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Archive for the ‘Trading’ Category

MRCI December / May Cotton Spread Study

February 22 2011 | 5:15 am PST

Yesterday we looked at the spread and how it cut volatility in an otherwise very strong directional market. The spread itself was flat when all the contracts were off about 7 points.

Today, we’ll look at how to trade that spread courtesy of my friends at Moore Research Center, Inc (MRCI).

Long Dec Cotton (CTZ1)
Short May Cotton (CTK1)

Jerry Toepke at MRCI has done some backtesting and showed that over the last 15 years, had you bought December and sold May, you would have made money in 14 of those years. This is a two month spread trade from February 22 and you take it off on April 22. It is saying that the chart I put up yesterday is at it’s narrowest seasonally, and it will widen.

Here’s a look at the chart:

dec.may .cotton 300x225 MRCI December / May Cotton Spread Study

(click for larger and clearer chart)

A few other salient points to make:

The worst drawdown per single spread was $2,090 back in 2005, which was the only losing year. This spread model has the unique characteristic of being accurate and having positive mathematical expectation. The average profit from this spread over the last 15 years has been $971 per spread.

Looking at the entry prices, it doesn’t seem to matter whether cotton was a carry-charge market or one that was in backwardation in order for this spread to be profitable.

You can see in the graph that the solid black line is the current market. This is the same chart I put up yesterday.

Keep in mind that you are not trading the direction of cotton, but the direction of the differences between the two contract months. This is a relative value trade.

Can you count how many way you can win if you need the spread to increase (widen) in order to be profitable?

Chart and data used with permission courtesy of Moore Research Center, Inc. (MRCI).

Trade futures and spreads at your own risk. You can lose money trading spreads. Although it’s never happened to me, both legs of the spread can go against you.

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The Cure for High Commodity Prices: Hedging

February 15 2011 | 5:00 am PST

march.corn  300x168 The Cure for High Commodity Prices: Hedging

March Corn (click for larger picture)

Didn’t the US Government pay farmers to NOT grow corn? That was quite a gamble, especially since they don’t allow for sugar ethanol. Now the food companies and the ethanol producers are jamming up the prices on American consumers.

Had they hedged, they could have passed the savings on to consumers, just like Southwest Airlines did from their effective fuel hedges during peak oil. By not hedging, food companies are in effect gambling that prices for their raw materials will stay within a range. But when scarcity hits the tape, they can blame speculators (whatever that means anymore) and push the costs off on consumers in order to protect their profits. They can do this by increasing prices, or by decreasing the size of the containers they sell the food in and keep the prices the same. You get less food for the same price, hence an increase in food prices.

What the food companies do is gamble that their competitors won’t hedge either, an extremely reckless way to run a business. If the prices go up, none will look so bad as all the firms will have to raise prices. In the meantime, the large space under the curve when things are “normal,” food companies can jack their earnings higher by saving the insurance money they would have used to hedge.

When your compensation is in stock, you’ll whore out your balance sheet and income statement to get the stock price as high as possible. I believe that they are gambling their company for the sake of their Executive Compensation plan. Myopia, USA.

An article in Agrimoney.com stated that “corn and cotton are to win this spring’s battle for acres on US farms, enjoying hefty increases in sowings, US officials said in a report forecasting crop prices would stay “historically high” for at least a decade.”

march.cotton 300x168 The Cure for High Commodity Prices: Hedging

March Cotton (click for larger picture)

Hmm, more forecasts…I love it. High prices for the next decade. I guess that means for all the new plantings, there will still be insufficient crop surplus to drop the prices of at least corn and cotton. The unnamed US officials must have a line on the US dollar then…that must be the cause for high commodity prices going forward the next ten years. These people are f’n talented man…people of vision. Sir Richard Branson should be looking to recruit his successor from this lot for their vision.

Farmers rush to plant crops of the highest price commodities so that they can potentially earn more $$$ from their farmland. But it’s not a science per se, they have to account for the fact that every crop has its own unique costs.

If the farmers over-correct and create a bumper-crop…a giant surplus…the prices of the commodity drop very fast. Therefore, it is said, that high prices are the cure for high prices. Farmers can use futures or options on futures to lock in the higher sell prices long before the crop is ready for harvest. Food companies can use the same tools to lock in lower purchasing costs.

American CEOs who don’t hedge are the real gamblers in the commodity markets. Not having an effective hedge on is still a position in the market.

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Barron’s Top 100 Self Esteem Boosting List of Stocks

February 14 2011 | 5:00 am PST

Barron’s ran their annual list of stocks that the manager’s they surveyed ranked by levels of respect.

Who would say they didn’t have respect for a stock they owned in their portfolio? “Yeah, AAPL is our largest position, but we don’t have any respect for them anymore. For some reason, we just can’t seem to say goodbye.” And how many readers wasted their time this weekend making deposits into their self-esteem accounts by looking up all their stocks on the list to see which ones made it? How banal. Barron’s has become too flaccid.

It would be more entertaining if Barron’s mixed it up a little (which is the polite way to say “grew some balls”) went back a decade and showed where Enron ranked, and then named all the people and firms by name who voted with “utmost respect.” This article has no investment value and it’s not even entertaining. What a person thinks about a publicly traded firm means nothing without a solid risk management plan attached.

These aren’t women. Fall in love with a stock or a brand and you’ll vaporize more of your cash faster than any ponzi schemer could. And if you are madly in love with AAPL, for example, you should own put options until Steve Jobs is back in the the saddle. Otherwise, you are gambling.

But diagnosing AAPL is easy, let’s look at Cisco’s chart over 2010:

cisco.csco .2010 300x120 Barrons Top 100 Self Esteem Boosting List of Stocks

And here it is over the last decade:

cisco.csco .historical 300x119 Barrons Top 100 Self Esteem Boosting List of Stocks

If you’re not trading this stock, what’s the point? Who cares about respect. It’s about capital gains. Unless you’ve traded in and out of CSCO for the last decade, it’s been dead money. CSCO has been on lists for “great CEO”, “Best Company to work for”, ” and it’s still called the “backbone of the internet.” Use their products, but don’t own the stock unless you’re going to trade it. The opportunity cost for having owned CSCO has been huge.

Ed, Rich, and Vito of Barron’s would do a lot more service for the community if showed the managers’ fallibility over the years and how you can’t trust human judgment and fundamental theory. Otherwise, they perpetuate the falsehood about fundamental value. Forget the Balance Sheet people, the market puts the value on the firm.

Here is Barron’s Most Respected Companies.

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Victor Sperandeo on the Economy (Video)

February 11 2011 | 5:30 am PST

Dwight Anderson The Long Look At Commodities

Dwight Anderson, managing partner of Ospraie Management LLC, always keeps his eyes on commodities. Today he is focused on three major economic elements that will drive commodity prices: economic stimulus, interest rates and U.S. dollar weakness. He’s also keeping a close watch on the country that continues to drive prices across the commodity spectrum: China.

For all the talk about the effects of the Federal Reserve Bank’s stimulus efforts – inflation and fiscal debt woes – the value of storable commodities is getting remarkably little attention.

Dwight Anderson, managing director and founder of Ospraie Management, says the flood of stimulus money into the U.S. economy means investors need to consider holding storable commodities as a way to retain purchasing power.

A combination of a supportive monetary backdrop and demand from emerging markets has created an environment for commodities that encourages investment in storable resources. These include platinum and palladium – known as the platinum group metals – and cotton on the agricultural side.

Read the rest of The Long Look at Commodities at CME Group.

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