In this episode, Jeff talks with Stephen Davis of Davis Commodities about Memphis’s long-standing role as a center for commodity trading and Stephen’s path into the business, from his first days on the Chicago Board of Trade grain floor to building his own trading firm. Stephen dives into how agricultural markets are shaped by global supply and demand, crop conditions, weather, trade flows, and government policy, including the many uses of corn and soybeans in food, animal feed, and fuel. He also explains how he turns research into trades, why he favors longer-term themes over short-term market moves, and how experience, including costly mistakes, helped him develop firm risk-management rules. The conversation covers his Plutus agricultural strategy, Global Macro and Atlas programs, and how commodities can diversify portfolios concentrated in stocks and bonds. – SEND IT!
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Check out the complete Transcript from this week’s podcast below:
How an Discretionary Ag Trader “Reads the Soybean Leaves” with Stephen Davis
Jeff Malec 00:09
Welcome to The Derivative by RCM Alternatives. Send it. Hello there. Welcome back to The Derivative brought to you by RCM Alternatives, where I think there’s nothing to plug today, just plain old RCM and all the cool ways we help investors and managers. Okay, on to this episode where we got to talk with Stephen Davis of Wait for it, Davis Commodities. Stephen’s been part of the Memphis commodity scene since he was a teen, has been trading discretionary ag for clients for over 20 years. So we get into how he looks at corn, why soybeans are so much more than edamame, what’s the demand from China look like, the supply from Brazil, El Nino, and all the rest on the ag markets. We’re finding out. Send it. All right, we’re here with Stephen. Stephen, how are you? I’m
Stephen Davis 01:09
doing great, Jeff. How are you?
Jeff Malec 01:10
I’m good. Where on that big world map are you? You get pointed out?
Stephen Davis 01:16
All the way over there. So it’s not. It’s not really in the background here.
Jeff Malec 01:21
You’re in the middle of oh yeah, that’s the middle of Africa.
Stephen Davis 01:25
Yes, no, a little bit a little bit further west than that.
Jeff Malec 01:29
Where where are you for real? You’re down in Memphis.
Stephen Davis 01:32
I’m in Memphis, Tennessee.
Jeff Malec 01:33
Love it. You lived there a long time.
Stephen Davis 01:37
I’ve been here since I was seven. So yeah, so 47 years.
Jeff Malec 01:41
Woo,
Stephen Davis 01:42
yeah.
Jeff Malec 01:43
Give us a little background on like the what do they call it? The Memphis Cotton Mafia or the commodity, right? Like a ton of commodity traders and big commodity stuff out of Memphis that I think most people don’t know about if they’re not deep in this world.
Stephen Davis 01:57
So the the three biggest cotton companies were historically based out of Memphis. You had Allenberg, Hohenberg, and Donevent. Those have all been since acquired by the Bigs, but they were independent. The other thing that that put kind of Memphis on the map was going back to the 70s and cook grain, and cook grain made a big push into. They started out in in cotton and pushed into corn, soybeans in a big way, and that was run in the end by Willard Sparks of Sparks Commodities fame, and out of that as well, Refco. If you remember Refco, I mean, I’m really turning the
Jeff Malec 02:46
yeah
Stephen Davis 02:46
historical dial back here. But yeah, down in Memphis,
Jeff Malec 02:49
you just call him Willard. If you just said Willard, everyone knows who you’re talking about, right? Yeah,
Stephen Davis 02:53
100% 100% But you also had Charlie McVane, and McVeigh trading is still down here. So I mean, at at when I got in the business in ’94, you had Chicago, New York, and then Memphis for commodity trading in the United
Jeff Malec 03:11
States.
Stephen Davis 03:11
Yes, yes. Part of me
Jeff Malec 03:12
thinks Memphis would have almost been better, but I guess you had all the grains coming from as far as the Dakotas and Minnesota and stuff to get stuff into Chicago, but Memphis seems like a more natural geological hub for all this with the river and everything.
Stephen Davis 03:27
Yes, I mean right here on the Mississippi River, absolutely. You know, we we see a lot of grain go past us on a on a daily basis.
Jeff Malec 03:35
And then you, as a little seven year old, were you just staring at cotton, saying I’m going to trade one day, or what? What was the? How’d you get from there to here?
Stephen Davis 03:42
That’s kind of funny. No, I I grew up in in the city, so I had really no idea when I got in the business actually what a soybean looked like. I’d seen cotton, but you know, if you’re not versed in agriculture at all, you know when you see a a soybean field and a cotton field, before you start getting bowls on the cotton, you really don’t know which one’s which. So, no, it wasn’t until after I’d been in the business for a couple of years before I really figured out, okay, this is soybeans, this is cotton. You know, obviously, corn’s pretty easy to pick out, but also, you know, then you go into the differentials of sweet corn, which we eat, versus feed corn, which is obviously fed to animals. Learning how to how to differentiate those was was a little learning experience as well.
Jeff Malec 04:33
What did you go to school for this business or something else?
Stephen Davis 04:38
So I started out getting my degree in finance at the University of Tennessee in 1990, and my I’m a Gator
Jeff Malec 04:45
fan. We got to hang up now.
Stephen Davis 04:47
My both of my parents went to University of Florida. Of course, you know my my kids hate me because they went to University of Alabama. My older two, and then my youngest is at Ole Miss. So Alabama, Alabama, Tennessee. Is really oil and water,
Jeff Malec 05:01
yeah.
Stephen Davis 05:02
Ole Miss, not so much. But my my daughter looked at me and she said, “I’m not wearing that gaudy orange, Dad.
Jeff Malec 05:09
You got any sea covered? Yeah.
Stephen Davis 05:11
Yes, we do. Yes, we do. But my dad did some business with Willard Sparks, and I had been doing internships at banks, regional bank here in Memphis, and they offered me a third internship. And I walked into my dad’s office one day, and I said, “Dad, this isn’t what I want to do with the rest of my life.
Jeff Malec 05:32
Yeah, what what’s a third internship? Like weanuts or nothing for a third season, third summer?
Stephen Davis 05:38
They were paying me, but you know,
Jeff Malec 05:41
yeah,
Stephen Davis 05:42
it was okay, but it just wasn’t wanted what I wanted to do with the rest of my life. And fortuitously, Willard called at that at that time when I was sitting in his office, and my dad said to him, “Yo, Willard, my son Stephen’s here.
Jeff Malec 05:57
Yeah, Willard called your dad while you were sitting in his office,
Stephen Davis 06:01
yes.
Jeff Malec 06:02
Well,
Stephen Davis 06:02
so my dad he started out in the Air Force, went into air traffic control, got fired with everybody else by Reagan, and eventually moved into private aircraft sales. And so he sold Willard his planes.
Jeff Malec 06:14
Ah,
Stephen Davis 06:15
so that’s how my my dad got to know Willard
Jeff Malec 06:17
planes with an S.
Stephen Davis 06:19
Well, I mean, it was one at a time, but it was like every time the the plane came out of warranty, he’d buy a new one. So it worked out really well for my family. Anyway, my dad said, “Yeah, Stephen’s here, and he really doesn’t want to do banking again. Is there anybody you know he can talk to? And Willard said, “Well, I’ll just send him up to Chicago. He can be a runner at the Board of Trade for me.
Jeff Malec 06:44
Perfect.
Stephen Davis 06:44
And so that was my first introduction to commodities. Prior to that, I really had no inkling as to what was going on. So get to the floor day one, and by the time the opening bell sounded, I knew I was home. This is this is what I want to do with the rest of my life. I mean, it was inject this right into my veins. I’m in. So I went back to college.
Jeff Malec 07:08
What floor were you on? A
Stephen Davis 07:10
board trade, grain floor.
Jeff Malec 07:12
Grain floor. I
Stephen Davis 07:13
would help out on the bond floor for the big 730 reports, and I did spend a little bit of time over at the Merc in the meat pits and helped out a little bit in the S and p5 100 pit once again just as a runner I mean
Jeff Malec 07:30
knew nothing. Were you like coming from a sleepy bank to the trading floor? You are like whoa. Like was part of you like what the hell’s happening here? Or you were just that’s 100%
Stephen Davis 07:39
right, Jeff. I mean you are just sitting there and you’re you know running through numbers on a on a daily basis as far as you know looking through balance sheets and you know trying to help with loan approval and things like that and yeah that that just wasn’t really my speed. I still spend a whole lot of time on balance sheets, but they’re just different, yeah. But anyway, so yeah, it was kind of funny when I was in Chicago. I was looking for more hours because you know internships they really don’t pay a whole lot, and the lady who was the assistant to Tom Ditmer, who was the chairman of the board of Refco? He, she said, if you want more hours, come and see me. And I, I was like, yeah, I need more money.
Jeff Malec 08:30
Here I am. So,
Stephen Davis 08:32
so I came up and saw her, and she was really impressed with the work that I did, and asked me to leave the floor to work directly up in the executive offices at the time. Refco had bought a Russian business publication called Commerzont, which is actually still around today. But they had bought the rights to to market it outside of Russia, and they needed it all digitized. And so I spent weeks, just weeks, going through, and this is back in the early days. You know, the old 486 chip and the first optical character recognition software that was out there. It was really clunky, so I spent hours and hours just digitizing the old back issues of Commerce aunt, and it was funny because this was the first computer that, at least the one that I was aware of, that you could actually do voice commands for macros. So I’m sitting here working in back in the day it was Word Perfect, and I made a bunch of macros where I just had to talk to the computer and it would run the macro. And Tom Ditmer walked by my office, and if you knew Tom, if he wasn’t cursing at you, you didn’t mean anything. So he he curses at me. What are you doing? And I told him what I was doing, and he immediately calls the head of operations down into my office. And this is before you know electronic order entry was anything. It was. Phone and yeah, he he said, “Show them what you’re doing. And I showed him. He said, “You’re telling me we can’t get an electronic order entry system, and this guy can sit here and talk to his computer. One of you is wrong. So anyway, that’s kind of a funny story.
Jeff Malec 10:14
Were you speaking Russian? Did you have to translate, or was already translated?
Stephen Davis 10:17
No, it was already translated into English. Yes, yes, but
Jeff Malec 10:21
and what that was all covering like Ukraine grains.
Stephen Davis 10:26
It was covering everything business coming out of Russia at the time, and
Jeff Malec 10:31
not just grains. Back
Stephen Davis 10:31
then, back then, I mean, the news out of Russia was was pretty scarce.
Jeff Malec 10:36
Yeah,
Stephen Davis 10:37
you know, back in what year? What time frame are
Jeff Malec 10:39
you talking?
Stephen Davis 10:40
1993.
Jeff Malec 10:41
Got it.
Stephen Davis 10:41
So pre internet, pre everything. So
Jeff Malec 10:44
right around Rocky Four,
Stephen Davis 10:46
exactly right.
Jeff Malec 10:48
Yeah, I used to tell people like, “Oh, you want to trade online with air quotes? I was like, “Come down. I take them to the floor, and it was probably Revco where there’s like the dot matrix printer.
Stephen Davis 11:00
Yes,
Jeff Malec 11:01
printing off the online air quotes again order, and they’d just be they’re just stack of them like six inches tall. I’d be like, “There’s your online order, like 17 deep. And when that guy sitting there like sucking a lollipop gets it to it and tears it off, then it’s going to get filled.
Stephen Davis 11:17
Yes,
Jeff Malec 11:18
so that’s yeah, I get them for a long time, like online is not online. It just means you’re instead of using the phone, you’re getting it to that desk on the floor in a different way.
Stephen Davis 11:28
Absolutely,
Jeff Malec 11:29
but we got there.
Stephen Davis 11:31
Well, anyway, after ’93, I went back to college and I talked to the dean of the finance department, and I said, “This is what I’m going to do with the rest of my life. I’d like to take some ag econ classes, and I’d like to petition them into my major. And they allowed me to do that. So I I started learning about teachers and options and everything else.
Jeff Malec 11:56
Oh, and did they have any idea what was good? Did was there actual classes and studies you could do there around. Oh
Stephen Davis 12:02
yes, yes. University of Tennessee has a pretty decent ag econ department. It’s nothing like you know Mississippi State is really well known in the SEC for their ag econ department, but you know Tennessee has has a they have a good one. I wouldn’t call it. It’s not on the level of Mississippi State, but at least it got my foot in the door as to understanding futures, understanding options, understanding agriculture, and it was obviously really helpful. As when I graduated, I was offered a job on the brokerage side at Willard Sparks division of Refco in the Memphis office, Memphis. Then you’re like, I guess I’m not leaving. Nope, I was home. How long did it take you to say like, okay, I’m going to go do my own my own thing? Well, I was a broker for 12 years, and I I knew that wasn’t what I wanted to do long term, and then I got hired by a CTA named Dicken Commodities. John Dickin ended up being, as far as I know, the largest agricultural CTA in the United States for sure, and probably the world. At his peak, he was managing a little over a billion dollars in basically trading corn, soybeans, soybean products, wheat, and cattle.
Jeff Malec 13:46
It’s hard to do.
Stephen Davis 13:48
It was like turning the Titanic.
Jeff Malec 13:50
Yeah, exactly. And when you were a broker, you’re getting farmers helping them hedge crops and whatnot. Are you like they were doing marketing and saying, “Hey, you could trade corn, like people might say trade crypto or something today.
Stephen Davis 14:04
So I would help out some individuals, but more than anything, I was a broker’s broker. So I would help out entire introducing brokers throughout the the countryside. You know, feed them the research that I was getting out of Sparks companies, feed them the the information I was getting from other brokers. I was kind of a hub of information to help out those guys along the way, and ultimately to help out their their farmers and cattle ranchers, etc. Then
Jeff Malec 14:31
what what happened to Willard? When did he pass?
