Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

Raising oil margins won't curb speculators -Bodman
uk.reuters.com ^ | 05/22/2008 | Staff

Posted on 05/23/2008 12:47:21 PM PDT by Red Badger

WASHINGTON, May 23 (Reuters) - Significantly raising margin requirements on oil futures trading at the New York Mercantile Exchange (NMX.N: Quote, Profile, Research) would not rein in speculative investors and bring down crude prices, U.S. Energy Secretary Sam Bodman said on Friday.

Many U.S. lawmakers blame hedge funds, pension fund managers and other speculative investors for pushing up prices for crude oil and other commodities to record levels.

"I don't think that the margin requirements per se are going to have any impact on it," Bodman said in an interview on CNBC television.

Legislation is pending in the U.S. Senate that would require the Commodity Futures Trading Commission, which regulates NYMEX, to significantly raise the amount of money, or margin, that speculators have to put up to trade oil futures.

The bill does not specify how high margins should be increased, leaving it up to the CFTC to decide.

However, the CFTC has told Congress that, while more speculators are doing business in the futures markets, the agency has no evidence they have caused prices to rise.

When purchasing stocks, many brokerage firms require investors to have between 30 percent and 40 percent of the market value of the securities in margin accounts.

Margin requirements for futures are generally lower, less than 10 percent for many contracts, and often change depending on the volatility of the contracts.

Separately, Bodman said he supported broadening some regulatory powers of the CFTC, which this week was given new authority from Congress to monitor and collect more information on some of the energy trading going on in exempt commercial markets, such as the Intercontinental Exchange (ICE.N: Quote, Profile, Research). (Reporting by Tom Doggett; Editing by Walter Bagley)


TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: energy; energyprices; futures; market; oil; speculators
Let's try it and see............
1 posted on 05/23/2008 12:47:21 PM PDT by Red Badger
[ Post Reply | Private Reply | View Replies]

To: Red Badger

With this congress and administration we a F...ed, just bend over, these idiots in congress have let this get out of hand. Now they blame everyone but the reflection in the mirror.


2 posted on 05/23/2008 12:56:29 PM PDT by boomop1
[ Post Reply | Private Reply | To 1 | View Replies]

To: Red Badger

make a an are but what’s the dif?


3 posted on 05/23/2008 12:57:13 PM PDT by boomop1
[ Post Reply | Private Reply | To 1 | View Replies]

To: Red Badger

“WASHINGTON, May 23 (Reuters) - Significantly raising margin requirements on oil futures trading at the New York Mercantile Exchange (NMX.N: Quote, Profile, Research) would not rein in speculative investors and bring down crude prices, U.S. Energy Secretary Sam Bodman said on Friday.”

Of course it would. Investors would park the money in other commodity futures with lesser margins or stocks or such.

Anyway, why not try it???


4 posted on 05/23/2008 12:57:55 PM PDT by Shermy (Nightmares From My Pastor, A Story of Race and Insanity)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Red Badger

I agree. Raise them way up.


5 posted on 05/23/2008 12:57:55 PM PDT by pallis
[ Post Reply | Private Reply | To 1 | View Replies]

To: Red Badger
You have got to be kidding me, 10% down only?

It was this 10% number that helped contribute to the crash of 29'

Move it upwards of 50% maybe even 75%.

6 posted on 05/23/2008 1:01:48 PM PDT by taildragger (The Answer is Fred Thompson, I do not care what the question is.....)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Red Badger
CFTC distinguishes between 'small' spec trader and 'large' spec trader by the number of contracts held by a trader. If one holds more than X contracts, one has to fill out the infamous Form 50, and one is classed as a large trader.

X is not typically a very large number, either. For NYBOT/ICE Coffee 'C', the figure is 50 contracts. I believe, but I'll have to look it up, that X is 100 contracts for NYMEX Light Sweet Crude.

The point of all this is that CFTC had best be careful raising the margins. They must specifically exempt hedgers and small specs for 2 reasons: 1) hedgers, because they are using the mkt for its traditional purpose, namely insurance, and 2) small specs, because trebling the margins (or bumping them 10-fold, as some want) will chase every small spec out of a mkt right away, immediamente, and the bid/ask spreads will increase equally quickly, thus making it more expensive for the normal mkt users to obtain their insurance hedge.

