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EconMatters - Global Economic and Market Analysis That Matters

The Stock Market is a Giant Ponzi Scheme

February 20, 2013 by EconMatters   Comments (0)

By EconMatters  

An Auction with Fake Buyers, that will end well!
The reason why is when you have the Federal government in the form of the Federal Reserve injecting 85 Billion worth of artificial capital, i.e., capital that wasn`t earned, or created through increased sales, revenues or increased productivity gains. 


The problem is that this ‘artificial capital’ is not real, it is temporary and the Fed will discontinue the artificial capital injections, and even remove the liquidity out of the system when they begin tightening. 
You call it Asset Purchases, I call it a Ponzi Scheme
So a Ponzi scheme pays out old investors with the proceeds of the new investors. Well, current retirees right now are benefitting from these ‘artificial injections’ into the stock market at the expense of future retirees who will be left holding the bag on depreciating assets once the fed stops the artificial injections, and asset prices go down. Moreover, when they take the additional step of removing the liquidity from the system, i.e., tightening mode, asset prices will go down even further.
Consequently, anybody who takes money out of the stock market while the fed is artificially raising asset prices is benefitting at the expense of all 401k money that is buying assets now at artificially raised prices. 
In short new investors are buying assets at prices higher than they would otherwise without the Fed`s involvement in the markets. 
These are ‘Temporary Purchases’ right?
Hence the cost basis of their investments is much higher with each artificial liquidity injection. This is great for current retirees, but at the expense of future retirees who now have inflated assets that will deflate once the Fed takes away the proverbial punch bowl. 
 
Throw in the fact that baby boomers will start withdrawing their retirement capital to live on and those are two deflationary variables that future 401k retirees must overcome.
Nobody likes the Re-Pricing Mechanism
By artificially raising prices in a temporary fashion the Fed is guaranteeing losses for the future for anybody who bought the assets under these ‘artificial circumstances’ and these policies are withdrawn and the very same assets re-price to non-artificially inflated levels.
3 Alternative Outcomes
The only way the Fed can avoid this guaranteed negative outcome for these investors is to hope real productive growth and private capital can substitute for the greatest artificially created liquidity market capitalization in history. 
Or alternatively, the Fed can never stop artificially raising asset prices with the same magnitude and level of involvement. So they have put themselves in a box, effectively committing them to QE eternity.
The other possibility is they lessen the liquidity as much as private capital can make up the difference, i.e. a QE lite. 
Should Retirees Gamble with the Fed?
But for future retirees this is entirely too risky territory to be caught up in a scenario which the Fed seems to have no solid exit plan. And I know that employees just sort of allocate money into the company sponsored plan with a given level of investment choices each month without really thinking about these deeper issues. 
But every asset that employees have bought over the last four plus years and put in the retirement account has been artificially raised through Fed involvement. When the Fed stops being involved investors should seriously move out of these investments and into money market funds to protect the gains made in the artificial liquidity driven period. 
Don`t be left looking for a chair, when the music stops
Otherwise, these investors are going to be paying the price, just like in a Ponzi scheme when the liquidity tide recedes back into the ocean of actual asset values.  Make no mistake current asset holders are reaping the benefits, at the expense of current investors, and future asset holders who will be left holding the bag of artificially inflated “Non- Stores” of Value! The Federal Reserve is guaranteeing that these assets will lose value in the future. 

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Lumber Prices near the Top of their Historical Range

February 19, 2013 by EconMatters   Comments (0)

By EconMatters

You have come a long way baby
The lumber market has really come off the 2009 bottom of $140 per mbf and closed Friday at $399.80 per mbf on the back of good news out of the housing sector of the economy. 

The housing sector of the economy led the way in 2012 with record low interest rates, and investors and banks working through the foreclosed inventory, leading to a trending and steady rise in both average home prices and new constructions.

