Category Archives: Investments

Swiss Secrecy Subtly Subdued

How do you say "drop a dime" in French? Ok then, how about in German?

Looks like UBS struck a deal with US authorities that includes (1) payment to Uncle Sam for his troubles ($780 million) and (2) disclosure of private info on American clients who thought they were just out of the Tax Man’s reach.  And then they’re going to close the offshore accounts of their American clientele, you know, for shits & giggles.

This raises such a lot of operatic questions –  is the fat lady belting out her final aria and is she nearing the last note that signals the end of a banking era being the two most heard in these parts.  Such drastic, far reaching moves by UBS has undoubtedly raised the specter that the traditional role of Swiss banking as a haven for those chasing financial anonymity may not be long for this world.

It’s easy for me to sit here and say “good riddance” because I don’t have the kind of funds that would make a non-interest bearing account in the middle of Europe an attractive proposition.  Were I on the other side of the table as a full-fledged member of the financial patricians, my feelings might not be so plebeian.

But I’m not, so they are.

Plus, and this to me is the really important part, it sets a precedent for The Hague to go after the funds accumulated by all the corrupt Third World rulers (and some in the First and Second, too) who have stashed their ill-gotten gains in Swiss accounts while simultaneously giving their people the finger.

I, Hambricscurvus Maximus say: “Let The Games Begin!!!!!!!!  Release the Lions!!!!!”https://i2.wp.com/www.vroma.org/images/mcmanus_images/bestiarii.jpg

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The Real Source of High Gas Prices

The following is a paper I wrote a few months ago to respond to the question what should the federal government do about the skyrocketing price of oil & gas. I’m pasting this now, because of tonight’s 60 Minutes report.

In recent months, the price of gasoline has set record after record on its seemingly unending upward surge.  The jump in price has ignited a debate in the US as people seek to understand why the price of gasoline is high and rising, and to determine what policy prescriptions are available to bring it back down to Earth.  The most popular explanations for rising prices have focused on the standard economic relation of gasoline’s supply and demand curves, the US dollar’s weakening performance against other major currencies and the impact on prices of speculation in the futures markets.  Logic and anecdotal evidence tends to support the argument that US demand for gasoline, in the face of apparent supply constraints, have led to a series of upward shits in the supply curve, resulting in the rising price per gallon.  The rising price of gasoline is further exacerbated (from the consumer’s perspective) by the oil companies’ firm grip on pricing power, as one would expect from an oligopolistic industry, and the widespread lack of viable alternatives. The result is a commodity with inelastic demand and consumers best described as price-takers.  Yet a closer look at the events revels the current price of gasoline may be due to increased speculation outside of government oversight.

In May 2008, the nationwide average price of gasoline stood at $3.60 per gallon, climbing above $4.00 by mid-June 2008.   John Moroney, an economics professor  at Texas A&M, asserts that supply constraints are at the heart of soaring gas prices, citing production declines in Mexico, an unstable oil industry in Venezuela and possible shrinking production capacity in the Middle East as supporting evidence.    If one adds to this the increased demand for oil and gasoline in Asia and rising geopolitical tensions in the Middle East, the conclusion that starts to emerge is that the global demand for oil (and by extension gasoline) has shifted outward, outstripping the commodity’s supply.  From a straight forward application of the economics of supply and demand, one would therefore expect the price of gasoline to rise under such circumstances.  According to the International Energy Agency, global oil demand in 2008 is expected to grow by 1.7 million barrels a day, up from 0.9 million in 2007, in spite of record prices and an economic slowdown in the US.   Under the circumstances, one would expect supply to increase as oil companies are able to tap previously uneconomic sources of oil, such as the oil sands in Canada, and deepwater sites in the Gulf of Mexico.

Another important factor that has contributed to rising gasoline prices in the United States is our currency’s declining value.  Oil, like many other commodities, is priced in US dollars and the dollar’s decline in this environment has benefited consumers based in relatively stronger currencies – Euro, Yen and GBP – as they can pay more per barrel in dollars without felling as much of an effect at the gasoline pump as is felt in the US.

Despite this evidence, there are those that share the opinion of Michael Lynch, president of Strategic Energy & Economic Research, Inc., who states “[t]he fundamentals don’t justify anywhere near these prices, even when you factor in geopolitical problems,”  adding that demand has begun to wane. On April 30, 2008, the Associated Press reported that although gasoline prices have followed crude prices upward, the rate of change has not been the same.  Because gasoline demand fell for several months, refiners were not able to raise gas prices fast enough to keep up with the rising cost of crude, which was up about 76% year-on-year compared to the 22% increase in gasoline prices during the same period.  Speculation in the futures markets for oil and gasoline is the additional factor believed to be a major driver of the upward surge in gasoline prices:  “[t]he price of crude oil is not made according to any traditional relation of supply to demand.  It is controlled by an elaborate financial market system,…” according to Mr. F. William Engdahal,  who goes on to estimate that “[a]s much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.”  At the root of this development is the change of trading platform for speculators in West Texas Intermediate crude futures contract.

