According to this Reuters report, “When markets are teetering on the brink of financial Armageddon, it is hard to make the case for holding practically anything other than cash, and not surprisingly, we are seeing a broad retreat in most commodities,” said Edward Meier a New York-based analyst for MF Global, the world’s largest broker in commodity futures. That statement makes an interesting point, the retreat from commodities may have less to do with supply and demand (which we have reported on more than once or twice) and more to do with speculators and others looking for an opportunity to outperform stocks and other asset classes. Conversely, is the fall in commodities due to those same speculators betting that some of the major Wall Street firms were about to crash?
The Big 3 that are in trouble, Lehman Brothers, Merrill Lynch and American International Group (AIG) are all clearing members on the major commodity exchanges. According to Investor Words.com, a clearing member is “a member of an exchange clearinghouse, responsible for executing trades and other financial commitments of customers.” They are a market intermediary responsible for the pay in/pay out of securities to the exchange/market etc. But perhaps the biggest role of each of these firms is “getting clients to invest in the rally that made commodities the best performing asset class of the past few years,” according to the Reuters article. Of course Lehman Brothers didn’t quite describe it that way as we previously reported. Lehman however, still remains a clearing member of the New York Mercantile Exchange.
But we wouldn’t be surprised if margin and collateral requirements go up as well. In all likelihood the other foot has yet to drop.