Seeking Alpha

Elgrey's  Instablog

Elgrey
Send Message
Expat finance professional living and working in Hong Kong.
  • My April-13 Strategy Review

    Let's see what April brought me:

    Soy Oil - BO was underwater in April. Not by a large extent a couple of cents only but still - the month began at 50.2 cents and ended at 49.2 cents per pound in July contract. I had thoughts to leave the trade during 2nd half of April if I would see price appreciation which did not happen. Therefore I was early for a bull party but since I already came wearing a fancy hat I better stay in.

    WTI - initially I was not going to liquidate this position but during early April prices drop made me worried and I sold oil and saved profit. I guess no matter price recovery that we have today we yet to see further bottoming.

    Cotton - shorting CT was a good idea until 26th of April when prices jumped for whatever reason. Some say because of crop planting fears. From the past years I know that slow planting is not a sign of poor crop so I am optimistic about coming pull back. However I am not targeting 70 cents level in June. I will leave the trade when prices be within 75-80 cents. OK, anyway prices went down from 90 cents to 87.50 cents in July contract.

    Live Cattle - I chose not to roll over my April contract into June and booked losses. I keep LC on my radar but I am neutral for now.

    Natural Gas - timing was not my friend in April. NG continued its bull run through April. Prices reached maximum levels on April, 18th adding another 10% since the end of March. Thank God I hedged the position. Good news for bears is that coal by plants usage started to grow again. Looking at 1 minutes price bars I start to notice more long red bars meaning that bigger chunks of NG come for sale. It looks like some funds started a quiet liquidation.

    Silver - I issued a buy call just a few days before the stellar crash. Timing, timing, timing… But I also said - buy protection. So I am less worried now. Also - do not give up, it is too late to sell. Weak hands are leaving, strong hands are replacing them. Stay calm, price will return to 30+ levels.

    Rest of the items on my April schedule did not appeal me and I ignored them.

    The month was very difficult, one of the most difficult months within past year horizon. I was early to jump in almost every trade. What keeps me alive is that everything is hedged in my portfolio. But this is a small relief as no one has an intention to lose when opens a trade.

    Apr 30 11:19 PM | Link | Comment!
  • Silver - Blood On The Streets

    What a week! Just a few days after I wrote a blog about buying silver it crashed! The blood is on the streets, on trading desks, on margin accounts and everywhere else it can be. OK, lyrics aside - what has happened and what is likely to happen next?

    Doing a simple analysis of front contract daily price changes revealed that there were 12 similar or worse crashes during last 50 years. And here is crashes hit parade and the events that happened to take place on those lucky dates:

    22-01-80 -22.73% Hunts times

    26-03-80 -21.78% Hunts times

    23-09-11 -17.75% Recession fears

    14-03-80 -17.65% Hunts times

    28-02-83 -17.60% n.a

    17-03-80 -17.14% Hunts times

    20-04-06 -13.75% Margins changed

    13-06-06 -13.01% n.a

    13-03-80 -12.97% Hunts times

    02-10-08 -12.92% October 2008

    20-10-87 -12.02% Black Monday

    17-09-81 -11.30% n.a

    5 times out of 12 drops took place when Hunt brothers attempted to corner the market,

    3 times drops happened when all markets dropped,

    1 time it happened when margins were hiked but I could not identify events that caused that, and

    3 times I could not identify anything at all.

    Speaking in terms of VAR (value at risk) the above events represent 0.1% of total population (12 out of 12500 trading days). VAR analysis takes into account 95% or 99% confidence level not 99.9%. In other words what happened on 15th cannot be explained using one of the most used approaches in today's risk management and it cannot be predicted. It just happened - markets are not perfect.

    And since we are dealing with something very unusual let us see how prices reacted in the past. I am going to drop "Hunts times" events from further analysis as those are not relevant - we are not in a situation when someone artificially inflated prices of a single commodity, the whole metals sector and many other markets took pain on 15th:

    23-09-11 Having finished the day at $30 level it took markets 2 months to hit $35 again

    28-02-83 It took 2.5 months to recover from $10.3 to above $13 levels

    20-04-06 In 3 weeks prices jumped from $12.5 to $14.8

    13-06-06 Again, in 3 weeks prices appreciated from $9.6 to $11.3

    02-10-08 This time it took 4 month to get from $11.1 to $13.1 levels

    20-10-87 Prices attempted to bounce but stuck in the range and in several months a long-term silver bear market began.

