riverpirate

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    • Fri Jul 18th 17:18 PM
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      Wells Fargo Lays Bear Trap on Wall Street
      While the dividend move was questionable, one thing is for sure, Wells is not in the same boat -- not even in the same ocean -- as IndyMac, CFC, and Bear Sterns. Be careful what you shorties focus on was the message, loud and clear. While the apacolypse-wishers focus on the 265m affected by the change to 180 days, the smart money doesn't turn a blind eye to the very high Tier 1 capital they have and the fact that the bank is highly diversified, they aren't a one-trick pony by any means.

      Also, they have always been the most vigorous managers of credit quality in their peer group, by a long shot. It's not so hard to believe that they are faring the best (sans USB) out of the banks when the have consistently had the best counterparty rating of any domestic bank, period.

      A lot of banks are in serious trouble. Well's trouble isn't THAT serious, and they wanted to let you know that, shortie, very emphatically, so that you wouldn't sully their reputation and ruin their access to capital.
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    • Wed Jul 16th 11:28 AM
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      The Global Food Crisis: From Panic to Organic
      Sure, small scale farming can work if your only goal is to stay alive and feed yourself.

      Bottom line however is that the wealth we enjoy in the world -- the whole world -- is largely the product of one very powerful phenomenon: specialization (aka utilizing comparative advantage).

      If we were all to grow our own food locally, 3/4 of the world would be farmers as a primary occupation. Good luck finding someone to roof your house, fix your car, pave your roads, do your taxes, build you a TV, or make you a coffee. No, they'll all be to busy tending to their gardens.

      A fine bit of eco-ignorance this is.
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    • Mon Jun 2nd 14:35 PM
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      Is Oil a Bubble? Part Two
      Let's straighten out some ideas here. "Supply and demand" can mean a lot of things in this context:

      1. Current supply and demand of crude oil in the cash market.
      2. Future supply and demand of oil in the cash market.
      3. Current supply and demand for futures contracts.
      4. Future supply and demand for futures contracts.

      Now, of course oil's price is a function of "supply and demand," but what's the mix? What are the driving dymanics in above and which are irrelevant.

      My argument about hoarding was misunderstood I believe. Oil is NOT being hoarded in the cash market -- the spot market for oil is clearing Refiners tanks are actually full right now because the current supply and demand dynamic is slight OVERPRODUCTION vs. USE.

      Futures contracts, however, ARE BEING HOARDED by long only investors. If with every succeeding month more money enters the futures market for oil with a long bias (as has been the case recently), that means that each month the futures market will have to find MORE people willing to sell them contracts. With each month that passes, the market must find new net sellers of futures contracts in order to fill the longs' buy orders.

      This is accomplished by the market mechanism by an increasing price. The rising price lures people in to the other side of the contracts. The rising price of oil in the futures market is techincally due to only one thing (no. 3 on the list), an imbalance in the current supply vs. demand for oil futures.

      Now the other half of the story -- the link between futures and spot.

      The cash market for oil is working just fine and there is plenty of oil to go around, which is why the saudis "officially" refuse to increase production: THERE IS NO ONE TO SELL IT TO. Everyone who wants a liquid barell of oil is getting one, and the storage tanks are full to the brim.

      So what's the link between the two markets? Let's see if i can articulate this better. If you are trying to buy a barell of oil in the spot market you have a couple ways of "VALUING" that barell of oil:

      1. Manufacture Cost + Profit: "I will pay 10% more than it cost to pump"
      2. Intrinsic Value: "I will pay what the oil barell is worth to me"
      3. Future cost - discount: I will pay a price that reflects what oil is worth next month, price-adjusted for immediate delivery.

      Now here's the thought experiment: If oil were being priced based on number 1, why would you sell a barrell of oil as a producer for $55 if you could make more than double that by sitting on it for a month? If method 1 were pricing spot oil, no oil would have been delivered this last month -- it would have been hoarded to sell futures against.

      It is precisely BECAUSE liquid oil is not being hoarded that you can be certian the price is being set by the futures market. If the prices were independent, producers would hoard the oil rather than accept normal margins. The spot price of oil is skyrocketting along with the price of the futures because the mechanism for hoarding doesn't exist -- tanks are full. The only way to hoard is to leave it in the ground, ala Saudi Arabia.

