How and Why I Trade the Commodity Futures Market What I am Doing Now Victor Adair Senior Vice Presid

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How and Why I Trade the Commodity Futures Market
What I am Doing NowVictor AdairSenior Vice
President / Derivatives Portfolio ManagerMF
Global Canada Co.

• World Resource Investment Conference
• Toronto Ontario, October 4, 2008.

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Program Outline

• About MF Global Worlds leading broker in
  exchange traded futures and options
• My Macro Market Opinions
• Why I like to trade Futures and Options
• How I trade / manage risk
• Markets I am watching now
• Questions

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Disclaimer

• This presentation is for information purposes
  only
• Trading derivatives (futures, options, foreign
  exchange) involves risk of loss
• Investments can go up as well as down and involve
  the risk of loss
• Past performance will not necessarily be repeated
  in the future
• MF Global Canada Co. is a member of the
• Investment Dealers Association
• Canadian Investor Protection Fund
• Toronto Stock Exchange
• Montreal Exchange
• Winnipeg Commodity Exchange

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MF Global Ltd. formerly Man Financial

• Worlds leading broker in exchange listed futures
  options
• 130,000 active accounts financial institutions,
  industrial groups, hedge funds, asset managers,
  professional traders, private clients
• Operates in 12 countries on more that 70
  exchanges 3,200 employees
• Daily average volume of 8 million lots, more than
  most of the worlds largest derivatives exchanges
• NYSE listed MF

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MF Global Canada Co.

• Leading Canadian futures options broker
• Full service futures options, stocks bonds,
  foreign exchange
• Online futures FX trading platforms
• www.mfglobal.ca
• www.VictorAdair.com
• Vancouver, Calgary, Saskatoon, Winnipeg, Toronto,
  Markham, Montreal

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Macro Market Opinions

• THEN
• Credit Boom Asset Boom High Risk Tolerance
• Many years of low interest rates / easy money
• Moral hazard
• Reaching for yield / dont want to be left behind
• Borrowers and Lenders - pushing the envelope on
  risk
• NOW
• Lenders less willing or able to lend
• Borrowers less willing or able to borrow
• Risk being avoided not embraced

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Macro Market Opinions (cont.)

• Commodities A Demand Driven Bull Market
• Common cause rapid demand growth / supply
  shortages
• China changed everything
• Dr. Michael Berry Quality of Life Cycle
• Commodities as an Asset Class
• Funds have been in the commodity markets like
  never before
• Record open Interest and Volume in exchange
  traded futures
• Will Commodity Bull Market Continue? No! Economic
  Slowdown

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Macro Market Opinions (cont.)

• Inflation / Deflation?
• US credit crisis induced slowdown deflationary
• Monetary reaction inflationary
• Credit tightness deflationary
• Fiscal action bigger budget deficits
  inflationary
• Rising food/fuel prices consumers squeezed
  deflationary
• Demographic trends in West deflationary
• Central banks tightening deflationary
• Rising US (?) deflationary
• De-coupling? Will the Rest of the World
  continue to grow if USA goes into a real
  recession? No deflationary.

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Macro Market Opinions (Cont.)

• We are all currency speculators now
• 6 years of US weakness 6 years of commodity
  market gains
• Currency trends overshoot then make V shaped
  turns
• Is the US turning?
• We are all oil speculators now
• All markets key off the oil price
• Short term Bullish/Bearish Mood (Risk Appetite)
  in financial markets is determined by the
  question Is the credit crisis over?

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Why I Like To Trade Futures and Option Contracts

• Mike Campbell interviewed Jim Rogers on
  Moneytalks Radio in October 2003
• Jim said, The best way to trade commodities is
  with futures contracts. But most retail traders
  use way too much leverage.
• Following that interview I wrote Five Reasons
  Why Futures Contracts Give You a Powerful
  Advantage posted on www.VictorAdair.com

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Why I Like to Trade Futures and Options Contracts
(cont.)

• Efficient
• Transparent
• Pure Play
• Variety
• Leverage
• Easy to go short, open 24 hours, regulated market

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What is a Futures Contract?

