Thursday, December 1, 2016

The Maturation of an Investor

Many of us have had early success in investing. My first microcap investment fifteen years ago was a 15-bagger. Instant success can be a great imposter because you think it’s skill instead of luck. Your head starts to swell. After this first big win I thought to myself, “Warren Buffett who? Investing a marathon? Pfff..This is going to be a race and they better get a spot ready for me on the Forbes 400 list”. Here is a chart I shared in a previous post on my maturation as an investor:

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We all want fame and fortune, but the problem with instant success is you rarely have the power to keep what you haven’t earnedIf you don’t have a firm foundation and understanding on how and why you received something, it’s really hard to keep it let alone duplicate it. Deep down we all know it’s not what we do randomly that will produce long-term returns; it’s what we do consistentlySo the education begins to try to turn random luck into consistent skill

Unfortunately, investing’s greatest lessons can’t be taught in a book or in a classroom. They have to be experienced and often times the teacher is loss. Don’t get me wrong, you can learn a lot from books and from other people’s experiences, but they are no substitute for making your own experiences. 95% of successful investing is controlling your emotions when your money is on the line. This is why paper trading/investing is almost useless. You have to put your own money on the line.

In most cases to step toward your destiny you have to first step away from your security. You have to risk who you are for what you can be.

The market loves to destroy egos because only through humility can it prepare your mind to accept truth. Just like military training, the market needs to tear you down and destroy all your selfish beliefs and tendencies before it can build you back up. It is no accident that the greatest lessons occur when we are the most confident. My biggest losses have all occurred after my biggest wins. During periods of over-confidence is when we decide to get lax with our checklist, analysis, maintenance due diligence, or expand outside our circle of competence into areas we don’t have competence. This is when the market comes in and destroys our ego again. It is not surprising that many successful investors are not arrogant or brash, but self-reserved and humble.

“Wisdom flows into the humble man like water flows into a depression”

An investor must experience the highs of success and lows of failure several times before they can exploit these emotions in others. Through the peaks and valleys of your investing experience you begin to learn and pick up nuggets of truth that begin to shape your investment philosophy. In a recent article, When To SellI shared a bit on how my own personal investment philosophy shifted from short(er) term trading to longer term investing.

I’d like to share with you another story:

In 2008, during the financial crisis, I was well diversified (sarcasm), invested in primarily two companies of equal proportion. The first company was a junior mining company. During the crisis, the stock was down 70% from its highs a year earlier. I held on. I knew the management and company really well. It was a high quality junior mining company, if there ever was such a thing. The stock recovered all its losses before the market bottomed in early 2009, and 18 months later was up 600% more.

The second company was a consumer products company. I had traveled to meet management and did field based research. The company’s products were sold online and in large retailers. Even during the worst economic backdrop since the great depression, consumers bought the product. During Q1-Q4 2008, Revenues were up 200%, 200%, 450%, 320%, compared to Q1-Q4 2007. The company produced record results during the crisis. Since no one else owned the stock it only had one way to go…Up…300% during the crisis while the broader markets were down 50%.

I’m not na├»ve enough to think the success I had navigating the financial crisis of 2008-09 was all skill. You will become a better investor when you accept the role that luck plays (good and bad) in your winners and losers. The mining company literally outperformed all other mining companies in North America for a 5-year period. The consumer company was one of only a handful of companies that doubled or more during the crisis. These two companies were probably in the top 0.1% of all companies during this time period. I just happened to find them (one randomly at a conference, second one through word of mouth), did the work, bought them early, and had the conviction to hold. When the next bear market comes, whenever that may be, it would be hard to duplicate this success.

Nevertheless, I learned a great deal from this experience which ultimately gave me the confidence to become a full time private investor. A few years prior I learned the importance of knowing my positions better than most, and this nugget helped me greatly during the crisis. Owning these two companies during the crisis taught me two more valuable lessons. First, invest in quality because quality always pays you back first. Even before the bottom was put in the bear market, capital started flowing back to quality first. This is something I always remember to this day. Second, invest in the best companies you can find that no one else owns because these companies can do well in any market environment. What does “No one else owns” mean. For me it means zero or very limited institutional ownership.

