To anyone following energy market analysis in recent years it is not a shock that high profile Alaron energy analyst Phil Flynn is bullish the complex. In a commodity market panel sponsored by Dow Jones Indexes and AIG Financial Products on Tuesday, Flynn gave his assessment on the energy complex and explained why the explosive rise in energy prices was not a bad thing as it signaled global economic growth.

While perhaps a tough pill to swallow, Flynn’s analysis makes sense and has been born out as rising energy prices has not sent the economy into a tailspin as some have feared.

Continue reading ‘Why $3 gasoline is good’ »

Crude oil prices today traded as high as $78.10 per barel, setting a one-year high.

In an unrelated story, the New York Mercantile Exchange announced second quarter earnings.
As per Nymex:
- Second Quarter Operating Revenues Rise 34% to $163.6 Million
- First Half Operating Revenues Increase 40% to Record $327.8 Million
- Takes One-Time Charge of $26.0 Million Related to Optionable Investment
- Diluted EPS of $0.44; Excluding One-Time, Pretax Charge, Diluted EPS of $0.60

Right before agreeing to be taken over by the London Stock Exchange, Borsa Italiana exercised an option on MTS, the pan-European government bond platform that dominates the European secondary market and that designed Euronext’s market-driven indexes. The Italians had shared ownership of MTS with NYSE-Euronext, but now it’s all theirs – and soon part of LSE.

Sounds like a coup for LSE, but the man who built MTS, Gianluca Garbi, has been tossed from the company after a well-publicized pissing match with Borsa Italiana boss Massimo Capuano.

Garbi has landed comfortably in the government bond department of Dresdner Bank – but what does this mean for the new London-Milan project?
(from Steve Zwick in Germany)

There is a strange anomaly going on with the dance between the Chicago Board Options Exchange, Chicago Board of Trade members and the newly formed CME Group.

Theoretically the closing of the merger between the Chicago Mercantile Exchange and CBOT should have negatively affected the value of CBOE seats but CBOE announced a record seat sale of $2.65 million yesterday. After all the Intercontinental Exchange (ICE) had worked a deal with the CBOE that if approved by CBOT members would have put a definitive price on the value of exercise right privileges (ERP) on CBOE held by CBOT members. In outbidding the ICE, the CME took off the cap on funds it would dedicate to defend those rights. Additionally CME Group pledged yesterday to “vigorously defend the right of CBOT B-1 members in the Delaware litigation against CBOE.”

The CME Group release goes on to say, “We will continue to work to preserve the rights of CBOT members to become or remain exerciser members of the CBOE pursuant to the exercise right and to share equally in any CBOE demutualization (ital. mine).”

The term “equally” is an important one. There are 1,331 ERPs out there and approximately 827 CBOT members holding all of the necessary components to use the right. But we are not talking about using the right, we are talking about equity in a demutualized CBOE. A CME Group spokesperson says only those members with all the necessary components would be eligible to retain the right pursuant to the Delaware court action and qualify for equity in a CBOE demutualization but that a record date would be set in the future and members would be able to reassemble components to qualify for a stake. There are 930 CBOE members, if an additional 827 ERP holders (and possibly many more) qualify for a full share stake in a CBOE demutualization, current CBOE members would see their share stake cut by nearly half, or more.

To give a little perspective, the first CBOE seat sale in 2007 was for $1.8 million and a seat went for a low of $850,000 as recently as January 2006.

So why did a CBOE seat sell for a record $2.65 million? With seat prices continually rising throughout the ICE/CBOE negotiations, there probably is a CBOT member equity stake in CBOE worked into the price of CBOE memberships. But if that is the case that price is probably the equivalent to the CBOE offer, which was roughly 10% of a CBOE full member not including the ICE share. A source with an interest in the value of both CBOE and CBOT told Futures prior to the CME/CBOT merger vote that the street was valuing the ERP at 20-25% of a CBOE membership. The assumes that ERP holders would eventually be awarded equity in CBOE equivalent to 20-25% of what a full CBOE member gets. If somewhere between 827 to 1,331 ERP holders are awarded a 100% share of what the 930 CBOE members will receive, that would make the most reason sale a pretty bad investment. However, the market is usually right and if the CBOE wins the court battle and the rights are extinguished completely, that $2.65 million price tag will be the bargain of the century.

