IOUSA

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Doug's picture
Doug
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IOUSA

I watched the documentary yesterday.  The very knowledgeable panel seemed to be in agreement that the current stimuli are necessary, but with the proviso that simultaneously we must reform the real gorillas in the closet, Medicare, Medicaid and Social Security in order to keep our economy from becoming insolvent.  Of course, none of them would publically say that the necessary measures will create wrenching dislocations themselves, but I'm curious how others feel about it.  If Obama and the Congress are able to do these things and get them right, how bad will it get?  What are the odds of them getting it right?  What measures do others think will rescue our economy, or is it all futile?

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Woodman
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Re: IOUSA

I haven't watched the documentary yet but I see close to zero chance of maintaining an economy like we have.  We've gone down the wrong path so far that the best thing that that can be hoped for now is we feel enough pain to realize bailouts and stimulus packages don't work and we have to change our whole economy and way of life. That might come a year from now or 10 years from now, I don't know.  But measures that might work include enough folkssurvive and develop an alternate system and carry that message forth in the future.

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Why doesn't the gov't play the Oil contango?

All this talk about being defensive and putting up stimulus packages, why doesn't the gov't take the offensive and get some smart traders?  They have a huge resource in the SPR, if they have a barrel of room, they should be buying prompt month oil and selling the 2 month forward for $5.50 higher.  Yes, that's right, you can buy oil for delivery in a few weeks for $39 and with no risk, at the very same time you buy it, sell it for delivery in March at $44.  The oil contango and the front month roll is the highest it's been in history, the gov't should be taking advantage of an inefficient forward curve where realism has not yet hit the financial markets.  Take the arb, make some money... geez, this isn't rocket science.

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SnowshoeBob
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Re: IOUSA

I saw IOUSA the night it opened - it was one of the experiences that eventually led me to the Crash Course. The Peter G. Peterson Foundation and David Walker's Concord Coalition are groups that focus on one aspect of our economic woes and as such I view them as potential allies with specific knowledge and energy. I don't know what kind of response the CNN screening got, but a Concord meeting I attended on Saturday included a number of folks who expressed interest in the Crash Course and the wider perspective it offers. I am going to explore working with my local Concord folks to do a Crash Course viewing/discussion. 

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Damnthematrix
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Re: Why doesn't the gov't play the Oil contango?

Are you talking about buying oil faster than it can be produced here?  Won't that mean that increased 'demand' will force the price back up?  Sorry...  but I don't understand the logic here.

Mike 

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Re: Why doesn't the gov't play the Oil contango?
Damnthematrix wrote:

Are you talking about buying oil faster than it can be produced here?  Won't that mean that increased 'demand' will force the price back up?  Sorry...  but I don't understand the logic here.

Mike 

Mike,

It has nothing to do with how fast anything can be produced. The unprecedented record contango in oil futures is essentially an open offer to rent storage space from anyone who has a big tank, at unprecedented rents.

If you have a big tank, like the U.S. Gov't does, all you'd need to do is buy all the oil you can store on the spot market today, sell the long-dated futures today, and instantly bank a 40% profit on your investment.

More than 25 super-tankers have already been rented to sit offshore as nothing more than storage tanks, and Cushing, Olkahoma is already at capacity.

Anyone who owns a big tank is throwing money away not to take advantage of the contango arbitrage trade that is staring everyone in the face. Xfiles' point was that the only party that has a big tank but is too goddamn stupid or incompetent to put it to work is the U.S. Gov't.

Erik

 

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jkibbe
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Re: IOUSA

IOUSA is an awesome video certainly worth viewing.

Davos posted the 30-minute version in a Daily Digest a few days ago.  It's almost as good as the 85-min. version, in my opinion:

You can also borrow a copy for a free home viewing with friends or other private groups here:
http://www.concordcoalition.org/organize-screening-iousa&ref=front_widge...

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Xflies
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Oil Contango and a large contribution offer

Hi Mike, Erik,

Sorry for not posting, I was off the board for the afternoon and Thanks Erik, you took the words right out of my mouth :) ... my post wasn't well written, my apologies. 

I have a twist to this trade if anyone wants to make some money... problem is, you need access to $80M for 30 days.  The upside, is that it's pretty much guaranteed money but the large capital outlay makes it only possible for big companies like BP or RDS.  The other way to make money on this trade is to just watch the contango and get ready to short the VLCC stocks (VLCC means Very Large Crude Carriers) when the contago disappears.  These are some very strange times we're in, I can't point to many inefficiencies in the markets that show how 'out of whack' we are.  These periods of contango rarely come and if they do it's maybe $2-3 for a month but we're into the 3rd month of incredibly high contango. 