If the Regress **really** wanted to start fixing the situation -- which, of course, they don't -- they'd start enforcing provisions of ERISA that would chase a number of huge pension funds such as CALPERS out of futures mkts. Pension funds have absolutely no business -- the ''prudent man'' doctrine, and all that -- in dealing in spec mkts.

7 posted on 05/23/2008 1:06:41 PM PDT by SAJ
[ Post Reply | Private Reply | To 1 | View Replies]

To: boomop1
make a an are but what’s the dif?

Translate to English, please.......

8 posted on 05/23/2008 1:07:18 PM PDT by Red Badger ( We don't have science, but we do have consensus.......)
[ Post Reply | Private Reply | To 3 | View Replies]

To: taildragger

33.33 percent would shave off a bunch of the speculators...........


9 posted on 05/23/2008 1:10:02 PM PDT by Red Badger ( We don't have science, but we do have consensus.......)
[ Post Reply | Private Reply | To 6 | View Replies]

To: taildragger
Comparing margin trading in stocks and the ''margin'' required in futures mkts is so wrongheaded as to be laughable.

Stock shares represent proportional ownership of a company, and a 50% cash figure is a quite reasonable requirement when dealing with ownership.

Futures ''margin'', contrarily, is simply a performance bond ensuring that the hedger or trader will hold to the terms of the contract traded, as well as be responsible for any trading losses.

Now, where in your experience, where on this planet does someone require a 50%-of-net-contract-value as a performance bond?

Sheesh.

10 posted on 05/23/2008 1:11:27 PM PDT by SAJ
[ Post Reply | Private Reply | To 6 | View Replies]

To: SAJ

Pension Funds are double dipping. They own large chunks of stock in oil companies and now they are manipulating the price of the oil.........................


11 posted on 05/23/2008 1:12:13 PM PDT by Red Badger ( We don't have science, but we do have consensus.......)
[ Post Reply | Private Reply | To 7 | View Replies]

To: boomop1; Red Badger

At times like these....elction year, expensive gas, remember that Congress can not act. It must react.

We are now feeling the heat to boil public opinion. When it boils and the heat is greater than that of the enviro wackos, congress will react and there will be enough drilling to settle the public.

I don’t think they can go to the election without some drillling, relaxation of refinery regulation


12 posted on 05/23/2008 1:13:21 PM PDT by bert (K.E. N.P. +12 . The Bitcons will elect a Democrat by default)
[ Post Reply | Private Reply | To 2 | View Replies]

To: SAJ
Now, where in your experience, where on this planet does someone require a 50%-of-net-contract-value as a performance bond?

Government contracts?..........

13 posted on 05/23/2008 1:13:43 PM PDT by Red Badger ( We don't have science, but we do have consensus.......)
[ Post Reply | Private Reply | To 10 | View Replies]

To: SAJ
Sounds good to me. I think pension plan managers should be slammed if they're in futures markets, and violating ERISA.

Why couldn't the CFTC raise the margins and provide the exemptions that you stated? I think the point here is to make it more difficult on strictly speculative traders. They're making their money on the volume discounts and leverage. Just make it tougher on them.

14 posted on 05/23/2008 1:13:48 PM PDT by Night Hides Not (John McCain is Lucy, McCainiacs are Charlie Brown, and the football is a secure border.)
[ Post Reply | Private Reply | To 7 | View Replies]

To: Red Badger
Agreed. And guess who'll be asked forced to bail them out when -- not if -- some of them get caught wrong in a spec mkt, eh??

Get the pension funds OUT of spec mkts NOW. Should've been done years ago, but the Regress doesn't enforce ERISA worth a damn.

15 posted on 05/23/2008 1:16:04 PM PDT by SAJ
[ Post Reply | Private Reply | To 11 | View Replies]

To: Red Badger
"I don't think that the margin requirements per se are going to have any impact on it," Bodman said in an interview on CNBC television.

