Mark Fisher is one of those unique characters that only can be found in the futures industry. He became a successful trader on the New York Commodity Exchange (Comex) floor while still at the University of Pennsylvania Wharton School of Business 30 years ago. He went on to launch MBF Clearing, one of the largest energy-based futures commission merchants (FCMs) and the 39th largest FCM in 2010 based on customer segregated funds. He also runs a proprietary trading shop and has spent his entire career educating traders on his method of trading. As part of his education efforts, Fisher long has administered an internship program bringing young people from various backgrounds to MBF to learn about markets, one of his many philanthropic pursuits.
He also has been involved in product development, including designing an ETF that mitigates the roll effect of a long-only commodity index, which has a patent pending. More recently, Fisher has launched a commodity trading advisor (CTA)/registered investment advisor product (RIA). Mark’s brain works a little faster than most and he usually is tackling the next issue before you can digest the first, but we attempt to get his take on his recent pursuits and the energy markets.
Futures Magazine: Mark, you started out as one of the youngest floor traders at the Comex and went on to build one of the largest energy focused futures commission merchants (FCMs) and proprietary trading shops. Tell us what you are up to now.
Mark Fisher: I have been trading for myself for over 30 years. With the markets going electronic I spend more of my time concentrating on trading my own account so I started trading a lot of very liquid instruments, mostly futures, some equities and then opened it up to various friends and acquaintances via managed accounts in September of ’09. I did it for the same reason I became an FCM. I became an FCM because I was the largest floor trader and it made more sense to clear the trades myself. I figured to open it up to close friends. My active trading strategy is basically taking my pattern recognition and risk management expertise built up over the years in commodities and taking a fundamental view, combining that with the technical research that we do and try to create alpha that is not based on stock market results.
FM: In a sense have you come full circle because you started off as a trader, then built a large clearing firm and now are going back to trading?
MF: It is a CTA and it also is a RIA. The trades don’t even clear MBF for complete Chinese wall reasons. You are right, we have come full circle. When I began I was just trading for myself. Now, I am spending most of my time on this active management strategy.
FM: There has been a strong belief in many corners that speculators in general and long-only commodity funds specifically are distorting the price of oil. Where do you stand on this?
MF: That is rubbish. Basically if you look at the [commodities] that don’t trade on futures markets – coal, iron ore, uranium and those with a limited market like rubber, LNG (liquefied natural gas) or rice – they went up just as much as those [commodities] that trade on active futures markets. People who believe that will believe anything. You can blame the governments themselves because of all this quantitative easing and printing money will end up someplace. So the money went into commodities. Because commodity markets are so much smaller than the equity and debt markets, it is a huge tidal wave that gets reflected in price. So I don’t think you can blame speculators. You should blame the printing presses, not the speculators.
FM: Is the price of crude oil misaligned with the fundamentals?
MF: No. It depends on how you define fundamentals. People are looking for a store of value. It depends on what China is doing. They are buying every energy asset available whether it investing $1 billion in Nigeria or in Western Canada, whatever they can do. People recognize that crude oil is a store of value and crude oil, more than gold, is the ultimate currency. You see that more and more. The fundamentals are [not] just the physical supply and demand; crude oil is taking over as a store of value whereas 20 years ago that was not true.
FM: How has quantitative easing affected the price of crude oil?
MF: When you have the emperors that have no clothes on sitting there printing and printing, whether that is the right policy or not, the money has to go someplace. You always have unintended consequences. What you think is going to happen doesn’t necessarily happen. Obviously quantitative easing saved the banks and saved Wall Street, but at the same time a lot of this money is falling to commodities, especially in the energy and agricultural sectors because those things are necessities, even more so than precious metals. China is trying to go to a protein-based society. Do you know how much grain that takes? Where is it going to come from?
FM: You have been working on creating new energy ETFs. Where are you with that?
MF: We have been back and forth with six or seven index providers, but to no avail because we are trying to change the status quo. The index is trying to help mitigate the effect of backwardation and contango. The problem is to bring this to Wall Street; they want to keep it in their own club. Coming from an open outcry background, the banks wanted nothing more than to break up the open outcry pits and make everything electronic. But be careful what you wish for. Now that everything has gone electronic the floor local has been replaced by the upstairs hyper-speed local and now every day is like the Indianapolis 500. The banks, though, have been reluctant, unless they are forced by Congress, to give up their own little over-the-counter markets because they want to keep their ‘clubs’ in terms of CDS trading. They want to keep their market as non-transparent as possible for as long as possible. What I see happening in energy is that the banks control so much of this business, it is going to take a while.
FM: So your ETFs are not trading yet.
MF: No but another ETF we have been [working on] is a risk ETF. The whole world now has become risk-on/risk-off so [we] created a basket of risk-on instruments weighted quarterly — for example, let’s say long S&Ps, long crude oil, long grains, short bonds. Basically, an investor or speculator or fund can come in and have more exposure to buy or sell risk. You will see a lot of these risk-on/risk-off ETFs come out in the next year or two, if not sooner. If you have a problem on a large scale sovereign debt, I don’t think it will matter if the dollar goes up or down, you are going to see huge moves in risk-on/risk-off. People are going to want to get in and out of this risk environment on a more frequent basis. Just as the VIX took off in the last few years, you are going to see people short-term trade risk.
FM: What is your opinion on the CFTC proposal for speculative position limits? What would you like to see from the regulators?
MF: Whatever limits you are going to have they need to be simple, straightforward and the marketplace needs to be able to absorb them. On top of that, we have to make sure that regulatory arbitrage does not happen.
The bigger problem the CFTC has to look at is that the markets have gone into hyper-speed. The CFTC has to act as the ultimate flag holder and when the markets get crazy slow things down for a couple of minute. [They need to] put out the red flag for a couple of minutes, sort of like the CME does with its stop logic functionality, to allow the markets to catch their breath, digest information and go forward in an orderly way.
In a Nascar race when the track gets slippery out comes the yellow flag; in a crash, a red flag, until the track is cleared up. Can you imagine in a Nascar race if there is an accident and they let everyone go around at 100 mph? It is the same thing with the markets. The CME has the right methodology but all markets need to have a certain measure of when chaos hits, slow everybody down across the board. [Take the housing market.] Can you imagine if you could push a button and sell a house in the next two seconds? Where would the housing market be? Someone needs to step up and say when markets are going fine sure, but in times of crisis it is irresponsible not to go ahead and slow markets down.
FM: Is there anything specific you would like to see from the CFTC?
MF: The CFTC for the first time in a long time has the right handle on things; I hope they don’t get so bombarded with 1,000 things that they don’t see the forest for the trees. They [have to] get the regulation passed that they need to get passed, because with Dodd-Frank there is so much to be passed in so little time that my only fear is that they get inundated and lose perspective on what they need to do.
FM: Do you think that we are going to transition to using natural gas for transportation as recommended by T. Boone Pickens in the “Pickens Plan”?
MF: It seems to be that the physical participants in the world who have a long-term perspective all see the value of natural gas. Eventually this country is going to have to wake up and realize that we are going to have to use our own natural resources. Natural gas has potential to change the balance of power in the energy markets if we just let it. What is happening is America is going to wake up to what is going on with natural gas. If we wait five years it is just a waste of time. Inevitably natural gas has to be the answer in this country; it is not matter of if, it is a matter of when. All these companies and countries who are buying up all these natural gas reserves, you don’t see them complaining about the spot price of natural gas because they are still in the accumulation phase. They want to buy as many of these assets at this depressed base as possible because they know five to 10 years from now natural gas is going to be a game-changer.
FM: In your own trading you focus more on technicals than fundamentals. Given the volatility in energy over the last few years, what would you say is the best approach to trade energy markets?
MF: It depends on what perspective you are coming from. Are you a short-term trader, are you a long-term trader, are you a physical trader? The best approach is to take whatever fundamental basis you have and combine it with whatever technicals you have and come up with a picture that makes sense to you. It depends if you are day-trader, if you are a swing-trader, if your time horizon is two weeks or two years. The opportunities are all different depending on where you are coming from.
FM: Can you give us your medium- and long-term outlook for crude oil? Natural gas?
MF: The medium-term outlook on crude oil really depends on what happens with the fiscal and monetary policy in the United States and Europe. Gold right now is nothing but an anxiety barometer and slowly but surely crude oil is becoming another anxiety barometer around the world. [It is happening] regardless of supply and demand, and whether it is a cold winter or warm winter, whether there is an El Niño or La Niña. In the end, if there becomes a sovereign risk, you are going to see elevated crude prices in the $85 to $125 range for a long, long time, maybe even higher.
