Wednesday, January 9, 2013

Hecht, How to Make Money with Commodities

Andrew T. Hecht’s How to Make Money with Commodities, written with Mark S. Smith (McGraw-Hill, 2013) is a surprisingly good book. I say “surprisingly” because it joins a crowded and for the most part uninspired field and yet manages to stand apart.

Despite the fact that the book is intended for two radically different audiences, the equities investor and the beginning to intermediate commodities trader, it artfully glides between them. The investor learns to read futures data as a guide to the prospects of his commodity-driven investments. The beginning commodities trader is introduced to the landscape; the intermediate trader gets a richer context and some tips.

One thing that distinguishes this book is its stories. Hecht has many of his own (such as the outsized silver position that he and three other traders at the Philbro division of Salomon Brothers had in 1995, “a bigger position than the Hunt brothers took back in 1979”). Some come from his friends: for instance, the “fiasco of the giant sugar cube.” “Because of the low value of sugar, the ships that transport this sweet commodity are often old and sometimes not in the best state of repair. Raw sugar is loaded onto and off a ship with a device that resembles a vacuum cleaner.” In this case, “at some point during the journey, moisture had leaked into the cargo—so much moisture that the shipment had turned rock solid.” The trader who had negotiated the deal needed some quick thinking to reduce his losses. “He hired a team of laborers to break up the giant sugar cube with jackhammers. The laborers then had to remove thousands of smaller cubes by hand. The cargo was eventually unloaded and delivered to the buyer, who then demanded a discount because the sugar was not in the form contracted for. While insurance paid for part of the fiasco, the trader’s profit margin was not enough to cover the losses, which amounted to several million dollars.” (p. 48)

Hecht also recalls one of the problems that coffee traders encountered in the 1980s. The vessels of drug smugglers often carried “huge coffee shipments to mask the aroma of the drugs.” On one occasion “a dead body arrived with a massive coffee shipment, along with a large cache of marijuana and cocaine.” (p. 209)

Another distinguishing characteristic of the book is its detail. When discussing natural gas, Hecht describes among other things its dramatic historical volatility, the divergence between UNG and the price of natural gas in early 2012 when the book was being written (signaling that “either UNG is too low or that the price of natural gas will rally from levels shown on the chart”—the latter happened), and the negative correlation between heavy natural gas users such as Potash and the commodity.

And he demonstrates how the trader who understands commodities can profit in the stock market. A case in point was his 2008 trade in JetBlue as oil made new all-time highs and JBLU was dirt cheap. “When the price of crude oil fell, there was a short-term correction in JetBlue’s price—it shot up by more than 100 percent in six months.” (p. 110)

Hecht had skin in the game for nearly 35 years, and it shows in this book. Both investors and traders can learn from him.

No comments:

Post a Comment