Martin Kronicle

Thanks for all the feedback on the Journaling. The most important thing you can do for yourself is learn about yourself.

You can get a free download for RedNotebook journaling software if you’d prefer to journal in your computer instead of handwriting. I prefer the latter, so I don’t use it and cannot comment on it. Plus, I do all my writing on a Mac and this is for PC.

The software is free too, not just the download.

There seems to be plenty of evidence in the news this week how supply and demand can affect commodity prices.

Oil Trades Near a One-Week High After U.S. Stockpiles Decline

Dec. 16 (Bloomberg) — Crude oil traded near a one-week high after a government report showed U.S. stockpiles declined the most since 2002 and refiners boosted fuel output in the world’s biggest crude consumer.

China Corn Imports May Rise to Record, U.S. Group Says

Dec. 16 (Bloomberg) — China may boost corn imports to a record next year as the U.S., the world’s biggest grain exporter, potentially faces increased competition from rival supplier Argentina, the U.S. Grains Council said.

Corn purchases may grow fivefold from 1.5 million metric tons this year “to upward of” 7.4 million tons in the 2011 calendar year, Thomas Dorr, president of the industry group, said in an interview in Beijing. The group in July forecast imports of 5.8 million tons.

India to Review Sugar-Export Plans as Output Rebounds

Dec. 16 (Bloomberg) — India, the world’s second-biggest sugar producer, plans to review its export policy in January amid projections that output will top domestic demand for the first time in three years. (MartinKronicle: it will take India 9 more months to figure out who to bribe and pay off before they export any sugar.)

I just got a phone call from February Gold. It’s the first time in my 23 years of trading that I’ve gotten a cold call from a commodity futures contract. Seems Gold has been reading my blog and he’s chosen my humble corner of the market for this exclusive interview to set the record straight on a few things that have appeared in the media recently. Ed Bradley RIP and Charlie Rose eat your hearts out.

The first thing Gold said to me was that “I don’t give a f*** about Ireland’s economy. All the Guinness sold in Spring Lake, NJ adds up to more GDP than all of Ireland. Next.”

– “Helicopter Ben is one of my favorite business partners. He is clueless, but leaving him at the helm of the Fed is like Christmas at Fort Knox. He’s totally “job security” as far as I’m concerned. I haven’t decided whether I’m going to $3,000 from these levels or not. I might take a breather down to $1325, who knows. But don’t take my word for it, just watch my price.”

– “I think Obama must be part Irish. His face reads like County Armagh. After Obama endorses Bill Clinton for President, he should move to Northern Ireland. They’ll have something for him in Londonderry as a community organizer. He was good at it and they need him to bridge the peace between the Orangemen and the Nationalists.”

– Not surprisingly, Gold left me with another nugget on the Fed Chief: “I want to have Ben Bernanke’s children. No man in history, not even the big fella Michael Collins, has had such a profound effect on my growth and upbringing. He’s heavy metal. Love him…”

Netflix is being added to the S&P 500. This is an unbelievable story if you look back a years. One of my better equity trades was taking advantage of a short squeeze on Netflix.

I remember in the early to mid 2000s, Blockbuster Video had a deep and loyal client base that analysts thought they could not be touched. Because of this bias in the media, Netflix had over 88% short interest! That means that for every 8 shares held by the public, 7 had been borrowed by short sellers to sell short. You can see the same thing in the below graphic:

When the trend turned higher, and the short interest didn’t decrease, I knew that the shorts were going to bleed through the teeth if there were any positive earnings announcements. Those of you who traded NFLX know what happened next. The know-it-all shorts thought that they knew more than the market and didn’t follow the price.

As new highs were being made, new and existing shorts kept placing their protective buy stop orders above the market. When you’re short, higher prices hurt. In order to minimize losses, traders can place what are called buy “stop orders” at a specific price above the prevailing market. When you’re short, you buy it back to offset the position. Stop orders become market orders when the security trades at or through the stop price that you choose. You can use stop orders to minimize losses, but also to protect gains. That’s why I don’t call them “stop losses” as some incorrectly do because they are “stop gains” when used to protect profits.

The longs wanted more of a good thing and kept buying, triggering these orders. As you might imagine, with 7 out of 8 shares in the public, there was a lot of buying to do by the shorts in order to offset their positions. Valuation can fall more rapidly than price, so that’s not to be trusted either for all the Buffett fans reading. Saying Value Investing is best is like telling a Catholic to convert to Judaism because it’s better.

The earnings announcement came in and it was like 10 cents better than expected during this time. The stock was up $7 in the pre-market and I think it was up somewhere between $9 or $11 by the close. I remember selling it during the day before lunch. When the market gives you a gift, you take it. I’ll have more about this in my book.

You’ll see stories in the paper about deals that Netflix is going to have to close in order to stay competitive. I remember when everyone counted them out and Netflix ate everyone’s lunch. Be wary of analyst’s predictions. Many of the analysts have massive conflicts because they advise the big media companies, and not Netflix. They have a vested (short) interest in seeing the firm due badly or lose market cap as if that will cause doubt in the investors’ eyes. It won’t. Prices fluctuate because they fluctuate, but don’t fight the tape in a downtrend.

The moral of the story: you can trust any analyst you want, but the price always tells the truth.