Everything related to the housing sector performed well in 2012 from materials to the home improvement and remodeling big box retailers in Home Depot and Lowe`s Companies Incorporated. 
Lumber prices getting slightly ahead of themselves?
But if we examine the history of lumber prices relative to the strength of the housing sector, lumber prices may be getting slightly ahead of themselves from a valuation standpoint. 
Lumber prices will probably break through the $400 level on trading momentum alone, but if we look at the charts most of the time lumber prices are south of the $400 level. 
The all-time high for lumber prices established in 1993 was just shy of $500 on a spike, with additional spikes of $440 in 1997, and $420 in 2005. So we are now basically sitting at $400 and in spike territory based upon the charts. 
I will be watching lumber for some additional upside momentum, and looking for a good entry on a longer term reversion to the mean short in the commodity as I think the risk and reward dynamics are setting up nicely in lumber for an eventual short once the momentum is exhausted. 
Cheap capital chasing returns fueling the upside momentum
The US economy is looking for all the good news it can get, and housing has definitely improved but lumber prices are pricing towards the best ever levels in the housing market from a comparison standpoint. 
I know that a lot of investment capital has moved into anything housing related seeking a return with a bunch of easy access to cheap capital. 
As a result prices can move well beyond historical valuation models, and I think they will definitely test the $420 and $440 levels as a direct result of liquidity flows.
But from a historical valuation standpoint prices just do not stay for long at these elevated levels, and once the housing euphoria trade loses momentum, prices should fall more in line with historical norms around the $320 per mbf level. 
Therefore, the higher prices get pushed up on the crowded investment spike this year, the better risk reward trading setup for shorting the lumber market in the future looking for a high probability reversion to the mean trade. 

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Technical Analysis of the Cotton Market

February 18, 2013 by EconMatters   Comments (0)

By EconMatters

The Cotton Market & Historical Slumber
The Cotton market was a pretty calm market until the last four months of 2010 through the first four months of 2011 when it awoke from its giant slumber to more than double its historical trading range. Cotton #2 for May 2013 which trades through the CME Globex & ClearPort venues has recently shown signs of life after the big spike and full retracement move of the last 2 plus years of trading activity.


Future Spikes or Trading Range Market?
So where is the Cotton market going next? Was the major move just a historical blip on the trading radar, or has something fundamentally changed in the Cotton market that makes for more aggressive price swings? The rationale for technical analysis and price action analysis is that fundamentally there is just too much information for anyone, group, or organization to factor in to an effective understanding of market dynamics.
TA helps clarify the “unknowable”
In short, there are just too many variables, too much information, and even unknown variables that play into market dynamics. But the thought is that eventually all the factors reveal themselves in the charts, the deciding factors affecting price movements, this knowledge is in the charts. Even inside information is reflected in the charts, so an understanding of price action and technical analysis tells the trader all they need to know about the commodity. 
What is “priced in” regarding crop rotations, results, weather, etc. and what is not priced in by how the price reacts to fundamental news in the market.  The idea is that eventually every factor that is knowable, and then needs to be prioritized by the market, is in the price movements on the chart.
So study the price action, and the trader knows what is going on in the commodity. This is the argument for technical analysis in general, and price action analysis specifically. Price action analysis avoids all the fancy indicators for the most part and just focuses on how price is moving in a given time frame. 
Now that was a decent Spike story
So the major move in the Cotton market was going from $90 a pound on September 20 2010 to $220 a pound by March 7 2011, and then bottoming at $68 a pound on June 4 2012, quite a move there! Since bottoming last June, a major retest was established on November 9 2012 in the $71 a pound area, and since then the market has been putting in higher highs and now stands at $83.19 a pound as of the Friday close in markets. 
How does Cotton react to first major correction in 2013?
Cotton is trying to breakout above the $84 area of resistance and has been rebuffed four times in the month of February. It seems that some of this recent move is basically mirroring the move in the S&P 500 and markets in general.  
We haven`t had an outright rejection of price moving higher as the $81 level of support has held for the last 3 weeks with little effort. 
Now mind you market optimism is very bullish, and not many markets have experienced any heat yet in 2013, so I want to see how Cotton reacts to the first 100 point negative close in the Dow Industrials before I get too excited about the recent move off the bottom.
We could just be in a trading range which has resembled the majority of historical trading in this market, it hasn`t historically been a very exciting market to trade. This isn`t exactly the coffee market by historical standards!
Resistance Levels
If we break through the $84 level of resistance with any conviction then a likely test of the $90 level seems like a surety. The next much stronger resistance level would be the nice round number of $100 a pound. The final level would be $110 a pound, and if we break this level something is going on in the Cotton market beyond a little market optimism. 
Each level that breaks convincingly should provide strong support for backing and filling purposes. This provides many different ways to play the breakout via outright buy stops to buying the retest on support holds, there are pros and cons of each trading setup strategy around these key levels both on the upside as well as the downside. 
Support Levels
Speaking of the downside, if Cotton breaks the $81 area of support, expect price to move down towards the $77-78 area of support, watch how it reacts to these levels. The next level of support would be the $71-72 area, which should provide for a solid entry point for a long to play a trading range setup with a relatively tight stop. 
But even if the $68 a pound level of support breaks, there is really strong support at $60 a pound. As the trips down to the $40 a pound levels have been recession level/market crash induced, and of course, one doesn`t want to be long a commodity when all assets are being pulled from markets on a “just protect my principal” trading event. 
The Fundamentals Matter
As always pay attention to the fundamental news regarding the commodity you choose to trade, as many strictly TA focused participants fail to gain the advantage that has yet to be priced into markets. Let`s face it the fundamentals matter in the equation, and sometimes the fundamentals are obvious, but other times require interpretation which is open for debate, and takes months and sometimes years to be fully priced into markets during dramatic paradigm shifts.
This is why reading everything you can, and knowing and thinking about the drivers of a given commodity can pay dividends if you anticipate and are right about fundamental shifts in a given market. Of course, just because you are right if too early doesn`t make for a profitable trade. You have to allow for the herd to catch up with your genius. 

