John Kemp is a Reuters market analyst. The views expressed are his own.

Oil hedgers held the smallest net short position in WTI-linked futures and options for at least six years in the week ended April 24, according to commitments of traders data published by the U.S. Commodity Futures Trading Commission (CFTC).

This physical hedgers category, which the CFTC identifies as “producers, merchants, processors and users” (who use futures predominantly to manage or hedge risks), typically runs an overall short position in U.S. crude futures and options, according to CFTC records.

Companies that sell or store physical oil and run a short position in futures and options to hedge price changes generally run larger positions than oil buyers who hedge their price exposure with a long futures position. But that net overall short position has been dwindling since the start of 2010. At the close of business on April 24, short futures hedges outnumbered long ones by just 15 million barrels, down from 220 million at the same point in 2011 and 256 million barrels in 2010 (Chart 1).

Chart 1

If the net position continues to adjust at the same rate, producers/merchants/processors/users will find themselves net long of WTI-linked futures and options this week for the first time since at least 2006 (Chart 2).

Chart 2

From Producers to Banks and Dealers

The shrinking net short position held by physical hedgers is part of a big realignment of the oil derivatives market. Until 2011, producers/merchants/processors/users were the major net sellers of futures and options, while hedge funds and other money managers were the main buyers. This accorded with the theory of risk transfer and hedging pressure popularized by John Maynard Keynes and others in the 1920s and 1930s. Producers transferred (downside) price risk to investors by selling production forward, or hedging inventories, while investors gained exposure to any upward move in oil prices by buying derivatives.

The remaining positions were supplied by swap dealers, who were sometimes net long, sometimes short, depending on the imbalance between physical hedging and investor buying.

But two things have happened since 2010 and especially the start of 2011. First, net sales of futures and options by producers/merchants/processors/users have dwindled and now nearly vanished altogether. Second the swap dealers have stepped into the void to become the main sellers of futures and options to hedge funds and other money managers.

Swap dealers have not run a net long position in WTI since September 2010. In March, dealers ran a record net short of 404 million barrels of oil. It was the direct counterpart of the massive net long of 290 million barrels run by hedge funds and other money managers. Producers etc supplied only 53 million barrels of net short positions.

Where Have the Physical Sellers Gone?

It is not clear why the producer/merchant/processor/user community has stopped being a supplier of net short positions.

One possibility is that producers and stock holders have cut their forward sales as working inventories have fallen and WTI remains depressed compared with Brent, especially for forward dates, where WTI prices are subject to large discounts. Producers may prefer to retain price risk in the hope of realizing higher prices in future, rather than accept big discounts for locking in prices now. WTI futures for December 2014 are currently priced under $97 per barrel, compared with spot prices of $105.

Another possibility is that some producers have switched from hedging in WTI to Brent. WTI prices have been depressed owing to congestion around Cushing, while Brent is a better benchmark for seaborne crude sales.

A third explanation is that some hedgers, such as large oil companies formerly classified as producers, merchants and processors, have been reclassified as swap dealers, or that hedging previously conducted by oil companies is now being undertaken by banks and other dealers instead.

We don’t know. The CFTC will not disclose data on how it classifies market participants and on whether the policy has changed, despite requests, so we don’t know if the shrinking producers/merchant/processor positions are due to reclassifications, a change of behavior or a combination of both.

The lack of an explanation is unfortunate, because the disappearance of the producer/merchant/processor/user net short is as much a driver of oil prices as the accumulation of a massive net long by the hedge funds.

—John Kemp

Written by Bob English

Ahead of Tuesday’s Senate Banking Committee hearing on MF Global, we present the April 20 installment of Capital Account with Lauren Lyster, featuring futures industry veteran guest, Mark Melin. Ms. Lyster pulls no punches in the opener:

Has the case really gone cold? Or, are those who are in charge of the investigation, the “regulators” and the trustees, simply spraying teflon on every piece of sticky evidence that could lead to criminal prosecutions–and, ultimately–the recovery of stolen customer money?

We wish that MF Global were just a one-off affair–a bad apple, if you will. Unfortunately, it seems more likely to us that this is another milestone in the history of what we see as criminality, which has swept through the financial services industry, like some sort of Medieval Black Plague–the Black Death for capital formation. It seems the only time people are held accountable anymore, is when they commit crimes that affect the super-rich.

Bernie Madoff is a prime example…Madoff is securely behind bars, but Jon “Teflon Don” Corzine is busy ordering carmel-Frappuchinos at the local Starbucks as he goes to shop for office space in New York…bothered only by the low din of discontent emanating from the blogosphere (and shows like this, Capital Account). What a nuiscance we must be to the new God-fellas of Wall Street…

Nuiscance, indeed, to which we hope we are part. Here is a link to the entire episode, in which Ms. Lyster and Mr. Melin cover the following salient points, all pointing to a criminal intent to commit fraud, as well as the role of regulators and investigators:

Why was the MF Global back office cleared out with three top personnel allowed to leave, just as the firm was exeriencing its most serious liquidity (ahem solvency) crisis in its soon-to-be-terminated existence?

Why were C-level executives, far from being sequestered by investigators and being placed in an information silo, allowed to run the company for six weeks (prior to Mr. Freeh being installed as Trustee of the Holdings company)?

Why did Lois Freeh wait until early March to have MF Global Holdings USA declare bankruptcy, the very entity that retained the few remaining executives and employees and may have been cash-rich?

Why did Federal criminal investigators fail to so much as question Mr. Corzine nearly six months after the crime?

Why were large counterparties paid with wire transfers, when requests from lowly customers for wires were converted to checks (which ultimately bounced)? “Sloppy is when you don’t do things consistently. Sending all checks to customers and all wires to counterparties–that’s consistent.” See here for details published by John Roe of the Commodity Customer Coalition.

Why were the final days characterized as so “chaotic” when a properly programmed iPhone or Android smart phone (sorry, RIMM) should have been able to handle what amounts to maybe a few dozen megabytes of transfer instructions?

Just what were the details surrounding the successful lobbying effort by top level MF Global execs that effectively postponed reforms on rules that would limit use of customer funds (coincidentally, or not perhaps, just ahead of a $325 million bond offering by MF Global)? [For more details, see our prior piece from this week, which includes exclusive CFTC emails on the issue.]

Even Chuck Grassley, the sponsor of the now-widely criticized 2005 bankruptcy reform act, has stated, “The bankruptcy laws are written to ensure that company executives who were involved in the demise of a company because of fraud or mismanagement shouldn’t be eligible for bonuses,” Mr. Grassley said.

More broadly, MF Global customers have an absolute right to clawback of questionable margin payments and asset transfers from the broker unit that occurred in the weeks leading up to the firm’s demise because there was a clear pattern of intent to deceive investors and customers alike–from manipulating regulators and the regulatory process to changing business practices in the final wee–all of which ensured that customers would be last in line for the remaining morsels of the MF Global carcass. (And, as we have pointed out since early November, 2011, the very nature of the Corzine Trade from Day One was such that all the risk was put in the customer brokerage house, while profits were diverted to an offshore business unit).

“Fraud” is the operative word here. There is no dispute that the Commodity Exchange Act (sic, the law) has been broken, but until fraud is investigated, customers are at the mercy of a very fuzzy and opaque legal process.

It’s time for Congress to put pressure on those in charge of this investigation and oversight to break their own glass of silence and dare them to utter the magic “F” word.

To view the full video interview with Lauren Lyster and Mark Melin click here.

Bob English is the author of this article, the opinions expressed are entirely his own. View his work at:

http://english.economicpolicyjournal.com/2012/04/mf-global-roundup-so-far-great-escape.html

When one considers the lack of investigatory zeal in the MF Global scandal, it might raise questions as to the need to make the investigation of MF Global’s top executives – which is occurring some six months after a potential crime was committed – eventually a matter of public record.

MF Global is a story that publicly debuted with a fraud allegation. This is when CMEGroup president Terry Duffy famously proclaimed in Congressional testimony that critical account segregation reports had been falsified by MF Global to regulators during their final week of operation. Further, Mr. Duffy clearly called into question the honesty of MF Global CEO Jon Corzine’s now famous testimony “I simply don’t know where the money went.”

