Trader's Corner 2008

MrBill · **Posted:** Mon Dec 15, 2008 6:27 am

[align=center]The Shipping News[/align][align=center]

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Industrial output may only be about 25% of world GNP, but it is one of the best indicators of ship demand. After all, it is concerned with physical commodities rather than services which dominate the rest of GNP. Health care; education; retail and restaurants; not to mention bankers and lawyers, however important they may be to our business, the things they produce don't get moved by sea.

Industrial cycles
The other feature which makes industry a better indicator of ship demand is that it moves faster than GNP. Since 1992 there have been three pretty wild industrial growth cycles (see graph). The first bottomed in 1992 (remember Bill Clinton’s election mantra "It's the economy, stupid"), then peaked at 11% in November 1994, before wandering along at around 6% until September 1997.

The Asia Crisis
In July 1997, the Asia Crisis triggered the next trough. It was about three months before output started to slide, and then between October 1997 and April 1998 it collapsed from 6% to - 1.3% a year. But the trough only lasted from April to May 1998, when growth resumed.

The Dot.Com Crisis
The world economy was propelled out of the 1998 trough by the internet boom. As internet business surged, industrial output reached 8.5% in February 2000. It stayed there for about nine months, and then, as the new industry’s lack of many mundane business skills became apparent (like delivering goods sold on time), the bubble burst. The US NASDAQ index fell from 5048 on 10 March 2000 to 1620 and the world industrial growth rate fell from 6% in October 2000 to -3.2% in December 2001.

The China Boom
The third cycle was driven by China, which powered on through the Dot.com crisis, then in 2003 really got into its stride. For world industry the turning point came in April 2002, and by February 2004 it was growing at 8% a year, despite the SARS wobble in 2003. From then growth averaged 6% until April this year, when the slump started, taking only six months to get from boom to bust.
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The Financial Crisis 2008
So far, the collapse looks a bit like the Asia crisis, but this financial crisis has a different spin, with an asset bubble thrown in. If things develop like the dot.com crisis, negative growth will continue until midsummer 2009. But most economists today think an Autumn 2009 turnaround is more likely, a plausible scenario provided nothing too nasty happens.

On Your Bi-cycle
So there you have it. The IP downturn looks reassuringly like the slumps the world has powered through twice in the last decade. But this recession, with its tentacles deep in the global financial system, may turn out to have much sharper teeth. Have a nice day.

source: Clarkson Research Limited[align=center]

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cube · **Joined:** Sat Mar 12, 2005 1:00 am **Posts:** 3955

The dollar index is heading downhill.
I think this time it's for real.
For the past 2 months it has formed a lopsided head and shoulders pattern.

MrBill · **Posted:** Tue Dec 16, 2008 1:20 am

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Is the parking lot emptying?

Is the parking lot of dollars finally full? We have said many times that the dollar is like a huge parking lot. Investors, rattled by high-risk markets like corporate credit, mortgages, emerging markets and commodities have sought sanctuary in the dollar and in the T-bill market in particular. They’ve been so desperate to do this that they have gobbled up the USD1tr, or more, of extra dollars that the
Fed has supplied through its balance sheet and the extra dollars released through foreign central banks.. They’ve also been so desperate for dollars that they have been prepared to accept negative yields on treasury bills. All of this has not cost the dollar in any shape or form: in fact, the dollar has rallied. But it is not rallying anymore and this begs the question, is the parking lot full? And, if it is, how far could the dollar fall?

Probably the clearest way to see this parking-lot effect is through foreign purchases of US T-bills. The monthly Treasury International Capital (TIC) data shows a phenomenal surge in foreign demand for T-bills (figure 1). Yesterday’s data, which covered October, revealed an unprecedented USD147bn increase in overseas T-bill holdings to follow a USD90.9bn increase in September. This means the cumulative sum so far this year is USD348.5bn and the year as a whole seems likely to top USD500bn. In comparison, 2007 saw net T-bill purchases just a tenth of this, at USD49.2bn and, in 2006 overseas investors were net sellers of T-bills to the tune of USD0.9bn! If we go back to periods of market turmoil in the past, like the failure of Long Term Capital Management (LTCM) in October 1998, we find that overseas investors went from net sellers of USD8.5bn in Q3 1998 to net buyers of just USD23.5bn in Q4. In other words, there has never been anything remotely like the foreign demand for T-bills that we have seen since September.

