Friday, December 28, 2007

Hog Wild

"Woooooooooo, Pig! Sooie!"

- President William Jefferson Clinton (at University of Arkansas sporting events)

Similar to the grains (corn, soybeans, and wheat) discussed in the previous post, the Lean Hog contracts are very liquid and have high seasonal correlation from year to year, as do the Live Cattle contracts. Almost every year, the April contracts for both Lean Hogs and Live Cattle soar in price beginning in late-December or early-January, following dramatic plunges in price immediately prior to Christmas. Right on schedule, both hogs and heifers plunged in price this fall and early-winter, and I made some good money earlier this year shorting the hogs.

While published reports and market commentaries continue to be bearish on all of the major meat contracts (Lean Hogs, Frozen Pork Bellies, Live Cattle, and Feeder Cattle), over the last several trading days the cattle contracts have started to move upward right on schedule. Since the Live Cattle contract is the more liquid of the two, I have started watching that April 2008 contract closely, and plan to get on the train on the second consecutive close above 99. The Lean Hogs haven't started moving up yet, but I will continue to watch that April 2008 contract as well, and plan on getting onboard on the second consecutive close above 68.

The secret to trading is good money management much more than trade selection. Investors spend most of their time trying to find the next "sure thing," and not nearly enough time focusing on the mechanics of their swing. You want to search out opportunities where you have any type of edge and then take a cut. If a trade goes against you, cut it quickly, and if it goes your way, let it run with a trailing stop. As long as the amount of money you make on winners exceeds the amount of money you give back on losers, you win, even if you only "won" on 2 out of every 10 trades. The historical trends indicate that the odds are in your favor with the meats in January, but it's the mechanics of your swing - waiting patiently for the right entry point, cutting your losers quickly and letting your winners run - that will make you come out ahead in the end. Good trading!

The hagiography of Benazir Bhutto has begun in earnest, as you can see from the framing and composition of the above photograph that appeared on Time's website. While there is no doubting her bravery in returning to Pakistan, the picture of her as an earnest liberal democrat focused solely on the welfare of her people is far from the mark. My favorite description of her comes courtesy of Marty Schwartz, immortalized forever as the "Champion Trader," by Jack Schwager in his trading classic, Market Wizards: Interviews with Top Traders. While it was Michael Lewis' Liar's Poker: Rising Through the Wreckage on Wall Street that first got me interested in being a trader, it was Marty Schwartz's Pit Bull: Lessons from Wall Street's Champion Day Trader, one of the all-time classic trading books, that really made me believe it was possible to succeed at this game.

Bhutto was an early investor in an international fund managed by Marty. He met her at a lavish and opulent party in England, and described her as follows:

"This was not the woman I'd seen on TV, her body covered in drab black tentlike garb, her thin ascetic face devoid of makeup, her straight black hair pulled back under a black scarf. A gold chain hung over one shapely shoulder and attached to it was a quilted black Chanel pocketbook. Chanel beads, Chanel shoes, and Chanel fragrance all adorned Benazir - Coco in her most opulent hour had never worn as many accoutrements as Benazir Bhutto. This woman had money radiating out of every aperture."

Having worked in the intelligence field, and having visited and analyzed many third world countries, especially in Asia, I recognize Bhutto's type very clearly - someone who could not get ahead in her country's domestic politics on her own power, and therefore tried to use the United States to accomplish her goals for her. Mark Steyn, the most astute political commentator on the current scene, as usual nailed it.

Another astute analysis came from an estranged relative, Bhutto's niece Fatima. Coincidentally, I finally got around just last month to reading Ghost Wars: The Secret History of the CIA, Afghanistan, and Bin Laden, from the Soviet Invasion to September 10, 2001, a book my brother gave me as a gift several years ago. This meticulously documented book makes it clear that the Taliban was a Pakistani-funded and supported creation from its very beginnings, and that Bhutto lied directly and repeatedly to United States officials about Pakistan's activities in support of the Taliban.

In light of this history, why on earth would anyone at Foggy Bottom believe that she would really welcome "NATO boots on the ground" in the Pakistani border areas where Osama Bin Laden is hiding? Both times she was deposed as Pakistan's ruler, corruption was the excuse, but the real reason was her attempts to bring Pakistan's Islamist-infiltrated intelligence service to heel. It is quite clear she would say anything to the United States she thought they wanted to hear to gain the assistance of the CIA in regaining power - a power she was not capable of seizing unaided.

The most obvious recent similar example of someone who hoodwinked the United States this way was Ahmad Chalabi. You can read that whole sad story here.

