Headlines were made around> the world this summer amid reports that Armajaro, a commodity fund controlled by British financier Anthony Ward, had taken delivery of 240,000 tons of cocoa, nearly 7% of the world's supply, worth upwards of $1 billion.
Given that speculators had already been blamed for pushing up oil prices and collapsing the economy, many didn't hesitate to scapegoat the trader for making your 100 Grand chocolate bar even more expensive.
Ward had "all but cornered the market in cocoa" and "held a big enough chunk to sway prices," warned the The New York Times. AOLNews.com predicted the "stunning cocoa grab could hike prices" and lead to lower quality, and the British Press dubbed Ward "Choc Finger," after the James Bond villain Goldfinger. The Huffington Post didn't spare the subtlety with its populist headline: "Armajaro Cocoa Investments Driving Up Already-Rising Chocolate Prices."
Binge and Purge
iPath DJ-UBS Cocoa Subindex ETN (NIB) 5 months
But as The Wall Street Journal points out an in excellent follow-up , the trade likely ended up a failure, with futures prices falling 30% since the summer and the firm now reportedly disposing of its stockpile. (Funny how "Investment Firm Suffers Loss," won't get nearly as much press.)
Attempts to corner free markets have always ended painfully, at least for those pursuing such gambits. As we wrote a few years back, prices might temporarily rise as a result of a speculator making massive bullish bets, but because the investor has to eventually sell to someone, and because nobody is bigger than the market, prices inevitably end up quickly correcting long before the operator can capitalize on the scheme.
These stories illustrate a major advantage for smaller investors. As we've previously noted, unlike bigger funds, they are able to enter and exist their positions without affecting prices.
In reality, the only entity able to corner the market is the government, by setting either artificial limits as to how far prices can move or arbitrary restrictions as to how much an investor can own, both of which have statistically increased volatility and created regulatory anomalies to game.
In the case of the now-discredited market for green carbon credits, which we wrote about a few years back, the government didn't just limit the market, but created, defined and controlled it in nearly every fashion. iPath Global Carbon ETN (GRN)
When a fund like Amaranth makes big bets and implodes, or a "corner" in the cocoa market falls flat, only those traders with risk on the line are affected. But when the Federal Reserve takes a swing, the results can cost us all.
10-Year Treasury Yield (TNX) has risen since "QE2"
Since announcing its latest plan of "quantitative easing" to keep interest rates low a corner by any other name interest rates have actually soared, jumping again Wednesday to seven-month highs. The yield on the 10-year note has jumped from approximately 2.45% to 3.55% in just two months, a spike of nearly 45%. U.S. government bonds have lost 2.84% this month already, the worst showing in nearly two years.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC