4th place finish in NYMEX Commodities Challenge 2008 (Round 1)

March 14, 2008 was the last day of the first round of the NYMEX Commodities Challenge 2008.
I represented UTD Grad team in this competition. It is with great pride that I announce the results of the first round of the NYMEX Commodities Challenge 2008. Both UTD teams ended in the top 5 teams. UTD grad was placed in 4th position and UTD undergrad in the 5th place.

UT Austin ($212,560) took the top honors followed by Hofstra Grad team. ($178,760). UTD Grad managed to retain its 4th place from the previous day, with the rest of the teams swinging wildly for huge home runs. One team actually managed to land a lot of home runs. George Washington University gained a mind boggling $95,000 to move to 3rd place and ended with $166,500. . UTD Grad ended with $145,880.

UTD Undergraduate team turned in an awesome performance on the last day, gaining 4 spots and 15,000 on the last day to end in the 5th place. Their ending balance was $137,170.

Some of the teams that were left behind include : Yale, Rice, U Houston, Columbia, Penn State, Syracuse and Brown.
Brown was the only team with a negative balance at the end with a -$11,140 balance.

The most surprising result was that of Yale. Yale was placed in a seemingly winning position on March 7th with $214,030, which would have been more than the eventual balance of first placed UT. Inexplicably, Yale continued to trade heavily and lost a crazy $114,000 over the next 7 days.

The top 4 teams now move to the final round where they will all receive cash prizes.

Lessons learnt from Commodities trading

I have been participating in the NYMEX Commodities challenge 2008.
The standing as of March 12,2008 were posted here.

I have learnt that trading futures contracts of commodities is not for the faint of heart. The markets are so volatile and there are so many things that can affect them. Now, during the period of the competition (Feb 13-March 14), the markets have gone only one way. that is way up. Oil moved from mid 90s to 110 today. Gas is up big time to from 8.6 to 10$.

I just wanted to list what i can think can affect Futures of Crude Oil prices.

• Value of USD ($$$):
• Commodities are $ denominated items. As the price of $ changes, there is a direct impact on the commodity. So, during the competition and for a couple of years now, the $ depreciated against major currencies such as the Euro, Pound. This means the oil producers earn less in their local currency terms. So, they demand more for a barrel of oil. This will push the prices of the commodities higher.

• Interest rates in US
• As interest rates in US are cut, its a sign that the economy is slowing down. The Fed cuts the rates to jump start the economy. This normally has the effect of raising crude oil prices. Now, if the market has certain expectations of a rate cut and those are not met due to a lower than expected cut, prices may move in the opposite direction.
  

• Supply-demand
• Laws of supply demand do impact everything that is traded on this planet and commodities are no exceptions to this rule. As demand drops, so do prices. As supplies increase, for constant demand, prices will drop. However, during speculative times, supply demand tends to be ignored. Watch for the U.S. Department of Energy data that shows the level of crude stockpiles. A reduction or draw is considered bullish for crude oil prices while an increase in supplies is bearish.

• State of US Economy and Equities markets
• If the US economy is slowing down and the equity markets are turning bearish, money from several financial insitutions, hedge funds, tends to flow into commodities. This can lead to speculative positions and the prices may move irrationally against the other factors, such as supply demand.

• OPEC Production
  
• OPEC controls a major portion of crude oil production levels. They have their vested interests and like to see crude oil prices stay above or at a certain level (say above 80$). OPEC meets every few months to decide its course of action and whether they will increase production, keep it constant or decrease it ( if demand is less or they want to raise prices).

• Political factors
• This one can throw a curve ball at you on any day. Any remote event in an oil producing country can significantly impact crude oil prices. Like the last time, Chavez caught a cold and Oil prices went up. Kidding :) However, events like fears of war ( Venezuela - Columbia) , attack on pipelines in Iraq or Nigeria tend to raise prices. You need to read news at sources such as Bloomberg
  

Discussion on Insider Trading / Insider Buying

Today, in the SMIF meeting(@UTD) we had a good discussion about Insider trading and the merits / demerits of basing investing decisions based on that.

There were 2 positions. One position was that if the insiders are selling more shares overall recently, then that is a point of concern. That is a valid point. However, I think that alone should not sway investing decisions one way or the other.

My opinion is that Insider selling should be looked at. However, you should look at the % of Net shares sold as well as the Insider holding % itself. Consider an example : Insiders own $800M worth of company stock ABC. They sell $35M worth of stock. Sounds like a big amount. Well, considering that they continue to hold $765M worth stock, it seems like they may be diversifying or selling to buy a huge house (they can afford to) or for any other reason. They are not dumping shares in entirety. You should however keep an eye on this to see if this is a regular pattern.

On the other hand, I firmly believe that if Insiders are buying shares of the company, that would be a positive signal.

In fact, one of the greatest investors of all time, Peter Lynch, said

"Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise".

What this means is insider selling is relatively non key. Insider selling does not necessarily mean that the price will go down. However, Insider buying should be given more importance as that means they think the price will rise.

An excellent link is http://www.investopedia.com/articles/02/061202.asp