    17-09-81 Another bear market that lasted for 1 year

    5 times out of 7 prices recovered quite fast but there is no unanimity.

    Let's try another voodoo spell - maybe it helps? This one is called Commitments of Traders report. Let's see positioning of users of silver and speculators during periods of price crashes:

    23-09-11 Users - Ultra Bullish, Speculators - Ultra Bearish

    28-02-83 n.a.

    20-04-06 Users - Neutral, Speculators - Neutral

    13-06-06 Users - Bullish, Speculators - Bearish

    02-10-08 Users - Ultra Bullish, Speculators - Ultra Bearish

    20-10-87 Users - Ultra Bullish, Speculators - Ultra Bearish

    17-09-81 n.a.

    2 times out of 7 data was not available. Other 5 times users of silver never had bearish stance. In fact 4 times they were feeling the bottom and they were buying bottoms. No wonder they are called "smart money". And today users of silver are extremely bullish again. They have been bullish since early Feb, they realized market bottoming. But of course they did not and could not predict what happened on 15th. As I say above this drop had a chance of 0.1%.

    Speaking of bottoming - how do users of a commodity realize it? Well, here comes next portion of black magic - let's see how much it costs in the real world. Take an example of Hecla Mining Company, largest US silver miner. Download their audited form 10K for 2012 and do some homework. What we are looking for is a benchmark indicator for cost of silver - in real world no one would be selling it below its costs, right? Not in the long run at least. So, we are looking for:

    (A) - gross sales

    (B) - profit from operations adjusted by costs of one-off events (they are not relevant to usual production costs).

    (C) - cost of operations

    (D) - indication of silver dollar value using product sales during 2012 multiplied by average prices during the year

    (E) - share of silver dollar value in A

    A = 321M

    B = 38M + 25M (one-off event cost) = 63M

    C = 321M - 63M = 258M

    D = 6,4M SI oz * $31 = $198.4M

    E = 198.4 / 321 = 62%

    Hecla cost of silver production = C * E = $160M

    Cost of 1 SI oz = $160M / 6.4M oz = $25

    Hecla will not be selling silver below the cost for too long. They would rather close down the business. And by the way - they reduced silver output by 1/3 between 2011 and 2012. Guess why... Commodity markets react fast, another example - last April natural gas prices were below the cost at $1.90, today it is $4.10. And by the way - they state they do not hedge the price. Probably, they know that from this point prices have no other way to go but up.

    OK, let's get to conclusions. The only time when prices did not recover well was the case of Black Monday. Why did it happen? Well, hard to say now but it do not think we are in that situation. In 1987 US Government tightened monetary policy and it was reasonable to sell assets and sit in cash. But today situation is very much different. Some say inflation is up to 10% p.a. In all other cases it took weeks or months to score a 2-digit recovery. What am I going to do? I will wait a few more days and if Black Monday won't be here I will buy again. And of course I will hedge my long bet buying puts. Just in case.

    Apr 17 9:21 PM | Link | Comment!
  • Addition To April-2013 Strategy

    I want to make an addition to my April plan. Usually I do not do that but it looks like an emergency case. If anyone ever reads my blog they should notice that I am not a fan of precious metals. I personally believe that this market is for dumb gamblers cause all you hear is noise from media - last year it was Buy, buy, buy and this year it is Sell, sell, sell. So I prefer to turn it off.

    Now I want to make an exception. For last several weeks silver has dropped significantly and so position of speculators did. Simply speaking speculators were selling silver short and closing long positions. As of last COT report I notice that they have reached the point they have not been at since 2003 when silver began its last bull run. They are incredibly short. This can mean two things - either bull market is dead and bear market has begun or it is a bear trap and large speculators are shaking the boat to scare weak bulls away before taking their seats for a major bull run.

    I have read different opinions but I follow the same old rule - follow the commercials. They are incredibly long. They have not been that long in both absolute and relative amounts since a long time. Also look at latest developments in the World - Greatest Cyprus Robbery, numerous upgrades to debt ceilings, Yen devaluation, slow Chinese exports and huge equity market bubble. There is not recovery, governments run out of tricks and print money and steal money and equity markets will notice that soon and retreat. And where will the money flow from a stock bubble? Precious metals is one of the most possible directions.

    I bought silver last week, I bought it this week and I am going to buy more as soon as I see market turning positive. I also bought protective puts just in case. If I am right I will lose only a small fraction of profits. If I am wrong I will save my investment.

    Apr 10 11:57 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.