Insider’s Market

Reddit

–There are two more observations to make about last week’s surprise announcement from the International Energy Agency that it would release 60 million barrels of oil from various strategic petroleum reserves. We wrote about three explanations on Saturday. If you missed that, you can find them here.

–The first observation is that somebody on Wall Street had to know this was coming. A lot of people probably knew. There is a bigger point here, too. And that point is that there are really two stock markets. One is for people who have inside, non-public information and profit from it. This is the “insider’s market”. The other is for the rest of us, the “outsider’s market”.

–The IEA announced it was going to make an announcement at 8am on Thursday 23 June. An hour later, it made its announcement. By then, crude oil prices had already fallen in the futures markets (something the Commodities Futures Trading Commission is investigating, according to the Wall Street Journal). And then there’s the chart below, which shows that someone was either very lucky or very well informed about the IEA’s upcoming move.

–The chart is a five-day, intra-day chart of the of the PowerShares DB Crude Oil Double Short ETN (NYSE:DTO). DTO is an exchange traded note (ETN) that lets you bet on the price of oil. It’s designed to track the price of oil by mimicking an underlying oil index and delivering a return of 200% of the inverse performance of that index. You can read how it does that here.

–What we’d like to point out on the chart is the huge black spike at 2pm on Wednesday 22 June, in the DTO chart. Remember, because DTO is designed to inversely track crude oil prices, a rise in DTO means a fall in crude oil. The IEA announcement triggered a crude fall on Wednesday ahead of the announcement.

–But by the time Thursday rolled around, someone had already bought $20.8 million worth of units in a security designed to double your return on crude price movements. As of now, that clever trade is up about $1.4 million, or 7% in a few trading hours.

–That’s either a very good trade…or the IEA’s secret was already out. This is just a microcosm of what’s happening in the financial markets overall. First, the Fed lowered interest rates to make free money available to financial firms – money they used to buy stocks (and presumably sell back to the public in a rising market). Now the Money Power is trying to use the oil price to boost the stock market and the economy. And a few industrious traders are trying to…get ahead of the game.

–By the way, on a totally non-conspiratorial/observational note, it always pays to check whether an ETN or an exchange traded fund does what it says it does. The more complicated the structure of the security, the more that can go wrong. For example, an ETN or ETF that is inversely correlated to an underlying index and claims to deliver double the result can only do so through some active management in the futures markets.

–That said, we ran a chart comparing DTO’s price performance against that of the continuous West Texas Intermediate Crude oil contract ($WTIC). You can see the results for yourself. By the way, the unit price for DTO is arbitrary, so it tells you nothing in relation to the unit price of WTIC, which is just the price of a barrel of crude oil in New York.

–The moral of this story? It doesn’t really have one. But if we were going to make one up, it might be that the more intervention in the markets – either through too much credit or interfering with the price signals generated by the interaction between supply and demand – the more incentive there is for fraud and speculation.

–If you’re a fraudster or a speculator, this is a great market. If you’re an investor, you’re a mug.

–The second observation we wanted to make about the IEA move is that it could also be explained by the inability of Saudi Arabia to actually increase production. As we said on Saturday, the Saudis agreed to increase production independent of OPEC’s non-decision on 8 June. But what if the Saudi’s can’t increase the kind of production that’s gone missing since the non-war in Libya began?

–This would support the argument that the Age of Oil is over. That doesn’t mean oil is no longer important to the world’s energy mix. But it does mean that oil is harder to find and more expensive to produce than ever. This shifts geopolitical power away from oil producers to consumers. And it forces energy consumers to find other sources of energy.

–This is our working theory, anyway. And it does explain some of the recent deals between Saudi Arabia and China we mentioned Saturday. Hmm. Stay tuned.

Dan Denning
Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Comments

  1. “The first observation is that somebody on Wall Street had to know this was coming. A lot of people probably knew. There is a bigger point here, too. And that point is that there are really two stock markets. One is for people who have inside, non-public information and profit from it. This is the “insider’s market”. The other is for the rest of us, the “outsider’s market”.

    … you and the rest of us have known this for a long time. There are dozens of articles (eg: Bloomberg and others) explaining in great detail just how rigged it all is. Question is what to do about it?

    Reply
  2. Agree. Markets are all rigged. If Bernanke says QE3 tomorrow then risk will go ape. If he is indifferent…gradual sell-off. If he says no QE then the market tanks. Apart from that the banks can play commodities/equities to produce higher or lower prices. The trading desk is a high calibre central planning tool.
    Humanity is on course for mass starvation.

    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au