The NYT’s reported that PepsiCo’s “Tropicana announced they were effectively raising orange juice prices due to some freezing weather in January. This year’s orange crop is expected to be 19 percent smaller than last year’s, according to a report from the Agriculture Department on Wednesday,” that was quoted in the NYT article.

A Tropicana spokeswoman, Jamie Stein, said the company spent a while examining the impact of the freeze and wanted to make changes without affecting people’s grocery bills too much.

Brilliant, less goods (and service) for the same price. Sounds like a banking operation. Of course, OJ consumers can balk at any price hikes.

You can see a lot of volatility in the red circle in the May ICE OJ futures contract chart above. The big bar down was 12/31/09 and the large one up was on January 8 and those prices set the range for the rest of the season. The very next trading session after the spike on January 8, was a 18.95 point drop in the May contract which closed only 5 ticks off the low for that day, at 13545. Coincidentally, the breakout price back on 12/14/09 was 13500 – ish.

Tropicana would be a buyer/hedge of OJ since they need the physical. If they didn’t have a hedge on before the price collapsed, do you think they took advantage of the 18.95 price sale and offset some of their exposure since the damage to the crop was unknown?

Citigroup is making a comeback. In the short-term, it’s gone parabolic, and parabolas don’t usually end well.

But investors, who have a cost basis of $30+ are still saying, “Citigroup, comeback.”

You always have to have a sell discipline.

At today’s price of $4.20 a share, it looks like a LEAP option that may eventually pay a dividend.

John Del Vecchio

A bear to the bone, John Del Vecchio looks for companies hiding dirty, disgusting messes-and then cleans up.

Late in the fall of 2006, John Del Vecchio, an analyst with Dallas-based David W. Tice & ­Associates, managers of the Prudent Bear Fund, was about to get on a conference call when it hit him: He had written his last research paper.

I should be trading, Del Vecchio thought as the voices, challenging his research on a stock, came out of the squawk box. “I knew my research was dead-on,” he recalls. “I just had this moment of ­clarity. I was tired of arguing my points. I realized I should be trading these names myself.”

Del Vecchio’s ideas made money. He began to paper-trade them using strict money-management rules while he contemplated finding a trading opportunity in which he could have discretionary control over his ideas, and his income.

In June 2007, he departed from Tice’s firm to join Ranger Capital Group, a Dallas-based company that runs a hedge fund called Ranger Alter­native Management. Ranger manages more than $1.3 billion; Del Vecchio oversees the fund’s short-only portfolio, taking on as many as 30 positions at a time. While he wouldn’t break out how his portfolio has done or how large it is, he appears to have done his part to help Ranger Alternative to a 24 percent return this year through August.

Del Vecchio, 32, now puts his convictions into action, not white papers. He walks into his eleventh-floor office in downtown Dallas every day looking for someone to bet against. A traditional short seller, he abides by a simple theory: If there’s robust demand for a company’s products, management has no reason to engage in accounting gimmicks that mask operational deterioration. “I can see where the companies are utilizing some aggressive accounting or understating inventory. If they’re a one-product company, they’re going to have risk if the bottom falls out of their market,” he says. “But since we’re all looking at the same numbers, it’s going to come down to putting on the trade and having the conviction. Not that everyone is a crook, but we all know that executives try to support their stock as long as they can.”

Del Vecchio, who focuses on small- and mid-cap names, generally looks for evidence of low earnings quality and aggressive accounting. With that, though, he is acutely aware that small- and mid-cap names can get terribly thin if they go against you. He doesn’t sleep with one foot on the floor, because he uses stops to protect his capital; he also avoids shorts that draw crowds.

In one such trade last fall, he went short IMS Health Inc., a provider of market intelligence to the pharmaceutical and health-care industries, because his fundamental criteria were met. He sold it short when it was trading in the low 30s. Then the news hit the tape: “Days sales outstanding” (DSO) had jumped five days in June, and deferred revenue fell $6.5 million. DSO jumped 10 days in September.

Del Vecchio’s decision to short was based on his understanding that an increase in DSO is indicative of extended payment terms. That trend would accelerate into autumn. Also, the deferment put pressure on IMS’s ability to meet future targets as well. Look out below! In the end, Del Vecchio covered, for a 25 percent gain.

Short selling, clearly, is only for traders with steely constitutions. Those who know Del Vecchio aren’t surprised he has the requisite makeup.

