Trade ideas...lets see what we can come up with

[DcifrThs]

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I focus on only a few select commodities in my trading.......orange juice, sugar, corn, soybeans, heating oil being the frontrunners.

It appears to this observer that this years corn crop is not going to produce the bushels that many are expecting due to the increased planted acres.


Test weight is a big factor in yield, and if corn runs out of moisture before blacklayer, test weights and grain quality goes down. Test weights can hurt final yield quite a bit. Last year we got good rains starting at the end of July and through the month of August. Test weight and rain quality on corn was quite good, and corn yields surprised everyone to up side of expectations. This year corn is running low on moisture, temperatures are higher, and rain appears not to be coming. Again, I think most yields will be lower than the SWAG's people take counting kernals.

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to what degree is this priced into (or not priced into) corn futures?

Barron

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Good question and one I could only make a guess on.

I would think not as much as many other factors, but it should. That's why I like trading corn futures, as I follow this market naturally, meaning I'm following it for different reasons other than investing in futures.

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good, so then answer me this then:

you mentioned some survey that takes into account kernels (by manual or other counting) and then projects yields based on this...do you have the release date of that survey?

if so, then can you supply a graph of the price of corn's applicable futures price level before, during and after the release of that survey?

can i see that data daily for months before and after?

that is the first step towards answering that question. looking at how the price responded (or didn't respond) to the release of that kind of data.

did that response decay despite NO other data being released?

if so, then there may be some degree of your thoughts already priced into the market.

you can't just randomly guess at things in this type of analysis, you have to systematically approach your thoughts with data and a sound logical process.

our goal is to see to what degree or extent, the SW-whatever kernel count is taken as literal expectations by the market by how the prices responded to it and the release of other pertinent info (i.e. weather estimations, actual weather realizations, oil price, acrage adjustments, preliminary yield estimates, etc.)

looking at the timing of the release of those data and plotting them on a graph will give us a preilminary idea of whats going on.

then we can go for there,
Barron

[DcifrThs]

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Barron-

Here is an example of the types of emails I recieve from my friends on a daily basis........and get 5-10 like this daily. It's a great resource, but still one as to guess our the floor traders are thinking and sometimes you think you can make easy money only to have a big fat L(loss) hit your recordkeeping.

Here is the email..........


15 day forcast for central and southern Illinois - 97-97-98-99-93-90-92-97-94-94-90-89-89-94! Chances of Precipition during period - Zip. I know some are saying the corn is made, I don't think so...at least not some of the top end yields that some are predicting.The bean crop is really going to take it on the chin, at least around here...we're at critical flowering - pod set.....Double crop soybeans here will be virtually crap if this forcast holds up...My question...will the stress on beans get us started on another march toward 9+....or is the illusion of the monster corn crop going to hold the market in check until combines start rolling and actual yields start flowing in...I know there's a big corn crop out there, although HOW big is still up in the air as far as I see it...but this is some serious heat setting in...and we seem to get the wind with it...our pastures are toast...most are feeding some supplemental hay already and we don't have all that much of it to spare for summer feeding...

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well i don't necessarily compeltely understand everything in that email, but i do get enough to want to not have to read that every day.

seems like a lot of fluff and speculation based on highly variable expectations (temperatures, yields etc.)

do you get emails saying the opposite (behold the vastness of this years crop!! yay the tide of corn to hitthe market shall bequeth 7 good years on this country)?

Barron

[DcifrThs]

Another note i've seen confirmed in the past day to keep a lookout for, is that it seems there are massive inefficiencies in the (relatively very new) markets for insurance against default (CDS) markets.

one main reason is likely because banks are basically the sellers of this product. whenever a bid comes in to purchase insurance, they up the offer price more than one would think reasonable.

during this 24 hr period of excrutiatingly high volatility in this market, b-a spreads were as wide as 5 times normal trading periods (15bps vs. 2-3bps).

to paraphrase the FT:

did corporate defaults really go up by a third in the past month? did they fall back down again in a day? i'd have to guess not, but according to the CDS markets, it appears that they have.

of course, markets can stray wildly from fundamental values, especially during times of strain or emotional trading. and especially for new products that haven't been through even 1 full cycle yet at the level of market participation we have now.

i'd really look to these markets right now for extremely profitable trading for the reasons above. it will certainly be risky as a years worth of volatility in 24hrs is quite a spasm, but those inefficiencies clearly offer highly valuable expected returns.

just some additional thoughts on this situation.

Barron

[irunnotgood]

So Fishhead you betting on hot dry weather in southern Illinois during early August? Because I think most people know its not terribly unusual.

[DcifrThs]

well, it's that time again:

time to bet against those are putting their money on a rate cut by Jan 31, 2008. thats 5 months and 3 meetings from not (not counting the one on august 7th)

the implied probabilities are up at near 100% that there will be 1 rate cut between now and then.

as a result, i'd be long (once again) the put option on fed funds futures at 94.75.

i don't think housing is as massive a problem relative to capacity right now, though some economists that i respect disagree (goldman's & lehman's for instance). they feel confident the fed will "change their tune" when new data come out.

but it would take quite a hit to move us into rate cut territory. even downward revised growth of 1.5% or so would still not warrant a cut given the almost 82% capacity level we're at right now. industrial production isn't slowing enough to give the fed the slack it would need to move from an inflation focus to a growth focus.

so long the puts i say!
Barron

[Fishhead24]

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So Fishhead you betting on hot dry weather in southern Illinois during early August? Because I think most people know its not terribly unusual.

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No

However, I've received confirmation from many of my farmer friends thoughout the country stating their corn crop is already fried beyond improvement and yeilds will be dramatically lower than average.

Again, we must consider the huge amount of acres planted this year and the government figures could be off 3%+ on that figure.........one way or the other.

[irunnotgood]

In the light of the bridge collapse infrastructure plays should do well. CBI comes to mind, any others?

[DcifrThs]

Great thing about a thread like this is that i'm forced to come back to it and learn.

so i'll now post some thoughts on the performance of the major issues i was talking about.

first off, bond yields have significantly fallen since the 5.02%. the subprime issue appears to be spreading farther into the macroeconomic landscape than i initially thought.

does that change my position? and if so, how? well the issue really comes down to how will it affect growth given where we are in the cycle? the flow through affect seems to be fairly significant in a few senses.

first and foremost, it has slightly, and can significantly cause an effective tightening in monetary policy in the sense that consumption can come in a lot as credit is withdrawn from the economy (just as a higher fed funds rate would cause credit to become more expensive).

directly, mortgage holders' free cash is constrained by higher rates and their ability to take out more credit to spend (either by getting a mortgage or by getting more credit if they've defaulted) has been hugely dampered. that will likely have a direct affect on consumption.

indirectly, a few things appear. we see overall credit spreads widen, which makes company spending less likely to carry the same burden it did in the first quarter. it also makes credit for non-subprime mortgage holders harder to get (though not on the same scale). this can again reduce consumption both by individuals and investment in companies. risk aversion in, turn has increased. investors require higher returns then for LBOs and other takeovers than was priced into the actual transaction. the 300bil in the pipeline will cost more, cause some constraint on free cash flows of companies, and not give the same freedom to the lenders as previously thought.

further, the glut of homes in the pipeline push down housing prices and new home sales continue to deteriorate as old home sales stagnate or fall further. lower housing prices all around push wealth down and thus also hurt consumption.

no homes being sold, means fewer homes being built. the construction industry is thus at risk. one BIG sign to look for here is the construction job market. unofficial jobs have likely been cut, but when we start to see actual reported layoffs, THATs when the true hit to the economy is likely to begin as those workers are indicative of many different types of future consumption.

equity valuations can then (and have been) be subject to a correction, as is likely what happened (though possibly an overreaction...that is yet to be seen and i can't say whether we've even seen a big enough correction given current conditions). when equity values AND home values fall WHILE credit becomes harder to get, i'd expect consumption to take a fairly large hit.

bernanke doesn't seem to think so, but we'll see what he has to say about that next time he testifies.

another indirect effect flows through to actual job losses. 2 subprime mortgage companies have failed. this means that those workers are now 'looking for work' and don't ahve that income. they can thus be expected to consume less. but, this does have a positive outcome (though very slight). unemployment can be expected to come up a bit now as hirings by mortage issues is likely to tail off as well as construction.

add to all this the ease we've had in the recent past and how people tend to bake that into their expectations of the future and we see a large jump in the cost of insurance against defaults (and likely some buying opportunities as discussed earlier). the spike in vol has also been quite obvious and we've hit record volume numbers.

now that is growth. what about inflation? well we still have it, though it is a lagging indicator and thus likely to fall a touch in the near future as capacity may come down below 81% on the next read, which would be significant. below 80% would mean a massive increase int eh probability of a rate cut in the near future.

oil prices are still high and that may flow through to keep up headline CPI, but core is likely to fall a bit given all the above.

in turn, yields on risk free assets have come down while risky loan yields have stayed flat or jumped. thus spreads have risen alot. the risk free yields coming down reflects an increased priced in probability of a cut given the hit the growth/slowdown in inflation/pull back in capacity and industrial production + the "flight to quality" we tend to see when sh*t hits the fan, as it has.

those yields coming dwon push the dollar deeper into falling territory and this is where my gold bet falls apart. i'll likely lose my bet w/ Mr. Now since i've misjudged the liquidity vs. dollar effect on the futures price of gold. liquidity doesn't necessarily need to come from real rate moves, as spreads can widen and withdraw enough liquidity to keep rates at current levels. real rate moves are more likely to move prices as i've stated.

further, liquidity is a long term playout thing vs. the short term trading off of the dollar weakness we see in gold. i was wrong here. the dollar is weak and the int'l demand for US treasuries isn't enough to compensate for lower treasury yields.

one GOOD thing about that, is that exports to trading partners become more attractive and that might help us through the above mentioned growth issues we'll likely soon be facing. if our trade deficit comes in significantly (either due to increasingly expensive imports, or larger #s of exports) the economy will benefit (either by reduced input prices b/c fewer imports are purchased at high prices, or by increased demand for our goods).

this is why i'd think fed funds rates are going to stay the same in the US. the current reduction in yields (though not necessarily in all borrowing costs as discussed) can affect the economy in a similar way as a fed rate cut. despite that, the one bet i had on as a steepener has come to fruition slightly so not all my FI positions have failed [img]/images/graemlins/smile.gif[/img]

i still don't think we'll see a fed rate cut at all so i'd bet against that, though with a slightly weaker signal.

further, the long silver legs of my trades have come in and the steepening of the gold futures curve, while not winning, has a long portion to it so it mitigates overall losses.

that was a bunch to chew on so i'll stop there.

to sum, being wrong affords one the opportunity to think back as to the hows & whys and learn from it.

questions? comments? thoughts?

Thanks,
Barron

PS- i'm not rereading this entire post b/c it is so long so please take all errors in spelling, grammar, sentence construction in stride.

thanks.

[DcifrThs]

Scanning my daily reads, it seems that fear is so absolutely persistant throughout the markets that there exist some diff bet opportunities.

one that i like right now is short the 3 mo Tbill rate, long the euodollar futures contract. the spread between the LIBOR rate and the spot 3motbill rate is around 1.4% (largest in a long while).

i think that while markets may get a bit more crazy before they calm down, the level of fear now is persistant enough to enter this diff bet trade.

i'd put a +25% signal on this trade (long since i'm betting the spread narrows)

other ideas welcome

Barron

[DcifrThs]

new trade idea 8/26/07:

i think it may have been mentioend, but buying municipal callable (and even non-callable) bonds now i think is a good idea.

yields have jumped up .71 bps (on callable bonds) due to pressured selling. interest rates are still low, but, i think it is reasonable to conclude that they'll come down a bit as demand slows growth . a lot of data comes in this week, though none of it post credit market turmoil.

if the fed lowers rates as predicted, getting in now would be a good idea, but, waiting a week might also be best since robust readings could push yields on these bonds even high, thus providing even better entry points.

i don't have a strong signal on this, maybe +15-20%, but it is definitely worth dipping your toe in since you could average down after strong readings or leave the investment as is after weak readings.

Barron