We as human beings are very impatient, so the hardest part of maturing as an investor is allowing ourselves the time. You can’t force it. Many investors “force it” by being active for activity’s sake. I believe it was Ed Borgato that said, “I find that a lot of what Wall Street perceives as productive activity is needless complexity”. Just like a fine wine, you have to be patient and allow yourself the time to mature. Pastor T.D. Jakes in his book, Destiny, says it best, Many people cannot find success because they lack the patience to go through the process to become who they want to be.”

You cannot force the maturity process but you can shorten it in five ways:
1.      Experience. Don’t be afraid “to do” and learn from experience.
2.      Read. Read a lot of annual reports and industry reports. The key is to develop a circle of competence so you can act quickly and decisively. Read up on business leaders, investing leaders, thought leaders, and even some fiction. Why Fiction? It keeps your creative mind balanced which ultimately makes you more focused.
3.      MentorsPicture in your mind where you want to be in 10-years, and then go find that person today and learn from them.
4.      Self-Awareness. In this context self-awareness is the ability to identify and evaluate your strengths, deficiencies, and outcomes. For example, you need to have the self-awareness to recognize luck versus skill. Sometimes you will make the right decision but you will still lose money. This doesn’t mean you made the wrong decision. Sometimes you will make a wrong decision but you will still make money. Don’t play games with yourself. Have enough self-awareness to recognize that even though you made money your actions were wrong.
5.      Own Your Mistakes. When you blame others for your investing mistakes it proves you didn’t do enough of your own work. Fully own your past mistakes so you learn from them.

Only after you’ve experienced failure can you fully appreciate success. You aren’t defined by your past. You are prepared by it. A big part of the preparation is so you develop a thick skin. True conviction can only be obtained by trusting your own research over that of others. Most multi-baggers will have long periods of stagnation as fundamentals backfill, old shareholders give up or get bored, and new shareholders enter. A multi-baggers journey is filled with the corpses of highly intelligent articulate naysayers. Every investors strategy is different, so don’t waste a lot of time defending your positions to others. Do the work. Trust your work. Let company execution prove you right or wrong.

I’d like to leave you with this. You weren’t put on this Earth to be average so stop thinking like everyone else. The greatest investors ever, they all had different investing strategies. Some of them strikingly different. The commonality amongst all of them is they focused on the downside. Find an area of investing that connects with you and your personality. You will have some painful lessons as you mature as an investor, but it’s all part of the journey. Almost all successful people went through incredible hardship, obstacles, and challenges. The power to endure is the winner’s quality.