“His greatest strength is understanding why a particular name or company makes for a timely investment,” says Craig Sheets, a principal/analyst with Wilmington, Delaware–based Assay Research. “He’s seemingly able to differentiate noise from real issues when names go against him — another trait of successful investment managers.” One of Del Vecchio’s favorite noises while attending Bryant College in Smithfield, Rhode Island, was the sound of horse hooves thundering down the stretch at nearby Lincoln Park. The Syracuse, New York, native always made time for between-class trips to the track, two miles from campus, and unlike a lot of young kids, he didn’t let the gambling bug drag him down — he maintained a 4.0 GPA and won more on wagers than he lost. More importantly, he became fascinated with odds and the wisdom of crowds. He graduated in 1998 with a degree in finance, and by 25 had earned his CFA.

Parimutuel wagering interested him because he believes that people systematically under- and overestimate the odds of something happening — in this case, a horse winning a race. “This led to my interest in stocks, since the market is bigger, but the concept is the same — with better odds,” he says.

His interest in shorting stocks began in 2000, when he was working for an Internet company (which he chooses not to name) that had solid backing and a good brand. However, a look at his employer’s revenue model and financials, along with the knowledge of how the VCs wanted to burn through company cash, indicated to him that disaster loomed for the entire dot-com sector. His instincts proved spot-on.

“Most CFAs are too literal and not dynamic enough, but John has a grasp of the intangibles,” says John Sidawi, vice president and senior trader at Federated Investment Management in Pittsburgh, and a longtime colleague. “We all share the same information content; John has the ability to translate it into performance.”

In 2001, Del Vecchio landed a job at Rockville, Maryland–based CFRA, Inc., working as one of a team of forensic accountants. The group had an enviable track record of uncovering lousy stocks that then plummeted. “At CFRA I took away two key concepts,” he says. “First, every company is guilty until proven innocent. In other words, let the numbers and the nuance of the SEC filings, not management, tell you if business is good or not. Second, the higher up on the income statement a concern is, the more critical it is.” Del Vecchio went to work for David Tice in late 2002, honing his skills alongside one of the most famous bears alive. “I realized during my stint there that if I stick to accounting issues, I can find shorts that work even in a bull market,” he says. “Where I lost, almost all of the time, is when I strayed from this and wrote research on fundamental issues such as the health of the advertising market or iPods.”

At Ranger, a firm with broad infrastructure and support, Del Vecchio now has another opportunity to put his theories about aggressive accounting and risk management to the test. One short over the past year and a half that he liked — but which failed to pan out — was Stanley Inc. “When it reported improved backlog, I exited the position as the concerns regarding unbilled A/R abated,” he explains. “We got out at a small loss rather than trying to hold and hope things went our way.” “There are always timing mistakes,” he adds. “My biggest mistakes happen when I fail to recognize that the issues I’ve identified as being problems are no longer relevant. To be a winner as a short, you have to be a great loser.”

This article originally appeared in the October, 2008 edition of Trader Monthly.

Frankly, I don’t care for that moniker, but the article is very thorough and worth a read.

Kovner is considered to be one of the greatest intellects in the world. He originally interviewed at Commodities Corporation to be an assistant for Michael Marcus, who was so blown away by Kovner’s intellect during the interview, Marcus called CC founder Helmut Weymar and said, “Helmut, I have in my office the next president of Commodities Corp.”

Must have been a hell of an interview…they hired him on the spot as a trader and they all made history.

Here are a few words from Kovner himself, as they appeared in Absolute Return + Alpha in 2008.

“California consumes 3 times as much energy as it produces, and as MacDonald states, “when oil and natural gas prices rise, states like Colorado see a cascade of earnings, revenues, and royalties flow into their state. Whereas states like California see a cascade of capital flow out of state.” This seems emblematic of how LA and California in general are run: the state and local economic policies seem to chase otherwise great businesses out of the state, rather than trying to attract them or get them to stay.”

In the recent post Soft Commodities Are In A Permanent Downtrend: This is Fact, Not Opinion, the author has gotten a bit twisted up.

Soft commodities are in a permanent long-term downtrend since technology is in a permanent long-term uptrend.

Here are a few clarifying points:

Softs are coffee, sugar, and cocoa (and sometimes cotton) because of how the data was gathered and transferred by the former CSCE, Coffee Sugar Cocoa Exchange. Frozen Concentrate Orange Juice found its way in there sometimes too. The article is supposed to be about Softs according to the title, but the contents seem to be about Grains and Oilseeds as the author mentioned corn and wheat by name.

Technology may have an impact and lower labor costs, but if commodities become too cheap, farmers will rotate crops to produce higher financially yielding crops.

New technology tends to be more expensive too. Farmers are reluctant to spend/finance new technology in the face of lower revenues.

