Global Correction

[Paul MBMG]

However, as far as commodities are concerned, it wasn't too difficult to predict that commodities would drop as demand is sliding, fast, especially in China and India.

My wife and I know quite a few business people in China and/or people working for hotels, factories, plants, real estate etc. but also European business people importing from China.

LaoPo

This is where most of the people get this story wrong. Commodity prices are/were high because the demand for the instrument that prices commodities was high. Demand for the underlying commodity is but a peripheral story and has very little to do with what's happening now. If the markets become properly regulated that may change .

and let me know if this one is of interest -

One topic raised by Midas MitonOptimals's Scott Campbell during his recent visit to the City of Angels was the way that an influx of investment capital, mainly institutional, has exacerbated the recent rises in commodity prices. Scott differentiated the impact and effects on commodity prices of index investors, actual users, speculators and traders in the physical markets.

With commodities the various indices only make up 11% of the volume of the actual commodity markets themselves. The indices generally equate to long positions which are meant to emulate for investors the increases (and decreases) in physical commodity prices on the spot market. Within the physical markets there is a whole range of trading activity in addition to this simple spot trading of commodities :

- producers will often forward sell future production

- producers, traders and other user frequently use short positions by to hedge out the physical commodities that they own.

- speculators such as hedge funds and traders continuously trade long and short positions.

Whilst neither speculators nor index investors usually believe that index investors do not have the same impact on commodity prices as speculators. Whilst this may be correct on some levels, there can be no doubt that the ever burgeoning investments into commodity indices over the past 12 months has influenced prices significantly. Scott also believes that US Political rhetoric concerning legislation to restrict commodity index investing (largely intended to bring down the oil price) may have had much less of an effect than was anticipated. Scott points out that in America back in the 1950’s The Onion Futures Act was enacted for mainly political reasons but had very little impact on reducing prices and volatility, both of which increased simply because onions were scarce and the speculators knew it. In those days there were no ETFs or CFDs so the additional upward pricing pressure of an Onion Index didn't exist either!!

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG International cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG International. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

[Chaimai]

WHAT ARE PRUDENT INVESTMENT STRATEGIES IN A STAGFLATIONARY ENVIRONMENT?

The short term answer is to hold cash, cash and more cash.

Hmmmm! big post (and technically beyond me) but ............ if everyone is holding cash, why is there a liquidity crisis ?

[Naam]

WHAT ARE PRUDENT INVESTMENT STRATEGIES IN A STAGFLATIONARY ENVIRONMENT?

The short term answer is to hold cash, cash and more cash.

Hmmmm! big post (and technically beyond me) but ............ if everyone is holding cash, why is there a liquidity crisis ?

the liquidity crisis does exist. banks are hesitating loaning each other money although they are flush with cash held by their own clients. the situation is now slightly better than six months ago when private investors were paid a pittance on their cash although interbank rates were much higher.

[Chaimai]

WHAT ARE PRUDENT INVESTMENT STRATEGIES IN A STAGFLATIONARY ENVIRONMENT?

The short term answer is to hold cash, cash and more cash.

Hmmmm! big post (and technically beyond me) but ............ if everyone is holding cash, why is there a liquidity crisis ?

the liquidity crisis does exist. banks are hesitating loaning each other money although they are flush with cash held by their own clients. the situation is now slightly better than six months ago when private investors were paid a pittance on their cash although interbank rates were much higher.

So, as I understand it. the institutions have the capacity to lend but not the ability - sorry - desire to lend - sorry, perhaps I did mean ABILITY..... to lend to an acceptable credit risk rather than on a high-yielding, sub-prime book where due diligence was undertaken by Stevie Wonder.

[Paul MBMG]

WHAT ARE PRUDENT INVESTMENT STRATEGIES IN A STAGFLATIONARY ENVIRONMENT?

The short term answer is to hold cash, cash and more cash.

Hmmmm! big post (and technically beyond me) but ............ if everyone is holding cash, why is there a liquidity crisis ?

the liquidity crisis does exist. banks are hesitating loaning each other money although they are flush with cash held by their own clients. the situation is now slightly better than six months ago when private investors were paid a pittance on their cash although interbank rates were much higher.

So, as I understand it. the institutions have the capacity to lend but not the ability - sorry - desire to lend - sorry, perhaps I did mean ABILITY..... to lend to an acceptable credit risk rather than on a high-yielding, sub-prime book where due diligence was undertaken by Stevie Wonder.

confidence is an issue - banks stop lending to banks or even slow down slightly that stops money circulating so well in the system

Also balance sheets have been damaged by writing off/writing down overvalued assets - because banks can lend multiples of their net assets/liquid assets every $1 they write off takes something more like $5-$10 out of circulation in terms of lending to corporates, personal mortgages, car loans etc

Also - the fact that cash is a smart startegy doesn't mean that most people have followed it; in fact hot money has poured out of stocks and into commodities - the US is at record levels of consumer and government debt. We recommended cash and alternatives and commodities overweight around 18 months ago. We weren;t the only ones but we were one of a small number of voices in the wilderness- most money was pouring into stocks and property back then......