The consequence of all this demand has been dollar strength. What we don’t know is whether investors have all the T-bills they need now. If they do, there could clearly be a big risk of dollar weakness ahead if this “parking lot” of dollars starts to empty. Given the speed of the dollars slide recently, especially against the euro and the pound, it might seem that we have arrived at this
point. However, we are somewhat cautious here. We have warned before that the euro and sterling can see seasonal demand in December and that we should be wary about reading too much into any strength that we see through this month. We still feel that same way about this. Hence, while some might try to chase the euro and pound up, and predict more dollar weakness ahead, we
are not going to follow. We will assume that dollar weakness against the euro and pound could last another week, or more and, with thin liquidity conditions, could lead to 1.40 for the euro and 1.60 for cable. But, as we look out to the first quarter of next year, we would not be at all surprised to see the dollar make a comeback, to 1.20 against the euro and sub-1.40 against the pound.

source: research@standardbank.com
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Source: www.capitalspectator.com
[/align] [align=center] My Rollercoaster Year

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CarlosFerreira · **Posted:** Tue Dec 16, 2008 2:13 pm

Now what?

Reuters wrote:

WASHINGTON (Reuters) - The Federal Reserve on Tuesday aggressively cut its target for overnight interest rates to a record low zero to 0.25 percent, and said it would employ "all available tools" to dispel a year-long recession.

The surprise move to lower its target for the benchmark federal funds rate by 0.75 percentage points to up to a full point from its prior 1 percent put the Fed in unprecedented policy territory. Financial markets had expected the Fed to lower rates by no more than three-quarters of a point.

Source: Reuters

What does this mean? What are the tools from now on?

MrBill · **Posted:** Wed Dec 17, 2008 1:35 am

What now? Printing money and distributing by helicopter. Then passing the bill to your children and grandchildren.
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The quest for weakness
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When deflation starts to take a grip everyone wants a weak currency. With 2009 looking like a year in which deflation will take a grip in some countries, the quest for currency weakness could become a much more significant factor than it is right now. In Japan, for instance, the central bank is likely to intervene to try to stop dollar/yen falling to 80. Even so, we think it will fail. Other major central banks might not intervene—but they will all want currency weakness so that the fight against deflation is not undermined by falling import prices.

We have long stressed the role of the dollar as a key provider of global liquidity to the world. When it is weak, fixed exchange rate countries accumulate huge reserves, build up massive liquidity and usually suffer high goods and asset prices as a result. When the dollar goes into reverse the snapback in these countries is particularly severe. For rather than fight dollar weakness and accumulate reserves and liquidity in the process, they suddenly have to fight dollar strength—and that costs reserves and liquidity.

While these reserve and liquidity strains are most acute in the fixed-rate countries, those with floating exchange rates, or semi-fixed (basket) systems, suffer as well. They too see ample liquidity when the dollar is weak because reserve accumulating central banks in the fixed-rate countries buy bonds and drive yields down to levels that are not appropriate given the strength of growth and the extent of price and asset inflation. The turnaround in the dollar, since July has not, in itself, forced liquidity down. Instead, asset bubbles have burst, investors have become risk averse—especially banks—and the dollar strength that we have seen recently has merely compounded the squeeze on liquidity because global reserves have started to plunge.

Dollar strength may be harmful in the sense that it squeezes global liquidity but most floating rate countries are probably happy to see the dollar rise as it could help stop deflation taking a grip through higher import prices for dollar-based goods, like commodities. Those that are not basking in the glow of a stronger dollar—like Japan—could well do something about it by intervening to buy dollars.

Others are likely to stay out of the currency market if possible. Looking ahead though, we sense that the dollar will start to fall somewhat significantly later in 2009. This could start to cause problems for regions or countries that would really like a weaker currency but have not stated as much just yet. In particular, we are thinking of the Eurozone here. The ECB has not cut rates as much as other central banks, Finance Ministers have not been as aggressive in easing fiscal policy and the euro has rallied back towards record highs in tradeweighted terms. This suggests to us that it will be the Eurogroup and the ECB that bleats the most about the damaging effect of currency strength next year. It might be quite a jump from here to suggest that the ECB be intervening to sell euros at some point next year, but we would not be at all surprised.

source: research@standardbank.com

I do not like to quote too much from just one source. For copyright reasons for a start. But Standard Bank has been doing good currency research lately and their conclusions mirror my own thinking on the strength (weakness) of the US dollar. If I wanted to quote someone who I diametrically disagree with on the effectiveness of Keynesian bailouts by debtor nations I would have to attach links to Paul Krugman's blogs. He is a Noble Laureate as is Joseph Stiglitz, whom I also seldom agree with, but in my opinion they are to the study of economics what Yitzhak Rabin and Yasser Arafat are to world peace.

CarlosFerreira · **Posted:** Wed Dec 17, 2008 11:37 am

I wonder if this is a bad moment to ask for participant's opinion, as traders, on a different investment asset: carbon trading.

This one is currently hanging from my bedroom wall (don't worry, there's a Gallardo right next to it :oops:

):

Financial Times wrote:

Imagine you could design a new asset to invest in. You would want it to offer returns uncorrelated with equity and bond markets and it would be a bonus if it made you feel better about your role in the world. The carbon emissions trading market seems to promise both these things to canny investors. The general rhetoric around climate change and the increasing consumer emphasis on “carbonfootprints” or “green energy” seem to point to this as the way of the future.
[...]
The companies are then free to trade these allowances (EUAs) with each other to allocate them as efficiently as possible. They can also use Certified Emission Reductions, credits brought into the system from outside based on projects cutting carbon emitted elsewhere. The CERs are approved by the United Nations under the Kyoto protocol, but at this point, they may only make up a small proportion of an EU company’s emission allowance. There are several opportunities for investors in this process. They can take a view on the price of carbon units, which have recently fallen from their July 1 peak of €29.33 to a low on October 28 of €17.40. ETF Securities is bullish on this: “Long term global growth in terms of structural demand led by energy markets should give a floor to the markets,” says Daniel Wills, a senior ETF Securities analyst. Other commentators, however, are not so optimistic. Alessandro Vitelli, director of strategy and intelligence at carbon finance consultant Ideacarbon, points out that shrinking industrial output across Europe will lead to shrinking demand for emission allowances.
[...]
“Passive exposure is probably a risky game at the moment, with the price of oil so low,” says Danyelle Guyat, a senior principal on the responsible investment team at consultant Mercers. “The alpha strategies, on the other hand, where they try to exploit the arbitrage opportunities, could be very interesting.”
[...]
leading up to 2012 we will see significant prices rises from here.” The date is relevant because that is when the current phase of EU allowances ends and the limits are reset. In the initial trial phase, from 2005 to 2007, the limits were set too high, not constraining emitters at all, so the price collapsed. This brought the nascent system into general disrepute, but specialists in the market are more prepared to cut the administrators some slack.
[...]
As an asset class, carbon is too young for any very precise conclusions to be drawn about it. So far, it looks relatively uncorrelated with mainstream asset classes, although it has recently been drawn into the global market weakness, and it does hit the fashionable environmental nail squarely on the head. However, since its very existence depends on the political will to limit greenhouse gases, and both supply and demand depend largely on government policy, its risk profile is uniquely related to politics.

Financial Times

There's also this report of the Deutsche Bank:

Deutsche Bank wrote:

[Press release] On October 22, 2008 Deutsche Asset Management (DeAM) published a research paper arguing that the accelerating pace of global warming will force governments to invest more heavily in climate change mitigation and adaptation despite the financial setbacks of the current market crash. An economic downturn offers governments across the developed world a prime opportunity to boost their spending on ‘green’ infrastructure as a stimulus to avoid severe recession.

Key section highlights from the two-part paper include:

Part I examines the climate change investment universe.
* Climate change is a large and growing investment opportunity
* Climate change sectors have been caught up in the volatility of the credit crisis. Given regulatory support, they should recover well and value is already been established in many sectors
* Climate change when combined with energy security will play a role in government efforts to stimulate economies in 2009
* In the long-term, DeAM expects a return to higher oil and gas prices, but weaker coal prices with carbon prices as they are adopted, being the key backstop to ensuring clean energy is deployed

Part II examines how regulation interacts with the underlying dynamics of technology costs and energy prices.
* Government regulation, including carbon pricing, traditional regulation (mandates and subsidies) and innovation policy (incentives and subsidies) is a major driver of investment opportunities in climate change
* Carbon pricing is the key long-term market-related climate change policy
* Clean technologies are becoming broader and deeper. It is important to understand their stage of development for investment purposes. For venture capitalists, driving down the cost learning curve is a key focus for any technology
* In the long run, the most sustainable breakeven point for renewables is when they are commercially viable without subsidies, but with a carbon price established to ensure that they remain viable when energy prices are volatile

Press Report (RFF)

DBAdvisors Report

The literature on these subjects is so vast, I could go on quoting studies forever.

