Imagination stretches commodity trading

The Insider

Your Money

December 12, 2004|By BILL BARNHART

TWO RECENT events in Chicago expand the way you think about investing:

The Chicago Climate Exchange, which a year ago began trading industrial pollution allowances issued by the U.S. Environmental Protection Agency, launched futures trading Friday in the EPA's sulfur dioxide-emission allowances.

The Chicago Mercantile Exchange, a 106-year-old institution that began life as a butter and egg exchange, said it might trade futures contracts on house prices.

Investors wisely treat the futures markets with skepticism, despite their simple purpose: Futures are contracts granting the holder the obligation to buy or sell something at a specified price within a specified period.

For example, farmers sell their fall wheat crop in the spring, thereby avoiding the risk of lower prices, by selling futures contracts. The buyer, such as a food processor, buys the contract to lock in the harvest price. The two sides exchange values.

Today's array of mutual funds and home mortgages would not exist if financial institutions were unable to transfer the risks of stocks and interest rates through futures contracts.

Innovations in futures markets will indicate tomorrow's investment values.

Two of the best thinkers about identifying and trading values are Richard Sandor, a pioneer of interest rate futures and chief executive of the Chicago Climate Exchange, and Yale University professor Robert Shiller, perhaps best known for his best-selling book Irrational Exuberance.

Shiller, whose firm Macro Securities Research is behind the housing futures proposal, notes that consistently less than 10 percent of national income is generated by corporate profits - the sole basis of stock prices.

Sandor says we may be near the limit of creating value through stocks and bonds.

Many Americans wisely have discovered another source of value, Shiller noted. "I think everybody should be invested in real estate, because it's a diversifying move."

Increasingly, global stock markets are rising and falling in sync, he said. "So, in order to diversify, it's getting important to have a real estate position."

His firm has applied to the Securities and Exchange Commission to offer investment certificates based on an index of house prices in Los Angeles.

The decision by the Chicago Mercantile Exchange to become a publicly traded company is pushing innovation in trading values of all sorts, Sandor said.

"There will be bull and bear markets [in stocks and bonds], and that will drive volume," he said, "but innovation and new products are going to drive it further."

Here's one: Sandor sees the day when the options on an automobile will include leather, adjustable seats and a reduction in greenhouse gases.

Trading in EPA pollution allowances assigned to industrial polluters creates value. Demand for the allowances gives industry an incentive to reduce pollution, which, in turn, enables them to sell their allowances.

Your return on investment is cleaner air, he said.

"One could envision buying gas at a penny or two higher, knowing that penny or two would go to retire carbon permits, to offset the gasoline emissions," Sandor said.

Such grand visions "put financial markets at the center of our lives," Shiller said.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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