WEDNESDAY JULY 29, 2009

They're Back!...Evil Speculators

This week, the Commodity Futures Trading Commission’s Chairman Gary Gensler is holding hearing to determine how “excessive speculation” has impacted the price of oil. Of course, the politicians are blaming “evil” speculators for the last year’s dramatic rise to a record $147 a barrel. We all know that evil speculators are greedy profit seekers. They are not out to protect truth, justice and the American way! Not surprisingly, no one can provide a proper definition of “excessive.” Much like beauty, it must be in the eye of the beholder. 

 

The argument seems to be that much of the trading volume in oil is being generated by “non-commercial” traders. One of the benefits of the futures markets is that commercial users of oil (trucking firms, utilities, airlines, agriculture, etc.) can hedge their cost of energy. Yet, these commercial players can not generate sufficient volume to make the markets liquid. Enter the speculators. They provide the much needed capital to keep markets liquid. Without them, there would be no market, and commodity prices would be significantly more volatile.

 

The argument also seems to imply that speculators run in a pack, making the same one way trade that drives excessive price increases. But if evil speculators are greedy profit seekers, wouldn’t they seek to trade against the trend? Wouldn’t someone eventually determine that the pack in wrong (as they often are!). After all, someone made big money by shorting oil at $147 and seeing it trade down to $33.87. But I guess this would “good” speculation, since oil prices went down.  Could the evel speculators be respnsible for this dramatic sell-off?  Of course not!  But they are most definitely responsible for the run-up from $33 back to $65!

 

“Excessive.” Ever wonder why this word doesn’t apply to things like, say, budget deficits or Congressional healthcare benefits?

 

POSTED AT 1899-12-30 10:09:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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