B.S.

There may be legitimate reasons not to raise margin requirements, but it would almost certainly bring down oil futures prices in a hurry, simply because it would reduce the amount of dollars chasing contracts.

16 posted on 05/23/2008 1:19:58 PM PDT by B Knotts (Calvin Coolidge Republican)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Red Badger

Of course it would, you lower the profit margin, the money moves elsewhere, what an idiotic statement to say this would have no effect.

Make the margin requirement on all energy futures to be 75% and raise the capital gain tax rate on this trading as well, and you’ll see the speculative bubble burst quickly.


17 posted on 05/23/2008 1:21:33 PM PDT by HamiltonJay
[ Post Reply | Private Reply | To 1 | View Replies]

To: Red Badger

Do it ,its worth a try.


18 posted on 05/23/2008 1:23:38 PM PDT by linn37 (phlebotomist on duty,its just a little pinch)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Night Hides Not
Sorry, FRiend, but there are no 'volume discounts' in futures. Every contract in a mkt is for the same amount of goods, and each one ''costs'', in terms of margin requirement, the same number of dollars.

Margin-raising is ineffective, as regards the big specs. Why? They'll simply move to SIMEX, DUBEX, Rotterdam, or London. Capital knows no borders.

What WILL cool out the big specs is the following:

1) Suspend Section 1056 of the IRS code specifically regarding big specs in energy mkts. (Explanation on request, it's somewhat technical.)

2) ERISA enforcement. This will remove, in very short order, ALL the pension-fund money that's currently in spec mkts.

3) Felony sanctions for position-limit violations. Right now, all the big specs get when they violate position limits (which some of them do routinely, btw) is a slap-on-the-wrist fine. Make it hard jail time.

4) A revision in daily trading limits, and a change of procedure when a daily limit is touched. (Again, technical, will explain at your request).

Given only the will, these four provisions could be executed in 30 days' time or less. Having been a futures trader since 1972, I guarantee you on my life that the mkts in which these are enforced will be cleared out of ''hot money'' and the overparticipation of the big specs in 2 weeks or less.

19 posted on 05/23/2008 1:24:48 PM PDT by SAJ
[ Post Reply | Private Reply | To 14 | View Replies]

To: HamiltonJay

See #19 for detailed reasons why raising margins won’t have any effect except curtailment of liquidity at NYMEX. No other effect in this world.


20 posted on 05/23/2008 1:26:42 PM PDT by SAJ
[ Post Reply | Private Reply | To 17 | View Replies]

To: Red Badger

You know, ever time we’ve gotten a huge equity bubble, the SEC has raised margin requirements for stocks. In the 1920’s, you could buy stocks on margin the way you buy futures today - on about a 10:1 leverage.

After the ‘29 crash, the margin requirements were raised significantly.

After the dot-bomb bubble imploded, the SEC (and brokers) raised the margin requirements on small, speculative stocks of companies with short trading histories. Now, it is the practice of my broker that they won’t allow you to buy stocks in thinly-traded companies with short listing histories without 100% cash to do so; ie, no margin loan on these stocks at all. Even on big, stable companies, I can get only 50% margin loans (ie, if I own $100K of IBM, my margin based on that position is $50K buying power).

There’s no reason why we shouldn’t raise margin requirements for futures. The people the commodities markets were originally meant to serve (ie, farmers and buyers of farm commodities) are being washed out of their hedge positions by the increasing margin requirements that are brought on by the rapid rise in the price of commodities outside supply/demand fundamentals.


21 posted on 05/23/2008 1:30:39 PM PDT by NVDave
[ Post Reply | Private Reply | To 1 | View Replies]

To: SAJ

Could you give pointers or background on the IRC Sec 1056? I’m all ears, to quote H. Ross...

I completely and vehemently agree on enforcing the ERISA statutes. You and I both know that futures are risky, that huge losses can be had (as well as huge gains) and when funds like CalPERS get in there and lose huge amounts of money, they’re going to be hitting up the taxpayers (again!) to make them whole as a result of getting into markets where pension money has no business being.

