Wt Wti Crud 1xs Discussion Threads

[andrewbaker] 11/12/2008 18:26

I reckon back into SOIL before too long. Market comment suggests a crude price above what it is now, but well below previous levels for 2009. Could be a nice trading market as long as the trends don't yo-yo too quickly.

[markewizaard] 11/12/2008 17:08

I'm thinking along the same lines,build upto meeting,i'd guess after that anything less than 1.5 million cut from OPEC will dissapoint the market the concensus seems to be 1million cut but theres talk of upto 3million,could be a case of buying the rumour selling the facts...a trickey one??If thats the case i,ll join the party and soil it end of next week ,can see next year being extremely loil if things are on the turn!!

[andrewbaker] 11/12/2008 13:16

Sold SOIL, went long LOIL today: here's hoping auto bailout and OPEC meeting next week work the oracle, as least long enough to turn a profit: then maybe back to SOIL. Maybe I'll change my name to Kenneth Williams: he thought the answer lay in the soil! lol

[andrewbaker] 11/12/2008 13:13

-Sat69

Thanks; am there now.

[sat69] 10/12/2008 22:02

Andrew/Spob/Mark

Please feel free to air your comments on the general ETF thread.

[andrewbaker] 10/12/2008 19:48

-markewizaard

Hope the book helps.

Technical analysis is a must - certainly for short/shorter term trading - for ETF trading. If you've already got that skill, which a lot of traders have, then excuse me for saying this. The trend is very important: more so in my view than expert written opinion. By the time it's in the public domain, it will already have happened, or, if not, it's wrong! (or not timely.)

[markewizaard] 10/12/2008 16:58

Hi andy iv'e just bagged a bargain etf trading book from amazon for the pricely sum of £7.50 hopefully should be profitable 2009!!

[andrewbaker] 10/12/2008 11:49

AIG are counterparty to some ETF Securities ETF. As AIG has been backed by the US Govt., one could feel that they are as strong as any other counterparty out there. In addition, ETFS are seeking to find other counterparties to back up and/or remove AIG in time. I have no connection to any of theses companies: I'm just a private investor, and this is what I've found out from my own research which includes talking to ETFS.

[markewizaard] 09/12/2008 21:02

Hi guys iv,e just learn't that a lot of the leveraged oil etcs are backed by AIG not trying to scare anybody but it certainly puts a particular perspective on things!! also learn't that some are backed by shell.

[andrewbaker] 09/12/2008 15:26

Hi all. As of today I'm short oil (SOIL), industrial metals (SIME), precious metals (SPMT) and agriculture (SAGR). Also ultra short financials in the US, though was long yesterday.

Changing direction is tricky and I'm caught out sometimes, having to switch back if I get it wrong. I'm expecting gold to rally sometime, and have been long recently, but overall short (through SPMT). Oil is difficult right now with the OPEC meeting looming. Nearly switched short to long yesterday, but stayed short. I was out of agriculture for a while as it was drifting sideways, I thought; then realised I'd missed a few dollars on the short side, so back in a few days ago. US financials have been a rough ride recently: been in and out long and short on almost a daily basis. I've also gone long and short oil and gas companies in the US, and they've proved profitable recently.

Important thing is to follow the trend and not move too soon. It's generally cheaper to wait than be first mover when sometimes you've got to sell and reverse the bet: which is costly on the turn.

The leveraged petroleum and oil could pay off in time, but I'm not sure if now is the time to go long, ultra-long to boot. They may pay off over a couple of days but you'd need to watch the share price like a hawk to be sure to get out at a profit. Good luck though; I may be there myself in a while, just can't say when yet.

I'm as willing to learn as anyone, so please pass on your thoughts, guys. We're all here together to make some money, after all! Good luck in all your positions.

[hodginsjkp] 08/12/2008 23:52

Bought some LOIL late on Friday close to bottom at 4.36 PENCE
It is a medium term hold and would sell if oil got back up in region 75 before double bottom retest 40???

[daz] 08/12/2008 21:48

Andrew

Am considering the LPET ETF, the oil price looks oversold and should be due a technical bounce at the very least. OPEC meeting next week I believe and the pressure must be on to make production cuts with national spending plans to support.

[markewizaard] 08/12/2008 21:32

thanks i'll be seeking out the next trend then?? could i ask what positions you have open at present?