With credible acquisitions of potential fraud highlighting a major pronouncement regarding the eighth largest bankruptcy in the US, one might assume that an investigation, or at least questioning, of MF Global’s top executives might take place. This is particularly the case as reports had surfaced in leading publications quoting those close to the investigation as saying “the case is cold” and “prosecution is unlikely.” With all this, one might assume questioning of the top executives had taken place.

That didn’t happen.

According to the New York Times, MF Global’s inner circle of executives, including CEO Jon Corzine, General Counsel Laurie Ferber, president Bradley Abelow, along with newly employed Henri Steenkamp, Chief Financial Officer, had not been initially questioned after the “loss” of $1.6 billion in customer segregated funds. In Congressional testimony on March 28, 2012 rumors that top MF Global executives had yet to be questioned were confirmed when both Ms. Ferber and Mr. Steenkamp testified they had not yet been directly questioned by investigators. However, in this same testimony it was confirmed that Chicago back office employee Christine Serwinski, chief financial officer for North America, had been questioned twice. Sources have indicated that back office employees have undergone extensive questioning while watching MF Global top executives float freely through the company with impunity. These same sources say that the back office employees who remained at MF Global were sequestered and not allowed to talk to one another about MF Global or its demise, while MF Global’s top executives operated the company that was plundered and had the ability to wire transfer money out of MF Global for up to six weeks after the firm declared bankruptcy.

When it comes to investigations, the type of questions and how they are asked can greatly impact the outcome. Given the fact that an investigation into the top officers might never have taken place without public pressure, and with such un-even investigation of the back office, is it not reasonable to ask that the now long overdue investigation into MF Global’s top executives be made transparent so it can be held to a higher standard?

Transparency need not be immediately made public. It can occur after a trial or when the “case is cold.” The point is known transparency into a situation can alter behavior and operate as a most cost effective regulator.

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To follow the MF Global case in real time, go to www.Twitter.com/MarkMelin or visit www.Go2ManagedFutures.com

All contents Copyright (C) 2012 Mark H. Melin.

John Kemp is a Reuters market analyst. The views expressed are his own.

Continued under-performance by the main commodity indices during Q1 should convince any remaining holdouts that passive investment does not work and will never provide a satisfactory return over the medium to long run.

Some firms are promoting the concept of “enhanced beta” strategies that aim to provide a decent return by beating an index or a blended benchmark. But the performance of the main commodity indices has been so poor there is no reason why investors should want to replicate it, whether in enhanced form or not.

Commodities can provide a very attractive return, but investors must embrace a fully active strategy (either selective long-only or preferably full long/short) in order to achieve it. Any other strategy is bound to disappoint.

While many institutional investors have been wary about active management, skeptical about “stock picking” and hedge fund-type strategies, there really is no choice.
Serial Disappointment

In the first three months of the year, broad-based commodity indices such as the S&P Goldman Sachs Commodity Index and Dow Jones-UBS Commodity Index failed to benefit materially from either exceptional liquidity conditions or an improving global economic outlook.

U.S. equity markets notched up their best first quarter ever, according to The Wall Street Journal (“That’s a wrap: Stocks register a record first quarter”, March 30).
But apart from a very good start to the year, when commodity prices leapt on Jan. 3, returns to commodity indices have been poor. In fact the jump on the first day of the year accounts for more than half of all returns so far. Since the second day, Jan. 4, total returns on the S&P 500 index have been almost 11 percent, according to Thomson Reuters data. And returns on the GSCI? Just 2.4 percent. The more diversified Dow Jones-UBS index actually fell 1.5 percent.

Commodity indices failed to rally strongly despite almost ideal conditions. Continued support from the Federal Reserve. Another massive liquidity injection by the European Central Bank. A brightening outlook for the U.S. economy. Geopolitical tensions and a string of supply disruptions in the Middle East. Fears about shrinking spare capacity.

It was a good quarter for anyone with exposure to the spot price of oil. But many other index elements had a lacklustre performance or worse.

But this under-performance should not have come as a surprise. Passive commodity indices have failed to match the performance of equities over any realistic time horizon: 20 years, 5 years, 2 years, or the last quarter.
Active is the Only Approach

Commodity indices do not offer much in the way of diversification from macroeconomic and equity market shocks. They do not match, let alone outperform, the return on equities. And their potential as an inflation hedge remains unproven. They have certainly failed to benefit from the massive creation of liquidity in recent months.

