Do we have an oil bubble?

[metalman]

Re: We have an oil bubble : the proof

Here is a very good explanation of CDOs and what went wrong. Please correlate this to ETNs and oil, please. I don't see similarity.



A global Enron? Not possible.



Yes, but not sufficient to create an asset price inflation on the scale of NASDAQ 1996 - 2000 or housing 2002 to 2005.


Fred I have no hard feelings and I hope I have enough humor to take more friendly challenges only as they should be taken. I'm not upset or resentful at all. I was only trying to reply to the the friendly and colorful welcome using a tongue-in-cheek style ... just to add one more spot of color to the crowd

Congress has been all over the "speculators" issue, vilifying oil companies, hedge funds, investment banks, anyone but the primary cause: the weak dollar. Far from looking the other way, the government has oil under a microscope.

Oil is not and can never be an the target of an asset price inflation no matter how fast and high the price goes: Oil is a commodity and as CharlesMungerFan, GRG, and others have explained there can be no bubble in a commodity when the spot price is nearly the same as the futures price unless the commodity is physically hoarded.

That said, when Peak Cheap Oil arrives, producers will hoard in the ground and consumers in storage. That might contribute to a rapid increase in price that one may choose to call a bubble, but as the cause of the hoarding is irreversible – global depletion – it's a "bubble" that will fluctuate with high volatility but never pop and revert to a mean oil price.[/quote]

i'm totally lost... who said what?

[Supercilious]

Re: We have an oil bubble : the proof

It's wrong to call Mr. Guarino a brilliant charlatan (Part II)



The last argument I have wrote in my previous message was about being wrong to accuse Mr Guarino of being a charlatan because he didn't have any valuable insight to sell, “but acts as he had” any insight. I came with the counter argument that ETNs offered by many respectable
financial institutions are the same thing: banks sell paper notes without having to buy the underlaying futures “ act as if they had” (ETFs, for example, are supposed to have for each dollar in shares shares the corresponding value in futures -some small fluctuations allowed though)


Again the big disclaimer: I have nothing against DB and Germans, no axe to grind with anybody ( besides Fred with respects to points 5 to 8 -that was a joke of course), I don't have any positions in any commodities whatsoever and all what I write here is only for educational and entertainment purposes (mainly entertainment through absurd surreal and twisted humourous speculations) All persons, iTulip nicknames and all (financial) institutions are poorly impersonated. My messages contains false and possibility highly offensives ideas and should be not read by .. anyone.


I thought all day how to put this in writing, to make it shorter and easier to understand. I ask those who are more knowledgeable than me in this field, to forgive the excessive simplification needed for a succinct/non-boring expression of my views.


The big problem is that many don't really understand how ETF's and their mutated children ETN's actually work. Instead of going from the beginning I'll start from the very end. Let's start with an advanced ETN mechanism and analyze carefully some semantics (excessive due diligence) because someone told more that he probably wanted to tell there:

The ETNs issued by Deutsche Bank use a simple mechanism to assure close tracking of the index. They pledge to redeem ETN shares at the calculated market value, thus preventing indexing drift. The bank doesn't actually have to buy the underlying futures, but instead "acts as if it had." The guarantee of the bond and the guarantee that it reflects the futures are backed by Deutsche Bank.

- “use a simple mechanism to assure close tracking”-doesn't that sound strange? if that is so simple, why the Index itself is such a secret black-box?
-the bank doesn't actually have to buy the underlaying futures:- that indicates the bank has complete liberty to buy . It can start with 0 futures and can end with 100% futures (widowed-long and pair-decay will be explained later)


OK so let's start a small imaginary experiment. First we need a model, and I'll take the German model from the official prospect:
http://www.powersharesetns.com/pdf/C...Prospectus.pdf


Let's assume I'm the manager of the “$#* Investment Bank” and the bank is small and almost a goner, because of the CDO mess. I have 0 liquidity and the vault is full of worthless swaps. I need a $7 billion injection to prevent a collapse at the end of the week. I've already asked Ben for some change.... but, he told me that if I want a $7 bil breath of treasury oxygen, I have to accept being put in a small cage and sit there while his minion-enforcer (JPM), performs on me unspeakable acts, then, subjects me to total dismembering, for a complete digestion.