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Technical Analysis of the Wheat Market

February 17, 2013 by EconMatters   Comments (0)

By EconMatters

Down trending Market
The Wheat market is definitely in a downtrend right now, and if we look at the 6 month chart we stand at $7.42 a bushel as of the close of last week. If we break $7.20 a bushel, then there are going to be a lot of sell stops positioned to sell Wheat lower to the next level of support at $6.84 a bushel. If this level fails to hold look out below as $5.85 is the next major level of support on the five-year weekly continuation chart and should hold. 


Support Levels
Now Wheat should bounce around the $7.00 a bushel area, probably first busting through it, and then spiking above it as price tries to find its equilibrium after establishing a new low. And obviously $6.00 a bushel provides a level of support being both a round number, which is heavily guarded, and near the two year low in the contract. This is another area where I would expect Wheat to first push below $6.00 a bushel, then spike above it several times before making a strong run at the $5.85 level.
The Death Cross
Interestingly we had the proverbial “Death Cross” in early January where the 50-day moving average crossed below the 200-day moving average which actually signaled a buy to many traders initially as price spiked to retest the $8.00 a bushel level, but soon faded and has been putting in lower highs and lower lows ever since. 
I often see that where a bearish technical signal is faded by buyers thinking selling and bearish sentiment is overdone. This is why I am often cautious when the media starts discussing Death Crosses, this often offers up contra-trend trading opportunities in the market. 
However, ultimately the Death Cross in Wheat proved to be prophetic as Wheat has confirmed that it is still in a bearish downtrend as each price spike is met with many sellers waiting patiently to enter in the direction of the trend, and eventually pushing the contract lower with each bearish thrust of price momentum.
Trading Philosophy
Now I will talk a little about the psychology and underlying trading philosophy that plays out in the price discovery process.
Wheat is a commodity, and commodities trend, and there are two main types of traders in these markets. 1) The traders who are looking at value in relation to historical Wheat prices the last two years, and they are looking for areas to buy and go long. 2) Then there are the traders who look at the market in the exact opposite manner. They see Wheat at these lower levels as a sign of weakness, and they are looking to sell new lows. 
It is a battle that plays out in price in many instruments, and one side eventually wins, forcing the other side to cover their position. There isn`t a rigid definition on why one side will always win because at some point it is definitely wrong to sell a bottom and buy a top, just look at the historical tops and bottoms on the charts provided to ascertain that conclusion. Some buyers and sellers bought the very top and sold the very bottom of the Wheat market the last five years. 
Prudent Money Management
This is where proper money management techniques with strategically placed stops come into play. The ability to understand that momentum has shifted, the trade is invalidated, and price is going the other direction. Furthermore, it is underestimated the importance of being able to be flexible to get on the train going in the opposite direction of the original price assumption. 
Invalidation Signals
Price tells them where the trade is invalidated; it literally forces the other side to cover at key technical reversals, which is your sign to be out of a trade if large numbers of positions are going to be forced out automatically via stops at key technical invalidation levels. 
Always look for technical areas where other traders would think the trade is invalidated, and place their stops. Sure there are stop runs and trading noise; and this is where feel comes into trading and strategically placing stops to avoid the creative stop runs and noise, and be on the right side of the price action to come in the direction of the trend. 
