30, 2008 -- Uncertainty is bearish.
With that thought in mind, here is a news release from this afternoon after the markets were closed. It comes from CNNMoney.com; "Amid soaring (crude) oil prices that some say are caused by nothing more than rampant speculation, the government announced a wide ranging probe into oil price manipulation and said it would get more information on the effect investors are having the market."
The announcement went on to say, "the measures, undertaken by the Commodity Futures Trading Commission after pressure from angry lawmakers, do two things. First, they'll attempt to gather more information from index funds and other non-commercial users of oil. They'll also see information on oil trades made outside the US on exchanges like the Intercontinental Exchange Europe (ICE) where the CFTC has no oversight and has been unable to get more detailed information. The second thing on the CFTC's agenda is an actual investigation into possible price manipulation most likely by a commercial user of oil like a production company, shipping company, or storage company."
Despite all the forecasts of $150 to $200 a barrel crude oil by the "big hitters" I view the statements above as the dawn of uncertain times for the energy markets. And when times become uncertain, it usually brings forth bearish market action. In other words, lower prices.
The following day, this news item came from the Wall Street Journal; "the US Commodity Futures Trading Commission has launched an investigation into potential irregularities in the cotton futures market, according to people familiar with the matter. Commissioners are considering publicly acknowledging the ongoing, confidential probe as soon as next week, along with a broader set of oversight initiatives involving other agricultural markets."
The last three words of the WSJ item, "other agricultural markets" is a bombshell. There have been instances in grain trade the past year where prices have moved so quickly and irrationally that it seemed to have been done with mirrors rather than the normal "price discovery" mechanisms that have been in place for years. In late winter, for example I mentioned in this column there was one fateful day when wheat prices, "rallied $2 a bushel ($10,000 per contract) in two minutes" How is that possible? And not a week that goes by in my, "twice a day market letter," Commodity Insight, that I question the price movements seen in the night session for grain trade. In the night session, prices seem to be set not by the normal "price discovery" mechanisms as much as being achieved thru the use of mirrors or slight of hand.
In the night session, the period from midnight to 4 a.m. central time is when most of the big price swings take place. The swings take place when most everyone is sleeping. Everyone of course, except for those wide awake and throwing money at markets when few can see what is going on. I cannot tell you how many times over the past year in my newsletter when I will say something like this: when I went to bed last night, corn was down two cents, wheat off one cent and soybean prices were two cents higher. But when I came in this morning, corn was six higher, wheat up 10 cents and soybean prices were 20 cents higher. Gosh, I guess I should not have gone to bed!" I write about such goings on all the time. All the time!
If the CFTC wants to snoop around and investigate something, they should start with the night session for grain trade! That is where they should start! And if they uncover chicanery, don't be surprised! In the WSJ piece was this paragraph that was straight forward: "The agency's stepped-up scrutiny of the agriculture markets comes in response to criticisms aired at a CFTC hearing in April that speculators and other financial investors could be influencing markets for basic foods and fibers, either driving up prices or making the markets more volatile. Grain elevators, farm cooperatives, and other merchants have flooded the agency with letters and sent lobbyists to Capitol Hill to argue that the CFTC should do more to police aggressive hedge-fund trading and to study the impact of increased pension fund investment in farm commodities. What does all that portend for prices? I'm not certain. But I'm certain that uncertainty is bearish.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)