In the face of two big Washington initiatives, the Chicago Mercantile Exchange ( CME) 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 IntercontinentalExchange ( ICE) and NYSE Euronext ( NYX) 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.
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.
Panicky Commodities Talk
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.