Black Swan Insights

Showing posts with label market manipulation. Show all posts

Anthony Ward's Sweet Tooth Has Cost Him $230 Million

Anthony Ward is probably ruing his $1 billion cocoa purchase back in July. Since news leaked of Ward's activity, the price of cocoa has fallen by 23% as the market digests a stronger crop out of the Ivory Coast. This decline in cocoa prices means Ward has lost about $230 million. Ward's investment thesis was that weather conditions would negatively impact supply from the Ivory Coast, which produces approximately 50% of world cocoa production. So far this has not occurred. The only major news in the cocoa market today was the announcement by the International Cocoa Organization, which upped expected cocoa demand by 3,000 tons. Overall the ICCO estimates the cocoa market will be in deficit of 72,000 tons during 2010-2011. As we speculated earlier, these kinds of market corners rarely work as the market starts to trade against your position leading to large losses. The real question is how much pain can Ward take before he liquidates his cocoa position?

From Dow Jones:

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No Bond Bubble--- Just Another Fed Machination

Bloomberg has an article about record money flowing into bonds over the last 2 years. A total of $480 billion has rushed into bonds compared to $497 billion that went into dot com stocks between 1999-2000. So does this constitute a bubble? Many economic commentators and bloggers have suggested as much. They regurgitate the usual reasons why bonds will do poorly in the future and should be avoided: low yields, purchasing power to be eroded by inflation, the dangers of following the herd into an investment. I do not think we are in a bond bubble--yet. In fact, investors are simply responding to the Federal Reserve's interventions and market distortion. Since the Fed took rates down to zero, it does not make sense to hold funds in money market accounts, but investors are still fearful of equity markets.What are they to do? Invest in bonds.

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Cocoa Market Cornered by Anthony Ward

Boy, it sures takes you back to the old days of Wall Street when audacious speculators would attempt to corner a commodity. In those good old days, they lost and were ruined as a result of their temerity. Well, news leaked out over the weekend that British hedge fund manager Anthony Ward has tried to corner the cocoa market by taking delivery of 240,000 metric tons, which is the equivalent to 7% of world cocoa production. The obvious goal is to create an artificial supply shortage of cocoa in Europe and force prices higher. It should be remembered that Mr. Ward is not some dilettante rogue speculator; he has a very successful history of trading cocoa and other soft commodities. He also has fundamentals on his side due to poor cocoa crops in the Ivory Coast. Furthermore, warehouses stocks are very low. I would also argue that he is acting in collusion with other entities--be it hedge funds or otherwise. Cornering a commodity takes a lot of money and more importantly strong financial backers who are willing to see the operation through to its resolution.

However, Mr. Ward and company made a serious mistake by allowing word to leak about the operation. Rule #1 when it comes to market manipulation is secrecy. If rumors of your operations become known, the market will start to turn against you. Hedge funds in particular will start shorting cocoa because they know that if they can force heavy losses for Anthony Ward, at a certain point, he will be forced to sell his entire position for a steep loss. This will in turn cause cocoa prices to plummet as everyone tries to get out ahead of Ward and company. We might already be seeing this happen considering today's action in the cocoa market. Cocoa prices are down 5% as the market digests this recent news. It seems the market is going against Mr. Ward. Will this end well for Mr. Ward? We don't know yet, but if history is any guide, it probably won't.

Black Swan Insights

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