And the winner is…
So there will be a lot of battles to come in the Wheat market between these two trading camps the value buyers and the trend sellers, and it is your job to determine who is going to ultimately win out, and the charts and technical analysis is your tool to help you in this quest.
The Fundamentals
Sure the fundamentals are underlying these moves, and with high prices over most of the last 4 years, soaring farm land prices, and wealthy and fat farmers, things have been good in the agriculture space, and this probably plays out in some bumper crops if the weather cooperates. This is economic theory playing out putting downward pressure on Wheat prices. 
Be careful of “Value Traps”!
So at what price does the market determine that Wheat prices are a value? This should be taken into an analysis along with the fact that commodities trend, and they gain momentum runs, and areas where buyers and sellers have thought represented real value, failed to offer that for these investors, and their having to cover their ‘value investments’ provided additional fuel in the direction of the trend, i.e., prices can go in a trending direction far more than any investor rationally thinks is possible. 
Just look at the chart and that $13.00 a bushel Wheat price was a pain induced short covering rally that investors who came in ‘value shorting’ at $10.00, $11.00 and $12.00 a bushel thought was unreachable, i.e., or they would have waited until $13.00 to come in and short. So price can always go far lower or higher than one would think ahead of time in any market, but in commodities especially be careful not to make price assumptions. 
Blood in the water
In summary, if Wheat gains momentum to the downside due to larger than expected bumper Wheat crops, and some key technical levels are broken, the trend traders will be piling on, and the value investors will be testing their pain threshold. 
Additional sharks will appear as the blood in the water of lower prices in a down trending market brings even more attention to the Wheat market, and before you know it outsiders who never thought of trading Wheat are pushing the contract lower causing more pain; that is how extreme levels in price get established in a forced liquidation process.
If the Wheat market gains some more downward momentum, traders will see just how far they can push it lower. One has to be careful in picking bottoms because of this very fact, price invariably goes so much lower than you think is rationally possible. 
Bottom Picking & Rewards
But as always the flip side is that if you pick the near term bottom, then you can get some exceptionally profitable bargains because price was pushed way to low or way to high. It helps if a big buyer or seller steps in right after the levels that you decide to enter the trade, as then you can comfortably move your stop up to guarantee a riskless free-roll on a trade. 
These are the holy grail moments in trading: you pick a top or bottom and a big player agrees with your market assumption; your trade is instantly profitable, highly protected, you experience no heat, and your only concern is where to place the stop to protect your profit but remain in the trade for the potential of a sustained trend in the new direction of the market.

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More Layoffs Coming in Financial Markets

February 16, 2013 by EconMatters   Comments (0)

By EconMatters

Trading: State of the Union
I was visiting a large Oil trading floor last year, and they were having their big state of the union town hall on the floor and the CEO of the group that trading and marketing rolled up into talked about the dying volatility in general saying that they could hold on for a couple more years with this level of volatility, but if this continued for 5 or 6 years they were in trouble, and would have to find new ways of making money, i.e., new business models for trading and marketing. 


Industry Layoffs
Last week ING and SOCGEN both announced significant layoffs despite the rest of the economy seeing a slight improvement over the last 12 months. CITI has already restructured, and promised more layoffs in the future, and J.P. Morgan announced substantial job cuts in their equities division on Friday.
Dead Markets
Just watch markets lately and one realizes rather fast that more job cuts are on the way, and in a major way all across the spectrum from financial analysts, stock analysts, traders in most products, back office support staff, and management.
More Layoffs Inevitable
I would say that all firms probably need to cut staff by at least 1/3 over the next two years, with current and trending market dynamics in the industry over the last five years, these positions are just not needed today. Frankly, these jobs are dead weight on firms’ balance sheets, and it is amazing how long it has taken firms to reduce staff given the evolution in financial markets.
Changing Market Dynamics
First of all be sorry for what you wish for in fed induced liquidity taking all the volatility out of markets; and trading profits are sure to decline in trading shops all along the spectrum of products. 
Next, with the evolution of computer trading and computer driven Algos not only has this reduced volatility, but traders’ jobs in the process. 
Third, with highly correlated markets and more money flowing into ETFs, stock and commodity differentiation is less relevant than in the past requiring fewer analysts. 
Fourth, with major consolidation in the industry due to the collapse of Bear Stearns, Lehman Brothers and Merrill Lynch this has reduced the overall size of market competition, shrinking volatility further, and reducing overall trading volume. 
Fifthly, the overall sluggishness of the global economy where many countries have debt problems and are still in the deleveraging phase has severally shrunken GDP growth which hampers private capital infusion into businesses which hurt the IPO and investment banking markets for the financial industry. 
And finally as the chart of the 10-year note versus the S&P 500 futures contract illustrates asset class differentiation over the last five years has reduced significantly requiring less investment expertise than in the past. All of which is bad for jobs in an industry struggling to redefine itself after the financial crisis.
Revive Markets=More Industry Jobs
In watching financial markets there are many products which are simply deteriorating before my eyes from  a volume, volatility and profitability standpoint, and the more of these markets that pop up each year means that many more job cuts in the industry are on the horizon. 

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The Corn Market Looks like a Short

February 15, 2013 by EconMatters   Comments (0)

By EconMatters

When there is Corn planted behind gas stations in makeshift lots
After the last weather disturbance in 2008, I remember traveling for my company in the Northeast, and I visited several states that were not known for being corn belts, the biggest impression besides the business takeaways, was how much corn was being planted anywhere and everywhere. There was corn planted in makeshift small lots, open fields, small farms, and bigger farms. 


In a nutshell, there was corn everywhere, and when I got back from my trip it dawned upon me that the corn market was potentially a big short, and my suspicions were proven correct as the corn market dropped like a rock from $8.50 a bushel all the way down to $3 a bushel in late 2008. Now a lot of that drop reflected the capital withdrawal from markets due to the financial crisis.
High Prices eventuates into Larger Market Supply
However, a lot of the continued weakness was the result of high prices due to the crop shortages incentivizing crop rotation to the more profitable corn commodity, and economics taking care of the rest with greater supply coming to markets creating downward pressure in prices. Plus there was some reversion to the mean average going on as well in the commodity. 
2 years of Muted Prices 
Prices remained relatively muted for two years trading between $3 and $4.50 a bushel before a breakout late in 2010 where we ultimately tested the $8 a bushel level in September of 2011. Prices drifted down to test $5 a bushel in June of 2012 before skyrocketing higher on drought concerns to $8.50 a bushel in August of 2012.
Downtrend Channel 
Since then a defined down trending channel is forming and every spike in prices is met with resistance, and price fails to gain any momentum to the upside. Corn isn`t exactly a major staple in people`s diets these days, and is mainly used as a feedstock for cattle and other livestock.
Technical Levels
From a technical standpoint the corm contract appears to be trading relatively weak and if it breaks the $6.75 a bushel support area traders will jump on the downside momentum and test the $6 area of next major support in the commodity. The crop reports, weather and overall market sentiment will determine price movement from there but a trade down to test the $6 a bushel level in corn seems like it is in the trading cards. 
Trade Management
Pay attention to the technicals, and remain on the trending side of the trade. Look for pullbacks within the trend to establish a position with strategic stops where the trade is invalidated and you should live to fight another day if you are wrong. 
But commodities trend a lot in channels, and the big players determine the trend, and you want to be on the side the big money is playing. They set the rules, and it will do you no good to fight the trend from a capital preservation standpoint. 
You in essence are piggybacking on their trade, they will do all the work, and you just pay attention on where to move your stop up to stay involved in the trade for the bulk of the move. 

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The S&P 500 and Brent Oil are basically the Same Market

February 15, 2013 by EconMatters   Comments (0)

By EconMatters

Portraits from the Dark Period
"The price has nothing to do with a shortage of oil. There's a lot of oil on the market. It's because of speculation and OPEC cannot control speculation."  Quote by OPEC Secretary General Badri.


Some people are audible learners, some learn based on touch, some by interaction, for the visual leaners out there I provide the following work of art, which I call the “Risk-On Correlated Asset Motif” from the Dark Period by Jerauld de Speculator. 
1 – Day S&P 500 & Brent Oil Comparison
4 – Month S&P 500 & Brent Oil Comparison
6 – Month S&P 500 & Brent Oil Comparison
9 – Month S&P 500 & Brent Oil Comparison
2 – Year S&P 500 & Brent Oil Comparison
3 – Year S&P 500 & Brent Oil Comparison
5 – Year S&P 500 & Brent Oil Comparison 
Correlated Global Markets require one thing, a whole lot of Juice!
The first thing you have to realize about markets is that they are crooked. If you believe the price of oil has anything to do with the stuff that comes out of the ground, then I have some nice beachfront property in Louisiana for you. 
It is all about the juice, whether it is 401k money coming in the beginning of each month, Central Bank injections, share buybacks, increasing leverage ratios, or currency funding the initial money has to be there in what I call the juice for markets, and I mean all markets. 
This is why before and during almost any major up move in markets traders go to the EUR/USD and USD/JPY funding crosses for the juice to propel the move. It all starts with the juice, that is what determines price in markets. 
This is why the S&P 500 has stalled for a couple days; traders are waiting for the next juice injection into markets. There would have to be some ‘crazy good’ news for firms to extend their leverage ratios at this point, so they wait for the next big fed injection, major currency move, or 401k money for their next major move up in markets.
Finally, those traders who think they are trading oil, you are actually trading the S&P 500, for all intents and purposes, it is the very same liquidity fueled market.

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The Brent Oil Contract is a Sham!

February 13, 2013 by EconMatters   Comments (0)

By EconMatters  

Oil Benchmark 
It is a sad state of affairs that the entire world of energy, and consumer energy prices are all based upon a fraud of an energy contract masquerading as the Industry`s Benchmark, setting the price for all other grades. 