Higher Prices, Weaker Currencies Threaten Oil Demand in Asia

Rising oil prices in the wake of OPEC’s production cut could deliver a one-two punch to demand from Asia’s emerging energy consumers, where weakening currencies have already led to higher prices.
China and India, the world’s second- and third-largest oil consumers after the U.S., have each seen declines in their currencies versus the U.S. dollar in recent weeks. The Indonesian rupiah and Malaysian ringgit have also hit the skids.
The currency declines compound the effect of the surge in oil prices following Wednesday’s decision to cut production by 1.2 million barrels a day by the Organization of the Petroleum Exporting Countries, analysts and economists said. Benchmark Brent crude prices are up nearly 7% this week, trading at five-week high above $52 a barrel.
Since oil is priced in dollars, it makes crude more expensive in local currencies that have weakened against the greenback. In terms of Indian rupees, for example, the price of a barrel of oil has actually risen 8% last month.
“You have the negative compound effect of a weaker currency and higher oil prices,” said Virendra Chauhan, oil analyst at the research firm Energy Aspects. “It could dent demand at the margin.”
Emerging-market currencies have fallen sharply in the past month against the dollar, with investors placing bets on higher interest rates in the U.S. and the prospect of reduced global trade under a Donald Trump presidency. The rupee fell 2.7% in November against the dollar, while the Chinese yuan lost 1.6%, the Malaysian ringgit is down 6.1% and the Indonesian rupiah is off 3.9%.
Asia is a crucial market for OPEC as the cartel contends with declining market share and rising competition from domestic production in the U.S. But even in Asia, OPEC is fighting to maintain its hold amid growing competition from Russian crude. OPEC accounted for 59% of China’s oil imports in September, down from an average of 66% four years ago, according to Chinese customs data.
Asia is home to some of the world’s fastest-growing economies and energy consumers, though the pace of the expansion has decelerated alongside economic growth. The International Energy Agency in November highlighted a slowdown in oil demand in China and India in recent months, which it said is contributing to a broader slowing in global oil-demand growth.
Even at $50 a barrel, oil prices are still low compared with a few years ago when $100-a-barrel crude was the norm. Those low prices have been a boon to a region where economic growth has slowed and asset bubbles have rippled across markets.
“There would have been a much sharper economic downturn had oil prices stayed where they were at over $100 a barrel,” said Frederic Neumann, Asia economist at HSBC in Hong Kong.
In China, gasoline demand in October was up 17% to 32.83 million barrels a day from a year earlier, according to consultancy Facts Global Energy. India’s gasoline demand showed the same pattern, rising 13% in October from the previous year.
FGE expects demand in India and China to increase next year, juiced by rising auto sales.
Crude-oil demand by Chinese refiners, however, may slow slightly if prices stay above $50 or higher, as higher crude prices mean narrower margins.
“The ideal crude price range for us is between $42 to $48 a barrel,” said Zhang Liucheng, vice president of Shandong Dongming Petrochemical, one of China’s biggest independent refiners.
But while higher prices usually stunt buying, as long as the increase is between 10% and 15%, Asia demand will be remain largely unaffected, said Jeff Brown, president of FGE.
“If oil level remains in the $50s, it is actually indifferent in terms of economic growth and oil demand. But if you start getting more extreme, like going down past $40 and above $60, then it starts to be more of an issue,” said Scott Darling, head of oil and gas research Asia Pacific at J.P. Morgan.

Customers in the digital economy have the whip hand

If the story of industrial relations has been the tussle between capital and labour, then we might have arrived at the plot twist. The digital economy threatens to unseat shareholders and workers as management aligns itself with a third party that has been sidelined until now. Customers, to whom executives have long paid lip-service, are in the ascendancy. “The customer is always right” is no longer just a hollow corporate slogan.
Nicolas Colin, the co-founder of investment firm TheFamily, sees this shift in power as the inevitable consequence of the way digital companies work. They need enough users to create scale and a network effect. Without them, their business models simply do not work. “The strongest party at the table is not the employees or the shareholders any more; it’s the customers,” he told the annual Drucker Forum management conference in Vienna this month. 
Amazon is a perfect example. Jeff Bezos, the chief executive, warned his shareholders in a letter in 1997 that Amazon would “focus relentlessly on our customers” and market leadership over “short-term profitability”. And it would make its employees sweat in the service of those customers. “It’s not easy to work here … but we are working to build something important.” 
Of course, there are plenty of sectors (utilities, airlines and pharmaceuticals to name a few) where customers are far from empowered. And even in the areas where they are gaining ground, they might not hold on to it for long. Many investors in companies like Amazon believe that eventually, once these companies have reached sufficient scale and dominance, the shareholders will reap the rewards. For now, though, it is the customers in the digital economy who have the whip hand.  
That has not been good news for workers. It is because customers want cheap same-day delivery from retailers that many van drivers are paid a piece-rate per parcel and cannot predict their hours. It is because customers want Uber to take them wherever they want to go that drivers are not told users’ destinations until after they have picked them up. It is because customers want their takeaway food delivered fast and hot that Deliveroo couriers have only 30 seconds to respond to the algorithm that controls them.
Low prices mean low wages. Speed, reliability and convenience mean pressure, monitoring and unpredictable hours. In other words, the same things that make this a wonderful time to be a consumer make it a terrible time to be a worker. 
Mr Colin thinks the smart thing for workers and unions to do would be to build alliances with the most powerful party at the table. That might mean calling fewer strikes, which usually hurt the clientele, and more time appealing to customers’ better natures. After all, most of us are consumers and workers at the same time. The “fight for $15” minimum wage campaign in the US, for example, persuaded some home-care clients to join forces with home-care workers to call for better wages and conditions.
Still, it requires a good deal of optimism to believe that customers will ride en masse to the rescue of workers, particularly if the quid pro quo will be higher prices or slower service. Initiatives such as Fairtrade, which certifies products that treat producers decently, have been a success but remain niche.
I once interviewed a man who worked at Amazon, his feet blistered from the seven to 15 miles he walked each day inside the warehouse. He said the company treated him and his colleagues like disposable automatons. But he was still an Amazon customer. He could see the irony but it was just so cheap and efficient, he said with a shrug. It is that good at what it does.

