Monday, June 30, 2008

Apparently China is where commodities hoarding is happening

according to Wall Street Examiner. Andy Bebut says
"some time ago I’ve indicated that apparently China is building a multi-year stockpile of various commodities to diversify its trade surplus. Anything that can be practically stored (as metals, grains) is removed from the world markets and stored. Obviously it creates gigantic price distortions.
This is why I’m watching China, at some point I expect the consumption of industrial metals by China to slowdown dramatically as they shift from imports to enormous domestic stockpiles. In fact I think China can easily continue to grow for some time without importing any industrial metal at all. Zero."
That is a bold statement. It would make sense in that the Chinese government would want to invest in something besides US Treasuries. On the other hand, driving up the prices by itself would cost the Chinese some non-trivial amount. Of course, they stand to lose a lot once they stop buying Treasuries, as the value of their holdings fall when prices go up. Interesting...

Cause of ballooning US budget deficit not what you might think

The linked report from the US Treasury shows that monthly spending on Social Security and Medicare, along with the "Other Non-Defense" category spiked up since January. Defense spending has been essentially flat on a month to month basis since October 2007.

Global labor arbitrage is dead

If transportation cost increases due to the oil price shock erase the wage differential between US and China, the Chinese manufacturing sector is in deep trouble. Some manufacturing jobs may return to the US. The increase in oil prices is as big a threat to China as it is to the US.

Further evidence regarding oil speculation

Bull Bear Trader points to a piece in the FT that states
"Barclays Capital is planning to enter the shipping business. The bank is attempting to increase its commodities exposure by hiring ships on long-term charter to move oil, gasoline, and diesel. As opposed to gaining exposure by taking derivative positions, Barclays hopes to cash in on the prices involved in hiring ships, which have been up more than 50% in the last six months. The move also allows them to support their new venture into the physical trading of oil. Physical trading allows for a more predictable price since you are not at the mercy of the spot market prices."
So we have a non-user/producer of oil trading the physical commodity...that is speculation. By gaining control of ships, this company could affect oil prices by holding ships they have contracted out of use, driving up prices for both the ships and the oil as they would be acting as a capacity constraint.

Friday, June 27, 2008

Oil market speculation

The Importance of the "Roll Return" in Commodity Futures Returns
..."Roll Return" is the difference between the current spot (what you pay if you "consume" the commodity today) and the futures contract price. It is also the return a futures contract holder would earn if the spot price stays constant until the expiration of the futures contract - in which case the price of the futures contract would gradually converge to the spot price. Assuming the spot price is held constant, a futures contract holder will earn a positive roll return if the price of the futures contract is lower than the spot price (this behavior is termed "backwardization"). Conversely, a futures contract holder will experience a negative roll return if the price of the futures contract is higher than the spot price and is converging to it over time (this is termed "contango")"...

It seems that a speculator long an oil contract would have strong incentive to roll over to the next period contract should the current contract get bid up too close to the spot price. Of course the spot price starts moving up if the spread between spot and the front month contract moves up to where the physical holder makes more by selling at the contract date rather than immediately. Then you get momentum bids on the contract because the contract price is moving up. A positive feedback loop...once your long contract gets too close to spot you will want to roll over to the next month to avoid a small or negative return...and you will keep doing that until the spot price goes up enough or you have to pay back the margin loan or return the capital that is invested.

Naked Capitalism points to a possible solution: "Exchanges could impost a "liquidation only" requirement, which was last used to break the Hunt brothers' attempted corner of the silver market in the early 1980s "... in this case no one is allowed to roll over to the next contract, so if you are long contracts you have to offset with shorts because you don't want to take delivery. The rapid increase in short interest pushes contract price down and the feedback loop is broken.

US domestic oil reserves-still massive

The USA has massive amounts of oil deposits in the ground that at current prices are very likely to be economically viable. Here are some examples:

-Bakken Formation...2.1 billion barrels up to 503 billion barrels...located in north-central US...

