Monday Links: U.S. Oil and Gas Production Shoots to the Moon

A handful of links to start this holiday week…

Futures Links

U.S.
oil and gas production shoots to the moon (Frank Holmes)

American farmers move 1.6 million acres of conservation land into production (NPR)

The California gold rush of 1849 vs. the North Dakota oil boom of 2013 (Business Insider)

British Columbia lumber exports to China sets record in 2013, topping $1.17 billion (Stockhouse)

U.S. farmland prices drop for the first time in four years (Agrimoney.com)

Cotton rides strong export numbers higher (Lubbock Online)

Other Fun Stuff

A high IQ doesn’t automatically correlate to trading success (Martin Kronicle)

Retail traders won’t escape the CME price hikes…bummer (Trader Planet)

A Final Goodbye to the Gold Bugs

Since the spring I’ve been super bearish on gold and my short in April will go down as my single best trade of the year. Yet, I don’t think this long-term downtrend is finished. There are still some gold bugs left to squash.

But before I go full greed mode and leverage myself to the neck shorting gold, let me explain a bit about my trading philosophy.

When I enter a trade, I usually check three criteria before I jump in: a strong fundamental basis, a technical breakout and matching sentiment. (I say ‘usually’ because sometimes I let hope interfere and I enter a trade without proper vetting. I often pay a hefty price for this lack of discipline.)

1) A Strong Fundamental Basis. With the fed signaling the end of qualitative easing in a largely symbolic tapering move, for the first time in years we see a faint sign on the horizon that dollar debasement may be ending. In other words, the gold bug dream of returning to the gold standard is fading. Finally, the dearth of high inflation data essentially dismisses any shred of credibility left in the gold bug argument.

 2) A Technical Breakout. The front-month contract of gold futures is currently hovering around $1,200, dangerously close to its year low of $1,179 set in June. Since that time, gold has put in what appears to be a head and shoulders pattern on the weekly chart.

The front month NYMEX gold weekly chart

The front month NYMEX gold weekly chart

Granted, one could probably find a head and shoulders pattern in just about any chart; but, if we can close below $1,800 that will crush a major resistance point. From there we will be staring down $925 an ounce or possibly even lower.

3) Matching Sentiment. Despite the vitality of the gold bug crowd, it is shrinking fast. We are in a full-fledged bear market and big player John Paulson, though sticking with his gold position, is no longer buying. There is certainly room for more bears.

Another tool I use often is the significant news indicator, which I have already discussed. Right before the Fed announcement yesterday, gold prices shot up to more than $1,240 an ounce. Unfortunately for the bulls, price action could not maintain this level after the announcement crossed the wire and Ben Bernanke’s press conference ended. Once gold broke below $1,220 late in the afternoon, the market had made its decision. The news was bearish, creating a low-risk short opportunity.

Hitting the trifecta on my trading criteria, I am short gold with expectations for a fresh multi-year low. If I am wrong, I will gladly accept the scorn of gold bugs everywhere. Yet, I won’t regret my decision because I believe my reasoning is sound.

After all, I don’t own a crystal ball!

Thursday Links: You know what’s cool? $2.3 billion…

Articles for your reading enjoyment…

Futures Links

Sugar falls to 3.5-year low on a strong downtrend…pretty impressive (Business Recorder)

Despite strong prices, soybean acreage to increase by smaller-than-anticipated margin (Agrimoney.com)

Commodity investors rush for the exits to the tune of $88 billion in fund outflows (Financial Times)

Gold hangs by a thread around $1,200 an ounce (Bloomberg)

Other Fun Stuff

The 10 best performing stock markets of 2013…Zambia anyone? (Business Insider)

Playing nice before the Olympics, Putin pardons former oil tycoon (Washington Post)

A story about short selling (Joe Fahmy)

You know what’s cool? $2.3 billion… (Business Insider)

What My Serengeti Safari Taught Me about Risk Management

Last week I had the opportunity to visit Serengeti National Park in Tanzania. It was a fantastic trip that yielded a bevy of animal sightings—lions, wildebeest, hippos, elephants and a cheetah hunting down a rabbit among many more. I will never forget this incredible experience, but unfortunately, the one memory that will probably stick the most is a dark one.

Minutes after arriving in the park we passed the first of two terrible game-drive accidents. Although the park is full of dangerous animals, regular car accidents make overland travel on the park’s treacherous roads a potentially more dangerous proposition than trekking across the landscape on foot.

A game drive gone wrong in Serengeti National Park

A game drive gone wrong in Serengeti National Park

Our guide informed us that, thankfully, no one died in the accident, but noticing the dried blood inside the vehicle did little to stop the chill from traveling up my spine. The turned-over SUV looked exactly like the one I was sitting in when I took the photo above.

Lucky for us, we had an experienced driver who has spent countless hours driving the dirt and gravel roads of the Serengeti year in and year out. We didn’t have any problems despite the intermittent showers that quickly turned roads to mud pits.

The common issue in most Serengeti car accidents is excess speed. Game drivers talk constantly on the radio and stop to chat with other drivers who pass by to get a read on where the action is, such as a lions eating a fresh kill down the road or a Leopard gorging on a gazelle in a nearby tree. These moments can be fleeting and drivers feel compelled to put the pedal to the middle to catch the action—and a fat tip.

It is human nature to put the thrill of short term excitement ahead of one’s long-term survival. Unfortunately, taking unnecessary risks on the plains of the Serengeti, or on a trade that makes you giddy with excitement, can lead to terrible consequences.

During the trip I spent my downtime reading the classic from Jack D. Schwager, Market Wizards: Interviews with Top Traders. The legends interviewed discussed their own unique trading styles and philosophies, but they all maintained one trait in common: strict risk management. Every single one has experienced the horror of risking too much on one trade and going nearly broke. Most believe traders should never risk more than one to five percent of total capital on any single trade idea. Personally, I prefer five percent, and can think of countless times where I felt tempted to increase that threshold only to save myself from a large drawdown by simply not acting on this impulse.

Next time you feel compelled to up the ante on a trade idea you just KNOW will work, take a step back. On the plains of Serengeti I would much rather drive safely to a fresh lion kill than risk it all for a quick glimpse. There are thousands of lions in the park and I’d rather finish the safari at the exit gate than in a nearby hospital.

My trading account was once on life support from excess risk and I’ll never let that happen again.

A visitor to our campsite

A visitor to our campsite

Wednesday Links: Can Spinach Save the Florida Orange Juice Industry?

Today’s links begin with a bit of parody: the definitive chart on bubble physiology. Hat tip to @ACTOFCONGRESS on StockTwits.

 bubble chart

Futures Links

The end of the Mexican state oil monopoly could add 2.5 million barrels a day of production, but don’t expect immediate results (Bloomberg)

China rejects 30 percent of U.S. corn shipped due to unapproved GMO strain (Reuters)

Rabobank sees cocoa as top performer and soybeans the worst in 2014 (Agrimoney.com)

A look at how Chinese agriculture reforms may affect the prices of cotton (Agrimoney.com)

Scientists look to GMO to save Florida’s orange crop (BusinessWeek)

Other Stuff

A convincing bear argument for a corporate earnings retreat (John Hussman)

What will it take to keep the stock market flying in 2014? (Market Watch)

Boca Biff: the man who has lived the above “Happy Trading…” chart multiple times (Doug Kass)

Taper expectations: September versus today (Money Beat)

Tuesday Links: To Taper or Not to Taper? That is the Question…

Howdy y’all, I’m back after two weeks away with a fresh set of links. I was on holiday in Africa and am planning a quick post soon about what I learned about investing while on safari.

But before I get to that, I’m introducing a slight tweak in my daily links. I’ll now be dividing out the commodities/futures specific links with other stuff I find interesting. As this is primarily a futures trading blog, I’m listing the former first.

Let me know if you have any feedback on this new approach or have any other ideas. I love to hear from you.

Thanks for reading!

Futures Links

It is time for a fun bubble in commodities (Financial Times)

Contrarians are getting that shiny look in their eyes for gold (Market Beat)

Arabica coffee jumps to two-month high… of course it does when I’m away (Business Recorder)

The oil market sits around waiting for the Fed taper decision (Investing.com)

Corn can’t break the pressure as GMO concerns and the South American harvest loom (Business Recorder)

Other Fun Stuff

To taper or not to taper? That is the question… (Tim Duy)

A nice list of investing-themed books from 2013 (Reading the Markets)

I look forward to this every year…investments fads and themes 1996-2013 (Reformed Broker)

 

My Top 10 Favorite Quotes from Reminiscences of a Stock Operator

A fascinating aspect of trading is how history seems to repeat itself. Although globalization and technology have transformed traditional floor trading, the underlying emotions of fear and greed continue to drive price action. Trading remains largely a human endeavor and as long as humans run financial markets, booms, busts and panics will continue.

My favorite trading axiom is “This time it’s different.” It is often used during market bubbles by perma-bulls who let greed get ahead of rational thinking. There is even a whole book about it, describing how in specific markets through history people convinced themselves that the normal levels of valuation no longer applied. The U.S. housing bubble that popped in 2007-2008 is a perfect example. Those who said and believed housing prices “never go down” essentially thought the housing boom really was different. We all know how that turned out.

Markets, trading methodologies and products may change, but timeless investing advice does not. That’s why my favorite trading book remains Reminiscences of a Stock Operator by Edwin Lefevre with Jessie Livermore—it is chocked full of great advice for any investor. First appearing as a series of articles in the Sunday Evening Post during the 1920s, the book is largely a biographical account of Livermore’s professional life. He is remembered as one of the world’s greatest traders who won and lost tremendous fortunes before tragically taking his own life in 1940.

Although Jessie’s life ended too early, his words of wisdom live on for discovery. The book is filled with obscure references and colorful characters long forgotten by the general public, but the key themes of the text remain as relevant as ever. Therefore, I’ve pulled out my favorite quotes, below, though I highly recommend reading the entire text.

There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.

The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals.

I never lose my temper over the stock market. I never argue the tape. Getting sore at the market doesn’t get you anywhere.

They say you can never go poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand I made two thousand. That was what my conservatism did for me.

Remember that stocks are never too high for you to begin buying or too low to begin selling.

A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street…nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was the sitting. Got that? My sitting tight!

Losing money is the least of my troubles. A loss never bothers me after I take it…But being wrong—not taking the loss—that is what does the damage to the pocketbook and to the soul.

Prices, like everything else, move along the line of least resistance. They will do whatever comes easiest.

The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you hope that every day will be the last day—and you lose more than you should had you not listened to hope—the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out—too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts…Instead of hoping he must fear; instead of fearing he must hope.