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finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-09 17:29
Hello guys,

Since I notice that trying to communicate complicated mathematical portfolio models to investors is a desperate task, I try an analysis-lite:

https://letyourmoneygrow.com/2017/07/09/market-spotlight-pick-commodities-picky/

Constructive comments and suggestions are - as usual - very welcome.

www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

rftx713


Total Posts: 77
Joined: May 2016
 
Posted: 2017-07-10 03:37
prices are down, so the thing is cheap?

deeds


Total Posts: 346
Joined: Dec 2008
 
Posted: 2017-07-10 13:16

Thank you for generously sharing your blog posts.

Seems a question raised when you first shared your book persists...who is this advice for?

Seems it is specific technical advice, pitched at a high level - maybe it wouldn't be such a good idea for someone who doesn't already understand the investment context to follow the advice (as they may not know how to manage the investment going forward)?

But a more informed reader may already have a view and a programme and emphasis on specific detailed advantages that support the advice may be desired.

Very interesting rhetorical problem. Best of luck!

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-10 22:37
@rftx713
>prices are down, so the thing is cheap?
Is it not?

@deeds
>Seems a question raised when you first shared your book persists...who is this advice for?
Well, initially for an ex-colleague and a good friend of mine.
More generally, for a broad society of retail investors ... to which the audience of NP may also belong.

I don't want to speak for the whole world but in Germany many quants, being excellent in Q-world, are not aware about P-world.
(since my network is large, my observation is statistically significant).

>But a more informed reader may already have a view and a programme and
> emphasis on specific detailed advantages that support the advice may be desired.
It may follow. As I have already said, this post was a reaction to the question of a friend of mine "what are current investment opportunities".
In particular, you may tell me which details you want and I will do my best to scrutinize them.

Meanwhile, I got a feedback from my readers that I shall check the issue of rollover costs. Though a quick look at current forward curves does not suggest any extreme contango, the situation may change and I am going to investigate this question in detail if I manage to find historic futures prices to build historic pfc.

P.S.
As to my book, readers' feedback [mostly] implies that it is a good book :)

www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

rftx713


Total Posts: 77
Joined: May 2016
 
Posted: 2017-07-11 03:15
Was oil cheap at $70?

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-11 09:06
@rftx713
No, because historically it was traded at much cheaper price.
(I experienced the August of 1998 in Russia and remember it quite well - by that time the oil was ca. at $10)

Additionally, if you mean the drop in 2015-2016:
a) the forward curve was often inverse, which means the market anticipated the drop
b) there was a plausible explanation of this drop (shale oil).


www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

ronin


Total Posts: 199
Joined: May 2006
 
Posted: 2017-07-11 16:15
TBH, the reasoning for the trades seems fairly arbitrary.

I don't know much about softs anyway, but I am not any wiser after having read the post.

E.g., what do these things cost to produce, is there fluctuation in supply and demand and what drives it, and how much of the price movement is speculative? At a minimum, I would expect to see some objective reasonaning for why something is cheap or expensive - and historical range usually doesn't count. There can be all sorts of reasons why prices spike temporarily.

Also, your reasoning for some of the trades is long gamma - you are waiting for events to drive prices up. You will pay a lot of money while you wait for these events, and when they happen they may turn out differently from what you expect.

"People say nothing's impossible, but I do nothing every day" --Winnie The Pooh

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-11 17:49
@ronin

> I would expect to see some objective reasonaning for why something is cheap or
>expensive - and historical range usually doesn't count.
In case of stocks (without reference to fundamentals) and in case of a revolution like shale oil I would agree with this statement.

However, to my knowledge, there is no revolution w.r.t to the production (or consumption) of coffee and cocoa. Moreover, according to the news the supply actually falls (the question is of course, to what extent these news are trustworthy: I know from the first hand about Russian cold summer but for Ghana and Ivory Coast it is not the case).
And it is well-known that the commodities market is heavily affected by speculators. Thus: since there is no (widely known) structural changes of production and consumption, it is not so implausible to assume that current prices are irrationally low.

>Also, your reasoning for some of the trades is long gamma - you are waiting for >events to drive prices up. You will pay a lot of money while you wait for these >events, and when they happen they may turn out differently from what you expect.
I would talk here rather about roll costs and not about gamma vs. theta (I considered no options) but I agree with your point.
Of course there is such risk and as I already said, I am going to scrutinize them if I find a reliable history of futures prices.
However, historical (yes, again historical) analysis shows that the (agricultural) commodities medium cycles last 5-6 years. Most of what I mentioned grew for 3 years and now are falling for 2nd or 3rd year. That's why I say: trend followers - not yet, mean reversion guys can gradually start.

BTW, allegedly, Pure Beta Cocoa ETN (CHOC) is much less affected by contango but it of course should be checked.

www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

rftx713


Total Posts: 77
Joined: May 2016
 
Posted: 2017-07-11 18:41
I'm starting to think you're trolling to keep the conversation active and get more clicks on your blog post. You're making (incorrect) blanket statements about things that you admittedly aren't an expert in, and then not providing the requested analysis for the recommendations in your post.

"The forward curve was inverse so the market was anticipating the decline" is one dead giveaway.