-"The United States has the largest known deposits of oil shale in the world, according to the Bureau of Land Management and holds an estimated 2,500 gigabarrels of potentially recoverable oil, enough to meet U.S. demand for oil at current rates for 110 years. However, oil shale does not actually contain oil, but a waxy oil precursor known as kerogen. For this reason and because there is not yet any significant commercial production of oil from oil shale in the United States as of 2008"...from Wikipedia piece on oil reserves...

-"Chevron Corp. has tapped a petroleum pool deep beneath the Gulf of Mexico that could boost the nation’s reserves by more than 50 percent"...MSNBC piece...

Wednesday, June 25, 2008

Thursday, June 19, 2008

FDIC keeps a running list of bank failures

Here: Bank Failures & Assistance

The current list:

The list of Bank Failures and Assistance Transactions is updated through May 9, 2008. Please address questions on this subject to the Customer Service Hotline (telephone: 888-206-4662).
Douglass National Bank, Kansas City, Missouri, with approximately $58.5 million in assets was closed. Liberty Bank and Trust Company of New Orleans, Louisiana has agreed to assume all deposits (approximately $53.8 million). (
Hume Bank, Hume, Missouri, with approximately $18.7 million in assets was closed. Security Bank, Rich Hill, Missouri has agreed to assume the insured deposits (approximately $12.5 million). (
ANB Financial, National Association, Bentonville, Arkansas, with approximately $2.1 billion in assets was closed. Pulaski Bank and Trust Company, Little Rock, Arkansas has agreed to assume the non-brokered insured deposits (approximately $212.9 million). (
First Integrity Bank, National Association, Staples, Minnesota, with approximately $54.7 million in assets was closed. First International Bank and Trust, Watford City, North Dakota has agreed to assume all deposits (approximately $50.3 million). (

What happens when China reduces oil subsidies?

The linked Yahoo piece starts out with a blinding flash of the obvious: "China is raising fuel prices, a move that could dampen the booming Asian nation's oil consumption".

The piece further quotes several traders to the effect that "This could change the psychology of the market completely," and "A rise in prices in China "would be a major factor in driving prices down".

I don't think there's any question that Chinese oil consumption will stagnate or decrease if the government there reduces the insulation from market prices that consumers there now have.

Thursday, June 12, 2008

How long to live?

This data is for US residents, check it to see how long the government expects your remaining lifespan will be:

Click on the image to zoom in...

Futures contract roll over info

Yves Smith pointed this out:

"John Dizard, a writer for the Financial Times (and a casual acquaintance), illustrates below how fortune favors not necessarily the brave, but the powerful in his article, "Goldman and its magic commodities box". Dizard discusses how Goldman plays the commodities market, using its role as the largest manager of commodities index funds (Goldman designed and maintains the most popular index, the Goldman Sachs Commodities Index, or GSCI, the biggest commodities index, which it has successfully leveraged into becoming the largest manager of GSCI-based index funds), market maker, and principal trader (see this post on the questionable role of indexes)...

...Dizard calculates the collective losses to investors (organizations like pension funds, endowments, and insurers) on the monthly roll of the GSCI (required because the index uses futures contract that expire every month) at 150 basis points on $100 billion of funds, or $1.5 billion. And who is on the other side of these trades? Dizard believes Goldman is at the top of the list...describing the practice known as index roll congestion...This involves profiting from the requirement that public investors' positions in commodities indices be "rolled over" from one contract month to another over a known five-day period. The price of the old month's contract is depressed and the price of the new month's contract is inflated. This can be a huge source of profit for those ready to take advantage of the naive public....a lot of money is being lost by the public to someone...

... Given that Goldman knows how many contracts it has to buy and sell on certain dates, that in many pits the GSCI is the biggest single factor in the market and that it has many trading hours to cover its positions at advantageous moments, its profitability is not surprising.The GSCI has not been as profitable for all the investors who use it to get commodities exposure. Last year it lost about 15 per cent on a total return basis. Goldman itself had a record year. The customers' yachts weren't just small, they were under water.There is no failure to disclose here since Goldman lays out the GSCI's terms and conditions on its website and in customer contracts. The real failure is with the institutional investing community that still does not understand how commodity markets work..."