• Specified unit of trade with an expiry date
• Example December 2008 Gold Futures Contract
• 100 troy ounces / specified quality and delivery
  location
• First Notice day November 30, 2008
• Value of the contract at 900 oz 90,000
• Minimum initial performance bond, approx. 7,000
• Leverage 131

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How I trade

• I develop Global macro opinions
• I may be100 in cash or up to 4x leverage
• I read a lot of different research
  www.VictorAdair.com to form my opinions
• Im not a day trader but I watch the markets all
  day
• Opinions necessary (you have to have the
  courage of your convictions) and dangerous (you
  have to give up quickly when proven wrong)
• I try to anticipate a trade before it is time to
  make the trade then Im ready when its time to
  pull the trigger
• I need a technical confirmation that my opinion
  may be right before I execute

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How I trade (cont.)

• I trade like a mercenary (Dennis Gartman) when
  markets change I change
• I challenge consensus what if the popular
  idea is wrong, has run its course?
• I try to judge the mass psychology who has a
  weak / strong position in the market?
• Changing psychology not math moves markets
• All markets are spreads try to think like a
  spread trader what is X worth relative to Y?
• Markets are inter-related but relationships
  change
• Options Current I.V. relative to history - Use
  alone or in combination with futures

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Managing Risk

• I know practically nothing and cannot predict the
  future
• Most likely risk my opinion is wrong
• Anything can happen
• Patience sitting in cash is OK
• Add to winners, never add to losers
• I know where I will get out (if Im wrong) before
  I get in
• Write down my reasons

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Managing Risk (cont.)

• Max loss 1 2 per trade / use low leverage
• Accept that most of my trades may lose money
• No big losses, occasional big wins
• Relationships between markets change, but markets
  always influence one another
• Be aware of my prejudices foundation of all
  opinions
• Without risk management the road to the Poorhouse
  is paved with fine opinions
• See How To Be A Better Trader
  www.VictorAdair.com

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Yield on US 30 year Treasury (falling IR boost
asset prices)
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US Long Bond Futures Contract - Yield
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Dow Jones (falling IR boost asset prices)
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Average US Real Estate Prices Falling Interest
Rates Boost Asset Prices
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US Dollar Index not always a bear market!
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Commodity Index 6 years of a bear market in US
6 years of a bull market in commodities until
Summer 2008!
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Commodity Index Vs. US Dollar Index
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Gold Now thats been a heck of a Bull Market!
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Crude Oil another fabulous Bull Market until
Summer 2008!
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Euro Currency Vs. US A Major Turn?
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US Dollar Index Psychology was / still is
extremely negative. Time for a turn?
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Euro Vs. Japanese Yen Risk thermometer, week to
week ups and downs very similar to ups and downs
of G7 stock markets
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New Zealand Dollar Vs. Japanese Yen another risk
therometer, look at the break in the summer of
2007 another canary?
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Canadian Dollar Vs. US Dollar match this with a
commodity index chart overdone at 110.00
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Canadian Dollar and Commodity Index
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Gold Reciprocal are we pre-programmed to see
bull markets? If this becomes a bull market then
gold is falling in price
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Gold / Crude Oil At least a 25 year low all
markets are spreads. What is X worth in terms of
Y?
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Gold / SP 500 another spread
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Copper Does copper have a Phd in economics?
Base metals have been weak lately
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Crude Oil Have Investors piled into the
energy markets? Has rising global demand been
cause for nearly tripling prices in 18 months?
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Minn (Hard Red Spring) Wheat supply shortages,
volatility, disconnect with cash markets
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Corn global demand for better food, ethanol,
funds - hit new all time high prices big
sell-off
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Deere Company Another way for the public to
play the Agricultural boom Yikes!!
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Potash Corp of Saskatchewan WOW!!
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Philly Bank Share Index started to fall from all
time highs before the credit crisis became
front page news
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Philly Housing Sector Index The top was made
well before the problems of the US housing market
became front page news
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Starbucks Is the consumer cutting back on
non-essentials? Duh!!
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Harley-Davidson Necessities not Accessories
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Vix CBOE Volatility Index
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Chicago Mercantile Exchange it has been a
triple play on rising stocks, commodities and
exchanges now what?
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Summary

• MF Global is the worlds leading broker of
  exchange traded futures and options
• The Credit Boom produced an Asset Boom a great
  Appetite for Risk.
• Futures markets give you a Powerful Trading
  Advantage
• Opinions are necessary and dangerous
• How I trade / manage risks
• There are great trading opportunities in a number
  of markets