There are excellent returns available for investors in the commodity markets. But those are returns to skill. They accrue to investors and fund managers able to spot turning points and time the markets, using either fundamental analysis or momentum-based strategies.

In contrast, holding a basket of commodity futures for months and years hoping for “roll returns” or spot appreciation is a recipe for disappointment. Equity investors have made up for all their losses since the financial crisis. Most long-term investors in passive commodity funds remain far underwater.

It is time to give the indexing approach a decent funeral. It simply does not work.

—John Kemp

In many ways, Wednesday’s House Financial Services subcommittee hearing on the eighth largest bankruptcy in US history was as much about what was not said than what was said.

Much attention was focused on MF Global assistant treasurer Edith O’Brien and her widely anticipated move of declining to answer questions during the hearing. Ms O’Brien has been at the center of questions surrounding her role in questionable money transfers of nearly $1 billion during the final days of MF Global’s existence. Speculation is Ms O’Brien received instructions from top officers at MF Global to transfer the money, a charge which has been denied by the executives, who generally claim either to not be aware of “where the money went” or claim they did not provide specific instructions to dip into customer segregated funds. A handful of money transfers were sent to the likes of JP Morgan and related MF Global overseas brokerage units in the final days of the firm’s existence. The staggering size of the money transfers makes it impossible for such transfers to have occurred without dipping into customer segregated funds, as the reported $1.6 billion “missing” from MF Global far exceeds the company’s net worth at the time.

While O’Brien was up-front about not answering questions, the remaining panelists might have just taken “the fifth” because their responses often didn’t answer questions.

In a contest for the most absurd answer of the hearing, MF Global chief financial officer Henri Steenkamp may be the winner. When asked about the historic money transfers in the final week of existence, Mr. Steenkamp claimed he was unaware of fund transfers due to his “global role” and he was engaged in “other serious matters” that apparently took his attention away from the draining of $1.6 billion in assets from the firm.

While the transfers were initially painted by quotes in news reports as due to “chaos” and implications were made that money vanished due to clerical errors, questions remain as to how $1.6 billion in cash – an amount in excess of MF Global’s total liquidation value at the time – could have escaped the notice of top executives. In fact, testimony highlighted how the bankruptcy trustee clearly identified October 26 as the date the segregated funds short fall was officially identified, while in testimony Mr. Steenkamp claimed learning of the transfers several days later.

“The height of absurdity is thinking that $1.6 billion simply vanished without the CFO’s knowledge,” noted Stanley Haar, who runs a managed futures hedge fund and has been a leader in bringing the MF Global issue to the attention of Congress.

When asked an obvious question regarding the role of creditor’s bankruptcy trustee Louis Freeh and his stated motivation to deliver assets to creditors as opposed to customers, Steenkamp answered with “I’m not an expert in bankruptcy.” Mr. Freeh is effectively Mr. Steenkamp’s employer and has authorized bonuses be paid to MF Global executives such as Steenkamp who have remained at the firm while it is being liquidated.

If Mr. Steenkamp was consistent in one area, it was avoidance of questions – and this drew the ire of Committee Chairman Randy Neugebauer, who flatly questioned Mr. Steenkamp’s honesty. At one point Congressmen queried Mr. Steenkamp regarding relatively arcane details of his college life, which he remembered. Then the Congressman proceeded in asking why the CFO of a financial firm couldn’t remember details regarding what were likely the most significant money transfers in MF Global’s 224 year history.

Ferber Confirms Investigators Finally Questioning Top Executives

While MF Global chief legal officer Laurie Ferber was generally evasive, one interesting piece of information to emerge is that investigators are beginning to question the firm’s top executives. Unlike MF Global’s back office, which had been questioned by executives early in the process, Ms. Ferber acknowledged that she will be questioned for the first time in April – close to six months after the fact. Mr. Steenkamp confirmed that he has not spoken to investigators, although his lawyers have answered questions. MF Global’s chief financial officer for North America, Christine Serwinski, who worked in the Chicago back office, confirmed in testimony she had been previously questioned twice by investigators. “I’m shocked,” said Congressman William Posey, speaking of the fact investigators have not interviewed MF Global’s top executives until long after the potential crime had occurred.

Ferber also made statements confirming that Mr. Corzine was involved in MF Global’s questionable money transfers to JP Morgan and she acknowledged she was responsible for compliance and disclosure to regulators. One issue in the MF Global case is that proper disclosure of segregated account balances was not made to regulators during the final week of the firm’s life.

Finger Pointing to Steenkamp, Serwinski, O’Brien

During a rare moment of candor, at one point Mr Steenkamp was asked who would have authority over money transfers and he apparently pointed a finger at Ms Serwinski, who proceeded to point the finger at an absent Ms. O’Brien. When Ms Serwinski was asked if she would have approved the wire transfer in question had she been in the office, she said she would not have approved the transfer.

Committee Treats JP Morgan to Soft Questions

Among other panelists was JP Morgan, which played a number of reported conflicting roles as MF Global’s primary lender, provided clearing services and was custodian of certain MF Global customer funds. Questions that might point more specifically to JP Morgan’s intimate knowledge that such money transfers took place from customer funds were left alone in the testimony.

####

Mark Melin is author of three books, including HIgh Performance Managed Futures. He taught managed futures at Northwestern University in Chicago and has consulted for a variety of futures exchanges, hedge funds and professional traders. He can be reached at: markhmelin(at)yahoo.com

Contents Copyright (C) 2012 Mark H. Melin all rights reserved.

Gold prices have fallen nearly 10% in the past month, but long-term fundamentals are strong, making this a good time to buy up the shiny metal, says Philip Klapwijk, global head of metals analytics for Thomson Reuters GFMS in Hong Kong.

“Well I actually think the dip that we’re currently experiencing, particularly if we go lower still is a good opportunity to start loading up on gold,” Klapwijk says. (more…)

Soaring oil prices have started to draw interest from contrarian hedge funds willing to bet the increase is a spike and not sustainable.

Hedge funds and other money managers raised their short positions in futures and options linked to U.S. crude prices (also known as WTI) by the equivalent of more than 17 million barrels in the week ending March 6, according to the Commodity Futures Trading Commission (CFTC).

It is only the third time this year money managers have boosted short positions in WTI. It was by far the largest addition to short interest for nine months, since the first week of June 2011, when hedge funds and other investors raised their short positions by the equivalent of almost 22 million barrels, in the aftermath of the May 5 flash crash.

Shorting the U.S. oil market remains strictly a minority interest. The overwhelming majority of hedge funds remain bullish, especially for WTI, given its more limited gains since the start of the year compared with Brent. Hedge fund long positions amount to nearly 326 million barrels of oil, compared with just 45 million worth of shorts, a ratio of 7:1.

So far there has been little indication of significant profit-taking among the oil bulls. Long positions are down only marginally from their peak of 332 million barrels at the end of February.

But the influx of new short positions—to both CME’s light sweet crude contract and the lookalike contract offered by ICE—was significant, increasing total short interest among money managers more than 60 percent from just 28 million barrels seven days earlier.

Even if oil prices have become locked into a spike, as some observers have argued, hedge fund shorts are taking a brave stand, putting on an early bet against the rally before there is more evidence it has run out of steam.

But the rate of price increases does seem to have tapered off since the start of the month, for both Brent and WTI , with April WTI in particular pulling back to levels first achieved three weeks ago, which might indicate a loss of momentum and be the first sign the market is peaking.

—John Kemp

After 2011’s volatile movements in the S&P 500 index, we received a long-term buy signal in mid October basis the June 2012 E-mini S&P 500 contract.

However, the market keeps bumping up against the 1365 to 1370 area and then sells off.

Currently on a long-term basis, the market would need to close below 1321 for a new short signal to occur. There is strong support in the 1337 area.

Our indicators are showing the market entering into an overbought region, but our long-term indicators can remain overbought or oversold for a while before the market finally begins to turn. However, we need to be aware of the area it has entered.

Read more

Copyright ©2012 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com www.shorecapmgmt.com Mark Shore publishes research, consults on alternative investments and conducts educational workshops. Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures/ global macro course.