Amazon’s drive-in grocery store marks new offline push

On a grey industrial block in north-west Seattle, the lights are already turned on in a building that has no name. This is set to be Amazon’s new grocery store, one of two that will open soon in its home town, marking the retailer’s first step into physical stores for grocery and convenience items.
It will be anything but your typical convenience store, however. The store functions around a drive-in concept, and features a large tilted awning that gives it the air of a 1950s drive-in diner. Customers who come here will not browse the aisles — they will order their goods online in advance, then stay in their car while their groceries are brought out to them.
Amazon’s move into bricks-and-mortar outlets marks a dramatic departure from its online-only strategy, whose success has made the company one of the most valuable businesses in the world. It also underscores a key new goal, one that has so far proved elusive: mastering the grocery market.
The company has been expanding its grocery delivery programme, Amazon Fresh. It has more than doubled its footprint this year and expanded to 17 markets, including London, yet Amazon controls just 1 per cent of the $800bn US grocery market, according to estimates from Cowen and Company.
“Grocery is the company’s biggest potential for revenue upside,” says John Blackledge, a Cowen analyst. He estimates that Amazon’s food and beverages sales could grow from $9bn this year, to $23bn in five years, making it one of the top 10 grocers in the US.
This could spell tough competition for Amazon competitors such as Walmart, which controls a fifth of the US food and beverage market, as well as smaller players such as Kroger and Albertson’s. Walmart is struggling to find growth in its grocery sales, which fell 2 per cent in October compared with the previous year, according to a consumer survey by Cowen. Amazon’s grocery sales grew 12 per cent in the same period.
Amazon’s experiments with physical stores come at a time when its soaring overall sales give it room to test out new strategies. In the past 12 months, Amazon’s salesrose to $117bn (excluding Amazon Web Services), up 25 per cent from the same period a year earlier — vastly outpacing the growth of the US online retail market.
Despite this, more than 80 per cent of US retail sales remain offline, and those familiar with the company’s thinking say Amazon is looking for new ways to get a piece of such sales.
“You can only grow faster than the market for so long before the law of large numbers catches up with you,” says Scott Jacobson, a former product manager at Amazon, now a managing director at Madrona Venture Group. “You have to go after a few different markets — and this is a different market.”
[Amazon has] built up such a large physical [logistics] infrastructure, it is a question of how do they maximise the use of that infrastructure?
Mark Mahaney, analyst at RBC
Although groceries are a notoriously low-margin business, shoppers tend to purchase items more frequently than any other category. This makes it highly desirable from Amazon’s point of view, as the company works to get users ever more hooked on its Prime membership service, which could in future include groceries, and to cross-sell other items to grocery shoppers.
Mark Mahaney, analyst at RBC, points out that Amazon’s retail margins are already in the low single digits, and thus not dramatically different from typical operating margins in the grocery business.
“They have a core competency in physical logistics and distribution” that can easily be applied to groceries, he points out. “They have built up such a large physical [logistics] infrastructure, it is a question of how do they maximise the use of that infrastructure?”
Amazon has been investing heavily to bring its logistics infrastructure deeper into urban centres and closer to its customers by building a network of smaller warehouses close to city centres. These serve as bases for Amazon’s one-hour and two-hour delivery programme, Prime Now, which has expanded to more than two dozen US cities, as well as London and Paris.
The new drive-in stores could build off those Prime Now warehouses, which already include a limited selection of groceries. Those familiar with the company’s thinking say the pick-up stores could dramatically reduce the delivery costs of a fresh grocery service, which is particularly expensive because of refrigeration needs.
A one-year subscription to Amazon Fresh, the company’s grocery delivery service, currently costs $15 a month. Amazon declined to answer questions about its new stores for this piece.   
Analysts caution that the drive-in grocery stores are still an experiment at this point. “Do I expect them to set up a chain of physical retail stores? Absolutely not,” says Mr Mahaney.
However, the company has recently starting increasing its brick-and-mortar presence in other areas too. Amazon opened its first physical bookstore a year ago, in Seattle. It has since opened two more, in Portland and in San Diego, with a fourth set to open in Chicago next year.
Analysts expect that it is only a matter of time before Amazon starts testing out bricks-and-mortar strategies in other areas, starting with apparel. Amazon has already upended the traditional retail market with the success of its online model, and now it is looking to take the fight closer to its rivals’ home turf.