Monthly Rollover Ramp
Here is an idea of how manipulated the Brent Oil contract that trades mainly on the ICE exchange is we are at rollover time once again in the Brent oil contract and sure enough as day, the contract is moved up substantially right before expiration. 
This happens almost every rollover, and is impossible to do in a non-deliverable market without precise market manipulation. 
Always Positive Rollover Carry
The other common feature of the Brent contract is the expiring month is always higher by a dollar, dollar and a half, than the contract for the next month without fail. Again this happens every single rollover without fail, and again very hard to “naturally occur”. 
It might be reasonable in the old days, or in a market that was partly physical deliverable that you would have times that exhibit Contango features that would account for this price differential. 
No Physical Delivery 
But this happens every time, and the old rules of Contango and Backwardation don`t apply to purely paper markets as there is no need from one month versus the next for “stronger demand” as nobody ever takes delivery of a Brent contract of oil. There is no demand for near term oil contracts due to supply shortages in the oil market.
The only reason for this price differential which always occurs and is heavily manipulated is to ensure for a positive rollover effect for the big players in the market.
No Rollover Risk equals much easier to invest capital in the market
Why lose money if in basically an unregulated space you can just move up the front month at expiration so that when you sell to close out the position on the front month at a higher price, and buy the next month to reestablish a position at a lower price you have a positive built in rollover. 
Makes the risk of investing in oil with an always positive carry much less. It is a scam of major proportions when you factor in how many years this has been going on in the ICE market.
Not fully credentialed to be a Benchmark for anything
However, that isn`t the only thing that doesn`t pass the smell test with the Brent contract. The main problem is the Brent contract is illegitimate and should not serve as a founding basis for any price discovery.
It trades on essentially an unregulated market with little or no accountability in regards to transparency. And this contract is setting the price of oil for the entire oil supply chain.
Represents what Storage Facilities?
First of all the Brent contract needs to be tied to actual oil inventories in Europe so that supplies can actually be tracked and evaluated on a historical basis. 
For example, WTI is based upon oil inventories at Cushing Oklahoma, which can actually be tracked in a weekly report, and reported by an independent government agency in the EIA, for Brent to become a legitimate Oil contract it needs to do the same. 
Needs to be actually Regulated
Or frankly regulators need to force the ICE exchange to do so or discontinue the futures contract, as it has become far too important at setting world oil prices to remain in this non-transparency illegitimate status. 
Independent Governmental Agency Reporting of Supply Data
So once actual inventories of oil supplies are attached to the Brent Contract, there needs to be an independent government agency like the EIA in the US which collects data on an independent basis and provides weekly, quarterly, and annual reports on oil stockpiles.
We live in the Information Age
We do live in the modern age of increased technology, data collection, and transparency with unprecedented access to all types of information. 
ICE exchange has no incentive to change status quo without Regulatory Pressure
It is about time that the ICE exchange is forced by regulators to come into this century, especially given the important role that Brent has become as a benchmark for setting price in the oil markets, and thus derivatively gasoline and heating oil markets, by being forced to comply with these aforementioned instrumental changes, or be forced out of the market. 
Brent is so much easier to Rig than WTI: This attracts Fund Flows
You want to know the real reason that the Brent market has traded at so high a premium to WTI, and became so popular by the major players in the oil trading and investment community? 
It is because the contract is based on “nothingness” has no supervision by regulatory authorities, completely non deliverable, represents no actual storage facilities, no data tracking, has no independent weekly status reports, a forever positive carry, no transparency, and very easy to manipulate. 
Fund Inflows Set Price not the Fundamentals Anymore
Moreover, since oil prices are not set by the fundamentals of supply and demand, price is solely determined by fund flows, i.e., investment capital goes into a commodity it goes up, investment capital goes out of a commodity it goes down.
“Asset Class” Investing has a built-in Long Bias
I know theoretically capital inflows could come into a market and price could go down, i.e., they could all go short, but for various reasons these shorting periods are relatively few and far between in the modern era of oil trading. 
The same reason investment capital for the S&P 500 has a long bias applies to oil markets as well in the modern era of asset class investing. Funds want exposure, and the modern definition of an “asset class” by investors is inherently long biased. It is just how it actually plays out, theoretically it doesn`t have to, but it just does.
The Dirty Little Secret of the Brent Premium to WTI
So given this state of affairs, and prices have no real attachment to the fundamentals of supply and demand, fund inflows into the futures market increase price, and consumers all over the world pay for end use products based upon these fund inflows, not the fundamentals. 
So the dirty little secret why the Brent Contract is so much higher than WTI is it attracts more fund inflows by the large players who want exposure from an investing standpoint to the commodity, thus increased fund attractiveness equals increased prices, and a much larger premium to WTI than would otherwise be the case.
It all has to do with fund inflows, and the deleterious effects for consumers play out in the following: Fund inflows into Brent, Finished Petroleum Products pegged to Brent Price, Consumers pay higher prices with no change in the fundamentals of supply and demand in the marketplace. 
Given the slow growth economy, consumers should be getting a break at the pump!
We have gone from a supply and demand market to a funds flow market and this really sucks for consumers. 
This is where the regulators are supposed to step in and protect consumers. After all, this is part of what governments can offer citizens for taking substantial pieces of their income via taxes.
But the regulators to date have been unwilling to step in and regulate the oil markets, and consumers and businesses will continue to pay more than they should for gasoline and heating oil products in the marketplace. 
ZERO-SUM Game in Oil Markets
However, what sucks for one group is often great for another constituency, and for large banks, hedge funds, and financial institutions that have been known to rig a market wherever and whenever they can, this ICE exchange traded Brent Oil contract is a dream come true for their needs.

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WTI – Brent Spread to test $30 Level in 2013

February 12, 2013 by EconMatters   Comments (0)

By EconMatters

Seaway Pipeline or Garden Hose
This is hilarious if prices weren`t so damn high, but despite a robust export market for finished products, crude oil is backing up all the way to Cushing, Oklahoma, and is only going to get worse in 2013. 


