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Tuesday, July 7, 2009

Avoid US Mainstream Media at All Costs

"And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. 'Who controls the past' ran the Party slogan, 'controls the future: who controls the present controls the past." - George Orwell, 1984

I sometimes advise new traders and investors: "Whatever you do, stop listening to the U.S. mainstream media."

Why?

Well, I ran across this little "gem" today from the Washington Post, written by a Mr. Zachary A. Goldfarb that perfectly illustrates why I believe it's time to stop listening to U.S. mainstream media. The title of the article was, of all things: "CFTC Floats Rules Aimed at Speculation"

That title, by the way, is incorrect. That is not what the CFTC is doing, and therefore, the Washington Post has engaged in a bit of sloppy journalism. But what do we expect from the U.S. mainstream media? But more on that later.

The article starts, right out of the gate, by stating:

"The Commodity Futures Trading Commission will consider new measures to curb speculation in the markets for energy and other commodities, the agency is set to announce today."

Wrong.

Wrong wrong wrong wrong.

Here, let me fix that for you Mr. Goldfarb, since you are obviously writing about a subject you know NOTHING of ...

"The Commodity Futures Trading Commission will consider new measures to curb manipulation of future energy contract prices by limiting the sizes of the positions that hedge funds and other investment banks are allowed to hold, the agency is set to announce today."
- - Corrections mine

There. Fixed. First of all, it is impossible to speculate in the spot energy market. It can't be done. That was the first mistake by this article, and a mistake that was in the opening paragraph I might add. Speculators are engaged in the futures market. Futures. As in, 'hasn't-been-delivered-yet-and-wont-be-for-months'. The spot market is what is being agreed upon, right now, today, by buyers and sellers of crude oil. And there are no speculators in that market !!

The CFTC cannot 'limit speculation' in the futures market. To do so, would be to destroy those free markets, and the benefit they provide to the commercial interests that are trying to hedge their operating costs. Which, ironically, this very article goes on to admit in later paragraphs! More on that later.

It's already obvious, and we've progressed only a few paragraphs into the article, that the Washington Post wants a scapegoat. And they have decided to land on speculators. The problem there, is that their insinuations do not match the facts (Gee, remember the times when a journalist was a noble truth seeker?) The mainstream media acts as if speculators are actually determining the price of today's barrel of oil. They aren't.

Those guys you see on your television screen in bright colored jackets waving around pieces of paper? The aren't even participating in the futures energy markets. They are in a secondary markets of the options market, that is based on the futures energy markets, which is removed from the spot market. But isn't it interesting when someone from the mainstream media want to talk about blaming speculators? They flash that image on the screen? As if options traders in the energy pits are the guys actually trading the cost of today's barrel of oil?

The article continues:

"Concern over such deal-making reached a fever pitch last summer, when oil prices were sky high and people were feeling pain at the gas pump. CFTC data showed last year that a significant amount of trading in oil was concentrated in the hands of just a few speculators."

Ahhhh, now we come to the rub.

First of all, since I did the Washington Post the favor of fixing their first paragraph, I should probably also fix this one.

"Concern over such deal-making reached a fever pitch last summer, when oil prices were sky high and people were feeling pain at the gas pump. Much of this weakness was due to the fact that the Federal Reserve began cutting the Fed Fund Prime Rate at an ever quickening pace in an attempt to support and re-inflate market valuations. The negative side to this action is that it can be inflationary. This is because it leads to a weaker U.S. dollar. A weaker dollar translates into weaker purchasing power. In fact, the Federal Reserve was engaged in this action at a time of the year when Crude Oil usually comes under seasonal buying pressure. This means that the dollar could not purchase as much crude oil, and therefore high spot oil prices were the result, at the same time Crude Oil was already facing seasonal demand." - corrections mine.

Since I have never, ever seen any data by the CFTC to purport the claim that a "a significant amount of trading in oil was concentrated in the hands of just a few speculators." I will leave that sentence out completely. I'm not saying it's false. I am not one who comes to conclusions before all of the data is presented, legally. I've never personally seen any data to that effect. Trust me, if I had, I would be screaming about it. The CFTC always shows which group, holds what positions, in the COT (Commitment of Traders) report that is released each week. Now, admittedly, that report does not report who is holding what position. And I will agree that if the size of a position is concentrated in the hand of one or two firms, that this could adversely affect the future contract price of oil for a very short time. At times, the spot market may take notice of what the futures market is doing, only if it can be demonstrated that the premium spread on future contract months is intact, and at the same time, the net position of a few speculators was in excess of previous requirements.

But even if this were the case, that could in no way affect the spot markets price of oil for any length of time. The spot market flying sky high last year, was the direct result of the Federal Reserve cutting rates, and cutting rates, and cutting rates and .... oh ... let's cut the rate some more; at the exact same time that crude oil comes under seasonal buying pressure. There were no speculators in the spot market, as the dollar was falling. So how are speculators to blame? So if we're going to have an article that throws mud and tries to seek out blame? Let's throw that mud in the correct direction shall we?

"Mr" Goldfarb continues:

"Financial firms can affect the price of commodities such as oil and wheat by buying and selling futures, which are financial instruments traded on exchanges."

Prove it. You explain to me how that happens. I would love to hear an explanation of that statement.

"A future is a contract between two parties which agree to buy and sell a commodity at a certain price."

Again, wrong. Wrong wrong wrong. Again, let me fix that for you:

"A futures contract is a contract between two parties which agree to buy and sell a commodity at a certain price at a set time in the future; usually, two to four months in the future." - Corrections mine.

Come on! You can't even get a simple definition correct! And you write for a supposedly reputable newspaper in the United States of America? Or, is it that by providing an accurate definition, you just might, possibly show the truth of the matter, and may not be able to throw your mud at futures speculators?

What makes this even better, is that the next few sentences in this article actually demonstrates the need for speculators !

"For example, an airline that is worried about being hurt by rising fuel prices might try to lock in costs by buying oil futures. If the price of oil does rise, the futures the airline owns would also rise in value, offsetting the increased cost for fuel."

What you left out, Mr. Goldfarb, is the fact that the airline will not be able to make that deal, unless the speculator is willing to pick up the risk for the airline ! For every contract sold by the commercial interest, there MUST BE A BUYER! Otherwise, no one will pick it up, and the airline cannot hedge themselves. The speculator is critical to the both the liquidity, and the function of the futures contract markets. Has the last year taught you nothing as to what happens to a market when the liquidity disappears?

The article continues:

"The CFTC already has established position limits for some commodities, such as wheat. But it has also granted exemptions to these limits"

Ohh! Ohh! Now we come to it! In other words, the rules on the books, that were working just fine? And those rules were removed? Why? THERE is your story! This reminds me of other rules on the books that were removed. Rules regarding leverage that a Mr. Hank Paulson asked to have removed years ago. Those rules were removed as well. And here we are.

I'm a futures speculator, and I am sick to death of mud-flinging articles like the one above.

My solution?

Quit listening to the U.S. 'old-school' media. Period. I'm not saying you shouldn't turn on the television, or read what these clowns are saying. That's not what I mean. What I'm saying, is stop listening to the ideas they are trying to put inside your mind. The mainstream U.S. media simply fills peoples heads with ideas that are far removed from this little concept we call: reality. When you don't understand what's truly happening, it can lead to all sorts of financial problems for you as an individual.

You're going to get a heck of a lot more truth from guys like Karl Denninger, than you ever will by reading the Washington Post.

* * *

Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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