Tag Archives: commodities

Monday Market Expectations 3/14/11 - Jeremy Frommer vs Jeremy Klein, The Debate Continues


Dear Jeremy Klein:

I have waited since Monday, Feb 28th to respond to you, my old partner and dear friend.

First, I have covered all my shorts and started to build a small long book. The trade back through 1300 that I’d blogged about has occured. We had a nearly 5% correction from recent Highs on the S&P futures of 1343 to the Lows set in overnight of 1283. The next time I’ll attempt to short this market will be near the 1304 - 1308 level. I will be slowly buying speculative take out names as they have cheapened up significantly.

I will now respond to your points one at a time.

1. You recently made your perception clear that oil could soon return below 90, when you stated “crude was trading at 85 just prior to the Libyan crisis.” Well, its been 2 weeks, we are nowhere near 90, and I still believe it will be a while longer before we somehow find our way back to that level. We are far from out of the middle east oil crisis, and this could continue for the rest of the year.

2. You also believed that the revised GDP was not all that important as it was a look back of very old data, and more importantly thought the housing data is priced into market. Perhaps this is true, but the bottom line is that we have 5 years of inventory build up. So while I am long term Bullish and have been short term bearish, my bullish thesis is a slow and steady grind from here. Not the Hyper bull market we were in the last 6 months.

3. You’ve commented that the jobless claims have resumed their downward trend. However, most recently we were a little too close to 400,000 for my comfort. It is going to be an ongoing struggle for the labor environment to improve. Again this is why I look for a much slower grind up in the market than we have experienced recently.

4. Michigan sentiment came in a little lighter than expected. And while you importantly pointed out that it is near its 3 year highs, that is exactly why I think we needed a small correction, a pause, and a slower resumption of the bull market.

5. As far as the Index of out performing names, lets keep in mind that:

a. I trade names that may not be in the S&P 500; although I know you, my esteemed colleague, believe that outside of the S&P nothing else matters.

b. Often a handful of stocks are sustaining an Index due to extremely strong moves up, while the rest of the names in an index suffer.

6. In response to the market not being overbought;  I think the move below certainly shows us that we cannot expect a market to be up 4% every month, and we were in some need of a pull back, which is what came to fruition.

7. And finally, if you read the blog below, you’ve questioned my probability of an extreme event occurring in Saudi Arabia. Well, I think we know the answer to that now. Sauid Arabia has demonstrated that they will fire on protestors. And clearly the show of force on the streets of their major cities implies that the Kingdom is nervous.

Now I am no soothsayer. And I do wish I had taken your opinions more seriously last year as I would have saved hundreds of thousands of dollars. You saw the sell off in April and May of last year and warned me. I probably would have made a great deal of money. I have happily paid attention ever since. So I only felt it appropriate to give you a heads up on my bearishness, 4 - 5 percent higher than where we are today.

In addition, you do have an uncanny ability to pick the year end close of the S&P. Pay attention members. Klein is looking for an end of year 1435 close. And although I have to look over my previous blogs, I believe I was looking for 1425.

As usual my good friend, great minds think alike.

Best Regards,

Jeremy Frommer


——————————Below is my previous response to Jeremy Klein’s own response which is bolded———————————-

My old friend, partner, renowned economist, and all around great guy, Jeremy Klein, provided a counter point to my most recent blog “Stock Market Commentary 2/25/2011 – My Advice”

In all fairness and in the interest of thoughtful debate, it is only appropriate to publish it as its own blog.

Three other important points about the distinguished Jeremy Klein

  1. He is a wine connoisseur
  2. He is known at Goldman Sachs as “The one that got away”
  3. He is the winner of HFL pick the year end close on the S&P 2010

His response follows:

Hedge Fund Live - The Battle of The Jeremy's


“To my old friend Jeremy Frommer,

As you know I hold your opinion in the highest regard, you are by far one of the wisest and talented individuals I know, that said, I am not sure I agree with your view. First, crude traded at $85 just prior to Libya. It sold off there, after Egypt calmed down and may do the same when Libya reaches a resolution assuming another major oil producing nation doesn’t fall. Ironically, you argue that consumer is worse off than people think which would imply demand for oil would decrease which would also bring crude back down below $90.