Wednesday, November 30, 2016

Consumer durable retailers go slow on fresh inventory

Nilesh Gupta, Managing Partner at Vijay Sales in Mumbai has stopped giving orders to consumer durable companies for the past few weeks and is unsure about when he will resume filling up his inventory. Demonetisation has taken a toll on the sales of the Mumbai headquartered retailer along with others like Croma, eZone and Next Retail, all of whom are now tightening their budgets when it comes to buying fresh inventory from companies such as LG, Samsung, Godrej and Voltas.
“We have stopped giving orders to durable brands since the time demonetisation was announced and suspect that even durable companies have reduced their production in the current scenario. It is a million-dollar question as to when we will start giving orders again to these companies since sales are down by 50 per cent at our stores,’’ says Gupta.
Videocon Group-owned Next Retail is also adopting a similar approach to controlling inventory in times of slow offtake in the durable category.
“We have stopped buying all the categories of consumer durables except mobile phones and the annual budgets of buying the durable brands are being reworked since we do not want to take risks.
“Sales have derailed despite us trying to push EMI schemes and it will become a serious issue for the high-end durable brands who might also have to shut down production,’’ observes Sanjay Karwa, CEO, Techno Kart, a Videocon Group company, which owns the 120 stores of Next Retail.
In fact, mobile phones is the only category which seems to be selling faster than the rest of the consumer durable categories today.
As Rajan Malhotra, President- Retail Strategy, Future Group, CEO, eZone, said: “Mobile phones is the only category which has momentum. We are tightening our budgets by nearly 40 per cent when it comes to buying other durable categories till the year end as we need to have a cautious approach.’’
Tatas-owned Infiniti Retail, which owns Croma retail stores, is witnessing healthier growth rates for the mobile phone category compared to the rest. “Smartphones is growing the fastest at more than 30 per cent even post demonetisation at our stores,’’ said Avijit Mitra, CEO, Infinity Retail.
As for consumer durable companies, it may be a matter of time some of them are forced to scale down production targets.
According to industry sources, MNC players like Samsung are believed to have halted production in certain categories and have prolonged their maintenance period at their factories when they are supposed to refurbish and repair their machinery by exceeding a week, as they do not want to undertake any production at this stage.
Others like LG are being cautious and would try and practice ‘just in time’ inventory control. “While we are not taking up our growth targets, at the same time, we are taking some precautionary measures. For instance, in the case of imports, we will try to keep a month’s balance and not stretch it beyond 30 days,’’ said Niladri Dutta, Head of Corporate Marketing, LG. Domestic players like Godrej and Voltas are also mulling cutting down on production in some of their categories.
Kamal Nandi, Business Head & Executive Vice-President, Godrej Appliances, said: “Since demand has dropped by nearly 40 per cent, we have decided to cut down production across all our categories like air-conditioners, washing machines and refrigerators by almost 20 per cent.’’
Market leader in air-conditioners, Voltas is waiting to see how demand pans out for the category. Pradeep Bakshi, President &COO, Voltas, said, “In the last 15-20 days , sales have dropped by 50 per cent. If this trend continues in the long run, we may have to cut down on production.’’
An analyst at brokerage firm MK Global said, “Most durable companies would be forced to scale back on production as they do not want to be stuck with unsold inventories since most retailers have stopped buying from them. Durable sales were not that great during Diwali and it should be a matter of time before durable manufacturers take a call on production.’’

