How and Why I Trade the Commodity Futures Markets What I am Doing Now Victor Adair Senior Vice Presi

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How and Why I Trade the Commodity Futures Markets
What I am Doing NowVictor AdairSenior Vice
President / Derivatives Portfolio ManagerMF
Global Canada Co.

• Mike Campbells Survive and Thrive
• Investment Conference
• Vancouver, BC November 1, 2008.

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Program Outline

• Macro Market Opinions
• Why I trade Futures and Options
• How I trade / manage risk
• Markets I am watching now
• Personal Cautious. Savings. Trading. Income. In
  cash too early. No leverage. Wait for bargains.

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Disclaimer

• This presentation is for information purposes
  only
• Trading derivatives (futures, options, foreign
  exchange) involves risk of loss
• Investments can go up as well as down and involve
  the risk of loss
• Past performance will not necessarily be repeated
  in the future
• MF Global Canada Co. is a member of the
• Investment Dealers Association
• Canadian Investor Protection Fund
• Toronto Stock Exchange
• Montreal Exchange
• Winnipeg Commodity Exchange

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Macro Market Opinions

• THEN
• Credit Boom Asset Boom High Risk
  Tolerance
• Many years of low interest rates / easy money /
  rising asset prices fuelled a consumer spending
  boom and an attitude
• Reaching for yield / dont want to be left behind
• Borrowers and Lenders - pushed the envelope on
  risk
• NOW
• Lenders less willing or able to lend
• Borrowers less willing or able to borrow
• Risk being avoided not embraced

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Macro Market Opinions

• Asset price gains from 2001 to 2007 were
  extraordinary not normal
• Buy and hold is not good advice
• Throw away your previous ideas about valuations
  and risk this is a different world
• Dont buy something today because it is ½ price
  compared to what it used to be
• Inflation is history for now deflation is the
  worry for now
• Inflation will come back
• Be prepared for a lot more government in your
  lives
• Stress whats the next shoe to drop?
  Volatility
• Something BIG will breakEuro? Country default?

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Macro Market Opinions

• Real estate prices will continue to soften
• Unemployment will rise
• Previous economic growth came from rising
  consumption based on rising asset prices,
  borrowed money and leverage. Thats over.
• Expect a L shaped economy
• Expect real interest rates to rise
• Financial markets will have relief rallies but
  a weak real economy will keep a lid on gains
• Expect lots of garage sales and booming thrift
  store business
• Demographics Boomers will try to save more,
  spend less

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Marco Market Opinions

• Commodities bull market is over until the last
  Johnny-come-lately bull throws in the towel and
  promises to never return. Speculators fuelled
  most of the price increase
• Currencies incredible barometers of capital
  flows 40 declines - will the Euro hold US
  wins the least ugly contest
• Stocks a slow-motion (and sometimes not-so-slow)
  crash
• Bonds great battle aheadSupply Vs. Demand
• Volatility new highs as a result of stress
  opportunity. Learn option writing strategies

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Macro Market Opinions

• Inflation / Deflation?
• Credit crisis induced slowdown deflationary
• Monetary reaction inflationary
• Credit tightness deflationary
• Fiscal action bigger budget deficits
  inflationary
• Demographic trends in West deflationary
• Rising US (?) deflationary
• Weakness in global economy deflationary
• De-coupling? Will the Rest of the World
  continue to grow if USA goes into a real
  recession? No deflationary.

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Macro Market Opinions (Cont.)

• We are all currency speculators now
• 6 years of US weakness 6 years of commodity
  market gains
• Currency trends overshoot and make V shaped
  turns
• Is the US rising?
• Currency flows from risky to less risky from
  the periphery to the center as the market seeks
  to avoid risk
• 90 of Hungarian residential mortgages financed
  with Swiss Francs!

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Why I Like To Trade Futures and Option Contracts

• Mike Campbell interviewed Jim Rogers on
  Moneytalks Radio in October 2003
• Jim said, The best way to trade commodities is
  with futures contracts. But most retail traders
  use way too much leverage.
• Following that interview I wrote Five Reasons
  Why Futures Contracts Give You a Powerful
  Advantage posted on www.VictorAdair.com

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Why I Like to Trade Futures and Options Contracts
(cont.)

• Efficient
• Transparent
• Pure Play
• Variety
• Leverage
• Easy to go short, open 24 hours, regulated market

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What is a Futures Contract?

