Archive - Jan 27, 2011

The market continued to rally today as the Fed voted to keep QE2 going (something about the economy being shitty, so rally on), bankers at Davos...

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this offers very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.

Recently there has been much speculation about the nature of the notable divergence between WTI and Brent. Explanations range from the now traditional Cushing syndrome, to Hess attempting to corner the BFOE, to correlation desks blowing up, to the ludicrous, which includes HFT (as much as it is trendy to blame parasitic HFT for everything, is not responsible for correlation trades, especially not in markets that do not have endogenous liquidity at least 1,000 times above that needed for HFT to actually add value). Probably the best explanation to date comes from JPM's Lawrence Eagles who in a just released note asks "Is Brent-WTI wide enough." His lede: "Brent and WTI have been trading increasingly as entirely separate commodities in recent weeks, driven by decidedly different fundamentals. Yet this is an important spread, which tells us a lot about regional Midwest and international crude economics and will, over time, drive investment that will ‘normalize’ price discrepancies." In other words, it is not the spread's wideness that is the outlier: it is the fact that it was overlapping for so long that is peculiar. In time, Eagles claims, speculation may drive the spread so wide that the economic incentive to close the gaping infrastructure holes will be large enough and the discounting of this act will bring the spreads back to parity. In the meantime, the spread will likely persist. Not only that, but he also believes that the 2012 calendar dated differential, currently trading at a far more reasonable $2.50, will likely also diverge, as two years is insufficient time for the required changes to transpire. Furthermore, the last straw that convinces us that it is likely early to bet on a convergence, is Goldman's just released commodities report which has a WTI target $2 above Brent. By now everyone should know what they say about trading Goldman recommendations...