I don't want to become another Bear, so I decide to look elsewhere.
Let's say that Lukester is the manager of a Chinese SWF who just got $7 bil worth of freshly printed T bonds (probably a small lot from the FRM/FNM rescue operation the Chinese had to gulp immediately to keep the yuan down). He has to find a place to invest those treasuries, to get a better return, but it has to be something completely safe, not like the CDO-blackjacks.


I ask Lukester if he is interested in buying shares, but obviously he doesn't want to invest in an ailing bank. He needs an investment that is first safe and then profitable (above the yield of T bonds), he wants to invest in commodities like: oil (because of a solid theory of Global (Cheap) Oil +Ahmadenis the Menace), rizuki beans (predicted shortage because of growing demand from developing Asian countries), cocoa (that long predicted drought that will happen next year) and silver (....you name here the silver delusional shortage scare....). He doesn't want to touch any kind of stocks or bonds. He wants a safe refuge in commodities.


I need his $7 bil like my last breath, although since I have 0 liquidity, I can't even afford the low margins for future contracts... I need cash. But, I'm not doomed, because I can imitate what others (people at the cutting edge of structured virtual investment) have been doing for almost 2 years and getting good money out of it.


I'm talking about ETN's . ETN's are such a versatile tool they can be simultaneously oil rigs, excavators/foundries and harvesters for any virtual commodities. Using the inexhaustible resource fields of false hope for a profitable and safe place for parking low yield deficit paper, with an ETN multi-tool I can extract any amount of virtual commodities. I don't even need the low margins for futures market, because I just “have to act as I have bought” the underlaying futures.


Unfortunately, I know nothing about ETNs. Therefore, I take a prospect, from a DB public offering, and I try to imitate it. I want to keep it simple. Forget about that nonsense with monthly T bill return (although that is very interesting detail). Forget about the daily calculation of fee factors. I'll use just a monthly factor, that will give the same annual investment fee of 0.75%.



To convince Lukester to give me those $7 bil, I'll craft for him a special private ETN offering. I'll make a special index with exposure precisely in Oil, azuki beans, silver and cocoa. I'm trying, with no luck, to find out from the DB prospects how do they choose their indexes.



http://www.powersharesetns.com/pdf/C...Prospectus.pdf


Well,... I'll make my own index and I'll call it something catchy such as: Huge Returns Safe T-bond Parking Index or HRSTP. Hurray, I can get Lukester's money and I can survive at least another month ... at least.


Let's see how exactly this ETN thingie works. Is it truly such a miracle others claim it is? I make a pair of perfectly hedged 2x ETNs . That is a safe and very profitable investment. My hedged pair will be named:

• HRST 2x Long ETN's due June 1, 2038 . These ETNs offer investors exposure to two times the monthly performance of the HRST benchmark commodity index, subject to the investor fee.
• HRST 2x Short ETN's due June 1, 2038 . These ETNs offer investors exposure to two times the monthly inverse performance of the HRST benchmark commodity index, subject to the investor fee.

I make small a 24 month spreadsheet simulation to see exactly how this works for a pair of perfectly hedged 2x Long -2x Short, indexed ETN's calculated like the Germans do.
The hole idea of hedged pair is to invest in pairs (long and short). If the index goes up, the long is going up and the short down and vice versa. Theoretically, regardless where the market goes, your money is safe and you still make a small profit. The mechanism is a game of rate and volatility. Te value of an ETN being calculated monthly/daily volatility may eat the profits of an ETN investor.

Time (mm)	Spot Oil ($/bbl)	Spot Price Indexed ETN pair (bil$)
		2xLong	2xShort	Pair	IRR (%)
0	112	3.5	3.5	7	0
1	114	3.64	3.36	7	0.27
2	116	3.78	3.23	7.01	1.19
3	119	3.93	3.11	7.04	2.08
4	121	4.07	2.99	7.07	2.94
5	123	4.22	2.88	7.11	3.77
6	125	4.38	2.78	7.16	4.57
7	128	4.53	2.68	7.22	5.34
8	130	4.69	2.59	7.28	6.08
9	130	4.69	2.59	7.28	5.36
10	135	5.06	2.39	7.45	7.84
11	125	4.28	2.79	7.07	1.13
12	135	5	2.36	7.36	5.09
13	125	4.23	2.75	6.98	-0.27
14	135	4.93	2.33	7.26	3.17
15	125	4.17	2.72	6.89	-1.28
16	135	4.87	2.3	7.16	1.76
17	125	4.12	2.68	6.8	-2.05
18	135	4.8	2.27	7.07	0.67
19	125	4.06	2.64	6.71	-2.66
20	135	4.74	2.24	6.98	-0.2
21	125	4.01	2.61	6.62	-3.14
22	135	4.68	2.21	6.89	-0.9
23	125	3.96	2.58	6.53	-3.54
24	135	4.62	2.18	6.79	-1.48