New Era for Oil Reverberates Through Asia’s Shipyards to Runways

While the first OPEC production cuts since 2008 were inked as Asia slept, the winners and losers from the surprise deal are already becoming clear in the world’s biggest oil-consuming region.
U.S. crude is hugging $50 a barrel following Wednesday’s 9.3 percent surge, the biggest since February, and Goldman Sachs Group Inc. is projecting further gains of more than 10 percent by the end of the first half as the current oil surplus withers into a deficit. A revival in prices could prove challenging to countries like India and China, which import most of the crude they consume. Yet the region is also home to some of the largest players when it comes to shipping and oil-market infrastructure.
“It’s extremely hopeful and optimistic for those traditional manufacturing companies in Asia,” Hong Sung Ki, a commodities analyst at Samsung Futures Inc., said by phone from Seoul. “Oil explorers as well as steel companies that supply pipeline makers will start boosting investment and production as oil prices are on the rise in the long term.”
Asian energy stocks are surging the most in almost 10 months, with exploration companies such as Australia’s Santos Ltd. and Tokyo-based Inpex Corp., Japan’s biggest oil and gas explorer, leading gains.
Rig builders are also rallying, amid speculation higher oil prices will encourage further exploration, fueling demand for drilling equipment. Keppel Corp., the world’s biggest oil-rig manufacturer, jumped as much as 5.5 percent to S$5.75 in Singapore, the most since June. Sembcorp Marine Ltd., the second-biggest, also surged.
For them, the OPEC deal is coming at a key moment. Oil-rig makers have fired thousands of workers in the past two years and have been planning more cuts amid weak demand for equipment to explore and transport oil. Energy companies have cut more than 350,000 jobs since crude prices started to fall in 2014 and explorers reduced hundreds of billions of dollars in investment to weather the rout. 
Shipbuilders in South Korea, home to the world’s top three shipyards, also benefited from the deal, with Hyundai Heavy Industries Co., the biggest, gaining more than 5 percent in Seoul. Rival Samsung Heavy Industries Co. rose the most since June on a closing basis. Both companies have also had to shed employees this year as low oil prices crimped demand for new vessels and deep-sea drilling platforms.
While the oil-price increase may prove a boon for crude-industry support companies, it’s a negative for air carriers, with jet fuel prices jumping to a one-month high in New York. Japan Airlines Co. sank the most in nine weeks, as Australia’s Qantas Airways Ltd. slipped more than 2 percent. Singapore Airlines Ltd. lost the most since Nov. 11.
Moving beyond equities, the impact of the OPEC deal is being most keenly felt in the government bond market in Asia, with benchmark yields from China to New Zealand tracking Wednesday’s surge in 10-year Treasury rates.
The Bloomberg Barclays Global Aggregate Total Return Index, a measure of investment-grade debt from 24 markets around the world, capped a 4 percent slide for November last session, the gauge’s worst monthly slump since its inception in 1990. High oil prices buoy inflation expectations, which were already elevated on bets Donald Trump’s U.S presidency will usher in a wave of government spending.
Yields on Australian sovereign notes due in a decade jumped by seven basis points Thursday to 2.79 percent, their highest level since January. Rates on similar maturity bonds from South Korea to Hong Kong rose by at least two basis points as the slump in Treasuries worsened. Ten-year U.S. yields extended Wednesday’s nine basis-point climb, rising another basis point to 2.39 percent, their highest level since July 2015.
“A lot of people are beginning to think that it is the end of the bull rally,” said Roger Bridges, chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management’s Australia unit, which oversees $14 billion.

