(Bloomberg) -- Australian employers unexpectedly added workers in April and the jobless rate dropped, driving the local currency to a seven-month high on signs the nation’s economy is skirting the worst of a global recession.
The number of people employed climbed 27,300 from March, the statistics bureau said in Sydney today. The median estimate of 19 economists surveyed by Bloomberg was for a decline of 25,000. The jobless rate fell to 5.4 percent from 5.7 percent.
Bonds yields rose on speculation the Reserve Bank of Australia’s record round of interest-rate cuts may be close to an end. A New Zealand report today showed that nation’s unemployment rate increased less than expected and U.S. figures yesterday revealed companies cut fewer jobs in April, adding to evidence the global contraction may be abating.
“We’re starting to see signs the global economy is recovering,” said Savanth Sebastian, an economist at Commonwealth Bank of Australia in Sydney. “The fundamentals for the Australian economy were very sound before this global economic crisis. Employers are a lot more hesitant in culling staff.”
Central bank Governor Glenn Stevens said this week that the effect on the economy of six interest-rate cuts since early September, which have taken the benchmark to a 49-year low of 3 percent, and government spending are “yet to be observed.”
Supermarket chains Woolworths Ltd. and Aldi are among companies that have announced plans to hire more workers in Australia.
Rate Expectations
The Australian dollar jumped to 75.57 U.S. cents at 12:11 p.m. in Sydney from 74.72 cents before the report was released. The two-year government bond yield climbed 11 basis points, or 0.11 percentage point, to 3.47 percent.
Traders now expect Australia’s benchmark interest rate will be higher in a year, according to a Credit Suisse Group index based on swaps trading.
Traders forecast the overnight cash rate target will be 8 basis points higher in 12 months, the index showed at 12:19 p.m. today in Sydney. Earlier today, they expected it to be 13 basis points lower and at the start of April, they forecast 37 basis points in reductions.
Reports yesterday showed Australian retail sales surged 2.2 percent in March from February, more than four times the increase that economists had forecast, and the trade surplus widened to the second highest on record as farm exports jumped.
Full-Time Jobs
The number of full-time jobs gained 49,100 in April and part-time employment decreased 21,800, today’s report showed.
“These are extraordinary numbers,” said Brian Redican, senior economist at Macquarie Group Ltd. in Sydney. “Things are not as bad in the economy as some people thought.”
To underpin the economy, Prime Minister Kevin Rudd is spending almost A$90 billion ($66 billion) on infrastructure, bond-market guarantees and cash handouts to consumers.
The central bank also moved to stoke domestic demand after the economy shrank in the fourth quarter for the first time in eight years. Policy makers cut the benchmark rate by a record 4.25 percentage points between September and April.
“The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead,” Governor Stevens said on May 5, when he left the rate unchanged.
Aldi said in February it will hire 2,600 people along Australia’s eastern coast this year as it opens as many as 30 new supermarkets. Woolworths, Australia’s biggest retailer, has said it expects to add 7,000 workers and reaffirmed its forecast for an increase in annual profit of as much as 12 percent.
Read more here
Wednesday, May 6, 2009
Tuesday, May 5, 2009
Bankruptcy Sleuths Find Cash in Trader Receipts for Lap Dancers
(Bloomberg) -- As Sentinel Management Group Inc. neared collapse in August 2007, piling up $950 million in losses, the Northbrook, Illinois-based investment firm wrote clients, saying it was yet another victim of the credit crunch -- an asset manager that grew too fast as it tried to ratchet up gains for customers.
The Securities and Exchange Commission didn’t buy the explanation of the 28-year-old company, which had about $1.4 billion under management, most of it for futures or commodities traders and hedge funds.
After a week-long examination, the SEC filed a civil suit against Sentinel in U.S. District Court in Chicago, accusing the company of, among other things, using client money to secure a $500 million credit line.
“The clients had no way of knowing that their assets had been used by Sentinel to obtain financing for its own purposes,” the SEC complaint says.
The task of unwinding Sentinel’s affairs and recovering money for an estimated 200 customers now falls to 56-year-old Frederick Grede, a former Chicago Board of Trade executive who is among the nation’s more than 1,400 federally appointed bankruptcy trustees.
These trustees -- along with overseers known as receivers -- find themselves in brisk demand these days as they sort through an avalanche of companies felled by the credit crisis and an assortment of alleged crooks and con artists who may have played a role in it.
Avalanche of Cases
On March 12, Bernard Madoff pleaded guilty to 11 counts of fraud as the operator of a $65 billion Ponzi scheme, the largest such fraud in history. With 64,318 companies filing for some form of bankruptcy last year -- a 50 percent increase from 2007 -- the job seldom has been more crucial.
“What receivers do is indispensable,” says Lewis Freeman, a Miami forensic accountant who has served as both a receiver and a trustee in overseeing the recovery and disposition of assets of companies that have collapsed as a result of frauds and the credit crunch.
“If you think of a case such as Madoff, the receiver all of a sudden is the CEO of a $50 billion fraud, responsible for preserving the assets, gathering information and figuring out where all the money went.”
Trustees and receivers bring broad powers to their jobs, sometimes sparking controversy. They can file civil suits on behalf of creditors, including investors, to recover money. Results of their civil investigations may lead to criminal charges by state or federal prosecutors.
Broad Powers
Federal bankruptcy law has evolved as a loosely regulated field, with no uniform application from jurisdiction to jurisdiction and no standard set of qualifications for those like Grede who get assigned to undertake the often complex work of mopping up defunct or troubled firms.
Grede is new to the trustee field. He won appointment by a federal bankruptcy judge in August 2007 after being nominated by a Sentinel creditors committee, whose members knew him from his 30-year career as a commodities executive. He started out in the Chicago Board of Trade’s surveillance department, conducting spot audits of traders.
A lawyer by education, he brings to his new job a digger’s mentality and a detective’s suspicious mind. His work on the Sentinel case is emblematic of what is core to a trustee’s job: to get to the bottom of a company’s collapse in order to recover assets for creditors.
As he delved into Sentinel’s demise, Grede says the case began to look like a parable of the current economic crisis. Grede laid out that case in a lawsuit filed in October 2007 in Chicago’s U.S. bankruptcy court against Sentinel’s chief trader, Charles Mosley, and its controlling shareholders, CEO Eric Bloom and his father, Philip Bloom, the company’s founder.
‘Phony’ Returns
In that suit, he alleges that the company defrauded and misled clients with “phony” returns while assuring those customers their cash was being parked in safe, liquid commercial paper or U.S. Treasuries. Grede says Sentinel was actually making huge bets on unorthodox 30-year instruments that turned out to be another example of financial engineering gone awry -- and hiding those bets with misleading accounting.
Grede says he began to understand Sentinel’s fondness for those instruments as he probed the machinations of Mosley, who had an alleged fondness for boozy lap dances, limousine rides and, according to additional lawsuits filed by Grede against outside brokers, bribes.
“I call it leverage gone wild,” Grede says. Neither Mosley, nor his lawyers, returned phone calls or e-mails seeking comment. The Blooms, in a settlement of Grede’s suit, agreed to return $10.7 million to Sentinel’s estate in exchange for a release of all claims.
Read more here
The Securities and Exchange Commission didn’t buy the explanation of the 28-year-old company, which had about $1.4 billion under management, most of it for futures or commodities traders and hedge funds.
After a week-long examination, the SEC filed a civil suit against Sentinel in U.S. District Court in Chicago, accusing the company of, among other things, using client money to secure a $500 million credit line.
“The clients had no way of knowing that their assets had been used by Sentinel to obtain financing for its own purposes,” the SEC complaint says.
The task of unwinding Sentinel’s affairs and recovering money for an estimated 200 customers now falls to 56-year-old Frederick Grede, a former Chicago Board of Trade executive who is among the nation’s more than 1,400 federally appointed bankruptcy trustees.
These trustees -- along with overseers known as receivers -- find themselves in brisk demand these days as they sort through an avalanche of companies felled by the credit crisis and an assortment of alleged crooks and con artists who may have played a role in it.
Avalanche of Cases
On March 12, Bernard Madoff pleaded guilty to 11 counts of fraud as the operator of a $65 billion Ponzi scheme, the largest such fraud in history. With 64,318 companies filing for some form of bankruptcy last year -- a 50 percent increase from 2007 -- the job seldom has been more crucial.
“What receivers do is indispensable,” says Lewis Freeman, a Miami forensic accountant who has served as both a receiver and a trustee in overseeing the recovery and disposition of assets of companies that have collapsed as a result of frauds and the credit crunch.
“If you think of a case such as Madoff, the receiver all of a sudden is the CEO of a $50 billion fraud, responsible for preserving the assets, gathering information and figuring out where all the money went.”
Trustees and receivers bring broad powers to their jobs, sometimes sparking controversy. They can file civil suits on behalf of creditors, including investors, to recover money. Results of their civil investigations may lead to criminal charges by state or federal prosecutors.
Broad Powers
Federal bankruptcy law has evolved as a loosely regulated field, with no uniform application from jurisdiction to jurisdiction and no standard set of qualifications for those like Grede who get assigned to undertake the often complex work of mopping up defunct or troubled firms.
Grede is new to the trustee field. He won appointment by a federal bankruptcy judge in August 2007 after being nominated by a Sentinel creditors committee, whose members knew him from his 30-year career as a commodities executive. He started out in the Chicago Board of Trade’s surveillance department, conducting spot audits of traders.
A lawyer by education, he brings to his new job a digger’s mentality and a detective’s suspicious mind. His work on the Sentinel case is emblematic of what is core to a trustee’s job: to get to the bottom of a company’s collapse in order to recover assets for creditors.
As he delved into Sentinel’s demise, Grede says the case began to look like a parable of the current economic crisis. Grede laid out that case in a lawsuit filed in October 2007 in Chicago’s U.S. bankruptcy court against Sentinel’s chief trader, Charles Mosley, and its controlling shareholders, CEO Eric Bloom and his father, Philip Bloom, the company’s founder.
‘Phony’ Returns
In that suit, he alleges that the company defrauded and misled clients with “phony” returns while assuring those customers their cash was being parked in safe, liquid commercial paper or U.S. Treasuries. Grede says Sentinel was actually making huge bets on unorthodox 30-year instruments that turned out to be another example of financial engineering gone awry -- and hiding those bets with misleading accounting.
Grede says he began to understand Sentinel’s fondness for those instruments as he probed the machinations of Mosley, who had an alleged fondness for boozy lap dances, limousine rides and, according to additional lawsuits filed by Grede against outside brokers, bribes.
“I call it leverage gone wild,” Grede says. Neither Mosley, nor his lawyers, returned phone calls or e-mails seeking comment. The Blooms, in a settlement of Grede’s suit, agreed to return $10.7 million to Sentinel’s estate in exchange for a release of all claims.
Read more here
Monday, May 4, 2009
Fiat Raises Opel Offer To EUR1 Billion - Union Source
(AFP)--Italian auto maker Fiat SpA (F.MI) has raised its offer for troubled German rival Adam Opel AG to EUR1 billion, a labor leader told AFP Monday.
"Fiat has raised its offer a little to EUR1 billion," Rainer Einenkel, head of the Opel works committee at Opel's factory in Bochum in west Germany, said.
Another German union leader, Armin Schild, had said previously that the offer was worth less than EUR750 million.
But Einenkel, who works at the Opel plant in western Bochum, said one billion wasn't enough, noting that Opel needed EUR3.3 billion to keep running and develop further.
Fiat has not yet unveiled a true "financial plan and production plan," he added.
Read more here
"Fiat has raised its offer a little to EUR1 billion," Rainer Einenkel, head of the Opel works committee at Opel's factory in Bochum in west Germany, said.
Another German union leader, Armin Schild, had said previously that the offer was worth less than EUR750 million.
But Einenkel, who works at the Opel plant in western Bochum, said one billion wasn't enough, noting that Opel needed EUR3.3 billion to keep running and develop further.
Fiat has not yet unveiled a true "financial plan and production plan," he added.
Read more here
Sunday, May 3, 2009
Colleges Flunk Economics Test as Harvard Model Destroys Budgets
(Bloomberg) -- On a Thursday morning in March, the $32 million School of Management building at Simmons College in Boston is all but deserted. Three students lounge in armchairs facing floor-to-ceiling windows that look over the quad with its winding walkways and greening lawn; another makes photocopies.
“This building is always empty,” says Raya Alazzouni, a sophomore from Saudi Arabia who’s studying graphic design and taking courses in the management school.
