Is there a lesson in commodity market price scare?
Just how serious is the damage to US commodity firms and brokerage houses from last week's unprecedented across-the-board plunge in commodity prices? Rumors have been rampant for days that as many as a dozen firms, including some large ones, are in deep financial trouble and that some of these could go under.
Virtually all firms trading on the commodity exchanges have been forced to scramble for much more cash in recent days to respond to significantly higher margin calls as prices took sharp drops. A margins is, in effect, a security deposit traders must pay to reserve their positions.
In a business where even the rumor of panic has a damaging impact, the quick response from leaders of Chicago's major commodity exchanges and brokerage house spokesmen has been one of a united front of confidence and optimism.
All admit that some individuals and firms have been hit by severe losses as futures prices plunged last week, but they deny that they know of any firm unable to meet its commitments and absorb the losses. They point to the rigorous checking that goes on constantly in the commodities market to be sure that every firm has the capital and net worth to back up its trading moves. Most such spokesmen interviewed by the Monitor cited the upward rally in futures prices that occurred Friday and was still holding as of midday Monday as a welcome sign of possible market recovery and stressed that all accounts on the exchanges are settled daily before trading begins.
"There's been no difficulty at all," insists Robert Wilmouth, president of the Chicago Board of Trade, the nation's largest commodity exchange. "There's no doubt that some people lost money, but all of the firms we've looked at are in sound financial condition. . . . The free market system works."
Says John F. Sandner, chairman of the Chicago Mercantile Exchange: "All this gloom and doom is without any basis whatsoever. We're very, very tough as far as financial requirements go, and it would be very hard for any firm to be in financial jeopardy without our knowing about it. We've never had a problem."
But some market analysts in a position to be more objective insist that the question of damage goes deeper than the technical immediate ability to pay bills owed. In many cases, banks lent the necessary rescue money. Whether individual speculators can come up with the cash required remains to be seen. If not, the brokerage house is generally liable. Some observers suggest that the extent of the damage to brokerage houses may not be known for some time.
"I think it will be about a week before we'll really know," says Charles Stahl, publisher of Green's Commondity Market Comments. "It's a serious situation."
"There's no question but that some firms were severely affected by the high margin calls," agrees Gerald Backer of Commodities Magazine. "It's conceivable that some could go under, and there may be a couple of big firms in this, too, when all is said and done."
Most vulnerable, in Mr. Becker's view, are the smaller firms that deal more heavily with what the industry calls "nickle and dime" traders and that may have had to reach deeper into capital reserves to come up with the needed cash.
"When firms get into trouble, it's when they use too much equity money -- they should never use more than 50 percent of their assets for trading," says Mr. Becker, who suggests that some firms, burned by their recent market experience, may decide to restrict their business to commercial rather than individual clients as a result. Commercial clients, he notes, have a better bill-paying record and usually enjoy a lending relationship with a bank.
Playing the commodities markets has long been considered one of the most dangerous games in town. Players can move from rags to riches as futures prices move up or down only a point or two.
"You're largely trading at a margin of 10 cents on the dollar, and it doens't take much to place an account in jeopardy," concedes Jack Boyd, commodity research director at Drexel Brunham Lambert Inc. Accordingly, he says, any decline can be "very harmful" to the individual broker.
Most experts in the field say it is still too early to know whether the upturn in the commodities market over the past two days really signals a recovery or not. But one who says he is convinced that the market was oversold and that the worst in volatile price action is over is Nelson Chang, commodity research director for Shearson Loeb Rhoades, Inc.
"Overall, the selling drive we've seen all week and even the week before has terminated," he says. "I'm convinced that the liquidation is over and that the market has turned around."