Friday, 18 December 2015


Not valid at present - but no doubt it will be ....


            Most people these days have heard of "Tulip Mania", the episode in history when investing frenzy first registered on the public consciousness. Just to recap, it was in the first half of the 17th century, in Holland (even then the tulip capital of the world, although the plants were still a comparative novelty), when enthusiasm for buying and selling these new bulbs spread from collectors to investors and thence to speculators and sharpsters. In the beginning, it was the merchants and the upper bourgeoisie who bought and flaunted their tulips - rare, because they had to be imported from the East, and special, because the blooms were exotic and strange. Soon however the need to keep up with the Jones's meant that demand outstripped supply, and prices began to rise; sailors began to smuggle in these rare goods, and the market began to broaden. Prices were quoted in the press, public interest was aroused, the opportunity for profit became evident.

            High prices were normal from the time of their initial introduction from Turkey into Europe some time after 1550, but from around 1630 until 1637, when the market peaked, tulip prices rose inexorably. Until around 1633 the market was mainly among professionals - growers, specialists, and their wealthy patrons; for the next three years, however, everyone wanted a piece of the action - it was, after all, a one-way market, with "guaranteed" profits. Stories were told of farms being mortgaged, extraordinary barter deals were arranged, forward contracts became common - all to take advantage of these ever-rising prices. The craze was not limited to Holland - a French brewery was reportedly swapped for one tulip bulb, and the English were in the market as well, but the Dutch were the principal participants.

            However, early in 1637, the market suddenly found a vacuum; without any warning, the buyers were no longer there. Sellers began looking for bids, buyers kept their heads down, financially over-stretched speculators became increasingly anxious, buyers ran away from their forward contracts, which were anyway classed as gambling, and not legally enforceable. Prices collapsed, and panic ensued. The Government was asked to help, and (after some consultation) a proposed "scheme of settlement" was put forward, but this found no friends - after all, close-outs at 3-1/2 percent of contract value were not particularly attractive. With prices having risen twenty- to twentyfive-fold during January alone, value was hard to establish.

            So the Dutch - those solid, dependable citizens of Europe who could be relied upon to keep their heads when dykes were springing leaks - were swept off their feet by "irrational exuberance". There were perhaps extenuating circumstances at the time: a major outbreak of the plague which had decimated some cities in late 1636 had created a psychological climate of "short-termism", and the continuing war with Spain was a constant background factor. But the main reason for the buying mania was the expectation of profit - the knowledge, based on recent experience, that there would always be (tomorrow, or perhaps next week) a buyer willing to pay more than you had paid. The fact that tulip bulbs were basically useless had nothing to do with either the rise or the fall in prices; academic theorists who have worked out that - given time - the most expensive bulb (costing around US$50,000), if properly propagated, would have paid for itself well inside a hundred years are looking at economic logic rather than truth. The fact is that this was an example of unbridled greed.

            And there are innumerable other examples of this sort of mass enthusiasm. It has been pointed out often enough that men, however sensible and logical they may be individually, change in character and thought process once they become part of a crowd. And the crowd does not have to be a gathering of many people in one place - it needs only a commonality of purpose, an agreement on what appears to be an obvious outcome, for the crowd mentality to become operative. That is why newcomers are so frequently "flamed" when they join a new Internet forum - they are not yet part of the crowd, they are still individuals waiting to become assimilated. And that is why the Internet - although it may seem an isolating process - is taking the place of the town square as a meeting place for individuals who may transmogrify into a crowd.

            Other examples of financial manias which are often quoted are the South Sea Bubble (around 1715-1720, in England) and the Mississipi scheme (in France at around the same time). In both cases the public became so enthusiastic about the prospects of easy money that common sense went out the window - for a while. In both cases, the end came quite suddenly and unexpectedly; it is very hard to judge the top in cases like these. Occasionally, however, common sense and dispassion can provide the opportunity for profiting from a contrarian view. In 1959, an attempt was made to squeeze  May Wheat futures in Chicago; for a time, the market moved inexorably upwards, but it happened that deliverable supplies were available (although they were held outside Chicago), and - such was the conviction that the squeeze would succeed - it was possible to sell at good prices even after wheat began to move into Chicago in volume. But then this was a squeeze rather than a wild burst of enthusiasm, and the psychological underpinnings are very different.