Simmons, home to 4,700 students, opened the 66,500-square- foot (6,200-square-meter) center in January, two months before the U.S. stock market hit its lowest point in 12 years. Even before the ribbon cutting, enrollment in the management school had been dropping.
Now, the vacant halls are reminders of the new math confounding U.S. colleges. Students, pummeled by scarce loans and savings plans that have fallen as much as 40 percent, are heading for less expensive schools. The perks designed to lure them during boom times -- from hot tubs to dorm-suite kitchenettes, to in-room cable TV -- are crushing universities with debt. Even projects like Simmons’s “green” management building, with its rain-absorbing roof patio and toilets with two flushing modes, can turn into burdens as schools struggle with rising expenses, plummeting endowments and needier applicants.
‘Spending Binge’
“The spending binge by colleges and universities was part of the same trend that created the bubble in the rest of the economy,” says Ronald Ehrenberg, an economics professor at Cornell University in Ithaca, New York, and author of “Tuition Rising: Why College Costs So Much” (Harvard University Press, 2000). “Now we’re seeing it burst.”
From Harvard University to California’s 3 million-student community college network, the American system of higher education is in turmoil. The economic crash is upending each step in the equation that families use to determine where students will spend four of their most formative -- and expensive -- years. Today is the deadline that most schools set to receive a decision from accepted applicants.
Independent colleges that lack a national name or must-have majors are hardest hit. Many gorged on debt for construction, technology and creature comforts. Now, as endowments tumble and bills mount, they’re struggling to attract cash-strapped families who are navigating their own financial woes.
Shutter Their Doors
Such mid-tier institutions may be forced to change what they do to survive. In the best case, they’ll merge with bigger schools, sell themselves to for-profit organizations or offer vocational training that elite colleges eschew, says Sandy Baum, a senior policy analyst at the College Board. In the worst case, they’ll shutter their doors for good.
Standard & Poor’s predicts bankruptcies will rise from the typical one or two schools that fold each year.
“Small colleges with no reputation could go out of business,” Baum says. “They’re very tuition-driven, so if they can’t get tuition revenues, they’ll be in really bad shape.”
College of Santa Fe, a private liberal arts institution, is one casualty. On March 24, the 1,900-student school in New Mexico announced it was closing. The reasons: It couldn’t pay its $30 million in debt, and talks to join with New Mexico Highlands University, a state school, broke down.
Richard Kneedler, a former president of Franklin & Marshall College, a Lancaster, Pennsylvania-based college founded in 1787 with financial support from Benjamin Franklin, says many small schools face the same predicament.
Read more here
“This building is always empty,” says Raya Alazzouni, a sophomore from Saudi Arabia who’s studying graphic design and taking courses in the management school.
Simmons, home to 4,700 students, opened the 66,500-square- foot (6,200-square-meter) center in January, two months before the U.S. stock market hit its lowest point in 12 years. Even before the ribbon cutting, enrollment in the management school had been dropping.
Now, the vacant halls are reminders of the new math confounding U.S. colleges. Students, pummeled by scarce loans and savings plans that have fallen as much as 40 percent, are heading for less expensive schools. The perks designed to lure them during boom times -- from hot tubs to dorm-suite kitchenettes, to in-room cable TV -- are crushing universities with debt. Even projects like Simmons’s “green” management building, with its rain-absorbing roof patio and toilets with two flushing modes, can turn into burdens as schools struggle with rising expenses, plummeting endowments and needier applicants.
‘Spending Binge’
“The spending binge by colleges and universities was part of the same trend that created the bubble in the rest of the economy,” says Ronald Ehrenberg, an economics professor at Cornell University in Ithaca, New York, and author of “Tuition Rising: Why College Costs So Much” (Harvard University Press, 2000). “Now we’re seeing it burst.”
From Harvard University to California’s 3 million-student community college network, the American system of higher education is in turmoil. The economic crash is upending each step in the equation that families use to determine where students will spend four of their most formative -- and expensive -- years. Today is the deadline that most schools set to receive a decision from accepted applicants.
Independent colleges that lack a national name or must-have majors are hardest hit. Many gorged on debt for construction, technology and creature comforts. Now, as endowments tumble and bills mount, they’re struggling to attract cash-strapped families who are navigating their own financial woes.
