Spoiler alert: fundamentals no longer seem to matter when it comes to trading cattle futures.
Ernest risk managers and analytical masters of spreadsheets can burn vats of midnight oil studying monthly on feed reports, foreign trade data, supply and demand tables, packing house capacity, macroeconomic development, scatter charts, and econometric models. But if these diligent number-crunchers truly believe that any of this eyestrain will help them anticipate, predict, or even explain CME market behavior, I'd like to sell them a lovely vacation condo just outside of Damascus.
Though the marriage between cash activity and board gyrations has been on the rocks to years, the severe disconnect now appears to be surging toward the point of no return. And guess what? As more and more commercial traders are forced to desert cattle futures as feckless and even dangerous in terms of risk management, the greater CME randomness and volatility becomes.
I suppose the CME Group is within its rights to turn cattle futures into a complete, no-holds-barred playground for speculators, a riverboat orgy where professional gamblers, Saudi princes, and bored trust babies can indulge their risk addictions to the max. Yet when the party-whores in the middle of the block start to disrupt the entire neighborhood, it's probably time to call the police.
Sometimes for my own amusement, I imagine the weekly "Cow Pie Award", a traveling trophy won by an individual, corporation, or nation for especially dishonorable behavior. When the week began, I thought the pharmaceutical company Mylan would win the unflattering competition in a walk.
This is the greedy company that recent jacked the cost of EpiPen, the medical injection device that can be easily jabbed into a person's thigh whenever they suffer from life-threatening reactions to cashews and peanuts, shellfish, bee stings and other allergens.
At one time, the retail price in a pharmacy for a two-pen set was less than $100. But after Mylan acquired the rights to the decades-old injectable drug in 2007, the price began to rise exponentially. Last May, the retail price soared once again, this time to $608 for a two-pen set -- a six-fold increase in less than a decade.
Why did Mylan do it? Pretty much because it could, holding a unique patent on the injection device ensured by the American legal system. To some extent, I admire companies that play hard by the rules. But here's the bit that pushes Mylan over the edge of propriety and respectability. Several years ago, Mylan engaged in tax inversion, shifting its legal domicile from the U.S. to Holland in order to pay lower taxes.
Gouging desperate sick people? Hiding behind U.S. patent law? Dodging U.S. taxes? Sounds like a veritable "Cow Pie" Olympian.
And yet this week's irrational implosion of cattle futures makes me wonder if the CME Group shouldn't also be nominated. While exchange officials continue to give lip-service to the cattle industry, emphasizing the CME's intent to sponsor and maintain a meaningful platform of risk management, I've heard little to assure me that they really understanding the problem, let alone have practical ideas to fix it.
No, the CME Group's immediate irresponsibility in this regard is probably not in the same league with Mylan. Nevertheless, it needs to wake up to how tragically irrelevant cattle futures have become to production agriculture.
For more of John's commentary, visit http://feelofthemarket.com/…
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