If i can keep, Lukester's $7bil for 24 months, as a liquidity injection with a negative interest rate, while I keep him mesmerized with funny Index numbers... who needs Ben? Unfortunately, I don't know enough math, but that's not a problem since I have on a retainer my private regression samurai who can get proper numbers for almost everything. That's not the kind of matter that can be discussed on the phone, therefore, I put the little spreadsheet on a memory stick,the DB prospect in my pocket and head out of the office to talk to metalman.

[Supercilious]

Re: We have an oil bubble : the proof

It's wrong to call Mr. Guarino a brilliant charlatan (Part III)


I'm continuing here my imaginary story about the adventures of the $#* Bank manager. All previous disclaimers apply.


As expected I find metalman in his usual hanging place, in a corner Starbucks, and as usual he is alone at a table, with a cup of hot chocolate working on his his laptop. After he acknowledges my presence I go directly into the subject. I give him the memory stick with the my spreadsheet ETN calculation and the DB prospect. I tell him directly that I need Lukester's $7 bil as a loan with a very low interest rate or slightly negative if it's possible.
I tell him I need him to provide me with an index math and a hypothetical history of great returns that would allow me to fool Lukester into give me $7 bil to cover my urgent liquidity needs for a year or two. While I keep the money, Lukester should be kept distracted by watching wonderful $#* Index numbers and calculating illusory profits he hopes to obtain by making a safe investment into virtual commodities ( ETNs). After I explain to metalman what I need, I ask him three simple questions:


“Can something like this be done in a credible and legitimate way, to look like the DB ETNs? Can you create a mathematical engine for such an “optimized” Index? Can you create a model, which applied historical market, able to “prove with solid numbers and charts” that HRSTP ETNs could have brought him a fortune by now, if he bought them long time ago, let's say 20 years, and kept them as a long term investment?”


Metalman listens to my questions and begins to work on the problem. For about an hour he keeps working on my little spreadsheet, goes back again and again to the DB prospects. Eventually, he is done examining my problem and has answers:


“I'll start in reverse order with your questions:
I can provide you with a model 'proving' that your ETN's are a safe and profitable long term investment, the best thing invented since sliced bread.
It is impossible to create such an 'optimized' Index for your ETN pair that would allow you to treat Lukester's money as an adjustable rate loan, you being the one who decides what the rate is. More important, it is possible to do something in a credible and legitimate-looking way to satisfy you liquidity needs, and even to make a good profit. “


Here he got me puzzled, but one should not be surprised when trying to understand what a math genius is saying. I wanted clarifications:
“You are trying to tell me that one cannot make such an 'optimized' index, but I can get Lukester's money through my ETN's in an apparent legitimate way. Can you elaborate?”
“That's simple” replied metaman “you can get Lukester's money in a legitimate-looking ETN offering, but you can't do that by having them linked to an 'optimized' index by simply playing the volatility game. You can't control the future evolution of spot prices, therefore you can't add excessive volatility to erase his profits if there is no volatility in the market. That would make you 'optimization' obvious and you may end up in jail. What you have to do is to use to different indexes: one specially 'optimized' for the long ETN's and the other 'optimized' for the short ETN's”
“Why do I need two separate indexes? Does that solves my problem?”
“That solves all your problems. You can modulate the spot price of your commodity with a luring/time-bomb function two symmetrical components that will generate two 'optimized' indexes. Regardless what happens to the market not only that you can control Lukester' s profits, but you can get from him a $1.4 bil 'present' and get to keep the rest of his money as a liquidity pool for your bank”, concluded metalman with a cynical smile.
“Tell me more” I asked with undivided attention.”How this modulation function works? And what about my 'present' ?”
“It's really simple. In the actual black-box machine spewing the 'optimized' indexes it may be more complicated because I'll have to use differential equations, but the modulation can be something as simple as an inverse hyperbolic cosine function. Let's say you want 20% of Lukester's money as a gift(L_gift=0.2), but you have to create the hope of a great profit by a temporary profit of 5% for his money (L_profit=0.05). The profit increases with a speed L_praising let's say of 7 inflexion distances, reaches a maximum 8 months (L_partytime=8) after offering and after that decreases with a speed of 5 (L_pvanishing) to the the value of his initial investment minus your gift. The function would look like this:
F(month)=1-2*L_gift+(L_profit*2+L_gift)*(2/(exp((month-L_partytime)/L_praising)+exp((L_partytime-month)/L_pvanishing)))


Ihave modified your spreadsheet to compare your idea of one index paired ETNs based on oil, with a 2 index pair ETN with a hidden modulation on the spot price. See what happens in both cases if the price of oil continues to increase in the next 24 month with little volatility” said metalman turning his screen toward me:

Time (mm)	Spot Oil ($/bbl)	Spot Price Index ETN pair (bil$)					Fudging function	'Optimum' Index		Lukester's $#* ETN's
		2xLong	2xShort	Pair	IRR (%)			Long	Short	2xLong	2xShort	Pair	IRR(%)
0	112	3.5	3.5	7	0		0.90	850	140	3.50	3.50	7.00	0.00
1	111	3.43	3.57	7	-0.08		0.94	820	144	3.25	3.32	6.57	-53.10
2	127	4.4	2.69	7.08	7.39		0.97	896	150	3.85	3.01	6.87	-10.89
3	120	3.93	2.99	6.92	-4.68		1.01	886	143	3.77	3.29	7.06	3.32
4	136	4.96	2.29	7.25	11.24		1.03	957	150	4.38	2.98	7.36	16.26
5	129	4.47	2.53	7	-0.01		1.05	941	145	4.23	3.19	7.43	15.27
6	144	5.55	1.98	7.54	15.9		1.06	1002	152	4.78	2.87	7.64	19.26
7	138	5.04	2.18	7.21	5.24		1.05	976	149	4.53	2.99	7.52	13.03
8	153	6.18	1.73	7.91	20.16		1.03	1022	158	4.96	2.63	7.59	12.91
9	147	5.64	1.89	7.53	10.18		1.00	986	157	4.60	2.67	7.28	5.35
10	162	6.84	1.52	8.37	23.86		0.96	1018	167	4.91	2.33	7.23	4.02
11	156	6.27	1.66	7.93	14.59		0.92	976	167	4.50	2.32	6.83	-2.69
12	171	7.54	1.35	8.89	27		0.88	1001	178	4.73	2.01	6.75	-3.60
13	165	6.95	1.46	8.41	18.43		0.84	960	179	4.34	2.00	6.34	-8.70
14	180	8.27	1.21	9.47	29.63		0.80	983	190	4.55	1.75	6.30	-8.70
15	174	7.65	1.3	8.95	21.73		0.77	945	190	4.20	1.74	5.94	-12.29
16	189	9.03	1.09	10.12	31.8		0.74	969	201	4.41	1.54	5.95	-11.47
17	183	8.39	1.17	9.55	24.54		0.72	937	201	4.12	1.54	5.66	-13.92
18	198	9.83	0.98	10.81	33.58		0.70	963	212	4.35	1.38	5.73	-12.54
19	192	9.16	1.05	10.21	26.91		0.68	935	211	4.10	1.39	5.49	-14.23
20	207	10.66	0.89	11.55	35.03		0.67	963	221	4.34	1.26	5.60	-12.52
21	200	9.96	0.95	10.91	28.89		0.65	939	219	4.13	1.28	5.41	-13.72
22	216	11.52	0.81	12.33	36.19		0.64	968	228	4.39	1.17	5.55	-11.85
23	209	10.8	0.86	11.67	30.54		0.64	948	226	4.20	1.19	5.39	-12.75
24	225	12.42	0.74	13.16	37.12		0.63	978	235	4.47	1.10	5.56	-10.85

“And you think that nobody will smell something fishy if we use two separate indexes for the long and short ETNs?” I ask metalman.
“Of course not” he replies.”Read carefully the DB prospect. It's a bit confusing but, see for yourself: they are also using two separate indexes for long and short ETN's. As long as the algorithm for calculating our indexes remains our secret your bank's offering will be as respectable as DB's. Nobody would be able to make the difference between our ETN's and theirs. Moreover you would not care what the spot price of oil is. As long as it moves somwhere you make money. If the price of oil increases the 2xLong ETN's will grow and the 2xShort ETNs will shink. If the oil price decreases the reverse will happen, but that doesn't affect you since you make money at the flow between the long and short portfolios.

I look again at the numbers and they were breathtaking. Of course the Long 2x ETN's would be widowed, because Lukester would try to cut his loses by getting his money out of the short ETN's. I'll have to hedge the remaining long notes directly into the futures market. At that time my little ETN toy will make the transition form virtual oil to paper oil becoming a bona fide ETF with long positions. Of course with so much money getting into futures (long positions only) the remaining $4 of Lukesters's money would be just a drop in the ocean or ... a little stream joining the great river. Because of the low margins required in futures markets. I can still keep $3.5 bill of his long investment as liquidity. After 19 months the financial equation will be:
$7 bill initial offering =

$1.4 bil gift for the bank
+
$600mil margins for surviving long ETN transformed into a long ETF (the carcas of your ETN toy is disposed as long only positions on the futures market)
+
$3.5 bil for $#* bank as a liquidity pool.(Value of remaing 2xLong - the margins required to hedge the widowed Longs with long futures)
+
$1.5 bil I have to repourchase from Lukester when he liquidates the 2xShort ETN's

It can't get better than this.

Therefore I conclude here my argument. Not only nobody has any evidence Mr Guarino is a charlatan (he may be just a more rustic Cramer imitator), but definitely he cannot be accused of being brilliant if compared to the hypothetical manager of the $#* Bank. Of course, more skeptical people may argue that not even the hypothetical bank manager is a brilliant charlatan because he he may be just an imitator late to the game, but such an argument would be irrelevant for our discussion.

Going back to the subject of peak oil I've found an interesting blog entry claiming a proof was found in favor of Oil Bubble arguments. . I disagree with that, although the author makes a credible case that a large influx of ETF money (or widowed long ETN's residues) into long futures positions may create an artificial scarcity of benchmark crude oil which would create the artificial impression of insufficient physical oil supply.


http://peakoildebunked.blogspot.com/...-physical.html

[Munger]

Re: We have an oil bubble : the proof

The big problem is that many don't really understand how ETF's and their mutated children ETN's actually work. Instead of going from the beginning I'll start from the very end. Let's start with an advanced ETN mechanism and analyze carefully some semantics (excessive due diligence) because someone told more that he probably wanted to tell there:

The big problem is that you apparently don't really understand how ETNs work. Replace the mysterious acronym "ETN" with the word "bond" and all this mystery goes away - because they are the same thing. Bonds usually have a fixed payout, while ETNs usually have a variable payout based on some index.

I ask Lukester if he is interested in buying shares, but obviously he doesn't want to invest in an ailing bank. He needs an investment that is first safe and then profitable (above the yield of T bonds), he wants to invest in commodities like: oil (because of a solid theory of Global (Cheap) Oil +Ahmadenis the Menace), rizuki beans (predicted shortage because of growing demand from developing Asian countries), cocoa (that long predicted drought that will happen next year) and silver (....you name here the silver delusional shortage scare....). He doesn't want to touch any kind of stocks or bonds. He wants a safe refuge in commodities.

Then why would he buy an ETN from an ailing bank when he knows that the creditworthiness of the issuer is explicit in the valuation? Remember, ETNs are just bonds issued by some debtor. They by definition are not collateralized or subordinated. Thus, they are nothing like CDOs.

I'm talking about ETN's . ETN's are such a versatile tool they can be simultaneously oil rigs, excavators/foundries and harvesters for any virtual commodities. Using the inexhaustible resource fields of false hope for a profitable and safe place for parking low yield deficit paper, with an ETN multi-tool I can extract any amount of virtual commodities. I don't even need the low margins for futures market, because I just “have to act as I have bought” the underlaying futures.

