Closing Time for the Pits

A long standing tradition in Chicago is officially coming to a close, with the CME starting to shutter its pits starting Monday, July 6th (was supposed to be today, but they delayed it. Maybe the ‘pit closer’ had the 4th of July weekend off, and they didn’t realize that until last minute).

What started as a way for farmers (both grains and pigs) to hedge their crops, boomed into a full blown, career opportunity for those willing to take on “the pits”. Now, after more than a century (167 years to be exact), most of the trading is done online – with the trading pits looking like an old mining town to those who saw them in their full glory in the early 90s.

Electronic Pits Chart(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Crains Chicago

Suffice it to say, this is more than just a business decision to those who cut their teeth on the trading floors. This is the end of an important piece of the entrepreneurial cycle in Chicago. This is the end of a proving ground for new young trading talent. This is the end of a brotherhood (and sisterhood) of close friends who shared the joys and pain of making money in real time together. Life will go on. Futures trading will go on. But the trading lifestyle (the good and the bad) and ability for working class kids to make something of themselves based on street smarts and hustle, not an Ivy league degree – will forever change. How that changes the rest of the industry, if at all, remains to be seen.

Here’s some of the best articles we’ve found about the glory days of the trading pits. Enjoy the read over the holiday weekend.

  • Interactive: Closing Time: Stories from Chicago’s Famed Trading Floors – (Crains Chicago)
  • Closing time for Chicago’s trading pits – (WBEZ)
  • What Chicago Loses by Closing the CME’s Futures Pits – (Chicago Magazine)
  • CME Group’s decision heralds end of an era – (Futures Magazine)
  • As Silence Falls on Chicago Trading Pits, a Working-Class Portal Also Closes – (New York Times)
  • End of an Era as CME to Close Almost All Floor Trading for Futures – (Wall Street Journal)

Alternative Links: Growing Fivefold in the Next Decade

Alternatives:

Investors Plan to Boost Alternatives Allocations – (Think Advisor)

Alternative investment growth to boom in next five years – (Reuters)

Managed Futures:

GAIM 2015: What’s next for managed futures? – (Automated Trader)

Managing the Future With These Alternative Funds – (Morningstar)

Suppressing volatility? Easy. Eliminating risk? Not so easy – (Investment News)

Managed futures/macro most sought after alts strategy – (CTA Intelligence)

Have wealth managers overlooked the best hedging strategy in town? – (Investment Week)

High Volatility Reduces Risk – (Top Traders Unplugged)

Diversification:

How Long do Investors Have to Wait Before They See the Benefits of Diversification? – (Irrelevant Investor)

Markets:

With 61 Seconds in a Minute, Markets Brace for Trouble – (Bloomberg)

What if Risk-Free Returns Slowly Go Away? – (A Wealth of Common Sense)

U.S. Corn, Soybeans Rise on Smaller-Than-Expected Stockpiles, Planting – (Wall Street Journal)

Rain Makes Grains (Die?) – (Attain Alternatives Blog)

Oil Prices Fall After Inventory Data – (Nasdaq)

Rain Makes Grains (Die?)

Forget what’s happing halfway around the world in Greece, we’ve got a storm brewing here in the heartland of America, in the grain markets. One quick look at the Finviz quote table, and we can see grains are as a green as the commodities they represent.

Grains Table(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: FINVIZ

The major grains are up anywhere between +2% to a little under 5%. For those living in the Midwest this might not be a shocker, as June was one of the wettest months on record if not the wettest, putting a damper on our summer celebrations so far.  And putting a damper on ideal growing conditions, where you need just the right amount of rain. To greatly oversimplify things: too little rain, and the Corn dies of thirst. Too much, the Corn drowns.

Which brings us to the current ‘too much rain’ environment, where the only things more colorful then the table above are the maps of May precipitation versus the average – with a big swath of the country in the green to dark green color representing 100% to 500% more precipitation than normal.

Perception Percent AverageChart Courtesy: NOAA

For a slightly different look, here’s each state ranked individually on the dry to wet scale (which for some reason goes up to 121?), meaning this is the wettest May on record for Texas, Oklahoma, and Colorado.

Rain RankingsChart Courtesy: NOAA

While the NOAA hasn’t released June numbers yet;  the Illinois State Climatologist says June has been the wettest in the state’s history.

Illinois Rain RecordChart Courtesy: Chicago Tribune 

If you like to hear it from the words of the people who spent time in the fields, Rosetta Capital’s Jim Green spent a great deal of time on I-80, traveling through the heartland of the U.S., and experienced some not so great crop conditions.

“I saw so much drowned out beans, windblown corn and major roads closed due to flooding in the largest corn county in the US of A! The water damage is more prevalent than not. That tells me we will have a tough time reaching USDA estimates on planted acres and projected yields. A warning has been issued that things are far from perfect and the funds are short.”

It seems Mr. Green isn’t the only one noticing these conditions, with the grain complex up sharply since the middle of June, and many markets going Limit Up today, leading the CME to extend daily limit moves for the commonly traded grains.

 

This time last year, Ag traders were looking at riding the grain market trend down, down, down, with systematic traders joining in once the trend was established. And now it looks like the tables will be turned – with discretionary traders looking at crop conditions and the recent up move as proof prices have some upside, while systematic traders are likely getting stopped out of short trades as markets like Corn break above their 50, 100, and 200 day moving average in the past 6 trading days (June 23th), setting things up for potential long trades if their models confirm the rally as an up trend.

Corn Markets moving average(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart

Of course, there’s those out there who get worried about rain causing gains, because of the old trader saying:  “Rain Makes Grain”, with the thinking going – rain can be bad for supply, but more often than not it’s a good thing, meaning more supply thanks to the rain, not less… which would make this a head fake higher. Only time will tell.

For more information on how these ag mangers trade these markets, check out our whitepaper, “Ag Traders.

Why Greece is a Big Fat Slow White Swan

If you’ve read Nassim Taleb (or this blog, since we mention him fairly often), then you’re probably familiar with the concept of the “black swan.” It’s a way of thinking about the “unlikely” events that no one thinks will happen – but they do, and far more often than we’d like. It’s the Black Monday crash of 1987 or the May 2010 Flash Crash – and if you aren’t prepared for the Black Swan, you’re probably going to get into trouble eventually (think Long-Term Capital Management…).

Which leads us to today’s headlines about Greek banks closing and missed debt payments and the rest – leaving global markets plunging (the new ‘plunging is down -1% to -2%).  But it isn’t just today; this uncertainty is toying with other markets as well. Which all begs the question…. Is this Greek drama a black swan event? Or more like the Austin Powers Steamroller?

The financial press sure acts like a Greek exit from the Euro is a black swan-type event. But can anyone really say these events are unexpected anymore? This doesn’t really resemble Taleb’s black swan… this is more of a slow, fat white swan that everyone has seen coming for years. It’s been a slow motion car wreck, analyzed and discussed ad nauseum for years. We’ve been unsure about how close it is (even though debt payment schedules are there for all to see), how big it will be, and so forth – but there has been no doubting it is there and it is a problem.

Just how long have we been wringing our hands over this mess?  This timeline of the Greek debt mess starts back in December of 2009 and the first Geek bailout was announced over 5 years ago … Can anyone really be surprised by what comes out of Greece anymore (or Europe for that matter)?

We can’t think of any analogy more fitting than that steamroller scene from Austin Powers. Sometimes losses are caused by unexpected events (or at least, not-widely-expected-events), but this time around the causes are right there for all to see. We can’t say for certain what the future holds, but we do know that we’d much rather face it armed with a plan, solid risk management practices, and a portion of our portfolio that can prosper even when the steamroller hits.

Weekend Reads: The Future of Equities

We asked traders about the future of equities – (Futures Magazine)

How To Prepare For a Lower Rate Environment – (All Star Charts)

Drawdowns happen…get used to it – (Abnormal Returns)

MFA Recap: There’s no Crumpets at the Four Seasons – (Attain Alternatives Blog)

Just For Fun:

13 Practical Ideas That Have Helped Me Make Better Decisions – (Farnam Street)

Why everyone is so keen to agree new trade deals – (The Economist)

A Brief History Of Gay Rights At The Supreme Court – (Five Thirty Eight)

Scientific Retractions are on the Rise, and That May Be a Good Thing – (Priceconomics)