      What does this mean? All it means is that the price is being set by the FINANCIAL MARKET DEMAND, not THE OIL MARKET DEMAND. I fully expect the prices to remain high, but if it fell to $70 tommorow I wouldn't tell you "there must have been a major demand reduction or new wells started magically producing." No, I would tell you "Someone must have sold a lot of Futures."
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    • Fri May 30th 13:58 PM
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      Commented on:
      Is Oil a Bubble? Part Two
      Just think for a second about the actual dynamics faced by market participants:

      1. Refiner. He needs to buy oil in the cash market and/or futures market. He knows that the crude costs $45 on average to pump. Why would he be willing to pay $135 for that barrel? Because he has to. Refining margins are pathetic right now due to this, but refiners have a lot of leeway to pass on their costs due to the public's general accetance of volitile gas prices. In short, the refiner does not care about the price he pays unless it will cause him to operate at a loss -- which will only happen if somehow demand for gasoline fails to slacken AND his ability to pass on costs is constrained. Barring an act of congress this will not happen.

      2. Index Speculators. They bet that oil will be scarce and are willing to pay a premium -- any price really -- to have a piece of the action. They are willing to pay any price because no matter what that price is, they belive it will be higher due to 'supply and demand' dynamics in the future.

      2. The producers. The producers SELL their crude to refiners in both the cash and futures markets. Many people dismiss the oil runup as a bubble because "cash and futures markets' operate independently and there is no delivery of paper barrels. I belive this is a TRAGICALLY flawed argument. Why? If I'm a producer who's average cost to deliver a barrell is $45, I would be willing to sell my oil for $50 any day, right? Easy money. However, why would I sell my oil on the cash market (which is detached from the futures market) for $50 when I could wait 1 month and get the future's price, which will make me literally 17X more profit!

      The truth is while many people say that CASH and FUTUTES markets operate independently, they hold each other hostage because there would be an arbitrage opportunity if the prices diverged too much. What would that arbitrage opportunity be? Hoarding oil! This isn't rocket science really. Until refiners operate at a loss or are no longer able to pass on the cost of their oil inputs, they have no real incentive to challenge the price they are paying in the cash market. Additionally, the cash market participants must charge a similar price to the futures price, because if it were wildly different they could make good money by simply holding on to it for a later date. Since refiners need oil to keep doing business, they pay the cash price, which is tied to the futures price by an arbitrage mechanism.

      Guess what, the futures price is set by a steady deluge of "hot money" from every corner of the market right now. From hedge funds, to index funds, to armchair specs, they all want a piece of the action. In order to get sellers for their INSATIABLE demand for contracts they are running up the bids: it is the only way they can attract parties to the other sides of the contracts.

      What makes matters worse, all the other world grades are held hostage to the WTI price. Why? Because if the WTI price is $135 the other grades could be arbitraged if their price did not rise to a level that reflected $135 minus deminished refining potential. The whole of the world's oil is indeed being priced by a deluge of demand for futures contracts by non-commercial players, and I've yet to hear a compelling reason why these dynamics are not what is exactly what is taking place.
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    • Thu May 29th 17:46 PM
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      'Index Speculators' Responsible For Commodity Prices?
      Think about the the housing bubble for a second: there was a also a seller for every buyer during the ascent of the housing bubble.

      The key to every bubble is not the actual moneyflow, it is the EXPECTATION of higher prices. The hypothesis is no different here -- Index speculators are not buying houses to live in them, they are buying them on the expectation of perennially greater prices. That someone would sell oil futures (or be short) makes perfect sense as long as the fools remain solvent.

      For example I am willing to go short oil here because I think it's hit a top. I may lose, as short have in previous contract months for quite a while, but as long as I don't develop the expectation that crude prices will be perennially higher every contract expiration I will be willing to take the sell side once and a while.

      What you're seeing with the passage of time is fewer people willing to take the sell side. The bids on the contracts keep going up, up, up, to convince people like myself to write contracts -- because we don't want to! The skyrocketting price of oil is the result of a TON of PERMA-LONG money dragging reluctant sellers into the market by the only way they can: jacking up their bids.

      So too with the housing bubble. As prices ramped up and up speculators were willing to buy, for instance, 3 condos in florida, with bank money, before the condo's had even been built, on the expectation that they could liquidate them for certian profit. There was a buyer and seller for EVERY housing transaction -- except the last one. That's how bubbles work.
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