A revised reading on Q4 GDP is not all too relevant as it looks back at chunks of data 5 months old. New Home Sales was disappointing, but much of that was the snap back from the CA tax credit expiring last month. More importantly, the housing sector remains depressed which most everyone agrees with and is priced into market.

Jobless Claims has resumed its downtrend and Thursday’s print was without any seasonal adjustments, so it’s clean. Most

Hedge Fund Live - Frommer Vs Klein



importantly, you ignore the University Michigan number, which now sits on 3-year highs and clearly shows that consumer sentiment is important.

I am also not sure how stocks in general have underperformed the S&P 500 when the latter is an index average.

I am not sure the market is overbought let alone leveraged overbought. The TICK information and open interest in the futures actually imply managers are very nervous and looking to hedge aggressively and quickly at the first sign of trouble. Therefore, we will continue to get sharp 1-3 day sell off such as the one on Jan 28 and this week before grinding back higher as the managers scramble to cover. The increase we have seen in open interest on these sharp down days contradicts greatly what one would expect when coming off 2 1/2 year highs such that we saw panic selling through Thursday afternoon.

Hedge Fund Live - Economist vs Entrepreneur



Finally, what percentage would you put on Saudi Arabia falling into same malaise as Egypt, Libya, and Tunisia? I am no expert on Middle East, but given monarchy is liked much more than Gadaffi, proactively trying to reform, and the U.S. will do anything in its power to aid the nation in keeping pumps flowing, I would put it at 10%. Earnings on the SPX for 2012 are $110. I think that’s a bit of stretch and will use $105. If oil prices continue to rise, I will use $85 as an estimate as energy names (12% of index and rising) will see solid increases. I will use a 14x forward multiple for the former and a 13x for the latter given additional risk premium for geopolitical uncertainty. Using my aforementioned, yet understandably arbitrary, probabilities yield a year-end level of 1435.

Been tuning in a great deal lately, as Hedge Fund Live has become the top ten go to destinations for a real time look at the markets. I really enjoy the content.

I look forward to hearing your response.

All the Best

Jeremy Klein”

Well J. Klein, you will hear from me soon as I have quite a bit to say. For now I hope our members, readers and listeners enjoy our debate




A brief look at the situation in Libya

HedgeFundLIVE.com — In terms of recent events, the on-going chaos in Libya has been causing quite a stir. Its president has resided in the position for 42 years (!!!) and not surprisingly has resorted to violence and military power to suppress the people. This has been causing quite the stir in the markets and I thought I’d just add my two cents on what kind of impact it has / is going to have.

One thing that is interesting to me is the momentum the Middle East has been on in terms of protests against the government. Even if the situation in Libya stabilizes, another incident may not be too far away. Most times, these sorts of events tend to be negative indicators for the market but most of the drop I feel is due to investor fears and mainly not following from the fundamentals. Because of this, I think volatile events like this are a good time to buy, particularly during a day where a decrease in the market is likely due to news associated with Libya.

There are certain scenarios that can play out though that may throw this for a loop. For instance, trade sanctions currently being enforced against Libya will cause spikes in prices of commodities and the situation can even worsen. This will cause downward pressure on the US economy and it is unknown when prices will go back to normal if at all even if Libya’s situation stabilizes.

Another cause for concern is how the armed forces, in particular for the US, will react to continued violence and armed resistance. By itself it may not cause much impact on the global economy but it’s possible that its influence in the Middle East may be enough to send other countries around it into chaos. So the black swan in this case is the particular set of events that have catastrophic consequences for the global economy. Personally, I wouldn’t put too much merit in this sort of idea unless the situation remains stagnant or continues to get worse over an extended period of time.

Overall, I would still say that this situation creates more investing possibilities and one should not be hesitant to participate even if the outlook may seem bad.

Market Analysis - Can the Flash Crash happen again and can it be predicted?

HedgeFundLIVE.com -

The Flash Crash (FC), May 6th 2010, is the biggest one-day point drop in the history of the DJIA (998.5 points) and the third highest volume  day ever (but one of the most illiquid). Studies conducted by the SEC and other private groups have shown the FC was caused by a multitude of factors, which can be understood simply as a snowball effect. Factors, such as liquidity consumption, high-frequency trading, normal market action, and a lack of retail trading all played into the historic move. Contrary to popular believe the FC was not caused by a “fat finger” or one single High-Frequency Trading firm (HFT). This article will attempt to clarify the confusion, discuss the use of the VIX as a hedge, and how another FC can potentially fit into our market conditions.

