“It’s the Speculators”

The price of oil is not being controlled by “the speculators” as publicized by the media shills. Below is a chart that lists the number of Google “hits” returned by the search phrase “It’s the Speculators” and the words, “Oil” and ‘year’ from 1998 to 2008. As you can see, even though we are not even one-half of the way through 2008, the number of such Google hits more than doubled that of 2007. This indicates that the media is bombarding the public with talk of the rise of oil being significantly attributable to speculation. While this may be partially true with regard to the short term, it clouds the more important fundamental picture and allows the short-attention-span of the public to be distracted by largely unimportant and incorrect aspects of the dual crises in oil and the US dollar.

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However, the potential effects of speculation are not entirely an empty thought as applied to other financial markets. These are not discussed in the media, and most of the public is entirely unaware of the impacts that speculation having on the markets. Consider the US stock market, where most Americans have their savings “invested.” Here one can easily see the potential for speculation to manipulate the prices of equities. The long term chart below depicts the price action and trading volumes in the Dow Jones Industrial average dating from the late 1920’s to the present. It is important to note that in recent years, trading volumes have increased in a parabolic manner even though the change in dollar value of the Dow has remained relatively unchanged. This reflects the trading volumes brought upon the market by a relatively new entity in the financial markets – hedge funds. Or to put this in more simple terms, “It’s the speculators.”

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How might this impact upon one’s investments in these blue chip companies? Prices are determined “at the margin” where the securities are bought and sold. Companies that are held by long term investors will, in aggregate, reflect the attitudes of long term investors in their market prices. Conversely, companies held by short term traders will reflect their attitudes in the market. Are these companies held by long term investors, or short term traders? This can be established by evaluating how long an average floating share of stock is held by investors/traders. A simple calculation of the number of floating shares divided by the daily trading volume yields the average hold time for a share of a company’s stock. How does the blue chip Dow Industrial Average hold up? As you can see from the table below, not a single one of the Dow’s 30 components are held for an average of a single year. There are three Dow components – Alcoa, Citigroup, and General Motors - where the average share is not even held for a single quarter, while most of the components are held for less than 2 quarters.

The average holding time of blue chip Nasdaq stocks are more loosely held than Dow stocks where shares of Apple and Yahoo change hands every 25 and 29 days, respectively. This is reflected in the chart below, and it shows the speculative nature of today’s markets.

Unlike oil, which must be delivered and taken position at a specific time, there are no commitments in the stock market beyond that of finding the “greater fool.” Therefore unlike oil, it is important for investors to realize exactly who is determining prices in today’s stock market?

It’s the Speculators!