Oil and U.S. Banks

Friday, July 25th, 2008

(by John Authers, FT.com) Bastille Day, July 14, is a good day for an old order to come to a sudden and brutal end. And on July 14, the blade came down on the phenomenally successful “buy oil, sell financials” trade.

This trade, popular with hedge funds, offered a rare way to make money this year. It exploited the credit crisis and the response it provoked from the Federal Reserve. Investors deserted banks in the US (and Europe to a lesser extent) and bet that liquidity would instead flow to oil. As higher oil prices made it harder to aid banks with lower rates, and intensified pressure on banks’ customers, it was self-reinforcing.

By July 14, a trade of buying crude oil futures on Nymex while selling short the KBW index of US commercial banks would have made a profit of 168 per cent for the year. Even if we substitute the broader MSCI world financials index for the KBW, which covers the banks most exposed to US housing, the trade had made 114 per cent.

Then, banks bounced while oil dropped 15 per cent. The trade, using the KBW index, lost 35 per cent in the six days after Bastille Day (20.7 per cent using the MSCI world financials index).

This plunge was also self-reinforcing, in a different way. Traders covering their short positions by buying back bank stocks may have funded this by selling their positions in oil.

Note, however, that anybody who made the “long oil/short US banks” trade at the beginning of the year is still sitting on a gain of 74 per cent, much the same as they were six weeks ago. This has not hurt that much.

With the trade back to its level of early June, it appears, thankfully, that we can chalk up the extremes for banks and oil in the weeks before Bastille Day to speculative “piling on”.

But traders now have to find a new way to make money. And the world must still contend with the strong fundamental reasons for high oil prices and cheap US bank stocks.

People who read this post also read these:

• Words from the (investment) wise for the week that was (November 24 – 30, 2008)
• Words from the (investment) wise for the week that was (November 17 – 23, 2008)
• More volatility coming and more ETF options
• Why the selloff in commodities and emerging markets?
• Rob Fraim’s Call on Energy

Tags: Bank stocks, Banks, Commercial Banks, Commodities, Credit, Credit Crisis, Crude Oil, energy, Euro, Fed, Federal Reserve, Financials, FT.com, Hedge Fund, Hedge Funds, John Authers, kbw, liquidity, long oil, Nymex, oil, Oil Prices, risk, short banks, Trading, US Banks
Posted in Commodities, Financials, Markets, Oil and Gas, US Stocks, inflation | No Comments »

Horizons BetaPro Bull Plus and Bear Plus ETFs

Friday, July 11th, 2008

Canadian investors looking for the equivalent of the popular Proshares which are available on American exchanges can do so via Horizons BetaPro ETFs which trade on the TSX. These ETFs allow investors with long-only accounts to easily bet against the market or hedge their bets.  The Horizons BetaPro ETFs provide either double or double the inverse of the daily returns of the asset classes they track.  In the current market environment, the HBP Financials Bear Plus ETF (up 31.4%) and HBP Nymex Crude Oil Bull Plus (up 113.8%) have been huge winners.

Below is a listing of Horizons BetaPro ETFs and their YTD returns. YTD returns are not available for the funds launched this year.

People who read this post also read these:

• More volatility coming and more ETF options
• New Ag and Oil&Gas offerings from Claymore and BetaPro
• Words from the (investment) wise for the week that was (November 24 – 30, 2008)
• Words from the (investment) wise for the week that was (November 17 – 23, 2008)
• Rob Fraim’s Call on Energy

Tags: Agricultural Grains, asset class, Bear Plus, Bull Plus, Crude Oil, ETF, Financials, Horizons BetaPro, Howard Atkinson, JovFunds, Mining, Natural Gas, Nymex, oil, Proshares, S&P 500, TSX 60, ultrashort, US Dollar
Posted in Agriculture, Canadian Stocks, Commodities, Crude Oil, ETF, Emerging Markets, Financials, Fixed Income, Gold, Markets, Oil and Gas, US Stocks, mining stocks | No Comments »

Stephen Briese: 200-days Oil Supply Held Long by Speculators (Audio Interview)

Tuesday, June 24th, 2008

Stephen Briese, a highly regarded commodities trading expert, independent commodities analyst, author of The Commitments of Traders Bible (2008), editor of http://www.commitmentsoftraders.org/, and an advisor for JovInvestment Management’s Horizons Global Contrarian Fund, says, for example, that large investors are sitting (naked) on roughly 200-days worth of crude oil, and the CFTC (Commodities Futures Trading Commission) knows it.
GreenLightAdvisor.com interviewed Stephen Briese, and here is an excerpt. You may hear the entire interview by clicking the link below.

“I follow the Commitment of Traders reports and what we see there is that the producers and users who are hedging in the market, the ‘negative feedback traders’ - the higher prices go, the more they sell [of the commodities], and they were selling at record levels last September, indicating that they were fully hedged.” Briese says. “Now those hedged traders have continued to sell all the way up, and historically they have defended their markets by doing that, but I think that all of the price increases since September have been speculative.”

Under CFTC rules however, large investors who are not handling the commodities are not entitled to an exemption allowing them to trade in the commodities. Commodity Index Funds, such as the popular S&P GSCI (S&P Goldman Sachs Commodity Index) have gotten such exemptions, allowing investors to pile in this way.
 

Briese says the unwinding of these positions could have dire consequences for investors, large and small.
 

LISTEN TO THE INTERVIEW: , 9 min. 18 sec.

