Sins of Commodities Trading

Kevin Kerr tells us the seven deadly Sins of Commodities Trading.

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November 18, 2005 - If you like The Daily Reckoning, you’ll love Empire of Debt. Same sardonic wit...same critical insight...same great authors... all wrapped up in an entertaining read that only a full-length book can bring you. Coming to a bookstore near you this Friday!

Empire of Debt - In stores Friday

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We're sending our NEW RELEASE Empire of Debt, to every Senator and Representative in Congress - all 535 of them. Will they read it? Maybe.

They might even agree with these readers who say...

*** “...far more readable and entertaining than Friedman's drippy, World is Flat...” 

*** "...ironically humorous... a wry pleasure to read. I recommend this book highly."

*** "Cheers for Bonner and Wiggin "Empire of Debt" kept me riveted hoping for the happy ending... that never came."

Order a copy of Empire of Debt right now. It may well be one of the most important steps you can take today to preserve and grow your financial independence in a period of unrelenting crisis.

Empire of Debt

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“We came, we saw...we borrowed!” Addison proposed a suitable motto for the U.S. imperium.

But the dollar keeps rising. Dollar strength has surprised most analysts. We have no particular view about the dollar - except that we don’t like it. We don’t much like the euro either. All the world’s paper monies are bound to be a disappointment over the long term. Our guess is that the euro will be less of a disappointment than the dollar, but it is merely a guess. Europe has less debt than America, and a positive current account.

Warren Buffett has lightened up on his bet against the dollar. He made $3 billion when the dollar fell against the euro. He’s given back $1 billion since then, as the dollar rebounded. Now, he’s cashed in 25% of his anti-dollar position. It may turn out that he should have waited longer, we don’t know.

But for the present, the dollar is going up...against other paper currencies. Against real money, gold, all paper - no matter whose picture is on it - is going down, fast. This is what we have always expected. Yesterday, the price of gold - the anti-paper - rose more than $10, to nearly $480 (December contracts).

Right now, we rather regret it. Because gold has, so far, been unwilling to correct to our current buying target: $450. This leaves us to wonder whether we should buy at the market price - whatever it is - or continue waiting. Over the long run, we doubt that it will make much difference. The supply of paper - in all its forms - is multiplying rapidly. Money supplies everywhere are going up two, three, even five times as fast as GDP. Debt levels, too, are going up much more quickly than real economic output. And credit derivatives? Don’t even mention them; they’re soaring. About the only thing that is not outpacing economic growth is the supply of hard assets generally, and gold particularly. Over time, we have little doubt that the price of paper will fall...compared to gold. How, when, and why remain the subjects of much debate and uncertainty.

Meanwhile, helping to support the dollar are foreign investors, who are buying record numbers of U.S. assets. But the assets they are buying seem to be shifting from debt to equity. That is, while they may be cooling on U.S. Treasury bonds, temperatures are rising for U.S. stocks. Again, as expected, foreigners are turning up their noses at more IOUs. They want to own U.S. businesses and American resources. They want something that has real value. In September, foreign investors put a record amount of money on Wall Street, a net of more than $100 billion.

For the moment, this foreign buying is helping to push up Wall Street and the dollar. But we also know that the growth in U.S. dollar claims, obligations, and debts is growing at a rate that can’t be sustained. A “Fiscal Hurricane” is coming, says USA Today. For the next 10 years, $1.6 trillion in federal deficits are projected. Altogether, the national debt is expected to grow by $3 trillion through 2010, to a total of $11.2 trillion. This is in addition to Americans’ $7 trillion in mortgage debt. Of course, these are only a fraction of America’s financial obligations. There are also all the automatically expanding programs for health and retirement - all set to explode when the boomers begin to retire in 2011. The interest on the national debt alone, in 2010, will be more than all the rest of the world combined spends on defense.

Where will it all lead? Broadly, it will lead to a lower standard of living in America (so much money has been pledged to so many different places, there will be less left over to spend). It will also lead to a lower dollar, though not necessarily directly or immediately.

