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.

Dollar and crude oil price

The skidding of dollars against the major foreign currencies, especially Euro were constantly blamed for the seemingly unstoppable skyrocketing crude oil price. The logical explanation for this relationship often quoted was that crude is traded in dollar and the weakening the dollar is the major reason the higher crude oil and hence gasoline price paid at pump. If the arguments for this negative relationship contributing to a high crude price. We would expect a significant correlations between crude price and dollar strength. Are there any significant correlations between oil and dollar? Regressing crude price with dollar index ( DXY ), we did found the strong negative correlations between the two beginning early 2006 up to now. The correlations reached to the highest at -0.96 today. However, this relationship were neither stable nor constant over time. We can see from the attached chart (the green area represents positive correlations and red areas indicated negative relationships...

Is US Treasury Yield Curve Flattening or Steepening?

There have been nine 25 bps rate hikes since the Fed tried to normalize short term interest rates, or Fed Funds rates, from Dec 17, 2015, the first hike to the latest of round on December 22, 2018. The short term borrowing rate rose from almost zero percent to the target of 2.25-2.5% as of now, and short term bond yields also climbed along with overnight rates. The benchmark yield of 2 year Treasury bond was near 1% when Fed made the first 0.25% rate increase on December 17, 2015, and it rose nearly 140% to about 2.39% as this note generated. However, the long bond or the yield on 30yr US Treasuries is traded at roughly 2.95%, almost the exactly where it was 3 ¼ years ago. The table below looks at the bond yield changes from the date that the Fed made the 1st hike to today. Also visually, the central bank’s gradual rate hike policy since 2015 has pushed yields on short (2 year) and intermediate term note (5 year) steadily marched higher and while 30 year bond yield fluctuated a...

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...

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