Filtering Out the Noise
The Daily Reckoning PRESENTS: When looking at the commodities market, it’s hard to decipher what is critical information, and what is just media fluff. Below, Kevin Kerr explains how to tune out the noisy chatter – and zero-in on the significant data from news and media outlets…
FILTERING OUT THE NOISE
Sometimes when I turn the TV on and listen to the commentators talk about commodities I cringe. For years the media treated commodities as a secondary asset class, or worse, a form of legalized gambling – to some extent they still do. Their understanding of how the markets actually function is rudimentary at best. Now I’m not saying these journalists are not intelligent – some of them are brilliant. They just don’t understand how the commodities markets work. But yet they have such power that when the camera light goes on millions of people hear and believe what they say. Having done a lot of television and print media myself, I know that they can be very powerful tools but, as they say in the Spiderman movies “with great power comes great responsibility.”
Anyway, let me be clear – I make use of the media and information superhighway every day. While I have colleagues who are deep philosophical thinkers who don’t even own a TV, I have five computer screens in my office and two televisions. Does this make me non-philosophical and obtuse? No, because most of the time I keep the volume on the TV down, which improves my IQ immensely.
Distractions of any sort when trading can be of little or no value. The TV blaring opinions that change moment-to-moment can be one of a trader’s most useless tools. A friend and colleague of mine, we’ll call him Jack, used to work in the office across from mine. Jack is one of the best currency traders I know and he and I come from the same mold. Jack never had a TV in his office; he thought it was worthless and that what was said was mostly drivel. For the most part he was right. More importantly, Jack’s point was that TV offered him nothing beneficial for his trading–it only interfered with his system and was a distraction; in other words, just noise. I agree with Jack. I also feel that staring at a trading screen all day long is useless.
Markets move up and down and when they move against you, when the screen is totally red, emotion can creep in, and we all know how detrimental that can be. I suggest sometimes that you simply switch off the screen and do something else. Pet the dog, make a sandwich, go to the gym, make another sandwich (there have been some years where I’ve gained 20 pounds!) – my point is to leave the scene and clear your head, then come back and decide what to do. You may be amazed at what you find when you return!
Jack was a funny guy; he had very little in his office: a little box over in the corner, a few books on the desk, a light and that was about it – maybe one picture of his family. Truly a minimalist. My office, on the other hand, had tons of stuff in it–pictures books, plaques, TV blaring, etc. So one day I went into Jack’s office and I asked him “Not for nothing Jack, but what’s the box for, and why don’t you keep more stuff in your office?” He looked at me and said, “I can fit everything I have in this office in that little box in about two minutes.” Jack’s point was that he wanted to be ready to go at a moment’s notice. After being a professional trader for a number of years you come to learn that no matter where you’re working as a trader it all comes down to results, you’re only as good as your last trade.
Now is that true? No, but it’s the perception. Truthfully, the media can be an invaluable source of new information and also a good contra-indicator. In other words, if everyone on TV or in the press is talking about how strong copper is, or crude oil, it may be time to look for a downside move, not always, but sometimes.
My advice is to use the news and information as a resource; pull out what you need and leave the rest behind. It’s quite possible to be bombarded 24/7 by talking heads and then have no idea what to do. The best plan is to pick one or two trusted information sources, then lay out your own disciplined game plan and stick to it. Alter it occasionally but never stray too far or too fast. You can always hit the mute button on the TV–sometimes that’s your best move.
You’ll preserve more of your sanity if you tune out all of the opinion and stick with the facts on which you should have based your trades in the first place. Moving your positions with every sound byte on TV only makes one person rich – your broker. Don’t do it!
In the world of commodities, figuring out which data NOT to look at can be just as important as knowing what you absolutely must follow on a regular basis. Each commodity is different and learning what’s important for corn is a lot different than learning what you need to watch for crude oil. Government numbers such as employment data, GDP, and Federal Reserve announcements impact almost all markets, even the global ones. It’s important to have an understanding of the key reports and, even more essential, how much emphasis the markets place on them. Certain reports carry more weight with traders than others.
In addition, as a market changes and matures, certain reports may lose their relevance and new ones may come into play. For example, back when I started in the crude oil markets, everyone followed the American Petroleum Institute report (API), the benchmark report for oil inventories. Not anymore. These days, traders monitor the Energy Information Agency (EIA) report.
Key government reports have been around for as long as the markets and they rarely change. Unemployment numbers, trade deficit, GDP, consumer sentiment. These all are major indicators of the state of the economy, and traders should know when these numbers are going to be announced or published.
I’ve found that the hardest part about any information or number is not only understanding what it means but, more importantly, anticipating how the markets will react to the data. The second part of this equation is a thousand times more difficult than the first.
For example, if the EIA data for crude oil comes out on a Wednesday morning and it shows a build in crude oil supplies, will the market perceive that as bullish or bearish? In other words, if the report shows more crude oil on hand than expected, you would think that would tell traders the market is heading lower. Not always. Sometimes traders may figure that OPEC will see that supply is higher and immediately cut production, which will have an impact on supplies down the road. So while the front couple of months may drop in price, if you own futures further out they actually could go higher. Commodities trading is like one big chess game; I advise being the knight, not a pawn. You always need to be flexible and agile when trading “off of the numbers.” Remember not to get tunnel vision and don’t fight the trend after a number, chances are very good that the trend will win.
“Buy the rumor, sell the news” is a common traders’ saying, and for good reason. But once again this is not always the best advice. Sometimes what happens is that the markets will already “price in” the anticipated data; then when the numbers are released it’s a bit of a letdown from the hype before the number, thus “buy the rumor, sell the news.” Another favorite old-time saying I used to hear was, “Those who trade headlines end up selling newspapers.”
Here are some of the key reports professional traders follow:
Commitments of Traders (COT) – A report published every Friday by the Commodity Futures Trading Commission (CFTC) that provides investors with up-to-date information on futures market operations and increases the transparency of the exchanges. This is one report that traders rely on heavily, and so should you.
Volume and Open Interest – We talked about this. Open Interest shows us how many people are actually trading any particular market at a given time. The higher the open interest the safer, or at least more liquid a market is to trade.
Commercials’ Positions – This shows what commercial and end users are doing. Commercials buy more than individuals, or sell more, depending on market conditions. Traders put a lot of stock into what the commercials are doing because they carry a lot of weight in the market and often control the majority of the open interest.
Unemployment Claims – Jobs are the lifeblood of the economy so traders pay very close attention to these numbers.
Interest Rates – Interest rates affect almost every aspect of people’s lives, especially borrowing, and that can impact the ability of traders to invest, so it’s important to keep an eye on the Federal Reserve at all times.
More specific to certain commodities are reports such as:
Cattle on Feed – Shows the number of cattle that are in the process of getting ready for slaughter
Crop Progress Report – Shows the condition of the current corps and how and in what condition they may harvest.
Crop Reports for OJ – Shows the orange crop estimates and potential damage from weather, pests, or disease.
EIA Report for Oil – A weekly inventory report, appearing every Wednesday, for crude oil and products derived from it
Natural Gas Inventories- Same as the EIA report for Crude Oil, except it comes out on Thursdays and only measures the amount of natural gas in storage in cubic feet.
…and many, many others.
Like any tool in our trading toolbox, these reports can help us make an educated trading decision, but remember they are only one tool. Putting all of your eggs in one basket is never a good idea. Take the numbers with a grain of salt and try to anticipate how the market will react to any given number release. It’s a good rule of thumb to be on the sidelines for any major announcement because trading ahead of a number is highly risky and often very unpredictable, but then again that’s what many investors want. As you gain experience, you’ll be able to see where you want to be.
for The Daily Reckoning
March 22, 2007
P.S. In Outstanding Investments, we often write about the most profitable ways to play the commodities and natural resource markets – and our readers have been quite pleased with the results. That’s why we’ve decided to package all of our commodity-related publications together in one easy package so you can effortlessly take advantage of the next leg of the massive commodity super boom.
Editor’s Note: Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.
The above was taken from Kevin’s soon-to-be-released book, A Maniac Commodity Trader’s Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls “the last bastion of pure capitalism on Earth.” Whether you’re a novice or an experienced trader, Kevin’s down-to-earth, clear-cut guidance will make you more savvy, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you.
We are on a plane, with no access to the latest financial news, so we will just have to wing it…
What struck us as interesting this week was not money, but politics. One thought led to another. On Monday, we noticed that the war in Iraq seemed to be disappearing from America’s newspapers! We don’t know, but we guess that Americans are getting tired of it.
Then on Tuesday, the day after George W. Bush spoke on the war and asked for a hundred million more to keep it going, apparently the International Herald Tribune found the event unworthy of coverage. We have been checking lately, and often on the front page of the paper, there is no mention of the war at all. What kind of strange war is this…that it doesn’t make the papers?
This morning, we have a new Theory of Modern Politics…but we will back up a bit to show you how we came up with it.
First, the Financial Times and other British papers carried the story – including a large, front-page photo of George W. Bush at the lectern. But what was that behind him? Why, it was a painting of Theodore Roosevelt…on a horse, as though he was leading a cavalry charge.
How appropriate, we thought. Poor George is caught in the same trap as Teddy. The buffoonish Rough Rider helped ride the United States of America into a number of pointless military adventures – mostly in malaria-ridden Latino banana republics that nobody cared about. American casualties were few and the bananas were plentiful. The public loved it, proclaiming T.R. a national hero.
But then came WWI. Roosevelt goaded, prodded, and pushed Professor Wilson to get into the war. Wilson hesitated, but then his vanity took over. He saw that the war could make him a hero too – not only of the war…but of all Western Civilization. He would save democracy from the Huns!
This war ultimately cost Wilson his health; he had a stroke after the Europeans and the Americans all turned on him. The French and British exploited him ruthlessly…the Americans simply had enough of him. But the war cost Teddy his own son, Quentin, who died fighting in it.