Coffee, Sugar, and Cocoa (softs) are not grown too much in the US. We are net-importers of sugar cane, coffee, and cocoa for the most part. We can produce sugar from beets and corn though, for example.

Commodity traders and investors can readily sell short for months to years in advance. There is no lending mechanism to hold them up. There is no prime broker who’ll lend only to big HF clients. There is no immediate demand from the actual owner who wants to take possession of his/her certificates. There are no dividends to pay. (There are no rebates either :) )

Permanent long-term uptrends or downtrends or sideways trends notwithstanding, there will still be seasonal relationships between old crop and new crop spreads that can yield profits. These are called intra-commodity spreads.

There will always be trade-offs and indifference prices between some of the grains that feedlotters use to fatten up the livestock, because they watch what they pay for the actual percent of protein they garner from the grain itself. That is a weight issue, not volume (grains are priced by volume/bushels), feedlotters think in how many pounds of protein do I need to bring the steers to market. These spreads go under the chapter on inter-commodity spreads.

USD and foreign currency fluctuations can have an impact on commodity prices, and net imports/exports, for every country.

Interest rates affect carry charges, as do shipping and insurance rates, and those are reflected in commodity prices.

Acts of god are facts of life in my world.

By John Del Vecchio, CFA

The problem with a lot of people on CNBC is that they are preconditioned to think stocks go up, along with professors that write books about stocks over the long-term.

In reality, many of the individual stocks that comprise an index, under-perform the index over time. In the Russell 3000, it is nearly 2/3 of the stocks, with 20% falling 75% or more. The statistics for the S&P 500 are horrible in this regard.

Imagine it were 1979 and I told you that in 30 years GM, Kodak, Polaroid, Xerox, Bethlehem Steel, General Electric, etc would either be bankrupt, bailed out by the government, trading for less than it was in 1969 or with their competitive advantage seriously eroded. You would throw me right out of your office. But, that’s exactly what happened to those companies.

Stocks have had long periods of doing nothing. 1929-54, 1966-82, 2000-10. Individual stocks are relics. People lose quite a bit in real terms during flat markets.

We can have a deflationary bust, the USD can rise, Gold can rise, and stocks can fall. The notion that this is a typical post-war recession is absurd. After the war, everyone else was destroyed. It was an unfair competitive advantage that no longer exists.

You had a massive debt bubble, only a small fraction of which was wiped out in 2008. The U.S. then printed to offset the deflationary pressures, but the money never went anywhere. There is no bank multiplier. What small business can get a loan?!?!

Average workweek hours are down. Unemployment is really around 17%. There is tons of excess capacity out there. ALT-A and option ARMS are starting to reset. How can there be inflation?

If people think the USD is worthless, then what is the EUR worth? Their problems are far worse.

The USD can rally because it’s the funding currency for carry trades. When the @##$% hits the fan, those shorts will be covered and the USD will be bought. But what no one talks about is that not only is the USD the funding currency for carry trades, it is also the reserve currency of the world. So, you’ll have even added buying pressure in a crisis.

When the Yen was the funding currency there was a massive rally when the crisis hit. But, it was not also the reserve currency.

Gold is an asset class like anything else. It will have periods were it performs well and periods when it does not. My opinion is that now it is being viewed as a currency as opposed to a commodity to protect against inflation, which means it can go much higher than people think.

And, notice how the analyst poo-pooed gold but clearly has no problem being paid in dollars which has lost 90% of its value since 1913.

CNBC has it all wrong. I wouldn’t buy U.S. stocks with counterfeit money.

James Overdahl, whose office reviews potential regulations to determine whether benefits outweigh costs, said in an e-mail today that he will step down March 31 to join NERA Economic Consulting. He joined the SEC in 2007 from the Commodity Futures Trading Commission, where he also served as the top economist.

I don’t short sell equities, but as far as regulation goes, this is political rule during a time when the Obama Administration needs a win. I wrote about the SEC Short Selling Rule and that something was rotten in the state of Denmark on March 2 with the 3 – 2 vote that was taken.

If there is going to be an introduction of a new regulation, the vote has to be unanimous.

George Soros in Davos this year.

George Soros will literally start to have a backache when all of his faculties don’t line up anymore. Here is a quote from How George Soros Knows What He Knows by Flavia Cymbalista, Ph.D.

“My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s this early warning sign.”

You can read all about it in Section 4. The Role of the Backache: an Entry-Point to Experiential Reflexivity found on page 36 of the pdf attachment.

Photo of Soros Copyright by World Economic Forum. swiss-image.ch/Photo by Sebastian Derungs and is licensed under Creative Commons.