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

http://stockcharts.com/freecharts/candleglance.html?DDP,AGA,BOM,ERY,DNO,DTO,SZO,SCO,DWTI,DGAZ,KOLD,GASX|B|P5,3,3
http://stockcharts.com/freecharts/candleglance.html?DZZ,DGZ,DGLD,GLL,ZSL,dslv,DUST|B|P5,3,3

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!

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 "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

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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.
http://finance.yahoo.com/news/obama-launch-government-backed-retirement-110000794.html

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...
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http://www.zerohedge.com/news/2014-01-28/marc-faber-warns-insiders-are-selling-crazy-short-us-stocks-buy-treasuries-gold
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You Are Mine

Real Stuff

As I was reflecting on 'how things don't fit together anymore' in The Big Dogs and HorseShit post (link) back in early December 2013, I was keep going back to situation with commodities. S&P has gone back down to levels of two months ago, but all it did was to relieve some overbought conditions. As nasty as last Friday candle looks, it brought NYAD indicator into (at-least) bounce territory. We have been down this road so many times in 2013, its kinda comical to watch it again. I am withholding judgement on index direction and levels for now. System 9 allocation is a bit over 50%, mostly long with SRS and 1/2TBT.

 For a variety of reasons, my mind keeps drifting back to commodities -  real, heavy... you know...stuff. Some of them are more important than others, driven by different fundamentals, politics, investment fads etc. There are so many opinions and various research out there, plus my own views - makes trading decisions a very conflicting process. As usual, when I smell investment opportunity, I trust my gut, but go by charts. Price plot contains all the information I need. Commodity Index turned out to be a complicated problem.

The definitive paper on subject of Commodities Indexing seems to be " Facts and Fantasies about Commodity Futures" by Wharton and Yale professors.

http://fic.wharton.upenn.edu/fic/papers/06/0607.pdf

I haven't read whole thing yet, but here is from their Summary:

We construct an equally-weighted index of commodity futures... The correlation with stocks and bonds is negative over most horizons, and the negative correlation is stronger over longer holding periods... commodity futures perform better in periods of unexpected inflation, when stock and bond returns generally disappoint.

 'All Down' bear market had been something I was pondering about for years. Stocks, bonds and commodities all down together, with no place to hide, would be a truly catastrophic financial condition. Still only a theoretical possibility, especially with commodities down so much already... Sure, corn and cotton can fall, but they are not going to zero. Can't say the same about FB and TWTR.

 "Unexpected inflation" my ass. Inflation has been here, much higher that reported numbers, and very very real. Not if, but when it will become 'official' - that will be a truly 'unexpected', Black Swan type of event - inevitably leading to rapid repricing of all Real Stuff. Timing is uncertain, so I'm taking it one step at the time, in order to not get killed (financially) between now and then.

 There is also a matter of Commodity SuperCycle and Kondratiev Cycle, but I don't want to get into it now.

Thomson Reuters/Jefferies CRB Index is the oldest, but it undergone so many revisions over the years, I don't know if long term chart should even be considered.
Present composition is 19 commodities, minimum of two delivery months, 5-6 months out. Abnormally large allocation to Crude Oil at 23%, while Silver and Wheat are only 1%.
Energy: 39%
Agriculture: 41%
Precious Metals: 7%
Base/Industrial Metals: 13%
http://thomsonreuters.com/commodity-indices/?subsector=commodities-market

 Thomson Reuters Equal Weight Continuous Commodity Index (CCI) is calculated the same way CRB was done prior to 1995. Equal weight of 17  components, 2 to 5 delivery months, up to 6 months out, arithmetically averaged to 5.88% each. Notable that CCI doesn't have Aluminum, Nickel and Gasoline, but has Platinum and Soy Oil.
There is an GreenHaven Continuous Commodity Index Fund (GCC) etf that closely tracks CCI and rebalanced daily. Exp ratio is close to 1%!
http://www.greenhavenfunds.com/about-gcc.php
Energy - 18%
Agriculture - 34%
Softs - 24%
Metals - 24%

  Then there is a Goldman Sachs Commodity Index (S&P GSCI), created by evil's at GS right on time for 2007-2008 world food price crisis. Then they sold it to S&P (McGraw Hill), who have zilch info on their site. All I know is there are 24 components, weighted according to world production. Its like market-cap weight, but based on some arbitrary opinion (I guess).

$GNX index seems closely tracked by GSG  iShares etf-Trust with 0.75% exp ratio. All they do is buy 100% futures contracts for S&P GSCI Excess Return Index and hold 0% Treasury Bills as collateral.

