In the face of two big Washington initiatives, the
Chicago Mercantile Exchange
and its shares have come sharply into view for investors in the last week. Because I think investors have overplayed one of them and overlooked the other, CME shares (along with
to a degree) look like tremendous buys right here.
The "endless bid" -- a phrase I coined to describe the unending appetite of investors for exposure to crude oil -- has finally come of age.
Last year, while oil was rocketing to $147 a barrel, and I was talking about the investment speculation premium in the market, I was being contradicted by Boone Pickens; Nobel Prize-winning economist Paul Krugman and our Treasury Secretary Hank Paulson, all claiming that the moves were fundamentally based.
Panicky Commodities Talk
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This year, those voices have disappeared. And now that the talking heads have come around to the power of investment to manipulate price and increase volatility, Washington and the CFTC has begun to rumble about quick legislative fixes.
The talk about position limiting and margin increases have forced the weakest oil investors out of the market, and we've seen the price of the crude barrel decline 20% in little more than a week.
Further talk of regulation has helped pummel CME shares as well, they've dropped from $340 in mid June to close to $260 yesterday, a 23% decline. The fear is that regulation will cut volumes and quash revenue.
But Washington is a paper tiger in this case. As I outlined in my previous column, the complex mechanism that the modern oil markets have become will not bend so quickly to the simple will of regulation fixes that Washington and the CFTC are threatening.
It has become impossible to trace individual futures accounts and install position limits with any fairness or efficiency. And those participants who really engage in oil exposure for investment will care little about fresh margin requirements. Even a 100% increase will be shrugged off by the major traders and investment banking desks.
CME shares have been discarded recently based on fear, but not fact. Volumes still grow robustly and the investment interest in oil and other commodity markets that they alone provide only seems to get stronger. The markets for commodities are still only in their most infant stages still.
So investors have made too much of these threats coming out of Washington.
But they've ignored a different initiative from Washington that has real teeth and could ultimately bring the CME a whole NEW market share and enormous fresh revenue.
Tim Geithner, in his recent testimony, again outlined his desire to put transparency into all over-the-counter markets (another suggestion I've been pounding the table on since Lehman's collapse last fall). Geithner is signaling that he'd like to see these customized and one-off derivative products cleared and accounted for on regulated and open exchanges, and pulled away from the back room "dark pools" of the investment banks and insurance companies where they've been traded.
And when Geithner talks about open, regulated exchanges for derivatives, one name comes quickly to mind: the Chicago Mercantile Exchange. It has the deepest liquidity of participants, the strongest history of counterparty fidelity, the best clearing mechanism and the most modern trading platform.
A great starting point for finding clarity in the OTC markets, Geithner might now take a more serious look at clearing up the credit default swaps (CDS) market, which has been rightly blamed for a lot of the default disasters we experienced last year. In trying to migrate this market into an open, regulated exchange, much of the new clearing has been heading to the Chicago Corporation, a brand-new entity that is little more than a front for the major investment banks that continue trade these bets on corporate bonds.
If Geithner is completely serious about OTC market transparency, the easiest place he could begin is with this market, which continues to beg for CME, ICE or Euronext-style clearing mechanisms. All of these exchanges were locked out of serious contention for the CDS market last year by outgoing Treasury Secretary Paulson. Geithner now has a golden chance to make this right.
Investors have so far ignored the possible impact of Geithner's speech on CME and its shares, while overplaying the possible impact of other Washington talk.
That convergence should make CME shares a screaming long-term buy right here.
At the time of publication, Dicker was long CME.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.