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How and Why I Trade the Commodity Futures Markets – What I am Doing Now Victor Adair Senior Vice President / Derivatives Portfolio Manager MF Global Canada Co . Mike Campbell’s Survive and Thrive Investment Conference Vancouver, BC November 1, 2008. Program Outline. Macro Market Opinions

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mike campbell s survive and thrive investment conference vancouver bc november 1 2008

How and Why I Trade the Commodity Futures Markets – What I am Doing NowVictor AdairSenior Vice President / Derivatives Portfolio ManagerMF Global Canada Co.

Mike Campbell’s Survive and Thrive

Investment Conference

Vancouver, BC November 1, 2008.

program outline
Program Outline
  • Macro Market Opinions
  • Why I trade Futures and Options
  • How I trade / manage risk
  • Markets I am watching now
  • Personal: Cautious. Savings. Trading. Income. In cash too early. No leverage. Wait for bargains.
disclaimer
Disclaimer
  • This presentation is for information purposes only
  • Trading derivatives (futures, options, foreign exchange) 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
macro market opinions
Macro Market Opinions

THEN:

Credit Boom = Asset Boom + High Risk Tolerance

  • Many years of low interest rates / easy money / rising asset prices fuelled a consumer spending boom and an attitude
  • Reaching for yield / don’t want to be left behind
  • Borrowers and Lenders - pushed the envelope on risk
  • NOW:
  • Lenders: less willing or able to lend
  • Borrowers: less willing or able to borrow
  • Risk being avoided – not embraced
macro market opinions5
Macro Market Opinions
  • Asset price gains from 2001 to 2007 were extraordinary – not normal
  • Buy and hold is not good advice
  • Throw away your previous ideas about valuations and risk – this is a different world
  • Don’t buy something today because it is ½ price compared to what it used to be
  • Inflation is history – for now – deflation is the worry – for now
  • Inflation will come back
  • Be prepared for a lot more government in your lives
  • Stress = what’s the next shoe to drop? = Volatility
  • Something BIG will break…Euro? Country default?
macro market opinions6
Macro Market Opinions
  • Real estate prices will continue to soften
  • Unemployment will rise
  • Previous economic growth came from rising consumption based on rising asset prices, borrowed money and leverage. That’s over.
  • Expect a “L” shaped economy
  • Expect real interest rates to rise
  • Financial markets will have “relief rallies” but a weak real economy will keep a lid on gains
  • Expect lots of garage sales and booming thrift store business
  • Demographics = Boomers will try to save more, spend less
marco market opinions
Marco Market Opinions
  • Commodities: bull market is over until the last “Johnny-come-lately” bull throws in the towel and promises to never return. Speculators fuelled most of the price increase
  • Currencies: incredible barometers of capital flows – 40% declines - will the Euro hold – US$ wins the least ugly contest
  • Stocks: a slow-motion (and sometimes not-so-slow) crash
  • Bonds: great battle ahead…Supply Vs. Demand
  • Volatility: new highs as a result of stress = opportunity. Learn option writing strategies
macro market opinions8
Macro Market Opinions
  • Inflation / Deflation?
  • Credit crisis induced slowdown = deflationary
  • Monetary reaction = inflationary
  • Credit tightness = deflationary
  • Fiscal action = bigger budget deficits = inflationary
  • Demographic trends in West = deflationary
  • Rising US$ (?) = deflationary
  • Weakness in global economy = deflationary
  • De-coupling? Will the “Rest of the World” continue to grow if USA goes into a real recession? No = deflationary.
macro market opinions cont
Macro Market Opinions (Cont.)
  • We are all currency speculators now:
  • 6 years of US$ weakness = 6 years of commodity market gains
  • Currency trends overshoot + and make “V” shaped turns
  • Is the US$ rising?
  • Currency flows from risky to less risky – from the periphery to the center as the market seeks to avoid risk
  • 90% of Hungarian residential mortgages financed with Swiss Francs!
why i like to trade futures and option contracts
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
why i like to trade futures and options contracts cont
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
what is a futures contract
What is a Futures Contract?
  • Specified unit of trade with an expiry date
  • Example: December 2008 Gold Futures Contract
  • 100 troy ounces / specified quality and delivery location
  • First Notice day: November 30, 2008
  • Value of the contract at $800 oz = $80,000
  • Minimum initial performance bond, approx. $7,000
  • Leverage = 11:1
how i trade
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
how i trade cont
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
managing risk
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
managing risk cont
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
  • Without risk management the road to the Poorhouse is paved with fine opinions
  • See: How To Be A Better Trader – www.VictorAdair.com
options trading ideas
Options trading ideas
  • Option volatility is extremely high. Learn option selling (writing) strategies:
  • 1) you like a stock/commodity at today’s price. Write a put option on it, collect the premium. If you get put you own the stock/commodity at a better price, if you don’t get put you keep the premium. Repeat.
  • 2) you like a stock/commodity at today’s price. Buy it and write a call against it. if you don’t get called you own the stock/commodity at a better price, if you get called you make a short term profit. Repeat.
  • 3) Write both calls and puts at the same time – look for the market to trade sideways. Repeat.
slide22
Commodity Index: 6 years of a bear market in US$ = 6 years of a bull market in commodities – until Summer 2008!
slide26
Euro Vs. Japanese Yen: Risk thermometer, week to week ups and downs very similar to ups and downs of G7 stock markets
slide29
Gold Reciprocal – are we pre-programmed to see bull markets? If this is a bull market then gold price is falling
slide30
Gold / Crude Oil: At least a 25 year low this past summer: all markets are spreads. What is X worth in terms of Y?
slide31
Copper: Does copper have a Phd in economics? Base metals have been weak (no kidding!!) lately (Speculators exit stage left??)
slide32
Crude Oil – Did “Investors” pile into the energy markets? Did rising global demand account for a tripling of prices in 18 months?
slide33
Corn: global demand for better food, ethanol, funds – prices hit all time high prices – what changed to cause prices to fall 50%?
slide36
Philly Bank Share Index: started to fall from all time highs before the “credit crisis” became front page news
slide37
Philly Housing Sector Index: The top was made well before the problems of the US housing market became front page news
slide41
Chicago Mercantile Exchange: it was a “triple play” on rising stocks, commodities and exchanges – what happened?
summary
Summary
  • The Credit Boom produced an Asset Boom + a great Appetite for Risk – This fuelled a Global Economic Boom driven by Consumer Spending – the markets are now reversing this trade!
  • Why I like to trade Futures and Options
  • How I trade / manage risks
  • Ultra-high option volatility creates opportunities to write options
  • Markets I am watching now – looking for trading opportunities
  • Be cautious – things have changed – wait for bargains

www.VictorAdair.com