The same miscreants from McGraw Hill own Dow-Jones UBS commodity index, but thru different web-site and also will very little info. There seems to be 22 components, with limits of no less than 2% and no more than 15% allocation to each futures, and no sector can represent more than 33%.
DJP is etf for that from iPath with 0.75% fee. I only found 10 holdings in their fact sheet, largest are Nat Gas (12%) and Crude Oil (10%). Complete fucking scam. May be I should invest into MHFI?

Interesting approach of Deutsche Bank Liquid Commodity Index (DBLCI) used by PowerShares DBC. They take 14 most heavily traded contracts in the World, set base weight in November of each year, and just let it roll until next re-balancing. DBC is the biggest and most active commodity index etf.
http://www.invescopowershares.com/products/overview.aspx?ticker=dbc#dist

 And then there is Jim Rogers, Mr Bow-Tie himself, with RJI - Rogers International Commodities Index etf, with traditional 0.75% exp ratio. This monstrosity is based on 37 commodities, heavily weighted in Oil, but seems the most complete and sensible allocation to all the Real Stuff. 
http://www.rogersrawmaterials.com/weight.asp 
RJI is rebalanced at the start of every month back to initial weights, that changed very little in almost 20 years of index history.

http://stockcharts.com/freecharts/candleglance.html?$CRB,$CCI,GCC,$GNX,GSG,DJP,MHFI,DBC,RJI|C 

 Charts offer a couple of shocking revelations:
First of all - it doesn't even matter which methodology used, all these charts are fairly similar looking.
Secondly, Over the period since 2008, during bull and bear market, two indexes clearly outperform - equal weighted CCI and market weighted GSCI, and none of etf's even come close to matching performance of indexes.
And finally, and it depends on a period selected for relative performance analysis, but some of worst performers are GSG and DJP - both based on indexes published by McGraw Hill. Meanwhile stock of thy lowly publisher MHFI is up over 300% since 2009 low.

System 12 - 2014

System 12 will trade exclusively in BCM account, starting now.
I found several problems with it, but the biggest one is: System is better than me. In order to track under/over-performance I will create unfiltered index of Mega Dozen (MD Control): equal weight, 1 unit size with fractional shares count, no commissions or slippage, no dividends.

Second change I am making is moving re-balancing into mid month. End-to-beginning of the month period seems too common time frame and causing some whipsaw. I will record MD on 15th of every month. MD Control will sell on 16th, buy new on 17th, unless its a weekend (then use following business day). System 12 will continue to use standard PP (positioning period), following 15th of the month.

TM, AMZN, BAC, T

This is MD:
http://stockcharts.com/freecharts/candleglance.html?aapl,xom,goog,msft,ptr,brk/b,ge,jnj,wmt,wfc,rds/b,cvx|B|P5,3,3
MD Control is slightly under-weather.
WFC ready to go, JNJ close
AAPL, XOM (30b), GOOG (30a), good, but earnings coming up on 27-30th
RDS good, not sure when earnings. Year end in Dec., results published in March?
BRK annual report in Feb-March?
WMT 2/20b

This is SD:
http://stockcharts.com/freecharts/candleglance.html?HSBC,JPM,PG,IBM,PFE,CHL,NVS,VOD,TM,AMZN,BAC,T|B|P5,3,3
NVS,VOD, AMZN (30), BAC, HSBC, JPM, PFE (28)
 HSBC annual report in Feb?

Hunting season is open.
 http://stockcharts.com/freecharts/candleglance.html?WFC,RDS/b,AAPL,XOM,GOOG,HSBC,JPM,BAC,NVS,VOD,AMZN,PFE|B|P5,3,3

See, I can write whole post without curse...

Bergamot Capital Management

Ever since I decided to Spring to Action, my life changed for better, as I look forward with great hope and anticipation. Exciting opportunities abound and I continue to come up with new plans (some more realistic than others). I guess I've been ready for some time, just my 'idea muscle' atrophied - I got old. I didn't noticed how I lost exuberance of young mind, even as I wrote here in January 2013:

   Fuck old people
World of the future belongs to young. Young of heart and mind. They don't know what is impossible, they don't know not to charge, they think they will never die... Do that and you will never grow old

Unfortunately, I forgot to practice what I preach.
By sheer chance I came across James Altucher:
http://www.jamesaltucher.com/2013/09/how-to-be-a-slave/ 
http://www.jamesaltucher.com/2013/12/the-ultimate-cheat-sheet-for-reinventing-yourself-2/ 
http://www.jamesaltucher.com/2012/04/how-to-have-great-ideas/ 
http://www.jamesaltucher.com/2012/10/how-to-become-an-idea-machine/ 
I've been exercising that 'idea muscle' ever since. Its working. Thanks, James

Bergamot Capital Management (that's me) will have several orientations, with a goal to diversify. In case something doesn't work out, I will have a workable current idea in progress to fall upon. Also very important to continuously look for new directions

1. Financial Speculation.
 I am in process of pulling capital from everywhere to fund my old OX account. They finally fixed streaming charts, so I don't have to look for new data provider. Costs are a bit high, but its an old dependable platform, so it will do for now. This will run Systems 11 and 12 continuously and on margin.