Can you also explain the daily trading limits too? Or give me a pointer where I can learn on my own? Thanks


22 posted on 05/23/2008 1:33:49 PM PDT by NVDave
[ Post Reply | Private Reply | To 19 | View Replies]

To: Red Badger

I am simply shaking my head at the mind numbing ignorance being rattled around on this thread...

If you call your cable or phone company for service and end up at a call center in a Bombay suburb, what makes you think for a minutes that the speculative traders are going to keep trading on the NYMEX when you make it more difficult to trade there?

There are functioning commodities exchanges in at least 20 major cities around the world — three in the US alone. Making it more difficult to trade here in some kind of half mast attempt to bring down the price of oil will just move the action to London, Singapore, Hong Kong, or Johannesberg. C’mon, folks — we’re supposed to be the ones that actually think — let the dammed marxists run around raging against the machine...

If you want to reduce the price of oil, try strengtheneing the dollar. An increase to the fed rate from its current 2% to about 8% ought to cut the price of oil by 30% or more within the month.

{Got real quiet in here all of a sudden}


23 posted on 05/23/2008 1:35:41 PM PDT by L,TOWM (If the GOP is this desperate to lose, who am I to stand in their way?)
[ Post Reply | Private Reply | To 1 | View Replies]

To: L,TOWM

We have no control over the Fed, unfortunately(?). Is it a good practice for the owners of the stock in oil companies to be trading futures in oil?........


24 posted on 05/23/2008 1:41:18 PM PDT by Red Badger ( We don't have science, but we do have consensus.......)
[ Post Reply | Private Reply | To 23 | View Replies]

To: SAJ

My god, some one that actually knows something.

Watch out, man. Your going to get a lot of abuse from the people that get their economics lessons from ayn rand novels and newsletters from da misses (van misses that is). I have to laugh on most of these economics and markets threads. Laughing keeps from screaming in terror.


25 posted on 05/23/2008 1:43:22 PM PDT by L,TOWM (If the GOP is this desperate to lose, who am I to stand in their way?)
[ Post Reply | Private Reply | To 19 | View Replies]

To: Red Badger

lol you get the point


26 posted on 05/23/2008 1:43:53 PM PDT by boomop1
[ Post Reply | Private Reply | To 8 | View Replies]

To: taildragger

I don’t think raising it that high would be useful, at least not on everyone.

There are several different parties now in the commodities markets. Traditional commodities markets have had:

- producers, forward contracting and hedging
- consumers, forward contracting and hedging
- speculators, helping make a market along the way.

These people aren’t the problem, as they’ve always been in the markets.

The recent problem is caused by huge “commodity index funds” and “managed commodity futures” products which people are treating like stocks. Look at the ETF’s “DBA,” “DBC” and others like these.

Speculators are just that - speculators. They’re speculating that there is a price movement going to happen in the future based on some information, analysis or condition in the future that isn’t currently priced into the futures contracts traded on the market. That’s it. Once the price movement happens, a speculator will take profits and exit the position, or if the timeframe passes, the speculator might exit with a loss.

The recent “commodity index” funds and vehicles have brought HUGE amounts of money into the commodities markets that is trying to treat commodities as an “investment” - the way you or I might buy a SP-500 index fund.

This is the problem, IMO. Commodities are NOT an “investment.” Companies that make, consume, add value to or otherwise touch commodities might be an investment, but the commodity itself is simply not an investment. Look at gold. There’s all manner of people who keep talking about “gold as an investment.” When measured as an investment, gold’s track record is horrible. Yes, it has price spikes, but, as with all commodities, eventually more production comes into the market to capitalize on high prices and the prices come down again. The prices continue to go down until low-efficiency producers are pushed out of the market, the excess production capacity is removed from the market and the prices stabilize. Along the way, a commodity’s price might go up or down as a reflection of the currency used to buy or sell the commodity, but overall, there isn’t a net return to someone holding the commodity as an ‘investment’ the way there is for someone holding a stock in a good company or an index of stocks.