About the Commitment of Traders reports: 
The Commitments of Traders (COT) report is a very useful tool to use when trading commodities, yet most traders don’t know how to properly use this gem of weekly information. Steve Briese is considered an expert in this field of study and he gives the readers of The Commitments of Traders Bible a logical understanding of how the professionals move the commodity markets and how you can take advantage of those opportunities.

People who read this post also read these:

• Words from the (investment) wise for the week that was (November 24 – 30, 2008)
• Words from the (investment) wise for the week that was (November 17 – 23, 2008)
• Rob Fraim’s Call on Energy
• More volatility coming and more ETF options
• The Devil’s Dictionary for Financial Markets

Tags: Amp, Briese, CME, commitmentsoftraders.org, Commodities, Commodity, Commodity Indexes, COT, Crude Oil, EFU, energy, Gold, Information, interview, Investment Management, iShares GSCI, Markets, negative feedback traders, Nymex, oil, risk, S&P GSCI, Trading
Posted in Commodities, Markets, Oil and Gas | 1 Comment »

More volatility coming and more ETF options

Friday, January 25th, 2008

Jan. 25, 2008 - Watch out below. There is sure to be more volatility to the downside in the coming weeks, as the carry trade and proprietary traders continue to unwind profitable trades.

Finding themselves unable to collect on credit default swaps vis-a-vis AMBAC, MBIA, ACA, large institutions (banks) and hedge funds are finding themselves under pressure from a substantial cash call.

An example of this danger came to light when a little-known firm called ACA Financial Guaranty caused some of Wall Street’s biggest banks to write down billions of dollars in holdings, restating their value on corporate balance sheets. ACA revealed last month that it had promised to cover $60 billion worth of mortgage and corporate debt, but had enough cash to cover only a fraction of that. Merrill Lynch, Citigroup and financial institutions in Canada and France, which had all sold swaps to ACA, set aside billions in case the firm collapsed.

Most of the strength that the market is witnessing is due to short covering and this will manifest itself over and over during the next two to four weeks.

Institutions are still unwinding their profitable trades to raise cash. The market goes down. Then short covering occurs, and you get what appears to be a bounce or recovery in stock prices. The problem is that as long as the cash call remains larger than the outstanding short positions the market will continue to trend lower.

Don Coxe, in January’s Basic Points, puts it in these terms:

Sadly, the central bankers have been forced into injections of all-time record amounts of liquidity. Jim Cramer and some other prominent apologists for Wall Street glitterati screamed, “The Fed doesn’t get it,” and demanded bailouts for their buddies who faced demotion from Croesus status to morally cretinous status. The biggest benefi ciaries from these bailouts were not overstressed homeowners, but the biggest, baddest, borrowers who had made the biggest, baddest, bets through use of complex derivatives.

Despite strong openings today, both the Dow and TSX look unable to hang on to gains. You also have to look at trading volume for clues about the weakness of the recovery. Volumes are down 20% at the NYSE and 15% at NASDAQ. 

Assuming you agree with the idea that there is more downside in the market, there are some relatively new and interesting ways that you can take positions on the short side to reduce downside that do not involve derivatives or short positions. In particular there are a new breed of ETFs that provide short exposure to various sectors and country bets. These are aptly referred to as ’short’ and ’double-short’ ETFs.

ProShares has created ETF’s that trade inversely with the markets.  These allow investors and traders to hedge against market downturns or that want to bet against the market.  These ETFs are very liquid and actively traded and are designed to go up when indexes go down.  As a reminder, the SHORT funds use no leverage, but the UltraShort funds employ leverage.  Here is partial list by Fund (Ticker):

New Ag and Oil&Gas offerings from Claymore and BetaPro

Thursday, January 3rd, 2008

Claymore and Horizons BetaPro have just expanded their Canadian ETF offerings.

The newest ETF from Claymore Investments Inc. is Claymore Global Agriculture, which began trading on the Toronto Stock Exchange on Dec. 19 under the evocative ticker symbol COW. The fund’s investment objective is to track the performance, net of expenses, of a recently created benchmark called the MFC Global Agriculture Index…

 Including the new agriculture fund, Claymore now has 15 distinct investment mandates in its line-up of TSX-listed ETFs. Three additional new ETFs are to be rolled out in the new year. They include Claymore 1-5 Year Laddered Government Bond, Claymore Premium Money Market and Claymore Natural Gas Commodity…

…Meanwhile, BetaPro Management Inc., which offers ETFs that provide leveraged long or short exposure to various mainly sector indices, is planning to add 10 new funds. BetaPro has filed a preliminary prospectus for five “Bull Plus” funds and an equal number of corresponding “Bear Plus” funds. The funds will provide either leveraged positive or leveraged negative exposure to natural gas, crude oil, gold, the mining industry and the agriculture sector…

The five reference benchmarks for the 10 upcoming Horizons BetaPro funds are the next-month contracts for NYMEX light crude oil, NYMEX natural gas and COMEX gold futures; the S&P/TSX Global Mining Index, and the Dow Jones-AIG Grains Sub-Index.

People who read this post also read these:

• More volatility coming and more ETF options
• Year of the Rats: Don Coxe, Basic Points
• Remain Heavily Underweight Banks
• Horizons BetaPro Bull Plus and Bear Plus ETFs
• Agricultural Commodities - still in the early stages

Tags: Agriculture, Bear Plus, Bull Plus, Canadian Stocks, Commodities, Commodity, Crude Oil, ETF, Gold, Grain, Horizons BetaPro, Investment, Investment Strategy, Lt, Mining, Miscellaneous, Natural Gas, Nymex, oil, Trading
Posted in ETFs | No Comments »