[andrewbaker] 08/12/2008 17:10

-markewizaard

To learn in depth, best to read info from many sources: eg, the web and/or books/articles and the like. I don't pretend to be an expert but I like etf for various reasons:

1) You can go long and short (except for UK {and European} financials). This means that - in theory - you can ride the trend always upwards. When the long uptrend ends, switch to the down uptrend (reminds me of the Great St. Trinians Train Robbery!) In practice, this is not so easy, but the potential is there.

2) ETF cover a number of securities such as indices, industry sectors, geographical regions, commodities of different types and other groupings. You can form a judgement on the merits of the group (or sub group) and invest without being so concerned about one individual stock. eg: "I think banks are due for a re-rating" (say), so I'll buy an ETF in that sector. Had you done this a few months back, when Bradford & Bingley (Northern Rock before that) were nationalised, you wouldn't have had the full loss that you would have had you held either one as a direct shareholding. You can concentrate on the overall merits of the sector and not be so concerned about any one individual stock.

3) It is possible to gear-up your position. That is, some ETF are designed to give 2, 2.5 or even 3 times the daily return of the securities concerned. So, if (say) financials went up 5% in one day, then you could potentially have an ETF gain of 10% to 15% that day, AND equally you could lose a similar amount if the 5% was a drop!

5) ETF can be bought in US$ (and other currencies), so you can also play the forex market at the same time: with the £ sterling falling, that can be useful (and can also reduce gains/increase losses when it rises).

Well ... back to work now: be happy to post again if you've any other questions. This is all IMHO and in no way advice of any sort. Please do your own research in any position you may consider taking.

[markewizaard] 06/12/2008 17:57

yes i,d like to talk about etfs perhaps you could tell me a little more about them how they work and what they do iv'e come across a number of them now soil loil crud etc looks like the loil could be at bargain prices around end of yr with crude possibly rallying next yr your thoughts?

[andrewbaker] 05/12/2008 17:16

I'll take that as a no! lol

[andrewbaker] 24/11/2008 13:59

Anyone out there want to talk long/short ETF?

[simon gordon] 03/8/2008 14:03

The Iranian issue is hotting up again....

[spob] 03/8/2008 13:47

i have only used this as a hedge against my oil portfolio

i wouldn't reccomend betting on short term movements

long term the trend for oil is obvious - it's a finite resource

[5benny] 02/8/2008 18:54

i see this has just been tipped in MoneyWeek. Any thoughts spob/anyone?

[spob] 24/3/2008 16:04

Hedging your bets to protect against risk
Didier Cossin and Dinos Constantinou

The Financial Times

Published: April 6 2006 16:46

Amid all the risk-management techniques now available to large companies, few are generating as much debate in academic circles as hedging. In theory, hedging should help companies protect themselves against unexpected moves in exchange rates, interest rates, commodity prices and other economic variables. In practice, however, results vary depending on the design, execution and timeliness of hedging strategies.

The academic consensus seems to be that hedging can boost the value of a company, but only under certain circumstances. Recently, it has also become clear that the success or failure of a hedging strategy is influenced by the personalities of the individuals involved (principally, those of the chief financial officer or treasurer). Our understanding of this phenomenon has grown in parallel with that of "behavioural finance", a relatively new academic discipline that examines human and social cognitive and emotional biases on economic decisions.

Why and how companies hedge

Traditionally, corporate finance theory assumes that all financial market risks are diversifiable. Yet this is not always the case. If one company invests in others to try to guarantee its supply of a particular commodity, for example, then it will still suffer from the imbalance of information – and, therefore, the small risk of exaggeration, obfuscation or deception – inherent between any set of shareholders and managers. Equally, it may be beyond the resources of a single company to protect the economies of scale on which its business model depends through traditional financial instruments such as insurance.

Hedging can mitigate against these problems, and against the high taxes that tend to result from volatile income streams under systems of progressive taxation. Furthermore, companies with fixed-cost business models, in which costs cannot be passed on to customers, can use the predictability offered by hedging to cope with big jumps in input prices.

Corporate hedging strategies can be based on financial instruments such as derivatives (futures, forwards, swaps and options) or on operating and financial policies (so-called "natural hedges"). Either way, they should reduce the volatility of future cash flows.