The Chicago Board of Trade and representatives of the class who have filed suit against the Chicago Board Options Exchange in Delaware Chancery Court over CBOE’s attempt to terminate CBOT member exercise rights filed a temporary restraining order on July 20, seeking to prevent CBOE from terminating the exerciser rights while the issue is under consideration by the Court.

On July 2, CBOE adopted a rule change granting temporary membership status to CBOT members exercising on the CBOE until the Securities and Exchange Commission takes action on the CBOE rule filing attempting to extinguish those rights. Exercisers as of July 1, 2007 would be able to continue trading on CBOE and would be charged a fee. All other CBOT members with the necessary components to become exercisers would no longer be eligible. There are approximately 600 CBOT members who hold the exercise right privilege (ERP) and the necessary class A shares to become CBOE exercisers, who would be affectively locked out by the CBOE rule change. Also CBOT members leasing those rights out would no longer receive leasing fees as the CBOE will hold those fees in an escrow account in lieu of a monthly access fee to exercisers.

The Delaware Court set a July 31 hearing date on the temporary restraining order motion.

“CME Group is committed to vigorously defending the rights of CBOT B-1 members in the Delaware litigation against CBOE,” states a CME Group release. “CME Group and CBOT continue to believe that the merger of CBOT Holdings and CME Holdings Inc. did not impair the exercise rights of CBOT B-1 members under the terms of the 1992 Agreement and the CBOE Charter.”

The CBOT motion states that the Court should grant a restraining order because the actions of the CBOE drastically alters the status quo and immediately impacts class members while the CBOE would not be harmed by awaiting a ruling by the court on the plaintiff’s claims.

While the CME won its battle with the Intercontinental Exchange (ICE) over the CBOT, one of the moves made by ICE during the process that had CBOT members stand up and take notice and perhaps granted ICE more legitimacy was its ability to work out a deal with CBOE over the ERPs. It forced the CME to up its offer and take off spending limits to defend those rights.

An optimist may have thought that the ICE/CBOE proposed deal would serve as a template for a future settlement on the ERP issue but with CBOT members flush with cash and the CME taking off limits to defend the ERP, we are back to two sides offering an all or nothing solution.

One year ago today (July 18, 2006) the Dow Jones Industrial Average made a six-month low of 10,683.32. The date was significant because it launched one of the most impressive runs in the Dow’s history. The Dow set off on an impressive upward move with nary a correction until February 27 of this year when it dropped more than 400 points. That drop turned out to be a small blip as the Dow has since recovered and continued its upward march. The July 18 turn was relatively predictable as the Dow failed to take out the Jan. 20, 2006 low of 10,661, then rallied more than 100 points from the intra-day low to close at 10,799.23.

Yesterday, the last day of the yearly cycle beginning on July 18, 2006, the Dow surpassed 14,000 for the first time in history, meaning it gained more than 3,200 points in a 12-month time span.

No wonder there are people asking, ‘can this continue?’

One analyst who has his doubts is Garrett Jones. Jones sent out an alert to his customers and Futures’ Web readers regarding a possible turn. Jones, a technical analyst who specializes in market cycles, wrote, “My view is that the market is set to turn right away. With the date this Thursday (July 19), I am prepared for the market to reverse any time this week.”

He has written in Futures about the four-year president cycle that normally produces a low. That cycle was due in 2006, but a significant drawback never occurred. This anomaly occurred as well in 1986 only for a much more severe downturn to occur in 1987. Jones points out several similarities between 1987 and 2007 as well as the tendency for the market to experience its worst performance in years ending in the numeral 7. Coincidence? Maybe, but technical analysis has to do with the study of price movements.

Jones points out several other indicators of a possible major move including the obscure “Hindenburg omen”, which is believed to accurately signal a downward move.

While there are always market bears and the market has proven resilient in the face of both technical and fundamental signs of weakness, we are hearing from quite a few people regarding a major shift.

There are surely as many bulls though, and the problem of course is timing. Analysts were warning of an overheated market in the mid 1990s. They were right, of course, but most people following their advice lost money as the market continued to move higher until March of 2000. Perhaps the anecdote of traders balancing fear and greed is best exemplified during a possible blow-off top. The last move is often the most significant, making predicting a top a risky venture.

The best advice, as always, is to be diversified and manage your risk.

