23 Commodity, Equity, and Currency Markets since the 2009 Low

Markets Since 09It seems like only yesterday we had 700 point down moves in the Dow, Lehman going bankrupt, and billions and billions in bailouts being handed out as the stock market made new lows seemingly every week, dragging down most commodity markets with it. But can you believe it’s actually been 5 years, with the low of the crisis happening 5 years ago yesterday – March 9, 2009. The first 3 years sure went by quickly… as we didn’t really know we were in the clear, and now the last two have been a blur of new highs in the stock market seemingly every week.  My how things change in a hurry.

Now, that was the low in the US stock market – other markets like Crude Oil bottomed before then, and some like Wheat bottom after that – but it’s hard to find many losers among the basket of markets we track since that fateful day 5 years ago. Everything on our list is up since then besides the US Dollar and Japanese Yen (imagine that, the two economies which went nuclear in terms of providing capital to the markets).

Some items of note include Copper outpacing Gold almost 2 to 1… (funny we don’t recall any stories about Copper vending machines over the past 5 year); Cotton surging over 140%, and Crude Oil the only other market not a stock index having more than doubled with gains of 124% (of course that would have been tough to realize with the cost of carry and negative roll yield.) (Source: All data in the chart to the left is cash data provided from CSI.)

Meanwhile, Bonds have managed to stay positive despite 5 years of predictions of rising rates and debt ceiling debates; while Natural Gas somehow managed to get into the black after spending most of the 5 year period worse than the March 9th, 2009 low.  And most impressive of all, of course, is US stocks, where the S&P has even become a bit of a third wheel despite more than doubling, because of the high flying Nasdaq and Russell 2000 which are both better by more than 225%. Wow – why didn’t Bernanke just come out and tell Americans to buy stocks, on margin, on March 9th – and guarantee against any losses…

The question is – which markets will be the top performers over the next  five years. Will we see a five year replay of the start of 2014, where last year’s laggards are this year’s stars (so far), or will history repeat itself in one of the greatest bull market continuations of all time (not sure we can count on that…unless Bernanke wants to come out of retirement and make that guarantee). To remind us just how things can change from one 5 year period to the next, we decided to use March 9th, 2009 as a marker and look at the 5 year returns of the main asset classes both leading up to that point, and since that point. You can see a tale of two five year periods, with the two Asset Class scoreboards almost an exact inversion of one another.

2004 2009 Asset Class2009 Present
(Disclaimer: Past performance is not necessarily indicative of future results)
Sources: Managed Futures = Newedge CTA Index,
Bonds = S&P/CitiGroup International Treasury Bond Ex-U.S. Index
Hedge Funds= Dow Jones Credit Suisse
Commodities = UBS Commodity Index (DJC,) Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = MSCI ACWI ex US Index, US Stocks = SPDR S&P 500 ETF (SPY)

Is The World Ready To Trade Futures On Their Mobile Phones?

iBroker_1Ready or not – mobile futures trading (and stock, and options, and baseball cards) has been going on for years now; with firms like E*Trade famously making it appear so easy to trade stocks on your iPad a baby could do it (in their crib) –  but the first attempts at it (and even a lot of the current offerings) have been rather clunky and not very easy to use.

Enter a new futures trading app called iBroker, which is easily the best trading app we’ve seen in terms of ease of use and functionality. See the app in action via the website here:  www.iBroker.com. [In full disclosure - Attain is involved with iBroker, doing the distribution for it in the U.S.].

iBroker has been live in Europe and through a single US Broker for years – but is ready for the big time in the US as of today – with the iBroker app now connected to the popular desktop platform CQG.  Meaning… any CQG user at any participating FCM can now access their balances, positions, orders, and place trades via their existing CQG login. Cool!

But our brains immediately jump to the next question…

 

 

Are we ready for professional managers to be trading client accounts via their mobile devices?”

To tell you the truth, whether you’re excited for the tech advancement or worried by it, the move to mobile devices and unplugged trading seems pretty inevitable – just look at PC versus tablet shipments.  But will we start to see professional commodity trading advisors using their mobile devices to place their program’s trades on behalf of the client accounts they’re managing?  Will the guy on the train across from you or waiting for a flight next to you be entering 100′s of contracts for the millions he has under management. The overnight trading desks these CTA’s pay a few bucks per trade to execute orders sure don’t want that, and as a client, I’m not sure I want a manager rolling over in the middle of the night and slinging some DAX futures around for my account.

But who knows – maybe this becomes more common place, if nothing else, you could see such professionals using the app for checking quotes and getting fill notifications and essentially staying on top of the markets while at the kid’s soccer game or trying to raise money at a conference.  As Russell Crowe quips in his role as Captain Jack Aubrey in the Master & Commander Film: What a fascinating modern time we live in.

iPad

 

Record Volume Growth at Dubai Mercantile Exchange, Still Lags CME & ICE

Earlier this year, the Battle of the managed futures conglomerates (CME vs. ICE) made an interesting turn.  As we noted in a previous post, WTI Crude Oil future contracts were taken over by Brent contracts on the CME’s New York Mercantile Exchange. This is important to note because WTI was the preferred crude oil contract around the world, and primarily traded only on the CME, giving them the leg up they needed.  For those of you who are new to our blog, you’re probably wondering , what does that mean for the exchanges? You lose liquidity; you lose the enticement from investors.

But there’s another Exchange that is making headlines in the managed futures world, The DME. The Dubai Mercantile Exchange just came off a record trading volume this past month at 6,978 ADV. To put that in perspective, that’s a 9% bump from their previous record, and a 32% bump compared to June’s numbers last year. If you haven’t heard a lot about the DME in the past, there’s a reason; it’s only been around for eight years.

So what does this mean for the international battle between the CME and the ICE? Well Goldman Sachs, JP Morgan, and Morgan Stanley started becoming shareholders, and not long after the CME bought out the CME. With those great numbers, the CME couldn’t help but publicize the event, with a Q&A article on the CME’s website.

Naturally, this strengthens CME’s position to re-establish themselves as the global managed futures exchange. Plus, CME is going by the motto, “If can’t beat the competition, buy a smaller competitor and use them to supplement your power. “  AKA Earlier this year, the CME invested capital into the DME in hopes of establishing the Oman crude oil futures contract (which is the primary contract for the Middle East and Asia).

The CME is clearing the business so they want it to grow. Plus the contract is tied to a separate production pool so it won’t necessarily take away from WTI unless the major oil industry players decide that DME is a better benchmark for crude than the CME.

As for the CME and ICE showdown, here’s an updated chart as to where they stand midway through the year.

(Disclaimer: past performance is not necessarily indicative of future results.)

A Tectonic Shift in the Making: ICE vs CME

The CME’s mergers/purchases of the CBOT and NYMEX went a long way toward cementing their role as the world’s primary exchange for a variety of futures contracts – especially grains, livestock, and energies. Their importance in the global oil industry was bolstered by the fact that WTI crude, which is primarily traded on the CME’s exchanges, was the preferred global standard for oil futures trading. But nothing’s static in the futures world, and the CME’s grasp isn’t looking quite so cemented these days. A Dow Jones Business News article reports:

In April, monthly trading volume in West Texas Intermediate crude-oil futures traded on CME’s New York Mercantile Exchange was overtaken by the Brent oil futures offered by ICE. Now, analysts believe, open interest on the Brent contract–a closely-watched measure of trading activity and market liquidity–is set to overtake WTI, based on the recent trajectory of market activity.

Being home to the most-traded oil contract is important to exchanges like CME and ICE because traders gravitate to the most-liquid markets. Capturing the crude crown would be a boost for London, whose commodity-trading profile has increasingly come under threat from traders shifting to Geneva, partly for tax reasons.

The success of ICE in the oil-futures market is viewed as a sign of the threat it poses to CME overseas. ICE has been buoyed by the prospect of buying NYSE and its prized London-based Liffe derivatives unit, just as CME prepares its own long-awaited push into Europe.

Part of this is driven by the market itself – WTI hasn’t been quite as useful an indicator of global oil prices due to a prolonged supply glut in Cushing, OK. The two tracked each other very closely up until late 2010, at which point the consistently lower price of WTI took hold:

Disclaimer: past performance is not necessarily indicative of future results.