            Squeezes, or "corners", are in fact rather more frequent than manias, and depend on supply and demand rather than greed, fear or envy - as such, they tend to be seen more often in the commodity markets, where control of deliverable supplies appears easier to arrange. The most famous (attempted) squeeze of recent times culminated in 1980, when the Hunt brothers (famous oil billionaires) managed to ratchet the Silver price up from around $6/ounce in January 1979 to almost $50 a year later, spending and subsequently losing millions in the process. More recently, fears of a squeeze in the Palladium market took prices during  February 2000 from $491 at the start of the month to $815 three weeks later (basis NY spot), and - to be flippant for a moment - the current Pokemon craze among youngsters shows evidence of both a squeeze and a mania, as carefully calculated supply is measured out to frenzied buyers.

            But a true squeeze, as we said, has a different psychological effect on the traders in the market; it is (or may become) a fact, and (depending on the perceived likelihood of the squeeze succeeding), buyers may join in or not while shorts decide to cut or run their positions. A mania affects the public rather than the specialist, and depends on emotion rather than thought. In the move upwards, panic is evident among the buyers at the thought of opportunities missed - in a squeeze, the panic is likely to be among the sellers, or shorts.

            Because equities have appealed to a wider public for a longer time than commodities or currencies, there are more examples of speculative excess to be found in the stock markets than elsewhere: railroads - particularly in the US - provided a wonderful playground for the bulls in the 1850s, with the big bust coming on one day, August 24th, 1857. Radio was one of the technological wonders of the 1920s, but the share price of RCA (a very successful and profitable company during that era) fell 95% in the four years after 1929. Whether that was as the result of a preceding mania may be arguable, but it demonstrates the difficulty of establishing value in times of excess.

            And that is the problem with financial mania: there always appears to be good reason for the advance in prices to continue, because (after all) "things are different this time".  The 1920s were years of great technological change, particularly in the transport sector, and previously valid cost and profit calculations were "obviously" no longer applicable; but, for the time being, there was nothing else to take their place. Price, therefore, took the place of value, and  buying on dips became a habit, since cheapness was rare and the opportunity had to be seized.

            Sometimes an exogenous shock will halt a mania, sometimes the hot air simply cools; there is no sign hung out when the end comes, but a symptom is when serious, conservative investors who have held out against all previous blandishments finally admit that they might have been wrong, and the last remaining buyers come into the market. Watch out for such symptoms, and beware!

[Written Sep 2000]

Saturday, 27 June 2015

CFTC COT data of Jun 23rd 2015 - British Pound [BP], Dollar Index [DX]

Please note - this will be the last published comment on Pound and Dollar Index. Thank you for your interest ... 

British Pounds - Total o/i 178641, spreads 1234 (0.7%).  Closing price Jun 23rd 1.5725
 Nett differences:  Commercials  +15587 (from +25547)  Large Specs -22194 (from -25434) 
                              Small Specs +6607 (from -113) 

Commercials (50.6% of total o/i) - 55.0% of Longs (from 60.6%), 46.2% of Shorts (from 43.0%), balance plus 8.8 (from plus 17.6)
Large Specs (35.3% of total) - 29.0% of Longs (from 23.3), 41.5% of Shorts (from 40.8%), balance minus 12.5 (from minus 17.5) 
   Small Specs (14.1% of total) - 16.0% of Longs (from 16.1%), 12.3% of Shorts 
  (from 16.2%), balance plus 3.7 (from minus 0.1) 

  A change of attitude this week, with Commercials becoming bearish and Small Specs moving to the bull tack. Also a marked difference between the outright positions and the proportional - Commercials for example added to their total longs but held a lesser share of the increased total o/i, with the opposite showing on their shorts. Their proportionate balance, of plus 8.8, is the smallest since October last year - after that, Sterling gradually eased. With Small Specs going long, we expect the same to happen this time. 