Back in December I wrote a story about the four grain exchanges and the liquidity that was pouring into them as they went electronic on the Chicago Board of Trade’s e-CBOT trading platform and began offering side by side trading (see “Trade locally, think globally,” December 2006, page 52). The idea behind that story was that with exchange consolidation fever in the air, the regional grain exchanges just might be tasty targets for acquisition.

Since then, the CBOT merged with the Chicago Mercantile Exchange, and the Intercontinental Exchange (ICE) made an offer for the Winnipeg Commodity Exchange (WCE); the latest news is that a competitive unsolicited bid of CAN $50 million, or $77.59 per share, has been made for the WCE by an unnamed third party. That exceeds the CAN $40 million, or $62.08 per share that ICE bid.

Two down and two to go. But what about the Minneapolis Grain Exchange (MGEX) and the Kansas City Board of Trade?

Since December, the price of a membership at the Minneapolis Grain Exchange has increased to $170,000 from $65,000, and the exchange, which owns its own clearing operation, trades hard red spring wheat and five financially settled index contracts, has logged record trading volumes in three of the last six months, both in pit trading and electronic trading. But the exchange is still a mutual organization, making it an unlikely target for acquisition due to the lack of common currency.

Meanwhile at the Kansas City Board of Trade (KCBT), the home of the hard red winter wheat contract, the last membership traded hands in April for $465,000, up from $300,000 in December. Jeffrey C. Borchardt, president of the KCBT, says that the exchange converted to a Delaware for-profit corporation in 1973, not for the purposes of merger and acquisition, he says, but to unlock the value for members in the form of dividends, which the company has paid for each of the last nine years.

So what’s keeping them from being assimilated?

“There is nothing keeping us from doing that. It’s all a matter of interest and strategy,” Borchardt says. “The trend will continue, and at some point in time we may have to consider whether that is in the best interest of our members and customers to get involved with something like that, either on the buying or the selling end.”

Now don’t get the wrong idea. Borchardt DID NOT cop to anything in the works. In fact he wouldn’t even deny that the KCBT hadn’t made the offer for the WCE, (how’s that for canny?) But with 50% increase in seat prices over the last seven months, wheat prices as high as they are, and the issue of e-CBOT going away in the next 12 to 18 months, nothing would surprise me.

On Thursday afternoon the Chicago Mercantile Exchange’s acquisition of the Chicago Board of Trade became official. It ends the 159-year history of the CBOT as an independent company. It also ends the impressive 21-month history of the CBOT stock (BOT). The CBOT stock actually outperformed the CME stock in their initial few months. The CBOT had an offering price of $54—which was raised from $44 the week before the IPO—and opened at $80.75 and never looked back.

Intercontinental Exchange (ICE) shares rallied to $172.45 today, making the value of its offer for the Chicago Board of Trade $12.9 billion. Based on the most recent share price of the Chicago Mercantile Exchange…

Oh forget it!

Since ICE made its competing bid for the CBOT, chart watching has become a mild obsession and now that the CBOT and CME shareholders have approved their definitive merger agreement, I find myself in need of a fix. I am sure there will soon be new merger and acquisition proposals to follow as the New York Mercantile Exchange may be looking for a partner, ICE becomes a target and U.S. based options exchanges may begin to find partners.

Continue reading ‘CBOT fills CME’ »

The lack of tension at the Union League was palpable this afternoon, as Chicago Board of Trade (CBOT) members and shareholders gathered to vote on the proposed merger with the Chicago Mercantile Exchange and a round of informal interviews found not single vote against the proposed CME/CBOT merger.

“Preliminary indications are that this thing is going to pass overwhelmingly,” said Charlie Carey, CBOT Chairman.

While a vote tally isn’t yet available, CME spokespeople publicly declared victory to the press. The CME increased its bid on Friday morning, offering a stock swap ratio of .375 CME shares for each CBOT share, up from .35.

“I think it’s a fair deal, that’s what people were waiting for. It didn’t become a fair deal until Friday morning. All anybody really wanted was for it to be fair,” said independent trader Terry Donegan.

In a statement to the press, Jeffrey C. Sprecher, chairman and chief executive officer of the Intercontinental Exchange Inc. said, “Despite our disappointment in the outcome, our proposal has brought many benefits for both CBOT and ICE stockholders. For CBOT stockholders, ICE’s involvement has created nearly $3 billion in additional value through our willingness to recognize the true worth of your company.”