[cloudhopper]

Interesting article on subsidy-driven stagflation in SE Asia-

http://www.bloomberg.com/apps/news?pid=206...refer=exclusive

[AFKAFSinLOS]

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Sorry, got to totally disagree on that one. I'm a big fan of equities, and want commodity funds and ETFs to diversify risk... Individuals need to be able to put hedges in places as well if they want to. Commodity funds and absolute funds can have an important role to play in portfolios of us little guys too, as has been particularly evident in the last 12 months...

When you're down say 30%+ on a single country equity fund, there's a nice warm feeling knowing you've got an ETF commodity fund going in the opposite direction... even when your equity exposure exceeds your commodity exposure...

Edited July 31, 2008 by AFKAFSinLOS

[lannarebirth]

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Sorry, got to totally disagree on that one. I'm a big fan of equities, and want commodity funds and ETFs to diversify risk... Individuals need to be able to put hedges in places as well if they want to. Commodity funds and absolute funds can have an important role to play in portfolios of us little guys too, as has been particularly evident in the last 12 months...

When you're down say 30%+ on a single country equity fund, there's a nice warm feeling knowing you've got an ETF commodity fund going in the opposite direction... even when your equity exposure exceeds your commodity exposure...

Where do you keep the commodities you buy? Do you have any idea at all what you've "bought"?

[AFKAFSinLOS]

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Sorry, got to totally disagree on that one. I'm a big fan of equities, and want commodity funds and ETFs to diversify risk... Individuals need to be able to put hedges in places as well if they want to. Commodity funds and absolute funds can have an important role to play in portfolios of us little guys too, as has been particularly evident in the last 12 months...

When you're down say 30%+ on a single country equity fund, there's a nice warm feeling knowing you've got an ETF commodity fund going in the opposite direction... even when your equity exposure exceeds your commodity exposure...

Where do you keep the commodities you buy? Do you have any idea at all what you've "bought"?

I don't buy any physical commodities... with the exception of jewellry for the big boss at home...

For ETFs or commodity funds, it's very easy to just read their key features, look at period end holdings, discrete performance, cumulative performance etc. You're right that day to day I don't know what the exact holdings are. But then again day to day I don't know what the exact day to day holdings of the equity funds I have are either...

Not sure if that's what you mean, but below is a link for one of the funds I hold. It's part of one of the on-line portfolios I have... There's enough info on there for what I'm looking for if you click on the various tabs.

http://www.h-l.co.uk/fund_research/securit...edol/B195JD8.hl

Edited July 31, 2008 by AFKAFSinLOS

[lannarebirth]

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Sorry, got to totally disagree on that one. I'm a big fan of equities, and want commodity funds and ETFs to diversify risk... Individuals need to be able to put hedges in places as well if they want to. Commodity funds and absolute funds can have an important role to play in portfolios of us little guys too, as has been particularly evident in the last 12 months...

When you're down say 30%+ on a single country equity fund, there's a nice warm feeling knowing you've got an ETF commodity fund going in the opposite direction... even when your equity exposure exceeds your commodity exposure...

Where do you keep the commodities you buy? Do you have any idea at all what you've "bought"?

I don't buy any physical commodities... with the exception of jewellry for the big boss at home...

For ETFs or commodity funds, it's very easy to just read their key features, look at period end holdings, discrete performance, cumulative performance etc. You're right that day to day I don't know what the exact holdings are. But then again day to day I don't know what the exact day to day holdings of the equity funds I have are either...

Not sure if that's what you mean, but below is a link for one of the funds I hold. It's part of one of the on-line portfolios I have... There's enough info on there for what I'm looking for if you click on the various tabs.

http://www.h-l.co.uk/fund_research/securit...edol/B195JD8.hl

It's a Fund of Funds. Watch your fees (fees on fees). Good Luck.

[teej]

Fees on fees. That's the kicker that I Buffet wants to make known on his famous Long Bet vs. a hedge fund (another point is paying % profits to the hedge fund manager).

But the fees on fees structure is definitely not made to make the investor rich. I hate fees!

[bingobongo]

tick tick kiddies........

it will soon be time to short the baht........hold on to your som tham Naam

Credibility crisis at the BoT

......raised substantially the risk of a run on the Thai currency, which despite Thailand's rich store of foreign reserves has recently come under heavy foreign selling pressure. Thai inflation hit 8.9% in June, the highest rate in over a decade.