Since it was ETNs you issued, you explicitly told the buyers you have not and will not buy underlying futures contracts!

Unfortunately, I know nothing about ETNs.

Touche.

[Supercilious]

Re: We have an oil bubble : the proof

The big problem is that you apparently don't really understand how ETNs work. Replace the mysterious acronym "ETN" with the word "bond" and all this mystery goes away - because they are the same thing. Bonds usually have a fixed payout, while ETNs usually have a variable payout based on some index.

Apparently, my language wasn't plain enough. ETN's are bonds trying to masquerade as something else.

Then why would he buy an ETN from an ailing bank when he knows that the creditworthiness of the issuer is explicit in the valuation?

Because the originators create the impression that ETN's are backed by some asset even a less tangible one such as a complex spread of futures like ETF shares. ETN's can morph into ETF like shares through hedge decay. The problem is that the issuer takes no risk and all the risks are transfered in a very non explicit mode to the buyer creating a false impression of a low risk investment. And to answer your question in even more direct terms look at this:
http://www.bearstearns.com/includes/..._factsheet.pdf

Remember, ETNs are just bonds issued by some debtor. They by definition are not collateralized or subordinated. Thus, they are nothing like CDOs.

First, CDO's are bonds. As I have already explained this in an earlier post on this thread, ETN's being linked to Indexes (suposedly) based to a mix of complex futures spreads (oil+greasy wool+natural gas+ rizuki beans etc) are already structured. The buyer doesn't have even a clear access to the structure anatomy. ETN's are CDO's but bigger longer uncut and blown into the future(s)

Since it was ETNs you issued, you explicitly told the buyers you have not and will not buy underlying futures contracts!

Please read again carefully the wording. Nobody explicitly says that the issuer "will not buy" underlying futures contracts. The issuer explicitly says that "it doesn't necessarily have to buy" the underlaying futures contracts.

[Munger]

Re: We have an oil bubble : the proof

Apparently, my language wasn't plain enough. ETN's are bonds trying to masquerade as something else.


Because the originators create the impression that ETN's are backed by some asset even a less tangible one such as a complex spread of futures like ETF shares. ETN's can morph into ETF like shares through hedge decay. The problem is that the issuer takes no risk and all the risks are transfered in a very non explicit mode to the buyer creating a false impression of a low risk investment. And to answer your question in even more direct terms look at this:
http://www.bearstearns.com/includes/..._factsheet.pdf



First, CDO's are bonds. As I have already explained this in an earlier post on this thread, ETN's being linked to Indexes (suposedly) based to a mix of complex futures spreads (oil+greasy wool+natural gas+ rizuki beans etc) are already structured. The buyer doesn't have even a clear access to the structure anatomy. ETN's are CDO's but bigger longer uncut and blown into the future(s)



Please read again carefully the wording. Nobody explicitly says that the issuer "will not buy" underlying futures contracts. The issuer explicitly says that "it doesn't necessarily have to buy" the underlaying futures contracts.

CDO means collateralized debt obligation. An ETN is an unsecured debt note. Any half-sophisticated buyer knows the difference and the risk is reflected in the price. If you are stupid enough to mistake "trust me we'll pay you back" to mean "this asset is backed by secured collatoral assets" then you deserve what you get.

[raja]

Re: We have an oil bubble : the proof

Excuse me for interrupting, but I've been waiting to interject a question at the appropriate time . . . but that time never seems to arise, so let me ask it now.

I'm not sure if the answer relates to whether oil is now in a bubble, or not. My guess is that it probably doesn't make a difference . . . . .

Assuming that the stock market drops precipitously, as many are predicting, do you think it will take the various vehicles for oil investment with it, such as Canadian energy trusts (PWE, etc.), USO, etc., as has happened in the recent fall? Or, will investors flock to energy stocks while spurning the rest of the market?

My feeling is that investors will assume demand destruction and sell energy stocks along with the rest . . . and buy treasuries and gold.

[metalman]

Re: We have an oil bubble : the proof

Excuse me for interrupting, but I've been waiting to interject a question at the appropriate time . . . but that time never seems to arise, so let me ask it now.