What’s the best investment strategy right now? Sell inflated property; buy gold.

More news, from our team at The Rude Awakening...

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Craig Walters, reporting for The Rude Awakening:

"The term 'trust' is a legal term that means to hold an asset for the benefit of another individual or group."

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening:

Why Trust a Canadian?

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Bill Bonner, back in Paris with more views...

*** We are on the train to Paris...with time on our hands, a laptop at our fingertips, and the day’s press on the table.

“Memo to Europe,” begins the cover story from this week’s Newsweek, “Ready to change now?”

In the aftermath of riots, the American press shakes its finger at France in particular. The French model, say the papers, is rigid, centralized, calcified, elitist and xenophobic. What’s more, it doesn’t work. European leaders are urged to take a close look at a model that does work - ours, of course.

“What France can learn from 1960s New York,” is another headline on display today, this one from the International Herald Tribune.

On a facing page, President Bush is urging reform on another part of the world: “Bush pushes China to open its society.”

Is there any part of the globe that cannot benefit from becoming more like us? Apparently not. Over on the editorial page of the IHT is our favorite waggy, naggy columnist, Thomas L. Friedman. Your Daily Reckoning scribblers the exception, no columnist ever suffered by underestimating the intelligence of his readers. The New York Times opinion monger has become a celebrity by offering moronic points of view to the imbecile multitudes. His oeuvre of the last few years can be distilled down into a single question: Why can’t Arabs be more like New Yorkers? We don’t know what sense it makes, but who can argue with success; the goo sells.

Today’s paper brings us more classic Friedman. “The real problem in the Sunni Muslim world today,” he writes, “there is no controlling moral authority.” We don’t know what a controlling moral authority is, but we’re sure there is one controlling the Hell out of New York and other major metropolitan areas of the United States. Friedman goes on to describe how the Arab world must “de-legitimize” suicide bombing of innocent civilians. Exactly how you do this is not specified, but it must involve, we presume, a controlling moral authority...the very thing the Arabs haven’t got.

And now for Friedman’s piece de resistance: “You cannot build a healthy state from suicide bombers.”

We’ve always wondered about that, haven’t you dear reader? We mean, how you build a healthy state and all. Many times it has come up in dinner conversations, some people arguing that blowing yourself up really can help strengthen the foundations of a healthy, modern republic. Didn’t the whole universe get started with a big bang, they point out? Others take the contrary view, of course. They argue that self-detonation has a tendency to disaggregate the body politic; things tend to come apart rather than together, they say.

We could have gone either way. So, we’re glad Friedman has finally delivered a verdict on this vital issue. Someone should tell the suicide bombers; they have a right to know.

*** Coincidently: Empire of Debt “is far more readable and entertaining than Friedman's drippy, World is Flat,” reads a sympathetic, biased even, review of our book on Amazon.com. We apparently passed Friedman on the sales list last night. Empire is now sitting at #4 overall and #1 on the business list at the great River of No Returns.

“The idea that Americans are the most innovative,” the review continues “smart and democratic society in the world (as Friedman contends) is exactly the sophomoric and arrogant line of thinking that will lead to our downfall - if we don't mind our P's and Q's.

“If you only read one chapter...turn to page 261 and read the section titled ‘Something Wicked This Way Comes.’ It will be the most eye-opening 11 pages you read all year.” (Thank you, James)

To read more reviews of the book please go t

http://www.amazon.com/exec/obidos/ASIN/0471739022/ref=nosim/agora21-20 

*** We also received some kind and unexpected support from W. Curtiss Priest who is the director of the Center for Information, Information & Technology at MIT in Cambridge, Mass.

“Dear friends of the economy,” writes Dr. Priest to his colleagues. “Many of us have heard prophets of doom for some time now.

“As early as 1982, Joe Granville thought the sky was falling. In 1985 Ravi Batra wrote ‘The Great Depression of 1990.’ In '87 Robert Prechter warned of the October 1987 ‘crash,’ but soon the market was back into ‘bull mode.’ Prechter remained bearish.

