Agora Financial’s Rude Awakening

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Laguna Beach, California

• Feeding this hungry world: Corn, beans and wheat smash new highs,
• The trader’s philosophy, from the proverbial horse’s mouth,
• Taking a nibble on the soaring agricultural markets and more…

Eric Fry, reporting from Laguna Beach, California…

A few months back, in the February 23, 2007 edition of the Rude Awakening, your California editor remarked:

“Kevin Kerr, the mind behind the Resource Trader Alert, is a good friend of mine. But to his credit, he is also a brilliant commodity futures trader and a darn nice guy. So what does a brilliant - and really nice - commodity trader do when he receives a harsh email from one of his subscribers complaining about some losing trades?”

The answer – as the rest of the February 23rd edition illustrated – is that he simply reiterates the philosophy that underlies his success. And he does it with a smile on his face…really.

It’s true that Kevin’s hot hand caught a cold late last year. Five out of six recommended trades went belly-up…or almost. (But the one winner gained 162%). Since early February, however, Kevin has regained his hot hand. His last eight trades have produced four winners and four losers (so far), for an average gain of 40%. In other words, the winners were much bigger than the losers.Kevin’s mastery of the commodity markets means that his successes tend to outweigh his defeats…NOT that he will never suffer defeats.

Despite Kevin’s defeats this year, the trades he has recommended in 2007 have managed to produce a positive result. And very often, the positive results that Kevin produces are considerable, as the table below illustrates.

Despite Kevin’s impressive track record however, his subscribers never hesitate to remind him when he fires a stray bullet. Just the other day, Kevin received an email from a dissatisfied customer who complained about losing trades on coffee and sugar, to which Kevin responded:”Ya know, I have heard a lot of this all year long about my losing trades and I have more or less kept my mouth shut, until now. Now I’m now ready to respond. So here goes.
 
Yes, we have a Silver spread for 2008 (December 2008 mind you) that is 90% underwater right now. But we’ve still got more than a year to go on this one. The OJ calls for November are a 100% loss, although we might still recover some equity before expiration. And the March sugar position is down about 47%. On the other hand, we have an open gold call spread now worth over 100%, a wheat call option up more than 140%, and a soybean spread now that’s up about 125% so far, not to mention a soybean oil trade that I just closed out for a near-double. So I would say things are not as stellar as 2006 or 2005, but certainly nothing to scoff at. Bottom line, if you tack on the huge gains from wheat and gold, as well as soybeans, clearly this has been a fine year. 

“Quite frankly, trading is not a buffet - taking what you please and leaving the rest. It doesn’t work that way. It’s no different in a managed futures program than it is in a trading service like Resource Trader Alert. Our results reflect ALL the trades we recommend, not just the ones that subscribers pick and choose. If you do different things, you will get different results, period. In such a turbulent trading year as 2007 showing a positive gain at all is pretty darn good, if I do say so myself. Ok, I’ve vented and hopefully made my point.”

Kevin is still a very nice a guy…and still a very outstanding futures trader. In the column below, he offers a glimpse of the current commodity trends that are catching his attention.

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The Edible Portfolio
By Kevin Kerr

There have been few markets in my almost 20 years of trading that have been as exciting as the grain markets have been over the past two years. In my opinion, the best is yet to come.

In the commodities world, energy, metals, and stock indexes have been the most active futures contracts - and the most talked about - for years. But like so many things in the commodities industry, that’s changing too.

Sure, oil and gold commentary still rolls off the lips of the various business news channel anchors. But nowadays, in the same breath, you may hear them talking about corn, wheat, or even soybeans. Why the sudden change?

The big push by individual speculators, hedge funds, and others into the agriculture sector in such a short time has been unprecedented. A great deal of this move is a direct result of the ethanol boom and the record corn prices it has helped to generate.

It’s pretty ironic that the modern commodities markets owe their success to the original grain markets that started it all. Back only a couple of decades ago, there was no such thing as an energy futures market or a stock market index. In fact, the grain markets were the first organized futures contracts when many of the exchanges started trading. As the markets developed, grains took a bit of a backseat and the financial and energy commodities seemed to take the lead.

Now with the emergence of the electronic trading market and the ethanol boom, grain futures are soaring. The global demand for agricultural and soft commodities is so significant that these markets are not only important, they are vital for price discovery once again.