Shutter Their Doors
Such mid-tier institutions may be forced to change what they do to survive. In the best case, they’ll merge with bigger schools, sell themselves to for-profit organizations or offer vocational training that elite colleges eschew, says Sandy Baum, a senior policy analyst at the College Board. In the worst case, they’ll shutter their doors for good.
Standard & Poor’s predicts bankruptcies will rise from the typical one or two schools that fold each year.
“Small colleges with no reputation could go out of business,” Baum says. “They’re very tuition-driven, so if they can’t get tuition revenues, they’ll be in really bad shape.”
College of Santa Fe, a private liberal arts institution, is one casualty. On March 24, the 1,900-student school in New Mexico announced it was closing. The reasons: It couldn’t pay its $30 million in debt, and talks to join with New Mexico Highlands University, a state school, broke down.
Richard Kneedler, a former president of Franklin & Marshall College, a Lancaster, Pennsylvania-based college founded in 1787 with financial support from Benjamin Franklin, says many small schools face the same predicament.
Read more here
Tuesday, April 28, 2009
The new China rules for investing
(Fortune) -- It feels nothing like 2007 these days, except in one respect: Chinese stocks are outperforming again. The MSCI China Index, which tracks stocks traded in Hong Kong, has climbed 67% since late October (the S&P 500 has risen 2% in that time).
Analysts are debating whether or not the rally - which has slowed in recent weeks - will persist. Morgan Stanley strategist Jerry Lou warned investors last week that Chinese stocks were overvalued, writing in a note, "Although we now envision a marginally less severe earnings recession in 2009...the market has rallied ahead of fundamentals." Meanwhile, Goldman Sach's Hong Kong strategist, Timothy Moe, raised his forecasts for two Chinese stock indexes on Monday.
"People are worried that these stocks have run up too far," says Hong Hao, an analyst at Brean, Murray, Carret & Co. "But we're still talking about extremely low valuation multiples." The price to earnings ratio of the MSCI China index is currently 12 - three points higher than it was last fall, but twenty points lower than it was in late 2007.
Like U.S. companies, Chinese businesses are reporting underwhelming (although less dismal) earnings. Telecom China Mobile's 5% profit growth last quarter fell below analyst estimates, and state-owned carrier Air China's earnings declined 6%. But while the U.S. market has received little support from its sagging economy, China's economic data has perked up.
"Just about every indicator in China suggests that things have been looking up for months," says Larry Kantor, the head of research at Barclays Capital. "If I had to pinpoint a bottom, I'd say it happened in November or December."
Last fall, the Chinese market was stuck in a rut - stocks sank 60% from August through October, and the country' once-unstoppable gross domestic product growth began to peter out. When American investors' emerging market funds plummeted, they learned that China's export-driven economy was far from decoupled from the U.S.
Read more here
Analysts are debating whether or not the rally - which has slowed in recent weeks - will persist. Morgan Stanley strategist Jerry Lou warned investors last week that Chinese stocks were overvalued, writing in a note, "Although we now envision a marginally less severe earnings recession in 2009...the market has rallied ahead of fundamentals." Meanwhile, Goldman Sach's Hong Kong strategist, Timothy Moe, raised his forecasts for two Chinese stock indexes on Monday.
"People are worried that these stocks have run up too far," says Hong Hao, an analyst at Brean, Murray, Carret & Co. "But we're still talking about extremely low valuation multiples." The price to earnings ratio of the MSCI China index is currently 12 - three points higher than it was last fall, but twenty points lower than it was in late 2007.
Like U.S. companies, Chinese businesses are reporting underwhelming (although less dismal) earnings. Telecom China Mobile's 5% profit growth last quarter fell below analyst estimates, and state-owned carrier Air China's earnings declined 6%. But while the U.S. market has received little support from its sagging economy, China's economic data has perked up.
"Just about every indicator in China suggests that things have been looking up for months," says Larry Kantor, the head of research at Barclays Capital. "If I had to pinpoint a bottom, I'd say it happened in November or December."
Last fall, the Chinese market was stuck in a rut - stocks sank 60% from August through October, and the country' once-unstoppable gross domestic product growth began to peter out. When American investors' emerging market funds plummeted, they learned that China's export-driven economy was far from decoupled from the U.S.