Stephen Davis 14:35
Willard passed in I think it was 2004. Yes, I think this. But he had sold
Jeff Malec 14:42
firm into Revco.
Stephen Davis 14:45
No, Revco was gone by then. Refco, Revco folded into MF Global by then. He had sold the research company Sparks to Informa, and since then, Informa has sold out to S and P Global. So the his original research firm starting back in August of 77 is still alive. It’s just under a different name.
Jeff Malec 15:08
Yeah, but he was way more than research, right? He was research. He was brokerage. He was basically doing a CTA, trading his own account.
Stephen Davis 15:15
Yes, cash cotton,
Jeff Malec 15:16
like the whole gambit.
Stephen Davis 15:19
He was more involved in cattle than he was in crops. I believe, don’t quote me, I believe that before he passed away, he was feeding about 350,000 head of cattle, which would have made him the private, the largest private cattle rancher in the United States at that time.
Jeff Malec 15:36
Trading them, but not owning them.
Stephen Davis 15:39
Oh no, he owned he owned every head that went into his feed yard, 100% That at least that’s what I understand.
Jeff Malec 15:44
So then you were there doing the brokerage. I I lost track there.
Stephen Davis 15:48
Yeah, and so I left in 2000 2006 and went to Dickin Commodities. Worked for John Dickin.
Jeff Malec 15:56
Dicken
Stephen Davis 15:56
and and what was and they
Jeff Malec 15:58
were pure discretionary. They had systematic ways to look at all these grains.
Stephen Davis 16:03
Purely discretionary. All discretionary. Yeah, for the most part, yes.
Jeff Malec 16:09
And he would ask you guys to put push information up to him or something.
Stephen Davis 16:14
So I was in charge of lots of different things. It was a a small firm. John ran a lean shop, and I mean, just honestly handled it with a plumb. That’s from John Dickin. That’s where I really learned risk management. He is still probably the best risk manager I’ve ever met in my life. And obviously, if you you grow to a billion dollars, you have to be really good at risk management in the ag space. But no, I would handle everything from trade execution, idea generation, help him with sizing of trades, risk parameters. You know, just jack of all trades, really. So that that’s where I really cut my teeth on the trading side, understanding truly. I was learning the fundamentals, and I had a good grasp of the fundamentals. But taking research and turning it into action-that was a skill that I had not yet developed. And John helped me develop that skill. And yeah, I’m forever grateful to the for the opportunity that he gave me. But
Jeff Malec 17:20
so it’s a lot of that because the research is kind of hedged. They kind of be like, not right. Most if you’re writing a research report, you’re not usually taking a stand of like this is a screaming bit. It’s like, well, this could happen, maybe that could happen. We’ll see. It’s somewhere in the middle,
Stephen Davis 17:34
right? Exactly. And some of the best research guys I have ever met in my life, they can’t trade. Either the risk is you know too much, where they or they don’t know how to size it, or they can’t handle the fluctuations in equity that come with trading. You know, there’s all kinds of reasons, but you know, and at the same time, I’ve known some really, really good researchers who turn out to be great traders. But at the same time, I know some really great traders who are not very good at research. So I mean, they don’t necessarily go hand in hand. I mean, I know people who are able to do both and do both well, but at the same time, I know people who are able to trade just magnificently, and they’re really not good researchers.
Jeff Malec 18:31
Let’s dig into that for a minute. What exactly we mean by research in the ag space? Because a lot of people might have different thoughts if they’re thinking of right. If I’m an analyst for a Wall Street firm, and I’m poring over research reports. That’s basically like what their revenues and costs and expenses are. So, what what exactly do we mean by research in the ag space?
Stephen Davis 18:52
Well, it it all comes down to supply and demand at at its core. To keep it as simple as possible, you you’ve got worldwide crop production, and then you have worldwide demand, and balancing those two is what the job of price discovery is. So, the larger the production, the more demand that you need to buy, which indicates that the prices need to go lower in order to spur that demand. Conversely, when supply is low, prices need to go high to curtail demand. So, I mean, at its simplest form, that’s what it is. On a more detailed level, you’re you’re dealing with not just the supply. You know, it’s it’s easier when you back it into the U.S. but when you start looking at a worldwide basis, where you’re looking at production in China, Ukraine, Russia, North Africa, Middle East, Europe, you know, all the way into the United States, Canada, Mexico, down into South America, and South America has become obviously a very, very big producer. Brazil. The largest producer of soybeans in the world at this point in time, largest exporter at this point in time. So, I mean, there’s a whole lot of different pieces that go into the puzzle. So, but one of the go ahead,
Jeff Malec 20:12
just confusing to me, right? It’s all public information. These governments and whatnot are releasing this production, right? Like the USDA here, right?
Stephen Davis 20:23
So you can look at the USDA production, and obviously that’s what the market uses as its benchmark. But when you’re growing a crop, USDA can say, “Okay, production is X, and then we start looking at weather over the growing season, and we either add or subtract from that production potential in the crop. I mean,
Jeff Malec 20:46
so the research is projecting as much as it’s just reporting, or way more than just right. If the if I’m doing research on a whatever, I’m just looking at what’s actually been published and the the research that people are trading. I was like, okay, this these were the numbers. Here’s all these factors where the numbers may go for next next season.
Stephen Davis 21:07
Correct. You’re always projecting out on the supply side, and then you’re also projecting out on the demand side. So, like this summer, the weather was really really good until about the last 10 days of July in the U.S. and the corn plant pollinates toward the end of July and the beginning of August, and that is its critical growing period. And we turned off hot, and we turned off dry, and more than anything, corn is a cool season grass. So when you give it hot temperatures, it really doesn’t do well. Soybeans, on the other hand, they really don’t care too much about temperatures. They don’t want you know you don’t want over 100 or anything like that on an extended basis. But as long as they get water, they tend to do really well. So you had a combination for corn where it was really hot, it was really dry, for about four weeks, and that took the top end off of the crop. And the question was always, how much damage did we do? And so I have my own proprietary model that that I use to project out what the the yield is going to look like on a nationwide basis, and then able to back into, you know, what is exactly the balance sheet look like going forward.
Jeff Malec 22:30
And so, you still use outside research or no?
Stephen Davis 22:34
I use some outside research, but most of my agricultural research is in house.
Jeff Malec 22:40
Got it. So you were get you were doing the research. You were at
Stephen Davis 22:43
Dickin
Jeff Malec 22:44
Dickin, yes, not Dickies, not the overalls, Dickins. So yeah, finish that story, Dickens to getting your own, hanging your own shingle.
Stephen Davis 22:54
Well, I mean, so John was always very supportive of me learning to trade because it helped him, so he allowed me to take on managed accounts, trade my own proprietary account. He was, like I said, he was just very supportive of the entire endeavor. So I have been trading managed accounts since 2000. I didn’t start Davis Commodities until 2016, but I’ve been managing money for other people for 20 years now.