Foreign-currency traders are on the look-out for policy mismatches to exploit and several have tuned into Thailand's out-of-whack real interest rates, which apart from the Philippines are Asia's highest at a negative 5.4%.

http://www.atimes.com/atimes/Southeast_Asia/JH01Ae02.html

[AFKAFSinLOS]

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Sorry, got to totally disagree on that one. I'm a big fan of equities, and want commodity funds and ETFs to diversify risk... Individuals need to be able to put hedges in places as well if they want to. Commodity funds and absolute funds can have an important role to play in portfolios of us little guys too, as has been particularly evident in the last 12 months...

When you're down say 30%+ on a single country equity fund, there's a nice warm feeling knowing you've got an ETF commodity fund going in the opposite direction... even when your equity exposure exceeds your commodity exposure...

Where do you keep the commodities you buy? Do you have any idea at all what you've "bought"?

I don't buy any physical commodities... with the exception of jewellry for the big boss at home...

For ETFs or commodity funds, it's very easy to just read their key features, look at period end holdings, discrete performance, cumulative performance etc. You're right that day to day I don't know what the exact holdings are. But then again day to day I don't know what the exact day to day holdings of the equity funds I have are either...

Not sure if that's what you mean, but below is a link for one of the funds I hold. It's part of one of the on-line portfolios I have... There's enough info on there for what I'm looking for if you click on the various tabs.

http://www.h-l.co.uk/fund_research/securit...edol/B195JD8.hl

It's a Fund of Funds. Watch your fees (fees on fees). Good Luck.

This particular one yes it's a fund of funds. Normally I'm not a fund of funds fan, and for equities strongly dislike them; but for commodities because I have smaller exposures than equities, and to be honest less skill/knowledge in this area, it suits me fine...

The other thing I like about this service, is the fees are very transparent, plus the broker rebates some back. eg 5% initial charge if I went direct, they HL give me back 4% netting to 1% effective initial charge. Annual charge is 1.75% and again they rebate 0.15% of that back to me. Total expense ratio is 1.84% p.a. I'm prepared to pay up to around 2% p.a for what I really want...

[Naam]

it will soon be time to short the baht.... hold on to your som tham Naam

i rarely eat som tam Bingo but i'd love the Baht to weaken. in fact most of us living in Thailand would love that. if you don't know why, just ask and i will explain

[bingobongo]

thank you Naam, you have shown me that being geriatric and being financial astute are not correlated.......

Thailand: Bank of Thailand Receives Ammunition for Rate Increase as Inflation Hits Decade High Inflation hit a decade high in Thailand in July, reinforcing the case for increases in interest rates. Official data released today showed that the consumer price index (CPI) rose by 9.2% on the year, standing as the fastest rate of inflation since July 1998. In month-on-month (m/m) terms, the index increased by 0.3%, slowing from the 1.2% gain recorded in June. Upward pressure on the index continued to be exerted by rising food and fuel prices. Fuel prices rose by 46.9% on the year in July, while food prices increased by 11.8% over the same period, inflated by the rising cost of flour, rice, and meat.

Significance: The Ministry of Finance remains vocally opposed to any rise in interest rates that could undermine domestic demand as the export outlook deteriorates. The future course of monetary policy in the near term will provide a test of the central bank's independence following the reconfiguration of the legal oversight of its operations

[Naam]

thank you Naam, you have shown me that being geriatric and being financial astute are not correlated.......

and you Bingo prove with nearly each of your postings that you are nothing but a little poor and bigmouthed boy hampered by inferiority complexes

[Paul MBMG]

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Sorry, got to totally disagree on that one. I'm a big fan of equities, and want commodity funds and ETFs to diversify risk... Individuals need to be able to put hedges in places as well if they want to. Commodity funds and absolute funds can have an important role to play in portfolios of us little guys too, as has been particularly evident in the last 12 months...

When you're down say 30%+ on a single country equity fund, there's a nice warm feeling knowing you've got an ETF commodity fund going in the opposite direction... even when your equity exposure exceeds your commodity exposure...

Where do you keep the commodities you buy? Do you have any idea at all what you've "bought"?

I don't buy any physical commodities... with the exception of jewellry for the big boss at home...

For ETFs or commodity funds, it's very easy to just read their key features, look at period end holdings, discrete performance, cumulative performance etc. You're right that day to day I don't know what the exact holdings are. But then again day to day I don't know what the exact day to day holdings of the equity funds I have are either...

