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Articles by Donald E. L. Johnson

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Today is Wednesday, April 16, 2014

Futures Markets

Corn and soybeans are recovering

Corn and soybeans farmers are holding their crops off the markets in the face of weak export demand and in hopes that weather scares will give them higher prices in April, May and June. When the cold weather breaks, will farmers start selling in the face of possibly even bigger crops?

Posted by Donald E. L. Johnson on 02/26/14 at 08:45 AM
AgricultureSoybeansCornFutures Markets • (0) CommentsPermalink

Emily Lambert’s “The Futures, the rise of the speculator. . .” is disappointing

During the 60s and 70s I wrote hundreds of stories and weekly columns about the futures markets, the Chicago Board of Trade, Chicago Mercantile Exchange, Chicago Options Exchange and several of the characters mentioned in "The Futures, the rise of the speculator and the origins of the world's biggest markets," by Emilly Lambert, a Chicago-based reporter for Forbes.

I give the book only two stars for several reasons:
1. It's useless and barely entertaining for history buffs and Chicago traders.
2. It's shallow. There's not a chart or table in the book. Volume, open interest and other stats tell interesting stories.
3. It slams Leo Melamed, who I was the first to profile in depth while I was a business reporter for the Chicago Sun-Times. He isn't quoted in the book, which means his enemies told his story for him, and he refused to comment, angering the author.
4. The book profiles members of the exchanges as members of families and tribes. They were much more than that.
5. Lambert is unable to profile an exchange floor trader in a way that shows what kind of person succeeds as a floor trader or as an off-floor speculator.
6. Retail customers are almost totally ignored.
7. The folks who run commercial hedging operations for Cargill and other companies aren't profiled, described in any detail or given much credit for all of the committee work and time they put into exchange politics and development.
8. Descriptions of farmers who hedge or those who don't are missing. The book really down plays the huge role futures prices play in the lives of farmers, agribusinesses, banks, currency traders, petroleum company managers and the U.S. and world economies. 
9. Where are the commission brokers? They played huge roles in helping hedgers and speculators lose money while they and the floor brokers did very well.
10. This is one of the most poorly written and structured business and history books I"ve read in a long time. Some people are meant to write articles and columns, and some are meant to write books. Lambert is the former, not the latter. While the author cites her library research, her book looks like the work of a reporter who prefers to talk to people and suck up to some while slamming others. Most of the history of futures exchanges that you get from this book is in the introductory chapters of many books about trading futures.
I don't and never have traded futures, but I do trade options and covered Joe Sullivan as he worked on the development of the CBOE. As a reporter and columnist, I saw how dangerous and risky futures markets are for retail speculators, and they're even riskier today than they were 35 to 47 years ago.
Posted by Donald E. L. Johnson on 11/28/12 at 08:07 PM
AgricultureFutures MarketsBooksSpeculationPermalink

Futures speculators give Ken Buck 62% chance of beating Michael Bennet

Speculators on Intrade’s political futures markets are giving Ken Buck a 62.1% chance of beating Michael Bennet on Nov. 2. The Buck to win market is fairly liquid by Intrade standards with the 62.1% bid only about 8 points below the 70% ask price. In the Bennet to win market, the bid is 25.1%, or 14 points below the 39.1% ask price. If Buck wins, the bid price goes to 100%, a nice 38-point gain. At the same time, if Buck wins, the bid price goes to zero, a 25-point loss. Buy both and you stand to make a 14-point profit. If Bennet wins, his futures market gives you almost a 75-point profit as it goes to 100, and the Buck market costs you 62 points. So you stand to make 13 points if Bennet wins and you buy both Buck and Bennet-to-win-contracts. I think Buck has about a 53% chance to win, but I’m not going fight or trade this market. There is no trade in the Colorado Governors markets. LINK: Go to Click on Politics, click on 2010 U.S. Senate Races and click on Colorado (Incumbent: Michael Bennet - D).

Posted by Donald E. L. Johnson on 08/30/10 at 10:36 AM
AgricultureFutures MarketsColoradoPoliticsPollsPermalink

Intrade futures traders: Scott Brown 85.5% chance, Martha Coakley 17.5%

I live blogged Intrade until heavy traffic made it inaccessible at about 6 p.m., when polls closed in Massachusetts:

Posted by Donald E. L. Johnson on 01/19/10 at 01:04 PM
AgricultureFutures MarketsColoradoPoliticsRead More

Institutional commodity index speculators distort wheat futures markets, Senate panel reports

Large institutional specualtors that only buy indexes tied to wheat futures contracts on the Chicago Board of Trade and other exchanges distort the futures markets so that they ruin the price-hedging effectiveness of the futures contracts for farmers and food manufactures who use the markets to hedge their price risks, according to a report issued by the U.S. Senate’s Permanent Subcommitte on Investigations. The CBOT is owned by the Chicago Mercantile Exchange (CME).

