Archive for April, 2009
For a firm that touts “The Power of Human Energy” as its tagline, Chevron Corp. (NYSE: CVX) has certainly not invested that human energy in its hedging operations — where they are supposed to manage the risk of an adverse move in crude oil. The NYSE-listed firm, which releases its quarterly earnings on May 1, today announced that earnings would be “sharply lower” due to falling oil and gas prices. Huh?
So while we endured peak oil prices, Chevron did little or nothing to lock in higher crude prices before they fell. Firms like Chevron are able to transfer their risk of falling crude oil prices in the futures market. That’s one of the reasons the futures markets exist — so producers can sell commodity future contracts against their expected inventory. Crude Oil is refined into other products such as gasoline and heating oil.
According to data from MF Global, Crude Oil futures for January delivery traded as high as $121; for February delivery as high as $108; and for March delivery as high as $70 per barrel – all the months of the Q1 2009.
CBS MarketWatch said “Chevron reported that the average price of crude had fallen 56% to $43.19 per barrel.” That may be true, but it does not annul Chevron’s responsibility to their shareholders to lock in higher sale prices via commodity contracts. Chevron knows how much crude they can produce — they can easily sell it forward and hedge at least part of their expected production and refining.
Chevron passed the higher costs of gasoline at the pump to me and you during peak oil. Now, their shareholders might take the hit as Chevron’s shares fall due to lower profit margins — the result of unhedged crude oil inventory. Chevron’s shares closed up $0.75 during the day Thursday, but fell $1.99 in after-hours trading to close at $67.24.Read More
Whether someone is a fundamental trader/manager or not is irrelevant. Trends need to occur in order for a manager to make money. Their orientation might be from a value or a growth standpoint, but that hardly matters. The terms “value” or “growth” as adjectives are like saying I’ve got brown hair and hazel eyes. They help you group things like people and stocks.
Trend Following as an ethos is in our blood. It plays are major role psychologically in how we determine many of our choices – our tastes and preferences. Didn’t you want to have the cool jeans in high school? Didn’t you do everything you could to not have “skippy sneakers” or a bowl haircut?
There seems to be some dissension in the investment world because, at it’s heart, Trend Following is so easy to employ and understand, a sixth grader can get it. You don’t need a Ph.D, MBA, CFA, or CMT to to understand it.
In my experience as a teacher, professionals who are very invested in their intelligence (self-esteem wise) tend to be the most rebellious. Trend Following, they come to learn, completely annuls their need (and ability) to understand very complicated economic issues and the emotional need to make sense of why stocks go up or down. That doesn’t feel good. I can identify with that feeling. I like to be appreciated.
If a trader/manager holds a long position long enough, their “value” or “growth” story will likely come into favor. However, it will be Trend Following that moves a security up or down, and the fundamental story will come “true” – at least that’s what the stock pickers will say. The trend will be underway – new money or new demand can affect the price in an upward manner.
A good friend of mine, when asked about why a stock went up or down, would say, “Don’t know. Don’t care. My stops are in to manage my risk.” And that was his answer. Whatever the actual fundamental was at play didn’t matter. People vote their pocketbooks on election day, and in their trades.
Admittedly, it feels good to figure things out. For that I like crossword puzzles or trying to figure out a new guitar solo that I’ve heard. It’s also entertaining and fun to talk about stocks and commodities and what going on in the world. But a Trend Follower, albeit with many strong fundamental opinions potentially, only needs a buy or sell stop order to be triggered to enter or exit a trade. It is at that point (the price) where they become bullish or bearish.
Trend Followers can miss some of the initial bursts of a move, but they tend to be emotionally reconciled with that being a possibility…as long as they can catch the meat of the move.
Click here to listen to the Trend Follower podcast, or click the icon below.Read More
When the Depression of 1890 began, newspapers were reporting a huge increase in corruption. Shiller and Akerlof did a good job in researching the era:
“In order to understand this it is necessary to bear in mind that the ordinary embezzlement is sudden only in its finality. It is a gradual process till near the end, like the wearing away of land that forms the bank of a river. It begins with the abstraction of a little by a man who would be horror-struck at the thought of not putting back what he is taking. He ventures that usually in some kind of speculation akin to gambling or in an out-and-out gambling operation–and loses.”
“He takes more in the hope of being able to recover the first sum, loses again, and plunges deeper and deeper. At last he becomes reckless under the dissipation which almost always accompanies the embezzling process. He still would like to retain the good opinion of the world, but the time arrives when he has so far that it is a question of restitution or exposure, the restitution cannot be made without another abstraction, and the loss of that brings the collapse. The business conditions of last year favored a great deal of that kind of outcome to speculations previously begun.”
Chicago Daily Tribune
January 1, 1895
Source: “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism” – George A. Akerlof and Robert J. Shiller (Princeton University Press)Read More