This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

What Next for Futures Markets?

Modern forwards markets got their start when Midwestern farmers got serious about hedging their natural price risk. Modern futures markets got their start when traders in Chicago realized that the value in the business only accidentally had anything to do with wheat. Standardization, central clearing, and liquidity make futures work, and they work for any product. It's not a surprise, in other words, that financial futures have come to dominate markets in Chicago, New York, London, and the rest of the world.

With that in mind, we can find the silver lining in some stories this week about the decline of commodities as an asset class. First, the FT talks to asset managers and advisers about how people are pulling money out of commodities. The problem is that none of the reasons commodities were supposed to be so essential have turned out to be true:

"Commodities gained favour with a three-pronged sales pitch: they diversified portfolios, offered equity-like returns and protected against inflation shocks.

The global financial crisis and recovery undermined the diversification case, as commodity indices and stocks moved together in "risk-on, risk-off" swings.

In 2013, that correlation broke down but in a way that did not flatter commodities. The Dow Jones-UBS commodity index is down 10 per cent this year, while the FTSE All World stock index has gained 16.4 per cent.

When central banks undertook "quantitative easing" to stimulate growth, commodity fund managers warned of inflationary consequences. Five years on, consumer prices in western countries are crawling up at an annualised rate of just 1.3 per cent, according to the OECD."



Everyone watched as commodities took the brunt of it in 2008, right along with stocks, but the lagging returns in this up market really has managers looking for the exits. The holdouts - ideologically-oriented types looking for inflation - never got their apocalypse, either. The debate now among the economists who matter is whether and to what extent quantitative easing is actually deflationary.

The problem for commodities isn't just the weak investment thesis, either. Fundamental demand also isn't what it used to be. A recent Bloomberg piece catalogues the troubles. Emerging market demand for raw materials, especially industrial metals, is waning as those countries try to generate growth from internal consumption instead of export-oriented production. Gold is a non-starter. Even agricultural softs are seeing large stockpiles.

All this matters for smaller investors because if the fundamental picture is poor, the catalysts that justified the original thesis have proven to be absent, and other large investors are reducing their exposure, then odds of positive returns for the near term look even worse.

The silver lining I mentioned above is that even if futures markets -- which are associated with commodities in the minds of many investors -- prove less essential as the latter see reduced interest, they may yet see net gains in terms of trading activity and strategic importance as financial products come to the fore. With a rising interest rate environment on the horizon, access to liquid stock indexes is as important as ever, and volatility continuing to be accepted as a distinct asset class, the outlook for futures markets overall is bright.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Mark can be followed on Twitter at twitter.com/OptionPit

Stock quotes in this article: SPY, VIX 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters