[The Trader Mentoring Program starts March 1.]

So now that the trade is on, let’s see how the market moves in the respective contracts affect your trading equity. Here’s a chart of the spread through Wednesday’s close courtesy of FutureSource.com.

Short May Cotton
Long December Cotton

You can see how the May and December contracts traded on their own in the calendar strip above. One was up, the other was down. In this case, both moved in a favorable direction as far as the spread is concerned, but it doesn’t always work out that way…so don’t get your hopes up that this happens all the time because it does not.

You can derive the same spread chart at FutureSource, which I advise you learn to do.

Go to “Get A Chart” and enter the following syntax where it says “Symbol or Contract.” Then click the green button “Get Chart.” (There’s a graph below that shows you what to put where.)

= (‘CT Z1’ – ‘CT K1’)

There are spaces between the contract symbol and the expiration months in the equation above.

CT = Cotton
Z1 = December 2011
K1 = May 2011

It should look like this:

The spread widened approximately 5 points (3.70 + 1.36) which equates to $2,500 per spread. The margin for the spread is $2,800. I wouldn’t get hung up on making the big gains. I would, however, focus on how much the margin and the volatility mean to your account. You get paid to manage your downside and play good defense.

Download The Ice Cotton Brochure

I need to get writing. Apparently I have a book coming out.

March Corn (click for larger picture)

Didn’t the US Government pay farmers to NOT grow corn? That was quite a gamble, especially since they don’t allow for sugar ethanol. Now the food companies and the ethanol producers are jamming up the prices on American consumers.

Had they hedged, they could have passed the savings on to consumers, just like Southwest Airlines did from their effective fuel hedges during peak oil. By not hedging, food companies are in effect gambling that prices for their raw materials will stay within a range. But when scarcity hits the tape, they can blame speculators (whatever that means anymore) and push the costs off on consumers in order to protect their profits. They can do this by increasing prices, or by decreasing the size of the containers they sell the food in and keep the prices the same. You get less food for the same price, hence an increase in food prices.

What the food companies do is gamble that their competitors won’t hedge either, an extremely reckless way to run a business. If the prices go up, none will look so bad as all the firms will have to raise prices. In the meantime, the large space under the curve when things are “normal,” food companies can jack their earnings higher by saving the insurance money they would have used to hedge.

When your compensation is in stock, you’ll whore out your balance sheet and income statement to get the stock price as high as possible. I believe that they are gambling their company for the sake of their Executive Compensation plan. Myopia, USA.

An article in Agrimoney.com stated that “corn and cotton are to win this spring’s battle for acres on US farms, enjoying hefty increases in sowings, US officials said in a report forecasting crop prices would stay “historically high” for at least a decade.”

March Cotton (click for larger picture)

Hmm, more forecasts…I love it. High prices for the next decade. I guess that means for all the new plantings, there will still be insufficient crop surplus to drop the prices of at least corn and cotton. The unnamed US officials must have a line on the US dollar then…that must be the cause for high commodity prices going forward the next ten years. These people are f’n talented man…people of vision. Sir Richard Branson should be looking to recruit his successor from this lot for their vision.

Farmers rush to plant crops of the highest price commodities so that they can potentially earn more $$$ from their farmland. But it’s not a science per se, they have to account for the fact that every crop has its own unique costs.

If the farmers over-correct and create a bumper-crop…a giant surplus…the prices of the commodity drop very fast. Therefore, it is said, that high prices are the cure for high prices. Farmers can use futures or options on futures to lock in the higher sell prices long before the crop is ready for harvest. Food companies can use the same tools to lock in lower purchasing costs.

American CEOs who don’t hedge are the real gamblers in the commodity markets. Not having an effective hedge on is still a position in the market.

Barron’s ran their annual list of stocks that the manager’s they surveyed ranked by levels of respect.

Who would say they didn’t have respect for a stock they owned in their portfolio? “Yeah, AAPL is our largest position, but we don’t have any respect for them anymore. For some reason, we just can’t seem to say goodbye.” And how many readers wasted their time this weekend making deposits into their self-esteem accounts by looking up all their stocks on the list to see which ones made it? How banal. Barron’s has become too flaccid.

It would be more entertaining if Barron’s mixed it up a little (which is the polite way to say “grew some balls”) went back a decade and showed where Enron ranked, and then named all the people and firms by name who voted with “utmost respect.” This article has no investment value and it’s not even entertaining. What a person thinks about a publicly traded firm means nothing without a solid risk management plan attached.

These aren’t women. Fall in love with a stock or a brand and you’ll vaporize more of your cash faster than any ponzi schemer could. And if you are madly in love with AAPL, for example, you should own put options until Steve Jobs is back in the the saddle. Otherwise, you are gambling.

But diagnosing AAPL is easy, let’s look at Cisco’s chart over 2010:

And here it is over the last decade:

If you’re not trading this stock, what’s the point? Who cares about respect. It’s about capital gains. Unless you’ve traded in and out of CSCO for the last decade, it’s been dead money. CSCO has been on lists for “great CEO”, “Best Company to work for”, ” and it’s still called the “backbone of the internet.” Use their products, but don’t own the stock unless you’re going to trade it. The opportunity cost for having owned CSCO has been huge.

Ed, Rich, and Vito of Barron’s would do a lot more service for the community if showed the managers’ fallibility over the years and how you can’t trust human judgment and fundamental theory. Otherwise, they perpetuate the falsehood about fundamental value. Forget the Balance Sheet people, the market puts the value on the firm.

Here is Barron’s Most Respected Companies.