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Monday, November 19, 2012

Contango Myths and Misconceptions


First real post. These are some of what I think to be major misconceptions in commodity markets, some repetitive and presented in no particular order:

Roll yield exists, negative or otherwise.
Rolling futures in contango will result in a loss.
Investors will lose money if a market is in “contango”. 
Investors will profit if a market is in “backwardation”.
Losses or gains are incurred within an index by rolling from one contract to another.
Commodity futures prices converge to spot over time.
Over the long term, commodity prices are “mean reverting”.
Spot indexes are appropriate benchmarks for investment. 
Spot returns equal the return achieved from purchasing physical commodities.
Investors should choose hedge fund managers to make money in commodity markets.
Investors should choose commodity ETFs to make money in commodity markets.
Cost of carry means you start at a loss.
Commodity traders differ from traders in bonds and stocks.
Commodity traders are not buy and hold traders.
Commodity traders are not biased to the long side. 
Commodity sources of return are spot, collateral and roll yield. 
Negative roll yield is the reason for legacy commodity index underperformance. 
Commodities are leveraged investments. 
Commercial traders are short, non-commercials use trend following strategies.
Commercials make money, non-commercials lose money. 
Commodity trading volume confirms price.
Long only is a positive momentum strategy.
Legacy commodity indices are meaningful benchmarks.
Commodity indexes are bad.
Newly hatched “third generation” commodity indexes are better than the old ones.
Continuation data is valid.
Many academic studies don’t have serious data issues and flawed results.
Historical legacy index data is meaningful.
Legacy commodity indexes are not negative momentum strategies.
Negative roll yield hurts UNG.


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