Tuesday, March 24, 2009

The Emotions of the Market: Hope

In the 1930's, the economist John Maynard Keynes used the term "animal spirits" to describe human emotion in the marketplace. In the last 10 years, the Nobel Prize has been awarded to economists from the University of Chicago School of Business that have pioneered in the field of Behavioral Finance.

Emotion is not to be discounted in the market. And it plays a huge role in the decision to enter a fixed price contract. There are three main emotions that effect the buying decision, and they work in coordination with each other to help create a poor decision. These are the emotions of Greed, Hope, and Fear. They are not your friends, and when you detect them in your mind they should be dispatched with extreme prejudice. I would venture to guess that HOPE is an emotion that is at play in your mind today.

Consider the market context that we have recently experienced.
  • In July, prices were sitting at all time highs ($147/bbl on NYMEX crude)
  • But by November they had fallen to $37 - $40/bbl MORE than even the most bearish observer thought they could
  • The brutality of the fall caused folks all over the industry to examine their existing positions closely, they needed to make sure their positions were flat. Additionally, there were margin calls to work through. This period of time was very busy, as folks were attending to pressing business that could not be put off.
  • However, it was also (in retrospect) the best time to lock in some product. The wholesale price that was available in the market at this time was one that could be used as a base for a 2009-2010 fixed price program. A margin could be added, and the retail customer would have been interested. A large segment of marketers passed on this opportunity, though...it just wasn't a good time for them to make that leap.
  • Propane prices are now 30 cents above the price that was available in November.
  • Over the last month or so, folks have been thinking about layering into a piece of prebuy. Seasonally, it makes sense to do so as the market often trades on its annual lows in the first quarter.
  • Last week, an unexpected fundamental (news of the Treasury's plan to buy $1.0 trillion is debt) caused historic weakness in the dollar, and therefore spiked commodity prices across the board (energy prices included).
  • Those folks that were still waiting to lock in a piece of fixed price product find themselves in a state of shell shock, confused by the market's fluctuations and not knowing what to do.
  • Here is where the HOPE sets in:
It becomes the natural human reaction to wait for a while before pulling the trigger on a contract. Marketers in this situation are HOPING that the price moves lower and that they are able to get the price they could have gotten previously. They may wind up HOPING in that way for several months, as the price continues to move higher.

Whether you should buy now or wait is really a question that is dependent upon your unique business, customer base, and target margin structure. No one should ever give a blanket purchase recommendation to customers, although there are consultants that do so.

However, what an independent third party can do is offer perspective and encourage a balance between emotional and rational. Is there too much HOPE in your program? If so, consider buying the piece you might have missed out on last week.

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