Jeff Malec 23:28
You still have a little bit of hair. 20 years managing people, yeah.
Stephen Davis 23:34
It’s a lot drillier than it was 20 years ago. I can promise you that.
Jeff Malec 23:39
And would he back you? Would he be like here’s a prop account and I’ll put up the money and you trade it and we’ll split the profits or it was that was exactly
Stephen Davis 23:46
great question Jeff that was exactly how he started me out
Jeff Malec 23:50
yeah
Stephen Davis 23:51
and then you know I made enough money to where I didn’t need his anymore and yeah so I started just trading my my prop account alongside a couple of other managed accounts, and then eventually, and with I did absolutely no marketing at all, and it was just kind of a word of mouth. But eventually, I had too many managed accounts to not be registered with the NFA as a commodity trading advisor. So, thus, Davis Commodities was born.
Jeff Malec 24:21
How how many months did it take you to come up with that name?
Stephen Davis 24:25
I’m I’m original in a lot of ways, but coming up with a name, no, that that was not original at all. That was as boring as it could be,
Jeff Malec 24:34
right? Most hedge find they’re going to go like read a Greek dictionary, find some weird name that means hunter gatherer, maybe in the ag space, and you’re just like, nope, I’m going to trade commodities, and my last name is Davis. Boom,
Stephen Davis 24:48
that’s exactly right.
Jeff Malec 24:49
We got it’s if you could go back 20 years and tell that young you trading, right? Do you think you were good right off the bat, or do you like we would you shake him and be like, what? You doing, you idiot? Right. What were some of the things you did right in the beginning that you now know are stupid?
Stephen Davis 25:06
Well, like every new trader, I think every new trader, at least every trader I’ve ever met at the beginning, you trade too big, and the volatility shakes you out of really good positions. So that would be the one thing that I would tell me. You know, it’s kind of you had the trade
Jeff Malec 25:24
right and the result ended wrong.
Stephen Davis 25:27
Yes, simply because the the drawdown was too big. The structure of the trade was incorrect, and that was one of the things that forced me to learn. And and so you know, in the end, it probably wasn’t a. I mean, don’t get me wrong, it was a bad thing, but it wasn’t a bad thing to lose a little bit of money on the front end simply because it allowed me to learn how to structure trades, so I don’t get shaken out, and I’m there when the move actually happens. And that that’s even more important today than it was 20 years ago.
Jeff Malec 26:01
I feel like that’s invalid. Like I don’t almost don’t trust someone who hasn’t lost earlier in their career, right? Because it’s probably coming for everyone, and if they haven’t, it’s come. It’s something they don’t know yet that’s built into their model or whatnot that might show up at a future date.
Stephen Davis 26:17
There’s no doubt about that. I mean, you do have anomalies out there of of guys who really never lost money, and I’d love to know how they figured out their their risk parameters that early on, but they’re they’re few and far between. You know that it’s kind of funny that you know. So I started in 2006, and I lost money in 2006, I made money every year thereafter through 2015, and I was feeling a little bulletproof. And in 2016, we had had a we were we were a tight carry in of soybeans. There were problems with the Argentine soybean crop, and I said, “There’s no way soybeans can go down. There’s no way without a massive record yield in the U.S. and weather turned perfect, and we found out how big of a soybean crop we can grow here when weather is right. And yeah, I mean, I jokingly said that the market can have my soybean position when they pry it from my cold dead figures. Well, they almost did, yeah. So it was a good recentering for me. I mean, I was still old enough to know better, but still young enough in the business to where I was going to make those kinds of mistakes. But it it forced me into reexamining all of my risk parameters and turning my guidelines into rules, and I really took it took that big loss for me to to step in and say, okay, what works and what doesn’t, and push forward with what does, how to how to keep the risk in control but still deliver solid returns on the other side.
Jeff Malec 28:13
That’s a good segue into talking about the strategy. So you have two strategies, right? I have three now. Three, three. Yes, that was a test you passed. All right, you have three strategies. So I know you mainly from the ag grain strategy, but talk. Let’s take them one in order, wherever you want to start.
Stephen Davis 28:32
Sure. I mean, we’ll start with the one that I that I my original one, which is called Plutus. There, there’s your
Jeff Malec 28:39
yeah,
Stephen Davis 28:39
you know, great name that that
Jeff Malec 28:41
yeah all right
Stephen Davis 28:42
yeah kind of makes it stand out as my ag program so that trades corn soybeans soybean products wheat cattle feeder cattle that’s it it is a completely discretionary should call it the
Jeff Malec 28:58
Memphis program it’s like everyone. Everyone in Memphis knows those things.
Stephen Davis 29:03
I almost called it the Singing River because where I go to the lake, they call that portion of the of the Tennessee River the Singing River.
Jeff Malec 29:11
Oh wow! It
Stephen Davis 29:12
goes back to Native American times. But anyway, anyway, so it’s completely discretionary, fundamentally based program. I am not a short-term trader. My my trades last as little as a month. Usually, that’s kind of the bare minimum of of what I’m in a trade for, and can last as much as six months to multiple years. The reason why I say six months is just simply because we have the northern hemisphere growing, and then we have the Southern Hemisphere growing six months later, and so your your balance sheets can completely shift in six months from surplus to you know tight stocks and the opposite at the same time. And when you say
Jeff Malec 29:55
balance sheets, you mean supply of each of those commodities. Yeah,
Stephen Davis 29:58
correct, correct. And sometimes you can see a shift in demand as well, but yes, it’s mainly the the supply driven, you know, northern hemisphere, southern hemisphere dichotomy.
Jeff Malec 30:09
And so, what’s that look like? You come in, I guess you kind of always have a trade on, but say you come in, no position, you’re you look at each separately, or is it a mosaic of like they go together in certain ways.
Stephen Davis 30:22
Well, it’s a great question because most times they trade independently. But if for some reason we really hurt the corn crop, and we didn’t hurt the soybean crop, corn can trade at a high enough price to where soybeans kind of get pulled into their gravitational area, their gravitational field, and they don’t go nearly as low as what they should fundamentally. But to your point, you can’t look at everything in a vacuum. You have to see the big picture and then pull back into the pieces.
Jeff Malec 31:03
and then for the pieces, you’re you’re just going to okay corn. Here’s what, here’s all the reports. Here’s what I’m projecting. Here’s what my model says. Go take us through what that looks like to get each trade on. What the sizing looks like. The risk.