Read more here
Monday, April 27, 2009
Bair Looks Beyond Stress Tests, Seeks End to ‘Too Big to Fail’
(Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair, looking beyond stress tests that will determine the health of the top 19 U.S. banks, said her agency should have the authority to close even the biggest lenders.
The “too-big-to-fail concept” should be “tossed into the dustbin,” and the FDIC should have the power to close “systemically important” financial firms, Bair said in a New York speech yesterday. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program,” she said.
Analysts are recalibrating their estimates of the results of the federal bank examinations after the government announced the test methodology last week. Lenders were given preliminary results on April 24 and have time to discuss them with regulators before the full readings are released on May 4.
“If the FDIC had the authority to close down non-banks as they’ve been able to close down banks, the cost to the taxpayer would have been much less,” said Sung Won-Sohn, former chief economist at Wells Fargo & Co. who is now a professor of economics and finance at California State University Channel Islands in Camarillo. “With the authority she’s talking about, the government could take preemptive action.”
U.S. regulators have provided more than $90 billion to Citigroup Inc. and Bank of America Corp., given more than $180 billion in loans to American International Group Inc. and established debt-guarantee programs. The FDIC wound down 29 failed banks and thrifts this year.
‘Unnecessary’
Analysts including Richard Bove of Rochdale Securities say the stress tests aren’t useful.
“This test still strikes me as being unnecessary, dangerous, and poorly conceived,” Bove wrote in an April 25 note to clients. “My fear is that this program will not only fail to raise more capital, but it will force banks to contract.”
Regions Financial Corp., the Alabama bank that has accepted $3.5 billion in U.S. assistance, declined 12 percent in New York trading yesterday as analysts said regulators may push the company to raise more capital to offset mounting losses.
The bank “probably has been told to raise additional equity capital with $7 billion to $8 billion of projected 2009- 2010 losses vs. $4 billion to $5 billion of pretax, pre- provision income,” analyst Jeff Davis of Howe Barnes Hoefer & Arnett Inc. said in a report yesterday.
Read more here
The “too-big-to-fail concept” should be “tossed into the dustbin,” and the FDIC should have the power to close “systemically important” financial firms, Bair said in a New York speech yesterday. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program,” she said.
Analysts are recalibrating their estimates of the results of the federal bank examinations after the government announced the test methodology last week. Lenders were given preliminary results on April 24 and have time to discuss them with regulators before the full readings are released on May 4.
“If the FDIC had the authority to close down non-banks as they’ve been able to close down banks, the cost to the taxpayer would have been much less,” said Sung Won-Sohn, former chief economist at Wells Fargo & Co. who is now a professor of economics and finance at California State University Channel Islands in Camarillo. “With the authority she’s talking about, the government could take preemptive action.”
U.S. regulators have provided more than $90 billion to Citigroup Inc. and Bank of America Corp., given more than $180 billion in loans to American International Group Inc. and established debt-guarantee programs. The FDIC wound down 29 failed banks and thrifts this year.
‘Unnecessary’
Analysts including Richard Bove of Rochdale Securities say the stress tests aren’t useful.
“This test still strikes me as being unnecessary, dangerous, and poorly conceived,” Bove wrote in an April 25 note to clients. “My fear is that this program will not only fail to raise more capital, but it will force banks to contract.”
Regions Financial Corp., the Alabama bank that has accepted $3.5 billion in U.S. assistance, declined 12 percent in New York trading yesterday as analysts said regulators may push the company to raise more capital to offset mounting losses.
The bank “probably has been told to raise additional equity capital with $7 billion to $8 billion of projected 2009- 2010 losses vs. $4 billion to $5 billion of pretax, pre- provision income,” analyst Jeff Davis of Howe Barnes Hoefer & Arnett Inc. said in a report yesterday.
Read more here
Thursday, April 23, 2009
Easing bottleneck shifts the bet on oil futures
(MarketWatch) - The fast-shrinking price gap between crude-oil futures for prompt delivery and crude destined for delivery months down the road is backfiring on investors who bet big that the gap would widen.
At the same time, the trend is playing nicely into the hands of investors in oil exchange-traded funds, who stand to benefit from the loss of a somewhat obscure hidden cost along the lengthy supply chain.
That cost loops back to Cushing, Oklahoma, the delivery point for light sweet crude contracts traded on the New York Mercantile Exchange. As a weak economy slowed demand for oil, crude supplies backed up at Cushing, with sellers wanting to hold barrels in anticipation of a price rebound. This, in turn, put further pressure on near-term prices as storage became a problem.
