Financial Times: UBS index to focus on food inflation

For those readers not quite ready to open a futures account, here's a good alternative option for you. UBS announced today that they are launching a new index that will focus on food inflation. Needless to say, this index would have produced very nice returns over the past 5 years - and I think the next 5 will bring more of the same.

The nice thing about this index is that it focuses on commodities that are not usually included in typical commodity indices. Most indices have traditionally been heavily weighted in the energy and metal sectors.

The Importance of Stops

Now that the grains and softs have taken a breather - maybe temporary, maybe longer - I thought this would be a good time to talk about stops. Especially as I'm scrambling to set mine!

This is basic stuff, but it took me almost three years of trading to figure out. Always use stops - don't ride a position into the ground. At the heart of it, we're speculating here - we're not value investors who are content to buy more at cheaper prices. If the market tells us to get out - we need to get out!

I had a hard time getting this through my thick skull. I was used to the equity value investing school of thought - if you love a stock at $10, you should really love it at $7, because nothing has fundamentally changed about the business, and you can now buy it for less. Well that's great if you're Warren Buffett, but not so great if you're trying to catch a run in soybeans.

If prices drop, the market is telling you something - that you're wrong! Yes, there are corrections in every bull market. So it's important to set stops 'outside of the noise.' Depending on your trading style, you may allow for a correction, but you don't want to ride the downside of a trend - unless you switch your long position to a short!

Tonight I put in the following stops:

• May '08 Soybeans at 1480
• May '08 Rough Rice at 17.05
• May '08 Cotton at 82.50

I have some more work to do on these tomorrow. But the basic idea is that if these prices are hit, I'm out. I'm willing to give back some of my gains from the past few weeks, but I certainly don't want to give them all back. So if these stops are hit, fine - I'll concede that this leg of the bull market is over.

What happens if the stops are hit, and the market rallies? Personally, I will wait until a new high is hit. So if soybeans drop all the way to 1450, I will be stopped out at 1480. If they then turn around and rally all the way up to 1600, I will buy back in when a new high is hit - and the bull market is confirmed to still be in place.

The downside of this strategy is that I have to give up some gains. However I will take that trade, in order to make sure I'm out of the market for any nasty corrections. Look at any historical chart, and you'll see that any large spike has two sides - the sharp run up, and the subsequent sharp run down. Please make sure you're only on the front, profitable end of the spike!

Agora's Kevin Kerr Still Loves Cotton

From Agora's 5 Min Forecast:

“The cotton market has been very depressed the last few years due to high carryover stocks and lower global demand. All that may be changing. Farmers in key cotton-growing states are rejecting the idea of continuing to grow cotton and are opting for more profitable crops that have lower input costs.

“We are already seeing buying interest come back into the cotton, but it is still underperforming the other highflying grains. I would look at buying either call options or futures on the December 2008 cotton (CTZ8).”

Australian Investment Review: Commodities strong as investors flee credit markets

Here's a nicely done article that will take your breath away as it details the commodity markets.

Just one after another - soybeans rising on..., cotton jumps on..., oil over $100... - man, you gotta love a bull market!

Weekly Positions Update - 03/02/08

What a crazy week! Not complaining at all, just trying to hang on and enjoy the ride!

Have to be aware that a correction at this point could be sharp and nasty. But no reason to sell on this amount of strength - just fasten your seatbelts!

Open Positions

Date	Position	Qty	Month/Yr	Contract	Strike	Call/Put	Entry Price	Last Price	Profit/Loss
02/14/08	Long	1	MAY 08	Cocoa			2535	2743	$2,080.00
02/14/08	Long	2	MAY 08	Cotton			71.26	81.86	$10,600.00
02/28/08	Long	1	MAR 08	Japanese Yen			0.9501	0.9711	$2,625.00
02/14/08	Long	1	MAY 08	Coffee 'C'			154.25	165.25	$4,125.00
02/14/08	Long	1	MAY 08	Coffee 'C'			155.10	165.25	$3,806.25
02/22/08	Long	1	MAY 08	Coffee 'C'			162.50	165.25	$1,031.25
02/14/08	Long	2	MAY 08	Rough Rice			16.265	18.220	$7,820.00
03/03/08	Long	1	MAY 08	Rough Rice			18.215	18.220	$10.00
02/27/08	Long	1	MAY 08	Soybeans			1488	1560 1/4	$3,612.50
03/03/08	Long	1	MAY 08	Soybeans			1559 1/2	1560 1/4	$37.50
02/14/08	Long	1	MAY 08	Sugar #11			13.79	14.65	$963.20
06/04/07	Long	1	JUL 08	Sugar #11			10.05	14.74	$5,252.80
08/01/07	Long	1	JUL 08	Sugar #11			10.48	14.74	$4,771.20
12/20/07	Long	1	JUL 08	Sugar #11			11.37	14.74	$3,774.40
01/02/08	Long	1	MAR 08	Swiss Franc			0.899500	0.9667	$8,400.00
02/19/08	Long	1	MAY 08	Mini Soybeans			1417	1534	$1,170.00
02/22/08	Long	1	MAY 08	Mini Soybeans			1425	1534	$1,090.00
Net Profit/Loss On Open Positions:									$61,169.10

Account Balances
Current Cash Balance	$82,697.93
Open Trade Equity	$61,169.10
Total Equity	$143,867.03
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$143,867.03

Cashed out: $5,000.00
Total value: $148,867.03

Weekly return: 22.1% (!)