I am currently considering knocking on the doors of some of the companies that supply CERs, hence my question. Do you believe there's a future to it? My personal (easy...) prediction is that whenever the European (and American) economy starts recovering, and the industrial production picks up again, this market will have a good performance.

My other question is: if this was open to private investor - would you?

BlueGhostNo2 · **Joined:** Tue Jun 24, 2008 12:00 am **Posts:** 128

It's dumb, they use 'carbon trading' to make it sound like it uses market forces to value what was previously a market externality. However it fundamentally works via a bureaucratic process in which some official body decides who and how many carbon credits are given out.

They should just set a tax for all carbon emissions over a certain size if it were taken up globally via international treaty there wouldn't even be issues of unfair advantages.

CarlosFerreira · **Posted:** Wed Dec 17, 2008 3:01 pm

BlueGhostNo2 wrote:

It's dumb, they use 'carbon trading' to make it sound like it uses market forces to value what was previously a market externality. However it fundamentally works via a bureaucratic process in which some official body decides who and how many carbon credits are given out.

They should just set a tax for all carbon emissions over a certain size if it were taken up globally via international treaty there wouldn't even be issues of unfair advantages.

2 things:

1. the process of giving away credits based on past emissions - grandfathering - will all but disappear after 2012, when there will be auctions (with loopholes, like Poland's case)

2. a global tax sure is easy to negotiate, with all partners worldwide. We all know that. Than, the fact that we all use the same currency, with the same value, in every country makes it really efficient to have a tax like the one you propose. Also, all countries have effectively equal abatement costs. Sure.

Really, when you really delve into it, it makes some sense. It's not perfect, I grant you, but with the auctions and letting the market work, this might help.

Oliver · **Joined:** Fri Oct 10, 2008 12:00 am **Posts:** 5

In recent times, it has been seen that WTI trades at a heavy discount (as high as $7 per barrel) to Brent. Logically, WTI is a higher grade crude and should trade at a higher price. So, what is the reason for this divergence from the norm?

The last time we saw such a divergence it was due to strike at the Fos-Lavera oil terminal near Marseille (France) or to political tensions with Nigeria and Iran because their oil grades are priced according to a Brent-based formula so as the political situation gets tense, Brent shows a bigger increase in prices. But this time a don't see anything like these or do i miss a news ?

sparky · **Joined:** Mon Apr 09, 2007 12:00 am **Posts:** 378

.

West texas intermediate is an imaginary grade ,
it's a trading device with little reality behind it
technicaly it's a blend of other light grades as nominally traded at cushing
similarly Brent field is and has been dry for some time now
you would be hard put to buy and sell it
a bit like a trading desk on the dodo feathers ,making the price for poultry
traders are essentially technical morons and would buy and sell anything as long as there is a market (I.E. an other sucker ) for it .

the only real trading is for Opec basket and ,the real linchpin
Saudi heavy sour ex Ras Tanura ,
the oil with the biggest footprint on the market ,
the maker and breaker of price .

.

MrBill · **Posted:** Thu Dec 18, 2008 4:11 am

Oliver wrote:

In recent times, it has been seen that WTI trades at a heavy discount (as high as $7 per barrel) to Brent. Logically, WTI is a higher grade crude and should trade at a higher price. So, what is the reason for this divergence from the norm?

The last time we saw such a divergence it was due to strike at the Fos-Lavera oil terminal near Marseille (France) or to political tensions with Nigeria and Iran because their oil grades are priced according to a Brent-based formula so as the political situation gets tense, Brent shows a bigger increase in prices. But this time a don't see anything like these or do i miss a news ?

It is more pronounced at the front-end of the curve and less so the farther out you go. The contango is very wide. Looking at the front months it is about 40% annualized from Brent, and for WTI even more pronounced due to an over-suppy in the front month. This reflects an over-supply in physical crude for the domestic US market versus a more balanced picture for the rest of the world.

Crack margins are terrible. Between $5-10 per barrel. The margins for heating oil/diesel are still quite attractive at around $12-17 per barrel, but gasoline (or RBOB) is a paltery $1-2 per barrel depending on which futures month you look at. If refiners do not have any front demand for gasoline then they are not going to big buyers of crude either.

