I have been watching these 3 pure play nitrogen fertilizer stocks…
All three had a very good run since the beginning of the year to until about Monday, 9 Jan 2012… gaining anywhere from 11-22% in 5 days… however, they have fallen sharply in the past couple days…
in my opinion, the up trend is likely to continue…
TNH – $166-170 entry point
UAN – I am inclined to wait for a little bit even though the recent drop has retraced the 50% fibonacci levels… I think good entry points in the $25 area..
RNF – this is a new issue and hasn’t traded long enough to deduce anything meaningful… although based on the recent run-up, I want to wait till it drops to the 50% fibonacci level around $18
I’m using SLV as a proxy for Silver… SLV is down huge on above average volume when the overall trading volume is fairly low…
· 50% Fibonacci retracement for the run from early 2009 to the May 2011 peak is around $25
· 25 is a nice round number to anchor psychologically
· next major support is also at 25
CFA Level 2 – Derivatives; Study Session 16, Reading 61 in 2011 curriculum/Reading 59 in 2010 – Futures Markets & Contracts
I will go over FRAs and Futures in this post. (FRA is part of previous reading)
Forward Rate Agreements (FRA)
FRA is yet another derivative product. The underlying in an FRA is an interest rate on a deposit or on a loan i.e. the price of an FRA is an interest rate. The deposit/loan can be for any period in the future and the beginning of this period can also be any period in the future. It is the beginning and ending of these periods that form the notation of an FRA.
For example, 2 x 5 FRA means that the derivative contract expires in 2 months and the underlying deposit or loan is initiated at the end of 2 months (from now) and ends at the end of 5 months (from now) i.e. the deposit/loan period is for 5 – 2 = 3 months and (it is worth repeating) those 3 months start 2 months from now. (confusing I know but it is imperative you get your head around this)
An FRA is a forward contract in which the long, agrees to pay a fixed interest payment at a future date and receive an interest payment at a rate to be determined at expiration of the contract (not the expiration of the deposit/loan).
Value of an FRA from CFA Institute:
The value of an FRA based on a Eurodollar deposit is the present value of $1 to be received at expiration minus the present value of $1 plus the FRA rate to be received at the maturity date of the Eurodollar deposit on which the FRA is based, with appropriate (days/360) adjustments.
The payment made at the expiration of the FRA is the difference between the Value of the FRA and the agreed upon price of the FRA, adjusted by the notional principal and the number of days.
The payoff is also discounted, however, to reflect the fact that the underlying rate on which the instrument is based assumes that payment will occur at a later date… remember that the period of deposit/loan starts at the expiration of the FRA contract and the interest payment on this deposit/loan is made at the end of the period.
Let’s move on to Futures Markets and begin by establishing the difference between Futures & Forwards
Pricing Futures is similar to Forwards, future price for an asset with no storage costs is given by:
The market price of a Forward contract is the amount a party to the transaction is willing to pay to terminate the contract. However, because futures are traded on an exchange and are settled and marked-to-market daily , the Futures contract have zero value at the end of the day and have non-zero value during the day.
Value of a futures contract = Current Futures price – Futures price at last mark-to-market
Because of the daily settlement feature of futures, cash is exchanged daily between the long and the short and this cash can be invested to earn a return. And because of this futures prices are sometimes higher than forwards for an identical contract.
The following table illustrates the difference:
Costs & Benefits of holding the underlying asset
If holding an underlying asset results in monetary costs and benefits (net cost), futures price is:.
If holding an underlying asset results in non-monetary benefits (convenience yield), futures price is:
All other formulas (dividend paying asset, coupon paying asset, etc) for pricing futures are similar to forwards.
In the next topic, I will discuss contango and backwardation.
Source of all formulas: Schweser Notes
What goes up vertically… comes down vertically (almost).
Disclosure: no position in silver or silver related securities
Yesterday, natural gas broke the downtrend line (top blue) of the symmetrical triangle. These triangles signal continuation of prior trend for about 75% of the time and are reversal signals otherwise.
Here is a 2-year daily price chart:
Will natural gas break out of its multi-year downtrend and surge forward or will it go to new lows? Here is a 5-yr weekly chart:
And just to throw a kink, here is a seasonal chart which suggests that the time to short natural gas is right around the corner.
Disclosure: short natural gas
There has been a lot of chatter about commodities blowing off lately (see this, this & this)… especially Copper (& Silver) which has risen dramatically since the 2009 lows. Copper is considered by many as a leading economic indicator…. without further adieu here is the technical picture for Copper
On the daily chart, copper recently broke out of the descending triangle and the short-term downtrend line… pink line. The medium term price channel (blue lines) is still intact and Copper could go higher and take out the Feb highs (fundamentals story don’t support this view)
The dotted line symmetrical triangle supports the continuation of prior (up)trend.
On the other hand, the weekly charts show a rising wedge pattern which is almost always a bearish sign… if confirmed using other indicators. In the case of Copper, MACD supports the rising trend and is not confirming the reversal… yet
I have liked coal for the last couple years despite of the global warming/green energy/fierce environmental protection backdrop… for the foreseeable future I see demand for coal to keep rising regardless of what happens with the renewable energy sources.
Why I feel that way?
Two stats from World Coal
Coal provides 27% of global primary energy needs and generates 41% of the world’s electricity
Approximately 13% (around 717Mt) of total hard coal production is currently used by the steel industry and almost 70% of total global steel production is dependent on coal.
If you prefer to view graphics like I do, here are some key figures from IEA’s World Energy Outlook 2010
So… if you are still not convinced, too bad J
Moving forward, I plan to analyze some coal stocks and present my analysis here.
Grande Cache Coal (GCE.TO)
I’ll start with the easy technical stuff for Grande Cache coal – a metallurgical coal miner (i.e. coal used for steel making)
- The stock has broken out of the recent downtrend channel (blue) and closed above the 50, 100 & 200 day moving averages on reasonably high volume
- Green lines are support, Red lines are resistance and there is immediate resistance around 10.5, then at 11 and 12
In the next post, I will delve in to the fundamentals of GCE
Update: Right after posting this article I stumbled upon this piece from FP via Alphaville. Trust me I’m not looking for an opinion that confirms my thesis (confirmation bias) quite the contrary. Here are the salient points from the FP piece:
According to official data, Chinese investment in coal was about the same as its investment in oil, gas, and scientific research combined. The investment in coal at home was larger than the PRC’s outward investment in all non-bond assets — all energy, all metals, and so on — in 2010.
From 1980-1996, coal consumption growth was about 5 percent annually. From 2003-2009, under leaders Hu Jintao and Wen Jiabao, it was over 13 percent annually.
Coal previously accounted for less than 70 percent of Chinese electricity use; now it is over 80 percent.
Gold has declined $100 or 7% at pixel time from its recent all-time high… even when the US Dollar is declining (correlation trade broken?)! I think it is primarily due to rising growth forecast for the global economy (read US economy).
Technically, the charts speaks for itself:
· Medium term trend seems intact on the 1-Year chart
· We are near strong support area at $1325
The 3-year chart, however is more interesting… gold is hanging to dear life with these support points:
· Green long-term trend line
· Green support line
· 100 day moving average
If the long-term trend line is successfully breached, then I think we will test 61.8% Fibonacci retracement of the rise from $700-1425 at about $1150
Economics 101 aside, commodities as a store of value will only go higher in the long-term (> 5yrs) because the only solution to massive public and private sector debts is inflation.
Quick and dirty chart showing the performance of various commodities since the July 2010 low in S&P 500…(proxies)… forget Gold, look at cotton (BAL) – parabolic rise of 70% in less than 3 months!