Hopefully, Pakistan will emerge from this chaos with responsible, mature, non-Islamic fundamentalists in firm and clear command and control of Pakistan's nukes. If not, the special forces of the United States, India, Israel, or some unprecedented combined force might very well be sent in to take them out. To paraphrase H.P. Lovecroft, that scenario would indeed be "too horrible to describe," but the groundwork for it is already being laid. Note my use of the word "hopefully" at the beginning of this paragraph, and remember that hope is not a good investment strategy. As if we needed yet another reason to BUY GOLD!

Thursday, December 27, 2007

Turn, Turn, Turn

To every thing, turn, turn, turn
There is a season, turn, turn,turn
And a time to every purpose under heaven

A time to be born, a time to die
A time to plant, a time to reap

- Pete Seeger

History doesn't repeat itself, but it does rhyme.

- Mark Twain

The shapes of the annual price curves for wheat and corn follow reasonably predictable patterns based on their respective planting, growing, and harvesting seasons, as well as on seasonal fluctuations in demand for the products derived from those grains. Based on supply and demand factors in any given year, the degree to which grain prices rise or fall will change, but the basic seasonal pattern normally at least somewhat resembles those of past years. With the rising demand for grain products in China and India, price rises should continue to be in excess of the historical norm in 2008, just as they were in 2007.

As discussed in the previous post, both wheat and corn tend to rise in price between November and sometime in early-February, when prices tend to fall off sharply. Historically, the best contracts to play this seasonal rise have been the July contracts for both grains. Soybeans also tend to rise in early-January, but tend to fall again about two weeks later, and also tend to trade with more volatility than wheat and corn. Additionally, soybeans are much more affected by fluctuations in the price of oil than the other two major grains, so this discussion will focus on wheat and corn.

Both wheat and corn are already up from their November lows this year, and I am long July futures contracts of both. I started with a stop of $1,000 below my entry point on each and have now moved those stops up to lock in a $500 profit. I will continue to trail my stop up as these markets rise, and will move up those stops very tight in late-January in expectation of the "February break" frequently observed in these grains. Of note, in recent years corn has tended to "break" as early as mid-January, probably due to traders anticipating this traditional price move and getting out ahead of the pack.

Following the "February break," wheat and corn both tend to recover in price and go on to reach even higher prices, peaking sometime between May and July. If you are fairly confident this pattern will recur, another way to play this seasonal pattern that is developing right now is to buy options that are about 10-20% out of the money on the July futures contracts. Since you pay cash upfront for the options, you wouldn't have to worry about margin calls as the prices of the underlying futures contract moved against you during the "February break," as you would if you tried to hold a standard futures contract position all the way through to the summer decline in prices.

A more conservative way to play the likely agricultural commodity scenario for 2008 is to buy the corn/wheat "spread." This simply means buying the July 2008 corn contract, while simultaneously selling the July 2008 wheat contract. In 2006, corn prices went up more than wheat prices because of government subsidies for corn-based ethanol that distorted the free market (and led directly to tortilla riots in Mexico). So in 2007, lots and lots of farmers switched their wheat acreage over to corn to take advantage of the higher corn prices, which led directly to wheat prices rising more than corn prices in 2007 (to all-time highs). You can therefore expect to see farmers switch current corn acreage to wheat and soybeans in 2008, which should lead corn prices to outperform wheat prices due to the lower amount of corn harvested. By being long corn and simultaneously short wheat, you don't care anymore whether prices are going up or down - you win as long as corn becomes relatively more expensive than wheat over the holding period of the two contracts, even if both corn and wheat decline in price.

If you would like to play the agricultural commodity boom, but just can't bring yourself to trade futures contracts or options on futures contracts, probably the best way to do so is to buy some shares in an ETF with the symbol MOO that contains many agricultural-related stocks. If you want to increase your leverage on that bet, you can buy options on the ETF, the longer-dated the better. For those who prefer to play individual company stocks instead of ETFs, a personal favorite of mine that is in my wife's portfolio has the symbol POT. It's a Canadian potash mining company, and potash is a key ingredient in fertilizer. No matter how farmers decide how much of their acreage will be allocated to wheat, corn, and soybeans each season, they will still need ever more fertilizer! Again, you can increase the leverage by buying LEAPS on POT. A good friend of mine has had LEAPS on POT for more than six months and is currently up on that position in triple digit percentage terms even after the two market pullbacks that occurred this fall.

