We Trade Futures instead of Stocks for multiple reasons. We will explain the Key reasons why it is now a Great Time to be Trading these Instruments.
1) Tax Advantages over Stocks - When you trade stocks short term, the IRS will tax you at your ordinary Income Rate. When you trade Futures, even if you hold a position for 10 seconds, 60% of the profit is treated as Long Term Capital Gains, while the remaining is short term capital gains. Depending on your tax bracket this can be a very significant difference to the bottom line. If you are a trader, why pay the Government extra when you could simply trade futures and realize these savings? You know the incompetent bureaucrats are going to piss away your taxes on Warfare and Welfare anyway - keep it for yourself and find a more productive use for these funds.
2) Leverage - We already explained how leverage is rocket fuel, but it plays a part in your overall cost structure as well. If you want to buy a 100k worth of Stock, you either pony up 100k or 50k, and then borrow the other 50k at a High rate of interest. With futures your only outlay is is the Initial Margin percentage of 7-10%, so lets call it 10k. You could leave your other 90k in bonds or some other interest bearing investments. So purely from a business perspective, your cost of capital is way, way cheaper buying futures. Remember, you are starting your own trading business and you must consider your cost structure as well as the productive use of your capital.
3) 24/7 Liquidity - Stocks close at 4pm and have after hours sessions for another 90 minutes. Futures on the other hand trade 23 hours a day, with the Trading Week kicking off on Sunday night. Pretty much no matter where you are, or what time it is, you are able to execute a position as you see fit - No need to wait until 9.30am the following morning. This is a tremendous benefit from both a opportunity perspective, as well as a working hours perspective. If you have a day job or simply want to do other things during daylight hours, then you can take care of your trading business during the night hours.
4) No Risk of Accounting or Corporate Fraud - When you wake up tomorrow, Wheat is not going to zero - Will simply never happen. However Enron did.. and so have 1,000s of other companies that sold shareholders a bill of goods that they couldn't deliver on. You take this risk off the table, and you don't have to spend countless hours reading financial statements and earnings reports if that is not your thing. Your job is to work on your trading skills, as opposed to Financial Research.
So we can see that Futures offer a distinct advantage over stocks due to their Liquidity, Tax Advantages, as well as lower cost of capital. There are also Macro fundamental drivers that make investing in commodities today a compelling proposition. Let's look at some of the major themes in Global Finance Today.
1) Politicians across the world have made “infrastructure spending” a key element to their economic platform in order to rebuild decrepit roads, bridges, airports, while simultaneously helping to put some of the unemployed masses back to work. Since the Financial Crisis in 2008 almost all of the bailouts and printed money went into Financial Assets, bailing out the banks and propping up the Global Stock & Bond Markets. While the central planners claim to have "saved the system", what their actions have done is decimate the middle class and sow discontent among the populace.
Whatever phony numbers politicians and their paid mouthpieces, the main stream media, proclaim, the results for the every day citizen have been terrible. For example, Some of the numbers they can't hide right here in the USA are:
100m unemployed, and 70% of young adults living with their parents because they can't afford to live on their own. This has fueled a populist revolution across the World, and a new wave of politician is being swept into the Governments of the West. Their promise is to help the middle class, so we can expect higher deficits, except this time the money wont be spent buying bonds to suppress interest rates and prop up banks - rather it will be spent on things like higher minimum wage for all, and infrastructure spending creating a million or more jobs.
So we can expect higher wages for the every day working man, and this in turn will lead to a up turn in Inflation.
2) Rates are starting to rise. Now that the banks are sitting on trillions of dollars the central bankers have printed for them, Interest Rates will be raised. This will provide incentive for the banks to start pushing that money into the real economy via loans to small business as they will be able to earn a decent spread (or interest income) on those loans. When rates are as low as they are today, the banks don't make much interest on lending the money so they just sit on it. So we are anticipating a increase in Money Velocity in the coming years, and so are investors: Since the November 16 US elections, bank stocks have been flying on this expectation.
When Money starts circulating out of the banks and into the real economy, this is referred to as a increase in Money Velocity. Money Velocity has been the missing ingredient over the past 8 years as the central planners, as well as many speculators, have been disappointed that there has been very little in the way of statistical reported inflation despite all the money printing.
Here at 3ptCapital, we call bullshit on this, as massive inflation is evident, however it is not in the traditional places were statisticians and investors are used to looking for it.
Commodity prices collapsed across the board, and wages have been down, so the Academics & Economists, say: "Look, No Inflation - The Consumer and Producer Price indexes are benign".
However if you look at stock prices, bond prices, Health Care costs, as well as Education Costs, you will see a Massive Inflation. Not to mention the shrinking packages of food and other consumer items while prices rise "only slightly".
Just on memory alone I can tell you that: 1) A Chips Ahoy Cookie 2) A bar of ivory soap 3) A container of Breyers Ice Cream all have something in common - Do you know what it is? They are way, way smaller than they were 20 years ago - Yet the prices have doubled or tripled from that time! This is your friendly neighborhood Federal Reserve at work!
3) There has been a deflationary theme out there in the market from a funds flow perspective, because of suppressed wages and commodity prices. But when we look at the start of 2016 we see something very interesting happening. The massive beat-down of commodities not only stopped, but many of them have experienced rallies of 50-100%. Further we have started to see a sharp sell-off in Bonds. Both of these facts are giving us a clue as to where the big funds are rotating their money, and it's evident that after 7 years of a deflationary theme, the nascent stages of a inflationary theme are here.
It is our view that we are in the very early stages of this theme, and commodities across the board are on massive sale after years of a vicious bear market. And if there is one thing that you must learn to love as a speculator it's a good fire sale. Look at the below performance of some commodities in 2016 after the wicked selloff:
1) Gold - + 31%
2) Platinum - +47%
3) Copper - +43%
4) Silver - +52% (Man, we love silver!)
5) Oil - +52%
6) NatGas - +45%
7) Sugar - + 104% - (No bull Market like a Sugar Bull Market they say...)
8) Soybeans - +41%
Starting to get the point here? One of your main jobs as a Commodity trader is to learn to follow the footsteps of the Large Players in the market. Don't get in the prediction game, trying to call every turn in the market, or worse, trying to bet against these whales. Rather, see what the Big Guys are doing with their money - They can't hide their very visible footprints - You only need to observe and follow.
Our Fundamental Drivers are Clear. Continued increase in deficits, however this time Main Street being the beneficiary via public works and wage gains. A rising interest rate environment that will incentivize the banks to lend the cash hoard they are sitting on. A visible uptrend beginning across the entire commodity complex.
So the table is set. We are in the early stages of a multi year commodity rally, which means we will have a wind in our sails to help propel us forward. We only need to develop proper betting techniques, and a consistent and methodical method of knowing which way to bet, and when. This is what Chapters 3-7 will cover. This is where you get to test drive our application, and associated trading tools, that cost us 2 years and a small fortune to bring into production.
The proof will be in the pudding, and you will very clearly be able to see that our tools work.
Money talks, losers walk!