The commodity index ETF’s and other such instruments don’t settle their trades in the commodities markets the way a speculator, producer or consumer does. When the settlement date of a futures contract approaches, these commodity index ETF’s simply sell their current holdings (ie, settle in cash) and then they immediately buy contracts further out in time - ie, they roll the money forward, regardless of the price of the contracts in the future. This looks like demand and the market responds by raising prices out in the future, regardless of what production & consumption in those markets might be in the future.


27 posted on 05/23/2008 1:48:31 PM PDT by NVDave
[ Post Reply | Private Reply | To 6 | View Replies]

To: SAJ
The closest I ever got to commodity trading was when I passed the Series 3 in 1984, while a trainee at EF Hutton. Two months after I passed the Series 7 and received my license, EFH pled guilty to those 2000+ counts of check kiting.

I don't know how much of the trading is taking place in ERISA accounts, but retirement plans have no business in such volatile markets.

I'm so wrapped up in corporate tax returns, that I have no desire for new "technical" discussions. However, I do appreciate the offer.

28 posted on 05/23/2008 1:50:02 PM PDT by Night Hides Not (John McCain is Lucy, McCainiacs are Charlie Brown, and the football is a secure border.)
[ Post Reply | Private Reply | To 19 | View Replies]

To: Red Badger
Is it a good practice for the owners of the stock in oil companies to be trading futures in oil?........

Depends on your perspective. If Marathon Oil owns a large block of their own stock, it would be a normal business practice for them to be "speculating" on oil to make sure they get delivery of their company's basic raw material.

CALPERS owning a large block of Exxon Common and playing oil futures contracts, well, maybe that's another story, but money tends to go where it can make a good profit. A previous post made a point about ERISA enforcement on pension plans and futures, but where does that stop? A blanket prohibition on Pensions or other institutions from investing in Hedge funds or natural resource ETFs? No one ever made the argument that capitalism is not messy or does not screw over a few people all the time or even most of the people some of the time. But the alternative is usually considered worse, unless you are a Marxist.

29 posted on 05/23/2008 1:51:59 PM PDT by L,TOWM (If the GOP is this desperate to lose, who am I to stand in their way?)
[ Post Reply | Private Reply | To 24 | View Replies]

To: SAJ

While I agree enforcement of existing laws and modifications of other regs need to be done as well (something I doubt we’ll honestly see sadly). I don’t agree wholey that the money will all move to different markets. Surely some will, but if you raise the capital gain rate on such trades as well, guess what? Doesn’t matter where you made your profits, you are US based, you pay the tax... which is why the need is for raising of margin as well as increased capital gains rate on energy trades.


30 posted on 05/23/2008 1:54:38 PM PDT by HamiltonJay
[ Post Reply | Private Reply | To 20 | View Replies]

To: L,TOWM

The nut of the problem there might be that we’ve passed the point where the Treasury or Fed can do much about the dollar with the political situation as it exists.


31 posted on 05/23/2008 1:57:41 PM PDT by NVDave
[ Post Reply | Private Reply | To 23 | View Replies]

To: L,TOWM

The point where it should stop is where the risk for pension benefits outweighs the returns they could make. The job of a pension fund is to invest money used to pay retirement benefits, not to maximize profits to enrich some young turk who wants his 2-and-20.

Once a pension fund has achieved a level of return to guarantee the obligations of the fund to the beneficiaries, just what point is there in taking on more risk to achieve greater gains?

Because if the fund loses money (lets say that they lose so much money they’re not able to meet their obligations), guess who is on the hook?

You, me and every other taxpayer.


32 posted on 05/23/2008 2:02:06 PM PDT by NVDave
[ Post Reply | Private Reply | To 29 | View Replies]

To: SAJ

Ironically, raising margin requirements could actually push UP oil prices by inadvertently aiding the “speculators,” which really these days are pension funds like CalPERS and Hermes (UK).

They buy packaged commodity index deals structured for them by the big investment bank, which are “fully funded.” In other words, Calpers puts up the entire price of the futures contract, of which 5% gets put “down” for the margin requirement and the rest is invested in treasury bils, etc. Raising the margin requirement would only trivially reduce the actual return for the index fund investment.

