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“Futures & Options Give You a Powerful Trading Advantage in the Booming Commodity Markets” Victor Adair Senior Vice President / Derivatives Portfolio Manager MF Global Canada Co . Calgary Resource Investment Conference April 12 & 13, 2008. Program Outline.

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“Futures & Options Give You a Powerful Trading Advantage in the Booming Commodity Markets”Victor AdairSenior Vice President / Derivatives Portfolio ManagerMF Global Canada Co.

Calgary Resource Investment Conference

April 12 & 13, 2008.


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Program Outline

  • About MF Global – World’s leading broker in exchange traded futures and options

  • My Macro Market Opinions

  • Why I like to trade Futures and Options

  • How I trade / manage risk

  • Markets I am watching now

  • Questions


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Disclaimer

  • This presentation is for information purposes only

  • Trading derivatives (futures, options, forex) involves risk of loss

  • Investments can go up as well as down and involve the risk of loss

  • Past performance will not necessarily be repeated in the future

  • MF Global Canada Co. is a member of the:

    • Investment Dealers Association

    • Canadian Investor Protection Fund

    • Toronto Stock Exchange

    • Montreal Exchange

    • Winnipeg Commodity Exchange


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MF Global Ltd. – formerly Man Financial

  • World’s leading broker in exchange listed futures & options

  • 130,000 active accounts: financial institutions, industrial groups, hedge funds, asset managers, professional traders, private clients

  • Operates in 12 countries on more that 70 exchanges: 3,200+ employees

  • Daily average volume of 8 million lots, more than most of the world’s largest derivatives exchanges

  • NYSE listed: MF


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MF Global Canada Co.

  • Leading Canadian futures & options broker

  • Full service futures & options, stocks & bonds, foreign exchange

  • Online futures & FX trading platforms

  • www.mfglobal.ca

  • www.VictorAdair.com

  • Vancouver, Calgary, Saskatoon, Winnipeg, Toronto, Markham, Montreal


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Macro Market Opinions

Then:

Credit Boom = Asset Boom + High Risk Tolerance

  • Many years of low interest rates / easy money

  • Moral hazard

  • Reaching for yield / don’t want to be left behind

  • Borrowers and Lenders - pushing the envelope on risk

  • NOW

  • Lenders: less willing or able to lend

  • Borrowers: less willing or able to borrow


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Macro Market Opinions – (cont.)

Commodities: A Demand Driven Bull Market

  • Common cause: rapid demand growth / supply shortages

  • China changed everything

  • Dr. Michael Berry – Quality of Life Cycle

    Commodities as an Asset Class

  • “Funds” are in the commodity markets like never before

  • Record open Interest and Volume in exchange traded futures

    Will Commodity Bull Market Continue? Yes, but with Wild Volatility!


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Macro Market Opinions – (cont.)

  • Inflation / Deflation?

  • US credit crisis induced slowdown = deflationary

  • Monetary action = inflationary

  • Credit tightness = deflationary

  • Fiscal action = bigger budget deficits = inflationary

  • Rising food/fuel prices = consumers squeezed =deflationary

  • Demographic trends in West = deflationary

  • US, UK, CAD easing = inflationary

  • ECB, China steady/tighter = deflationary

  • De-coupling? Will the “Rest of the World” continue to grow if USA goes into a real recession? No = deflationary.


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Macro Market Opinions (Cont.)

  • We are all currency speculators now:

  • 6 years of US$ weakness = 6 years of commodity market gains

  • Currency trends overshoot + then make “V” shaped turns

  • Current dramatic differences between ECB + Fed policies may precipitate the end of the Euro rally

  • Short term Bullish/Bearish Mood (Risk Appetite) in financial markets is determined by the question: Is the credit crisis over?


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Why I Like To Trade Futures and Option Contracts

  • Mike Campbell interviewed Jim Rogers on Moneytalks Radio in October 2003

  • Jim said, “The best way to trade commodities is with futures contracts. But most retail traders use way too much leverage.”

  • Following that interview I wrote “Five Reasons Why Futures Contracts Give You a Powerful Advantage” posted on: www.VictorAdair.com


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Why I Like to Trade Futures and Options Contracts – (cont.)

  • Efficient

  • Transparent

  • Pure Play

  • Variety

  • Leverage

  • Easy to go short, open 24 hours, regulated market


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What is a Futures Contract?