In the US, the Commodities Future Trading Commission (CFTC) is tasked with “ensuring the integrity of the futures and options markets,” including the New York Mercantile Exchange (NYMEX).  Traditionally, US futures contracts on West Texas Intermediate (WTI) crude oil traded on exchanges, such as the NYMEX, subject to extensive regulatory oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud.   In 2000, the US Congress passed the Commodity Futures Modernization Act of 2000, which exempted OTC electronic exchanges from CFTC oversight,  severely limiting the CFTC’s ability to ensure the integrity of the OTC electronic exchanges through ongoing monitoring to detect price manipulation or fraud.  In January 2006, the CFTC further relaxed its oversight abilities by allowing US-based traders to route orders for WTI futures contracts, as well as US gasoline and heating oil futures contracts, through the ICE futures exchange in London.   By Mr. Engdahl’s estimation, more than 60% of the price of crude oil as of May 2008 is due to speculation on OTC electronic exchanges outside the CFTC’s regulatory purview.  In early May 2008, the Associated Press reported the price of oil neared $124/barrel as “investors captivated by the market’s upward momentum looked past the government’s report of an increase in crude and gasoline supplies.

A roll-back of that portion of the Commodity Futures Modernization Act of 2000 that exempted US-based OTC electronic exchanges from regulatory oversight is one viable policy prescription available to the government.  Such a move could potentially uncover manipulative or fraudulent activities related to pricing of oil and gasoline on US exchanges, and perhaps reduce price volatility through increased transparency.  A second, bolder remedy would be to restore the CFTCs oversight responsibility and authority with respect to US-based traders routing orders through OTC electronic exchanges, especially with respect to WTI, gasoline and heating oil futures contracts traded on London’s ICE.

Other remedies to lower the price of gasoline, such as the gas tax holiday and the increase of oil companies’ federal taxes, are unlikely to affect the price of gasoline as suggested by politicians.  If the federal tax paid at the pump were temporarily eliminated, politicians have intimated that the effect would be a one-for-one reduction of the consumer’s cost for gasoline.  Given the industry’s pricing power, which makes the consumer a price-taker, the more likely result would be a one-for-one increase in oil company profits.  Similarly, should Congress succeed in increasing the tax oil companies must pay, the pain would be passed on to the price-taking consumers, who would see the price of gasoline driven higher by the increased taxes.

In short, the government’s best route toward alleviate consumers’ pain at the pump is not to create new policies, but to undo two of their current ones.

Sources:

Chapman, Michael.  Pain at the Pump, Georgetown University, McDonough School of Business, May 2008.
Douglass, Elizabeth and Ronald White, Soaring costs are squeezing gas station owners too, Los Angeles Times, June 10, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Blas, Javier and Neil Dennis.  Oil flirts with $110 as demand remains robust, FT.com, March 11, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Mouawad, Jad. Oil Prices Pass Record Set in ‘80s, but Then Recede, The New York Times, March 3, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Engdahl, William F., Speculators knock OPEC off oil-price perch, Asia Times, May 6, 2008.
Ibid.
Ibid.
Ibid.
Associated Press, Cost of oil nears $124 as gas starts to rise again, May 7, 2008

VW Unpimped the Hedge Fund Ride with a 2-day Gain of 348%

Unpimp My Ride

Unpimp My Ride

Like, fo’ realz, yo, I ain’t even lying.  VW short sellers got straight up jacked by Porsche!

Some hedge funds that shorted VW’s stock using borrowed shares found themselves holding the dookie end the stick when it came time (unexpectedly) to buy back the borrowed shares they had sold short.  The plan that they would sell the borrowed shares, wait for the price to fall, then buy them back and repay the lenders almost worked.  Only snag was Porsche’s surprise announcement on Sunday that it had already bought a shit load of VW stock and call options that would give it something close to a 75% equity stake.

That made traders thing that the supply of VW shares had grown scarcer than a Saharan thunderstorm and sent them off in a panick to buy up what was left.  Long story short, the made rush by the short sellers to buy shares back drove the price up so high that at one point, VW was had a market value of over $345 billion!  That was only second to Exxon Mobil, the world’s largest publicly traded company.

Here’s a screen shot of today’s action in VW’s ADRs (OTC:VLKAY):

VW's ADRs on 28 October 2008

VW