Not sure if that's what you mean, but below is a link for one of the funds I hold. It's part of one of the on-line portfolios I have... There's enough info on there for what I'm looking for if you click on the various tabs.

http://www.h-l.co.uk/fund_research/securit...edol/B195JD8.hl

It's a Fund of Funds. Watch your fees (fees on fees). Good Luck.

This particular one yes it's a fund of funds. Normally I'm not a fund of funds fan, and for equities strongly dislike them; but for commodities because I have smaller exposures than equities, and to be honest less skill/knowledge in this area, it suits me fine...

The other thing I like about this service, is the fees are very transparent, plus the broker rebates some back. eg 5% initial charge if I went direct, they HL give me back 4% netting to 1% effective initial charge. Annual charge is 1.75% and again they rebate 0.15% of that back to me. Total expense ratio is 1.84% p.a. I'm prepared to pay up to around 2% p.a for what I really want...

Quite right AFK

there's a ,ot of nonsense talked about fees on FoFs that fail to take into account the rebates. I know FoFs where they receive as much as a 1% annual rebate and charge less than that in management fees but the same people who happily pay 1% more just to hold the undelryings won't buy the FoFs because of 'fees' even the Fofs are cheaper!!!

[lannarebirth]

Individual investors, or funds for that matter, have absolutely no business investing in the commodities market. Commodities futures markets were set up for producers, hedgers, and and the odd speculator. These "commodities funds" and ETFs that never have any intention of taking delivery, are going to get eviscerated one day and I will cheer their demise. Invest in companies that are involved with commodities? Sure, why not, but just know they are a cyclical sector of the broader market. Instructive to pull up multi decade charts.

MichaelMasters_1_.pdf

Sorry, got to totally disagree on that one. I'm a big fan of equities, and want commodity funds and ETFs to diversify risk... Individuals need to be able to put hedges in places as well if they want to. Commodity funds and absolute funds can have an important role to play in portfolios of us little guys too, as has been particularly evident in the last 12 months...

When you're down say 30%+ on a single country equity fund, there's a nice warm feeling knowing you've got an ETF commodity fund going in the opposite direction... even when your equity exposure exceeds your commodity exposure...

Where do you keep the commodities you buy? Do you have any idea at all what you've "bought"?

I don't buy any physical commodities... with the exception of jewellry for the big boss at home...

For ETFs or commodity funds, it's very easy to just read their key features, look at period end holdings, discrete performance, cumulative performance etc. You're right that day to day I don't know what the exact holdings are. But then again day to day I don't know what the exact day to day holdings of the equity funds I have are either...

Not sure if that's what you mean, but below is a link for one of the funds I hold. It's part of one of the on-line portfolios I have... There's enough info on there for what I'm looking for if you click on the various tabs.

http://www.h-l.co.uk/fund_research/securit...edol/B195JD8.hl

It's a Fund of Funds. Watch your fees (fees on fees). Good Luck.

This particular one yes it's a fund of funds. Normally I'm not a fund of funds fan, and for equities strongly dislike them; but for commodities because I have smaller exposures than equities, and to be honest less skill/knowledge in this area, it suits me fine...

The other thing I like about this service, is the fees are very transparent, plus the broker rebates some back. eg 5% initial charge if I went direct, they HL give me back 4% netting to 1% effective initial charge. Annual charge is 1.75% and again they rebate 0.15% of that back to me. Total expense ratio is 1.84% p.a. I'm prepared to pay up to around 2% p.a for what I really want...

Quite right AFK

there's a ,ot of nonsense talked about fees on FoFs that fail to take into account the rebates. I know FoFs where they receive as much as a 1% annual rebate and charge less than that in management fees but the same people who happily pay 1% more just to hold the undelryings won't buy the FoFs because of 'fees' even the Fofs are cheaper!!!

Another thing you never hear too much about is negative roll yields.

I find it terribly ironic that the "hard asset" crowd is drawn to these commodity/PM funds. They're a derivatives pyramid which most of the investors understand very little.

[AFKAFSinLOS]

...

I find it terribly ironic that the "hard asset" crowd is drawn to these commodity/PM funds. They're a derivatives pyramid which most of the investors understand very little.

Most things in life, including assets, often exhibit certain characteristics just because people expect them to. When you look at derivative valuations you see how models often become self-fulfilling. The fun is when they don't behave as expected. There are so many variables. If there weren't everyone would be making money all the time...

You like charting for example. The fact that there are so many chartists in the market looking thru the same lens means that whether you think it makes sense or not, charting will influence the markets. As do fundamentalists on the other hand... The point to take away from this is that you do not always need to understand the details and what is in the black box, only understand what you put in the black box vs what you likely get out. But no investor ever predicts the outcome and gets it right 100% of the time...

