Category Archives: Trading

Posted on

When Financial Firms Collapse

by

60 Minutes re-aired a great segment called “Your Bank Has Failed: What Happens Next?” on the Federal Deposit Insurance Company (FDIC) and what goes on behind the scenes when a troubled bank is taken over by FDIC. IMHO, what they showed was impressive. Kudos to Scott Pelley.

The FDIC was created under the Banking Act of 1933, better known as the Glass-Steagall Act (the second one). It was not part of the Gramm-Leach-Bliley Act, signed by President Clinton, which repealed Glass-Steagall. (Although unrelated to this article, the repealing of Glass-Steagall is the reason why the United States is in the financial mess we are in right now.)

The securities industry has something similar called the Security Investors Protection Corporation (SIPC). The SIPC gets involved when a Broker / Dealer becomes insolvent. On their website, they say “When a brokerage firm fails owing customers cash and securities that are missing from customer accounts, SIPC usually asks a federal court to appoint a trustee to liquidate the firm and protect its customers.”

SIPC insurance covers up to $500,000 per separate customer, of which $100,000 can be cash. So if you have a $500,000 account with $350,000 in securities and $150,000 in cash, you are covered up to $450,000 in this case: $350,000 in securities and $100,000 in cash. You will become a General Creditor for the $50,000 not covered in cash.

But only cash is cash. Money Market Funds are mutual funds with a set Net Asset Value of $1 per share. Those are considered securities.

You can think of “per separate customer” to mean per separate account title. Michael Martin is a customer. Michael Martin IRA is another customer. MartinKronicle.com is yet another. Yet all three could hypothetically be controlled by one person (me).

The SIPC does not cover commodity futures contracts nor currency. Neither are exempt securities such as Limited Partnerships nor Fixed Annuity Contracts. These are not registered under the ’33 Act (The Securities Act of 1933, slangly known as the Prospectus Act).

The SIPC was founded by an act of Congress called the Security Investor Protection Act of 1970. It is a non-profit, non-government, member corporation. SIPC is funded by member Broker / Dealers who pay premiums based upon their size.

Coverage limits will decline for some accounts in 2014.

Posted on

Outlook on Crude Oil

by

Commodities are beautiful things to trade. It’s all about Supply and Demand. There are no analysts upgrades, dividends, Balance Sheet issues, nor Sarbanes-Oxley Act compliance issues.

The media reports about Crude Oil however, are always written like they are for equities: with bias towards causality. Here’s an example from the Associate Press:

Oil has rallied on investor optimism that the worst of the global economic downturn is over. Traders will get fresh data to mull this week when the U.S. releases a consumer confidence index for May and reports on sales of existing and new homes last month.

Let me humbly point out a few things:

  • there is no investor optimism anywhere
  • in the commodity space you have speculators or hedgers, not investors
  • no one needs to heat homes, new or otherwise, from May to September in the United States

The term mull is defined as to chew over: reflect deeply on a subject in the manner it’s used here. Um, commodity traders don’t mull unless they’re making a nice masala chai. Commodity speculators are largely technical traders of the trend following methodology. That means, yes – they read, study, and analyze the fundamentals. But no, they don’t mull things over. They enter and exit the Crude Oil market using Stop Orders.

Another curious addition, is the reference to the Consumer Confidence Index. Modeling a Crude Oil trade based on the CCI would be very far-reaching, and frankly, far-fetched:

Each month The Conference Board surveys 5,000 U.S. households. The survey consists of five questions that ask the respondents’ opinions about the following:

1. Current business conditions
2. Business conditions for the next six months
3. Current employment conditions
4. Employment conditions for the next six months
5. Total family income for the next six months

Source: WikipediA

There are two things in the near-term IMHO that may be adding to higher prices in Crude Oil.

The OPEC ministers will meet this week in Vienna to discuss production cuts. But not even they could put their econometric minds together to model something on Crude with these 5 questions. (My take is that cuts are not likely to happen.)

Iran will hold Presidential Elections on June 12, a few weeks away. Iran is the #2 Crude Oil producer in OPEC and any uncertainty about who controls the oil can cause higher prices.

