FM: Do you need another fundamental reason to put on a bear spread instead of just taking advantage of the roll?
SD: Yeah, you’d better have a fundamental reason other than the fund roll; otherwise it is just not going to happen. It looked like there was more [volume] fading the funds than there were funds that were actually rolling.
FM: Do you trade more on seasonal factors?
SD: I always keep an eye on seasonality; I may or may not follow [seasonality] because it is another thing that so many people are doing that it doesn’t work anymore. I don’t have as much confidence as I used to have in it. It is more fundamental analysis like I did for many years except I have tailored it into some kind of a spread strategy rather than a directional trade. If I am bullish corn I can buy corn but [I ask] is there another way to take advantage of that and minimize the risk with some kind of spread? Maybe it is an options straddle or a bull call spread, or I can bull spread corn or I can buy corn/sell wheat. There are tons of alternatives.
FM: Many of the indexers are creating alternative products that change the roll components to avoid the effect of contango. Have you noticed a difference in the roll? Has it affected the way you approach the trade?
SD: I don’t know exactly what the [indexers] are doing but it is [another factor in why] the bear strategy for fund roll is seldom there anymore. The reason I got back in the business in ‘04 is not there any longer. We have to go back to traditional supply and demand, seasonal spreads; looking at all the factors I looked at back in the 70s, 80s and 90s to devise a spread strategy. For example, right now I am long corn and short wheat, and that has nothing to do with any fund roll.
FM: Many folks have seen the inflows into these indexes as manipulating the price of commodities, particularly crude oil. What is your opinion on the long-term impact these products have had on price?
SD: Whenever the price of something isn’t where somebody wants it to be, whether it is a politician or somebody in the industry, the first target is always the speculators, the traders. You have to blame somebody. Back in the 1970s, cattle prices were low and the cattle industry wasn’t happy about it and they wanted to blame the speculators. They wanted to have a ban on anybody going short the market. They don’t know anything about how the market works. It is the same way the politicians are talking about oil today. Funds can have a short-term effect for a day or two, maybe even a week, but it always comes down to supply and demand. There have been all kinds of investigations over the years. There is always somebody demanding an investigation as to how the speculators are affecting the market. I don’t know how many studies there have been, but they all come up with the same conclusion that speculators didn’t have anything to do with it.
One thing that [people] don’t understand is that the market is an anticipatory market. Today’s supply and demand numbers don’t mean very much if [traders are anticipating] supply and demand numbers 90-180 days down the road. They don’t get that.
FM: The end result is they got position limits into Dodd-Frank. What do you think the impact of those limits will be?
SD: It doesn’t affect me because I am not close to the limits. It is fine to have limits, but I am not sure what the right limit should be. It is not going to change the way the markets move, and I don’t think it is going to change price.