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 (NYSEARCA:UNG) and the U.S. Oil Fund (NYSEARCA: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)