There is also the problem in the longer term that WTI is becoming less of a global benchmark even though it is a lighter, sweeter grade than Brent. Simply because the USA is producing less oil, while worldwide production and consumption is growing faster elsewhere. The trend is for heavier, more sour grades that require more refining, but are more plentiful. Should their price reflect unique supply and demand fundamentals in the USA or do we need new global benchmarks that have less basis risk than WTI.

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So here’s the situation: the economy is facing its worst slump in decades. The usual response to an economic downturn, cutting interest rates, isn’t working. Large-scale government aid looks like the only way to end the economic nosedive.

But there’s a problem: conservative politicians, clinging to an out-of-date ideology — and, perhaps, betting (wrongly) that their constituents are relatively well positioned to ride out the storm — are standing in the way of action.

No, I’m not talking about Bob Corker, the Senator from Nissan — I mean Tennessee — and his fellow Republicans, who torpedoed last week’s attempt to buy some time for the U.S. auto industry. (Why was the plan blocked? An e-mail message circulated among Senate Republicans declared that denying the auto industry a loan was an opportunity for Republicans to “take their first shot against organized labor.”)

I am, instead, talking about Angela Merkel, the German chancellor, and her economic officials, who have become the biggest obstacles to a much-needed European rescue plan.

source: European Crass Warfare

I have already commented directly to Paul Krugman on this article as well as contributed to the comments section of his blog to another of his posts on this topic. As many posters have pointed out Germany as well as many EU members of the EMU are and have been running budget deficits that are by their nature stimulative. No one is making the mistake of tightening either monetary or fiscal policy in the current global slowdown, although many think the ECB is being too cautious. However, they do not have a twin mandate like the Fed, so their priority is always fighting inflation first.

The challenge to countries like Germany is to maintain spending as social demands rise along with unemployment, while tax receipts decrease due to the economic slowdown. This will temporarily test the upper bands for EMU members on debts and deficits. Many countries routinely break the Maastricht Criterion already that threatens the very stability of the eurozone. Witness the widening spreads between German bunds and Italian or Greek government bonds.

Basically, Dr. Krugman greatly over-estimates the limits of Keynesian policy by debtor nations, and in Britain and France he finds willing converts to the idea that we can spend our way out of this financial crisis. A crisis that has been caused by global financial imbalances as many countries ran large, persistant, structural deficits, and then exacerbated those imbalances by borrowing the capital to service those debts and deficits. This is far removed from the pure Keynesian idea that budgets should be balanced over the normal business cycle, while governments run temporary deficits during slowdowns, but pay down debt during recoveries. The bastard child that governments can run deficits all the time, and increase them during recessions is not sound economics. It is bound to lead to asset bubbles and busts.

Germany best serves itself and the global economy by being a responsible power and not lurching into excessive deficit spending just because its neighbors would like it to. It already offers generous support for low income earners, the unemployed and seniors as well as healthcare for unemployed workers that is a great social safety net in a recession. It also has an excellent public transport network. So it is far more important to financially support that basic infrastructure and safety net rather than give consumers a one-off cut in VAT that worsens public finances in the long-run, while adding very little extra spending to the economy in the short-term.

If there is little consumer demand then lowering VAT is no more an effective strategy then dropping interest rates if consumers and businesses are unwilling to borrow and banks are even less willing to lend. Both are like pushing on a string. Those that have money are in no hurry to borrow, and those that need to borrow are not credit worthy. As many posters subsequently pointed out Dr. Krugman's math was off as to the money multiplier effect of such a stimulus, and he also failed to take into account the second degree Ricardian implications. So not only was his argument flawed, but his numbers were not very solid either.

That he would use the bully pulpit of his recent Noble prize to criticize Ms Merckel, Mr. Steinbrueck and Germany for not blindly following the crass fiscal advice of England and France ignores that it was their own reckless spending policies that contributed to those global financial imbalances in the first place. Not Germany's low, slow growth since reunification and the introduction of the euro that Germany has painfully endured to put its finances on a solid footing and to live within the means of the Maastricht Criteria.
This was more of a cynical move by Mr. Brown to salvage his reputation for financial stewardship that now lies in tatters. And, of course, Mr. Sarkozy not only loves the spot-light, but France never passes up the opportunity to try to spend someone else's money. Germany is completely within its rights to explore how best it can stimulate Europe's largest economy without bowing to half-baked plans cooked up in a panic by cynical leaders with their own political agendas and Dr. Krugman's Keynesian ideology on steroids.