Stephen Davis 31:16
So I mean, like right now, I am negative prices on both corn and soybeans, for different reasons. Kind of ironically, for for corn, I told you earlier that yes, we did do some damage to the U.S. corn crop this year. It’s not terrible. It’s not an abject failure. It’s just not quite what we call a trend yield. So trend goes up about you know 1.6 1.7 bushels every year, better seed technology, better planting technology, better use of fertilizers, all kinds of stuff goes into it. So we’re going to come in a little bit underneath trend simply because we did do a little bit of damage to the crop. The problem with corn right now is that it has a demand issue? So USDA has exports coming down. Last year was record large corn exports to the world, you know, from the United States, and USDA’s got it coming down about 120 million bushels year over year. Well, we’re only two months into the crop year, and export commitments are down 400 million bushels already. Once you get through the first quarter of the crop year, which is September, October, November, you can gain some of that back by doing bigger exports through the rest of the year. It’s just tough to do. So I’m a little bit of a demand bear on corn right now. The wild card is obviously China, and we’ve heard a lot of President Trump speaking about China, and they’re going to buy 25 million tons of soybeans and 17 billion dollars worth of other ag. the The sources that I have in China are basically saying that if prices get right, China will buy ag out of the U.S. but the prices have to get right. And right now, we’re just not competitive into the Chinese market for corn, so it it it may make sense at some point in the future if prices get low enough. As of today, it really doesn’t make sense. Where
Jeff Malec 33:20
else is that export business going?
Stephen Davis 33:23
Oh, we we export basically everywhere around the world. You know, EU, Middle East, North Africa, Japan, a lot of Southeast Asia buys U.S. corn. So I mean, it’s a pretty wide swath. Mexico is a huge importer of U.S. corn, mainly because it comes in by rail, and with the geography of Mexico being, you know, that mountain range right dead in the center, it’s kind of hard to transport stuff over that mountain range. So it it’s much easier to bring it in through Texas via rail.
Jeff Malec 33:57
And as you said before, all this corn is 99% 95% used just for feeding cattle or feeding livestock in general.
Stephen Davis 34:05
The corn that we trade is the corn that we trade is 100% used for feed. Well,
Jeff Malec 34:11
yeah,
Stephen Davis 34:12
feed and ethanol-that’s a misnomer.
Jeff Malec 34:14
Yeah,
Stephen Davis 34:15
ethanol obviously with the 2006 bill for the Renewable fuel-that-that’s been a huge portion of the demand growth in U.S. corn. But you
Jeff Malec 34:29
ever see that going away? New administration, new.
Stephen Davis 34:34
No, not only do I not see it going away, they’ve kind of doubled down on the renewable fuel standard. Not so much on the ethanol side, but on the renewable diesel and biodiesel. So made out of basically any fat oil, but the way that they’ve structured it, it is favored to use domestic supplies of soybean oil, halos, and then imported. Especially canola oil from Canada; those all qualify.
Jeff Malec 35:06
All right. So corn. So anyway, you’re saying you put that whole puzzle together. You think prices are right? The demand side is what’s causing you pause. So then that builds into a short position. Correct. And then that’s just outright futures. There’s options in there. What does that look like?
Stephen Davis 35:25
90% of my trade, 85, is options. I like to define what the risk is going to look like. Now, I I will wrap futures with options if the volatility is high. I don’t want to own high volatility. I’m not a vol trader, but I don’t want to own high volatility options because I’ve seen what happens when you start moving a market lower in corn, soybeans, wheat. the the vol the volatility just implodes. Yeah. So you know, owning options and a high volatility regime is a good way to not necessarily lose money, but you just make less, and so I like to use a you know a futures versus option strategy to where I’m able to take some of that volatility back out of the market.
Jeff Malec 36:15
Love it. So what else in this model we know? So the your risk control is just that option premium. You have other risk controls on top of that,
Stephen Davis 36:26
for sure. You know, a lot of traders employ a lot of leverage in their future strategies, which is very very easy to do in futures, as you well know. And I limit my exposure to 150% of the net asset value of the accounts that I’m trading. So,
Jeff Malec 36:46
which still some people’s heads might expose like 150% What?
Stephen Davis 36:51
Well, it’s kind of funny because when I go into a position, I I never have a 100% of assets under management exposed to any position I have on, the way that it gets to above 100% is simply that the position starts working, and at that point, you know, I get up to 120 530, because it’s working, and then I have to move the deltas around to get the position back down to 100% The reason why I put 150 is sometimes the market just moves really fast in the right direction, and it’s very difficult to maintain the exact you know 100 that I really really want.
Jeff Malec 37:32
So that’s you’re looking at deltas there. So you’re in this short corn, you’re owning puts or whatever. They’re 20 deltas. Say when you put them on, and all of a sudden they’re 150 minus 150 delta, and you’re like, “All right, I got to bring these back to 100. Yes, ish. That’s exactly right.
Stephen Davis 37:48
Yeah, that’s exactly right. And it’s aggregated across every position that I have, so it’s a net delta position. Sometimes I’ll go, you know, long corn, short beans, long beans, short corn, long wheat, short corn, and you know vice versa. But it’s always aggregated back out to the net delta.
Jeff Malec 38:10
Yeah,
Stephen Davis 38:10
and then I don’t ever let the the leverage of the overall the gross position get out of hand either. That’s that’s capped at 300%
Jeff Malec 38:20
And then those long shorts aren’t a spread trade. You’re not think you’re not trying to trade that basis coming in. You’re just trading each of those separately.
Stephen Davis 38:29
Well, usually it’s a relationship trade. Like you know, like right now, soybeans are very expensive on corn, and for that reason, I’m I’m much shorter soybeans than I am corn. But I’m negative to both, so I’m not going to put on a corn long just to have a spread on. I just want to focus a little bit more on that which I think has more downside.
Jeff Malec 39:00
Talk to us about soybeans a bit, like you said. I don’t think most people in America know what a soybean looks like, right? But if, especially if they’re not sushi eaters,
Stephen Davis 39:09
yes,
Jeff Malec 39:10
get the edamame. But right, like, what? How did this come to be? Has it been here forever? Like, oh, 2020 years ago, were you trading beans? Sure.
Stephen Davis 39:19
Yes. Oh, yes.
Jeff Malec 39:21
Yeah.
Stephen Davis 39:21
Beans really, soybeans really got prevalent in the 70s. It’s primarily used as poultry feed. It’s an additive in poultry feed, hog feed, and then in dairy cattle. We use very little soybean meal in actual you know, beef cattle production-the steak that you eat has almost none in it in the ration. But you know, soybeans are kind of like crude oil. Nobody uses crude oil, right? You use unleaded gas, you use diesel, you use jet fuel. Well, soybeans are the same way. Nobody really uses. Soybean, a soybean is is put into a crushing
Jeff Malec 40:03
place.
Stephen Davis 40:04
That’s and and the feed grade soybeans are handled a little bit differently than the feed grade. Yeah, those are dried down. You wouldn’t even recognize it. They get you know a little bit bigger than a BB. It’s like a big BB.
Jeff Malec 40:18
Oh wow, yeah.