In my opinion, the contango is caused by ETF's rolling their contracts to the next month because these funds can't hold physical inventory.  When they go to sell their financial positions, the demand is so weak that it crushes the prompt month and the next month stays strong partly because the ETF's have to buy them.  It is also suggesitng that the forward curve is not being realistic.

 I'll make the largest contribution yet.  I just sold my natgas storage company and I have been a hedge fund manager for 15 years plus I have 2 years of private equity experience in building that natgas storage company.  If anyone knows of a charity or if there any wealthy families out there, I will dedicate myself full time to building a distressed and special sits fund as long as a portion of the profits I make goes to charities.  I have a very long track record of 20%+ returns and I have made money during this whole financial fiasco.  This is a perfect time to set up a distressed DIP fund and to do energy arbs. 

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Erik T.
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Posts: 1234
Re: Oil Contango and a large contribution offer

Hi Xfiles, great to see you back on the board!

I don't have the $80mm handy, so can't follow your lead there. But I do think there is a spread trade that should work for those willing to speculate, and I'm curious what you think.

Seems like the trend is month-end forced selling. I don't know or much care who's doing the selling - ETFs? Hedge funds? Somebody sure is. So I'm tempted to start selling the CL futures about 45 days prior to expiry, to get in on the short side ahead of the crowd, so to speak. Then cover just before expiry after forced selling pushes the prices down. Hedge the underlying trend risk by simultaneously going long the same number of contracts 6 months out. Roll both positions simultaneously just before front contract expiration.

I figure this strategy should be profitable for a few months - as long as the forced month-end selling continues, then it will go neutral when the forced sales pressure is out of the system, and the hedge should protect against trend risk.

Whaddaya think, Xfiles?

Erik

 

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Xflies
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Posts: 157
Re: Oil Contango and a large contribution offer

Come on Erik, aren't you one of those famed dotcomers that cashed in just in time? Smile  I was really hoping one of your readers would be wealthy family money.  I would give my entire performance bonus to charities... actually, you want to what is just as big of a scam in the past 10 years as Madoff and others?  Fund of Funds... I know some of them, I've been in front of them... they really have no idea what they're doing and yet charge a ridiculous fee to put your work into other hedge funds claiming they know how to allocate your money.  I haven't met any that have any real trading experience and most rely on historical performance and crude modelling to be lulled into a false sense of security.  Anyways, I digress... to your comments:

 A few months back, I saw this contango and thought to myself... "I'm going to be smart, I'm going to short this contango looking back at historical trends".  I didn't bother to ask myself why this contango existed and what factors go towards its pricing, longevity and volatility.  Of course I lost money on it, I prudently set a stop loss but instead of giving up on it or being stubborn and trying it again, I began to do more work on it and thought hard on the problem/issue.  There are a lot of financial players out there and many of them are pretty smart... the variables are constantly changing and a phenomenon that usually happens at the end of the month is happening a lot earlier now.  This month is a good example, it started off around $4 and has now moved to above $6.  In this case, I do think it has moved up quicker than it should and I think it's because a lot of money is now thinking of the short squeeze and trying to be 'ahead' of the game and put it on earlier.  I think ETF's really felt the last roll and and starting to mitigate some of this roll risk ahead of time as well so as not to wait until the end. 

2 weeks ago, I saw this and I actually bought April and sold May at $1.85.  At that time the Feb/Mar spread was $4.  I had actually gone long the contango, not short it.  THe April/May spread now stands at $2.40 and the Feb/Mar is now $6.35.  Your hedge trades work and I would never suggest trading it unhedged, but I would suggest staying in the short contracts.  The April/May is still good and I think this contango will stay for a few more months but you will be able to get a sense as to when the 'game is up' by watching the front month oil contract.  The only way this contango will disappear is if there is a lot more fundamental demand that will push up the front end.  I guess you can always say the forward curve can come down but again, you'll know when that happens- you'll hear people talking about producers hedging  etc..

 The best place to do these trades is on Interactive Brokers, they've got a great platform but I wouldn't recommend this to anyone who is not comfortable with investing and using futures as trading tools.

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