On the other hand, raising margin requirements would devastate the real speculators, who are needed to come in as shorts against the overwhelmingly “long” positions of the pension funds. Bottom line, sharply fewer sellers and just as many buyers. Result: more price increases.

The deck is stacked against the sellers, who mostly are still subjected to position limits whereas the pension fund “longs” are exempted since they go thru swaps dealers who are treated by the CFTC as if they were “commericals.” The game is heavily rigged to the long side.

The dirty little secret is that the government likes high oil prices (to screw the Chinese). You could claim the givernment ain’t smart enough to rig a market this big. But if you have the Ruskies, the Saudis and the oil majors by the balls, and can channel enough government-run pension money into the market, you can run prices to the moon and back at whim by tinkering with a few of these arcane market regulations. The truth is that the gummint can’t be this STUPID as to let these terribly flawed policies continue in effect for years and year while market prices go crazy. Its a bidness plan.

BTW, I wonder what the REAL story is behind all those CalPERS honchos bailing out recently en masse. Maybe they couldn’t take the guilt of what they’ve been asked to do.


33 posted on 05/23/2008 2:04:03 PM PDT by Tenega
[ Post Reply | Private Reply | To 7 | View Replies]

To: NVDave
Section 1056, aka the 'Rostenkowski Rule', originated in the Tax Reform Act of 1986. This Act curtailed the use of devices such as 'butterfly straddles' (don't ask ...g!) as tax avoidance devices, among many other provisions.

Rostenkowski was chairman of House Ways and Means committee, and from Chicago, just coincidentally. CBT and CME approached him while the bill was being drafted, and pointed out (quite accurately) that they were going to take a huge hit in volume if the Act just barred out the practice of interyear tax spreading. Rostenkowski then inserted 1056 into the IRS code -- didn't bother telling anyone about it, either (cute, no?).

What it says, boiled down to plain English, is this: ANY futures trade, whether profitable or losing, is subject to tax treatment as follows, 60% long-term cap gains, 40% short-term cap gains.

Think about this for a minute. Let's say I'm a day-trader (I'm not; that's like shooting craps with the other guy's dice). Suppose, on one of my trades, I buy June SP (that's S&P 500 Index) at 10:00am and sell it back 8 pts higher at 10:05am. I've made $2000 less commissions, call it $1900 or so, and 60% of that is taxed as long-term gain, or at something like 5% after the Bush tax cuts. So, under 1056, 5 minutes has become equal to six months (well, 60% of it, at least...g!)

Now, as it happens, I trade principally in futures options and the term of a typical trade is more like 3 wks or a month. The same tax treatment applies to these trades.

The Regress should have the IRS suspend 1056 for large specs in energy mkts, taxing their trading profit at whatever the applicable rate would otherwise be.

Unlike raising margins, which can only be done on US exchanges (and not SIMEX or DUBEX or London), suspending 1056 will affect the big specs' worldwide income, no matter where they trade. And some number of them will find something else to trade, at the favourable tax rates, rather than energies.

Clear enough, I hope.

Now, as to trading limits. In most American futures mkts, there is a maximum amount that a mkt's price can change during a session, and this is called ''the limit''. US Energy futures mkts, though, have a peculiar practice -- when a mkt reaches ''limit bid'' (i.e. no more sellers at or below the daily limit), the exchange effectively calls ''time out!'', lets everyone catch their breath for 15 or 30 minutes, and then reopens with higher daily limits.

Effectively, on a given day, there is NO maximum limit. This needs to change, and another change should be implemented, too.

When a mkt touches -- just touches -- limit bid or offered, the trading rules need to be changed. For hedgers and small specs, no change, enter any order(s) they like. For big specs, though, in the case of limit bid, they should be prohibited from bidding for the remainder of the session if they entered the session with a long position. They can sell (offer) all they like, but they would be prohibited from buying, even if the mkt traded lower away from the limit bid price.

