Gone for Two Weeks

http://www.ft.com/cms/s/0/81d4ce44-3717-11dd-bc1c-0000779fd2ac.html

Ben Bernanke stated yesterday he might raise rates and the two-year T-note yield jumped by 50 basis points. Wow. We live in an era of tremendous volatility, which probably increases the expected return of all the various asset classes as investors demand more return for taking on more risk, especially when such volatility is seen in the 'risk-free' asset. I can only hope that my future clients are smart enough to stick around for the long run rather than commit the all-too common error of selling when the market is at its bottom and buying at its peak (assuming that it isn't a bubble situation; in that case, the rules go out the window).

Over the next two weeks I will be in Switzerland, Germany, Italy and France, some of the shining examples of modern welfare states (with lower economic growth and an increasing fiscal drain from an immigrant underclass to boot). During the long plane ride I hope to finish Den of Thieves (a GREAT book so far) and perhaps start on When Genius Failed, a book about the rise and fall of Long-Term Capital Management in 1998.

The Oil Problem

http://www.ft.com/cms/s/0/23928598-36c1-11dd-bc1c-0000779fd2ac.html - Gazprom, Russia's gas monopoly, says oil could reach $250/barrel by 2009.

The story proffered by financial journalists and economic institutions has been one of rising global demand as emerging markets' increased wealth brings greater energy needs; never mind George Soros' testimony to the US Congress that the recent commodity market's price appreciation has been a bubble driven largely by speculation.

At the beginning of 2007 NYMEX crude oil prices were at a relative low of $50/barrel. This was down from a previous high of $75/barrel in mid-2006. Prices have steadily climbed since the beginning of 2007 to today's high of $137/barrel. Over the past year (52 weeks) oil has appreciated by $71.24/barrel, or 108.22%

Has worldwide demand increased by 108.22% in the past year? And will it increase by a further 80% (the amount needed to bring crude oil to $250/barrel, assuming no supply increases)?

The answer, I believe, is a resounding NO. As fast as the global economy is growing, it cannot possibly be growing at such a rate to justify the doubling of crude oil prices in such a short period. While the equilibrium price of oil is probably above the $50 low at the beginning of 2007, and may even be above the $75 high of mid-2006, I highly doubt that the hysterical speculative excesses we are witnessing are a true reflection of the underlying supply/demand situation of oil.

Assuming that this recent runup is a price bubble (which I believe it is), the question then remains: how do you profit from it?

I don't think it's possible to know when the bubble will pop, but it may be possible to know that it is popping through a combination of rapid and continual price depreciation and highly negative and doomsday-esque market sentiment/press coverage. When one is sufficiently sure that the bubble is popping, load up on puts or short positions and ride it all the way (or at least, most of the way) to its completion.

Care is needed, though.. the recent single-day 8% price runup was the result of fear-mongering over potential war in Iran, a Wall Street report saying oil would show further increases, a relative decline in the dollar and the subsequent covering of short positions by traders who thought that oil prices had peaked. See http://www.ft.com/cms/s/0/e34d30e0-366c-11dd-8bb8-0000779fd2ac.html for more information.

Bernanke's statement today warning of increased inflation may be a signal that the Fed may be ready to raise rates. Assuming the Fed follows through, this should alleviate dollar woes and eliminate the dollar's role in the increasing price of oil.

http://www.ft.com/cms/s/0/290efeb4-367d-11dd-8bb8-0000779fd2ac.html

First Post

Hello. This is the first post of Market Movements, a blog I will dedicate to taking a macro view of the financial and real asset markets both for my own education and (presumably, if you are reading this) your interest.

I am a Level 1 candidate in the CFA program (I took the level 1 exam several days ago and won't know if I passed for a couple months, at which point I can call myself a level 2 candidate if I do indeed pass the exam) and a recent graduate of Washington University in St. Louis with a dual degree in economics and finance. Any views expressed on this blog are my own opinions, and are not meant to be taken as investment advice. I take no responsibility for any investing gains or losses you may incur as a result of reading/acting on these blog posts.


In the following blog posts, I will try to focus in on a few key themes that drive much of the price fluctuation in today's asset markets:

• Price bubbles and the psychology underlying them. How do you know when you are in a bubble? How can you predict whether the bubble will last and when/if it will burst? Is it possible to know when the bubble is bursting, and if so, will you have the intestinal fortitude to take a short position to profit from the sudden depreciation in prices? I am extremely interested in the irrational motives behind bubbles and their resultant crashes, and how to manuever through these financial beasts for maximum benefit.
• The fundamental structural forces that will affect future asset class price appreciation. According to the CFA curriculum, asset classes rather than the individual securities within those classes account for 90% of a portfolio's performance. It is therefore obvious that the majority of one's analysis should be directed at analyzing asset groups rather than individual assets.
• How politics and other such extraneous forces affect the markets, taking into account both the direction and the magnitude of their effects.