It is now possible to hedge against more risks than only currencies, interest rates or commodity prices using instruments such as weather derivatives, natural disaster derivatives and energy derivatives. Even more potent is the credit derivative, a relatively new instrument for which there is already a huge market. Thus, companies can hedge against the exposure of a major supplier or major client. For example, GM could possibly have mitigated against its ongoing difficulties with major supplier Delphi if it had instigated a well-designed hedge a few years ago, say, through credit default swaps. With outsourcing becoming a widespread business model, and contractors' and subcontractors' risks being passed directly to brand-owning clients, credit hedging may become the next source of competitive advantage.

However, it is important to note that executives may have personal reasons to implement hedging strategies that are not in the best interests of every shareholder. A recent analysis of the US gold mining industry, for example, found that managers with substantial shareholdings tended to hedge more, while those with substantial share options tended to hedge less. The inference drawn from this research was that the former managers wanted to protect their existing assets while the latter thought they could boost the value of their options through the volatility of their companies' share prices.

The importance of timing

Perhaps the crucial factor in the success or failure of a hedge is its timing. This point has been illustrated dramatically by the airline industry in recent years, where some players have moved to hedge at the "right" time while others have jumped on the bandwagon at the worst point imaginable. Leading the former category is Scott Topping, corporate finance director at Southwest Airlines, a US low-cost carrier. He hedged his company's fuel costs at a crude oil equivalent of $25 a barrel for 2005, and progressively higher prices all the way up to 2009. By contrast, most other US airlines waited until oil reached the astronomical figure of $60 before resorting to similar measures.

Different hedging strategies meant that Southwest faced an average cost of fuel of $0.95 per gallon in the third quarter of 2005, compared with $1.56 for Alaska, $ 1.70 for JetBlue and upwards of $1.88 for Continental and American Airlines respectively.

Southwest's impressive results coincided with JetBlue's first losses in five years – all because of hedging. David Neeleman who, as the founding CEO of JetBlue, engineered one of the most successful airline start-ups of all time, announced a comprehensive restructuring plan this year. This included the creation of a new vice-president position for fuel purchasing, and a hedging programme (through collar options, which restrict both upward and downward price movements to a narrow band) covering 35 per cent of 2006 needs at an average $68 per barrel, versus an equivalent coverage of 20 per cent in 2005 at less than $30 per barrel. Delta and Continental are scrambling to hedge their exposures at the going rate, abandoning previous non-hedging strategies.

Strategists at European airlines appear to be more sanguine and are showing greater continuity in jet fuel hedging policy. Thus, while Lufthansa is 90 per cent hedged, at an average $63 per barrel, for the whole year, super-discounter Ryanair has no fuel hedging in place after the end of October 2006. Moreover, Ryanair has promised customers it will not resort to the increasing fuel surcharges implemented by mainstream rivals Lufthansa, British Airways and Air France-KLM.

Appearances, however, can be deceiving. Howard Millar, CFO of Ryanair, said in March that the airline would consider fresh hedging only once crude prices returned below $60 per barrel. But CEO Michael O'Leary stated in February that the company expects high fuel prices to continue and would hedge requirements "should an appropriate opportunity arise". So, on Tuesday, the company announced that it had hedged 90 per cent of its fuel needs from June to October, at an average price of $70 a barrel. Even the lowest unit-cost operator in Europe gets nervous when fuel accounts for over 35 per cent of operating expenses.

The tide in financial markets tends to turn when the last doubter has capitulated to the view of the majority, so is the airline industry at this point today? Arguably, we are witnessing the beginnings of a herd mentality in corporate hedging of the sort we have witnessed in all other market booms. So, the question must be asked: are CFOs beginning to act more like traders than corporate risk-managers?

Is hedging really just betting?

Why do so many corporations refuse to hedge currencies while just as many embrace the practice? What differentiates the winners from the losers? Is it possible to calculate the best possible time at which to hedge, or is the practice simply becoming a form of betting?

It is difficult to avoid asking these questions when one looks, for example, at the decision by Disney to hedge its yen exposure on its Tokyo park, at what turned out to be the bottom of a trough for the Japanese currency, and thereby deprived its shareholders of 50 per cent extra returns.

