On this day in the year 1507 A.D., an enterprising author published a hit book. While he was not the John Grisham of his day, he did hope to benefit from two recent events of interest to move his book. First was the discovery of moveable type, which had occurred some 60 years before. (That meant he could print his tome in volume...so to speak.) Then, of course, there was that other curiosity (not about past clandestine lunches or curious shifting of funds) rather it was a public curiosity about a variety of sea voyages in the previous two decades.
The author, a German named Martin Waldseemuller, decided to publish makeshift maps of the new lands reached by these explorers. He dutifully researched all the reports and drew the assumed designs and locations of the new areas. Of course, he had to name them, so in his massive "Cosmographics Introductione" he applied a name to a large landmass in the Southern Hemisphere. He used the name of one of the men who had claimed to have visited it. No, it was not Christopher Columbus (he was busy renegotiating with the Spanish Court). Rather the budding cartographer used the name on a certain self-promotional pamphlet by a certain Italian Merchant named Amerigo Vespucci. The author called the potential continent - Amerigo. Unfortunately for Columbus, Waldseemuller's book was an instant hit.
And so the continent became known as America (later, South America when another continent further North was also discovered). And the other guy, Columbus, well he remained in litigation over Spanish rights to the treasures of this New World until he wound up in jail.
Traders had a tough time figuring out where they were yesterday.
Monday Meander Means Monday Malaise – Stocks were unable to capitalize on a dip in the yield on the ten year below 5%. They also couldn’t capitalize on a drop in oil prices. It looked less like inability and more like indifference. A look at a minute by minute intra-day chart portrays a narrow range nearly horizontal move. Traders chalked it up to a lack of new economic data and the temptation to leave the wallet on the hip awaiting Bernanke’s testimony later in the week.
Whatever the motivation (or non-motivation), the indices closed mixed to marginally lower on shrunken volume.
Contango Concerns And Confusions – As we noted yesterday, a contango is not a torrid dance in a prison. It is the condition where the prices of a commodity for future delivery are higher than the price for current deliveries. For most non-perishable commodities, prices are usually at a mild contango reflecting storage costs. If you want me to sell you a barrel of oil but don’t want delivery until October, you’ll have to pay me a premium to cover my costs of storing that barrel of oil for five months.
The opposite of contango is called backwardation. Here the price gets cheaper the further out you go. That would happen if today’s high price would be part of a temporary condition or that visible new supplies would be available shortly (or a falloff in demand was thought visible). As you might imagine, in an era marked by bouts of inflation a backwardation is not a very frequent sight.
Okay, that’s the regular lay of the land.
Sometimes, however, a contango can go to premiums. The price in the future is higher than the current price plus presumed storage costs. That could come from two forces. First is that there is a perception that the commodity, say oil, will be much scarcer months from now. It might be from a sudden shortage of supply (storms, wars) or a sudden surge in demand – or both.
The other force that might produce an outsize contango might come from speculators being long so much oil that they are forced to compete for storage. They would drive the storage costs higher and thus the future price since it is a combination of spot price and storage costs. We’ve heard this latter advanced but believe it would have to be a very short-lived phenomenon. Excess product fighting for storage should, we think, rather rapidly pressure the spot price.
Okay, if you are still awake, here’s why we started this – we think.
We think that structure suggests the oil markets see continued demand for the balance of the year. It does not suggest (to us, at least) that the markets see the current price as a temporary or aberrational price. We think monitoring the contango may help in sorting through the confusion in the headlines.
Is Washington Watching? – Bloomberg News carries a rather interesting and unusual story this morning. They report that the trading arm of Sinopec (the Chinese petroleum company) is offering to sell lots of oil on the spot market. The story says they are offering two million barrels of Russian oil and six billion barrels of West African oil.
Lest you think that this indicates China’s economy slammed on the breaks, the cause of the selling lies elsewhere. The Chinese government controls the price of the refined product. They allowed an increase in fuel prices back in March. It was not, however, high enough to allow Sinopec to make a profit refining crude at today’s prices. So, the company has decided to sell the oil rather than refine it. That could lead to shortages in refined product and force the government to allow much higher fuel adjustments or face a scarcity slowdown. “I’m from the government and I’m here to help you.”
Today – We get a look at home resales (maybe -3.1%) and Consumer Confidence (maybe 105.5). The Richmond Fed Index is said to look around 10.
Stock futures firmed as daylight hit New York, probably on some solid earnings reports. That changed the outlook from mixed to slightly lower to mixed to slightly higher.
Consensus – You know the drill – oil and rates. We’ll see if they really are waiting on Bernanke.
Trivia Corner
Today's Question - Are we there yet? On a late vacation trip Mitch tried to keep little Evan quiet by suggesting that Evan count all the oncoming busses. Evan did better. He noted that an oncoming bus passed them every 10 minutes. "Dad," he asked, "If a bus passes us every 10 minutes, how many busses arrive at our town bus station each hour?" "That's math, son. If there are 60 minutes in an hour about 6 busses must arrive." Skip the Ozzie and Harriet - is Mitch correct?
Bonus Question - Sure, but who takes out the garbage! Betty's brother has one more brother than he has sisters. How many more brothers than sisters does Betty have? (No you don't need to know the size of the family.)
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