2. Real Estate.
There is little doubt that real estate cycle bottomed. Presently, its quite possible that some areas are somewhat overheated again, but not where I live. I figure there is at least 10 years before we see housing bubble again, so I have time. I am not sure if straight 'flipping' of properties will work now, as economy is rotten and not getting better. Plus I am out of cash. Methinks a better way is to take a fixer-up'er, and work on it slow and steady, in order to unlock its intrinsic value (Warren Buffet style).  Considering my long experience of fixing my own place and building 2 offices of MSPV, and a fact that I do a better job then most contractors, my own labor will naturally become my profit. I already started.

3. Investing in People.
Its one thing to invest in businesses. What is business, but a place with machines, phones and a stock ticker? People are the most important and the ONLY asset. Everything else can be bought on Amazon and sold on E-Bay. 
Enter DJ Boichik of Ibiza Entertainment. A dynamic personality, with IQ of genius and work ethics of Greatest Generation. 
A visionary. 
Young?
Fuck you.
I bet on Character and win every time!

4. I have a new idea about "How-to" video on You-Tube, with ads. I watch these videos all the time, they have thousands of hits. I got everything set for it already, just not sure where get the time to do it. I still need a bit of sleep, lol. This may have to wait until spring. Still its a kind of doable, realistic idea, that is also scalable (Taleb, yes). I need more of these...


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What a Journey!
Only a year ago I wrote a life-changing post "John Galt". Everything I wrote then is even more true now:

   I grown alot, I changed alot, I learned alot and I am not done. I haven't even begun. Looking at myself as if from the distance, I see this quiet confidence I never had before. Confidence of standing in a forward cabin of 100-miles in hour train. Not afraid, not confused.
        My method, My skills, My road 

Today... more than ever...
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Top-Less 2013

As John Hussman brilliantly put it (here):

...2013 was a bad risk that happened to work out well, not unlike the gains earned near the end of a Ponzi scheme.

SPX 2013

 

No, it was not an easy trend to ride. As I noted before, the only way to be long in 2013 was to disregard stop loss (be it a break of previous low, 50 day MA, sentiment, Elliott Wave, internal divergences etc), non withstanding real deteriorating economic conditions (based on my observations), and stupidity and ignorance of our elected leaders and their cronies.

My biggest losses of 2013 came from trying to short the market indexes. So much so, that summer short/hedge wiped out all early-year gains. Back end, and especially October - December period, put me back in black. Important to note that I was shorting the indexes, while being long individual stocks and sectors (via ETF's). I also traded a lot of commodities, both long and short, with mixed results. Grain longs cost me some, softs where about break even, silver short was a big winner early in a year, oil worked very well both ways.

This infatuation with S&P 500 index is rather a drawback to my approach. I continue to come up with different ways to better trade SPX via Systems 10 (discontinued), System 11, and major adjustment to System 1 (too late to implement in this cycle). This research takes a lot of time, detrimental to my P&L, and pulls resources (and gains) from System 9. As I Spring to Action, I will be looking for more balance, will be able to expand Theme Investing - all with goal to reduce dependance on intermediate term forecasting of index trends.

As we enter year 2014 warning signals abound. Here are some
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12/20/2013
SKEW sell signal
Only 4th time in history of SKEW since 1990, it gives 'Above 140' sell signal.
Previous times:

• 06/21/1990 - S&L Crisis (Stocks dropped 18% in next 3 months and the US entered recession)
• 10/16/1998 - Russian Default and LTCM (Stocks soared 22% in the next 3 months and the dot-com bubble was born)
• 03/16/2006 - Housing Bubble peak (Stock dropped 6% in next 3 months and the 'great recession' started within a year)

http://www.zerohedge.com/news/2013-12-21/last-3-times-happened-markets-turmoiled

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II most bullish sentiment on record (since 1990's). Implication being - if everybody bullish, who is left to buy? BTFATH...