I'm not sure if the answer relates to whether oil is now in a bubble, or not. My guess is that it probably doesn't make a difference . . . . .

Assuming that the stock market drops precipitously, as many are predicting, do you think it will take the various vehicles for oil investment with it, such as Canadian energy trusts (PWE, etc.), USO, etc., as has happened in the recent fall? Or, will investors flock to energy stocks while spurning the rest of the market?

My feeling is that investors will assume demand destruction and sell energy stocks along with the rest . . . and buy treasuries and gold.

applaud your adding a element of practicality to the discussion... 'what are we going to DO'?

here's what i've done with all of the 'no, it's not a bubble' arguments that itulip has made re gold and oil the few years every time they crop up: NOT sell. for me, not trading out of positions has been a blessing.

[GRG55]

Re: We have an oil bubble : the proof

Excuse me for interrupting, but I've been waiting to interject a question at the appropriate time . . . but that time never seems to arise, so let me ask it now.

I'm not sure if the answer relates to whether oil is now in a bubble, or not. My guess is that it probably doesn't make a difference . . . . .

Assuming that the stock market drops precipitously, as many are predicting, do you think it will take the various vehicles for oil investment with it, such as Canadian energy trusts (PWE, etc.), USO, etc., as has happened in the recent fall? Or, will investors flock to energy stocks while spurning the rest of the market?

My feeling is that investors will assume demand destruction and sell energy stocks along with the rest . . . and buy treasuries and gold.

Speculators (NOT "investors") will sell their energy holdings to make their margin calls. In a dislocating market the old adage that you sell what you have to, instead of what you want to [when you are levered] comes to bear [no pun intended]. Expect those issues that have done best this year, including energy, to take a hit under any such circumstance. That's already under way now.

Remember, however, that nobody can sell shares unless they can find a buyer for them. The BUYERS of the energy shares being dumped [as that happens] will be the real "investors".

BTW; I intend to add to my Cdn oil sands exposure next week on any further weakness in the shares.

[metalman]

Re: We have an oil bubble : the proof

Speculators (NOT "investors") will sell their energy holdings to make their margin calls. In a dislocating market the old adage that you sell what you have to, instead of what you want to [when you are levered] comes to bear [no pun intended]. Expect those issues that have done best this year, including energy, to take a hit under any such circumstance. That's already under way now.

Remember, however, that nobody can sell shares unless they can find a buyer for them. The BUYERS of the energy shares being dumped [as that happens] will be the real "investors".

BTW; I intend to add to my Cdn oil sands exposure next week on any further weakness in the shares.

this point bears repeating... there are trillions managed by funds, now > 50% of the market, that CANNOT run to the safety of tbills and such as the managers are NOT paid to sit in cash. so they run from one segment to the next, from tech to housing to energy to tech again. they know what each other are running from and to. wish i did.

[raja]

Re: We have an oil bubble : the proof

BTW; I intend to add to my Cdn oil sands exposure next week on any further weakness in the shares.

Isn't that jumping the gun?
Seems to me like the market has quite a bit more to fall . . . .

[Supercilious]

Re: We have an oil bubble : the proof

CDO means collateralized debt obligation. An ETN is an unsecured debt note. Any half-sophisticated buyer knows the difference and the risk is reflected in the price.

It's great if you read the wikipedia definitions. It's a good starting point, but only a starting point... Next step would be to go beyond reciting definitions and try to understand understand what you read ...

On page 16 there are some interesting comments about ETN hedging in futures. It may be not as simple to understand as wikipedia pages, but still, it may prove to be an interesting and educational reading:
http://www.optaetn.com/viewPDF.asp?d...prospectus_EOH

this point bears repeating... there are trillions managed by funds, now > 50% of the market, that CANNOT run to the safety of tbills and such as the managers are NOT paid to sit in cash. so they run from one segment to the next, from tech to housing to energy to tech again. they know what each other are running from and to. wish i did.

I wish I did too. I couldn't have said it better.

My guess (but it's a pure guess) is that the next target may be the renminbi/yuan. It seems that the Chinese government, with all it's communist chain of command power, has a very tough time trying to put a stop to what it is called "hot money" inflows. That would be an interesting development.

