Martin Kronicle

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The Barrel reported that OPEC has reduced its output by 70,000 from October to November. Not good news for the US consumers who are already hurting.

“According to the Platts’ survey, OPEC cut its output just as demand is showing significant signs of growth around the world, pumping out 29.1 million b/d in November, That’s down 70,000 b/d from a month earlier, during the quarter where demand is the heaviest and the inventory draw the most significant.”

The contract spiked the day after the news was announced and reversed down. With the ever-so-slightly tightening supply (fundamentals) married with an uptrend (technicals), you have a set up for higher prices. Plus, you can always count on a spike in crude oil or heating oil when the first big wave of freezing temperatures hits the northeast.

New traders have the confluence of trying to trade a diverse set of commodity contracts from a low capital base due to their newness. This poses a thorny problem because some of the contracts tie up a lot of cash because of the initial margin requirements. How can you take a position in one, but forsake the other because you don’t have enough margin available?

The CME Group is launching 3 more E-Micro Currency Pairs for traders that will be approximately 1/10th the size of the big daddies. The new pairs are: CAD/USD, CHF/USD, and the JPY/USD. There are several existing E-Micro Forex futures contracts: EUR/USD, USD/JPY, GBP/USD, USD/CAD, AUD/USD, and USD/CHF. If you haven’t looked at these yet, and you’re struggling with the volatility in your portfolio, it’s time you did.

Download CME E-Micro Currency Fact Sheet

Your goal as a trader or as an emerging CTA (Commodity Trading Advisor) is to manage risk. The larger currency contracts can tie up a lot of cash in margin. Although margin management is not the same as risk management, you must be aware of what is called your “margin to equity” ratio (M/E). Professional CTAs have M/E ratios that can be as low as 5% and as high as 12%. The latter would be considered aggressive. Your management of risk says a lot about you.

That means, for each $100,000 in equity you have, only $5,000 to $12,000 would be allocated to margin. That doesn’t seem like a lot — and it’s not. That’s where these E-Micro babies come into play. You can further expand the types of contracts you trade, and not go too far afoul of your margin management. Your goal for your first 3 years is to trade well and keep your losses small. One big blowup month, and you’re going to find it very hard to raise capital from the allocators.

Allocators (hedge funds and Commodity Pool Operators) will be asking about your M/E ratio during the interview process. High M/E % will raise eyebrows.

When John Lennon was killed 30 years ago today, I was a teenager living in NY. Two things flooded my mind besides locking myself in the bathroom for 3 days and causing duress in my family. One was the rhetorical question, “Why would anyone want to kill John Lennon?”

Most of us learned about John’s murder while watching Monday Night Football of all things:

The second thing going through my mind were the lyrics for a song he wrote with Paul for Sgt. Pepper’s called A Day In The Life. This is probably one of the best collaborative efforts whereby both men actually contributed lyrics to a song. Beatle fans know that more times than not, Lennon and McCartney shared “Written By” credits although a song was written by one or the other.

Below, you’ll notice John’s handwriting of the lyrics for A Day in the Life. Paul’s middle section was added later in the studio.

Central Park Vigil on December 14, 1980

To this day, I still cannot intellectually understand the actions of MDC, but each time it comes up, I make a point to sign the petition to keep him in jail and deny his parole.

Here is a two-hour documentary called LENNONYC for American Masters on PBS.

Watch the full episode. See more American Masters.

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The March Cocoa seems to not like any unrest in the Ivory Coast, The Guardian reported today. My guess is that Anthony Ward, the guy to took delivery of the giant cocoa position likes it a lot.

You can say what you want about the US, the President, Tim, and Ben, but one thing is for sure: political stability counts for something in the commodities markets.

The March contract surged 130 points on the day, or $1,300 per contract on fears that unrest will lead to a disruption in supply. If supply is tightened, higher prices can follow. West Africa provides about 80% of the world’s cocoa, and the Ivory Coast providing 50% of the world’s supply. That’s a giant number.

There are no daily limits in Cocoa (there used to be, but not anymore). I have traded tons and tons of cocoa over my career. This is not a contract that you want to get drawn into with fully understanding the risks involved. I have lived through the “Unrest in West Africa” headlines before, and most of the time, some French troops come in and things settle down, as do the cocoa prices.

Cocoa can be illiquid at times, and then flush with trading volume. When I trade cocoa, I expect massive amounts of slippage and skid on my fills, and I have traders who each have over 20 years of execution skills behind them.

BE CAREFUL. If you feel the bull move is upon us, with or without the news from West Africa, you might consider vertical call option spreads or long calls to minimize your losses if the contract does an about-face.

Ron Paul’s book End the Fed is required reading for traders.