Zeev,
Here is an nterview from Barron's from someone who says commodities are at the absolute rock-bottom....
Loaded Guns
Trader's system says commodities are ready to run-up, for a
change
By Kathryn M. Welling
An Interview With Michael Williams ~ The proprietor of Genesis Partners, a
commodities research boutique, and Genesis Trading Group, both of which just hitched
up with the Price Futures Group in Chicago, started out trading stocks. Mike picked up
his Series 7 securities license in 1982 at the tender age of 22, quickly set up his own
investment firm, managed portfolios for wealthy individuals and institutions and did
mega-deals. But since 1990, even though he's kept his hand in equity management -- his
research has been riveted on commodities, which means this awesome bull market in
stocks has largely passed him by. But, insists Mike, the research he and partner Mike
Ferguson have done in the interim has positioned them to catch the next big wave.
Would you believe in commodities? Read on.
Barron's: Just what is Genesis Partners, Mike?
Williams: Genesis, for the last 10 years, primarily has been a research effort. I have
done all the backlogging of data and research necessary to refine our method of
comparing certain data streams, so that we can understand -- and help traders and/or
investors understand -- how commodities trading can be used on a regular basis in their
investment portfolios. In a larger sense, our primary focus has been on figuring out
what makes commodities markets move in trends; how you can find that information,
and creating a way to project what is most likely to happen next. While that has taken a
great deal of time, we have been able to catalogue a number of very clear-cut signals
that go into analyzing the underlying supply and demand, which -- in commodities -- is
the primary issue. In that sense, the commodities markets are a little different from
stocks and bonds, where we can always print more paper or have another company go
public: Only a certain number of soybeans are grown.
Q: So you're tracking crop reports, weather patterns and
such?
A: Not at all. What Genesis has been able to do is create a
process through which we can now track, every day, what the
major investors in the commodities markets are doing -- so we
can understand the supply and demand situation in any
commodity market -- and therefore understand where we want
to take our investment risks.
Q: Nice theory. But how does it work in practice?
A: I have been using it for quite a while for myself and for a
few private accounts -- using it more in what I call a campaign
style, where you may not be trading every day -- in fact, most
of the time you are not. But we've used it a few times to
establish metals positions. We've done it a few times in
grains. We've done it a couple of times in the bond market.
Still, trading hasn't been our main focus -- research has been.
Now we have a broad enough base of data that we can sit
down with just about any type of investor, understand his or
her goals and then show them how to understand the data
and use it advantageously.
Q: If it's such a great system, why are you still working for a living?
A: An excellent question. I believe it is -- and we are -- that good, but only because
we've spent these 10 years researching the data. The commodities business is a
different kind of game than stocks and bonds. You have to do a lot of research. Now, I
will say this, for the past six months the principals here at the Price Group have watched
all of our data. While they didn't trade large accounts, they used it to trade with their
own money and the returns have been substantial -- which is kind of why we merged.
Q: We have to ask. Your background is in equities. Why in the world have you spent
the last decade researching commodities -- in the midst of the most marvelous bull
market ever in stocks?
A: Another good question. I did well during my time and still invest in stocks and
bonds. All three asset classes can usually be used quite well together in portfolios. But
I've always been fascinated by the thing that everyone hates. Being contrarian in
perspective, it's dynamic to watch these two asset classes work against each other. In
the mid-'Eighties no one thought we'd ever again see no inflation and interest rates of
5%. If you had told someone that in 1984, they would have thought you were nuts.
Which is what they think today when you tell them something different than that
inflation is a non-event. But our research is telling us that we are at a real inflection
point.
Q: How so?
A: There's a true sense of change happening in the underlying mechanisms that make
these markets work. Where you might think inflation is dead because of all the news
stories saying that it is, those are basically just reports of what has happened, not what
is about to happen, or what's going to happen next. In the 1980s, you thought inflation
was never going away; now you certainly don't think it is coming back. But 15 years
from now, people will not be checking their mutual funds. They will be checking how
much soybeans are selling for. This very interesting change is happening right now --
quietly. Just like we didn't wake up 10 years ago to find interest rates were low. It starts
slowly when no one thinks about it. Today, for example, commercials have never been
more short bonds. Yet everyone in the world will tell you interest rates are going down.
Q: Commercials? You're not talking about the sort on TV, we take it.