The main reason I prefer the futures to the ETF or to a single stock is that it is still not clear if we will suffer a major stock market correction in 2008 or not (regular readers know I consider this possibility to be highly likely). If we do, MOO and POT will most likely initially crash right along with the rest of the market, although I think that they will be among the first stocks to recover. I have MOO and GDX on my very short list of ETFs to buy once the crash is over.

Just a quick update on our old friends the yuan, the yen, and gold, all recommended here over the last few months.

I hope everyone had a very Merry Christmas! The upcoming year is filled with possibilities for profit, and we will be discussing them in this forum.

Sunday, December 16, 2007


It's a sad day for Navy football. As predicted here, Coach Paul Johnson was too great of a coach for us to be able to keep him. He will now be moving on to be the head coach at Georgia Tech. Unlike Roger Clemens, he's moving to a team we don't hate, so we wish him well and thank him for all those victories over Air Force and Army. Fair Winds and Following Seas, Coach Johnson!

And as for Roger, as a good friend once told me, "The Wheel of Karma always turns." Couldn't happen to a nicer guy!

We've talked a lot about financial commodities such as the yuan, the yen, and precious metals over the last few months, and those are all still looking like great places to be invested over the next few years, but today, I'd like to discuss a different group of commodities - the grains, the most liquid and widely traded of which are wheat, corn, and soybeans.

For a wide variety of reasons detailed here, agricultural commodities in general, and the grains in particular, are in the middle of what should be long-running bull markets. And the current rate cutting moves by the Fed are making the picture even rosier for grain bulls. The reason I draw your attention to this sector today is that agricultural commodities in most years have very pronounced seasonal patterns that can give a speculator an edge. For example, here are the average seasonal charts for wheat over the last 15 and 30 year periods.

You can see on these charts of the various different monthly contracts that wheat has a strong tendency to rise from early-December through mid-February, following which it suffers what commodity traders refer to as the "February Break." So far so good this year, as corn, wheat, and soybeans are all in uptrends right now as we head into mid-December. There are a number of different ways to play this trend, although as you can probably guess by now, my favorite is options on futures contracts! We will discuss some of the other ways in future posts.

Friday, December 7, 2007

Joy in Crabtown

It's official - Navy has now defeated Army six times in a row, something that neither school had ever been able to do in the more than 100 years of the greatest rivalry in college football. This picture shows Reggie Campbell scoring one of his touchdowns. He was personally involved in almost every point Navy scored, running back a kickoff for a touchdown, scoring from the run of play himself, setting two key blocks that allowed others to score, and even returning a punt 51 yards to set up a field goal with just seconds remaining in the first half. Now we go on to demolish Utah in the Poinsettia Bowl in San Diego on December 20.

Here in Japan, the game kicked off at 2:00 a.m. I managed to stay awake for all but the last five minutes of the game, when victory was already assured. 38-3 sounds like a dominating scoreline, but Army actually outplayed Navy on both sides of the line of scrimmage for much of the game. Army dropped an easy pass in the end zone, missed a 28 yard chip shot field goal attempt, and it seemed to me had at least three questionable officiating calls go against them on critical plays that either kept Navy drives going or killed promising Army drives. Hence our eternal gratitude to Reggie Campbell, the one man Army-destroying machine!

Army's strong play, plus the almost certain loss of our outstanding coach to another team that can pay him much more money sometime prior to next season, does not bode well for next year's game, but with Army-Navy, just like Red Sox-Yankees, you can always throw out the records and expect a hard fought contest. What a year so far - the Red Sox win the World Series, Navy beats Notre Dame for the first time since Roger Staubach was our quarterback, and we also beat both Army and Air Force to win the Commander-in-Chief trophy. Go Navy, Beat Utah!!!

On the not so cheery side, the world financial system continues on its inexorable path over the cliff. Citigroup, Goldman Sachs, and Morgan Stanley, among others, are all technically bankrupt. It is only a matter of time, most likely sometime early in the New Year, until even the mainstream media figures this out, and that is when gold will take off on the next leg of its bull run, if not before. If you haven't gotten some gold yet, now is a great time, as gold is in a consolidation phase that is offering a great entry point. If you haven't diversified out of dollar-based assets yet, the dollar is in the midst of a counter-trend rally that probably won't make it much higher than 80 on the US Dollar Index that offers a great chance to convert your dollars into stronger currencies like the Japanese yen, Swiss Franc, Canadian dollar, and Chinese yuan. See previous posts for the best ways to maximize your returns on these macro trends that will be with us for some time.

If you still doubt that the US dollar really is roadkill, and toxic waste in your financial portfolio, consider that the best performing currency against the dollar so far in 2007 is the Philippine Peso.