She wrote this specifically for cattle, I like steak.
I also think can be applied to commodities in general, some more so than others.
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Generic Cattle Market Comment
Posted by Ann Barnhardt - October 18, AD 2011 11:15 AM MST
Wow. A post about the cattle markets. Amazing. It's like I'm actually doing my job, or something.
Here is the generic conversation that I have many times per day for all of my cattle people:
Yes, we are making new all-time forever and ever in the history of the universe highs in the cattle market. Yes, I think the market will continue to grind higher. However, the end of the world as we know it does make for significant CHOP. Additionally, much of the liquidity has left the markets. The volume is there, but it is all big hedge funds and computer-driven trading schemes. The actual, real PEOPLE are few and far between. Given this, there is going to be hard-core volatility and there will be downside movements within the context of general choppiness. But the inflationary trend will probably continue.
If you would like to put yourself at ease, it would certainly be fine to buy a put or a vertical put spread and get a floor or a partial floor under the market. This will help you sleep at night and allow you to mentally deal with the chop without panic. Fine. No one will ever criticize you for putting a floor under things while the market is sitting at all-time highs.
DO NOT SHORT THE BOARD OUTRIGHT. Shorting the board outright is just about the riskiest thing you could do in an inflationary environment. And if I also may say, the dumbest. Why in the WORLD would you short an inflating market? Why would you convert your valuable, real cash cattle back into U.S. dollars by selling them on the board? As the market grinds higher (which may turn into GALLOPING higher at any time) not only are you no longer hedged against the inflation, but you are also in the worst possible cash flow position of having to take what fiat currency you have and send it to Chicago in the form of margin calls. The cash cattle on the hoof ARE YOUR PROTECTION AGAINST INFLATION. Why would you give that protection up, double-down on the U.S. dollar which is obviously TOAST and will eventually dissolve into worthlessness via inflation, and then call it "risk management"? That's insane.
Risk-limited, only, guys. That means puts or vertical put spreads. Short calls are a marginable short, and thus a no-no. Don't do that. Don't put ANY cap on the top of the market. Leave it WIDE OPEN so that when it runs you are carried right along with it. That is what will save you financially. That ability to ride the wave of inflation and have your wealth hold together is the best possible scenario. DON'T SCREW IT UP.
Rule of thumb: $2.50 premium is the "new normal" in the cattle markets. Start by finding what strike is trading in the $2.50 range and then work from there. The same goes for vertical put spreads. I usually look for a $10 strike spread and then find the highest $10 window that can be bought for $2.50 net. $2.50 in net premium is still less than the initial margin requirement on an outright futures, so you're keeping your cash outlay minimized with zero additional margin call risk. For the average cattleman, this is the only hedge that I can recommend in good conscience. Everything else is uber-risky risk magnification. If you want to play games, go to a casino. Don't send everything you and your family hve built over the decades to Chicago in the form of margin calls because some fool at Cattle-Fax told you that shorting the board is what all of the cool guys do. Cool guys use their brains.
DO NOT SHORT AN INFLATING MARKET. "