A: No. This gets to the heart of reason commodities are different than stocks or bonds.
Why it's a different kind of game. Someone uses every single thing that is grown, or
mined, or somehow brought out of the ground. Which means that you can understand
the value of that real asset -- determine what the demand for it is -- by watching what
the major users are doing with it. They are the commercials. What's more, there is no
other market, no other asset class, as dynamically related to mass psychology. What
our research has shown us is that mass psychology in the speculator camp is almost
always incorrect in commodities. By contrast, mass psychology in the commercial camp
is almost always correct. In other words, when the small traders and the hedge funds are
extremely bullish, that's almost always when the commercials are very short. Because
the commodities business is a zero-sum game.
Q: By definition.
A: Right. But think of psychology and emotion as the driver, the gasoline of the buying
or selling decisions in a commodities market. Eventually, when every speculator is
bullish, there is no more gasoline left. There is no one left to buy the next contract. And
since the commercials have sold all of the contracts the speculators have bought, the
pressure is on. No one can keep up against the commercials. There is not a group of
speculative traders that has enough money to fight a commercial position. What is so
fascinating about this is the psychology. While most people naysay the role of
emotion, we've developed a very dynamic set of statistics that show that speculators
make their choices about what they buy and sell in commodities on emotion -- and that's
why most of them lose money. They make the decision to buy based on emotion. They
get out of the position based on emotion. And usually it's incorrect.
Q: What statistics?
A: The data streams we've put together in our charts, which show, for the last 10 years,
every time commercials and speculators/hedge funds have been on opposite sides of
the market. The top lines on the charts trace the commodities prices, the bottom two
lines track the commercials' -- the heavy black line -- and the speculators' positions.
When they get to extremes, we know that market is about to change -- at least, that the
odds are very high that it's ready to change. Not overnight. We don't catch these things
on the day they happen, but we do catch the trend. We can see what is going to
happen next. And these trends typically last from three months to a year, maybe two,
depending on the market.
Q: Why do emotions hold
such sway?
A: That is important for the
trader to understand. The
fact that emotion drives the
speculator is a complete
result of the leverage in a
commodities contract. Let
me put it in terms stock
traders will understand.
Let's pretend for a second
that I could buy Citicorp
tomorrow, and let's assume
it's trading at $100 a share.
Let's also say that my broker will allow me to buy Citicorp for three bucks. Now that's
leverage, 30-to-1 leverage. Well, let's pretend that tomorrow the price of Citicorp goes
down by $3. I've lost 100% of my money. What people don't understand -- they hear
commmodities and they think, "Oh, my gosh, you can lose all your money." Well you
can -- but as a result of leverage, not because the commodities market is that different
from a stock or a bond. If you could employ the same leverage to buy stocks, the risk
would be identical. It's the leverage that is the danger. That's what people need to
understand. Our research shows that if we combine money-management techniques to
tame the leverage with our data on the commercials versus the speculators, we have a
reasonable way to manage capital in commodities markets.
Q: What about worrying
about freezes in Brazil, or
droughts in the Great
Plains?
A: That's the fascinating
thing about it. We're
entering the freeze-risk
period in Brazil right now.
But we don't have to worry
about what that means for
the supply/demand
balance in coffee -- all we
need to do is follow the
commercials. And right
now the commercials are
holding a multi-year long
position in coffee. Which
is telling you that the data
they follow imply a risk to
growing conditions.
Because they are buying coffee at these lows in prices. So I don't need to have 50
weather guys and four geologists and a whole staff of people following the growers of
coffee or the miners of copper. What I do is follow the data on the commercials. Say to
myself, okay, if the guys who actually use coffee every day are taking their buying of
this market to extremes, and if, at the same time, the speculators are short, then I want to
be on the opposite side of the market from the speculators. I want to be long coffee, or I
want to be looking for low-risk entry points. Because the next likely trend in coffee is
not down, it is probably up. You won't hear about weather scares until the market
actually rallies. By then, it'll be too late to be buying coffee. You want to be buying it
when no one is talking about weather scares. Just like grains. Just a few weeks ago, no
one was talking about weather problems. Yet only days after we got our latest very
bullish data on commercials' positions in grains, soybeans rallied over $4,000 a contract
inside of 10 days. So you don't have to worry about hundreds of different pieces of
data, just what the commercials and speculators are doing.
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