The simple facts of the matter are that the global population is exploding and exponential increases in demand from countries like China and India are straining a system that is already overloaded by demand and has been taxed by weather problems globally.

The wheat crop has been hit especially hard this year as droughts, floods, disease, and even frost have taken their toll. Wheat has risen to $9 a bushel, and $10 is entirely possible later this year. Meanwhile, the soybean complex is also soaring, as pent-up demand, especially from China, is keeping this market very well supported.

It’s important to realize that not only do we have exponentially higher demand for soybeans from a growing world population, but we also have the increased feed demands of a growing cattle population in answer to more demand for beef. Soybeans are also a victim/beneficiary of the biofuel boom.

Combine all of these factors and throw in a little disease and bad weather and you have a recipe for a very hungry world, indeed…and much higher prices.

This has been an incredible year for agricultural commodities, and many “experts” have been telling me for the last year that I was crazy to buy these commodities at such high levels.

Of course, they started telling me that when corn was at $2.20 a bushel and wheat at $5.50. Today, corn is trading solidly over $3.50 and wheat is trading close to $9. The bad news for wheat supplies just keeps rolling in. In the latest round of bad news, Australia slashed its harvest forecast 31 % because of dry weather. Wheat is surging as importers line up to buy whatever wheat they can. Global inventories are heading for a 26-year low.

Soybeans have outperformed expectations, too, as global demand has put a solid floor underneath prices.

Is all the bad news priced into the grain markets at this point, and have we finally seen the top for the grain rally? Think again. The biggest disaster for the grains may just be getting started.

According to my sources at farms in Minnesota and Iowa, diseases may be setting in, and this could be devastating to the wheat, bean, and corn crops.

Corn could be hit hard after a long summer, and hot and dry conditions and hail affected corn yields in Minnesota. The weather conditions favor the development of a disease called ear rot. Reports of ear rot have been coming in from several different areas, and the quality of grain that comes off these affected fields will almost certainly be reduced.

Meanwhile, things over in the bean patch are not faring much better. According to reports, early defoliation and death in patches of soybeans has occurred recently in fields across Minnesota.

According to Agriculture Online, “Although numerous soybean fields have started to mature and have suddenly turned yellow in the past week or so, it is obvious in many areas that the yellowing and plant death have been accelerated well beyond what would be typical.”

Sure, bean and grain prices are very high already — in fact, some of the prices we have been seeing for the agricultural commodities in the last few years are nothing short of astounding. It’s important to recognize, though, that demand has also been astounding. Demand is almost certain to outstrip supply, especially in wheat and soybeans. So even though we are seeing record prices, they may climb further as we head into winter. Therefore, some exposure to the agriculture sector in your portfolio seems like a prudent idea.

Clearly, the agricultural bull market is far from over, but that’s not to say that we won’t see some extreme volatility. Overall, though, the indications are pretty clear that staple commodities like grains are going to be more in demand and less in supply as time goes on.

So my forecast for the grain markets is as follows: Higher, but volatile.

The really nice thing about commodities trading is that it’s just as easy to bet on falling prices as on rising prices. So when the time does come, as it does in every market, we will be just as eager to go short and try to profit on the downside. For now, though, the trend is our friend and the trend is up.

Eric’s note: Kevin knows he will be wrong sometimes, but he also knows that he will often be right…as long as he grants sufficient time to his trades to allow them to work. It’s a very delicate balancing act, but one that he seems to manage quite well.

Kevin’s gold trades this year are a classic example: Back in February 15th, he instructed his subscribers to take a partial loss on gold call options for April, effectively “rolling” that position into the December call options he had recommended a few days earlier. The April options, therefore, produced a loss of about 58%. But those December gold options have gained about 110% so far, more than offsetting the earlier loss.

Obviously, Kevin’s trades don’t always work so well…But good things often happen to patient investors.

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Rude Endnote: On the subject of reader mail, while we always appreciate your insights and comments, feel free to leave the personal insults out. Guys like Kevin are offering their services for people wanting to take a step in the direction of financial freedom. And they do a darned good job at it. If you don’t believe me, take a look at their track records…they speak for themselves.

If you really want to be Rude, please restrict your insults to me, aussiejoel.

Cheers,
Joel Bowman
Rude Awakening