Streetwise Professor

July 24, 2010

Get a Room

Filed under: Commodities,Derivatives,Economics,Exchanges — The Professor @ 10:17 pm

Today’s FT runs another cringe-worthy PDA with Anthony Ward of Armajaro.  It is as probing and hard hitting as anything you would expect to read in, say, TigerBeat.  Its tone runs the gamut from credulous to worshipful.

I found the last two paragraphs particularly entertaining:

He is said to argue now as he did in 2002, that all he has done is go to the futures market “to buy cocoa in the most efficient and low-risk way possible”. The trade is likely to bring a stream of profits to Armajaro, particularly if the new Ivorian crop, due in October, disappoints.

Even if prices decline, Mr Ward is unlikely to suffer. A competitor who knows him well has no doubt he will have hedged his position. One admiring executive says: “No one knows the cocoa market better than Anthony.”

Paragraph 1: He’s long cocoa, so if prices rise due to a disappointing crop he reaps a stream of profits.

Paragraph 2: He’s hedged, so if prices fall, he doesn’t lose.  That is, he isn’t long cocoa.

If both of those things are true, he would indeed be a great trader: prices rise he wins, prices fall, he doesn’t lose.  He’s long the upside but not the downside.

How does that work, exactly? I mean, these diametrically opposed statements are in adjacent sentences.  Didn’t an editor think that such a feat was unlikely, or at least sufficiently intriguing to demand further investigation, explanation, and reconciliation?

There is, of course, a way that it could work: Armajaro could be long cocoa puts.  But this seems highly unlikely, as the traded put market is small relative to the deliveries that Ward has taken.  At the very least, though, the tension between the last two paragraphs should have spurred the report to do some actual, you know, investigation and reporting, to see whether the put story has any factual basis, and if so to provide some background on the cost of the puts and its effect on the profitability of the strategy.  And if it doesn’t (as is likely the case), to state forthrightly that Armajaro’s position is a risky one subject to a risk of losses symmetric to the prospect of gains.

But instead the reader gets a breathless fan mag portrayal of the hero who is able to do things that are impossible, or at least so unlikely as to demand further explanation.

This is all bad enough, but nothing compared to the apparent failure to ask any aggressive questions to test the reasonableness of Ward’s denial of squeezing or cornering the market.   If the questions were asked, but not answered, that should have been made plain, or the piece shouldn’t have run at all.  But that would ruin a nice piece of hagiography.

Mr. Ward’s evident hold over the FT is very curious.  An enterprising competitor could do worse than trying to figure out why–after, of course, doing some serious reporting on what has transpired in the cocoa market in recent weeks.

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