Stephen Davis 40:19
They they really do get pretty small, but no, the the soybeans go into what’s called a crushing plant, and from there they actually literally crush the soybean, and you get two products out of it. You get soybean meal, which goes into animal feed, and then you get soybean oil, which up until very recently is primarily a food. You know, goes into our food chain, and you can go buy your Snickers and what’s on there. Soybean oil, you know, all that, all that kind of stuff goes into, yeah, salad dressings. Yeah, just pretty much runs the gamut. But so you get basically about 80% of the soybean is meal, and 20% is oil, and so you you have your your balance sheet for the soybean itself, and then you have a balance sheet for the soybean meal, and you have a balance sheet for soybean oil. So soybeans are a little bit more in depth than corn is. Really, it’s just
Jeff Malec 41:16
it’s protein, right? Soy meal,
Speaker 1 41:19
soy meal cheap
Jeff Malec 41:20
protein source,
Stephen Davis 41:21
48% protein.
Jeff Malec 41:24
So if I’m I own a bunch of cattle, I own pigs, I’m trying to feed them. This is my cheapest protein source, basically.
Stephen Davis 41:30
As a general, yes, that’s correct. So
Jeff Malec 41:32
all the whole growth and right, that’s what’s interesting to me. Like versus corn and wheat, that’s just filler, right? What what are they doing? They’re not offering any protein. Corn, let’s say corn has a
Stephen Davis 41:43
little bit of protein. Wheat has more protein than corn, but what they found is that when you feed the protein into, especially hogs, poultry, even into fish, the conversion rates go up rapidly. And there’s an optimized point on that. And I’m not a feed ration guy, so you don’t ask me the exact ration: corn versus meal. I couldn’t tell you that, but all I know is that with the current feeding practices, the conversion rates have gone through the roof, and we just feed animals much more efficiently today than we did 50 years ago,
Jeff Malec 42:22
but the whole math, like I’ll take you to your macro now. Like the whole math is the world’s doing better, people have more money, they’re buying more steak and they’re buying more proteins themselves, right? Steak, chicken, fish, pork, and that needs protein itself, right? That needs to be fed, which is what drives most of the market. That’s the whole game.
Stephen Davis 42:43
Yes, 100% And our biggest growth in soybean meal and soybean, and even to some extent corn demand has actually come from some of the poorer countries here over recent years. You know, Middle East, North Africa, typically were very small users of the protein source of soybean meal as well as corn additive. They were just feeding it basically whatever they had laying around on the on the very low level. There are obviously some commercialized farms that were that were already feeding, but we’ve seen money growth. We’ve seen demand growth in all meats worldwide, and that is the driver for the growth of all ag products at this point in time. And it’s about two to two and a half percent a year.
Jeff Malec 43:34
And then wasn’t there some was it bean oil was getting smashed last year? Wasn’t there palm oil versus bean oil. There’s something going on with bean oil.
Stephen Davis 43:43
Well, bean oil. Am I making that up?
Jeff Malec 43:45
Yeah.
Stephen Davis 43:45
No, bean oil has been a very political football. We knew that the government was talking about expanding the use of vegetable oils and animal fats, even used cooking oil, to turn into biodiesel and renewable diesel, what we didn’t know was the magnitude. And it’s funny you talk to to people who should be in the know out of out of Washington, and they didn’t know. So you know, it’s it. Beano oil went through this entire process of Lucy holding the football for Charlie Brown, for a while, you know, oh, it’s going to be great, and then all of a sudden the government would go, and we’re not ready to do anything about that yet. So they would, you know, pull the the proverbial football out of the way, and soybean oil would crash, and then it would come right back. Now we know what the mandate is, and just suffice to say, it’s big. We are going to be turning a lot of food into fuel over the next several years, and
Jeff Malec 44:47
is that not enough food? That’s it seems dangerous, right? Hey, we need we need fuel instead of food. Don’t worry about starving people. Yeah.
Stephen Davis 44:55
Well, you know, without getting into the politics of it, I I don’t believe. That it was necessarily the the best decision that we could make. Fuel makes people unhappy. Going hungry makes them downright mad. Yeah. So revolting. Yeah. Yes. That that’s how you end up with hunger and starvation. That’s how you end up with revolution. That’s how you end up with lots and lots of problems. So, look, unfortunately, or or fortunately, however you want to look at it, it’s not my decision as to what policy looks like. My job is simply to say, okay, this is policy. How do I trade this? What is the environment looking like going forward? I don’t, I don’t get the luxury of right and wrong in my work life. I can have my own personal opinions about everything, but my work life is is based on the reality of where we’re sitting today, and trying to project where we’re going to be tomorrow. So you know, from that standpoint, it it does get very interesting that you you take your your personal beliefs and you set those aside and you just simply trade what is what is given to you by the government at any point in time, which has made this this environment actually very difficult because as as we all know, Trump can be a little off the cuff and you may not know what’s coming next, so the political footballs have been have been pretty rampant of late, and we’ll probably be that way for another two years.
Jeff Malec 46:30
The and how do you think about right? You you’re a small shop there in Memphis. You’ve got big, huge hedge funds and firms, and go like even car deals and big, huge commercial traders that have every bit of info you have, all the sources, right? How do you compete with those big guys, or do you think of that in that in that way? It seems like right if I had all the money in the world, I could model all this and it’d be perfect. So there’s like an art and a science to it, right? It’s not just getting access to the numbers. I don’t know if there’s a question in there, but yeah, no,
Stephen Davis 47:02
I’m following what you’re saying, and and it’s a good question. And what’s interesting is really about 2020, 2021. We saw the the funds that I was generally competing against shift in their focus. Most of those funds now are more algorithmic based. They’re they’re no longer trading the same things that I am, which actually gives me a bit of an edge. I mean, if you go around, I don’t know how many different traders you talk to on a daily basis or or monthly basis, but how many of them are discretionary traders? A
Jeff Malec 47:44
lot more so now. Yeah, I was just saying that it’s kind of like shifted back to yeah, they were kind of person non grata like 10 years ago, like oh discretionary. I’m I want a model, and now the models are like table stakes, and I feel like it’s shifting back. But yeah, for sure there was a move towards like ooh discretionary? No, I want all systematic,
Stephen Davis 48:04
right? And so I mean to be in in you know the discretionary basket for basically you know since I started trading, I think it puts me in a little bit different of a position. I don’t view most of the hedge funds really as competition because they’re as a general rule they’re either trend following or they’re very short sighted as far as their their their trade outlook. I’m not looking for the next 15 minutes. I’m not looking for the next 30. I’m not looking for the next day. My my trades, like I said, they’re longer lasting. They’re they’re big, longer-term ideas. Not so much. This is what we’re doing today. As a general rule, you know, day to day is a random walk.
Jeff Malec 48:50
Yeah.
Stephen Davis 48:51
So I really try to focus on that which I can control, which tends to be a little bit longer out.
Jeff Malec 48:57
But then that puts you kind of opposite the big commodity houses, and
Stephen Davis 49:02
well, sometimes and sometimes they’re on my side. Maybe on the main page,
Jeff Malec 49:05
yeah.