Derivatives are all all just variations on a theme: either future pricing or optionality, converted

into cashflows and discounted back to present value. They have a large impact on most assets classes these days... Including on themselves. Given derivatives are largely a zero sum game, once timing differences and accounting policies are eliminated and the cashflows settled; then if you believe there is a derivatives pyramid, there must be a reverse pyramid somewhere...

But a key point is that people do not play derivatives only, but also play underlyings, so the pyramid is never seen in isolation in the way you mention... In my book it is more dangerous for an individual investor to play only pure derivatives. The reason being a pure derivatives game is zero sum, and the individual will have less sophisticated models and proprietary trading mechanisms, in addition to transaction costs, compared to the institutional players. On balance in a derivatives only game the individual loses and institutions win.

On the other hand, equities usually increase in value over time, at a rate that outperforms inflation. Even taking into accounting funding costs it's not a zero sum game, unlike the derivatives only game. Hence for someone like myself, I prefer equities, where the odds are stacked in my favour, but "other products" including derivatives and commodities to smooth the downturns...

The scariest thing of course is when there is a fundamental shift in theories... including my own...

Edited August 4, 2008 by AFKAFSinLOS

[Paul MBMG]

...

I find it terribly ironic that the "hard asset" crowd is drawn to these commodity/PM funds. They're a derivatives pyramid which most of the investors understand very little.

Most things in life, including assets, often exhibit certain characteristics just because people expect them to. When you look at derivative valuations you see how models often become self-fulfilling. The fun is when they don't behave as expected. There are so many variables. If there weren't everyone would be making money all the time...

You like charting for example. The fact that there are so many chartists in the market looking thru the same lens means that whether you think it makes sense or not, charting will influence the markets. As do fundamentalists on the other hand... The point to take away from this is that you do not always need to understand the details and what is in the black box, only understand what you put in the black box vs what you likely get out. But no investor ever predicts the outcome and gets it right 100% of the time...

Derivatives are all all just variations on a theme: either future pricing or optionality, converted

into cashflows and discounted back to present value. They have a large impact on most assets classes these days... Including on themselves. Given derivatives are largely a zero sum game, once timing differences and accounting policies are eliminated and the cashflows settled; then if you believe there is a derivatives pyramid, there must be a reverse pyramid somewhere...

But a key point is that people do not play derivatives only, but also play underlyings, so the pyramid is never seen in isolation in the way you mention... In my book it is more dangerous for an individual investor to play only pure derivatives. The reason being a pure derivatives game is zero sum, and the individual will have less sophisticated models and proprietary trading mechanisms, in addition to transaction costs, compared to the institutional players

On the other hand, equities usually increase in value over time, at a rate that outperforms inflation. Even taking into accounting funding costs it's not a zero sum game, unlike a derivatives only game. Hence for someone like myself, I prefer equities, where the odds are stacked in my favour, but "other products" including derivatives and commodities to smooth the downturns...

The scariest thing of course is when there is a fundamental shift in theories...

One of the ways that you guys are smarter then the average investor many people don't realize that historically commodities go down in (real) prices over time. They expect that commodities are a hedge against inflation but for more periods than not this isn't the case. There are cycles when commodities outperform and we're in one right now.

What this really proves is the benefit of diversification of asset classes - don;t egt atatched to any single class - be ready to jump at a moment's notice - be open-minded to buying into every asset class and to selling them too.

[lannarebirth]

...

I find it terribly ironic that the "hard asset" crowd is drawn to these commodity/PM funds. They're a derivatives pyramid which most of the investors understand very little.

Most things in life, including assets, often exhibit certain characteristics just because people expect them to. When you look at derivative valuations you see how models often become self-fulfilling. The fun is when they don't behave as expected. There are so many variables. If there weren't everyone would be making money all the time...

What you see is the tail wagging the dog. People assume because prices are rising that demand is rising, when in fact, there is only demand for higher prices. Yes, it's self fulfilling in a closed end market but know if you can muck around in markets where you don't belong, so can legislators. Imagine if you applied the same principle to the life saving pharmaceutical markets, you could really get prices up.

You like charting for example. The fact that there are so many chartists in the market looking thru the same lens means that whether you think it makes sense or not, charting will influence the markets.

Some charting disciplines do that, briefly, but not for very long. BTW I doubt if there's anyone looking through the same lense I use. I know dozens of T/A, Cycle traders and they all use somthing a little bit different. It's just a way to gain a POV , it's psychology and money/trade management that make you money.

As do fundamentalists on the other hand... The point to take away from this is that you do not always need to understand the details and what is in the black box, only understand what you put in the black box vs what you likely get out. But no investor ever predicts the outcome and gets it right 100% of the time...

