Saturday, April 24, 2010

Business Week - 26 April - 3 May 2010

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Trading Crude Oil Spreads: WTI and Brent

Many investors are interested in profiting from their views on the price of crude oil, but may not have considered that trading price differentials between different products. West Texas Intermediate (WTI) and Brent crude oil, offer compelling opportunities for traders.

Two main types of crude oil products traded in the marketplace are based on location and grade. The one we normally trade in North America is West Texas Intermediate, the type of oil entering the United States through the Gulf of Mexico. Brent crude oil is the product located in the North Sea between Scotland and Norway, is essentially the benchmark for the European market.

WTI has slightly lower sulfur content and is therefore easier to refine to meet emissions requirements in place in most Western countries. Therefore, it demands a higher price. The West Texas Intermediate crude has an average historical premium of $1.40 over Brent. However we often see the prices go out of alignment and this often has to do with location and transportation bottlenecks. If crude oil is subject to a shortage in one region and there is an excess supply in another, oil will eventually be redirected, depending on the shipping industry’s capacity to move it around. This redistribution can take a few weeks or months, but over the medium term the market naturally rebalance. Oil tankers are basically conducting arbitrage as they move their oil around the world. In the meantime in the short term market prices can get out of line. (more)

Governments Will 'Bankrupt Us': Marc Faber

Current economic policies are not sustainable and the world faces doom because "the governments are taking over", said Marc Faber, editor & publisher of The Gloom, Boom & Doom Report.

"They will all bankrupt us and expropriate us, but it may not happen tomorrow. They'll give us something to play with, until the whole system breaks down...they'll just print money and print more money," he said on CNBC Thursday.

"What I object to the current government intervention in so-called 'solving the crisis', (is that) they haven't solved anything. They've just postponed it." (more)

The Economist - 24 April 2010

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World Financial Report, April 23,2010

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High-Frequency Trading: High-tech highway robbery

The Securities and Exchange Commission (SEC) knows that High-Frequency Trading (HFT) manipulates the market and bilks investors out of tens of billions of dollars every year. But SEC chairman Mary Schapiro refuses to step in and take action. Instead, she's concocted an elaborate "information gathering" scheme, that does nothing to address the main problem. Schapiro's plan--to track large blocks of trades by large institutional investors-- is an attempt to placate congress while the big Wall Street HFT traders to continue to rake in obscene profits. It achieves nothing, except provide the cover Schapiro needs to avoid doing her job.

High-frequency trading (HFT) is algorithmic-computer trading that finds "statistical patterns and pricing anomalies" by scanning the various stock exchanges. It's high-speed robo-trading that oftentimes executes orders without human intervention. But don't be confused by all the glitzy "state-of-the-art" hype. HFT is not a way of "allocating capital more efficiently", but of ripping people off in broad daylight. (more)

Escalating Greek default fears rock Europe's debt markets

With contagion spreading across Southern Europe, spreads on 10-year Greek bonds exploded to almost 600 basis points over German Bunds in panic trading, pushing borrowing costs close to 9pc. Rates on two-year debt rose to 10.6pc in a market gone mad.

“It is clear that the Greek situation is a very serious one,” said Dominique Strauss-Kahn, head of the International Monetary Fund. “There is no silver bullet to solve it in an easy manner.”

Credit default swaps (CDS) on Portuguese debt surged 50 basis points in a matter of hours to an all-time high of 270. Markit said the CDS on Spain reached a fresh record of 175, and Ireland jumped to 162, with jitters reaching Hungary, Bulgaria, Romania, Russia and even Argentina. (more)

Now we know the truth. The financial meltdown wasn't a mistake – it was a con

The global financial crisis, it is now clear, was caused not just by the bankers' colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday's announcement that the world's most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we've seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves. (more)

Are Interest Rate Derivatives a Ticking Time Bomb?

Derivatives are the world's largest market, dwarfing the size of the bond market and world's real economy.

The derivatives market is currently at around $600 trillion or so (in gross notional value).

In contrast, the size of the worldwide bond market (total debt outstanding) as of 2009 was an estimated $82.2 trillion.

And the CIA Fact Book puts the world economy at $58.07 trillion in 2009 (at official exchange rates).

Interest rate derivatives, in turn, are by far the most popular type of derivative. (more)

How Goldman Sachs Survived

Chart of the Day