Stephen Davis 49:06
Like like currently, you know the the funds they’ve had this big story, lots of stories as to why you need to be bullish ag. You know we’ve had the the Russia Ukraine, the U.S. Iran-you know-a lot of fertilizer comes out of comes out through the Strait of Hormuz, and their whole story going back to the spring was we’re going to run out of fertilizer. Well, that one didn’t hold water because most people who needed fertilizer for spring planting already owned the fertilizer, so the earliest that would be a problem was the fall, and we haven’t really seen a problem out of fertilizer yet in the fall either. You know, the the wars were going to cause massive inflation, and inflation means buy commodities, and so they came in and they bought all the commodities. And so far, outside of really. Few different commodities, it really hasn’t come to light either. So the stories are kind of being picked off one by one, and they’re long. I mean, the funds, the the big hedge funds, they are really, really long, and right now they’re wrong. So it’s it’s going to take some. They need help at this point. If if you want to get soybeans going sharply higher again, you need a massive weather problem in South America. That was the other story, El Nino. This super El Nino, and what people don’t understand is that yes, super El Nino can be bad for Australia. Did not manifest this year. Super El Nino can be bad for Indian weather manifested this year. They had a very subpar monsoon season. What’s interesting is when you get into South America, the El Nino can be beneficial or detrimental. There’s really no clear cut as to whether El Nino is really that bad of a deal for South America. Generally, what happens is the northern portions of Brazil are a little drier than normal. The southern portions are wetter, and that kind of comes close to offsetting each other. And then you usually get a really big crop out of Argentina. So, I mean, this is just once again going by tendencies. Not I’m not prognosticating what the weather is going to look like in three months because nobody knows. But this thought process that El Nino equals bad is a wrong thought process. It’s it’s a very interesting thing that I’ve had to manage over the last what six months, really.
Jeff Malec 51:45
You ever go down the path of like I need my own weather team and weather models and right you get some of these big funds and groups that start doing going down that rabbit hole of like if I could just get a better handle on the weather I could really trade this stuff well.
Stephen Davis 52:00
So I’m I’m really fortunate. I’m affiliated with a a trading group called Nesvik Trading Group. They do basically all of my operations for me, so I I don’t have to worry about new accounts and compliance and all these kinds of things. I basically just come in and trade. The other great service that they provide for me is they have, in my opinion, the greatest agricultural meteorologist in the United States on staff, and so I get his weather every day. I’m able to talk to him every day if I’ve got a question. He’s just immediately right there, and his name’s Craig Solberg, and he probably he is one of the backbones of the operation. I mean, he really keeps me on track as far as what the weather is looking like around the world. And so, no, I don’t have to worry about going out and outsourcing that.
Jeff Malec 52:54
Right, but I’m right. Do you feel like you’ve seen that other places? Right, of like people think it’s kind of seems to me like a red queen race for right, you like you’re just always going to be chasing that belief that you can solve the weather. Like I guess that’s a question: is the weather even solvable, or you just want to have a idea so you’re not too far out of bounds one way or the other?
Stephen Davis 53:15
That’s that’s great point. You know, a lot of people try to go out three months, six months, and say what the weather is going to look like? I look out 15 days. That’s it.
Jeff Malec 53:23
That’s it. Hard 15
Stephen Davis 53:24
days.
Jeff Malec 53:25
Wow,
Stephen Davis 53:25
hard stop. Even though your
Jeff Malec 53:27
trades are could be months, correct. And
Stephen Davis 53:30
and if if I need to pull the ripcord on a trade because the weather changes, I’m going to pull the ripcord, and I did over the summer. I had to I had to flip and go long because the weather was detrimental to corn, and so I did for a bit, and then I was like, “Okay, now now we’ve discounted that weather problem, and now the risks are shifting back the other way. So you know, when when the weather market’s going on, you have to pay attention, but it is not. It’s it’s a rarity that you really get a massive weather problem, and the last one we had in the U.S. was 2012. I’m talking about a big weather problem.
Jeff Malec 54:10
Was that partly technology also? Like we have more ways to handle the bad weather. Like you have a tractor that can go through the mud better. You have water resistant fertilizer that doesn’t get washed away, things like that.
Stephen Davis 54:24
So the hybrids are a little bit better at dealing with drought. It’s rare that you really have. I mean, don’t get me wrong; you can lose a little bit of yield because of nitrogen leaching with too much rain. But that just means that you’re going to lose 510, 15 bushels from an individual field, not necessarily the national average. Where we really to get into trouble is drought, and you know the last big drought we had was 2012. I think it’s been 14 growing seasons since then. Which
Jeff Malec 54:57
weird? You seem like you read about drought on the you see drought. Out on the news all the time. This area is a new drought. This one’s a new drought.
Stephen Davis 55:04
Sure, and and we
Jeff Malec 55:05
localized. Yeah,
Stephen Davis 55:06
exactly. I mean, like we had an ongoing drought down in the southern plains, and that’ll go down a different rabbit hole. But that that’s why your beef prices are so high because they had to liquidate the herd because there was no hay, there was no grass to feed these cattle, so, but yes, you do get localized droughts. But when you’re starting to talk about, we’re going from North Dakota down through Kansas, eastern Colorado, all the way east to you know a lesser extent, but you know all the way over to the Carolinas, Virginia, and you’re talking about a mass swath of the U.S. and you can have a localized area that has a problem, but getting a widespread drought, like I said, it hasn’t happened since 2012, and that was detrimental. I mean, I remember walking through cornfields that year, and it was early August, and the corn was dead. It was just dead. Couldn’t help it, couldn’t hurt it, couldn’t do anything to it at that point. But you know, that was just kind of the way it was.
Jeff Malec 56:06
Do you still do that, or is that part of your process? Right, like a lot of these Chicago guys used to go on crop tours and send back pictures, right, to the trade desk. Like, look at they’re like picking up dirt and taking a picture and sending
Stephen Davis 56:18
it. I am very fortunate in that I don’t have to do that anymore. That was that was nine days of getting cut up because I don’t know if you ever walked through a cornfield, but those leaves are actually pretty sharp. You know, so you’d get a you know like 100 paper cuts on your arms, and you know it just wasn’t a very comfortable process. And in the end, the number of samples that we got, what really wasn’t high enough to give us a clear depiction of what the crop is going to be. So now I’m I’m fortunate that I don’t have to do that. I’ve I’ve got a really good yield model that takes into account all the weather, planting dates, emergence dates. You know, it goes through. You know, when the crop is is going through its reproductive cycle, and ironically, I’m getting basically just as good or better data than I got from walking through a field.
Jeff Malec 57:12
Yeah, it seems seems old fashioned. So you’re telling me it is old fashioned. Yeah. Oh,
Stephen Davis 57:16
yeah. There’s still firms that do it. I mean, you’ve got some of the big commercials that that still do massive crop tours, and those are beneficial. But when you got two guys in a truck trying to get enough counts, get enough empirical data to really move the needle, you just
Jeff Malec 57:35
like where. And now a days where you got to do one in Australia, you got to go down to Brazil. You get right.