In a study conducted by David Easley (Cornell), Marcos M. Lopez de Prado (Tudor Investments), and Maureen O’Hara (Cornell), some of the major causes are identified (link to the study Study). What they found is that the ratio of informed trading volume to total volume had been elevated for days prior to the FC. The metric they used to measure this, also developed by the group, is called the VPIN or Volume-Synchronized Probability of Informed Trading. There are of a lot of ways to define the VPIN, here’s the way I find easiest: It is a ratio; the numerator is the absolute difference between buy-volume and sell-volume which is basically a measure of toxicity for maker makers*; the denominator is the total trading volume. The intriguing part about the VPIN is that it displayed elevated levels for a couple days before the FC occurred and ultimately peaking on May 6th, which means its predictive not reactive. When the VPIN is increasing, one to several things may be happening, here are a few (these reasons are FC specific):

-Total trading volume may be falling; this decreases the denominator and increases the ratio.

-Retail investors are trading less. This increases the numerator, because the population of active traders in the market then contains a higher percentage of informed-traders overall, such as hedge fund traders. Retail investor trading decreased due to the market crash a year earlier and the economic downtown. This will also decrease the denominator, thus elevating the ratio dually fast and consuming liquidity.

-HFTs, which actually act as market makers due to their low profit targets and extremely high number of actual trades, leave the market because of already existing liquidity problems. When this happens the HFTs consume liquidity that is already at low levels. This decreases the numerator but drastically decreases the denominator as well because they represent roughly 70% of total trading volume in US equity markets.

-Market makers leave the market, caused by a rise in toxicity*, this absolutely decreases the denomitor.

The VPIN displayed a rise due to all these factors and more. Although May 6th was one of the highest volume days ever, the actual liquidity was extremely low. This low liquidity (measured by the VPIN) can have a downward spiraling effect. The Flash Crash can be understood to be caused by low liquidity in an already nervous market, which results with investors essentially being hand-cuffed to cascading stocks. The VPIN, hypothetically could have predicted the FC and given regulators time to take precaution or at least give market makers a chance to be proactive.

Grown-up "Kevin McCalister" during the first #Flash #Crash

Can the VIX safeguard your portfolio from another Flash Crash? Unfortunately, the answer is no. The VIX, which is based on the expected 30-day volatility of the S&P 500 options, is only able to be reactionary to a crash, not predictive. The VIX is mostly misunderstood by the people looking at it, it is important to note that it is reliant on humans due to its use of option implied volatility, not directly of the S+P500. The VIX does not always rise due to panic, it can rise for many reasons, this is why it does not perfectly correlate with the S+P 500. Specifically, the index is based on volatility and that is what the index is used to hedge against, the FC was caused by low liquidity. Obviously these are two different market components.

So the questions are, can another Flash Crash happen and what may cause it. The answer to the first half is simply and sadly, Yes. The answer to the second half of the question is that commodities, economic unrest, political unrest and many more factors could trigger it, particularly oil. Commodities which have grown in the retail investing spotlight, can potentially take small amounts of volume away from equities markets. If you are familiar with the term risk aversion, you understand that when people want to hedge their overall investment risk they leave equities and turn to commodities such as the US Dollar,  gold, silver, etc. Economic unrest could trigger similar risk aversion strategies, with volume consumption and asset flights away from equities. It is possible the problems in the Middle East (political problems) could initiate huge increases in the price of oil, which will adversely effect the equity market. When oil prices rise investor-spending rises which causes less savings, i.e. spending more on gas or groceries instead of buying their favorite company’s stock. Oil price increases also cause companies to have higher expenses, which lowers fundamental worth in terms of investing, this can lead to lower stock valuations, which can lead to lower trading volume. Just because oil is rising, doesn’t mean everything is going down, some investors who are wise enough will hedge their lives by directly investing in it; this will also create a lower liquidity situation when people take the money they had in Ford and buy oil futures with it.

It should be understood that these reasons mentioned in the preceding paragraph will most likely not cause an FC on their own. They simply create an environment in which, another crash could occur. The Flash Crash is somewhat comparable to a perfect storm, a lot of bad elements that combine to create something much larger and much more dangerous.

