TARP funds have been received keeping the banks alive. Stress tests passed well, even though some of the test scenarios were a little weak. Even more important was that the Mark to Market rule was revoked. Toxic waste has been hidden once again. Insurance companies have been able to tap TARP funds as well. Short term financials are looking better.

2. GM has filed for bankruptcy and will be allowed to reorganize. Chrysler may go under. Toyota has had bad earnings. Vehicle sales have been weak across the board. No good news here.

3. Crude oil has reached $70 per barrel. GS says $85. Prices at this level will have a negative effect on the economy. The summer driving season has begun and may not be as good as hoped for. Crude inventories have been increasing as well. Natural gas has been wallowing in oversupply and weak demand. There is some downside potential in energy.

4. Unemployment reached 9.4% this week. The good (?) news is that less jobs were lost than were expected. How much employment is seasonal or underemployment has yet to be determined. The stimulus package offers $64 billion in extensions above the standard compensation. A minimal life support level for the economy.

5. The dollar took a big drop over the last few weeks. Treasury rates are increasing. Commodities are increasing in value. Inflation may be increasing. Not good for the economic recovery.

The market is peaking. A sad note is that the average investor has been getting signals to buy again. Many traders have stopped buying at this level and are looking to go short. The summer outlook is for a small correction going into the fall earnings. Then the wheat will be separated from the chaff. Fall earnings may be a little weaker than expected. Weaker equities that benefited from the rising tide will decline due to profit taking. Some of the equities that have gone up the most are ones that were considered a questionable trade just a few months ago. There better be a good report from some of these to maintain their current price. Winter earnings will be the real factor. Any weakness will send the market lower, especially if the unemployment rate hits 11%.

So:
Short term: a small rise due to new money coming back in (too late) followed by a drop to SP 850-870, DOW 8100-8200, in a good scenario. Lower if the fall and winter earnings prove to be weaker than expected.

Due to the large amount of government intervention it is hard to say when the March 09 low will be retested. At this point it looks inevitable. There is only so much money that can be printed out of nowhere.

On Jan 18 11:39 AM wundr wrote:

> Next week may set the stage.
> The bulls have beeen accumulating shares since November. Thursdays
> move was right around the line of support. Did anyone see the bounce
> once the DOW hit 8000? The entire market took off with a lot of volume
> behind it.
> Shades of October 10.
> The weakness of BAC and Citigroup is a little disconcerting. One
> of the criteria established for a serious crash is the failing of
> a large regional bank. We're looking at some large ones.Will there
> ever be enough money for the toxic mortgage problem? It is not over
> yet.
>
> Two scenarios, IMO, are:
>
> 1. The market will rise on an Obama bounce starting net week, move
> up to around the early November high (for the final round of profit
> taking) after breaking the January high and then decline starting
> in the summer to test the November low.
>
> 2. The market will drop over the next wave of earnings, bad news
> from the financial sector, and overall pessimissim. It will happen
> very quickly. Profits will be taken by the bulls and capitulation
> will occur. The December high may end up being the a significant
> level of resistance in the future.
> Both scenarios will test the November lows at some point this year.
>
>
> Three significant wild cards in the whole thing are:
>
> 1. The Middle East. The real war may have just begun.
>
> 2. Deflation. There have been large inventories built up in almost
> every sector. Profits will be weak until they get worked through,
> but the process could be deadly.
>
> 3. 9/11 #2 (could be anywhere in the world if it is big enough).
>
>
> I'm inclined to think there will be a decline.
> The shorts have been taking a big stake lately.
>
>
>

Goldman's CDS Curve Inversion

Excuse my ignorance but what is the CEC?

How the Treasury Bubble Will Burst and Why

Holding physical gold has its problems.
Finding it and buying it easily, without an excessive premium.
Potential for theft.
Potential loss of value in redemption.
Redemption...period.
If it looks like a barter scenario, due to a currency collapse, gold in any quantity may be a little diffficult to exchange, especially for the going 'market rate'.
Physical silver is more practical.
The guy at the gas station may not take a small piece of gold, but will probably take (real) silver coins without any big problem.
Buying a gold etf has a lot of risk. The rumor is that the amount of gold bullion actually being stored is less than what the fund says. If a real big withdrawal demand arises there may not be enough physical reserves to meet it.

Bulls Hold The Line - For Now

Next week may set the stage.
The bulls have beeen accumulating shares since November. Thursdays move was right around the line of support. Did anyone see the bounce once the DOW hit 8000? The entire market took off with a lot of volume behind it.
Shades of October 10.
The weakness of BAC and Citigroup is a little disconcerting. One of the criteria established for a serious crash is the failing of a large regional bank. We're looking at some large ones.Will there ever be enough money for the toxic mortgage problem? It is not over yet.

Two scenarios, IMO, are:

1. The market will rise on an Obama bounce starting net week, move up to around the early November high (for the final round of profit taking) after breaking the January high and then decline starting in the summer to test the November low.

2. The market will drop over the next wave of earnings, bad news from the financial sector, and overall pessimissim. It will happen very quickly. Profits will be taken by the bulls and capitulation will occur. The December high may end up being the a significant level of resistance in the future.
Both scenarios will test the November lows at some point this year.

Three significant wild cards in the whole thing are:

1. The Middle East. The real war may have just begun.

2. Deflation. There have been large inventories built up in almost every sector. Profits will be weak until they get worked through, but the process could be deadly.

3. 9/11 #2 (could be anywhere in the world if it is big enough).

I'm inclined to think there will be a decline.
The shorts have been taking a big stake lately.

Breweries Provide Sign of Deepening Recession

There is a lot more for people to choose from in the current recession.
Beer has become expensive.
Panama Red is back in town!