Dollar Index: Total o/i 85932, spreads 1835 (2.1%). Closing price Jun 23rd 95.64
Nett differences:  Commercials -63553 (from -65003)  Large Specs +52345 (from +53420) 
 Small Specs +11208 (from +11583)

Proportions -
 Commercials (46.7% of total o/i) - 8.9% of Longs (from 9.3%), 84.4% of Shorts (from 85.6%), balance minus 75.5 (from minus 76.3)
 Large Specs (44.6% of total) - 75.7% of Longs (from 75.1%), 13.5% of Shorts (from 12.4%), balance plus 62.2 (from plus 62.7)
  Small Specs (8.7% of total) - 15.4% of Longs (from 15.6%), 2.1% of Shorts (from 2.0%), balance plus 13.3 (from plus 13.6)

Not much change overall (although we note that prices did dip, as expected, in the period between the 16th and the 23rd). Commercials are still favouring the short side - so do we. 

Please note - this will be the last published comment on Pound and Dollar Index. Thank you for your interest ... 

Saturday, 20 June 2015

CFTC COT data of Jun 16th 2015 - British Pound [BP], Dollar Index [DX]

British Pounds - Total o/i 146635, spreads 1350 (0.9%).  Closing price Jun 16th 1.5650
 Nett differences:  Commercials  +25547 (from +30440)  Large Specs -25434 (from -28277)
                              Small Specs -113 (from -2163)

 Commercials (51.8% of total o/i) - 60.6% of Longs (from 69.5%), 43.0% of Shorts (from 52.0%), balance plus 17.6 (from plus 17.5)
 Large Specs (32.1% of total) - 23.3% of Longs (from 17.8), 40.8% of Shorts (from 34.0%), balance minus 17.5 (from minus 16.2) 
  Small Specs (16.1% of total) - 16.1% of Longs (from 12.7%), 16.2% of Shorts (from 14.0%), balance minus 0.1 (from minus 1.3)
  Both spreads and total o/i were reduced considerably, primarily by the Commercials, but their proportional balance ended not much changed. Small Specs hold their largest total open position since early January - with their balance near square, this could suggest twitchy trading in the near term. Large Specs added to longs, but were also hanging on to their shorts - it will be interesting to see whether they have thrown in the towel during the recent rally. With Commercials still moderately long, dips are likely to be limited. 

Dollar Index: Total o/i 86281, spreads 1140 (1.3%). Closing price Jun 16th 95.26
Nett differences:  Commercials -65003 (from -76035)  Large Specs +53420 (from +62877)

                              Small Specs +11583 (from +13158)
Proportions -
 Commercials (47.4% of total o/i) - 9.3% of Longs (from 12.8%), 85.6% of Shorts (from 87.9%), balance minus 76.3 (from minus 75.1)
 Large Specs (43.8% of total) - 75.1% of Longs (from 72.5%), 12.4% of Shorts (from 10.4%), balance plus 62.7 (from plus 62.1) 
  Small Specs (8.8% of total) - 15.6% of Longs (from 14.7%), 2.0% of Shorts (from 1.7%), balance plus 13.6 (from plus 13.0)
  Total o/i fell considerably, but proportions did not change dramatically. Commercials reduced both longs and shorts, but stayed nett short overall. Large Specs reduced longs considerably, although proportionately they held an increased share. There still seems no reason to turn bullish.

Saturday, 13 June 2015

CFTC COT data of Jun 9th 2015 - British Pound [BP], Dollar Index [DX]

British Pounds - Total o/i 181049, spreads 6831 (3.8%).  Closing price Jun 9th 1.5375
 Nett differences:  Commercials  +30440 (from +28514)  Large Specs -28277 (from -25658)
                              Small Specs -2163 (from -2856)

 Commercials (60.8% of total o/i) - 
  69.5% of Longs (from 68.1%), 52.0% of Shorts (from 51.6%), balance plus 17.5 (from plus 16.5)
 Large Specs (25.9% of total) -
   17.8% of Longs (from 19.0), 34.0% of Shorts (from 33.8%), balance minus 16.2 (from minus 14.8) 

  Small Specs (13.3% of total) - 
  12.7% of Longs (from 12.9%), 14.0% of Shorts (from 14.6%), balance minus 1.3 (from minus 1.7)
  Although total o/i went up, much of the increase comprised additional spreads, presumably ahead of the June position going off the board. Otherwise, not much change, in either total or proportional figures.  Once again, we can only reiterate previous comments, although the odds on some further steadiness are looking stronger. 

