Monday, September 17, 2007

More Commodities Meat

WhiteMan asked another timely question about the details of my commodity purchases which merits an extended response.

Click any of the charts to enlarge.

Above is a daily graph of "October Sugar". My average purchase price was $9.80 (read as 980 on the chart). I bought it back in mid-August and since then it obviously took an immediate dip down to $9.10 and currently hovers at $9.42 as I type this. I have since rolled this position to a March contract.

Above find December Cotton's daily chart. I got in at $61.67, it dropped to $57.00 right in my face before recovering to $63.76 as I type this.

Above is the wild ride of December Coffee. My average purchase price in mid-August was $1.2485. In the "credit crunch" induced broad market sell-off it dropped quickly to around $1.15. But as I type this it is the pleasant surprise du jour. It's up a whopping .0450 ticks today to $1.2540. Don't let the decimals distract you; that's a 3.7% up move today. That would be mathematically akin to a 495 point move in the Dow from today's level of 13,400.

As you readily see, commodities can really move.

Lastly, above find December Cocoa. My average price is 1,891. The chart illustrates that I weathered an immediate dip to 1,750. As I type this, the contract has recovered to 1,873.

Summing it up. I am down about 4% in sugar, slightly down in cocoa, and up in both cotton and coffee. So presently I am up a very small amount of money - albeit I was looking at red numbers in all four for a month until about a week ago.

I have been thinking long and hard about how best to play this commodity market - given that we are already half a dozen years into the bull market AND that trading commodities is not exactly my forte. Here's where I stand presently

  • I have decided that the four commodities I bought, cocoa, cotton, sugar, and coffee, will be "investments" that I won't try to trade around - meaning, I won't sell when they pop and look to buy them back cheaper. They will be rolled forward indefinitely. I will continue to barely even look at them - as I do with my shares of Google.
  • I will not short any commodities. As tempting as it is to look at soaring Wheat and Soybeans and give them a whack, I will refrain from making the same mistakes I made with tech stocks during the Nasdaq Bubble. I will be long and flat - but never short. There's always money to be made on the short side, but I will let somebody else have it.
  • So primarily, I will look to rotate into whatever commodities are beaten up - much as I did when I bought at ton of oil at $51 this past winter. Sugar I believe is ripe for the taking now after its cruel 50% drop from its December '05 peak around $20. Hence I bought a little more of that than the others.

So again, with commodities, the initial dollar investments are big and the volatility is somewhat scary.

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I have to laugh when I see these recent headlines about big hedgefunds losing 5%-15% in a month. 15% is often a daily fluctuation of my trading account!

(Remember, I only trade 5-7% of my money.)

Keep the questions coming. First and foremost I am going to try to make myself money. But I will share ALL of my thoughts and insights. With some money, a little luck, and my formidable powers of articulation...

ANYONE should be able to make money from commodities.

If you don't know the movie, go and rent it!

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