“In 1994 Davidson/Rees-Mogg published their alarming ‘The Great Reckoning.’ Batra published ‘Crash of the Millennium’ in 2000. Edward Chancellor published ‘Devil Take the Hindmost: A History of Financial Speculation’ in 1999. And, the highly regarded MIT economist, Charles P. Kindleberger wrote ‘Manias, Panics, and Crashes: A History of Financial Crises’ in 1978.

“One famous economist [if anyone recognizes this paraphrase and can tell me who, I'd appreciate hearing] once said it is easy to tell when an economy is rotten, but, getting the timing right is the hard part.

“So, based on many measures from indebtedness per capita to mounting trade deficits, we have ample evidence that something is quite rotten. However, everyone who shorted the market over the last twenty years has been killed off (the dot-com bubble being a sidebar).

“However, wishful thinking never stopped a panic. Only today we hear that the U.S. Pension Guarantee fund is already running seriously in the red, and may run out of funds quite soon. And this is in an economy growing around 3%, annually. What will the ‘safety valves’ do when the house ‘re-fi’ game ends (about now), and real GDP starts to drop?

“So, I tip my hat to Bonner and Wiggin for continued, insightful reporting about the real underbelly of this economy.”(Thank you, Curtiss) 

For more on Empire of Debt, see:

http://www.agora-inc.com/reports/RCKN/Debt

*** As you know, we’ve sent 537 copies to Washington. Today we offer some additional assistance to our representatives in Washington: If you’d like to buy multiple copies to put in the hands of your staffers, you can do so by clicking on the link below and receive a tidy bulk discount on the books.

For the record, this deal applies to anyone interested in educating the lumpeninvestoriat on the finer points of today’s system of imperial finance, for that matter.

Bulk Discounts on Empire of Debt here:

http://www.800ceoread.com/products/?ISBN=0471739022

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The Daily Reckoning PRESENTS: There are many rules and standards to abide by to make a successful trade, but what commodities guru, Kevin Kerr, thinks are most important are what he calls “The Seven Deadly Commodities Trading Sins”...

GREED IS GOOD! OR IS IT?
by Kevin Kerr

The highflying 1980’s movie Wall Street coined the term, “Greed is good.” Well, that’s fine in the movies, but in real life trading things are very different. As the old saying goes; “Bulls make money, bears make money, and pigs get slaughtered.”

There are many rules to successful trading, but what I find even more important are the “Seven Deadly Trading Sins” to avoid at all cost. I always teach them to my readers and clients before I suggest they ever make their first commodities trade.

Sins of Commodities Trading: Greed

1. Greed: In reality, greed tends to keep a trader from closing out a position when a reasonable profit has already been made, in the hope that the commodities futures or options price will go even higher. Staying in the market for too long is one of the most common reasons I see people consistently lose money in these markets.

When we seek more, and that’s more of anything, we tend to make rash or impulsive decisions, and ultimately this negatively affects us. After several winning trades, the feeling of invincibility takes over and completely eliminates the ability to be logical. This in turn, ultimately leads traders into trades that they normally would not have entered.

Sins of Commodities Trading: Over-Trading

2. Over-Trading: That feeling of invincibility we get from greed often leads some traders to feeling the need to hold positions in several markets, at all times, on every trading day. Often traders forget that standing aside is a position. Not long, not short, flat.

Sometimes it’s simply best to stand aside and avoid holding any position in the commodities markets at all. This allows a trader to hold onto equity and trading capital for those truly profitable opportunities. Holding various positions in all types of commodities at one time is not only complicated, but next to impossible to follow. The two things it does achieve are both negative: complicating your trading plan, and increased transaction and brokerage costs.