Carlos wrote:

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2 things:

1. the process of giving away credits based on past emissions - grandfathering - will all but disappear after 2012, when there will be auctions (with loopholes, like Poland's case)

2. a global tax sure is easy to negotiate, with all partners worldwide. We all know that. Than, the fact that we all use the same currency, with the same value, in every country makes it really efficient to have a tax like the one you propose. Also, all countries have effectively equal abatement costs. Sure.

Really, when you really delve into it, it makes some sense. It's not perfect, I grant you, but with the auctions and letting the market work, this might help.

Carlos, I believe you need cap & trade as well as carbon taxes to both cut emissions in absolute terms instead of just shifting them around and to reduce demand for dirty energy by increasing its price to end-users or consumer. They both need to be used in tandem.

The current system of cap & trade is insufficient. It is too ridden with loopholes, and the whole concept of grandfathering, granting exceptions, opting certain industries out, etc., show how susceptible such a system is to political interference. Dirty industries cannot make the necessary investments in their plant to cut emissions unless they have clear, long-term goals as well as efficient markets that correctly send proper price signals.

Also, a global system is far preferable to a piece-meal one where standards and efficiency vary widely. However, this is usually shorthand for calling on rich countries to subsidize poorer ones whereas developed countries are already losing manufacturing jobs to lesser developed countries where the ground rules on environmental, labor and safety standards are not always fair to say the least. This amounts to little more than paying poorer countries to take our jobs away. Whether or not this is good public policy depends on how the losers are compensated.

One huge problem that I see with carbon credits in emerging countries is long-term monitoring of performance. It is all well and fine to spend money to buy credits, but once that money is spent who controls what happens 5-10 years down the road. Those protected forests may be illegally harvested. If a country runs out of heating oil or natural gas then poor residents may cut down those trees for fuel. This certainly happened to the ancient cedars in Lebanon during their civil war there. It can happen elsewhere. But also there is good, old fashioned green mail. Poor countries may come back to donor nations at some point in the future for a second fill-up to protect those already supposedly protected forests. Rich world anti-globalization protesters might even support such moves as a form of debt forgiveness as has happened with low-cost loans in the past that are unrepayable. Trust is good, but control is better.

International treaties have not stopped illegal logging; trade in endangered species; the illegal ivory trade or poaching; whaling; over-fishing; etc. So I am quite dubious that we can implement a global system of cap & trade with iron-clad rules on carbon set asides that will stand the test of time. That does not mean we should not work in this direction, but we have to be aware of unintended consequences. In the meantime, carbon taxes are an immediate way to reduce consumption of dirty energy by using price as its rationing mechanism. Hit 'em where it counts.

shakespear1 · **Joined:** Fri May 13, 2005 12:00 am **Posts:** 1604

Nice to see that you are still around Mr. Bill

Here is something I was reading on iTulip and must admit I have no clue what the guys is saying. I vagly understand that there is some monkey business going on behind the scenes of the oil trading market.

Here is the comment of $#* which got me curious,

Code:

Mega, there are a least two explanations here:

A) one is my explanation from the oil bubble thread with a financial bubble anchored in commodities prices/futures . The vehicles of this financial bubble is what I call the ETN-like paper (synthetic derivatives based on commodities futures) which have very little to do with the crummy ETF/ETN's the beloved J6P buys through his e-trade account.

This ETN-like paper is traded on parallel, private and completely unregulated markets (144a OTC market) through private equity pools open only to institutional investors (dark pools). According to the latest BIS quarterly report the commodities (non gold) OTC derivatives increased in the Q2 -2008 (compared to Q1) with 56%, to a total amount of $12.6 trillion. This scam was so profitatle that even the iron ore , which is not traded on any regulated commodities market was made to behave like oil, rice, copper ... well you get it.
http://www.metalprices.com/metalNews...svc=ODJ&type=1

You can think of ETN-like paper as the CDO's of commodities, but there is an essential difference. The ETN-like paper (unlike mortgage CDO's ) is a synthetic derivative, and that means the sellers/originators of this paper don't have to actually hold the underlying asset (physical commodes or futures). The paper has only to provide a return mimicking the possesion of a physical commodity or another paper based on commodities (futures).

This detail allows the kings (originators) of this type of paper to pit the investors (dumb casino gamblers) against each other by netting longs against the shorts. The differential netted is hedged in futures. As a result Goldman Sachs (for example) not only makes great money by driving the price of oil to $147/bbl , but also can make another truckload of money by driving the oil price down to $35/bbl. The whole idea is to have the position differential netted against the price derivative.

