Today’s stock and ETF prices contemplate future EPS prospects – decisions enriched by necessary negotiations over hedging terms to protect market makers’ temporary risking of their firm capital. Risks necessary to balance buyers and sellers in multi-million-dollar block trade orders from institutions adjusting holdings in multi-billion-dollar portfolios.
Those hedging negotiations reveal knowledgeable expectations for near coming prices of the trade subject securities involved. Comparisons of the expectations and the outcomes of similar prior expectations lead frequently to profitable securities selections.
When the oil hit the reality fan
United States Oil (USO) is the commodity fund which tracks West Texas Intermediate, the usually accepted going price per barrel for oil transactions in the USA. It is shown in Figure 1 by the heavy dot in each vertical bar of the range of expected near-term oil prices. These dots and ranges are of real fund prices and expectations!
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There are few businesses where overall industry profitability flows so directly from the current price of one commodity. Producers, refiners, field service companies, shippers and shipbuilders, explorers & developers, bankers and market makers, all are impacted by changes in crude prices. It is the starting (and may be the ending) point of evaluation of these securities.
As the world’s current principal source of energy, petroleum products are in contests with technical advances bound to reduce and modify its usage (nat gas to electricity vs. gasoline) in Teslas and other models.
The conversions will cover far more years than can be forecast reliably. So, using near-term forecasts which can be compared and evaluated repeatedly is an odds-on approach to an evolving longer-term investment wealth-building solution.
First, here is a look at the commodity picture of crude and natural gas where, at present, bets are best. Please see Figure 2 for the picture as it is seen by the market makers in their appraisal of what is likely at the institutional investment level.
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This map locates ETF securities at the intersection of prospective price gains (green horizontal scale) and potential price drawdowns (red vertical scale) based on market maker hedging behavior to protect their necessary endangerment of firm capital as they enable volume trades. Desirable conditions are down and to the right.
The only viable commodity investment competitor at this time is WTI Crude (USO) at location . Potential payoffs are high because market price risks are higher in other commodity markets. S&P 500 Index ETF (SPY) is offered as an equity-market trade-off norm.
While Figure 1’s comparisons provide a perspective on many of this group’s alternative investment candidates, several conditions contribute to reward and risk. Principal questions for both are “how likely are these to happen”, and “can their impact be improved?” Figure 3 offers some perspective as seen in the commodity market-making community: