Martin Kronicle

Here is a funny and lighthearted quiz on the fundamentals of crude oil. Some of the answers may surprise you – I think that was part of its design.

This shot depicts two things:

1 – there doesn’t have to be a correlation between and ETF/ETN and the commodity it holds.

2 – If you have the institutional mindset of “long-only” and you own assets in futures that trade in what are called contango or carry – charge markets, you will find yourself in a situation where you have to liquidate the front month (cheaper) to purchase the next (higher) month out when you roll the contracts.

Such markets are characteristic of commodities with ample supply and the spreads suggest storage, rather than immediate demand.

Hmm? Curious to see a company such as UNG make such a mistake. They seem to have some educated, and highly intelligent members of their team, however, my guess is none are traders. Click on the graphic below to see it more clearly.

Here is a look at what is called the strip – the prices for each successive contract for the calendar. You’ll notice that for the most part, contract prices increase the further you go out in the strip. (Click on the graphic, and it will open to the full size).

The only way to trade this type of market (carry-charge) would be to implement a spread trade. Unless there happens to be a random spike in Natural Gas prices, you’re out of luck with this vehicle. This would be true for any other commodity as well.

I will write more about how to use spreads in this situation in another post. Please email me if you have something specific you’d like to know.

George Soros is living proof that the Efficient Market Hypothesis (EMH) is complete garbage. In fact, he takes on the fallacy of EMH in this interview. His historical rate of return eclipses Warren Buffett’s. He is a trend follower to the extreme and in his opinion, the worst error a trader can make is not being bold enough when you’re right on a position.

“Inflation usually starts by the government printing too much money.”

A question came in from a reader today, and I thought I’d answer it for everyone’s benefit.

hey mike

i was hoping to get your point of view on something. i’ve heard several times the phrase “small traders/accounts make the most money.” does this mean that if you have a small account (e.g. 10k or less) using a portfolio heat of 30%…you would use a portfolio of 6 futures betting 5% on each trade in lieu of using a 10 future portfolio betting 3%? is this how you would make money with a small account or am i missing the point entirely?

Great Question and thanks for writing.

Regarding “small traders/accounts make the most money” – I think it means that you can have $10,000 in equity, trade one crude oil contract for $9,500 in initial margin, and make $40,000 over the year on your equity. In this instance you will have made a few hundred percentage points, as well as tens of thousands of dollars.

When your account grows to the millions or tens of millions, there are markets that are a little more tricky to trade due to volume/liquidity constraints, so you can’t take gigantic positions b/c you might not be able to get out of them.

If you desire to run public money – for allocators like a CTA would – returns over 50% will raise more negative eyebrows than favorable ones…and that number might be high. It might be more like 30%. Friends and family will want you to run and gun for giant returns b/c they can afford a full loss of their capital. IMHO, you’ll want to show a slow and steady, positive slope to your equity curve: trade your model, not the emotional constitution of your clients.

Most importantly, if you can find a way to keep your drawdowns in the 10 – 15% range you’ll really be onto something. Allocators are more concerned with risk adjusted returns. Most large CTAs have drawdowns over 20%.