Snow has shut down Heathrow Airport in London. It’s become a roach motel. No one gets in, no one gets out. Snow has also shut down “The City” too. The lower volume holiday markets already were here. This snow has made it tougher for everyone to get to work in London. Meanwhile, the weather hasn’t been outstanding in NYC or Chicago. Volumes are light.
This week is a holiday shortened week. I would expect the trends of the year to continue. Bull markets in commodities and in stocks should continue. Keep in your back pocket that on the last trading day of the year, the funds will buy to paint the tape. Then on the first trading day of January, they buy again as fresh cash gets put to work. There is data this week, but action should be muted.
Weather is not given enough credit for its influence on markets. Weather affects business tremendously. It can throw a huge wrench in operations. In 2005, a study showed that stock market returns were correlated to weather. Better weather, better returns. Other studies linked here and here have looked at the same problem a little differently. The best summation is that returns are not determined by the weather, but that volume is.
Maybe the best study I have read trying to correlate weather and stock market returns is on sun spots. Low sunspot activity has been correlated to lower returns. In 1929, low sunspot activity equaled a stock market crash. In 2008, it repeated. Many blogs and even some investment banks began looking at sunspot activity for clues to the market. That’s really grasping at straws!
CME Group introduced weather futures in 2000. But they have failed to get a lot of traction. Businesses might be able to increase returns to their capital if they used them. A warm winter will affect the returns of a company that specializes in selling sweaters. It’s not clear why they haven’t gained traction. Companies may not know about them, or CME’s approach to trying to get volume in them may be flawed.
Infamously, the Chicago Climate Exchange(CCX) was acquired by the Intercontinental Exchange (ICE) for 600 million this past year. No one on the street can figure out why the transaction happened at that price. CCX did virtually no volume, and the global warming debate blew up during negotiations. The European Climate Exchange (ECX) had increasing volume, but it was purely due to government manipulation of the marketplace. The value add of trading carbon climate permits is limited. As Greg Mankiw, and other economists have posited, a Pigouvian Tax on emissions is much more efficient. The purchase of the CCX may be the most inefficient use of company capital we have seen in a long time.
Weather has a huge effect on volume. It has a massive effect on operations, mainly in snarling them. Maybe the best way to position yourself this week is listen to the old gray haired traders adage, “Never sell a quiet market.”....MORE
Tuesday, December 21, 2010
"Weather Related Markets"
From the Points and Figures blog: