My overarching view on commodities trading is that the financial intermediaries should go play in the gold and silver markets and leave the consumables (food, energy) to the hedgers and speculators.
I'd been meaning to post this Wall Street Journal article since last week:
Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks' profits.Here are some of our posts on JPM's Ms. Masters:
A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter, according to Coalition, a firm that analyzes the performance of investment banks. After a disappointing 2010, commodities was the fastest-growing segment in banks' fixed-income businesses in the first three months of this year, even though it still accounts for just 7% of banks' total fixed-income revenues, Coalition said.
Commodities trading is a bright spot for institutions that face new regulatory clampdowns on practices that previously fattened bank profit margins, such as trading with their own capital and slapping customers with hefty "overdraft" fees. Oil is up about 10% so far this year, settling at $100.29 a barrel Wednesday, and commodities such as gold and copper are close to all-time highs.
J.P. Morgan has emerged as one of the biggest beneficiaries of the commodities boom sweeping Wall Street. The bank's commodities unit—which employs about 1,800 people, more than any of its rivals—made more money during the first quarter than through all of last year, according to people familiar with the matter. So far this year, the unit has earned roughly $750 million and is on course to beat its 2011 internal target of $1.2 billion, these people added. The J.P. Morgan unit earned just $514 million for all of 2010, falling far short of its goals.
The performance at J.P. Morgan is largely the result of a recent acquisition and the run-up in prices and volatility levels. But the early results are being celebrated inside the halls of J.P. Morgan after the bank struggled through defections, miscues, bad press and a coal trade that cost the firm $130 million in 2010. The New York bank is making a bold and costly bet that a recent string of commodities-trading acquisitions will transform the operation into an industry leader and unseat rivals Goldman Sachs and Morgan Stanley. A bank spokeswoman declined to comment on any commodity-trading dollar figures, which it doesn't make public.
Commercial banks such as J.P. Morgan and Bank of America may have an edge over rivals like Goldman Sachs and Morgan Stanley, as new financial rules force Wall Street to cut back on "proprietary trading" with the bank's own capital and turn the focus of their business toward helping clients. Commodities desks at commercial banks can tap a larger corporate client base, offering hedging services to producers and consumers of raw materials, facilitating transactions for hedge funds and selling commodity-linked investment products to pensions and sovereign-wealth funds.
The revenue jump takes some heat off J.P. Morgan's embattled head of commodities, Blythe Masters, who went before the board last fall to explain why her group had fallen short of its goals and assured employees she still had the support of her superiors; her boss, Jes Staley, who runs the investment bank, had indicated he would re-evaluate the business this year if revenue dipped below $1 billion, according to a person familiar with the matter.
J.P. Morgan isn't the only financial-services firm getting a commodities lift this year....MORE
"CFTC Probes JP Morgan's Silver Trading" (JPM; SLV; HBC)
Brilliant: Maxwell's SILVER Hammer Came Down on Blythe Masters' Head (SLV; JPM)
"Woman Who Invented Credit Default Swaps is One of the Key Architects of Carbon Derivatives, Which Would Be at the Very CENTER of Cap and Trade"