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-11 20:18
>I'm starting to think you're trolling to keep the conversation active
No, I don't.
You probably try but in this case it is zwecklos

>The forward curve was inverse so the market was anticipating the decline"
Yes, normally commodity futures (and esp. oil due to storage costs, let alone market price of risk) are traded with contango. Backwardation often means that the market anticipates a price fall.
In particular, I am currently short in Zinc because price grew exuberantly and the forward curve is inverse.

www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

rftx713


Total Posts: 77
Joined: May 2016
 
Posted: 2017-07-12 04:08
I think we're done here :)

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-12 11:54
@rftx713
I expected you will [try to] disprove my statement about the reasons behind contango and backwardation, if disagreed.
But if "I think we're done here :)" is all what you can say, then we are indeed done here.


www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

tbretagn


Total Posts: 242
Joined: Oct 2004
 
Posted: 2017-07-12 12:03
> In particular, I am currently short in Zinc because price grew exuberantly and the forward curve is inverse.
Do you think that just maybe there is a shortage of zinc coupled with a high demand which means that people might want to price time value of availability in a more expensive manner?
I'd say you should look much more into the drivers of the actual underlyings rather than the price action.
So don't take it personally when people call you a tourist because that's what you are currently sounding like.

And you can take that from someone who ended up on a base metals desk after 7 years of looking at short term interest rates (aka "whaoo I really know nothing so maybe I should do a deep dive").

Et meme si ce n'est pas vrai, il faut croire en l'histoire ancienne

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-12 13:29
@tbretagn

>> In particular, I am currently short in Zinc because price grew exuberantly and the forward curve is inverse.
>Do you think that just maybe there is a shortage of zinc coupled with a high demand which means that people might want to price time value of availability in a more expensive manner?
I don't exclude this scenario.
But, as I wrote in my post:
> Anyway, I likely would not short zinc per se but in the portfolio context it is a good >diversification in the sense of market neutrality
(in particular, I am long in Nickel)

>So don't take it personally
I don't. I welcome any critics - whatever hard - as long as it remains sachlich

>when people call you a tourist because
>that's what you are currently sounding like.
Yes, I never claimed to be an expert in [all] commodities and I state in abstract that "we conduct *lite* analysis".
I am myself (though being quant and statistician) strongly against blind quantitative analysis, I am for recognizing the fundamentals behind.
But in real life it is always a trade-off between analysis comprehension and time costs. In this sense let me mention the excellent book What I Learned Losing A Million Dollars: there was *very successful* trader who traded lumber and always was wondering why they trade a lumber, painted in green, with a large discount.

But as I say, I do strive to recognize fundamentals and I would be grateful if you provide me a link to trustworthy analysis of demand and supply for any commodity I mentioned in my post.

www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

ronin


Total Posts: 199
Joined: May 2006
 
Posted: 2017-07-12 15:34
@fm,

Again, on a constructive note.

Have you ever heard of the "Cadbury Creme Egg Scandal" or the "New Toblerone Bar Outrage"? Price of cocoa was high, so manufacturers found ways to use less cocoa. The consumption of cocoa duly dropped.

Now the price of cocoa is low again, but the manufacturers are presumably unlikely to switch back. Why? Well, common sense would say that the reaction was bad enough first time around, so they would be crazy to risk going through it again any time soon.

I have no clue whether that has affected supply in any way. Are there some sources of cocoa which are now unprofitable and they are shutting down? If they are, and it affects a meaningful volume, that might be a reason to go long. If not, I don't see it.

Does that count as a "revolution"? Maybe, maybe not. But it is a factor.

Or take your argument around wheat. The world produces more wheat than coffee or cocoa. Fair enough.

The thing is, the world also consumes more wheat than coffee or cocoa. A kilo of wheat is nothing - as a random guess, an average household probably goes through a kilo of wheat in a day or so. But a kilo of coffee is a lot of coffeee. And a kilo of raw cocoa is a lot of raw cocoa. The average household would probably take months to go through a kilo of coffee and a kilo of cocoa.

So supply itself tells you nothing without demand. And without supply and demand, price history alone tells you nothing.

>I would be grateful if you provide me a link to trustworthy analysis of demand and supply for any commodity I mentioned in my post

Collecting and publishing that sort of data is what various bureaus of statistics do for a living. Some of it can be accessed through Bloomberg/Reuters/Quandl/whatever, and for some of it you have to go directly.

If you want analysis, look at consulting house reports. The reports usually cost some money, but sometimes they give them away for free.


"People say nothing's impossible, but I do nothing every day" --Winnie The Pooh

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-12 15:53
@ronin
>Have you ever heard of the "Cadbury Creme Egg Scandal" or the "New Toblerone Bar Outrage"?
No, I haven't. But I collect the cases like VW Dieselgate, Enron, shale Oil and so on.
This seems to be a good item for my collection, thank you.

>Or take your argument around wheat. The world produces more wheat than coffee or cocoa.
My argument is not the world produces more wheat than coffee or cocoa but that there are more produces, and what is more important, at both sides of ocean.
In simple words, a cold summer in Russia may be compensated with a particularly good harvest in Canada.
However, if a drought or hurricane devastates cocoa plantation in Ghana and/or Ivory Coast (if it happens, it will likely be "and", not "or") then there is no producer to compensate the shortfall.

>If you want analysis, look at consulting house reports.
Well, I am aware of it :)
But it also a well-known fact that most of these reports are,.. well, not worth reading.
That's why one must filter what to read and what not.
Being an expert for German stocks and energy markets I have my preferred sources of information.
So I hoped that e.g. "someone who ended up on a base metals desk after 7 years of looking at short term interest rates" will name the sites/consulting houses, whose reports he prefers to read.

www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students

finanzmaster


Total Posts: 118
Joined: Feb 2011
 
Posted: 2017-07-16 18:33
As, promised the follow-up analysis of the rollover costs effect.

@contango_and_cash, sorry, I [ab]used you nickname in the title of my post but it is so relevant that I simply could not help it :)

www.yetanotherquant.com - Knowledge rather than Hope: A Book for Retail Investors and Mathematical Finance Students
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