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Old 03-01-2002, 03:18 PM
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Default chart reading, trends, and Peet\'s coffee...



I just heard the CEO of Peet's coffee on TV. He explained how Peet's had "lost" money this quarter hedging their coffee purchases. They bought coffee futures in advance, and then the futures price kept dropping. The reason given by the CEO of Peet's for buying coffee futures was "because we thought it had reached a floor." Here is the chart:


http://futures.tradingcharts.com/chart/CF/W


Now, ask yourself on what basis did this CEO conclude coffee had reached a floor? Did he visit farms in South America? Meaning, did he enjoy unique or "asymmetric" information - meaning information which the person taking the opposite side of the trade did not have? Or did he think it had reached a "floor" simply because it was so much lower than where it had been?


Whatever reasons he had for believing coffee had reached a floor, you have to assume they were not secret. In fact, you have to assume even farmers knew them. So, everybody knows they should be buying, and yet somebody is selling? This is proof, is it not, that any such "information" is wrong!


In reality, all the information does is tell you on which side of the market people are likely to be accelerating or postponing. In this case, since the "information" said coffee should be higher, accelerated buying should be propping up the market, postponed sales should be over-hanging it, and the price of coffee should continue to drop.


But the real question is, what is some CEO doing trying to time the coffee market? This is just what I was talking about in my "a different kind of phone call" post. Hedging is fine, but trying to figure out when to do it or not is not a job for your average businessman. All trend-traders do is to try to fade - do the inverse of - busninessmen's bad (but typical) decisions.


So since businessmen sometimes hedge, and they sometimes don't - and they will be leery when you try to sell them a hedge, and resist moving the locus of decision-making for their business to you - all you really need to do is say, hey, do what you're going to do, only I'll pay you to tell me, so that I can do the opposite! Don't sell hedges to businessmen, buy information!


In this Peet's case, the information you could have bought from people in the coffee business would have been that 1) buyers are hedging, and they don't need to pay you any profit margin to tell them how, and 2) sellers are postponing hedging, and trying to sell them a hedge is just banging your head against a wall. So you buy the information, and then just sell the coffee futures short yourself.


eLROY
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