  • Specified unit of trade with an expiry date

  • Example: June 2008 Gold Futures Contract

  • 100 troy ounces / specified quality and delivery location

  • First Notice day: May 30, 2008

  • Value of the contract at $900 oz = $90,000

  • Minimum initial performance bond, approx. $4,000

  • Leverage = 22:1


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How I trade

  • I develop Global macro opinions

  • I may be100% in cash or up to 4x leverage

  • I read a lot of different research – www.VictorAdair.com – to form my opinions

  • I’m not a day trader but I watch the markets all day

  • Opinions – necessary (you have to have the courage of your convictions) and dangerous (you have to give up quickly when proven wrong)

  • I try to anticipate a trade before it is time to make the trade – then I’m ready when its time to pull the trigger

  • I need a technical confirmation that my opinion may be right before I execute


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How I trade – (cont.)

  • I trade like a mercenary – (Dennis Gartman) when markets change I change

  • I challenge consensus – “what if” the popular idea is wrong, has run its course?

  • I try to judge the mass psychology – who has a weak / strong position in the market?

  • Changing psychology – not math – moves markets

  • All markets are spreads – try to think like a spread trader – what is X worth relative to Y?

  • Markets are inter-related – but relationships change

  • Options: Current I.V. relative to history - Use alone or in combination with futures


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Managing Risk

  • I know practically nothing and cannot predict the future

  • Most likely risk: my opinion is wrong

  • Anything can happen

  • Patience – sitting in cash is OK

  • Add to winners, never add to losers

  • I know where I will get out (if I’m wrong) before I get in

  • Write down my reasons


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Managing Risk – (cont.)

  • Max loss 1% – 2% per trade / use low leverage

  • Accept that most of my trades may lose money

  • No big losses, occasional big wins

  • Relationships between markets change, but markets always influence one another

  • Be aware of my prejudices – foundation of all opinions

  • See 22 Trading Rules – www.VictorAdair.com


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Yield on US 30 year Treasury (falling IR boost asset prices)


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Dow Jones (falling IR boost asset prices)


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US Dollar Index – not always a bear market!


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Commodity Index: 6 years of a bear market in US$ = 6 years of a bull market in commodities


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Commodity Index Vs. US Dollar Index


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Gold: Now that’s been a heck of a Bull Market!


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Crude Oil: another fabulous Bull Market!


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Euro Currency Vs. US$ : Endgame approaching?


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US Dollar Index: Psychology is extremely negative. Time for a turn?


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Euro Vs. British Pound: Could be the “Canary in the Coalmine” for a turn higher in the US$


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Euro Vs. Japanese Yen: Risk thermometer, week to week ups and downs very similar to ups and downs of G7 stock markets


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New Zealand Dollar Vs. Japanese Yen: another risk therometer, look at the break in the summer of 2007 – another canary?


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Canadian Dollar Vs. US Dollar: match this with a commodity index chart – overdone at 110.00


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Canadian Dollar and Commodity Index


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Shorter term Gold: a rally up through $950 resumes the major up-trend. If $950 is resistance look for new correction lows


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Gold Reciprocal – are we pre-programmed to see bull markets? If this becomes a bull market then gold is falling in price


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Gold / Crude Oil: all markets are spreads. What is X worth in terms of Y?


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Gold / S+P 500 – another spread


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Copper: Does copper have a Phd in economics? A rally through $4 would be pretty impressive


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Platinum – Power shortages at S. African mines drive prices higher in a market with low inventories


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Crude Oil – Are “Investors” piling into the energy markets? Has rising global demand been cause for more than doubling prices in 15 months?


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New York Gasoline: another commodity at all time highs


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Minn (Hard Red Spring) Wheat – supply shortages, volatility, dis-connect with cash markets


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Corn: global demand for better food, ethanol, funds, new all time high prices


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Rice: food riots, hoarding, front page news, can a top be far away?


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Deere & Company: Another way to play the Agricultural boom


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Potash Corp of Saskatchewan: WOW!!


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US bonds Vs. S+P 500: Bonds catch a bid as stocks fall – the classic flight to safety


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Philly Bank Share Index: started to fall from all time highs before the “credit crisis” became front page news


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Philly Housing Sector Index: Could this be showing signs of bottoming in the face of relentless bearish news from the housing sector?


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Starbucks: Is the consumer cutting back on non-essentials?


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Vix – CBOE Volatility Index


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Chicago Mercantile Exchange: it has been a “tripple play” on rising stocks, commodities and exchanges


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Summary

  • MF Global is the world’s leading broker of exchange traded futures and options

  • The Credit Boom produced an Asset Boom + a great Appetite for Risk.

  • Futures markets give you a Powerful Trading Advantage

  • Opinions are necessary – and dangerous

  • How I trade / manage risks

  • There are great trading opportunities in a number of markets


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