Again the point of this article was to attempt to clear some confusion about the Flash Crash and discuss the current market we are trading.

*Toxicity: for market makers is basically they’re expected loss from transactions.


Market Hedge Strategy - Markets gone wild because of crazy people

HedgeFundLIVE.com — The market has been disrupted by the madness in the Middle East. In particular, the price of oil has caused fluctuations. My gut feeling is that the trouble in the ME will not be over within a couple weeks (sarcasm). There are different ways to hedge against quick pops/drops that the market should continue to experience. Here’s a few ideas:

Markets disturbed

VIX calls: in or out the money, its doesn’t matter, but they should be long-term to avoid time decay. Wait to get into these until the VIX settles lower again. This is a swing strategy and could last from a week to a month, definitely set a profit-take level.

VIX puts: as of this morning the VIX is abnormally high, result of yesterday’s sell-off. April 15 puts are 10 cents, and look like a quick play while the VIX inevitably resets itself.

DBO: an oil ETF that has been on a roll. May want to wait for a pullback, as the action it saw yesterday was abnormal, a good level to buy is around 28.40. The price of oil should continue to rise for many months for many reasons. Also the fund seems to go up whether the stock market does or not, having a low correlation to an unpredictable market is good for hedging purposes.

3 Reasons We Have Not Seen A Market Top & A Million Reasons It Will Burst


Are we at the top or about to fall off the cliff?

1. There has yet to be that strong push forward. On the desk, everyone is waiting for that move to signal the top. When markets come  to an end there is usually the egregious move. But day in and day out we trade in this tight range slowly grinding forward.

2. The earnings front:  It seems that there is nothing but positive earnings. Stock after stock are topping analyst estimates.

3. QE2 ends in June. I believe that as long as the “Fed” can spend, the market moves higher.

Now, that does not mean the economy is improving overall. We have an unemployment rate greater than 9%, which is more like 15%. There is still a housing crisis as foreclosures are still eminent. The “Fed” is testing the banks balance sheets, to see if they could sustain a double dip recession. Does this strike anyone else as a bit peculiar? We also have fears of inflation and rising commodity prices. At this rate, a pair of socks will cost $100. And we can not forget all this shit that is going on in the Middle East.

A topsy turvy day

Today was a bit unusual. We entered orders counter to our orginal plan. We went long on our shorts and shorts on our longs. By noon Mosk was fed up and feeling beside himself. I know he blogged about this. He gave us a speech before we broke for lunch. When you are having a bad day, simply just walk away. Before walking away, get out of your positions, by going flat or taking some share size off. This limits the amount of pain you will take. The next step is to get your strategy in order and know your risk tolerance. Do not try to make it  back on one trade! Make sure you stay small and feel good about your trade. Walk away from the day feeling okay.

After lunch we did not trade until around 3:00pm entering orders for overnight. Going into close we owned CLF. Needless to say we ended up positive.

A traders biggest down day usually comes after there biggest up days.

-Justin Valle

Eat Your Wheaties

…not those wheaties.  Here is a summary of the basics of how the grain commodity futures trade:

Ticker Prefix C
Exchange CBOT
Pit Trading Hours 10:30-14:15
Contract Size 5,000 bushels
Contract Months H, K, N, U, Z (Mar, May, Jul, Sep, Dec)
Tick Size 1/4 cent per bushel
Roll Date Business day prior to 15th day of contract month
Uses Animal feed, food, alcohol, ethanol, industrial usage, seed
Report Releases Prospective Plantings (end of March): survey of farmer on how many acres they expect to plant of each crop, including corn, for the upcoming season
Monthly Crop Production (10th day of the month): updated estimate of supply and demand for crops, including corn
Grain Stocks (quarterly): information on current global and domestic supply of grains, including corn
Other U.S. is leading exporter- IA, IL, NE top corn producing states
Planted in April, May, June; harvested in September, October, November
Summer months are most active and volatile for corn futures
Weather (excessive heat or floods), particularly in the Midwest where the bulk of corn is grown, is a catalyst
Late planting  may indicate smaller supply, which may cause prices to rise

