The Financials Pit Review For the week of July 26th, 2010

By PitGuru Frank LaMantia

Reports that the middle class is declining should be an eye opener to Wall St. Those who put money into the system from buying cars, houses, or vacations are struggling. If you break it down further this means less taxes for the government as many are still losing their jobs. 61% of Americans are living pay check to pay check and 31% have no retirement accounts. The retirement age, although not raised yet, is a topic that has people concerned. People are looking to work longer because of the 2008 crash. Some lost their entire retirement savings and now have to work another 10-15 years to make ends meet. People who are desperate will work for wages much lower than those with higher standards. Those who have higher education looking for jobs have resorted to working in the service industry. The only problem is people may work for lower wages compared to those with an education. To sum this up, consumers want to pay their rent and put food on the table. Let’s call this weathering the storm and not necessarily trying to find a career. (1)

The Euro has traded at 1.2937 and the U.S. Dollar Index has traded at 82.31. (2) Should this concern Americans? The reversal of the dollar VS the Euro should be something to watch. Follow this trend closely as this could be showing money being pumped into the system in Europe. Also, this may indirectly show the U.S. may be having issues with high debt.

Earnings seem to have less of an effect on the market than it has in the past. Eyes are focused more on the economic data that is coming in and less on how companies are doing. There are companies that have low debt and high cash reserves. These could be diamonds in the rough as some of these companies remain hidden due to the overwhelming stagnation of this market.

1 http://finance.yahoo.com/tech-ticker/the-u.s.-middle-class-is-being-wiped-out-here%27s-the-stats-to-prove-it-520657.html?tickers=^DJI,^GSPC,SPY,MCD,WMT,XRT,DIA

2 http://www.cnbc.com/id/15839178/site/14081545/

***chart courtesy Gecko Software’s Track n’ Trade Pro

Past performance is not necessarily indicative of future results.

Crude Oil Futures

Crude Oil was first discovered in the US over 150 years ago in 1859. At the start of the 20^th century it supplied only 4% of the world’s energy. Today that number has significantly increased to 40%, with the downright domination of the transportation market at 96%.

Crude futures began trading on the NYMEX in 1983 and are now one of the most heavily traded commodities in the world. Futures, by definition mean that you’re trading the price of oil months into the future at a later date. Traders speculate that the price in the future will be higher or lower. Crude futures trade 30 consecutive months plus long-dated futures initially listed 36, 48, 60, 72, and 84 months prior to delivery. Crude Futures trade in units of 1,000 U.S. barrels (42,000 gallons). Options: One NYMEX Division light, sweet crude oil futures contract. Trading terminates at the close of business on the third business day prior to the 25th calendar day of the month preceeding the delivery month. If the 25th calendar day of the month is a non-business day, trading shall cease on the third business day prior to the last business day preceeding the 25th calendar day. This is why it is called futures. Using March, we would trade the spot month April contract until the 3^rd business day prior to the 25^th of March. When the April contract would expire and then the next spot month would be May, and so on. If you have a position on at the end of expiration in that current contract then you have to either make or take delivery. This is the process where you could accept delivery if you are long or send delivery to the buyer if you are short. This rarely happens as 90% of oil futures trades are closed out before delivery.

The Crude futures pit was developed mainly for the producers of the commodity to hedge themselves against their own inventory. Throw in a bunch of speculators to liquefy the market and you have a trading pit with brokers shouting out buy and sell signals. Over the past two years this market has become solely electronic. They now have computer programs where at the click of a button you can execute a trade right from your own home.

Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.

Futures Glosarry

Arbitrage: A strategy which involves the simultaneous purchase and sale of identical or equivalent futures contracts across more than one market to benefit from an often temporary discrepancy in their price relationship.

Ask: The expression of a price at which to sell a contract

At-the-Market: An order to buy or sell a contract at the best available price upon reaching the trading venue (trading floor or electronic platform)

Back Months: Delivery months for futures contracts other than the front or spot month.

Backwardation: The opposite of contango; a futures market with successively lower prices in further out contract months.

Basis: The difference between the cash price of a commodity and the nearest futures month price for the same or similar commodity.

Basis Point: A measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.

Bear: An expression for a person who expects prices to decline.

Bear Market: An expression for a market in decline over a period of time.

Bear Spread: A trade design with a simultaneous purchase and sale of related - but not identical contracts – with the intent to benefit from a decline in prices.

Bid: An offer to buy a specific quantity of a commodity at a stated price.
Bid-Ask Spread: The price difference between the bid and ask quotes.

Break: Word to describe a rapid and sharp price decline.
Bull: A term to describe a person who expects prices to rise.
Bull Market: A term to describe a market in which prices are rising over a period of time.
Bull Spread: A trade design with a simultaneous purchase and sale of related - but not identical contracts – with the intent to benefit from a rise in prices.
Buy (or Sell) On Close: The designation to execute the order at the end of the trading session within the closing price range.

more futures glossary at BondFuturesTrading.com