How Commodity Banks Make Money: Part 1

Energy

How to Make Money Trading Commodities: Be a flow trader

This is a must read piece for investors looking for a better framework to suss out what it is the big players' intentions are when they take positions. Not only does it show the apparent current bias of big players, but it also unveils the complexity of positions. The take away for us is, don't think linearly. These days, Billionaire players employ similar methods as the banks they use. So a quick primer on a Bank tactic is in order.

The article below triggered a memory from way back when we saw a ton of Put buying in Oil coming out of Goldman. One of us happened to have a relationship with the lead trader on the GSCI desk and called him. This very seminal conversation in my education went like this:

Me: WTF are you guys doing to the skew, Puts are exploding!!
GSCI: Yea, that's not the GSCI, that's from the producer flow desk..
Me: So producers are hedging hard, and you guys are back-to-backing them?
GSCI: Yea, we got tons more to buy from some Mexican deal
Me: People are getting run over down here, now everyone holding extra short deltas against the obvious selloff tonight, at least we'll be o nthe right side of this.
GSCI: Then they will get destroyed. The Put buying is bullish. We talked a producer into buying puts instead of selling futures. We are going to rally after this is done, watch.
Me: BS, really?
GSCI: I'm buying the shit out of spot right now, probably buying your option hedges on those puts. hahaha, see you $2.00 higher
Me: Crap
GSCI: Gotta hop, Stopping out XYZ fund in coffee now, this will hurt him alot... haha.. <click>

And he was right. Usually, put buyers were Bank trading desks positioning themselves to front run producer hedging coming into the market. But this time it wasn't that at all. It was a Goldman marketer who talked a producer into doing "collars" (selling call and buying put) OTC. Then the Goldman OTC trader who took the other side was just buying the Put leg back from marketmakers and hedging them. So their options trader made money by padding the price on the Collars aka back-to-backing the client. Then he lifted the option leg he knew would cause the most pain in a rally ( a hedged Put). Then he (likely) lifted the hedge on the Calls he was long. Meanwhile he had the knowledge that there was no producer hedging coming into the market and his own GSCI index was going to roll its position by taking the BUY leg first. BOOM.

The GSCI trader got long buying the dips on our option related hedges
The GSCI Roll front runners got short spot month and long the second month in anticipation of the roll by the GSCI trader
The Goldman GSCI trader decided to leg into the GSCI Roll by first BUYING the second month 10k times after already getting long on his own personal book
After $1.50 higher he started taking the sell leg on his GSCI Roll.
the GSCI roll Front Runners cried that week and I just shook my head

One of many reminders that you have no idea what the players are really doing. Enjoy this concise explanation of what you might not know aboutthe Billionaire Boys Club- Soren K

Second Opinion from Billionaire Bears'

by Sebastian4u

Blogs are interesting in the aspect that they offer a different viewpoint. However, there is always some doubt concerning the who. Who is behind the digital print and their creditability?

As a blogger, I would hope that after you have read enough articles by a certain blogger, say myself, that the dots connect to reveal that the writer is providing factual information along with the opinions expressed.

With that said, this piece will be different. The views belong to a select club that I call, "Billionaire Bears." It is like getting a second opinion from another doctor as to a prognosis. In this case, the US stock market and our economy.

Bear Club

This unique perspective is not from your basic millionaire as I am still waiting for Michael Anthony to knock on my door, but the views from the one percenters themselves. They are all billionaires.

In a way, it is nice to know that my viewpoint is connected to the connected. Maybe we don't check off exactly the same list of reasons or solutions, but we agree on many of the fine points for our distress about our economy.

George Soros

He recently sold his large position in Barrick Gold. Gold bugs, don't fret. It is not that Soros no longer believes in the gold bull, but that he sees a correction after the huge run up in prices. He will double down on gold, but at a cheaper price. What he did with those gold profits is the point of consideration. He bought 1.9 million "puts" of the ETF, the SPY. He sees the market climbing on low interest rates and air. He sees another financial crisis like in 2008. He now controls 4 million puts on the SPY.

Paul Tudor Jones

Ever hear of him? This one percenter called the market crash on "Black Monday" in October 1987 when the market fell over 22% in one day. His fund owns almost eight and a half million puts on the SPY. One reason is that he cites the price of the market. Using CAPE, he says, "The market is 62% over historic average."

In addition to this respected group of traders is the companies themselves. Share buybacks are beginning to lag due to corporate debt. Low interest rates sparked the idea to raise the stock price by buying back company shares. CEOs also used low rates to finance dividends. You could create value on the cheap. Now, that technique is having consequences. Corporate debt has ballooned to over $51 trillion and rising. Companies have put themselves in a tough position because revenues cannot meet expenses. A CNBC report shows that corporate insiders are selling their company stock in record numbers, while at the same time, they are offering an optimistic analysts of their company before the media. The stock market is losing one of its biggest buyers and this is reflected in the low volumes in trading. These behind the scenes sales do not escape some other members of the "Bear Club."

Stan Druckenmiller

He just screams, "Get out of the market!"

Carl Icahn

The "old" corporate raider, not to be confused with the "just win, baby!" of Al Davis who owned the "old" Oakland Raiders. Anyway, Carl says, "I don't think you can have (near) zero interest rates for much longer without having these bubbles explode on you."

Jeff Gundlack

in an interview with Reuters said, "Sell everything. Nothing looks good."

Finally, Bill Gross, the old bond king in his monthly investment letter said, "I don't like bonds. I don't like stocks. I don't like private equity."

Bottom line: The decision is yours, but if you decide to remain invested, you are basically arguing with richer more successful people. Caveat emptor - Buyer beware!