Sins of Commodities Trading: Fear

3. Fear: Fear will have even seasoned traders second guessing themselves and pulling the trigger too soon on trades or holding positions until the bitter end. Fear leads to trading decisions that become unmanageable. This fear (or insecurity) leads to a false-pride, which tends to keep a trader in a losing position for far too long. The main mistake is the reluctance of a trader to admit that the original trading decision was incorrect. A winning trader must keep their emotions at arms-length in order to consistently achieve their trading goals. Fear is the biggest reason traders lose their commitment to their original positions.

Sins of Commodities Trading: Lack of Committment

4. Lack of Commitment: There are some commodities traders who are unwilling to make a serious commitment of time and effort to study and watch the markets. It is also important to engage in training and education that allows them to learn about technical and fundamental analysis, new trading systems and methods, order routing software. Those who do not commit themselves and their time are destined to fail.

Sins of Commodities Trading: Overanalyzing

5. Over Analyzing: Or as they say in the industry, “paralysis by analysis” is another big problem for traders. With today’s vast wealth of information and disinformation on the Internet and elsewhere, we can literally be bombarded with analysis. This analysis can be debilitating and the most important skills a trader can learn is how to pick a trade, how to be disciplined enough to execute it at prices they choose, and then how to hold the trade until it reaches the profit target they set or is stopped out. More often than not, a trader lacking discipline and commitment will change strategy midway through the trade and begin second-guessing the trade immediately.

Sins of Commodities Trading: Lack of Acceptance

6. Lack of Acceptance: A time waster for traders, and one of the biggest hurdles they run into, is acceptance. The inability to accept and limit losses is, in my opinion, the major reason commodities traders fail consistently. Some traders simply hold onto a losing trade for dear life, swearing it can’t go any lower.

But of course it can, it can always go to zero. Compounding this mistake is the practice of adding to an already losing position; sometimes called “averaging down,” when in fact it should be called what it really is: stupid! Losses are part of trading, and hopefully for the trader, a small part. The sooner a trader accepts that losses come with the territory, and learns to limit losses in advance the more profitable and stress free they will be.

Sins of Commodities Trading: Boredom

7. Boredom: And rounding out the seven deadly trading sins is boredom. Simply put: trading for the sake of trading. This is never a good idea. To be a good and successful trader you need to have conviction and actual passion for what you’re trading; some days it’s the only thing that gets you through without going insane.

Boredom is the worst excuse for trading. Sometimes the best thing to do is for a trader to walk away from the trading screen, shut off the cell phone, turn off the business channel, and go for a walk, or even take a nap (but not at the office, which could be bad for your career). The point is, by changing our actions we can change our thoughts and perceptions as traders. By doing so, we trade with a clearer head, better logic, with less emotion.

The seven deadly trading sins are not carved in stone, and there are many more, but what’s important is to recognize your emotions, and how they affect your investing approach. There is no confessional for traders, that penance comes from our brokerage firm when they mark our account to market at the end of the day. The best way to avoid this is by not committing any of the seven deadly trading sins in the first place.

Regards,

Kevin Kerr
for The Daily Reckoning

Editor’s Note: If you are looking to get into the world of commodities trading, then you should pay close attention to the above essay. Kevin Kerr’s expertise in the commodities markets is unparalleled. In fact, if you had been using his commodities trading service, Resource Trader Alert, you could have made money on 26 out of 30 plays in 2005. That's a phenomenal success rate of 87%. Or a winner every 8 out of 10 times you put money on the line.

To learn more about Resource Trader Alert, and to find out what special offer Kevin has up his sleeve, see here:

Resource Trader Alert’s Thanksgiving Special

Kevin Kerr is a regular contributor to news outlets like CNN, FOX News, CBS Evening News, Nightly Business Report and many others. Kevin is heard weekly on radio stations throughout the country and he is also weekly columnist with Dow Jones MarketWatch, where he's been quoted almost daily since 1999.

As editor of Resource Trader Alert, he uses his extensive knowledge and connections to uncover blockbuster natural resource investments - everything in the world of commodities using options on futures and occasionally resource equities, too.

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