Can you translate in layman's terms :-)

iTulip

MrBill · **Posted:** Fri Dec 19, 2008 3:38 am

I do not think that Goldie Sachs gamed the crude market using OTC contracts based on ETFs. They are more like a bookmaker who takes bets from gamblers where some think Chelsea will win and some that Arensal will win instead. The bookmaker stands in the middle, but if their exposure gets too big they will lay-off some of the bets on another bookmaker. Just like GS - or Barclay's Capital - would hedge the net exposure in the future's market, but it would only reflect a very small portion of their overall book.

However, far from making a fortune lately GS has a substantial trading loss on its proprietary positions in Q4'08. They were one of the biggest bulls on the way up and were very slow to change their minds as crude dropped. UBS is no longer in the commodities business. Neither is Lehman for that matter. Others - except maybe Barclay's - have scaled back their exposure to commodities, and most have reduced their exposure to commodity hedge funds as prime brokers. BNP Paribas has picked up some of that business in prime brokerage. While many hedge funds and prop traders that would have used commodity and energy stocks as collateral for repos or loans have either had to unwind those longs or stump-up increasing amounts of collateral to cover margin calls. I know we have.

Not only is there a lot of unwinding of long positions and deleveraging going-on, but the steep contango also helps fund the shorts. Basically being short since $147 has been a win-win proposition as not only have the shorts made a flat-price profit, but they have also earned the roll. It is possible that GS traders were doing the opposite of what their analysts were writing in their research, but I somehow doubt it, and as I said they have posted trading losses in the fourth quarter. Apparently enough that they have shifted their year-end. Probably so that they do not have to revalue their entire book at November's stock market lows, but now I am just speculating. I do not know.

Coincidentally, I received this today:

Quote:

Energy Weekly

OPEC cuts unlikely to relieve pressure on prices in the near term

Likely implementation of the announced OPEC cut in line with our expectations

OPEC announced a remarkable headline 4.2 million b/d cut from September's production levels yesterday, which brings OPEC 11 production targets to nearly 2.5 million b/d below November's target. While at face value, this reduction from November's target is larger than the 2.0 million b/d decline we are currently embedding in our forecasts, we believe that full implementation of the cuts is unlikely and estimate that an average 75% compliance rate would keep the announced cut in line with our expectations. As a consequence, we maintain that prices will remain under pressure in the near term and will reach our $30/bbl average target in 1Q2009. The full implementation of the cuts, although unlikely in our opinion, poses upside risks to this near-term price outlook as non-OPEC producers would bear less of the burden of returning the market to balance, muting the need for prices to decline significantly to motivate non-OPEC production declines.

Crude stocks near full storage against average product stocks levels support product cracks

A combination of extremely high level of inventories at Cushing, Oklahoma, the delivery point of the NYMEX WTI contract, and technical issues linked to the front month contract expiry has exacerbated the weakness in front WTI timespreads, leading refining margins to rebound from the lows of the past few weeks. This price behavior is also consistent with the broader pattern of
inventories, with OECD crude oil inventories at almost full storage levels against still average product stocks. We believe that this divergent inventory situation will continue to pose near-term upside risk to product cracks as crude inventories approach full storage. This will likely create an incentive to refine the excess crude and store it as product until product inventories build as well and margins weaken.

source: Goldman Sachs Global ECS Research
December 18, 2008

I also received this today from a friend of mine in shipping here:

Quote:

BULK owner, Armada (Singapore) and at least five other operators are taking legal action against Australia's Fortescue Metals after the iron ore producer suspended all cost and freight (CFR) contracts of affreightment and consecutive voyage contracts.

This came as an investment bank estimated that Fortescue Metals could be looking at total losses of $300m on charters fixed to the end of 2010.

Armada, an offshoot of Switzerland's Armada Shipping, took action after Fortescue Metals told the company that a CFR shipment due in December was not going to happen.

Armada was contracted for a total of 65 cargoes which if the present conditions persist are unlikely to take place.

The firm has filed a claim against Fortescue Metals in New York's
Southern district court for damages. It also has a rule B attachment
which works like a lien so that any US dollar payments made to Fortescue through the US bank clearance system are frozen.

Armada declined to say how much it was owed but in court documents the firm is claiming for almost $2.53m in damages. This covered the difference in charter rates between the contracted rate of $14.7 per tonne and the $3.7 per tonne spot rate for a maximum cargo of 187,000 tonnes, together with legal and associate costs.

