From the February 01, 2011 issue of Futures Magazine • Subscribe!

Mark Fisher: A trader returns to his roots

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 Now that everything has gone electronic the floor local has been replaced by the upstairs hyper-speed local and now every day is like the Indianapolis 500.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.

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