The Limerick of Finance for 11/22/15

Trading futures contracts is okay
For companies with cash to pay
Hedging the supply chain
Avoid volatile pain
Commodities always in play

The Strange Confluence of Cash Flow, Real Estate, and Maybe Even Futures

I am really curious about a whole bunch of financial concepts.  I get even more curious when one or more purveyors of proprietary strategies join up in a marketing maelstrom.  Let's explore a recent confluence of several practitioners.

Go ahead and try to locate a source for someone named Dahl Downing and something called Cash-Flow Strategies.  Google Search results gave me absolutely nothing.  There is nothing morally or legally objectionable about squeezing every last cent of wealth enhancement into an IRA.  I also do not object to flipping income-producing properties or participating in tax deed auctions provided the players involved know what they're doing.  I just cannot understand doing these things without referencing a credentialed expert source or appropriate legal guidelines.  It takes a lot more than having an "invested IQ" to pull these things off.  It also takes more than a couple of slap-dash Web portals that warrant a Google warning about hackers.

Background homework on the stars of Flipping Vegas is just as entertaining as one could imagine.  Perhaps a computer algorithm or a paid gaggle of trolls have published a large number of negative comments all over the Web.  Anything is possible.  It is also possible that a lot of consumers with real complaints just need to vent their opinions.  Contracting out a presentation to pitch an abundance of education probably won't help matters.

There are better ways to spend time than chasing wild rabbits into dark holes.  I elected not to waste one of my weekend mornings listening to slick seminars on real estate.  I did not need to find out whether cash flow or futures were also on the agenda once I saw a whole bunch of shabbily dressed people milling about a hotel lobby waiting to register.  I really am better off on my own, thank you very much.

The Haiku of Finance for 03/10/14

Hedging with futures
Substitute for adverse move
Not a pure play bet

First Consideration Of World Oil Price Components

I got thinking about the components of the market price for oil after I finished my analysis of the US Navy's renewable energy policies in my latest Third Eye OSINT article.  That article was oriented to military affairs, and this article is for business.  I'll develop the complete breakdown in a longer report to publish at Alfidi Capital, but I'll start here with some basic components.

Production cost.  This varies by wellhead but investment banks covering the oil sector figure some broad averages each year.  The best way to look at production cost (for my purposes anyway) is by country and then by type of oil:  light sweet, heavy, shale, etc.  The EIA has a good breakdown of oil and gas production costs in the US.

Transportation cost.  This includes shipping by ocean carrier, pipeline, and rail.  Oil imports to the US move primarily by ocean carrier and pipeline.  The Association of Oil Pipe Lines (AOPL) has a general breakdown of the traffic but I don't know when that data was published.  Barge movement plays little role for unrefined petroleum but is a major transportation mode for refined petrochemical products.  Platts breaks down oil shipping prices by seaborne routes.  I'm too cheap to pay for Platts' data so I'll have to wing it with open source data I find for free.  FERC's oil pipeline page shows that their indexing methodology for rate changes is tied to the BLS Producer Price Index for Finished Goods (PPI-FG) plus a statistical adjustment.  I find it interesting that the AOPL mentions several alternate methods FERC may use to adjust its approved pipeline rates.  That AOPL link is so intriguing I used it twice in a paragraph.

Security premium.  RFF studied the oil price security premium in 2010.  I mentioned this study in my Third Eye OSINT article (see the link up top).  Platts analyzed a security premium specific to the Middle East in 2011. 

Other factors.  Stanford's Energy Modeling Forum studied oil price determinants in a 2010 workshop.  Their conclusions considered asymmetric information, inventories, and futures market speculation.  I have not yet decided whether insurance cost gets its own special treatment or should be counted as a subset of production and transportation.  I should also account for the US tax code's oil depletion allowance.  The International Energy Agency's (IEA) statistics site has a lot of pricing and volume data but I will dig deeper to see if they have cost data.  Likewise, the Oil and Gas Financial Journal has plenty of current market data but for this project I need to see if they have cost breakdowns buried somewhere.

This analysis is by no means mature.  Like I said above, it's more suitable for a longer report.  These components matter for both the West Texas Intermediate and Brent crude prices.  I'll develop each of the ideas above from the perspective of an energy contract trader who must hedge the price of oil.  I want to understand energy price movements so I may use futures contracts to hedge my own portfolio.  Financial engineering techniques for energy and other hard assets may prove very useful to me during a hyperinflationary period in the US.  

The Haiku of Finance for 07/10/12

One more broker bust
Peregrine hit with actions
MF Global 2

MF Global Ripped Off Big Players Too

Individual clients of bankrupt commodities brokerage MF Global can take some cold comfort in the news that big corporations also got their pockets picked.  Major corporations that used futures to hedge commodity prices through MF Global comprised a fifth of the client funds that "vaporized."  The good news is that these players have the deep pockets for class action lawsuits and the political pull to ensure regulators don't sweep this under the rug.