The World Is Feeling the Might of China’s Commodity Traders

The Chinese speculators shaking up global commodity markets are switched-on, flush with cash and probably not getting enough sleep.
For the second time this year, trading has exploded on the nation’s exchanges, pushing prices of everything from zinc to coal to multi-year highs and sending authorities scrambling to deflate the bubble before it bursts. Metals brokers described panic earlier this month as the frenzy spread to markets in London and New York, prompting wild swings in prices that show no signs of abating.
While billions of yuan have poured in from herd-like Chinese retail investors who show little regard for market fundamentals, brokers and traders say even more is coming from an expanding army of deep-pocketed hedge funds. They’re chasing better returns in commodities as stocks and real estate fade, often using algorithms and trading late into the night, when markets in London and New York are most active.
“There is no doubt that the price moves and the bigger volumes worldwide are being driven by the Chinese, and by professional speculators and financial players,” said Tiger Shi, managing partner at brokerage BANDS Financial Ltd., which counts several of those funds as clients. “The western hedge funds and institutional investors don’t really know what’s going on. Often they were used to trading macro factors or Fed policy, but now they find they have fewer advantages.”
Shi, previously head of metals in Asia at Jefferies Group LLC and Newedge Financial Inc., estimates that China may have more than 5,000 hedge funds active in commodities. At least 10 manage assets of more than 10 billion yuan ($1.4 billion).
The use of algorithmic trading, in which computers execute multiple orders in milliseconds, is turbo-charging volume and volatility, according to Fu Peng, a portfolio manager at Lianzhan Global Macro Fund Management Co. About a third of activity on Chinese exchanges is executed by automated commands, which generates more volume and greater momentum on global markets, Shi estimates.
A recent example was on Nov. 11. Copper in Shanghai jumped by the most since trading began in 2004 amid a surge in volume. On the London Metal Exchange, it gained as much as 7.6 percent, before sinking 1.7 percent in the Asian evening. The gap between the day’s high and low was more than $500, the widest in five years, and the intensity of the swing was just as big in New York futures.
“I can recall only two other occasions in my career where there was such panic and devastating price action in copper but this market today is far less transparent,” Matthew France, head of institutional sales for metals in Asia at Marex Spectron Group, said in an e-mailed report on Nov. 14. “The machine component in the market is now so much bigger as is the onshore retail and fund involvement on the Shanghai Futures Exchange and OTC options.”
The country’s biggest hedge funds include DH Fund Management Co., Shanghai Discovering Investment Co. and Shanghai Chaos Investment Group. Officials for all three declined to comment for this story.
Over less than two weeks this month, the value of daily transactions on China’s three commodity exchanges more than doubled to peak at $226 billion on Nov. 14. Sparked by speculation that government reforms are helping reduce oversupply of raw materials amid signs of improving demand, Chinese money is pouring into commodities as investors look for better returns than other assets including stocks or real estate, according to Fu at Lianzhan Global Macro Fund Management. 
“The nation’s supply-side reforms had a big impact on the market balance, and that’s the fundamentals behind the trading,” Fu said by mobile phone from Hong Kong. “But at the same time, we’ve got too much money there. There have been no returns from investment in industries. The stock market is neither dead nor alive. Investment in real estate also got curbed. So all the money is rushing into commodities.”
The Bloomberg Commodity Index has returned 7.4 percent this year compared with an 8.3 percent drop in the Shanghai Composite Index of equities, and the government has imposed measures to cool the country’s real estate market.
“Commodities market volatility is liquidity driven, as money from commercial bank wealth management products and private banking accounts flow into the market seeking higher return,” said Li Yulong, chief investment officer at Jyah Asset Management, a mutual fund which overseas more than 9 billion yuan.
Chinese traders are often most active during the night session, when trading also typically peaks on the LME and on Comex in New York. On almost two-thirds of the past 30 trading days, copper trading was heaviest between 9 p.m. and 11 p.m. in Shanghai, bourse data show. Analysis of volume and open interest suggests they typically hold contracts for only a few hours.
Similar to the last frenzy in April, the government-owned exchanges have stepped in to cool trading by raising fees and margins, or cutting the number of new positions allowed daily. Volume and turnover have since come off their highs but prices are still swinging. Copper is poised for its biggest monthly advance since 2009 in London and has briefly jumped above $6,000 a metric ton. But broadly, metals prices are retreating, with lead recording its biggest two-day tumble in five years.
“The massive and unprecedented surge in Chinese trading volume in base metals over the past month -- but especially since the election -- has put LME metals traders on red alert,” Tai Wong, director of commodity products trading at BMO Capital Markets in New York, said in an e-mail. The price moves caused by Chinese traders make “a strong argument that the Middle Kingdom is once again the center of the world, at least for metals,” he said.