Similarly, BMW abandoned its profitable dollar hedge on US market exposure (the group's biggest) in 2004, only to see its impressive sales performance over the following year tarnished by the rising euro. BMW's change of strategy was triggered, according to company statements at the time, by what it saw as an undervalued US dollar. Thus, it was taking a position on the exchange rate, while its previous hedging policy was apparently a bet on what it viewed as an overvalued dollar. In May 2005, finance chief Stefan Krause warned that BMW would continue to be hit by the expiry of the currency hedging contract, and that losses could be far more significant in the future. A year later, Deutsche Bank analysts were telling clients that a 10 per cent drop in the US dollar would reduce BMW's earnings before interest and taxation in 2007 by $570m owing to its minimalist hedging strategy.

By contrast, Porsche, which faced a similar exposure to the US market and had a similar strategy to BMW until 2004, extended its dollar hedge to at least 2008, and is still benefiting handsomely as a result.

With corporate hedging teams beginning to operate more like the fund managers of independent investment houses, shareholders clearly need to take a more rigorous interest in how corporate finance departments are run. These departments are no longer ancillary but of core strategic importance to many large companies. Their decisions on which risks to take and which risks to hedge can ultimately make or lose more of a company's money than any other operation.

Why personality traits matter

Behavioural finance tries to shed light on why some corporate hedges succeed and others fail, by examining how individuals skew their investment decisions for irrational reasons. According to the theory, executive officers may be subject to "bounded rationality" – that is, to limitations of both knowledge and cognitive capacity – with the actual decision-making process influencing their decisions.

The most common behavioural traits that affect investment decisions adversely are described below.

■ Overconfidence Individuals tend to assign overly narrow "confidence intervals" (estimated ranges of values) to financial measures such as stock indices. In one recent survey, when individuals reported confidence intervals of 98 per cent (a high indicator of certainty) they were right only 60 per cent of the time.

Similarly, in another survey, over 90 per cent of people judged their interpersonal skills, driving skills and sense of humour to be above average. People are also poor at estimating probabilities: research shows that events they consider certain occur only 80 per cent of the time.

■ Belief perseverance Individuals are reluctant to search for (and to accept) evidence that contradicts existing beliefs. This trait is particularly prevalent among headstrong, high-ranking executives, because they often owe their success to an ability to hold steadfastly to visions and ideas.

■ Anchoring This term refers to the tendency to form initial estimates at arbitrary values, only to adjust them insufficiently over time.

■ Frame dependence Several experiments have shown that certain people find it tremendously difficult to move out of their existing frame of thought. The tendency is believed to explain why very creative individuals are often eccentrics.

■ Hindsight bias This refers to the inclination to see past events, regardless of evidence to the contrary, as being predictors of future events – it is a self-reinforcing trait that often has disastrous consequences.

■ Pattern recognition Discerning patterns in random data is a popular practice, but too often people think they can see value where none exists.

■ Herding Jumping on the bandwagon is perhaps the most well-known and common behavioural trait in business, as illustrated by the current state of panic among airline executives and the desperate purchases and hedging of oil at what appears to be a very high price.

Conclusions

Cognitive biases on decision-making may hinder significantly the performance of otherwise successful business models. Recognising the incidence of such biases and taking action to prevent resulting mistakes may be the key to developing both successful hedging strategies and broader risk management programmes within corporations.

Behavioural lessons are now well-used by the managers of trading floors, but awareness does not yet seem to have filtered up to corporate board rooms (even though everyone is aware of the tendencies of shareholders and entire markets to behave in irrational ways). Company executives must recognise both their own mistakes and those of others – and understand the behavioural reasons behind them – in order to avoid costly errors.

Didier Cossin is the UBS Professor for Banking and Finance at IMD. His research interests include risk assessment, structuring, management and advanced corporate finance.
Dinos Constantinou holds an MBA from IMD and is the founder of Global Microfinance Group

[spob] 11/3/2008 21:48

Outlook for Oil and Gasoline

Discussing when crude oil will crack, with Michael Lynch, Strategic Energy & Economic Research; Amanda Kurzendoerfer, Summit Energy and CNBC's Bill Griffeth

[spob] 07/3/2008 20:49

7 March 08

Price - 47

Barclays - 2332.85p

oil price - 105.58

Dollar - 2.0145