• Specified unit of trade with an expiry date
• Example December 2008 Gold Futures Contract
• 100 troy ounces / specified quality and delivery
  location
• First Notice day November 30, 2008
• Value of the contract at 800 oz 80,000
• Minimum initial performance bond, approx. 7,000
• Leverage 111

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How I trade

• I develop Global macro opinions
• I may be100 in cash or up to 4x leverage
• I read a lot of different research
  www.VictorAdair.com to form my opinions
• Im not a day trader but I watch the markets all
  day
• Opinions necessary (you have to have the
  courage of your convictions) and dangerous (you
  have to give up quickly when proven wrong)
• I try to anticipate a trade before it is time to
  make the trade then Im ready when its time to
  pull the trigger
• I need a technical confirmation that my opinion
  may be right before I execute

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How I trade (cont.)

• I trade like a mercenary (Dennis Gartman) when
  markets change I change
• I challenge consensus what if the popular
  idea is wrong, has run its course?
• I try to judge the mass psychology who has a
  weak / strong position in the market?
• Changing psychology not math moves markets
• All markets are spreads try to think like a
  spread trader what is X worth relative to Y?
• Markets are inter-related but relationships
  change
• Options Current I.V. relative to history - Use
  alone or in combination with futures

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Managing Risk

• I know practically nothing and cannot predict the
  future
• Most likely risk my opinion is wrong
• Anything can happen
• Patience sitting in cash is OK
• Add to winners, never add to losers
• I know where I will get out (if Im wrong) before
  I get in
• Write down my reasons

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Managing Risk (cont.)

• Max loss 1 2 per trade / use low leverage
• Accept that most of my trades may lose money
• No big losses, occasional big wins
• Relationships between markets change, but markets
  always influence one another
• Be aware of my prejudices foundation of all
  opinions
• Without risk management the road to the Poorhouse
  is paved with fine opinions
• See How To Be A Better Trader
  www.VictorAdair.com

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Options trading ideas

• Option volatility is extremely high. Learn option
  selling (writing) strategies
• 1) you like a stock/commodity at todays price.
  Write a put option on it, collect the premium. If
  you get put you own the stock/commodity at a
  better price, if you dont get put you keep the
  premium. Repeat.
• 2) you like a stock/commodity at todays price.
  Buy it and write a call against it. if you dont
  get called you own the stock/commodity at a
  better price, if you get called you make a short
  term profit. Repeat.
• 3) Write both calls and puts at the same time
  look for the market to trade sideways. Repeat.

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Yield on US 10 Year Note Futures ContractFalling
Interest Rates Helped Boost Asset Prices
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Dow Jones Industrials Stock Index (Falling
Interest Rates Helped Boost The Stock Market)
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Average US Real Estate Prices (Falling Interest
Rates Helped Boost Real Estate Prices)
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US Dollar Index not always a bear market!
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Commodity Index 6 years of a bear market in US
6 years of a bull market in commodities until
Summer 2008!
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Commodity Index Vs. US Dollar Index
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Euro Currency Vs. US A Major Turn?
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US Dollar Index Psychology was extremely negative
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Euro Vs. Japanese Yen Risk thermometer, week to
week ups and downs very similar to ups and downs
of G7 stock markets
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New Zealand Dollar Vs. Japanese Yen another risk
thermometer
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Canadian Dollar and Commodity Index
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Gold Reciprocal are we pre-programmed to see
bull markets? If this is a bull market then gold
price is falling
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Gold / Crude Oil At least a 25 year low this
past summer all markets are spreads. What is X
worth in terms of Y?
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Copper Does copper have a Phd in economics?
Base metals have been weak (no kidding!!) lately
(Speculators exit stage left??)
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Crude Oil Did Investors pile into the energy
markets? Did rising global demand account for a
tripling of prices in 18 months?
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Corn global demand for better food, ethanol,
funds prices hit all time high prices what
changed to cause prices to fall 50?
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Deere Company Another way for the public to
play the Agricultural boom Yikes!!
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Potash Corp of Saskatchewan WOW!!
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Philly Bank Share Index started to fall from all
time highs before the credit crisis became
front page news
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Philly Housing Sector Index The top was made
well before the problems of the US housing market
became front page news
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Starbucks Is the consumer cutting back on
non-essentials? Duh!!
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Harley-Davidson Necessities not Accessories
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Vix CBOE Volatility Index Ultra-high option
volatility creates new trading opportunities
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Chicago Mercantile Exchange it was a triple
play on rising stocks, commodities and exchanges
what happened?
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Summary

• The Credit Boom produced an Asset Boom a great
  Appetite for Risk This fuelled a Global
  Economic Boom driven by Consumer Spending the
  markets are now reversing this trade!
• Why I like to trade Futures and Options
• How I trade / manage risks
• Ultra-high option volatility creates
  opportunities to write options
• Markets I am watching now looking for trading
  opportunities
• Be cautious things have changed wait for
  bargains
• www.VictorAdair.com