From Chuck Cain

Hello Michael: I am tired of hearing about the speculators driving up the price of oil. People, mainly politicians and reporters, who dont bother to do their homework are giving this a lot of play. If they did proper research, they would find that, in futures, it is just as easy to speculate on a price drop by being short as it is to speculate on a price increase by being long.  Speculation on the short side would have exactly the opposite effect described in the press and put downward pressure on prices. But the fact is, that speculators are about evenly divided between being long and being short, and thus, cancel each other out. This (PDF) comes from our friendly government regulator who has access to all sorts of position reporting by brokers and exchanges. I especially like the graph at the end. Regards, Chuck Cain

Thanks!

For all of those complainers out there screaming about “bad” speculators, look in the mirror!

From a reader comes thoughts on intrade.com

intrade is a prediction-based website, where they offer essentially “bets” on outcomes. each trade matures at either 0 or 100, a negative outcome and a positive outcome to the event/trade in question, respectively. if at the extreme, markets and bets such as these were perfectly predictable, then the spread between the starting point of the bet and the ending point of the bet would have zero variance. in other words, each bet would be binary: if we could predict with 100% certainty that the Dow would finish above 12,000 by the end of July 2008, then the bet would start at 100 (actually slightly less given the time value of money) and mature at 100, as each player’s minimum bid would be essentially 100. thus a unary outcome – bets finish where they started as everyone has 100% certainty on the outcome, as markets would then be 100% predictable. conversely, if markets and bets such as intrade offers were not 100% predictable, then the variance of the price should be all over the place, which is exactly what you see at intrade. bets start at 20, move to 90, then mature at 0. some start and stay at 50 forever, only changing within a couple of days of the bet’s maturity, as certainty emerges. i recall the 2004 election, where Bush was given up as the exit polls showed him losing, and the intrade bet on Bush to win I believe hit 20, only to mature at 100 a few days later. So intrade’s bets essentially proves the unpredictability of markets and events: bets often start at 50 (zero prediction as it is equidistant), often move 90+ points as they swing from one outcome to another, but rarely do they start and finish near an outcome, given the complex system on which one is betting. this again all essentially proves that NOTHING is predictable in a statistically significant basis.

Thanks.

Feedback from a reader:

Mr. Covel: I commented on one of your commentarys, you emailed me with a question, and I responded with was was really a half assed answer.  First, your web site is much easier for me to navigate and view – cleaner; part of this is due to my older computer, slower speed, and less then good reception.  Second, much of the commentary which you quote is helpful and germane, however, while some YOUR comments are also helpful, I find that too many are snide and totally uninformative; as though you’re playing to an audiance of “true believers” and you have to feed them a fish every so often – when that occurs you’re little better then the hacks and talking heads you disparage. I am a very rank amateur when it comes to investing/trading; very timid and rather feeling my way along. I am looking for information that will assist in how I go about what I do, and hopefully the info is void of any blarney – hard to find that. Thanks. John H.

I don’t understand why the truth needs to be sugar-coated John? Instead of throwing me generalities, wny not explain what the “snide” is and why you find it so?

I don’t care whether it is monster optimism on the upside or over the top “the world is going to end (PDF)” pessimism on the downside, none of it helps you to know when to buy and sell precisely.

If the U.S. stock market keeps going down and oil keeps going up doesn’t the Fed have a problem whether they lower or raise rates? We bailed out LTCM summer 1998. Then we lowered rates to nothing after 9/11 to prevent a further stock market drop. Those rate decreases after 9/11 supplied the liquidity to grow the real estate bubble. Not so smart moves over 10 years.

A nice defense from CATO.

Is this not the same explanation we heard during the summer of 1998 when Long Term Capital Management was bailed out?

As I look at major stock markets spiral down I feel little. Do I know why stocks are down? No. Does anyone else really know? Not in my opinion. Are there explanations everywhere attempting to explain the downward trend? You bet. Are any of those explanations remotely plausible in a measurable way? You tell me.

This is a comment from a recent post:

Yes, I have read Rand and my bet here is she would agree with me, to a large degree, for no other reason than I am doing independent thinking and disregarding her and all other novelists and philosophers. I doubt what I have written here is perceived only by me and if that is true then my subjective thinking and reality may be way ahead of the curve. I doubt that is true. In fact, I have a hunch ninety percent of the working people in this country would agree with what I have written here. By definition, that would classify my observations and perceptions as powerfully objective. The fact is energy prices are plunging a dagger into the American and world economy. That’s the issue. That fact can be backed up with plenty of data. Yes, speculators were in the market at $30 per barrel and now in at $130 per barrel. Looks like about a 60 percent rise in trading volume since $30 per barrel. Yes, $30 dollars was good because there were no visible disruptions to the economy. $130 is extremely bad because the negative ramifications to the economy are huge and growing. This is a big price to pay for “free market” speculation. That said, this issue won’t get decided on this or any other webpage. If the price continues to rise, this mess will eventually be viewed as a national security risk to the country and then the Federal Government will step in. JFK was on top of the steel companies in the 60’s, while unfortunately, George Bush is missing in action in 2008.

My response:

The market doesn’t care what the term “working people” means – whatever it means to whoever. The market doesn’t care about you or me. If you can accept reality, then you can deal with it. Or you can wait for a handout or government subsidy or just whine.

Adding to my comment, in my experience people who talk with phrases like “working man” are either very rich politicians or people who have no money who believe the very rich politicians will actually deliver on a promise of giving them money in some form. Here’s a tip: ignore politicians and figure out how the great traders make their money. They don’t make it by whining about “working people” – whatever that means!

Cool comic.

I received an email from Turtle Tom Shanks today that adds more “color” to the story:

This is mainly a clarification of the fourth paragraph on page 33, beginning “Shanks and Svoboda . . .”. This is a fuller account, to the best of my recollection, that you may use any way you see fit:

I first met George [Svoboda] in San Francisco, through Blair Hull. George had a brilliant way of getting right to the core principles of any subject he approached, and he was investigating trading at the time. He quickly learned of Blair’s prominence in the field and flew to San Francisco to meet with him. I was working for Blair (had met him through Blackjack), and Blair knew that George had an extensive blackjack background as well. Since we all had that in common, Blair invited me to join them for lunch. I don’t remember much about that meeting, but a couple of months later Blair sent me to Chicago to research sources of commodity price data that he could add to his Options Research service. During that trip, I ran into a friend of mine named Ron Cohn, whom I had known in San Francisco. I had no idea Ron was working in Chicago; he walked into an office I was in to drop off some keys at the end of a project he was doing for the company, we recognized each other and decided to have dinner that night. I knew George was in Chicago doing more research and I didn’t think he knew anyone socially there so I called George and invited him to join us. We went to a Greek restaurant, I remember, and during the catch-up conversation, I learned that Ron had applied to the first C&D ad that had run the year before, which is the first time either George or I had heard of that opportunity. I returned to San Francisco, looked up the ad in the file of old WSJs we kept, procrastinated for a while and finally applied. After I got the application package, I phoned George to discuss it. In his inimitable way he had cut right to the heart of the matter and told me that he had gone to the library to research RJD to get an idea of how Richard might like to have the questions and essays in the application answered. I thought that was a great idea and did the same in SF. There were 20 interviews granted that year, two a day for two weeks. George and I were scheduled on the same day, he in the morning and I in the afternoon. The rest, as they say…Hope you are well. Best, Tom

PS: In the next paragraph, there is a reference to Dingo boots. There never were any Dingo boots. The boots we used were all made by hand by a Mexican shoemaker in San Francisco. The essence is correct, however: I was tired of boots

Thanks Tom.