ALOHA !!

Right you are Bill ... it is the banks trying to bail out of their short positions.

Copper Trade Losses Spark Fear of Defaults

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, May 18, 2006

The risk of defaults was hanging over the London Metal Exchange last night after a clutch of clients failed to meet margin calls on losing copper trades, leaving brokers struggling frantically to match their books.

The liquidity crunch follows another day of wild gyrations at the exchange, where copper, aluminium, zinc, and lead all tumbled on bad US inflation data after failing to conquer new highs.

Copper fell 3.3 percent to $8,080 a tonne in late trading. "The hedge books of the banks are seriously underwater on copper, but apart from that there are now brokers in trouble because clients can't meet the margin payments," said a market source.

LME brokers are liable for the margin calls of their clients, who are given 24 hours to stump up the cash. "Some of the wire cable manufacturers and industrial users can't meet payments because of cash flow problems, so the brokers are left holding the bag," he said.

He added that the banks were bleeding heavily because of a mismatch between their short-term and long-term futures contracts.

The market reached fever point late last week with all-time highs across the spectrum of base metals, led by an explosive spike in copper to almost $8,900 a tonne -- up 170 percent in a year.

Speculation by hedge funds prompted LCH.Clearnet to raise margin calls 71 percent to $25,000 per 25-tonne lot earlier this week, after doubling them just eight days earlier.

LCH.Clearnet said that none of its 39 LME members had missed payments, but it is not responsible for monitoring defaults by broker clients. Moreover, many smaller players are outside the Clearnet system.

The LME said all its members were meeting obligations and are in "good standing." "There is no chance of a member defaulting because systemic risk is managed through very sophisticated mechanisms," it said.

-END-

On that score, from Rob Kirby:

Reading Jim Sinclair commentary from last night about the Bank of England trying to save the bacon of the LME and the trapped copper shorts. Seems that COMEX and their latest "Rule Change" does much to confirm just that:

NYMEX to Change Position Limits for Copper Futures Contract

New York, N.Y., May 17, 2006 — The New York Mercantile Exchange, Inc., today announced it will decrease the spot month position limit for its copper futures contract to 250 contracts from 400 contracts, effective at the close of business on Thursday.

Seems that margin increases alone are no longer doing the trick. First I've noticed in any of the metals in position limits. Makes me wonder what's up next ... the old Hunt Rule ... Liquidating Trades Only? Sounds like SERIOUS trouble.

What's even more telling, the position limit changes are only in the "spot" contract. No such changes to the "back months" where the Goldmans of the world ply their trade. Even the latest margin changes were confined to the "front months" so as to exempt the "Goldman pet" from expending more precious capital. Goldman Sachs activity on TOCOM [doing virtually all of their shorting in the Feb./Apr. 07].

In the past, I have found that times like these can be first class opportunities. When the selling subsides, it is at levels that can make a year (or at least a quarter) :-)

But, you have to be paying attention, because if you buy too early, before the selling is over, you will have losses to deal with. I have found that the downtrend line is my best friend (buy when it is broken to the upside and price oscillators are moving higher from oversold conditions), tight stops run a close second.

Good luck to all!

Regarding last post, see kaimu's post regarding reasons for excess selling pressure that lead to buying opportunities.