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Sunday, January 26, 2014

Short Commodities Short

Some of my biggest losses in 2013 where stocks index shorts. While operating in non-margin LB account, only way to short is thru leveraged short etf's - and they carry their own set of practical problems. Never mind the futility of attempts to short S&P 500 during roaring bull market, I am talking about decay of leveraged etf's. I experienced it first hand in SDS, which suppose to be the most efficient and liquid vehicle to short major index, but was decaying by a full percentage point per month. Now , equipped with (almost) full power BCM account, I can try to use it to my advantage.

While reviewing Commodity Index etf's in  Real Stuff post (link), I was noticing how lousy this way is for investing into commodities. Not only all of them are at-least second derivative on underlying futures, options or some kind of swaps, but they are poorly managed. I don't know any people involved, and may be they are actually doing a good job, may be this is as good as it can be... I want to believe in responsible, smart people, performing their fiduciary duty... Somehow their customers are at constant disadvantage, suffering decay and high costs, and continuously under-performing corresponding index. All this is Commodities Index Long.

Take all problems of long commodity etf, flip it on its head, add leverage, wild futures swings and inefficient options market, multiply by illiquid equity etf market, raise to power of Wall Street sociopaths - and bingo - formula for leveraged short commodities etf's. This must be a disaster of tremendous size, and looking at how many of them closed down last year - the 2nd year of major BEAR market in commodities !- they know there is a problem. THEY always know, I'm just following the bread crumbs.

The way to use this dilemma to my advantage is to  Short Commodities Short, but carefully. It requires for commodities to at-least not fall, they really don't even have to rally big - decay is on my side.

There is only one commodity index short - DDP; whole bunch of energy double and triple short etf's (as it should be - oil and gas are the biggest component of any commodity index); closely followed by gold and silver. Specifically PM inverse etf's are very liquid with active volume pattern - must be real popular these days... he-he


I don't have any short interest info on these, but Finviz study reveals monster volatility on weekly time frame. Not a  single one would be considered by System 12, in fact its an exact inverse of every rule of System 12.
 These following charts are the real world results of this atrocity.
So what did you trade during 2-year long commodity bear-market?
That -95% disgrace is ERY - Direxion  Energy 3x Bear
Gold and Silver shorts are a definition of  'monkey hammer', especially DSLV - now that looks almost criminal!

 "He who fights with monsters should look to it that he himself does not become a monster. And when you gaze long into an abyss the abyss also gazes into you." - Friedrich Nietzsche

UPDATE 2/3/2014
Well, unfortunately things don't always work out in real world, and sometimes not even due to my own error. Specifically, this excellent notion of shorting leveraged inverse commodity etf's -
a complete fucking scam.

First of all, these shares are not readily available for short sale at my brokerage OptionsXpress. I understand the mechanics of short sale and , yes, its possible for any security (even actively traded) to be 'hard to borrow'. An option to call a representative was a way to go. I did. Surprise! There are some shares available, not for all symbols, not many, not all the time, in odd amounts, but available nevertheless. So I shorted whatever I could get - I didn't need too much, because of my position size rules. All is well in BCM land...

Then on Friday 1/31/2014 - boom! - all my short shares covered by brokers order (cough...Amy...cough), because they are no longer available... WTF, you know...?  I send an angry e-mail, but not expecting much. Brokers can do whatever they want. I should be looking for new broker, or just go back to Interactive Brokers (shit, I don't like so many things about them), which will make me re-start System 12 again. Again?! OMFG!

Obviously, I am pulling this theme. Its a good, practical idea... oh, screw that - its a fucking brilliant idea!..., but its not robust, and prone to failure thru no fault of my own.
I know 'when to fold 'em'...

-------------------------------------IN THE NEWS-------------------------
Obammer announced "My RA" during State of the Union Address.

MyRA will be like Roth IRA, but with holdings backed by the U.S. government like savings bonds.
A-HA - this is where QE bonds going to go! Will be sold back to muppets! Un-fucking-believable!
Sounds like a great set-up: 15K maximum contribution for 30 years, earning variable rate (that's your Treasury Bonds), practically no minimum contribution limit, and (because its after-tax money) contribution can be withdraw at any time tax-free (didn't I already said that?). Yep, its all tax-free after taxes paid, except for gains that are taxable again.
If family makes more that 191K a year, they can not play.
 "MyRA guarantees a decent return with no risk of losing what you put in," President Barack Obama said
Oh, I was worried there for a second...

You Are Mine

1 comment:

  1. "If you want your children to turn out well, spend twice as much time with them, and half as much money."
    -- Abigail Van Buren