Goldman’s mysterious oil analyst Arjun Murti joined Morgan’s Ole Slorer a few days later and piled on, and the blowoff move gathered steam heading into its ultimate top.
You were branded a lunatic in early June if you questioned the activity in commodities; but the skeptics have been paid. Regulators have been outgunned; much of the trading takes place away from the prying eyes of regulators. Good luck to the CFTC in untangling the mess. As I said at the time:
June 1st
...commodity market regulators have their work cut out for them given much of the activity takes place away from prying eyes in the OTC market.
Money has poured into speculative positions from the hundreds of hedge funds that have cropped up in recent years to trade these markets, in what amounts to a game of high stakes poker, as Amaranth’s $6 billion loss in the natural gas markets illustrates.
With pension and endowment funds increasing the funds allocated to commodity strategies, and other strategies, such as Global Macro hedge funds, getting in on the action it is easy to see the funds allocated to these positions can swamp the physical markets. Ospairie’s costly short position in copper two years ago, which seem to be fundamentally a sound trade based on historical precedents, taught them an expensive lesson; that the game had indeed changed.
Of course, with the traders beginning to smell blood in the water, it is possible the market sorts this out on its own. Leveraged long speculators have built up huge positions due to skimpy margin requirements; it is possible that further declines will lead them to liquidate positions as weak hands panic, margin calls accelerate, and the speculative trades are unwound..
But this time it has been different. Normally a slowdown the U.S. housing market would send shivers into the copper market; and while housing construction has seized up, copper has not sold off like you would expect. While construction in the BRIC countries explains some of the bull market move in copper, manipulation via hoarding and “hidden stocks” are being bandied about to explain the divergence from historical norms. 1440 Wall Street
Who did the CFTC reclassify as a “non-commercial speculator”. Was is SemGroup? I don’t have a clue, but we can always round up the usual suspects.
Speaking of suspect, the move in copper into early June was peculiar as well. Since when does copper rally with U.S. homebuilding activity grinding to a standstill? Not very often.
And soon we should find out if any funds are going down along with oil and copper:
June1st
A correction in the price of crude might set off a a series of dominoes, quickly toppling other commodity marts as well. David Threlkeld, a veteran trader who helped expose a Sumitomo trader who lost nearly $3 billion in 1996, has been blaming a number of New York and London hedge funds for our current straits. While it has fallen on deaf ears, if he is eventually right, the rout could begin. In a presentation to the the World Bank, authored by Frank Veneroso, the former partner at Omega Advisors responsible for global investment policy, Threlkeld was quoted as follows:
“This is a perfect storm. If oil takes a dive, there are going to be a chain of margin calls going through the copper market, and then we will find out there are no buyers.” he said. “Copper will implode overnight, This is like flipping condos in Miami, the last one holds the bag.”
Oil is getting the headlines but the copper market is following crude right down. If China and other emerging markets take a breather I gotta believe copper can continue to move lower.
But of course, that is just speculation on my part. Classify it as you see fit.
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Update: Whoops I missed this..Ospraie was down 13% in July. I doubt Dwight Anderson reads my site, and if he does he tried to fade me ..tsk tsk....
Sometimes, when your nose is pressed up against the window, you cannot see the forest through the trees. Copper specialist? Maybe not, but a nice guy by most accounts.
Ospraie and Other Hedge Funds Tumble
WSJ
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Data Raise Questions On Role of Speculators
WSJ
Gold, Silver Slump, Leading Commodities Drop on Dollar, Growth
Bloomberg
June 1st
Commodity Trading Probes Target Wall Street, Organized Crime
1440 Wall Street
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position
I love hedge funds! Every time they get it wrong it sets up a huge run in the other direction. I bought Nat Gas and related stocks when Amaranth blew up. Gold was an easy sale when it failed at $1000. Oil stalling near $145 spurred me to liquidate all my oils at the highs. You don’t even need to watch the screen - just read the front page of the WSJ. Going against the hedge fund herd is like shooting fish in the proverbial barrel.
Stocks trade like commodities, and fundamentals are out the window as we all shoot against each other.
Tons of fun if you get it right; agree on Gold and i still think MS got short crude up at their price target.
Maybe a few more days in the headlines and it is time to go long again....everyone trades off headlines instead of looking out a few months.
This excerpt from a piece was written by a former partner at Omega Advisors
June 17th
The markets are irrationally complacent. They see transitory economic resilience and
rising headline inflation emanating from a commodity bubble. They are making a mistake in bidding up Fed funds futures and bidding down bond prices.
This mistake will persist until the transitory fiscal stimulus fades, the commodity bubble
bursts, and/or a second wave of financial crisis begins.
The spike in the oil price, though a transitory bubble event, is a powerful depressant on
aggregate demand as long as it persists.
Bernanke is right in seeing the oil price spike as more of a deflationary danger than an inflationary threat.
Bernanke, correctly cognizant of the risk posed by the “financial accelerator”, will not
raise rates in response to headline inflation. When the second wave of financial crisis
sets into motion the financial accelerator, the Bernanke Fed will cut rates instead.
Then the Great Fake Out will end and the fixed income markets will fly.
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The beary bloggers were telling you how the dollar was going to hell there and that inflation was the enemy....Bernanke has been focused on deflation all along...only now are you hearing about it and everyone flip-flops on the dollar.
nice move in TNX since then...oops!
SJ
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