Simply put, pension funds and hedge funds that only buy and never short the futures markets have increased the cost of foodstuffs for the whole world, and similar speculation has increased the cost of energy and probably the costs of metals and other commodities.

Call this the Jim Rogers effect, because his mutual funds and book, Hot Commodities (Random House, 2004, 252 pp.), convinced the institutional investors that they could hedge against inflation buy buying commodities.

From the 174-pp. report’s executive summary:

Posted by Donald E. L. Johnson on 06/24/09 at 07:42 AM
AgricultureFutures MarketsSpeculationRead More

Bernanke’s warning to Congress about deficits causes selling of gold

Is adult supervision coming to Washington?

Today’s markets acted like they were worried that Congress would listen to Fed Chair Ben Bernanke’s warning that budget deficits were going too high.

In effect, Bernanke was trying to reassure the markets that a surge in inflation is not around the corner because the Fed won’t let it happen, and he’s warning Congress to watch that spending.

His warning could be bad news for health care reformers, who want to add a budget-busting health insurance reform bill to the economic mix.

So gold prices, which have been on a tear recently, dropped to $964. The next support levels are at about $950, $920 and below $800, if speculators really think they’ve over hedged against inflation. Traders buy gold as protection against inflation.

At the same time, the dollar, which has been sinking in the face of inflationary expectations, rose Wednesday. The charts say the buck could drop another 10%, but it may be due for an upward correction after recent declines.

These things are so hard to predict in these still relatively volatile markets and uncertain geopolitical times.

Posted by Donald E. L. Johnson on 06/03/09 at 09:34 PM
AgricultureFutures MarketsEconomyPermalink

Commodity mutual funds and ETFs plunge; are fund managers doing their jobs?

Most mutual funds and exchange traded funds (ETFs) tied to the commodity futures markets or invested in companies that make and process commodities are down sharply with the commodities and stocks they track and own.

Investors have a right to ask, don’t the professional money managers who run these funds and ETFs have any trading skills? If they don’t, why are they messing with the volatile commodities markets? Don’t they know how to do anything but buy and hold, which is a disastrous policy in the futures and stock markets?

The Wall Street Journal reports here on the sharp price declines that investors in commodity funds have suffered in recent weeks. Hedge funds that trade futures contracts, on the other hand, reportedly actually made money last month by shorting commodities futures contracts. “Directional Trading [hedge] funds advanced by +0.51% on average, led by Futures managers who capitalized on declining commodity values.”

Look at these charts for some commodity mutual funds and exchange traded funds. The mutual funds are actively managed by people who are supposed to know how to time markets and short commodities and stocks as well as buy them. Exchange traded funds are tied to indexes that track commodities or stocks. It is up to the speculator to know when to buy and sell index-based ETFs, because their managers are not in the business of timing the markets.

It seems clear that the portfolio managers for the mutual funds had plenty of time to see that their speculative buys of most commodities started to fail back in July. But they apparently don’t have any rules that tell them when to sell. They apparently don’t know how to admit they are wrong about their bets and get out while they still have a chance to preserve capital. And they must not know how to short commodities and stocks, or their bylaws don’t let them go short. You can’t win in the commodities trading games unless you know how to go short and spread as well as buy futures contracts and options on those contracts.

Same goes for main street speculators who buy commodity funds tied to gold, currencies, agricultural futures contracts and agribusiness stocks. You have to know how to cut your losses so you can play another day.

I’m betting (speculating) that many individual speculators made the right calls on their mutual funds and ETFs that are tied to commodity futures and stocks. Portfolio managers running commodity mutual funds and most other stock mutual funds clearly didn’t.

And, yet, they continue to collect their fees. Why?

Commodities, stocks tied to commodities and the funds that are tied to those futures markets and trade futures aren’t investments. They’re purely speculative trading vehicles.

Yet, they’re being promoted as asset diversification tools for investors with long-term investment goals. To me, nothing related to commodities or the futures or other derivative markets should be marketed as investment tools or as investments.