Also, as a sidebar, the daily limits in energies should be shrunk, and subject to the same type of consecutive-limit expansion we see on CME and CBT (which is now owned by CME). Told you it was a bit technical.

Hope I've answered your Qs clearly, and good trading to you!

34 posted on 05/23/2008 2:36:13 PM PDT by SAJ
[ Post Reply | Private Reply | To 22 | View Replies]

To: Tenega
Yep, quite right. The abuses of customised index products is rampant...but then again, we're talking about such folks as Goldman Sachs, so what the hell do you expect, eh?

Simple solution. CALPERS, et al., have no effing business in spec mkts in any case. Just enforce ERISA (what?! the gov't ENFORCE something except when convenient? Shocking, simply shocking! Cue Claude Rains...), and hit them over the head with ''prudent man'' doctrine.

Won't happen, of course. But it should.

35 posted on 05/23/2008 2:39:21 PM PDT by SAJ
[ Post Reply | Private Reply | To 33 | View Replies]

To: HamiltonJay
Yes, but your scheme shoots both the sheep AND the wolves.

You would raise taxes both on hedgers and on small specs, NEITHER of whom are contributing to the problem. Until you limit your notions to suspending IRS Section 1056 for big specs (Form 50 filers) only, you'll get no support from me.

Also, don't kid yourself m'friend. I've known personally half a dozen of these hot-money fund managers, and they'll liquidate a position in one country and re-establish the same or an equivalent position in a different country in less time than it takes to drink a cup of coffee. And they'll do it even faster if they'v a positive economic incentive -- such as vastly higher margins -- to do so. And they'll do it TO A MAN, because their performance reviews depend considerably on not letting their competitors get the jump on them.

To think otherwise is perhaps pleasant, but it's a bloody pipe dream. That ain't the way THIS world works, mate.

36 posted on 05/23/2008 2:45:26 PM PDT by SAJ
[ Post Reply | Private Reply | To 30 | View Replies]

To: NVDave
You know, ever time we’ve gotten a huge equity bubble, the SEC has raised margin requirements for stocks.

Right, and they've been ooohhh so effective./sarcasm

There’s no reason why we shouldn’t raise margin requirements for futures.

No reason, other than it won't work.

37 posted on 05/23/2008 2:59:07 PM PDT by curiosity
[ Post Reply | Private Reply | To 21 | View Replies]

To: L,TOWM
Von Mises was a genius. He understood markets thoroughly, as well as and goobermint's distaste for free markets.

We have these price dislocations today because of goobermint actions, not despite goobermint's best efforts.

I trust you've heard the clip, which has been played EVERYWHERE, of the idiot Maxine Waters for once honestly saying what she wants to do to oil companies (and presumably the rest of the economy). If not, don't miss it -- she and her ilk **intend** to try to destroy the economy. Her own words, on the floor of the Regress, clear as a bell.

Regulation is necessary, because some number of mkt participants will try to cheat others, and they must be stopped. That, however, is no longer the purpose of regulation, except perhaps incidentally, when the goobermint finds it convenient.

38 posted on 05/23/2008 2:59:45 PM PDT by SAJ
[ Post Reply | Private Reply | To 25 | View Replies]

To: SAJ

Gentlemen et-al, futures have and never will be my speciality, Thanks for the education. My Best, Taildragger


39 posted on 05/23/2008 3:24:44 PM PDT by taildragger (The Answer is Fred Thompson, I do not care what the question is.....)
[ Post Reply | Private Reply | To 10 | View Replies]

To: SAJ

Many thanks for the info.

I’m familiar with butterflies, straddles and strangled from books on options I have. I don’t use too many complex option strategies in trading stocks, but I’m somewhat aware of them.

Now I see what you’re advocating and how it would help. Being off-shore in the Caymans would offer no sanctuary for the funds, unless they never wanted to repatriate their earnings.

I’m always happy to meet another trader, even tho I don’t trade futures. Any info you’d like to toss my way will be gladly received. Thanks for your time...


40 posted on 05/23/2008 3:40:14 PM PDT by NVDave
[ Post Reply | Private Reply | To 34 | View Replies]

To: NVDave
Not to be commercial at all, but yr hmbl srvnt wrote a rather good book on options trading, five years ago.

