Martin Kronicle

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.

My friend Paul Sullivan just wrote an interesting article for the NYT called How to Avoid Being Taken In by a Ponzi Scheme. You might remember that Paul Sullivan wrote the book Clutch that I reviewed at Business Insider.

One of the ways I suggest is to ask about who are the other parties involved in the investment. Not everyone who is recommended is evil.

With Madoff, for example, his firm was the broker dealer, the investment advisor, and the custodian for client funds. There wasn’t an outside pair of eyes looking at the accounts. To make matters worse for the investors, he hired an auditor who he paid handsomely (a dimwit) so he wouldn’t ask questions.

Partnerships and funds can be a source of abuse because they lack the transparency between investor and manager.

Steps you can take to help avoiding getting involved with a Ponzi Scheme:

1) Ask who is going to issue your monthly statements and call them to confirm;
2) Ask who the Prime Broker or custodian is and then call them;
3) Ask who the auditor and accountant are, and call them too;
4) Ask to speak with a few existing clients and a few former clients.

Most importantly, if it doesn’t feel right. Halt and do nothing. More will be revealed.

A reader of mine wrote in, “Trading journals are frequently mentioned but rarely the specifics of what should be in them, tried and tested formats, and, best ways to
review them covered.”

Every successful trader I know keeps a journal or one kind or another. I like to write journal entries, others like to type them into a computer. It might be splitting hairs, but I don’t call them “trading journals” either. To me, they are just Journals and I write everything in them. I rarely write trades in them, that’s what a General Ledger is for.

You should date and time stamp every page that you write on so you can create a chronology. I’d write down whatever is important to you: goals, how you plan on achieving them, in what time frame, thoughts and feelings that you have about your life, and thoughts and feelings that come up in and around your trading.

If you don’t keep a General Ledger because you rely on your monthly statements, that’s too bad for you. You’re missing out on a great way to capture some of your behavior. If you write about your trades before you put them on, they appear much more real. More important, you might find yourself feeling much more connected to your money. One of the potential benefits of that is that you may gain some insight on the importance of keeping your losses small.

I keep several journals going at one time and each contains specific things. You can put everything into one, but I find they are harder to read afterward. I like to consolidate my thoughts and then I create a chronology of all my thoughts and behavior.

If you’re afraid to write down your feelings about a trade or put what you’re thinking about a trade in writing, you’re “closeted.” They are your feelings – own them. You also have a good entry point for your next Tribe Meeting…

In my experience, know-it-alls fear commitments because they might shine the light on their true level of knowledge, which is normally not as high as they’d like everyone to believe. They are the worst type of trader (and people). However, if they can learn to surrender their egos, they may have a chance before they vaporize tons of cash.

You can journal about other things too such as food & beverages (and portion sizes), phone calls/interruptions, and when you feel you need a nap. You can journal what it feels like before you meditate during the day and how you feel after. Time stamp everything. Sometimes I’ll even write in a “to do” list just to keep myself honest. I’ll go back to the list to see just how important all the “to do’s” were and what were the results of getting them done were and how the results have impacted my life, business, or trading.

You can write down how many Diet Cokes you’ve had, along with the times that you had them. You can write about how each of them made you feel, and how you feel about drinking “n” number of cans of diet coke over the course of the day. How many have you had all week. By writing the time down, you can also marry your food habits with your feelings and then conjugate everything with your trading.

Maybe you find that you’ve consistently made losing trades 45 minutes after your afternoon snack, because you’re crashing from your sugar high and you lose focus and get sloppy.

Ultimately, writing things down can give you clarity on your thoughts and your thought process in general. That saying “what gets measured gets done.” But I think what’s more important is “what gets measured can be improved upon.”

There are an endless amount of things you can learn from keeping a journal. But the goal is to learn about yourself and your behavior first, then you can see how it may or may not affect your trading.

I use these Moleskine Journals/Cahiers. They are not lined, so I can draw charts and diagrams and connect a bunch of things with lines. I’m a “pictures” guy, so I like to see illustrations and draw them for things I’m working on.