Natural gas, on the other hand, is sort of like a refrigerator concept. Up until now, natural gas only rallied like a refrigerator; 99 times out of 100 the refrigerator has enough to feed everybody and then you have to use what’s left. One time out of 100 there is not enough in the refrigerator to feed everybody and that is when you have to have the price rise to a certain degree to have demand destruction. But in the long run nat gas is going to be the single wisest investment. Natural gas is the lowest risk investment you can have in the long-term in the energy sector and that is borne out by how much money is being thrown at it in the United States and elsewhere. Once LNG becomes a reality worldwide and once we finally lift the handcuffs off of natural gas, it is going to be the cleanest and most efficient way and the prices will reflect that. Right now crude oil is fungible, natural gas is not because there is no way to store it; once LNG becomes a reality throughout the world and you can move it from place to place like crude oil, watch out. Natural gas will be the fuel of the future.
FM: What will that do for the long-term outlook in crude?
MF: You can create diesel at a cheaper price by using nat gas. Nat gas in this conversion process is going to restrain the ultimate price of crude oil but you go back to crude oil as a currency. As these paper currencies continue to get debased in a revolving currency devaluation, crude oil is going to keep increasing in value along with gold and all the other metals. The day of reckoning is here, it is just a matter of whether we are going to accept it and deal with the consequences now instead of pushing it off to the future.
FM: Will natural gas eventually be a currency commodity?
MF: No. Crude oil will be the ultimate currency. The problem with nat gas is that you really can’t store it. If you went out and bought the curve in 2018, 2019 and 2020 and realize the market is completely illiquid out there, if you can stomach the volatility and the markings that probably represents good value at these levels.
FM: If crude can surpass $90 in what is still a pretty soft economy, what will happen when we see a more robust economy?
MF: The price of crude oil is not being driven by strict demand/supply factors, it is being driven by the fact that people are afraid of what the futures holds for all these currencies. It used to be that people were worried about the immediate futures, the next three or six months, but [felt that] in the long-term everything is going to be ok. Not it is just the opposite. Now people say ‘I am sure I can get through the next three or six months but I am worried about where this country is headed in the next four or five years. Am I going to have a job? What is the price of everything going to be?’ I still don’t understand how all these inflation numbers come out at 1% when with everything I buy the inflation rate is probably 15%.
FM: Pickens noted that the United States is no longer the primary demand driver for energy. Do you agree with that? What are the implications?
MF: The implications are simple: We are in a stagnant economy; we are in a stagnant civilization. We are in a regulatory meltdown. The emerging markets and developing nations are eating our lunch and that is going to continue because that is where all the ingenuity is. You can see it in the marketplace. The demand is going to come from all these developing nations that want to raise their per-capita incomes. It is that simple. Do you know what I gave out for a holiday gift to all my clients? A six-volume book of “The Rise and Fall of Ancient Rome.” If you look at the book there are a lot of parallels to what is happening today in the United States.
FM: What do we need to do to prevent that?
MF: We need to run only balanced budgets. We need to [get a handle on] entitlements. We need to fix social security once and for all and do a means test so if your net worth is above X you lose all those benefits. We are going to have to tell people that if you want to work in government and set policy, then you can’t go into private industry and lobby Congress for five years. We need to make simple regulations so people can understand them. We need to incentivize business creation by allowing business people to make the investments instead of papering over everything. To some degree we are going to have to bite the bullet and say everybody is going to have to take a haircut, whether it be China or anybody else, because we printed too much money and can’t afford to pay it all back. As soon as we tell the patient the diagnosis as opposed to just hiding it from him, after the initial shock the market will accept it but the longer we put these things off [the worse it gets]. It is a revolving circus. Everybody has to take a cut. The sooner we bite the bullet the less pain there is going to be; the longer we wait the more pain there is going to be.
The energy market is just one place where you see the bubbles of the world boiling over.
FM: Where will crude oil and natural gas be a year from now?
MF: Crude will probably average — assuming the economy keeps stagnant and the government keeps mucking things up — anywhere between $85 and $110. Nat gas, it is more a point of where the long end of the curve is going to be than where the spot price is; the spot price [depends on weather]. You probably will see the back end of the curve, two or three or four years out, rise 30% this year.
FM: What are you attempting to do on the asset management side?
MF: It is Mark Fisher. It is me taking a very methodical, conservative approach to try and create, using a fundamental bias to adapt and change as market conditions change, and trade in a very low risk tolerance in a highly volatile environment. The idea is not to lose money. If you worry about the downside the upside will take care of itself in most cases.
FM: How much money under management do you have?
MF: Right now I have $130 million. It is all in one basic CTA/RIA program and I hope to raise that to $800 million by the end of 2011. It is futures and equities.