If you get a spare moment, you might look up ''Trading Options to Win'', published by John Wiley & Sons, 2003.

Or not. Please be assured that I will not make a penny whether you decide to take a look, or don't.

FReegards!

41 posted on 05/23/2008 5:51:37 PM PDT by SAJ
[ Post Reply | Private Reply | To 40 | View Replies]

To: Red Badger
Sorry, Badger, not so. Goobermint contracts -- and I speak from direct experience, having written software for our glorious goobermint for a decade or so -- usually included liquidated damages provisions (quite sensibly), but I've never put up a dime as a performance bond.

Perhaps it's different in construction contracts, but I rather doubt it. If a construction project would take any length of time, a company that put up 50% of net contract value would lose its ass!

42 posted on 05/23/2008 10:05:27 PM PDT by SAJ
[ Post Reply | Private Reply | To 13 | View Replies]

To: SAJ

I think I’ve followed you so far but ... why not the hedge funds ? If Goldman Sachs is running the hedge fund, doesn’t that count as a “big spec” ? If not why not ? (trying to learn something here!)

Thanks for all your info.


43 posted on 05/24/2008 9:17:47 AM PDT by nicola_tesla ("Life is Tough... It's Worse When You're Stupid".... John Wayne)
[ Post Reply | Private Reply | To 36 | View Replies]

To: nicola_tesla
Goldman trades spec in its own accounts, and they are indeed a large spec by CFTC rules. The problem here is different.

The problem occurs when a big pension fund -- say, CALPERS -- approaches G-S and says something like, ''We want to balance our asset portfolio and put 5% (or whatever amount) into commodities''.

The first problem is that CALPERS is subject to ERISA regulations (if/when the goobermint decides to enforce them, which is a separate question, of course...). As such, they are barred from participating in a number of areas, and commodity futures is one of them. The ''prudent man'' rule, and all that stuff, right?

So, what G-S does is to engineer an end run around the regulations. CALPERS **can** trade indicies, S&P 500 and Russell 2000 and whatnot, and G-S create an index product for them, or invest them in one of Goldman's existing index products.

CALPERS puts up 100% of the notional value of the index product, whatever it happens to be, because they are tightly limited as to the use of leverage. G-S allots 10% or so of CALPERS' stake (whatever is a mkt-competitive ''margin'' percentage) to the index product in question, takes a fee (of course), and puts the remainder into T-Bills or some similarly risk-free or nearly risk-free instrument.

In effect, CALPERS doesn't lever itself here, but Goldman does it for them. And this is the second problem. Leverage-by-proxy is not, afaik, prohibited. It certainly should be, however, because if the index product goes south, which is hardly an impossible occurrence, CALPERS will lose some sizeable proportion of its initial stake, T-Bills or no. It doesn't matter who is **doing** the levering; what matters is the effect on the capital stake should the levered instrument misperform, ok?

The third problem also stems from the way CALPERS is regulated. An index product -- ANY index product -- is what is called LOSO, or 'Long Side Only', because pension funds et al. are barred from selling anything short (reasonably enough).

Now, CALPERS by itself isn't any sort of problem. It's huge, to be sure, but so are many futures mkts. The problem occurs when LOTS of pension funds do this, because their capital base -- even the 5% or 8% or whatever portion they want to put into commodities -- can and does ultimately overwhelm the mkts in which they participate.

Net-net, what happens is that a given mkt or mkts, in the present case crude oil and products, sees an enormous infusion of capital, and every dollar of the new capital is on the long side of the market.

Now, here's your final exam for this little course in Index Futures 201:

Under these conditions, what MUST happen to the price of the affected markets, and why is this type of 'investment' a long-term problem for the US (and world) economy?

500 words or less.

=========

I hope the explanation above is sufficiently clear. If not, please say so, and I'll elabourate a bit more. FReegards to you!

44 posted on 05/24/2008 9:50:26 AM PDT by SAJ
[ Post Reply | Private Reply | To 43 | View Replies]

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson