Skip to main content

Michael Masters - The Commodity Speculator Crusher?

Michael Masters, the hedge fund (Masters Capital Management LLC.) manager, made some headlines in the Hill and markets for his champions that speculators cause skyrocket high prices for commodities from agricultural grains to metal zinc. Media has raised the questions regarding Mr. Masters's motive because of his investments concentration in transportation. I pull out the his q2 13F regulatory filings via Bloomberg (see the chart below from Bloomberg), it is interesting to note that he increased weights on industries and utilities, two sectors by 6.1% and 5.8% respectively over 1st q this year. Not surprisingly, two of his top 5 holdings, Delta and US Ariways, make up 33% portfolio. During the quarter, US Airways positions were increased from 2 millions to 4 millions shares, and Delta was almost double the positions too (from 1.05 to 2 millions shares.) I guess the pain must be unbearable when the benchmark crude rocked to over $140 from less than $100 during the quarter. Certainly it is not his best interest to see crude oil going higher and stay there.




On the surface, Masters's conflict interest certainly does not serve him well in the argument. But then we can not ignore the fact that commodity market dynamic have evolved in terms of market participants and operations. I have serious doubts when a single factor or variable was cited as the cause or reason for price movement in equity or commodity markets, or any other form capital markets. There is no question that speculation/investment in commodities, more precisely, the rising demand from alternative investment vehicles (physical commodities and related instruments) since late 90's, have morphed commodities from dull pure raw material that was driven by supply-demand and economic cycle into something more "magic" investment instruments with a great potential appreciation. We would expect that commodities were primarily driven by supply-demand when the market participants were dominated by producers and end-users a decade ago, but commodities have draw more financial institution investors and speculators. For example, the total contracts of crude oil futures from speculators doubled to about 400,000 in early 2004 from the end of 2001, and over 800,000 in early 2006 and doubled again to over 1,600,000 early this year (see the chart below.) The dismissals of increasing speculation activities in commodity market and its impacts on the extreme violent movements of commodity at least in the short term, probably overlooked the simple facts. The question is not if but how to quantify the impacts. But history has demonstrated repeatedly that government intervention is wrong medicine for curing oil dependence.












Labels:

Popular posts from this blog

What history tell us about “Sell in May and Go Away”?

US stock market has experienced one of the best first four-month performance over the last four decades, produced 17.5% price return comparing to 19.1% in 1987. It is the third best price return for S&P 500 index since 1950; the top four-month performance belongs to 27.3% in 1975 as the stock market recovered from a severe bear market in 1973-1974 when the index nosedived more than 42% in two years. With calendar flipped into May and onto summer season of sun, beaches, most likely we would hear a lot of about old Wall Street saying “Say in May and go away” in the media. Moreover, primarily because of the unprecedented nature of speed and magnitude of the current market rally against the backdrop of weakening macroeconomic and corporate earnings backdrops during the period.  Sell in May and Go Way has delivered 6 times more return Historically, the six months between Nov-April frequently experienced extraordinary stock market performance than the six months between May to Oct...
Read more

MBS spread widen at historical levels

The turmoils at FNM and FRE created great anxieties and opportunities for both equities and debt TRADERS. The newly passed housing rescued packages by the Congress and signed the President essentially changed the "implied" to "explicit" US government backings on both quasi agency's outstanding debts. Their spreads to US treasuries have tightened in last few weeks. However, the most liquid 15 yr and 30 yr fixed MBS from Freddie and Fannie were under great pressures in last few days. Using 10 yr swap rate as benchmark, FNCI (15 yr Fannie MBS TBA) was priced to 5.50% with spread of 78 bps, that was 4 times of historical 10 year average (see the first chart). FNCI was traded at the cheapest level since 1998. The 78 bp spread to the swap was about four sigmas of the mean. FNCL (30 yr Fannie MBS TBA) was also trade at the lowest level that we have not seen in the last decade (second chart). Comparing to other investment alternatives, current fixed MBS prov...
Read more

VXN converging to VIX

Nasdaq markets have been dominated by some of well know large cap tech companies and many smaller less know names too. Not surprisingly, Nasdaq markets measured by NASAQ-100 have been much volatile than SP500. However, since tech bubble busted in 2000, the Nasdaq volatiles measured by VXN declined dramatically and has gradually converged to broad market volatility represented by SP500, VIX (see Bloomberg chart below). Actually, as credit and mortgage market began to melt 18+ months ago, VIX and VXN have been almost in parities. SP500 was much volatile than NASDAQ100 in two of these period, first when Bear Sterns hedge funds fiasco and second time happened in last Nov when financial system was in the breaking point. Financial sector was the one of largest sectors until last year because of market value evaporation from some celebrated financial names, like Bear Sterns, FNMA and Freddie, Lehman and Citi. Almost all these financial firms were traded at the big board and are members of SP5...
Read more