Now that Enterprise Products Partners LLP has let the cat out of the bag that less than a month after expanding the Seaway pipeline capacity to 400,000 barrels per day, The Jones Creek terminal has storage capacity of 2.6 million barrels, and it is basically maxed out in available storage. 
How bad would capacity constraints be without a booming export market?
So good thing there is an export market for US finished petroleum products or oil and gas prices would be much lower, as in the US, demand is so low relative to supply, that you almost cannot give the stuff away, and the refiners still cannot utilize all the oil that Cushing needs to send to alleviate their escalating storage issues which stand at 52 million barrels and climbing. 
60 Million Storage in Cushing to be tested in 2013
Expect Cushing oil inventories to pass the 60 million threshold, and let`s watch how price reacts to that level. My first reaction is that a whole bunch of spread tightening trades will have to be unwound throughout the oil curve. My second reaction is that the $30 premium for Brent over WTI is now on the table for 2013. 
What happens when Cushing is full?
What happens if Cushing reaches complete capacity levels in 2013, does the oil back up further along the supply chain? A nasty logistics nightmare is beginning to play out for producers, now where do you send the oil? 
At any rate, WTI Oil is probably going to be going much lower from here, and the 2013 average will be well below current market prices. 
175,000 versus 400,000
Now back to what Enterprise said regarding the oil backup, citing "unforeseen constraints" in reducing deliveries to 175,000 barrels a day from 400,000 barrels a day at its Jones Creek terminal in Freeport, Texas. Enterprise added that maximum storage levels at the terminal have been reached. 
Seller`s Market for Storage Building
This is just hilarious, and is something that we touched upon before that there is so much oil coming out of the ground currently and for the next decade that much more storage capacity is going to be required throughout the country. 
Basically, the refiners need to build more onsite storage facilities, the terminals need to build more onsite storage facilities, Cushing Oklahoma needs to increase its storage facilities, and the oil fields themselves are going to need to build onsite storage facilities, as the entire supply chain is backing up right now like a clogged plumbing pipe in your house.
Too bad for Consumers, supply levels don`t match the Market prices
This is just hilarious, especially given the supply disconnect with the price right now in WTI. But how could this have not been foreseen by the pipeline operators?
I get it domestic supply is more than your outdated models planned for, and refinery demand even with exports cannot use all the freakin oil, and now you are stuck with an underutilized asset that doesn`t work as good as rails at getting around storage constraint issues. 
I would love to be a fly on the wall for this conversation
How do you explain this one to upper management? Well boss……I know we just expanded……..well…um….we thought that……this has to be a sick joke right? Nobody could be this bad at modeling demand/ logistical constraints for their expensive expansion project! 
After five minutes of casual thinking I thought this was going to be a problem, was this even considered in the project analysis report? Did they really have to run it at full 400,000 for a week to discover this issue? 
Talk about keystone cops, the picture in my head of the “light bulb moment” when someone realized the supply constraint issue on the ground and had to report this up the chain of command is just priceless right now! 

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The Volatility Index is closing out February with a Whimper

February 12, 2013 by EconMatters   Comments (0)

By EconMatters

Volatility Smack down
The VIX futures contract ends trading today, and the March VIX futures contract takes over. The first two months of the year have seen volatility crushed downward in this two month bullish rally in assets as new money came rushing into markets needing to get off to a positive start for the year. 


$13.45 Support area on Monday
On Monday the VIX futures got pushed down to $13.45 on several occasions on the S&P 500 attempts to rally the markets, the lowest level by far since before the financial crisis. There have already been several highly publicized bets placed for March and April VIX contracts to spike via the options market with some bull call spreads. 
More Volatility for March
I do expect more volatility in the VIX futures as we move further away without a correction, but the overall trend in the VIX has been declining for several years in between the spikes, expect more of the same. 
The Goal is to make the money before May
Remember asset managers are going to push assets hard through April options expiration if recent history is our insight into market behavior. 
Unless there is a major Risk Off geopolitical event, major Washington event, i.e., they stand and actually fight on an issue that stalls the government and risk a downgrade, or a HFT inspired Market glitch then new money comes in every month to markets and the bulls will extend this rally as far as they can before the annual summer selloff. 
S&P 500 New Highs before May?
The bulls will probably try to set a new high for the S&P 500 before the selloff, so expect the VIX to get hammered a lot as the S&P 500 rises to new highs. 
VIX Bottoms not Holding
For a while $13.75 was a decent support level, then the $13.65 level provided solid support, and yesterday we busted through that to the $13.45 level, which held several attempts to break it.
I am sure that today that level will be banged several times if equities attempt to establish new highs on Tuesday. Maybe $13.20 is in the cards for Tuesday if the S&P 500 can establish a new 2013 high. 
We have come a long way baby: $13, 12, 11…?
But longer term I envision a breaking of the $13.00 barrier some time in 2013, as the long-term downtrend in volatility is hard to miss, and very reminiscent of the bullish period before the epic collapse in financial markets.

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