I don’t own any of these funds or ETFs. Although I wrote stories and columns about the futures markets for 12 years, I don’t trade them because they are too volatile and risky for me.

Search the Web for “commodity funds” to see lists of mutual funds that focus on commodities.

For educational purposes only. Investigate before you speculate.


Posted by Donald E. L. Johnson on 10/08/08 at 09:23 PM
AgricultureFutures MarketsMutual FundsCommodity FundsSpeculationPermalink

Mortgage backed securities futures markets unlikely to attract traders

Why haven’t the Chicago Board of Trade or Chicago Mercantile Exchange introduced markets in mortgage backed securities? Both exchanges are owned by CME Group (CME).

Will they?

Here are some of the challenges I see.

First, a futures contract must call for the delivery of a standardized and gradable commodity, like No. 2 soft wheat, or a financial instrument, like U. S. treasury bonds.

There is nothing standardized about an MBS. If you’ve seen one MBS, you’ve seen one MBS. Bill Gross of Pimco claims this can be fixed relatively easily.

But then a futures contract has to be affordable. A 5,000-bushel corn futures contract trades for about $5.60 and is worth about $28,000. Speculators put down margins of 5% to 10% or a little bit more, depending on price and volatility, on futures contracts. This is affordable for most small speculators.

Mortgages, of course, range from under $100,000 to over $1 million. What would the contract size be?

Then there is the problem of regional diversity in home values and housing markets. This makes it difficult to have a large enough market for each of some 300 major metropolitan areas to provide the liquidity speculators and hedgers (banks, insurers, institutional speculators) need. There could be a national market for a standardized, high quality MBS and then regional markets could be traded at a discount, or basis, from the futures market.

But that seems awfully complex.

The idea needs more discussion and research.

Posted by Donald E. L. Johnson on 09/27/08 at 09:32 AM
AgricultureFutures MarketsPermalink

House votes to crack down on institutional oil and agricultural commodities speculators

The U.S. House of Representatives last week passed the Commodity Markets Transparency and Accountability Act of 2008 (CMTAA), which will crack down on institutional speculators and sovereign wealth funds that have helped distort oil and agricultural commodities prices.  Whether the bill, H.R. 6604, will get through the Senate and a House-Senate conference committee before Congress adjourns next week for the elections remains to be seen.  The bill authorizes the Commodity Futures Trading Commission (CFTC), which regulates the futures markets, to require institutional speculators in energy and ag futures markets to produce monthy position reports. The CFTC also will set position limits on the number of contracts institutional speculators and swaps dealers on Wall Street may have in the market at any one time.  Thus, the House bought the recommendations in the Masters and White report on how institutional index fund speculators are distorting the futures markets, not the bureaucratic dodge produced by the CTFC a couple of weeks ago. I blogged about the two reports here and here. It is not clear why the act applies only to energy and agricultural commodities and not the metals and other markets not regulated by the Securities and Exchange Commission.  In addition to expanding the CTFC’s long-time mission of protecting speculators, producers and consumers with appropriate regulations of energy and ag futures markets, the House bill requires the CTFC to produce several reports on how speculators affect pricing in futures markets around the world. Those reports are due over the next two years.  H.R. 6604 looks like a sensible and clean bill. There are no earmarks and only the institutional speculators and their brokers are opposing it. They have been profiting from the chaos they’ve created in the futures markets and don’t want the party to end.

Posted by Donald E. L. Johnson on 09/20/08 at 05:03 PM
AgricultureFarmingFutures MarketsColoradoEnergySpeculationStocksEnergy StocksPermalink

Gold’s new price objective $1,120

Gold posted a record one-day jump of $83.31, or 10.9% to $868.43 an ounce, and its new price objective on its point and figure chart is $1,120.

But while gold suddenly looks bullish on some daily and point and figure charts, it is still trading below its 50-day and 200-day moving averages on its daily charts, which means it looks bearish to some market technicians.

Gold still is bearish on its weekly chart. A gallery of gold charts is here.

Speculators rushed into gold today in a so-called flight to hard assets from stocks, especially the financials, which are plunging.

There are several ways to play the gold trade. Speculators can trade exchange traded funds (ETFs) such as GLD and GDX. Or they can buy gold mining stocks such as NEM, ABX and PAAS. Charts for these equities are here. Click on a chart to see a gallery of charts.

I don’t own gold or gold equities.

For educational purposes only. Investigate before you speculate.


