FM: As a fundamental trader, how do you react to the long-only indexes? Do you view them as a fundamental element that needs to be followed?
BP: The indexes certainly have a short-term impact on prices at the beginning of every month when new money comes into the market. If there are positive money flows, [we] are going to have price advances that may last two or three days. If there are negative flows, [we] are going to have a price break that is going to affect the market in the short-term, but on a longer-term aggregate basis I don’t think they really mean anything in terms of what the overall price is going to be. Yes, maybe they are responsible for some buoyancy in price but I wouldn’t call it dramatic. The fundamentals ultimately set the price. What is the supply/demand balance, how much of any given commodity is left over at the end of the production year? That [is what] affects price. Money flows from the long-only funds and from hedge funds and the entire speculative community for that matter, have increased the volatility in the marketplace, but I don’t believe [they have] increased the overall price level of any of these commodities.
Volatility is caused more by managed futures and by hedge funds than by the long-only funds. The long-only funds will affect activity around the end of the month and when they do their rolls; they are a fundamental. They definitely affect the market during the rolls.
I am aware of the roll. There are times when it is a good idea to be involved in the roll — selling the front, buying the back — if you are near carry it is stupid to do it but if there is a big premium of the near buy then it is a smart thing to do. There are guys who make a living in livestock with it. It is a great way to add a little bit of profit to your portfolio. The grain markets in times of tight supply can be dangerous. The best thing is to just not to be putting new positions on during the roll period. In my case I avoid adding to positions when I know the roll is coming. I might lighten up ahead of the roll but I don’t objectively trade the roll in near carry markets. They are a fundamental.
FM: Do you think there needs to be a regulatory remedy or do they simply represent another fundamental factor that needs to be worked into a trader’s analysis?
BP: No. First of all, is there such a thing as a regulatory remedy? There are laws on the books and [with] every new regulation that comes out of Washington you have the law of unintended consequences. No human being can anticipate how the market is going to adapt to any new rule. The best thing to do is let the market solve the problem.
FM: What about position limits?
BP: The market will go elsewhere. This is a world market, crude oil especially. Right now this call for investigation of speculators by the president is just a political ploy to divert public attention from his disastrous policy of pushing for alternative fuels and banning of offshore drilling.
FM: Technical traders acknowledge that systems need to be updated. Do fundamentals change, or perhaps do new fundamentals emerge that must be considered?
BP: Ethanol is a huge new fundamental factor. You have to be aware of changes in production capability and you have to be aware of changes in demand structure for any one of these commodities. In terms of supply, you have to be aware of advances in growing techniques, but these are broad based and they don’t make a difference in the short-term. But a new fundamental such as the use of ethanol is extremely important.