Derivatives are all all just variations on a theme: either future pricing or optionality, converted

into cashflows and discounted back to present value. They have a large impact on most assets classes these days... Including on themselves. Given derivatives are largely a zero sum game, once timing differences and accounting policies are eliminated and the cashflows settled; then if you believe there is a derivatives pyramid, there must be a reverse pyramid somewhere...

Most of the derivatives I trade settle in cash if I hold them till expiration. Not zero sum as there is premium to consider and if I roll them, roll yield and trading fees and of course leverage.

But a key point is that people do not play derivatives only, but also play underlyings, so the pyramid is never seen in isolation in the way you mention... In my book it is more dangerous for an individual investor to play only pure derivatives. The reason being a pure derivatives game is zero sum, and the individual will have less sophisticated models and proprietary trading mechanisms, in addition to transaction costs, compared to the institutional players. On balance in a derivatives only game the individual loses and institutions win.

Who plays the inderlying in commodities beside producers, hedgers and buyers seeking delivery?

On the other hand, equities usually increase in value over time, at a rate that outperforms inflation. Even taking into accounting funding costs it's not a zero sum game, unlike the derivatives only game. Hence for someone like myself, I prefer equities, where the odds are stacked in my favour, but "other products" including derivatives and commodities to smooth the downturns...

The scariest thing of course is when there is a fundamental shift in theories... including my own...

Anyhow, I wouldn't worry about it too much, I'm always a little early. I would say the most important thing in any healthy market is breadth. When the "nifty Fifty" in the 60's and the Nadaq in the 90's were topping out most everything else had been going down for some time. Now, everyone's attention is focused on Oil and to a lesser extent Gold as the headline representatives of "commodities". Alwyas a good idea to see what the other commodities are doing while everyone's attention is focused on one thing. Good Luck

[AFKAFSinLOS]

Derivatives are all all just variations on a theme: either future pricing or optionality, converted

into cashflows and discounted back to present value. They have a large impact on most assets classes these days... Including on themselves. Given derivatives are largely a zero sum game, once timing differences and accounting policies are eliminated and the cashflows settled; then if you believe there is a derivatives pyramid, there must be a reverse pyramid somewhere...

Most of the derivatives I trade settle in cash if I hold them till expiration. Not zero sum as there is premium to consider and if I roll them, roll yield and trading fees and of course leverage.

For each component you mention it is a zero sum game to the market/ within the market.

On cash settlement: one party has a cash outflow and the counterparty has an equal and opposite cash inflow at that point in time

For rollover: one counterparty rolls over an asset, one rolls over a liability

For premium: one receives and one pays

For funding: one borrows at a certain cost, one receives at that same cost

For margins: one pays a margin and one receives a margin

Each of the above nets to zero within the market. The only differences that occur are temporary timing differences on unrealised transactions, and where people use different valuation models. If both counterparties used the same valuation curves then any realised or unrealised mark-to-market on one is equal and opposite to the other.

At the end of the day, non-deliverable derivatives (settled in cash) are simply an exchange of cashflows usually been 2 counterparties, based on an underlying. Those cashflows take many forms, including terms such as fees/ premiums/ margins/ principal/ interest/funding etc but they are all simply cashflow exchanges.

The difference for underlyings, whether commodities or equities, is that they generate cashflows outside a relationship between players within the financial market. eg as a shareholder I receive dividends based on company profits which come mainly from customers...For a commodity someone mines it at a cost, someone buys it etc

At the end of the day the underlyings could survive without their derivatives, but the derivatives couldn't survive without the underlyings. As you say, unfortunately these days the tail often wags the dog. The irony is the dog could survive without it's tail but not the other way round...

The problems these days are that the combination of 1) derivatives and leveraging 2) increasing use of technology and faster information flows 3) increasing need for the media to make a story; all open the systems to abuses at several points, particularly in combination:

= take a long or short leveraged position, communicate it quickly and make news. By the time people have realised it is just fiction; the players have moved on... The fiction doesn't even need to be malicious, it can simply be mis-assumptions or mistakes that gets magnified...

With the vested interests flying around, and ability to manipulate these 3 factors, it's no surprise people lose sight of the dog...

Edited August 4, 2008 by AFKAFSinLOS

[lannarebirth]

Derivatives are all all just variations on a theme: either future pricing or optionality, converted

into cashflows and discounted back to present value. They have a large impact on most assets classes these days... Including on themselves. Given derivatives are largely a zero sum game, once timing differences and accounting policies are eliminated and the cashflows settled; then if you believe there is a derivatives pyramid, there must be a reverse pyramid somewhere...

Most of the derivatives I trade settle in cash if I hold them till expiration. Not zero sum as there is premium to consider and if I roll them, roll yield and trading fees and of course leverage.

I'll bet you loved the essay questions back at school.

For each component you mention it is a zero sum game to the market/ within the market.

On cash settlement: one party has a cash outflow and the counterparty has an equal and opposite cash inflow at that point in time

For rollover: one counterparty rolls over an asset, one rolls over a liability

For premium: one receives and one pays

For funding: one borrows at a certain cost, one receives at that same cost

For margins: one pays a margin and one receives a margin

Each of the above nets to zero within the market. The only differences that occur are temporary timing differences on unrealised transactions, and where people use different valuation models. If both counterparties used the same valuation curves then any realised or unrealised mark-to-market on one is equal and opposite to the other.

I don't care about any of that, I only care about my own costs and so should you. Believe me using leverage is not zero sum. One side takes on 00's% of risk while the other side takes in 4% (or whatever interest).

At the end of the day, non-deliverable derivatives (settled in cash) are simply an exchange of cashflows usually been 2 counterparties, based on an underlying. Those cashflows take many forms, including terms such as fees/ premiums/ margins/ principal/ interest/funding etc but they are all simply cashflow exchanges.

The difference for underlyings, whether commodities or equities, is that they generate cashflows outside a relationship between players within the financial market. eg as a shareholder I receive dividends based on company profits which come mainly from customers...For a commodity someone mines it at a cost, someone buys it etc

At the end of the day the underlyings could survive without their derivatives, but the derivatives couldn't survive without the underlyings. As you say, unfortunately these days the tail often wags the dog. The irony is the dog could survive without it's tail but not the other way round...

The problems these days are that the combination of 1) derivatives and leveraging 2) increasing use of technology and faster information flows 3) increasing need for the media to make a story; all open the systems to abuses at several points, particularly in combination:

= take a long or short leveraged position, communicate it quickly and make news. By the time people have realised it is just fiction; the players have moved on... The fiction doesn't even need to be malicious, it can simply be mis-assumptions or mistakes that gets magnified...

I haven't watched "the media" in years and it's true they can feed a mania, but the number one reason you left out is that too much money is chasing too little product, at any cost, despite not sufficient demand. How are they all going

to get out whole?

With the vested interests flying around, and ability to manipulate these 3 factors, it's no surprise people lose sight of the dog...

Anyhow, 've been housebound for a few weeks, so I'm chatting way more than normal. I'll undoubtedly be wrong about half the crap I'm spouting. Good Luck.

[AFKAFSinLOS]

Lanna

If you're only looking from one counterparty/person's point of view then investments, then agreed, it will rarely be a zero sum game. So when people talk of a zero sum game for derivatives they are always talking about the markets, and take that aspect for granted...On the example you give, one receives 4% and has very high risk on payment, the other pays say 4% and has very high potential for return. The risk and reward profiles for any one of the two inviduals are asymmetric in isolation, but when combined together they are the mirror images and net to zero.

The reason this concerns me, and I should "not just worry about myself " is the that in the whole derivatives game it nets to zero. Given instiutions are usually better placed than retail investors, on simple trading activities the institutions will generally win out over retail individuals. Why play a game where the odds are stacked against me? For me to gain, someone must lose... or put another way I will simply end up funding other people's gains.

For equities, they rise over time. Someone does not have to lose within the market for me to gain...

... the number one reason you left out is that too much money is chasing too little product, at any cost, despite not sufficient demand. How are they all going to get out whole?

I guess my wording wasn't so good. That's exactly what I was getting at by saying leveraging is one of the main issues. There is supply and demand for the derivatives, but that dwarfs the real supply and demand for the underlying, and is out of proportion.

For the bit about all getting out whole, that's again the key point for me on derivatives. By definition someone cannot get out whole...As the little guy, that will often be me... Hence I only want the exposures for their negative correlations to other assets or diversification, so I buy a part of one of the big guys funds...Put another way, I accept that I may not get out whole and pay a price, but accept that if it reduces volatility of my investments...

Hedging investments vs trading... Again another difference between us: you trade say volatility. I trade only to reduce overall volatility of my investments...

The natural question that comes out is how much leveraging is too much...or how much money should be allowed to chase how much product? Personally I think the markets have gone too far in being too free and open... that's not down to the hard asset owners, and the long players.

Edited August 4, 2008 by AFKAFSinLOS

[ray23]

Question time:

Does anyone have a thought as to growth in the alternative energy stocks over the next seven years?

Or now that oil is dropping are we giong back to business a usual

[lannarebirth]

Lanna

If you're only looking from one counterparty/person's point of view then investments, then agreed, it will rarely be a zero sum game. So when people talk of a zero sum game for derivatives they are always talking about the markets, and take that aspect for granted...On the example you give, one receives 4% and has very high risk on payment, (No risk at all actually, they'll sell it right out of your account and whatever else they need to to be made whole.) the other pays say 4% and has very high potential for return and loss. The risk and reward profiles for any one of the two inviduals are asymmetric in isolation, but when combined together they are the mirror images and net to zero.

The reason this concerns me, and I should "not just worry about myself " is the that in the whole derivatives game it nets to zero. Given instiutions are usually better placed than retail investors, on simple trading activities the institutions will generally win out over retail individuals. Why play a game where the odds are stacked against me? For me to gain, someone must lose... or put another way I will simply end up funding other people's gains. Not necessarily. You can have win/win situations. People tend to forget with futures and options, time is at least as important as price. More important in my work. For equities, they rise over time. Someone does not have to lose within the market for me to gain...

... the number one reason you left out is that too much money is chasing too little product, at any cost, despite not sufficient demand. How are they all going to get out whole?

I guess my wording wasn't so good. That's exactly what I was getting at by saying leveraging is one of the main issues. There is supply and demand for the derivatives, but that dwarfs the real supply and demand for the underlying, and is out of proportion.

For the bit about all getting out whole, that's again the key point for me on derivatives. By definition someone cannot get out whole...As the little guy, that will often be me... The little guy stands the best chance if he can think for himself. You don't need to go through a bunch of machinations get out without moving the market, You simply hit the sell button Hence I only want the exposures for their negative correlations to other assets or diversification, so I buy a part of one of the big guys funds...Put another way, I accept that I may not get out whole and pay a price, but accept that if it reduces volatility of my investments... I understand and would agree with that strategy even (for a younger person), just don't ever buy into the "this time it's different" story. It's almost never different.

Hedging investments vs trading... Again another difference between us: you trade say volatility. I trade only to reduce overall volatility of my investments...

The natural question that comes out is how much leveraging is too much...or how much money should be allowed to chase how much product? Personally I think the markets have gone too far in being too free and open... that's not down to the hard asset owners, and the long players. Too much interest by the masses because everyone's in. That ought to tell you something. Normal market participants should never, ever use leverage.

Edited August 4, 2008 by lannarebirth

[Naam]

One of the ways that you guys are smarter then the average investor many people don't realize that historically commodities go down in (real) prices over time. They expect that commodities are a hedge against inflation but for more periods than not this isn't the case. There are cycles when commodities outperform and we're in one right now.

What this really proves is the benefit of diversification of asset classes - don;t get attached to any single class - be ready to jump at a moment's notice - be open-minded to buying into every asset class and to selling them too.

that's exactly what i am avoiding since years for the simple reason that the follow-up and keeping in touch amounts to [YUCK! ] work. even me -who's activities are limited to cash and bonds- find it quite bothersome to watch half a dozen currencies and nearly 5 dozen bonds. how many hours a day can one work without falling back into the old rut/rat race and sacrificing quality of life? besides, it's impossible to be a master of all trades and knowledgeable as far as the different asset classes are concerned.

not doing own research but making decisions which depend on the opinions of @n@l-ysts? thank you, but NO, thank you!

[lannarebirth]

Anyhow, commodity hoarders. Here's a point to ponder. On this monthly chart of the CRB, you'll note that July's candle is what's known as a "bearish engulfing" candle. I offer no opinion on it as it's not a trade I'm interested in, save for my XAU puts.

Edited August 4, 2008 by lannarebirth

[bingobongo]

[Paul MBMG]

One of the ways that you guys are smarter then the average investor many people don't realize that historically commodities go down in (real) prices over time. They expect that commodities are a hedge against inflation but for more periods than not this isn't the case. There are cycles when commodities outperform and we're in one right now.

What this really proves is the benefit of diversification of asset classes - don;t get attached to any single class - be ready to jump at a moment's notice - be open-minded to buying into every asset class and to selling them too.

that's exactly what i am avoiding since years for the simple reason that the follow-up and keeping in touch amounts to [YUCK! ] work. even me -who's activities are limited to cash and bonds- find it quite bothersome to watch half a dozen currencies and nearly 5 dozen bonds. how many hours a day can one work without falling back into the old rut/rat race and sacrificing quality of life? besides, it's impossible to be a master of all trades and knowledgeable as far as the different asset classes are concerned.

not doing own research but making decisions which depend on the opinions of @n@l-ysts? thank you, but NO, thank you!

the lazy way to do it Naam is just hold an equal proportion in every asset class via ETFs

not as smart as Harvard/Yale approach but better than just bond/equity diversification and even just doing bond/equity puts you had of most of the game who just blindly follow equities and try to make money out of asset selection - almost impossible to do meaningfully over time even if you're Peter Lynch!

Cheers,

Paul