Posted on

Labor Migrates – So Do The Rich

by

Seems that former NY Gubernatorial candidate Tom Golisano is “as mad as hell” and he’s not going to take it anymore. The self-made billionaire and founder of Paychex is moving to Florida from New York to escape the punitive tax system there.

The rich and high-wage earners have been domiciled in tax-friendly domains for ages. And if things get to the point where they deem it too expensive, they move like Golisano did.

It’s not quite so simple to say that these people are tax-dodges either. That’s how’s the media presents it. But it’s more likely that people with high-incomes look at taxes as an investment into the social welfare structure of where they live. If to them it doesn’t equate, they decide to cut their losses and move. For them, paying taxes is not a charitable deduction.

Some domestic hedge fund managers domicile their funds legitimately in offshore locales b/c they have international clientele and/or US tax-exempt entities as clients as well. These are bona fide purposes to have offshore entities. How did Soros make a good chunk of his billions? You guessed it: Quantum Fund was domiciled in the Netherlands Antilles – an offshore banking haven.

Some very successful traders in the United States employ this tactic to lessen their tax burden. Below is a short list of some well-known traders and the states they live – states with zero state tax liabilities.

Bill Dunn – Dunn Capital – Florida
John Henry – John W. Henry & Co. – Florida
Linda Bradford Raschke – LBR Group – Florida
Ed Seykota – independent – Nevada
Victor Sperandeo – AFT, LLC – Texas
Michael Marcus – independent – Texas
Boone Pickens – BP Capital Management – Texas
Salem Abraham – ATC – Texas

Posted on

Question Everything

by

I just read a great article by Felix Salmon at Reuters and it got me thinking. He’s one of my favorite bloggers and I’ve been a fan since his days at Portfolio.

I’m not a conspiracy theorist, generally speaking. However, there is one piece of misleading information about investing that is a complete disservice to investors. There are lots of myths along the lines of “If it doesn’t fit, you must acquit” logic. The one on investing about “you can’t time the market” is one of them.

My guess is it started with the mutual funds companies b/c they are the ones who gain. Even if you’re getting charged 28 bps per year, they can’t charge you for managing cash. Another reason they tell you that “buy and hold” is the only way to go.

To prove to you that timing doesn’t work, you’re shown various scenarios where “if you missed the X best days in the market, your rate of return would have been Y%,” something like this chart below from Paul Gire’s article in the Financial Planning Journal:

Missing in Action

Missing in Action

The fact is, if you missed the 10 WORST days, your RoR jumps to an astounding 24.17%.

Even if you’re a long-only investor in mutual funds (the true weapons of mass destruction), this can be achieved by having Stop Orders or liquidation points entered at all times.

Posted on

Chevron to Lose a Stripe

by

chevronlogo

For a firm that touts “The Power of Human Energy” as its tagline, Chevron Corp. (NYSE: CVX) has certainly not invested that human energy in its hedging operations — where they are supposed to manage the risk of an adverse move in crude oil. The NYSE-listed firm, which releases its quarterly earnings on May 1, today announced that earnings would be “sharply lower” due to falling oil and gas prices. Huh?

So while we endured peak oil prices, Chevron did little or nothing to lock in higher crude prices before they fell. Firms like Chevron are able to transfer their risk of falling crude oil prices in the futures market. That’s one of the reasons the futures markets exist — so producers can sell commodity future contracts against their expected inventory. Crude Oil is refined into other products such as gasoline and heating oil.

Refining Crude Oil

Refining Crude Oil

According to data from MF Global, Crude Oil futures for January delivery traded as high as $121; for February delivery as high as $108; and for March delivery as high as $70 per barrel – all the months of the Q1 2009.

CBS MarketWatch said “Chevron reported that the average price of crude had fallen 56% to $43.19 per barrel.” That may be true, but it does not annul Chevron’s responsibility to their shareholders to lock in higher sale prices via commodity contracts. Chevron knows how much crude they can produce — they can easily sell it forward and hedge at least part of their expected production and refining.

Chevron passed the higher costs of gasoline at the pump to me and you during peak oil. Now, their shareholders might take the hit as Chevron’s shares fall due to lower profit margins — the result of  unhedged crude oil inventory. Chevron’s shares closed up $0.75 during the day Thursday, but fell $1.99 in after-hours trading to close at $67.24.