Going bananas.IN preparation for a recent speech, Federal Reserve Chairman Alan Greenspan Alan Greenspan Dr. Greenspan is Chairman of the Board of Governors of the Federal Reserve System. Dr. Greenspan also serves as Chairman of the Federal Open Market Committee (FOMC), the Fed's principal monetary policymaking body. had his staff dig up reams of information on oil exploration, supply and demand, spot prices and futures contracts Futures Contract An exchange traded agreement to buy or sell a particular type and grade of commodity for delivery at an agreed upon place and time in the future. Futures contracts are transferable between parties. . What he didn't have them do was save him from his fascination with the informational content in long-dated oil futures contracts. For years, every time the spot price of crude shot up, Greenspan has cited the stability of contracts maturing five or six years in the future as an indication that any rise in spot prices was expected to be short-lived. But given their track record in predicting prices, it's not clear why Greenspan puts Greenspan Put A colloquial term used to describe the actions of the Chairman of the Federal Reserve Board in preventing significant and sustained market downturns. Notes: so much faith in them. Six years ago, the December 2004 oil futures contract was trading at about $19--dead wrong. With the current price at $55 a barrel, why should the contract maturing in 2010 do any better predicting oil prices six years out? Such futures are sparsely sparse adj. spars·er, spars·est Occurring, growing, or settled at widely spaced intervals; not thick or dense. [Latin sparsus, past participle of spargere, to scatter. traded, notes Rick Mueller, senior oil analyst at Energy Security Analysis Inc. in Wakefield, Mass. "I can't imagine there's much information there." To be sure, there is an implicit forecast embedded Inserted into. See embedded system. in long-dated oil futures contracts, just as there is an interest-rate expectation in five- and 10-year Treasury notes or Eurodollar futures contracts maturing in 2010. Those "forecasts," however, are influenced by current information extrapolated into the future. When the current news changes, the implicit forecast changes. Greenspan puts a lot of faith in the markets, which is understandable. His faith in a small number of trades by a small number of traders in deferred oil futures contracts is less so. Usually, Mueller said, a dramatic spike A burst of extra voltage in a power line that lasts only a few nanoseconds. See power surge, power swell, sag and surge suppression. (jargon) spike - To defeat a selection mechanism by introducing a (sometimes temporary) device that forces a specific result. in oil prices is only reflected in futures prices Futures price The price at which parties to a futures contract agree to transact upon the settlement date. two to three months out. This time, he said, the prices are higher out to 2010, "suggesting a structural change in oil markets." Greenspan noted as much in his speech. A few years ago, "distant futures exhibited little variation around $20 per barrel," even as spot prices ranged from $11 to $40 a barrel, Greenspan said. "Such long-term price tranquility has faded dramatically over the past four years." The December 2010 contract finished the week at a record $38.30. Every time the 78-year-old Greenspan uses the 2010 oil futures contract to predict prices, I'm reminded for some reason of an old joke my father used to tell. An ill, elderly man goes to his doctor to get his test results. "So, doc, how am I?" the patient asks. The doctor replies: "Don't buy any green bananas ba·nan·as adj. Slang Crazy: "That's the horrible thing when you're bananas ." Caroline Baum, Bloomberg News |
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