Post by Glenn on Feb 19, 2011 11:07:46 GMT -6
Half of the ads on the business channel were hawking gold. Dealers were offering the product at wholesale prices and we are told to expect $2000 an ounce. The guest on the same channel reminded viewers of the importance of protecting against inflation and the suggested balanced investment portfolio containing 25% commodities. He listed several ETFs that were recommended for purchase and graphed their returns for the past year. The Exchange Traded Funds had jumped almost 50% through a basket of commodities and the guest said more was on the way.
In New York City on the 23rd floor of a skyscraper on Avenue of the Americas, a 26 year old trader was executing orders to balance his New Age Commodity Fund. Money was arriving daily from all over the country and with every new investment, New Age bought more of a basket of commodities. They bought gold, silver, wheat, corn, and cattle. The 26 year old trader was new to the business. He finished training last week and was responsible for managing the risk on the cattle portion of the index funds investments. The senior investment manager taught him last week how to divide the daily inflow of money apportioned to cattle into half and then divide by $1000 to determine how many contracts of live cattle and feeder cattle are needed. Today he had $1.2 million to invest in cattle -- $600,000 in live cattle and $600,000 in feeder cattle. He would need to purchase 600 contracts in live and 600 contracts in feeder cattle.
The 26 year old trader noticed that when he purchased the feeder contracts sometimes he didn't see a lot of contracts offered on the screen and had to reach fairly deep into the book to complete the day's work. A colleague told him that feeder cattle didn't always move in tandem with the beef markets and sometimes were more influenced by the corn but he was just following orders and he was sure the fund knew what they were doing. Also everybody knew the cattle herd was shrinking and the price of the feeder cattle contract continued to rise.
Liu Guanqui is the son of one of China's richest businessmen. He has just finished his MBA at Stanford and moved back to Beijing where he has started a commodity fund. Liu developed a strategic plan for the fund based on two key factors. Fed Chairman Bernanke was deploying a strategy called QE2 which everyone knows is basically just printing money and devaluing the U.S. currency to make U.S. goods more attractive to the world. China has a robust economy and a rapidly emerging middle class. Diet is changing and beef is becoming an important target for inclusion in that diet. China will need high quality U.S. beef. Liu has started accumulating large positions in cattle contracts. He doesn't really understand the difference between live and feeder contracts but since both have been rising he doesn't really care.
In this country, traders and commercials are struck by the disconnect between market fundamentals and the recent price rise. In the year 2000, analyst watched as tech companies sold for 200 times revenue -- not net profit but revenue. Some smart investors were handed their heads when they shorted overpriced stocks. Momentum can be very powerful and sometimes betting against a highly publicized spectacle like the rise in commodities can be treacherous. Markets are not required to behave rationally. And while in the long run, they will adjust to fair value, no one knows what is the long run.
In New York City on the 23rd floor of a skyscraper on Avenue of the Americas, a 26 year old trader was executing orders to balance his New Age Commodity Fund. Money was arriving daily from all over the country and with every new investment, New Age bought more of a basket of commodities. They bought gold, silver, wheat, corn, and cattle. The 26 year old trader was new to the business. He finished training last week and was responsible for managing the risk on the cattle portion of the index funds investments. The senior investment manager taught him last week how to divide the daily inflow of money apportioned to cattle into half and then divide by $1000 to determine how many contracts of live cattle and feeder cattle are needed. Today he had $1.2 million to invest in cattle -- $600,000 in live cattle and $600,000 in feeder cattle. He would need to purchase 600 contracts in live and 600 contracts in feeder cattle.
The 26 year old trader noticed that when he purchased the feeder contracts sometimes he didn't see a lot of contracts offered on the screen and had to reach fairly deep into the book to complete the day's work. A colleague told him that feeder cattle didn't always move in tandem with the beef markets and sometimes were more influenced by the corn but he was just following orders and he was sure the fund knew what they were doing. Also everybody knew the cattle herd was shrinking and the price of the feeder cattle contract continued to rise.
Liu Guanqui is the son of one of China's richest businessmen. He has just finished his MBA at Stanford and moved back to Beijing where he has started a commodity fund. Liu developed a strategic plan for the fund based on two key factors. Fed Chairman Bernanke was deploying a strategy called QE2 which everyone knows is basically just printing money and devaluing the U.S. currency to make U.S. goods more attractive to the world. China has a robust economy and a rapidly emerging middle class. Diet is changing and beef is becoming an important target for inclusion in that diet. China will need high quality U.S. beef. Liu has started accumulating large positions in cattle contracts. He doesn't really understand the difference between live and feeder contracts but since both have been rising he doesn't really care.
In this country, traders and commercials are struck by the disconnect between market fundamentals and the recent price rise. In the year 2000, analyst watched as tech companies sold for 200 times revenue -- not net profit but revenue. Some smart investors were handed their heads when they shorted overpriced stocks. Momentum can be very powerful and sometimes betting against a highly publicized spectacle like the rise in commodities can be treacherous. Markets are not required to behave rationally. And while in the long run, they will adjust to fair value, no one knows what is the long run.