Ticker Prefix S
Exchange CBOT
Pit Trading Hours 10:30-14:15
Contract Size 5,000 bushels
Contract Months F, H, K, N, Q, U, X (Jan, Mar, May, Jul, Aug, Sep, Nov)
Tick Size 1/4 cent per bushel
Roll Date Business day prior to 15th day of contract month
Uses Soybean oil (used widely in many products), soybean meal (used in animal feed)
Report Releases Prospective Plantings (end of March): survey of farmer on how many acres they expect to plant of each crop, including soybeans, for the upcoming season
Monthly Crop Production (10th day of the month): updated estimate of supply and demand for crops, including soybeans
Grain Stocks (quarterly): information on current global and domestic supply of grains, including soybeans
Other U.S. is leading producer- Midwest is top producing region
Planted in April, May, June; harvested in September, October, November
Summer months are most active and volatile for corn futures
Weather (excessive heat or floods), particularly in the Midwest where the bulk of soybeans are grown, is a catalyst

Ticker Prefix W
Exchange CBOT
Pit Trading Hours 10:30-14:15
Contract Size 5,000 bushels
Contract Months H, K, N, U, Z (Mar, May, Jul, Sep, Dec)
Tick Size 1/4 cent per bushel
Roll Date Business day prior to 15th day of contract month
Uses Flour, brewing, gluten, livestock feed
Report Releases Prospective Plantings (end of March): survey of farmer on how many acres they expect to plant of each crop, including wheat, for the upcoming season
Monthly Crop Production (10th day of the month): updated estimate of supply and demand for crops, including wheat
Grain Stocks (quarterly): information on current global and domestic supply of grains, including wheat
Other Two seasonal wheat crops: winter and spring
Winter wheat is planted in August, September, October; harvested in May, June, July
Spring wheat is planted in April, May; harvested in August, September
Two types of winter wheat: soft red winter wheat, hard red winter wheat (largest US wheat)
KS, TX, WA top winter wheat producing states; ND top spring wheat producing state

Q4 GDP: Lower Than Expectations, But Not Disappointing

Morning Notes

- Recall that Japan was downgraded a notch yesterday, and that happened after the Japanese market was closed
- Hence, today the Nikkei closed down 1.1% in reaction to the downgrade news
- Yen recovered a bit from its weakness yday
- First property tax was implemented in China, which pushed down the property stocks
- Not much out in Europe
- Spain’s unemployment rate is now over 20%
- FTSE weak due to weak Gfk (consumer confidence) reading, largest decline since 1994
- Commodities are quiet
- Q4 GDP (Advanced): +3.2% vs. +3.7% (still see this as a positive despite the miss as it is above 3%)
- Q4 Chain Deflator (Advanced): +0.3% vs. +1.5%
- Real final sales figure (excl. inventory changes): +7.1%, highest since 1984
- On economic calendar for today: U.Mich Sentiment at 9:55a

No Catalysts Will Probably Make for a Quiet Monday Session

Morning Notes

- Not much out over the weekend
- Nikkei closed up 70 bps while Shanghai Comp closed down 70 bps
- European PMI came in slightly less than expected, which added some pressure to the European bourses
- Commodities mixed- crude down, gold up
- S&P futures are flat in the pre market
- Nothing on the economic calendar for today
- The Fed will be main focus this week as they begin a two day meeting tomorrow with a policy statement out on Wednesday]
- Expecting quiet Monday trading today as there are no potential catalysts scheduled

Weakness in the Pre, Particularly in Asia

Morning Notes

- Looks like the leaked China CPI number from yesterday was spot on: +4.6%, in line with expectations
- China GDP and Industrial Production beat expectations
- China’s gov’t stressed that inflation would stay high, at least in first half of yr
- Rumors that PBOC may take action before Feb. 3 (Chinese New Year)
- All of the above weighed down Chinese stocks- Shanghai closed down nearly 3%
- Notable weakness across Asia: Hang Seng closed down 1.7% and Nikkei closed down 1.1%
- European markets trading slightly lower as well
- German PPI came in higher than expected, suggesting slight inflation
- Commodities lower in the o/n
- Initial Claims: 404K vs. 420K; prior revised down to 441K
- Continuing Claims: down 3.861M from 3.887M prior
- Remaining on the economic calendar for today: Existing Home Sales at 10a; Philly Fed at 10a
- S&P futures opening on no pivot signal, trades between S3 and R3 pivots