Contango

Contango

 

Hilary Till, Principal
Premia Capital Management, LLC

 

Continuing the discussion of the Hilary Till study, the next interesting tool she mentions is the roll yield embedded in the term structure of futures contracts. In her own words:

In the past, even if spot commodity prices declined, there was an additional way that a commodity investor could have a positive statistical expectation of profit, and that was through the “roll yield” embedded in certain commodity futures contracts.

[...]

By term structure, we mean one should examine the relative price differences of futures contracts across delivery months. When a near-month contract is trading at a premium to more distant contracts, we say that a commodity futures curve is in “backwardation.” Conversely, when a near-month contract is trading at a discount to more distant contracts, we say that the curve is in “contango.”

The $55 USD/barrel pact

Source: Stockcharts.com

I was quite annoyed the other day; oil prices had been steadily falling and had breached the $51 USD support. Suddenly, prices reversed, with unusual strength, recovering and climbing all the way to $55. Needless to say, I didn't like it because I got caught on the wrong side of a strong move.

A Rebalancing act

Balancing Act by Dion Wright.

Hillary Till, from the French EDHEC Risk and Asset Management Research Centre, published a very instructive study  (copy here) on commodities. She touched on a couple of interesting tools which are vital to improving our bottom line. I'll start with the unequivocal advantage of rebalancing a portfolio periodically; which not only safeguards investments, but furthers returns.

Mixed feelings...

 

David R. Kotok, Cumberland Advisors, Inc.
Source: Global Interdependence Center

There' a lot going on. But let me start out with David Kotok's remarks (with a copy here) which I picked up from John Mauldin's mail. I recommend subscribing to both mail newsletters --they're free and their advice is sound and most of all thought provoking.

Kotok argues that globalization allows us to determine one set of global real interest rates for the different maturities (3 mo, 1 yr, 2, 5, 10, 30 yrs). I'm sure he's singling out the developed countries (US, UK, EC and Japan) in his determination of the global rate, because they do carry most of the debt weights; as for the rest, in order to determine their real rates, we would have to add each country's risk rate.

Wines... why not?

Chateau Margaux wines.
Source: french-old-wine-club. 

Trophy wines are going up in prices like champagne bubbles. Apparently, positional goods are in strong demand as a consequence of globalization —which has widened the wealth gap, exacerbating the numbers of the filthy?? rich. So a bottle of Petrus 1987 vintage, which used to carry a £65 price tag 10 years ago , sells for £1,000 nowadays... in excess of 15x, a whopping 31 % annual yield.

According to this post from Gideon Rachman:

Some people reckon that it is all a bubble, and that the prices of the top wines will come crashing down. I don’t believe it. The supply of the fanciest Bordeaux wines is limited by the fact that they come from a specific vineyard. But the demand for them will only swell, as globalisation ensures that the number of new billionaires in search of “positional goods” keeps rising. In a few year’s time, a case of Pétrus 2005 for £22,000 may seem like a bargain.

Only 250 hectares of vineyards at Chateau Margaux according to Bert from wineterroirs. I like that... especially, if the Margaux investment goes south, you can always call your friends over and throw a very nice... wine party.

Check: Position goods.

Imagine... yourself

I learned about positive thinking years back... But I found Joe Vitale's argument quite illuminating: you also have to feel it; not only visualize it. If you'd like to have a house on the beach, go shop for them, walk them through, feel the softness of the carpet under your feet, the subdued colors, the warm temperature, the freedom of larger spaces, the tranquility of success, and the coolness of zipping a glass of white wine by the deck, in a bright and breezy afternoon, with the family surrounding you and the sea in the horizon... And, by the way, take that Porsche Carrera with the smelling like new leather seats, smooth small wooden steering wheel, and let it nail your back to the seat as it accelerates... on a test drive to get you there.

Listen to the importance of persistence... If you give up on your dreams too soon, how are you going to ever know that achieving them was just around the corner..?

               

Featuring: James Arthur Ray, Jack Canfield, Joe Vitale, George Pratt, PhD, and Jayne Payne. Source: Larry King's interview.

Sectoring

The whole point of looking at the economy is to get an idea of where to put our chips... and it hurts when we're wrong.

After making the rounds, I still hold to my view that 2007 is going to be a rough year for the US economy: 1.5 % GDP growth. If it does get rough, the Fed will have to open the liquidity valves full blast —they're already pushing liquidity... And if this is the case, interest rates falling, bonds will be a good place to be... And if liquidity will be pushed from all currency angles, assets is the next place to be.

Having said that, let's hone in to select the best sectors to safeguard our money this coming year.

The Robot

John Dorfman has this little but very profitable (34 % yearly) method of stock selection: The Robot. I like it... it screens a very safe set of stocks. One of these days I'll compare it to the Dow dogs method. But for now, I'll copy John's directions and add it to our... bag of tricks.

According to Dorfman:

The Robot Portfolio is a simple quantitative stock-picking model. I designed it to make the point that unpopular stocks are better investments than popular ones. It's easier for unpopular stocks to exceed prevailing expectations.         

The ``Robot'' starts with the universe of U.S. stocks with a market value of $500 million or more. It eliminates those companies whose debt is greater than stockholders' equity, and also slices off those with negative earnings over the past four quarters.

From the approximately 1,000 stocks that remain, the Robot selects the 10 with the lowest price-earnings ratios (stock price divided by the past four quarters' earnings).         

             

Fortune telling VI

What does GS expect for bonds next year?

A downturn in the economy, which will drag interest rates with it; and bonds to do quite well...       

"The economy will grow below trend, around 2 percent in 2007,'' said Jan Hatzius, chief U.S. economist at Goldman in New York. "The short end can rally somewhat more,'' with the two- year yield dropping to 4.5 percent at year-end.

...and base metals?

"While structural changes have pushed metals price ranges higher, we believe a cyclical slowdown in demand will likely result in a modest temporary surplus for most metal in 2007, with fundamentals likely tightening once again in 2008," said the report.         

Fortune telling V

A pit stop at Roubini's blog to have an idea of how the US dollar may fair in 2007...

According to Nouriel, the prospects continue to be on the negative side:

I am not in the business of predicting high frequency movements of currency over the horizon of a week or a month. But my macro and medium-term perspective tells me that fall of the dollar – over the medium term – has still a very long way to go.