[Munger]

Re: We have an oil bubble : the proof

It's great if you read the wikipedia definitions. It's a good starting point, but only a starting point... Next step would be to go beyond reciting definitions and try to understand understand what you read ...

On page 16 there are some interesting comments about ETN hedging in futures. It may be not as simple to understand as wikipedia pages, but still, it may prove to be an interesting and educational reading:
http://www.optaetn.com/viewPDF.asp?d...prospectus_EOH

Well, all you really need to know is the legal definition of a Note and the rights and obligations created thereby. As I sincerely doubt you know these rights and obligations, yes, I can recommend to you wikipedia as a good starting point. But you don't even need to go that far - from your own source: "We have no obligation to engage in any manner of hedging activity and will do so solely at our discretion and for our own account. No Note holder shall have any rights or interest in our hedging activity or any positions we may take in connection with our hedging activity." (taken directly from page 16 of this tome of enlightenment you cite).

Look - I am done arguing with you. Clearly you are convinced oil is a bubble and ETNs are a cause. I tried explaining to you why that doesn't make sense. You know more than I do though, so I suggest you get deep into some ultrashort oil funds.

[Supercilious]

Re: We have an oil bubble : the proof

Look - I am done arguing with you. Clearly you are convinced oil is a bubble and ETNs are a cause. I tried explaining to you why that doesn't make sense. You know more than I do though, so I suggest you get deep into some ultrashort oil funds.

That's fine with me, although IMHO it would have been better if you tried to examine in more detail what was said here and not rush to superficial conclusions. IMHO going intro ultrashort oil funds without knowing for sure that the bubble will bust in less than a couple of weeks is an act of financial suicide.

Of course, the DB ETN's and the Opta ETN have no effect on commodity prices. These are insignificant bait for small fry. They are just small streams joining the torrent. I'm using them only as an example to illustrate the effect of ETN-like paper on futures markets.

What I have been trying to say is that the process of producing ETN-like paper is responsible for raising the price of commodities, exactly as the process of manufacturing of mortgage-CDO's had as a secondary effect the rise in housing market prices.

I'm talking about the process of attracting liquidity from the trillions managed by various funds, and converting it into some attractive form of securities (ETN-like paper tax exempt/high yield) and anchoring that debt paper in futures contracts. Masters calls it Index speculation.

I partially disagree with Masters' views. These are not speculators in the classical acceptance of the term. They don't have as an objective making a profit by driving up prices (hoarding and cornering markets). I believe that the so called "index speculators" actually don't care very much about what those prices are (exactly like the CDO's originators didn't actually care very much about what the housing prices were) as long as those prices are attractive enough for fund investors.

As I tried to suggest in my hypothetical story, the manager of the $#* Bank didn't give a beep about the rise in oil prices (or if his paper was anchored in rizuki beans, cocoa and greasy wool futures instead of oil ) as long as he could keep fund liquidity in his bank and he could hedge his debt paper in a no-loose scenario on the futures market.

The steep rise in commodities prices (produced by pouring a deluge of long positions into the futures markets) may be actually a completely unintended and secondary effect, exactly as the rise in housing prices was a secondary effect produced by the flood of available mortgage credit especially in the subprime (high interest) category.

In both cases, the main objective of funny paper manufacturers is actually the recycling of the US deficit though some class of securities in a no-loose scenario. Making money from the appreciation of the underlaying assets (commodities-futures, real estate etc), is/was not an objective,... it is/was just a bait used for luring more US deficit liquidity into their vaults.

[Munger]

Re: We have an oil bubble : the proof

The steep rise in commodities prices (produced by pouring a deluge of long positions into the futures markets) may be actually a completely unintended and secondary effect, exactly as the rise in housing prices was a secondary effect produced by the flood of available mortgage credit especially in the subprime (high interest) category.

So you are saying that although ETNs are purely an unsecured debt instrument, they are having some secondary effect on the commodities market because the issuers, to hedge, are buying commodities futures?

Taking for granted that private equity would rather have a beneficial tax structure than a position that is backed by more than a near insolvent bank's word, there is still the problem that the price of a commodities cannot rise unless someone is taking actual physical delivery and stashing it away somewhere waiting to sell it at a higher price in the future. Are you suggesting the hedgers (banks or their agents) are storing oil/grain somewhere hidden?