Author: Michael Ferrari, PhD
VP, Applied Technology & Research

One year and several closed funds later, there was a noted difference embedded within many of the discussions at this year’s TradeTech 2010 event, held in New York. At the 2009 conference, Lehman had not yet failed, so where there was hubris on the part of many attendees and speakers last year, this year much of that was absent. That is not to say that everyone was humbled…I saw and heard enough to know that some of the same people will be repeating some of the same mistakes. But the tone was much different than last year.

Here is a brief summary of the highlights from this year’s event:

• Many of the panel sessions seemed to blend together. Each of the big name brokers, service providers, etc. discussed how they are utilizing technology to better serve their clients. All of this is well and good, but at the end of nearly all of the panel discussions, I was hard pressed to recall anything that stood out. There was virtually nothing that differentiated one provider from the next, and there was little that could have been even termed as a quasi-debatable topic. The only discussion that came close was an assessment of the value of pre-trade analytics, but even then, the conversation moved to post-trade and again, consensus.

• Nothing noteworthy came out of the dark pool session.

• Brian Fagan’s talk, while not a panel, again did not give me the impression that anyone on the street is doing much to stand apart from their competitors. His discussion points were pertinent, but to generate true alpha, new models and new metrics are necessary, and embracing the alternatives need to lead the way.

• Charlie Rose moderated a lively discussion with Bob Diamond, chief at Barclay’s Capital. While this is billed as a tech conference, it was very refreshing to hear Diamond talk about the global macro picture with a keen focus on the fundamentals, and why he is anticipating better results in the coming year. Among his notable observations: he is surprised at how quickly some sectors appear to be rebounding, there is ‘no playbook’ to put the last 18 months into context, and Volcker Rules will not work.

• On Day 2, Robert Doll of BlackRock shared an economic view (with slightly more conviction) with Diamond that a recovery is imminent, describing a U-shaped economic recovery with a V-shaped profit recovery. While I may not agree completely with his outlook, I do agree with his reasoning, which states that just because the US consumer is weak, this does not mean the economy-at-large is weak as well. He also believes that inflation fears are overdone, and my skeptical nature makes me cringe whenever I hear the word overdone in a sentence that revolves around markets (reinforced below). His medium range outlook is that the healthcare, technology and telecommunication sectors will outperform financials, utilities and materials.

• Don’t be a turkey. Turkeys live a nice life for a few years, then comes Thanksgiving on day 1,000.  The highlight was finally getting to hear an unfiltered lecture by Nassim Taleb. Disclosure: I have been telling everyone that I know to read Taleb since I first read Fooled By Randomness, so his appearance at this event, in light of his self-imposed media hiatus, was worth a couple of days out of the office. All in attendance likely knew who Taleb is, and were provided the first person intro on Black-Swans replete with real world examples (and why he hates the term), and why the law of large numbers does not work in Extremistan. The primary takeaway for all listeners is that he very nicely described why every portfolio should be protected against (not prepared for) black swan events. These are two different viewpoints, and I feel that most mistakenly believe the important component is the latter, so this discussion hopefully served as a clarification. He then went through the expected retaliations against quants and PhDs (being a quant PhD allows him to criticize) as well as professional economists, but not as hard as I thought he would…I guess he has done plenty of that since 2008, so no need to revisit. The other idea that he expanded very nicely was the relationship between how risk and robustness are viewed in the markets, against the backdrop of natural history. Nature is not normally distributed, nor does it optimize. Redundancy underlies robustness, and this is why when an elephant dies, the ecosystem survives, but when Lehman dies, the financial ecosystem is in disarray. He clearly expects more turkeys to be culled this year.

Author: Michael Ferrari, PhD
VP, Applied Technology & Research

Last week’s call for a stronger downside move materialized, and further verified the view that we have been pushing since late November of last year. May10 futures are currently below our recent downside target of 23 cents; as such, we are advising clients to look at the current trading range as a favorable entry point for first through third futures, with possible opportunities for exit over the next two months. There seems to be more consensus among market analysts that the global deficit will start to shrink as we move through 2010. While WTI is not expecting a strong production rebound for the current crop year out of India, we are anticipating a very good crop originating from Brazil’s Centre-South, which ultimately, is far more important concerning global stocks. India’s poor crop last year overshadowed the relatively favorable growing conditions in the Sao Paulo region, and the continuation of a weakening but present El Nino-driven pattern will help to put additional physical supply back on the market during the latter stages of the current calendar year. 

Author: Michael Ferrari, PhD
VP, Applied Technology & Research

Now that raw sugar futures have scaled back to the mid 20-cent range (a move that we have been anticipating), we have an even stronger conviction about a constructive pattern going forward.  There is still a downside target for May to drop to the upper 24 cent range; however when we are looking at the next 30-60 days, there is more support for sustainable movement to the upside.  Crude is once again approaching the $80 range, which at times (not always) can pull sugar along with it, although there may be some resistance via USD strength.  In addition, there has been more chatter concerning increased domestic demand for sugar in India, as the country’s supply forecast is not anticipated to satisfy internal demand requirements.  According to a recent government statement, the status of the domestic shortage is between 3 and 5 mmt (private estimates are placing the shortfall to be as high as 7 mmt), so any excess purchases to help satisfy demand requirements will pull physical supply off of the world market, thereby adding in price support to the upside. 

At this time of year, more attention is then turned to the potential of the fickle Indian Monsoon season, and there are hopes amongst growers that this year will usher in a pattern that will help the crop recover from last year’s disappointing yields.  WTI will be issuing a formal Monsoon forecast in the coming weeks.  However, we can at this point say that we are expecting the critical onset period to be better than last year.  Readers may remember that last year’s delayed onset set the growing period back in many regions between four and six weeks. It needs to be noted that while we are not expecting a poor start in 2010, we still are not seeing the development of a strong pattern to last through the entire growing season.  As a result, while the conditions look to be favorable compared to last year, it does not look like a rebound in crop potential will occur until next growing season. 

Author: Michael Ferrari, PhD
VP, Applied Technology & Research

Here is the discussion of the world sugar markets that was communicated earlier this week:

World sugar futures continue to trade in the range that WTI has been discussing, as the market comes to grips with the fact that, while a global shortage in physical supply still exists, we are likely beyond the most difficult point with respect to market tightness, and the outlook going forward is one of cautious optimism.  Last week’s move (Mar10 dropping from nearly 30 cents to the mid 26 cent range), puts sugar futures in a range that we feel is considered fair value, keeping in mind the current magnitude of the global physical balance, and the prospects of improvement as we move through 2010.  As stated, we view this recent move as a mild correction, and still expect the longer range trend to remain constructive over the coming months.  Our long range analysis is focusing on the Indian Monsoon onset and El Nino direction as the two key milestones in our supply forecast going forward; these two factors will shape our balance sheet expectations for the remainder of the Oct/Sep crop year.

Mar is currently at 26.34; May at 25.63.

as expected, stocks (slightly) higher than LY and 5 yr ave

EIA Natural Gas Storage Data

Release 18 Feb 2010

Total (02/12/10): 2025 Bcf

Total (02/05/10): 2215 Bcf

Change: -190 Bcf

%diff to LY: +1.3%

5ya stocks: 1972

%diff to 5ya: +2.7%