And as more traders begin to view Brent as a better reflection of the global oil market, ICE benefits due to their larger share of the Brent trade.

This is just another volley in the growing global competition for futures volume, and ICE’s intention to purchase of NYSE Euronext (announced in December) may soon become a reality, as well. That move is awaiting only regulatory approval, and would be a huge boost to ICE’s ability to compete with the CME.

This is an industry where scale is incredibly self-reinforcing; the biggest investors in the field seek the most liquid exchanges, which in turn makes those markets even larger (and more liquid). It’s a positive feedback loop that could spell trouble for the CME if they begin to fall behind.

Of course, the CME isn’t just sitting back and watching – they’re pursuing their own effort to expand into Europe, in the hopes of claiming a larger share of the currency futures market from ICE. And they remain unrivaled in the US… but that may not count as much as it once did. The flurry of mergers and purchases over the last decade has narrowed the field, raising the stakes for this battle for a bigger share of the world’s futures markets.

Good News for MF Global Customers

When a disaster strikes, there’s a certain amount of breath holding that takes place until the damage is assessed. Will it be worse than we imagined, or will we find that things aren’t quite as bad as we had feared in our worst-case scenarios? Only once the panic has subsided and pieces picked up can we make that determination. And such has been the case of the financial collapse of the futures broker MF Global, except in this instance the “picking up” phase has dragged out for well over a year. But as the picture of what comes next has become clearer, it has also become rosier. The Wall Street Journal reports:

Trustee James Giddens, who represents customers of the failed firm’s brokerage unit, said MF Global customers in the U.S. who invested on domestic exchanges could receive up to 93 cents on the dollar of their cash back, according to the filing in the U.S. Bankruptcy Court in the Southern District of New York.

Getting 93% back is better than 81% (the previous estimate), but still worse than 100%. Nevertheless, 7% is a loss that, while painful, isn’t likely to be life-ending for many people. But the news could get even better, with a plan in the works that might mean full restitution for customers:

…A group of MF Global creditors filed a plan of liquidation for the failed brokerage firm. The proposal outlined a plan to pay back creditors of MF Global’s general estate within a year and could restore the accounts of brokerage customers to 100% within months, according to a person familiar with the group.

The filing was made by a group of creditors led by Silver Point Capital LP, Cyrus Capital Partners LP and Knighthead Capital Management LLC. Those creditors own about 65% of MF Global’s $2.2 billion in unsecured debt, according to the filing.

This could potentially be good news for PFG customers, too, by setting the legal precedent that futures customers get paid back first, before any proceeds from the bankruptcy go to general creditors. That’s the letter of the law written in the CFTC regulations, but with high priced lawyers fighting to get around the letter of the law – we’ll take whatever we can get that supports following it.

Of course, along with the sigh of relief that restitution would bring, there will still be reason for frustration. Even with 100% of the money returned, customers have still lost access to much of their money for over a year. If “protection” means getting you some of your capital back sometime in the next few years… well, that’s a pretty loose definition of the word, in our opinion.

So this news may be a spot of bright news in what has been a long gloomy story, but it should serve as a reminder of what’s at stake in the futures industry. It’s why we suggested that the CME purchase all PFG customer’s claims at face value after its collapse, it’s why we’ve been strong advocates of an insurance fund for futures customers, and it’s why Attain CEO Jeff Malec is running for the NFA board. Because even as we pick up the pieces from the disasters we’ve faced, we can’t lose sight of the work that remains to be done.

Futures Account Insurance Getting Traction

As the year draws to a close, it’s hard not to reflect on the tumultuous times experienced in the futures industry. A great deal of progress has been made in enhancing customer protections, but there is still work to be done, particularly in what we view as one of the most significant arenas: insuring client funds against an MF Global/PFG type clearing firm failure.

A wide variety of proposals have been put forth, ranging from a SIPC-styled program to a liquidity facility protection fund. Giving us a little more hope than we’d usually have is the fact that the conversations seem to be progressing much further post-PFG than they did post-MFG. Reuters reports:

Fed up with what they see as authorities’ inadequate response to MF Global’s collapse, the CCC’s founders – traders James Koutoulas and John Roe – discussed the plan in a meeting this week with the chairman of R.J. O’Brien & Associates, the largest independent futures brokerage and clearing firm in the United States. They said they will gauge support from hundreds of other firms in the coming weeks.

Separately, exchange-operator CME Group Inc (CME.O), the National Futures Association (NFA), Futures Industry Association and Institute for Financial Markets said on Friday they will underwrite a study on the cost of insurance.

In other words, we’re moving in the right direction. However, not everyone is on board with the idea of protecting client funds. The CFTC’s response, in particular, would be laughable if they weren’t serious:

As recently as November, the Commodity Futures Trading Commission ignored the idea of an insurance fund when it proposed more than 100 pages of rules it said would enhance protections for futures traders after the failures of MF Global and Peregrine Financial, a smaller brokerage, exposed cracks in industry safeguards. Nowhere in the proposal was there a suggestion that funds in futures accounts be insured.

Instead, the CFTC proposes requiring futures brokers to explicitly tell their customers that their funds are not protected by insurance in the event of a bankruptcy or insolvency of the broker, or if customers funds are fraudulently misappropriated.

As a heads up to the folks at the CFTC – we can say, unequivocally, as one of the firms you regulate, that this “solution” is not acceptable to us or our clients. Try, try again.

Still, the CFTC having their head in the sand on this one might be a blessing in disguise. The article went on to explain:

[Commissioner] Chilton told Reuters he was “certainly not opposed to a private-sector solution” but thought a government-run program modeled after SIPC made more sense. He expects legislation will be introduced in early 2013.

“Why reinvent the wheel here?” Chilton said. “We have a government system for banking and securities that works well. The easiest thing to do is just do something similar for futures customers.”

The CCC wants to set up private-sector insurance before Congress takes action. A government-run fund based on SIPC would be a mistake because it would take too long to return money to customers, said James Koutoulas, who founded the CCC with Roe.

If you’ve ever had to interact with the CFTC for any reason, you’re probably nodding in agreement with Koutoulas at this point. Generally speaking, Attain is in favor of moving forward with a privately offered liquidity facility such as the one the CME uses for its own members to ensure that markets run smoothly. We’ve seen how government agencies handle futures affairs, and we’d rather see some of our own organizing the efforts. Further, if the Congressional dysfunction of the past two years is to continue (which, at this point, is looking pretty likely), the odds of a futures insurance fund getting the attention it deserves are slim to none, and we’re a little impatient.

Bottom line: the wheels are turning, and there’s a small army of futures professionals fighting to get their clients the protection they deserve. Good news, indeed.

Getting Back to Business as Usual

While we’ve all been glued to our TV screens watching the aftermath of Superstorm Sandy, a different kind of drama has been unfolding in the stock and futures exchanges in the US. This is the first time the market has had an unplanned closure since September 11th, 2001, although that closure was twice as long (not counting the weekend). However, this is the first time since 1888 that the New York Stock Exchange has been closed for closed for two days in a row due to weather.

But the disruption of trading has also spread beyond New York: futures trading here in Chicago has been interrupted, as the CME has implemented a slew of closures, shortened hours, and altered settlement procedures in response to the storm. US stock index futures and interest rate products were closed in conjunction with New York’s closures yesterday and today. (which seems like it may have been unnecessary… Why can’t they let people hedge their positions via futures while the cash markets remain closed?)

But, with the worst of the storm over (for New York, at least) it appears that it will be back to business tomorrow. So naturally, attention is already turning to where the markets will be when they reopen tomorrow (and how unexpected closures have affected the markets in the past). While it was looking like a weaker open for stock indices initially (SP futures as 2 month lows late last night),  after-hours trading is back up and running for the affected futures markets right now, and it’s looking like markets have rallied about 1.2%.

Here’s how those stock index and interest rate  (and other) markets have changed since the Friday pre-Sandy close.  Pretty much a non-event as far as the markets are concerned:

(Disclaimer: past performance is not necessarily indicative of future results. Percent changes reflect prices as of 5:10 PM CST 10/30/2012.)