Past performance is not necessarily indicative of future results.  There is risk of loss when investing in futures and options.  Always review a complete CTA disclosure document before investing in any Managed Futures program. Managed futures and futures trading can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone.  The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

3/10/2012

What can we say about corn basis May? Not a lot.

The market has been a real “yawner” and caught in trading range since mid December based on a longer term analysis when it bottomed at $5.8550. Since January we’ve had a long term buy signal, but the market is currently trapped between $6.67 and $5.99.

On a short term analysis we may be near a new buy signal as the market closed at $6.45. It is possible long and short term signals are converging towards a confirmation, however we need to see this market break above $6.70 to confirm a buy signal.

On a short-term basis $6.98 is our first resistance level, if $6.70 is broken. Somewhere between $7.14 and $7.31 would be the second resistance level. Support can be found in the $6.30 to $6.10 range.

Read more

Copyright ©2012 Mark Shore. Contact the author for permission for republication at info@shorecapmgmt.com www.shorecapmgmt.com Mark Shore publishes research, consults on alternative investments and conducts educational workshops. Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business in Chicago where he teaches a managed futures/ global macro course.

Past performance is not necessarily indicative of future results.  There is risk of loss when investing in futures and options.  Always review a complete CTA disclosure document before investing in any Managed Futures program.  Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone.  The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

It might be time to revisit the Kindleberger-Minsky framework of the anatomy of a bubble in assessing Asia. There are five stages of this anatomy: stage one involves a displacement such as a war, the introduction of new technology or financial deregulation.

Then comes a boom, such as we have seen with Asia’s tiger economies, particularly since the region’s late 1990s financial crisis. While stage two involves real organic growth, stage three involves leveraged growth based on underlying euphoria.

And next the stage is the one we seem to be at in Asia based on the debt issuance we have seen in the region over the past 15 months or so. That involves industry insiders selling, prior to speculators rushing to the exits.

What could have been more like an insider’s rush to the exits ahead of speculators than last year’s China property issuance frenzy? Yes, we are led to believe that the funds would be devoted to landbank acquisition and for capex needs. But the reality is that those funds were in most cases acquired in order to provide a liquidity cushion to see PRC realtors through the down-wave which is now punching through the China property market like there’s no tomorrow.

In other words the insiders knew only too well the state of their industry and decided to leverage up ahead of the downturn.

What if that downturn is vicious and prolonged? Well, they can always take the restructuring route and cane investors with equally vicious haircuts. And for all we know cash leakage on a vast scale is happening across the China property industry in the face of falling prices and rapidly diminishing contract sales.

Latest fad

And what about Asia’s latest issuance fad—issuance from the resources sector? Berau Coal brought a $500 million Global a few days ago (achieving a sensational near 20 times cover in the process) and deals are waiting in the wings from the Philippines’ Carmen Copper and China’s Yanzhou Coal Mining. Both of the proposed deals have some eyebrow raising features.

Carmen is rumored to be eyeing 6.5%-7% guidance, or a good 50bp below where the private banks see optical attractiveness on a five-year and Yanzhou is circling a $1 billion trade, which if completed would be the biggest mining deal yet out of Asia ex-Australia.

To return to bubble anatomy, it was widely assumed that commodities trader Glencore called a top to the resource market with its $10 billion IPO last May. That also looked like the ultimate piece of insider selling.

And there is credence to that view if the fall in Glencore’s stock from its ÂŁ5.40 IPO price to its current level of ÂŁ3.99 is anything to go by, with the stock failing to climb above the initial offering price and having declined since the start of this year, despite decent diluted earnings growth at the company in 2011 of 220%.

Could Carmen and Yanzhou be playing the same game as Glencore? It looks like it.

Let’s remind ourselves of the final stage of Messrs Kindleberger and Minsky’s anatomy of a bubble. That involves revulsion, where prices overshoot fundamental demand and scams and fraud are uncovered.

This is not to suggest anything of the sort with the above companies. Rather, it’s to suggest that they are cashing in while investors and speculators still think the sectors—in which these issuers are the ultimate insiders—are sexy.

— By Jonathan Rogers, chief IFR analyst, credit