Friday, November 23, 2012


Crude Oil has been rallying since I made that call for it to do so, albeit it a small rally. If we look at the weekly chart here the COT stuff continues to be bullish. However, most of the rest of the stuff is not. Here is what is really bothering me about the tepid rally in this market, it is really lagging the ES. These two markets have been very closely correlated for a long time now so this rally in the ES should be sparking more strength in Crude. You can also see the seasonal is very strongly down at this time of the year. It has been off this year at several points that I have marked. However, now we are following it pretty closely once again. The Oscillator I have in the middle is not telling us a thing at this point. The price trend is still decidedly down here. In summary, I am leaning now back to the short side if and only if these last few weeks lows are taken out. They may hold and we may fly higher, but if they go I think we could fall pretty sharply here.

Our November 30 date is looming here. If the ES happens to start to head back down at that time lookout below in Crude.

Segregated Funds

Here is a link to another Seg funds mishap:

Let's just be honest folks there is no such thing as Segregated Funds. At some point you just have to call BS on things. If you are not willing to have more than a passing interest in the safety of your money at a commodities firm you should pull it out now and stop trading. The segregation supposedly being this magical sacrosanct feature of commodities firms is a sham. It is up to you to segregate your money. You either need to take your balances way down and move money in and out constantly, or have it at a place where they sweep it into an equity account that is covered by FDIC or SPIC insurance. If you are not doing either one of these you are at risk.

I guess if you have so much money that you don't care if someone steals it you are in a different position than most of us. PFG was a life changing event for me that will take years to recover from and it is something I will never forget even for a single day. When I see a story like this one above, it just serves to remind me that firms are playing with this money on a daily basis breaking laws. Here is the biggest problem with the system.

FCM's have some of their money in the "segregated account."  This is required by the regulations! In other words they are ordered to mix money by the government. The reason for that is that they are responsible for meeting margin calls of the seg holders so if a big loss happens they have to cover it. As a result they have to keep some of their money in the segregated account. Let me ask readers this, is the money really segregated with this being a requisite of operation? 


Furthermore, this requirement gives them access to the client money since they have free access to the account. How many drug addicts do you know that if they were allowed access to a heroin bank would walk into it each day and not leave with some of the heroine? The point is if you give criminals access to money and just tell them well we are really going to be mad if you take the money, and then tighten the regulation to say we are really really going to be mad if you take the money, do you think that is going to have any impact? This story is from the beginning of the year so in all fairness it is not after they stepped up to we will really really really be mad if you take the money rule.

What about this as a law. If you are caught misappropriating segregated funds you will within 30 days be put into an Octagon against a seasoned MMA professional where there will be no referee and a full presidential pardon in place for anything that might happen? Or perhaps like China, your hands will be cut off in public?

I just keep going back to the MF Global situation where upper upper management went to their staff and solicited proposals on how to use the segregated money for company use. Remember this was just one year ago and there are no new rules that have been officially adopted. They are supposedly monitoring electronically bank account balances for seg money but understand one thing readers.

In the case of MF Global, this would have done nothing to prevent that exact same thing from happening again. Let's say a company like that has a big margin call and they use seg money to meet it and the trade goes south in a day. Ladies and Gentleman that money is GONE. There is someone on the other side of the trade who is not going to be subject to a clawback in a situation like that. The electronic monitoring would potentially discover this right away but it would not matter one bit. That money will already be gone never to be seen again and you are going to be out of luck. This is not a matter of FCM's adopting policies internally to better police things. That will not stop someone from ignoring them like we have seen happen repeatedly. There are regulations in place, but they do not get to the very heart of what needs to be done to put an end to this.

The money has to be in a place where they physically cannot get to it no matter what they do. There should be no mixing company money with seg money. The money the FCM is required to have to cover the margin should be in a different account. There should be no company money in a segregated account, not one single penny. If there is a margin call they can meet it from a company account. This is just so stupid it is mind boggling. It is as if this is setup this way to deliberately provide a way to steal money. I am sure they would argue that to change the whole structure would cause huge problems. Oh really? Would it cause bigger problems than having regular people having their lives ruined by these thefts?

Just put an insurance vehicle in place and quit ........ing us off. Until they do this buyer beware. You have had more than ample warnings, the next theft is on you if you fail to take the correct precautions. I apologize for ranting on this subject but this is so very important and I just don't sense the average person is as worried about this as they should be. I think we have a difficult period coming economically and if I am right about that other FCM's will do down. If other FCM's go down I can promise you they are going to take clients with them in the process. I am more sure of this than I am that I will have a losing trade next year somewhere. There is one decent sized FCM I saw recently that had only 2 Million dollars of cash and hundreds of millions of Segregated money. That is razor thin. One huge incorrect bet in the S&P if we get a sharp sell off and they are going to be insolvent on the spot. Where to you think they will go to get money to stay afloat? Hmm, that is a tough one isn't it? Is there a 3 year old who could not answer that question?

Take this holiday to spent some time developing a plan of how you plan to best protect your money in your trading accounts. When Monday comes implement it. If I am wrong and everything is just fine going forward you have lost nothing doing this. If I am right I may have saved your financial life by suggesting this. That above article should tell you, in that case half the money was gone at one point, HALF! I think most people would consider that firm to be pretty safe but is it? That money was obviously being used to do something when it was taken out of the segregated account, most likely to run the company business as we have seen in these other cases. If that firm had happened to go down during that period and your money was there half of it would never been seen again. You would have a 50% loss on your hands like what happened to us at PFG. We are going to likely wind up at about that amount.

I am sorry to keep bringing this up but my conscience is telling me to keep being a champion of this cause. The one last thing I suggest is to have your money at a place that is a public company, has decent financial reports, and decent ratings. If they go down there should at least be some assets to be sold to help make you whole on shortfalls. This was the case with MF, they had a lot of assets. The sale of those assets brought in a lot of money to be distributed and that is why MF clients are getting pretty close to all of their money back. PFG was a smaller private company that had almost no assets.

We are flat at this point sitting this one out today. I had the stop too close in the Swiss trade but the good news is my methods still picked a nice move I just messed it up with the management of the trade.

Have a nice weekend


Michael said...

How's your TD account doing so far, overall execution wise and customer service that is?

Chris Johnston said...

Michael so far this is the best brokerage firm I have ever had everything has been great so far. The customer service at this place is incredible and fills have been fine.

Chris Johnston said...

I published a comment asking about the other firm that does sweeps that has bad fills and I can't find what post it showed up in. It is Interactive Brokers. I would never personally have an account there ever again after my experiences with them and the awful fills, but they do have a similar sweep type setup I think. I would verify that with them if you are thinking of going there. They also have basically no customer service at all unless you like dealing with Helen in the Ukraine like the Mastercard commercials.

I think what they call the account you setup is a Universal account where you can trade equities and stocks from the same account, which is pretty cool.

Officially though I am on record as not recommending them.

Michael said...

I had a feeling IB was the broker you didn't like, I've heard far too many complaints about them from others over the years.

Thanks for the info on TD. I was with them for a short period back in the 90's. When it's time to diversify my futures account I'll give them another try.

Thanks Chris!