On Tuesday, the SEC extended its temporary rule restricting short selling on financial stocks including Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, UBS, Bank of America and others. It remains to be seen what lasting effect the rule will have on the market – the initial action spurred a market recovery – but either way the rule has been a definite plus for OneChicago. The single stock futures (SSF) exchange has taken full advantage of the short selling rule by touting SSFs on the financial giants affected by it – Bank of America, Barclays, Citigroup, Deutche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, etc. OneChicago CEO David Downey says that since the short selling rule was introduced, the exchange has seen some increase in business, especially in Fannie Mae SSFs. “Interestingly we have been taking many calls from traders who are taking another look due to the new rules,” he says, adding, “It still remains that the clearing members, ironically the very names that this ruling addresses, still resist letting the customers trade SSF.”

Yesterday the Securities and Exchange Commission (SEC) extended its emergency action restricting naked short selling of Freddie Mac, Fannie Mae and 17 investment banks.

The initial emergency action on July 15 pulled the market out of a downward spiral that had hit two-year lows. After a substantial recovery, nearly 900 points in the Dow Jones Industrial Average, the market turned south again, retracing the move by more than the notable 61.8% Fibonacci level. The extension spurred another impressive two-day rally.

But we have to question where this faith is coming from. Sure it helps to put a bottom below the investment banks but it is based on the notion that “there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets” according to the SEC that described this as “unusual and extraordinary circumstances.”

Continue reading ‘State of emergency’ »

That was the overall sentiment of analysts at the Dow Jones Indexes Mid-Year commodities outlook held Tuesday morning on the grain floor of the Chicago Board of Trade.

David Hightower, president and founder of the Hightower Report, joked that various pundits have cited 10 commodity bubble bursting events in recent years; he is not one of them. “We don’t see the factors that bring about a market top,” said Hightower who was commenting on the grain markets. “We don’t have high enough prices…we have to move to higher prices, demand has not been pushed back.”

One market where price has risen to the point of affecting demand is crude oil.
Phil Flynn, Alaron energy analyst and a consistent energy bull over the last decade, believes that for the first time in many years the price of crude may have hit a top and next year’s high will not exceed the current year’s high.

Continue reading ‘This just in… Markets are functioning correctly’ »

Although it’s been dropping for the past week (down to just under $125 a barrel on Monday) the price of crude oil is still sky high, and among the hardest hit by soaring fuel costs have been the airlines. But one airline actually managed to log a second quarter profit last week: Southwest. The secret to its success may be an agressive, successful fuel hedging program. All of the major airlines in the U.S. hedge, but Southwest had a whopping 80% of its fuel hedged for the third quarter 2008, paying $61 per barrel, compared to United’s 44% and Delta’s 48%. A Southwest spokesperson says that the airline historically aims to always enter the year with about 80% hedge protection. Hedging programs started in the 80s and became more aggressive in the 90s, but 9/11 and Hurricane Katrina were two major drop-off points in hedging when cash flow and the capital to put on and maintain the hedges became more scarce.

Continue reading ‘Ding! Southwest flies high on hedging’ »

If Congress thinks that their constituents are upset about $4 per gallon gasoline, what will happen when they find out a year from now that Congress restricted then from diversifying their portfolio and it cost their pension plans or 401Ks 10% or more, possibly thousands of dollars.

It could happen.

Futures did a quick calculation in our upcoming August issue on what would be the difference for the first six months of 2008 in a portfolio that had a 50/50 allocation to stocks and bonds and a similar portfolio but with a 20% allocation to the S&P Goldman Sachs Commodity Index(GSCI). The addition of the commodity allocation added approximately 10% and was the difference of having a significant loss to having a decent return. Numerous studies have indicated that an allocation to commodities improves a portfolio’s risk adjusted returns.

That is one argument being made by the Coalition to Protect Competitive Markets, an organization made up of industry lobbying groups and exchanges “to educate lawmakers about the negative consequences of imposing unnecessary regulations on investors’ participation in the commodity markets.”

Continue reading ‘An argument Congress can understand’ »

A Congressional bill to curtail speculation in the oil market may not come up for a vote this evening because of a partisan disagreement over the number of amendments attached to the bill. Republican Senators intend to include as many as 28 amendments to the bill, including provisions that would open offshore drilling, a move opposed by Democrats.

Continue reading ‘Don’t just do something! Stand there!’ »

The opening paragraph of the Securities and Exchange Commission’s (SEC) emergency order restricting naked short selling of Freddie Mac, Fannie Mae and primary dealers issued on July 15 read:

“False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by “naked” short selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process. If significant financial institutions are involved, this chain of events can threaten disruption of our markets.”

This preceded the SEC using Bear Stearns (BSC) as an example of what can happen when rumors get out of control, which begs the question as to why the government allowed—and supplemented through guarantees— JP Morgan’s purchase of BSC at such a discount. Shouldn’t shareholders get compensated?

Continue reading ‘Strange goings on’ »

Sen. Maria Cantwell (D-Wash.), one of the loudest voices in the current battle royale between Congress and what many legislators have decided are evil speculators, has taken another stand by blocking the nominations of CFTC Acting Chairman Walt Lukken, Commissioner Bart Chilton and first-time commissioner nominee Scott O’Malia. “I want them to do their job,” she said in a McClatchy news story. But many industry insiders are maintaining that the CFTC IS doing its job – that it’s not their job to control prices. And several experts we’ve talked to say that many of the bills being tossed around Congress by Cantwell and others designed to lower the price of oil show a huge misunderstanding by legislators about the way markets work and may actually raise the price of oil and drive investors out of U.S. markets. One commentor on our blog jokingly suggested that all candidates for Congress must first pass a course in economics before being entitled to speak or write about anything related to commodity or financial markets. So how will this Congressional firestorm end? What do you think?

On Tuesday, Sen. Harry Reid (D-Nevada) introduced yet another bill on designed to “curb excessive oil speculation.” This one, however, left out previous bills’ calls to impose higher margins on oil traders, such as the one introduced by Sen. Byron Dorgan (D-ND) on June 24 which would require the Commodity Futures Trading Commission (CFTC) to increase margin requirements to 25% for trades classified as non-legitimate hedge trades. Reid’s bill calls for “eliminat[ing] excessive speculation by changing the definition of ‘legitimate hedge trading’ to include only those producers and purchasers of actual physical energy commodities, and places limits on trading by those who are not trading actual physical petroleum products.” The Futures Industry Association released a statement on Reid’s bill, calling it a “mixed bag.” “While it mandates appropriate studies and it enhances energy market transparency, the bill has many provisions that would amount to liquidity-robbing, regulatory overkill. We fear that those provisions would undermine the bill’s own transparency goals, make hedging more expensive [and] drive energy market activity overseas,” the statement said.

Continue reading ‘Margins missing from latest spec bill’ »

An article in yesterday’s New York Times cited the length of hemlines as a barometer for economic strength. According to the piece, Wall Street watchers could have predicted the current economic downturn if they had only taken note of the long, flowy skirts featured on fashion runways last fall. Throughout history, when the economy is tanking, women’s hemlines have dropped along with it. The economy was flourishing during the mini-skirted sixties. During the stagflation of the 1970s, long prairie skirts came in vogue, and in the midst of the nineties bull market, short babydoll dresses were all the rage. So if you want to know where the economy is headed, you can either listen to the speeches of Fed Chairman Ben Bernanke, who said yesterday that inflation was too high and that the economy faces a “difficult period;” or sift through the pages of US Weekly, where Angelina Jolie can be seen sporting flowing, to-the-floor tunics. Who knew that fashionistas could be so in sync with the Fed?