Rondaben
March 27th, 2008, 11:33 AM
The Chicago Board of Trade has increased the margins for Corn and Soybean trades. STORY (http://www.cnbc.com/id/23826374)
The reason for raising the amount of money needed to trade on margin (increased from $1350 to $2025 per contract for corn, $3375 to $4388 for soybeans) was to try to limit "speculation" in the market. The state reason is that speculators (futures traders) will be less likely to trade a contract if they have to have more up-front money. This move was announced and is effective as of TODAY.
This is a big story that is largely not being reported. It will have an impact on how you should look at market performance, particularly with regards to stocks.
Looking at investments from a high level there are 3 big investment classes. Those are stocks, bonds, and commodities. Stocks are under a downward pressure even though they are near all-time highs. Bonds currently are currently paying very low interest rates because of the amount of people seeking a "safe" investment. Commodities are related to the strength of the dollar and the outlook for inflation and have been an amazing place to make money lateley.
Today's move causes casual investors to be less likely to invest in commodities because of the up-front cash needed for margin. It effects large traders already in the market because as of today they need to pony up an additional 25-50 percent of the money they currently have on reserve. This is why you should see stocks and commodities (gold and silver too) under pressure to day as investors sell the assets to meet margin requirements on commodities.
Where does the money go to from investors that are now not going to be in commodities? Bonds? not with short term interest paying under 1/2 of 1%. 10 year bonds? probably not, though this is something the Fed would like as it would drive down mortgage rates (contratry to popular belief, the Fed rate doesn't really effect the overall mortgage rate--LIBOR and 10 year notes do however).
The only other option is stocks.
I see this as a multi-pronged effort to effect the markets. This is how:
1. As stock markets rise people "feel better" about the economy and their own situation (401k up = happy)
2. Commodities--particularly corn and soybean (note they are foodstuffs--none of the other commodities had margin adjustments) will decrease in price. This lowers overall food prices and, in theory, will moderate inflation in food prices.
3. Unwinding of Derivatives--Fewer contracts at renewal because of increased margin costs will help to "unwind" the derivatives plays and shift that money coming out into the stock market. This is dangerous, because you don't want to push the market too far and cause a precipitous selling cycle.
4. As the stock market goes up, speculators in gold and silver will go there as well to capture some of the gains. This will have a direct effect on the gold/silver trend. I wouldn't be surprised if margins are not also instituted on metals because of the "speculation" that has driven up prices. If gold goes down, the dollar will strengthen and oil will come down. It also gives the Fed a little more 'gunpowder' in the form of an ability to lower interest rates even further because inflation will appear to be moderating.
The reason for raising the amount of money needed to trade on margin (increased from $1350 to $2025 per contract for corn, $3375 to $4388 for soybeans) was to try to limit "speculation" in the market. The state reason is that speculators (futures traders) will be less likely to trade a contract if they have to have more up-front money. This move was announced and is effective as of TODAY.
This is a big story that is largely not being reported. It will have an impact on how you should look at market performance, particularly with regards to stocks.
Looking at investments from a high level there are 3 big investment classes. Those are stocks, bonds, and commodities. Stocks are under a downward pressure even though they are near all-time highs. Bonds currently are currently paying very low interest rates because of the amount of people seeking a "safe" investment. Commodities are related to the strength of the dollar and the outlook for inflation and have been an amazing place to make money lateley.
Today's move causes casual investors to be less likely to invest in commodities because of the up-front cash needed for margin. It effects large traders already in the market because as of today they need to pony up an additional 25-50 percent of the money they currently have on reserve. This is why you should see stocks and commodities (gold and silver too) under pressure to day as investors sell the assets to meet margin requirements on commodities.
Where does the money go to from investors that are now not going to be in commodities? Bonds? not with short term interest paying under 1/2 of 1%. 10 year bonds? probably not, though this is something the Fed would like as it would drive down mortgage rates (contratry to popular belief, the Fed rate doesn't really effect the overall mortgage rate--LIBOR and 10 year notes do however).
The only other option is stocks.
I see this as a multi-pronged effort to effect the markets. This is how:
1. As stock markets rise people "feel better" about the economy and their own situation (401k up = happy)
2. Commodities--particularly corn and soybean (note they are foodstuffs--none of the other commodities had margin adjustments) will decrease in price. This lowers overall food prices and, in theory, will moderate inflation in food prices.
3. Unwinding of Derivatives--Fewer contracts at renewal because of increased margin costs will help to "unwind" the derivatives plays and shift that money coming out into the stock market. This is dangerous, because you don't want to push the market too far and cause a precipitous selling cycle.
4. As the stock market goes up, speculators in gold and silver will go there as well to capture some of the gains. This will have a direct effect on the gold/silver trend. I wouldn't be surprised if margins are not also instituted on metals because of the "speculation" that has driven up prices. If gold goes down, the dollar will strengthen and oil will come down. It also gives the Fed a little more 'gunpowder' in the form of an ability to lower interest rates even further because inflation will appear to be moderating.