This, Sornette log bubble and 1929 analog here:
http://www.zerohedge.com/news/2014-01-13/just-three-charts

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I take this guy very seriously, as his investment time frame is equal-to-little-longer then mine, and he is usually right on a money. His message - be careful
http://fat-pitch.blogspot.com/2014/01/weekly-market-summary.html#more
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Various cycle works project turbulence ahead in 2014

 

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Then, there is  John Hampson of  http://solarcycles.net/, who does very detailed analysis of sun/moon cycles and their effect on markets and mass physiology. Although it is still considered unorthodox approach by many, I am all over it. Having observed Sun, geomagnetic activity and Moon phases in real time and their effect on my co-workers, friends and family, and market, I think its safe to extrapolate results onto Northern Hemisphere population as a whole.

I've been watching this unfold for about a year, wrote about high Solar activity here in May 2013.
As for Moon Phases - its no joke:
http://ibergamot.blogspot.com/2012/08/read-moon-phases-im-not-crazy.html

Specifically, we are going right thru Solar Cycle Maximum, as Sun's poles flipped couple of weeks ago.
The following quote is from here: 

Historically, solar maxima have correlated with earthquakes and peaks in temperature oscillation. They have also correlated with protest/war/revolution, inflation oscillation peaks and speculative parabolic peaks (often secular bull peaks). With both magnetic poles now having flipped for SC24 maximum...the solar max then gives way to economic recession...

Important to note, that although three prior Solar Cycle peaks where followed by economic recession, they didn't start right away, and where not necessary accompanied by catastrophic bear market everywhere, but correlation is undeniable. Causation? I got your hard data right here, mothafucka:

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David Collum - 2013 Year in Review

He comes in at 5min and again at 15min. He said everything I do, or is it the other way around? Also, all this has been wrong for at-least a year, and would not help to make money. Quite the opposite. Still...
 http://www.peakprosperity.com/blog/84101/2013-year-in-review

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Of course, Aden sisters and Louise Yamada are bullish as shit. Have they ever been right about anything? Shills...
http://www.marketwatch.com/story/there-are-all-sorts-of-reasons-to-remain-bullish-2013-12-31?link=MW_TD_latest
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One my favorite 'Characters', Marc Faber :
"We are in a gigantic financial asset bubble,"  "everybody's bullish", "...this could burst any day. I think we are very stretched." bitcoin and more. He's been saying all this for a while, it doesn't make him wrong, just early


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Character

According to Google, 'Character' is a "the mental and moral qualities distinctive to an individual."

As one of my favorites, Mr Wolfe in Pulp Fiction pointed out:

Just because you are a character doesn't mean that you have character.

Two of my biggest gains of 2013 came from investing in companies led by very strong personalities, extraordinary people, real 'Characters'.   A series of profitable trades in strong uptrend of Navios Marine (NM) made me think of Angeliki Frangou each and every time. Its not an accident that while doing initial analysis of shipping industry in March 2013 (in Discovery at Sea post), I picked her interview out of all speakers of latest TradeWinds conference.  Mindboggling 400% profit in TSLA was delivered courtesy of Mr. Elon Musk of Tesla (TSLA) and SolarCity (SCTY). I actually started investing in SCTY in this post (link),  based solely on "young faces of their management team". Company just came public, so I had no indicators, no support/resistance, no earnings, no price history. I wrote:

...it gives me real pleasure to see young faces of their management team. I am a pretty good  face reader, and I am smiling looking at these boys and girls... ...management of SCTY are young, ambitious, driven young people. In finance it's bad, in service/manufacturing it is a combination that been changing the world thru-out history. Look up Elon Musk and see what he did, and what he set out to do.
Having said that, my stop is below most recent low, until further instructions...

“Character is like a tree and reputation its shadow. The shadow is what we think it is and the tree is the real thing.”
― Abraham Lincoln

"Character cannot be developed in ease and quiet. Only through experience of trial and suffering can the soul be strengthened, vision cleared, ambition inspired, and success achieved."
- HELEN KELLER (1880-1968) American blind and deaf writer/lecturer

 “Fame is a vapor, popularity is an accident, riches take wings, those who cheer today may curse tomorrow and only one thing endures - character.”
― Harry S. Truman

 “Love should be treated like a business deal, but every business deal has its own terms and its own currency. And in love, the currency is virtue. You love people not for what you do for them or what they do for you. You love them for the values, the virtues, which they have achieved in their own character.”
― Ayn Rand

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I find it bit alarming that usage of the word 'Character' has been dwindling over past 150 years

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Wally Weitz, whose flagship Weitz Partners Value Fund is celebrating its thirty year anniversary, and Tom Russo, with his market-beating Semper Vic Partners Fund

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This is how Marc Faber lives
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