i listened to Coxe. he is basically chasing past performance, in my view. just because commodities outperformed the equities this year doesn't mean they will next year. in fact, it probably increases the odds of equities doing better as mean reversion.
it is a valid point that equities, especially commodity equities, entail political risks that cannot be fully known in advance. confiscatory acts like that being considered in Alberta are par for the course.
but i did like one thing Coxe said: Suncor and COS have contracts in place which carry to 2015. that to me sounds like 7 more years under the current royalty regime for these two, or there will be a big legal fight.
i got scared away from places like Russia (Gazprom) due to all the political risks. i still like to think i will not get totally wiped out by Alberta. i still like to think this is just a "cost of doing business". some like Gartman will throw in the towel, but Coxe has not and i'm not.
i can understand the logic behind just owning the commodity instead of the equity, but to me it looks like you're just trading one type of risk (political risk) for another (leverage risk).
if i understand you correctly, you are using considerable leverage...
If a speculator put up $20,000 per contract and bought 5 contracts at $70, the price of the contract would have to drop down to $53 before his buffer would be wiped out.
the way i like to look at these things is, it's not static. it doesn't matter that you wouldn't lose 100% of your capital until $53. the point is, you would lose HALF your capital if crude simply fell $10. so then you have to ask yourself how happy will you be with losing half your capital, and at that point you will still have the risk of losing it all.
your answer to that is you will bring in the cavalry:
I have other capital that I can transfer over if this unlikely event took place.
but what is this other capital sitting in? things like COP LEAPS and long positions in COS and SU and CNQ? (please forgive me if i am mischaracterizing your other positions, and they are in truly non-correlated things like puts on XLE)
if crude drops 17 bucks you can be pretty sure any energy equities will also tank. so you'd be in the position of meeting your futures margin calls by selling out your equities into weakness.
in my opinion, this is just the sort of thing that happens all the time in the markets, and one of the reasons the down moves tend to be so pronounced: lots of leveraged traders have to sell the kitchen sink to meet margin calls.
my aim is to be on the other side of this trader. i am typically 40-60% equities (40% now), with the rest in cash and other positions which are non-correlated to the equities. right now most of my cash position is in JPY. i also have positions which are bets on the unwinding of the housing bubble and credit bubble.
what i notice is, when equities are doing poorly, JPY will be doing well. if we get a bad month or two, i think equities, commodities, and just about all foreign currencies can tank big time. the one thing i expect to do well in that circumstance is JPY, since that is what everyone has borrowed to go long all the "stuff" they are long.
so in that kind of dynamic, although i would be experiencing unpleasantness in my equities (let's say a 30% drop, which in a static PF [where the non-equity allocation is all static USD] could take equities down from 40% of PF to 32%), i would expect gains from the 60% of my PF which is JPY and bearish credit positions to at least offset this loss. let's say they gain 20% (only two-thirds of the percentage move assumed for the loss on equities)--that would fully offset the equity losses (60% of PF * 25% gain = 120 points). so the PF would be flat despite a 30% ravaging in stocks like COS which make up 40% of PF. and equities in this dynamic PF (where non-equity allocation is significantly negatively correlated to equity allocation) would fall not to 32%, but all the way to 28% (since the non-equities would be appreciating in USD by 20%).
the result of this is that, while all the leveraged speculators are getting carried off the field, i will be flush with cash and very underweight equities. i will then be in a position to buy some of the equities puked up by margin clerks. and as mentioned here before, it won't be the first time.
there are few things i am sure of in investing, but one of them is that energy equities (and commodities) will again face a brutal unwinding that will result in huge amounts of distressed selling and provide good entry points for those with the capital available at the right time.
I believe that Crude Oil prices are going significantly higher. IMO, the best way to profit from this is investing directly in the
i agree, but i like the equities because even if crude doesn't go higher, they will make a mint. btw, i believe what Coxe is talking about for institutional clients is buying unleveraged commodity positions.
there are certainly scenarios where huge leverage on the commodities will provide the best results, just as there are scenarios where selling your house and putting all the proceeds into the Powerball lottery provide the best results. the problem is, you can't know in advance whether your ticket will be a winner or whether you will lose all your money.
for me, it's a no-brainer to stay away from strategies that could cost me all or most of my capital. as Richard Russell says, "If you want to be wealthy, you must not lose money, or I should say must not lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing."
ww2.dowtheoryletters.com
if you can pull it off with significant leverage, more power to you. i don't think most people could, though i'm happy if they try, as i will be one of the guys their margin clerk sells to in the next downdraft. |