Posted by Donald E. L. Johnson on 09/17/08 at 05:45 PM
AgricultureFutures MarketsSpeculationTechnical AnalysisStocksPermalink

Oil crashes through bearish point and figure price objective; speculators run for cover

Heavy speculative selling today sent oil futures plunging through their $96 bearish price objective on point and figure charts to $95.69, and in post market trading, oil futures neared $94 a barrel. The last time oil traded as low as $94 was last March. A year ago, oil traded around $75.  The next support level appears to be around $85 a barrel. A gallery of charts is here. Charts for gold, the dollar and exchange traded funds that track the major stock indexes are here. Click on a chart to get a gallery of charts. Play with the charts’ settings.  Only the dollar looks mildly bullish, and it’s correcting.  I don’t own any of these commodities or ETFs.  For educational purposes only. Investigate before you speculate.

Posted by Donald E. L. Johnson on 09/15/08 at 10:40 PM
AgricultureFutures MarketsColoradoEnergySpeculationTechnical AnalysisStocksPermalink

Commodity Futures Trading Commission protects institutional oil index speculators

The Commodity Futures Trading Commission today proved that it intends to protect pension funds, endowments, mutual funds and other commodity futures index speculators and their Wall Street brokers from advocates of strong limitations on their ability to distort the oil, corn, wheat, soybean and other futures markets.  In a long awaited 71-page report to Congress, the CFTC basically asked for more staff to study the problem of institutional speculation in the futures markets. The report is here. The CFTC’s report shows 

Speculators drove oil futures up last summer; now they’re sellers

A new report on speculation in the oil futures markets commissioned by Democrats in the Senate fingers hedge funds, index funds, pension funds and other institutional speculators as the culprits behind recent wild swings in oil futures prices. The Commodity Futures Trading Commission will issue it’s report on speculation in the futures markets tomorrow.

The Wall Street Journal’s story about the report is here.

The Senate report released by a few senators today confirms what I’ve been saying for months, but it is controversial because its principal writer is a hedge fund manager whose investments have been affected by the runup in oil prices to $147 a barrel last July. At the moment, oil is trading in the $102 range.

What gives the report credibility, however, is that the author of the report, Michael Masters, president of the Masters Capital Management hedge fund, is a trader and knows the players better than any ivory tower economists or lobbyists for the futures exchanges and their members.

The question still is, what will Congress and the CFTC do to curb institutional speculators?

Bloomberg reports that the CFTC may require brokers like Goldman Sachs (GS), Morgan Stanley (MS), Merrill Lynch (MER) and others to “disclose their energy futures positions connected to the unregulated swaps market, according to people familiar with the discussions.”

The 58-page report is here.

Posted by Donald E. L. Johnson on 09/10/08 at 09:26 AM
AgricultureFutures MarketsSpeculationStocksEnergy StocksPermalink

Speculators distorted oil futures prices, says president of European Central Bank

Speculators helped inflate oil prices this summer, according to the president of the European Central Bank. Link is here.

Even the ECB president gets it now, but not the Fed’s Chairman Ben Bernanke.

And now the speculators are selling oil, helping to deflate prices.

Posted by Donald E. L. Johnson on 09/07/08 at 01:21 PM
AgricultureFutures MarketsSpeculationStocksEnergy StocksPermalink

Far more than half of oil traders are speculators

Vitol Group, a big European commodities trader, has been reclassified by the Commodity Futures Trading Commission (CFTC) as a large oil futures speculator, Ann Davis reports at

Her impact graphs say that far more than half of the oil futures traders are speculators:

n July, by changing the classification of a large oil trader from a commercial to a “noncommercial” trader, the U.S. Commodity Futures Trading Commission showed that noncommercial speculators represented half or more of all bets outstanding on the crude-oil benchmark traded at the New York Mercantile Exchangeup from about 38% before the restatement.

Combining these noncommercial traders with another category of financial investors brings the percentage of speculators in the oil market to far more than half of all trading. Last week, Democratic senators seeking to impose new restrictions on oil trading criticized the CFTC for playing down the importance of this revision at the same time that the agency was contending in a new report that speculators weren’t influencing oil prices.

That speculators are such big players in the oil futures market confirms that speculators have played big roles in inflating and then deflating oil prices.


Posted by Donald E. L. Johnson on 08/19/08 at 09:06 PM
AgricultureFutures MarketsStocksEnergy StocksPermalink
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