The Chocolate Position Going Forward (Longish)

Since the chocolate position was put on (Dec 19), it has done pretty well:

Long 500 HSY @50.52, Currently 53.67
Long 1 Lindt @ 30900 , Currently 31655
Long 1 May Cocoa @ 1726 , Currently 1804
Short 1 Mar mini-S&P500 @ 1436 , Currently 1378.75

Total Gain $5,781 or 10.5% of initial investment (assuming your futures broker charges 3.5% of face value for margin)

Note: The opening price for the cocoa futures is adjusted for an unfavorable 35 point roll. The Lindt is adjusted for conversion to Swiss Francs.

Not too bad for a three month investment! However there are a few details of the trade that are worth thinking about:

First, you may remember that I analyzed Barry Callebaut (BARN) but decided it was not quite as attractive as the other equities. That was a big mistake. Since Dec. 19 BARN has risen 51%. The primary reason was their decision to sell their US Brach's subsidiary. They bought this several years ago on the theory that they could use it to make private label chocolate for big retailers like Wal-Mart. That didn't work; US consumers like branded chocolate. So Brach's was a disappointment. I thought they would keep batting their heads against the wall on this one. Instead they decided to give it up. Good move. Also, they will be able to recognise a substantial gain upon the sale of this asset. BARN's management is proving to be a lot more shareholder-friendly than I gave them credit for.

Second, I am quite encouraged by the continued bullish tone in cocoa futures. I entered into this part of the trade with trepidation - I though the CFTC speculators would be forced to sell out. That has not happened, despite the strenuous attempts of the floor and their allies. Maybe the manufacturing buyers are seeing the same long-term setup that I do. Maybe the weather problems in west Africa really are serious. Whatever. The failure of the inside clique to break this market is probably telling you that the bull market is serious. I intend to add on either dips or strength.

At this point, I want to modify the trade somewhat and turn it into a longer term trade. To do it I will:

• Include BARN in the portfolio. Hard to set an entry point. Hopefully it will dip tomorrow.
• Increase the cocoa futures long position.
• Take off the S&P 500 hedge. As I mentioned in a previous post, I don't hedge my long-term positions.
• Scale back a little bit. You can't have as much leverage for a long-term as for a short-term position (nor do you need to).
  

I intend to do this opportunistically. I'll give you the prices when I finish up.