Train, Work, Steel,The Fed/CRB Connection and The Rule of 72

Back on the train this morning. I forgot to mention yesterday that because of the engine failure a couple of days ago the rail company issued us an apology letter and 2 free coffees. Looks like they may need to do it again because it looks as if we’re stuck at a station once more—at least this time I’m on the train and not waiting on the platform. Ah, there it goes. They had to restart a generator. Let’s see how long it takes to actually start moving.

You know, yesterday was a sad day. There are two guys who sit near me at work, I’ll call them Peter and Ryan, and I find them to be very interesting chaps. Ryan is a new broker. Quieter than some—train just started moving!—and reminds me of my bud Carlo from when I just started in the business. Peter, on the other hand, is older (54, to be exact). He knows everything. Just unreal encyclopedic knowledge of many things—especially mining, other businesses, markets (and their history) economies and interest rates. Things you can actually use in this business. An LME metal trader I know in London, Tony, had a question for him yesterday (I told Tony Peter is a bit of a whip at many things). The question was: “Why steel is not being traded on any of the exchanges?” Peter’s answer? “Different steelmills produce steel for inventory in different forms—then when they get an order they form it to specs—thus, there isn't much (or no) standardization. Alloys and form (ingot, roll) is all over the place in the industry. Even when ordered there are little, but important, specs like bias/orientation of the grain that are major factors to the cost and suitability. Thus, it isn’t suitable for exchange trading like gold, molybdenum or lead might be.”

I didn’t let you know the sad part yet: those two now have their own office (with a window, no less) so they’ve moved out of our little area (there was a fourth guy, David, there as well, and he is still there).

The good news is I’ve almost met all of the brokers in the firm and the response has been pretty positive to my role. At first most guys say there are few or zero clients of theirs that would be good prospects for what I do, but after speaking about it for a while with them they usually come up with a few ideas. That is cool. In Ontario, Calgary and, recently, Montreal where we’ve rolled this out it has been well-received—both by brokers and clients—so I’m not too concerned about that front. We’ll see, though.

You may know that Union Securities was a bit of a bucketshop when it started in the 1960s (or so I hear). Now the firm is adding many wealth management functions (like mine) to their platform, but, still, many of the clients are traders in the more speculative markets. One broker, on old hand (not as old as Peter, though) had an interesting comparison to RBC Dominion Securities (where I started) and other more conservative firms and Union. He said that at DS the name of the game is ‘asset management’ (you’re finding places to invest people’s money and your success depends on how big your book/client base is); at Union the deal is ‘debt management’ (you have clients buying stocks on margin and you have to make sure they don’t blow themselves up and end up leaving the firm, and you, a big debit balance to try to settle). It’s the end of the year for the firm now so all debit balances have to be covered by the end of the day. I asked this broker how it was coming in getting cheques from clients to cover—he said they did nothing of the sort. If the account isn’t flat by the end of the month (less 3 days to take into account settlement, I imagine) they hit the bid (sell at market) in the account until it is on-side. Ha! That was the last resort at DS, but I guess in this business if you wait too long you might have to make up the difference so you might as well do whatever it takes. Interesting.

Now, on interest rates. Peter has an interesting theory that wheneve the CRB rises above 238 the Fed tightens rates. I haven’t tested this, but it worked in the last tightening (although it was about 1-2 months in anticipation). The CRB is now 300 or so…and the word on the street it rates should rise about 5% from these levels to get things in order. Use that info as you like.

Got to get off the train. Later.

UPDATE: Rule of 72--The real rule (that hardly anyone knows):

log(2) / log (1+r) = periods to double

The numbers skew a bit at the edges (approaching zero and 72) but it generally holds in the mid-range.