Dollar Index: Total o/i 105463, spreads 4204 (4.0%). Closing price Jun 9th 95.17

Nett differences:  Commercials -76035 (from -73188)  Large Specs +62877 (from +59722)
                              Small Specs +13158 (from +13466)
Proportions -

 Commercials (50.3% of total o/i) - 12.8% of Longs (from 12.6%), 87.9% of Shorts (from 86.2%), balance minus 75.1 (from minus 73.6)

 Large Specs (41.5% of total) - 72.5% of Longs (from 72.9%), 10.4% of Shorts (from 12.8%), balance plus 62.1 (from plus 60.1) 
  Small Specs (8.2% of total) - 14.7% of Longs (from 14.5%), 1.7% of Shorts (from 1.0%), balance plus 13.0
(from plus 13.5)
  Commercials added considerably to shorts and also added slightly to longs, taking their total share of o/i to just over 50%. Large Specs did the reverse, while Small Specs remained basically sidelined. There seems no reason to change our view - taking guidance from the Commercials, in the medium term we'll remain bearish. 

Saturday, 6 June 2015

CFTC COT data of Jun 2nd 2015 - British Pound [BP], Dollar Index [DX]

British Pounds - Total o/i 175291, spreads 2560 (1.5%).  Closing price Jun 2nd 1.5345
 Nett differences:  Commercials  +28514 (from +26865)  Large Specs -25658 (from -25539)
                              Small Specs -2856 (from -1326)


 Commercials (59.8% of total o/i) - 
  68.1% of Longs (from 67.4%), 51.6% of Shorts (from 52.0%), balance plus 16.5 (from plus 15.4)
 Large Specs (26.4% of total) - 
   19.0% of Longs (from 19.8), 33.8% of Shorts (from 34.4%), balance minus 14.8 (from minus 14.6) 

  Small Specs (13.8% of total) - 
  12.9% of Longs (from 12.8%), 14.6% of Shorts (from 13.6%), balance minus 1.7 (from minus 0.8)

  Very little change in either the o/i figures or in the week-to-week price - we can only reiterate last week's comment: major weakness from here looks unlikely.

Dollar Index: Total o/i 102174, spreads 2708 (2.7%). Closing price Jun 2nd 95.90

Nett differences:  Commercials -73188 (from -65900)  Large Specs +59722 (from +52296)
                              Small Specs +13466 (from +13604)
Proportions -

 Commercials (49.4% of total o/i) - 12.6% of Longs (from 14.5%), 86.2% of Shorts (vs 80.2%), balance minus 73.6 (vs minus 65.7)

 Large Specs (42.8% of total) - 72.9% of Longs (from 69.5%), 12.8% of Shorts (vs 17.3%), balance plus 60.1 (vs plus 52.2) 
  Small Specs (7.8% of total) - 14.5% of Longs (from 16.0%), 1.0% of Shorts (vs 2.5%), balance plus 13.5
 Once again, Commercials reduced longs and added to shorts, while Large Specs added to longs but - this time - reduced shorts considerably. Small Specs reduced both long and short positions. Last week's comment proved correct, but this week's decision is more difficult - should one follow the Commercials (who are distinctly short), or the Large Specs (who are comparatively long)? [Small Specs seem to reflect this dilemma - they have a very limited commitment at present].  Our inclination, as always, is to take guidance from the Commercials in the medium term. 

Sunday, 31 May 2015

CFTC COT data of May 26th 2015 - British Pound [BP], Dollar Index [DX]

British Pounds - Total o/i 176797, spreads 1871 (1.1%).  Closing price May 26th 1.5385
 Nett differences:  Commercials  +26865 (from +23388)  Large Specs -25539 (from -23362)
                              Small Specs -1326 (from -26)

 Commercials (59.7% of total o/i) - 
  67.4% of Longs (from 64.7%), 52.0% of Shorts (from 51.8%), balance plus 15.4 (from plus 12.9)
 Large Specs (27.1% of total) - 
   19.8% of Longs (from 22.7%), 34.4% of Shorts (from 35.6%), balance minus 14.6 (from minus 12.9) 

  Small Specs (13.2% of total) - 
  12.8% of Longs (from 12.6%), 13.6% of Shorts (from 12.6%), balance minus 0.8 (from square)

 On a nett basis, all positions were increased. On a proportional basis, there was a reversion to the previous pattern - Commercials went slightly longer on the dip, while Large Specs went slightly shorter (following the trend, as usual). Small Specs went marginally short (from square), but are still a comparatively insignificant factor. On this basis, major weakness from here looks unlikely.

Dollar Index: Total o/i 103211, spreads 2916 (2.8%). Closing price May 26th 97.40

Nett differences:  Commercials -65900 (from -62596)  Large Specs +52296 (from +53483)
                              Small Specs +13604 (from +9113)
Proportions -

 Commercials (47.3% of total o/i) - 14.5% of Longs (from 16.7%), 80.2% of Shorts (vs 82.9%), balance minus 65.7 (vs minus 66.2)

 Large Specs (43.4% of total) - 69.5% of Longs (from 68.1%), 17.3% of Shorts (vs 11.5%), balance plus 52.2 (vs plus 56.6) 
  Small Specs (9.3% of total) - 16.0% of Longs (from 15.2%), 2.5% of Shorts (vs 5.6%), balance plus 13.5
 (vs plus 9.6)
 Commercials reduced longs and added to shorts, while Large Specs added to longs and - more aggressively - to shorts. Small Specs also added to longs, but reduced their already small short position. It appears that the current minor rally may end soon.

Saturday, 23 May 2015

CFTC COT data of May 19th 2015 - British Pound [BP], Dollar Index [DX]

British Pounds - Total o/i 182607, spreads 1093 (0.6%).  Closing price May 19th 1.5495
 Nett differences:  Commercials  +23388 )from +38987)  Large Specs -23362 (from -30769)
                              Small Specs -26 (from -8218)

 Commercials (58.3% of total o/i) - 
  64.7% of Longs (from 68.1%), 51.8% of Shorts (vs 546.8%), balance plus 12.9 (vs plus 21.3)
 Large Specs (29.1% of total) - 
   22.7% of Longs (from 20.6%), 35.6% of Shorts (vs 37.4%), balance minus 12.9 (vs minus 16.8) 

  Small Specs (12.6% of total) - 
  12.6% of Longs (from 11.3%), 12.6% of Shorts (vs 15.8%), balance square (vs minus 4.5)

 Commercials were quick to reduce longs once more, while adding considerably to shorts - seems like they needed only minor encouragement to get back to their recently normal "slightly nett long" position - their nett balance is now the lowest since end Oct last year. Large Specs reduced shorts and added to longs, both outright and proportionately, and Small Specs did the same. With the dust now settling, it seems Commercials (whose opinion we trust in the long run) are not very bullish, while Small Specs (whose opinion we prefer to 'fade') are completely undecided - they have their smallest share of the total open interest since last September.

Dollar Index: Total o/i 98050, spreads 3516 (3.6%). Closing price May 19th 95.36

Nett differences:  Commercials -62596 (from -66103)  Large Specs +53483 (from +55336)
                              Small Specs +9113 (from +10767)
Proportions -

 Commercials (49.8% of total o/i) - 16.7% of Longs (from 14.0%), 82.9% of Shorts (vs 81.8%), balance minus 66.2 (vs minus 67.8)

 Large Specs (39.8% of total) - 68.1% of Longs (from 69.1%), 11.5% of Shorts (vs 12.3%), balance plus 56.6 (vs plus 56.8) 
  Small Specs (10.4% of total) - 15.2% of Longs (from 16.9%), 5.6% of Shorts (vs 5.9%), balance plus 9.6
 (vs plus 11.0)
 Commercials yet again added to longs and reduced shorts (slightly), once more taking their nett short to the lowest figure this year. Large Specs continued to cut both longs and shorts, staying nett long, while Small Specs reduced longs more than shorts. Their overall nett long has become even smaller. Further minor strength seems likely.