Late last year, this situation resulted in the January crude contract trading at a $8.49 discount to crude for delivery in February, a record between two successive months' contracts, and a situation known among futures traders as contango. The discount was so steep it got the label "super contango." See related story.
Demand for storage prompted oil supertankers around the world to drop anchor and become floating oil storage tanks.
But since December the contango gap has dropped sharply to less than $2, as Midwest refiners slowly shipped oil stored at Cushing to their refineries.
That drop has been a blow to the mostly institutional investors who took part in these complex trades, betting that the gap would stay wide. But for individual investors, who tend to simply bet on the direction of a single-month contract, the drop in the price gap has brought some relief from a so-called "roll-yield" cost that hits exchange-traded funds.
This cost, which is caused when ETFs that hold the front-month oil contract move their holdings into the next month contract, can penalize holders of funds like the United States Oil Fund , the biggest oil ETF.
The narrowing of contango will help reduce this cost, the fund says.
That relief may soon disappear, however. As summer driving season approaches, analysts expect contango to change course again, although not to approach its earlier record.
"You really have demand destruction now," said Tariq Zahir, managing member of New York-based trading firm Tyche Capital Advisors. Weak demand is pressuring the price of the front-month contract, he said.
"But you get a little bit support [in the following months] with the hurricane season coming up, and of course the driving season coming up, that can keep the price further out high," he added.
Zahir said he is betting on a wider contango going into summer. But he said he isn't trading the front-month contract because of "higher volatility," instead choosing to enter a contango trade between the July and August contracts.
As of Thursday's close, contango between the front-month June contract and July contract stood at $1.45 a barrel, while contango between the July and August contract stood at $1.26.
On Thursday oil ended up 77 cents, or 1.6%, to $49.62 a barrel. Front-month contracts have gained 11% so far this year
Read more here
At the same time, the trend is playing nicely into the hands of investors in oil exchange-traded funds, who stand to benefit from the loss of a somewhat obscure hidden cost along the lengthy supply chain.
That cost loops back to Cushing, Oklahoma, the delivery point for light sweet crude contracts traded on the New York Mercantile Exchange. As a weak economy slowed demand for oil, crude supplies backed up at Cushing, with sellers wanting to hold barrels in anticipation of a price rebound. This, in turn, put further pressure on near-term prices as storage became a problem.
Late last year, this situation resulted in the January crude contract trading at a $8.49 discount to crude for delivery in February, a record between two successive months' contracts, and a situation known among futures traders as contango. The discount was so steep it got the label "super contango." See related story.
Demand for storage prompted oil supertankers around the world to drop anchor and become floating oil storage tanks.
But since December the contango gap has dropped sharply to less than $2, as Midwest refiners slowly shipped oil stored at Cushing to their refineries.
That drop has been a blow to the mostly institutional investors who took part in these complex trades, betting that the gap would stay wide. But for individual investors, who tend to simply bet on the direction of a single-month contract, the drop in the price gap has brought some relief from a so-called "roll-yield" cost that hits exchange-traded funds.
This cost, which is caused when ETFs that hold the front-month oil contract move their holdings into the next month contract, can penalize holders of funds like the United States Oil Fund , the biggest oil ETF.
The narrowing of contango will help reduce this cost, the fund says.
That relief may soon disappear, however. As summer driving season approaches, analysts expect contango to change course again, although not to approach its earlier record.
"You really have demand destruction now," said Tariq Zahir, managing member of New York-based trading firm Tyche Capital Advisors. Weak demand is pressuring the price of the front-month contract, he said.
"But you get a little bit support [in the following months] with the hurricane season coming up, and of course the driving season coming up, that can keep the price further out high," he added.
Zahir said he is betting on a wider contango going into summer. But he said he isn't trading the front-month contract because of "higher volatility," instead choosing to enter a contango trade between the July and August contracts.
As of Thursday's close, contango between the front-month June contract and July contract stood at $1.45 a barrel, while contango between the July and August contract stood at $1.26.
On Thursday oil ended up 77 cents, or 1.6%, to $49.62 a barrel. Front-month contracts have gained 11% so far this year
Read more here
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