Both Wilson and Roosevelt were fools…but at least Roosevelt was the kind of fool Americans seemed to like – bullheaded, blustery, bellicose. As has been pointed out before, he had more in common with the Kaiser and the great colonialists such as Cecil Rhodes than with the ideals of the American nation. His philosophy of government was remarkably anti-American; he believed in the military values of Bismarck, and probably spent time reading Nietzsche, at least in balderdash version, when he was relaxing after a battle.
George Bush II, meanwhile, is a kind of thinner version of Roosevelt – both in physical and intellectual stature. Similarly descended from a patrician New England family…similarly educated among the wealthy elite…he has similarly taken up a vision of America as a Nation at Arms – with noble warriors ready to kick any butts that get in its way.
This would be a perfectly good attitude for a Kaiser, but for a man who aspires to lead the United States of America, it is awkwardly anti-America. Except for the fact that the voting public has fallen into a collective amnesia with regards to what the country is supposed to be, it would otherwise be cause for disqualification…and scorn.
“There are two currents in western thought that give rise to our modern conception of political philosophy,” writes our friend Michel, referring to the work of Michael Oakeshott. “There is the Individualist Theory and the Collectivist Theory.”
America was founded by people who believed the Individualist Theory – that a man ought to be free to do as he likes, more or less, so long as it doesn’t harm anyone else. In our founding documents, it even says that the individual – not the state – is sovereign. And for many years – about a century and a half – it was true. Americans were expected to look out for themselves, to find their own way in life, to do the best they could with what they had…and to leave their neighbors alone.
“Justice” was a term used to define the individual’s relation to the state. If he were accused of a crime, he should get justice. He shouldn’t be locked up without charges filed…and without a chance to defend himself (as are those poor bastards in Guantanamo). The U.S. Constitution came with a whole package of “Rights” that were intended to describe the just treatment of the individual by the state. He could worship whatever God he chose; he could say whatever he wanted, and so on…
But now we have a new kind of justice. George W. Bush went to Latin America and spoke about America’s commitment to ‘social justice.’
What kind of justice is this? We will find out…more tomorrow…
Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…
“In the statement released at the conclusion of its two-day meeting, the FOMC acknowledged recent data that shows both higher inflation and a weaker economy. This is pretty much a worst-case scenario for Bernanke and his boys (and girls).”
For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig
And more thoughts…
*** You may think we have come to Zurich to put money in our Swiss bank account.
But no, dear, dear reader. Nothing of the sort. We have come to meet our new Indian partner, who just happens to live in Zurich. Yes, it is a globalized world!
As you know, we make our living by selling investment ideas, opinions, information and recommendations. Often, some of the worst we sell for high prices. Trouble is, we can’t always tell which are which in advance. (If you ever find someone who is always right, dear reader, we hope you will drop us a line.)
We are always looking for new partners, new associates, new writers, new analysts, new publishers. Our business has grown quickly in the last few years – partly because some of our readers have become our employees and business partners. We’re even preparing a version of the DR in Spanish, after a reader from Buenos Aires contacted us about it a few weeks ago. Will Spanish-speaking individuals dig the DR? We don’t know…but we’re going to find out.
We mention all this merely to encourage readers who might like a career in financial publishing to get in touch. We are now looking for analysts/writers/publishers in London…Melbourne…Buenos Aires…Johannesburg…Waterford (Ireland)…Paris, and, of course, Baltimore. Interested? Contact our assistant: Claire.firstname.lastname@example.org.
The financial publishing business is endlessly fascinating – because the markets are like life itself. And we as publishers get to watch…and get paid for trying to make sense of it. There is always new information…new theories…even new technology. Most of the new information is worthless. Most of the new theories are nonsense. Almost everything that everyone believes to be true turns out to be humbug and drivel. But that’s what makes it so entertaining…and so challenging!
*** Now, here’s an interesting little bit of news:
From Juneau, Alaska comes word that a computer technician accidentally erased a disk drive containing information on $38 billion worth of accounts.
“That’s what happened to a computer technician reformatting a disk drive at the Alaska Department of Revenue. While doing routine maintenance work, the technician accidentally deleted applicant information for an oil-funded account – one of Alaska residents’ biggest perks – and mistakenly reformatted the backup drive, as well.”
We will not dwell on the incident. Fortunately, the revenuers had a back up somewhere. All was well…more or less.
But one of our colleagues posed a question to us that we will pose to you:
How rich would you be if Fidelity…or Merrill Lynch…or your pension company…or your mutual fund managers…destroyed all those little bits of electronic information that define your wealth?
“I was talking with an old friend of mine who is filthy rich – 8-figures kind of rich, before the decimal point,” wrote our Pittsburgh correspondent, Byron King. ” He makes $20,000 per day just in interest on funds he has sitting in a money market account. He was musing about what would happen if somebody set off a nuke at altitude, and the EMP wrecked the world’s data storage network. ‘If you wiped out all the data storage at Fidelity, would I still be rich,’ he asked?
“We pondered the question, and he is now accumulating gold.”