I actually once considered opening a futures account with Refco, MF Global's predecessor firm, years before it collapsed.  I decided against it mainly because I'm not some heavy commodity user who really needs a hedge.  There are plenty of ETFs in oil, metals, and agriculture to satisfy the diversification needs of most normal investors.

Trust is in short supply.  Even big companies can't trust their brokerages anymore.  I hope these Fortune 500 victims get together and strategize some lawfare that will bury the MF Global malefactors in a big pile of . . . well, you can insert a fanciful agricultural commodity here.  

More Wind Out Of China's Sails

Writing "sales" instead of "sails" in this post's title might have been a cute play on words, but I don't feel like being all that cute today on the subject of China's continuing disappointments.  Manufacturing activity in China continues to slow down.  Europe's malaise is hitting China's exporters hard and the eurozone hasn't even fallen apart (yet).  The world copper price hasn't responded to this news, so perhaps Dr. Copper has decided to defy commodity analysts' wisdom and become a lagging indicator.  Steel futures indicate strong future demand, which no longer makes any sense at all.  Dude, like manufacturers use steel and copper, okay?  So, like, the prices should be cratering rather than meandering sideways or setting new highs.  This kind of action proves the old adage that the only people who make serious money in commodities markets are the brokers of transactions, not the investors going long or short.

The price of FXI hasn't factored in this bad news from China.  I'll renew my covered calls but I may be forced to eat a realized long-term loss as the market price went through my calls' strike price.  It all depends on how my brokerage calculates the purchase date for which shares will ultimately be sold off.  I can console myself with the reminder that the cash I've generated from years of covered call writing has built up a war chest I have yet to deploy.  More bad news out of Europe, China, and elsewhere will eventually give me the bargain opportunities I seek.  The waiting game is one I can play endlessly.

Full disclosure:  Long FXI with covered calls.

The Limerick of Finance for 10/30/11

MF Global looks for forced sale
Plunging share price has turned buyers pale
This thing might unwind
Some big firm wouldn't mind
It can buy select assets, then bail

Barclays Learned Nothing From VZZ

Never underestimate the stupidity of a large financial firm.  The crash and forced redemption of VZZ should have taught Barclays not to build structured products around futures.  They've learned nothing. they're about to roll out a brand new version of the exact same product.  I guess the "B" added to the ticker is for baloney.

This reminds me of automakers who rebrand a poorly selling domestic model for relaunch in an international market.  The key there is that they can introduce the lemon to a whole new batch of suckers who've never encountered it.  Doing that with financial products is almost impossible because of the globalization of financial markets.  Word will get out instantly, like on this blog (thank you very much).

Ah, Barclays.  You don't want someone as smart as me working there.  I'd ruin some managing director's day by ridiculing stuff like this. 

Futures ETNs Have No Future With VZZ

One of my previous employers, Barclays, had to learn the hard way that there are limits to financial innovations.  The firm had to redeem an iPath ETN based on index futures because its market price fell below a predetermined share redemption barrier.  The thing about constructing a passive note around futures contracts is that they have to be constantly refreshed to keep the note's holdings consistent with its prospectus.  Equity and bond ETFs need refreshing too, but futures notes require leverage, and that's what kills them. 

The note's symbol VZZ is appropriate for the fizzing sound this product made as its price declined.  It also represents the sound escaping the lips of an investor who gets increasingly angry watching this product's performance.  The good news is that ticker VZZ will soon be available for use.  Perhaps another enterprising asset management firm with know-it-all quants will come up with a snazzy new product that will lose money. 

Oil Price Speculation Confirmed By Sleepy Regulators

Our Arab "friends" were on to something when they claimed hedge funds were making life difficult for them by gambling on oil prices.  The CFTC confirms that the vast majority of investors in long futures contracts are not the end users of commodity products.  Futures contracts are great for producers who want to hedge against price swings in the stuff they produce.  Anyone else who wants in is playing games with things they don't understand.

Hedgies' attraction to commodity gambling is obvious.  Greed for yield drives their pursuit of new asset classes to churn.  One remaining question is whether or not the Fed's quantitative easing really is driving hedge funds to go long commodities, the results of which turn up in food price inflation around the world.  We'd have to somehow link incentives for banks to keep their excess capital on deposit with the Fed to increased lending to hedgies.  With those excess deposits unavailable for things like mortgage loans, are banks then forced to turn to their reliable money maker - margin to hedge funds? 

This also begs a question of what regulators plan to do with their newfound knowledge of this high-stakes gambling.  My bet is that they'll do nothing but talk.  CFTC auditors all want to work on Wall Street too, just like their SEC cousins, so excessive zeal in cracking down on speculators won't help their careers.  Nothing will change.