An Armada insider confirmed that while legal action was taken in New York to secure the claim the dispute would be settled by arbitration in London.

Fortescue Metals confirmed that ship owners and operators were taking legal action against the company on 10 contracts.

This came after it suspended all its long-term CFR contracts due to
unforeseen circumstances which it did not explain but were related to the dramatic collapse of bulk charter rates. Fortescue Metals contracted its CFR business at much higher rates than current spot prices.

The firm said about 66% of its iron ore sales have been on CFR terms but this is likely to reduce to around one third of sales".

Fortescue's FOB contracts are unaffected.

Morgan Stanley said Fortescue could have fixed long-term charters at rates of about $20 per tonne in the first six months of this year.
Consequently, total losses on charters fixed for voyages between the second half of this year and the end of 2010 could top $300m.

Fortescue Metals said each of the 10 contracts in dispute need to be considered on their specific facts and merits as Fortescue will use all the appropriate legal mechanisms for determining the disputes that have arisen between some of the parties and any future disputes that may arise".

The company added: Fortescue sought legal advice prior to taking its decisive action under the contracts and will continue to do so in the prudent management of this issue.

source: WORLD SEA TRADE S.A. wstrade@otenet.gr

You may also want to give this a read as well:

Quote:

Only a few days ago, so it seems, it took about $1.25 to buy a euro. Now it takes closer to $1.45 (it was more earlier today, but the dollar subsequently rallied). And — as Macro Man notes — the dollar’s move pales relative to the recent slide in the pound. Not so long ago a pound bought 1.5 euros. Now it buys a euro and change. The Anglo-Saxon currencies haven’t had a good two week run.

Both the US and the UK had housing and finance centric economies. Both have significant external deficits. And both are inclined to use monetary and fiscal policy aggressively to combat a downturn.

But with global trade collapsing, the euro’s rise can not be all that comfortable for members of the eurozone. It isn’t clear that any one wants a stronger currency right now. Currencies though are relative prices — and can go up or down amid a global contraction. In theory, everyone could ease monetary policy equally without changing the relative value

source: Brad Setzer - That was fast

So that's it for me. I am working all of next week, but then off to Asia again over year-end, back in January. I will post returns year to date before I go, although they might change slightly in the last 3-business days of the year after I leave. I can always update them in January. Have a nice weekend and speak to next week. Cheers.

cube · **Joined:** Sat Mar 12, 2005 1:00 am **Posts:** 3955

December 31st will be my last day here.
It's been fun guys but it is time to move on.
Thanks to everyone. A lot of people made some really good posts but I'd have to say MrBill takes the cake.
//
I feel that we have reached a saturation point where everything that could of been said about peak oil has already been said.
Furthermore it's my opinion that the general quality and mood of this website has definitely gone downhill.
Even if somebody did have a new or interesting point to make it's too much work to try and separate the Wheat from the Chafe.
Or should I say the EROEI is not worth it.
//
*back to trading*
I am currently holding a short position YMH9MINI DOW MAR 2009 *
wish me luck guys.

MrBill · **Posted:** Wed Dec 24, 2008 12:30 am

[align=center]Correlation between USD and OIL diverges[/align]
[align=center]

[/align]
Merry Christmas everyone! I will try to post some charts later as it will be a quiet day in the office. Take care and all the best over the holidays. MrBill.

UPDATE: important headline in Reuters

Quote:

China says to allow for yuan-denominated settlement of trade between some provinces and ASEAN countries - Xinhua

-and-

China raised export tax rebates on machinery, electronic products - Xinua

It sounds like they are determined to break the link to the US dollar for trade, but in the meantime they are also going to be exporting over-capacity and disinflation by increasing tax rebates that are effectively export subsidies. This newest wrinkle comes at an awkward time for the USA as more exports in CNY mean fewer export receipts in USD, which reduces the demand for USD-denominated treasury bills.

Take care, Cube. I have enjoyed your inputs and posts over the years. Good luck with your trading and feel free to contact me anytime at askmrbill@gmail.com . Cheers.

[align=center]WTI benchmark debate re-visited[/align]

Quote:

The record differential between the front-month and more liquid second-month contracts at expiry last week once again raised pointed questions about whether the NYMEX light sweet contract is serving as a good benchmark for the global oil market, or sending misleading signals about the state of supply and demand.

source: NYMEX oil benchmark again in question

Trader's Corner 2008

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