Stephen Davis 57:41
Actually, I actually did drop tours in Brazil back in the day. So, what does that
Jeff Malec 57:47
look like versus 20 years ago? Were you was South America and Australia were a thing, but not nearly as big of a thing?
Stephen Davis 57:53
Brazil had already been on the upswing. They weren’t. They weren’t. They hadn’t overtaken the U.S. as the largest producer of soybeans, but they were big, and first of all, Brazil is absolutely beautiful. But what’s interesting is that you know, in the United States, a big field is 50 or 75 acres, and in Brazil, it’s hundreds of acres big. I mean, it’s just this massive open area in spots and yeah, I mean their fields are are just on a different level from the U.S.
Jeff Malec 58:28
But is that is that harder nowadays? Like the stuff you have to do today, you got to know about all these global markets, right? You were talking before. I got to price the northern hemisphere. I got price the southern hemisphere. There’s never a rest, right? Used to be grain. I remember the grain traders like kind of took off, right? Like, oh, I just threw crop season, then it’s quiet period for a while,
Stephen Davis 58:48
right? Back before Brazil and and Argentina became the the big producers that they are now. Yes, absolutely. I mean, you you would plant your corn crop, your bean crop. We’d go through the summer, and then basically you just traded demand for the rest of the year until you got into the next planting season in April. That that has completely changed, and it actually, in some ways, it’s harder, but it’s also a lot more fun for me. You know, when you when you’re just tracking demand all the time. Okay, well that’s great. I can track demand, but I like having multiple inputs. I don’t know why, but my my brain, for some reason, likes that.
Jeff Malec 59:33
All right, take us through the other two strategies.
Stephen Davis 59:35
Sure, I’ve got a a global macro program that basically trades everything that the Plutus program doesn’t. So I trade metals, energies, currencies, interest rates, stock indices. So it basically trades everything else. And it’s interesting that the the macro program grew out of the Plutus program, and the main reason is and. I alluded to earlier, you know, it was these big macro stories that caused people to buy agricultural commodities, and I needed to understand what was going on in the macro world so that I could better forecast what was going to happen to the ag world. Well, then I started trading for myself, as most of these things happen, and I found out I’m I’m pretty good at it, so I continued trading the macro. And then a few years ago, I started that program, and it is the same kind of methodology as the agricultural program is. the The fundamental inputs obviously are a little bit different. You know, there’s not necessarily a supply and demand balance sheet that you can do for the U.S. economy, but you get the point that it’s all longer term. It’s all big theme, not necessarily trend following at all. But definitely, I’m I’m looking for mispriced assets against what I see as the fundamentals of what is ongoing in the economy. And then going forward, I’ve got the Atlas program, and the Atlas program just spun up, and it trades a whole lot more like my personal account does. So I’ve been trading my own money in that program since 2016, and yeah, I just spun it out to investors, I believe, in July. So it’s it’s a brand new program, but once again, it’s got a track record going back to 2016. Nice, and so that’s more. Sometimes it’s heavy grain, sometimes heavy macro. Like goes back and forth. It has both. It it’s kind of a blend between the two programs. It is a riskier program. You know the the rules that I have for the Plutus program, for the macro program, they are not the same rules that I have for Atlas. It takes a little bit more risk, a little bit more leverage. Like, as an example, margin to equity in my Plutus program is usually around 5% Macro program is usually a little bit beneath that, and then the Atlas program stays underneath 10% margin of equity as a general rule. It it can go above briefly from time to time, but it’s generally sub 10% So it’s it’s almost let’s call it double the risk of and
Jeff Malec 1:02:11
still all three of those. Which I’ll answer my own question. Like what I’m an investor. Why why do I want a discretionary ag trader? Like what’s what’s the logic for why this should be in a portfolio,
Stephen Davis 1:02:22
it’s a diversification. I mean, you’re you’re heavy in stocks, you’re heavy in bonds. You want something that has no correlation to what you’re in. Yeah, you you want to have some diversification, and it was kind of funny. I was at a conference last week for the Daily Dirt Nap, and
Jeff Malec 1:02:41
I thought I thought I was like I saw you there, but in Chicago you were in a conference after the conference I saw you.
Stephen Davis 1:02:46
Yeah, conference after the conference. It’s been kind of a conference heavy couple weeks, but no. And one of the speakers there, he ran the math on it, and this sounds crazy, but you should have a third of your assets in these diversified portfolio kind of the diversification diversification stuff like commodities. That’s what is me. That’s
Jeff Malec 1:03:11
what we talk about every every week here on the derivative. Well, I mean,
Stephen Davis 1:03:14
most people are like, okay, 5% 10% needs to go into alternative investments, and the math that he ran showed clearly it’s a it’s a third in alternative investments. But your answer before,
Jeff Malec 1:03:28
yeah, that it’s only 5% margin equity would make me right. If I’m building the portfolio, like hey, actually that third only needs to be 5% of your cash. Call it 10% of your cash or whatever. So you can actually have a little bit of both, best of both worlds, right?
Stephen Davis 1:03:42
Right. I mean, you can do cash management, especially like if you’re in the Atlas portfolio, where you know the the the max position is not 150 percent; it’s 300. So you know, when when you’re talking about things like that, yes, you you can use the extra cash to own T bills to your notes, 10 years. You know, you you pick your your flavor of how you want to manage your cash, but yeah, yes, you can you can actually end up leveraging one thing so that you can end up making money somewhere else.
Jeff Malec 1:04:15
Love it. What’s next? When are all these daughters done with college?
Stephen Davis 1:04:19
My what are they going to
Jeff Malec 1:04:20
work work for you.
Stephen Davis 1:04:22
This is this is kind of a fun story. My oldest son graduated from University of Alabama five years ago. He has a double master’s. He has an MBA and a master’s in mechanical engineering. He went to work for General Motors in Detroit, and he was not very happy. the The corporate structure wasn’t advantageous to him, so ironically, yes, ironically, the head research job at Nesvik Trading Group came open, and he now works alongside me, not for me, but in the same business. I talk to him on a daily basis and get to see him a lot, which
Jeff Malec 1:04:58
is he lives
Stephen Davis 1:04:59
in Nashville. And I live in Memphis, so I mean I get to see him a lot, which is beautiful. And my middle daughter, she graduated from University of Alabama a year ago, year and change, and she’s in commercial insurance and is very happy. And then my baby boy, he’s I say baby, gosh, he’s 20 and he’s six three, which you know, with me at five six, yeah, that’s that’s a quite a big difference, but no, he’s
Jeff Malec 1:05:22
pull that one off. Yeah,
Stephen Davis 1:05:23
yeah, I’m still trying to figure that out. Now there’s height on both sides of our of our families, so I just got the the shorting of the stick, no pun intended. But yeah, so yeah, he’s a sophomore at down at Ole Miss, so I got I heard like another two and a half three
Jeff Malec 1:05:39
daughters, two sons, one daughter.
Stephen Davis 1:05:41
Two sons, one daughter.
Jeff Malec 1:05:54
All right, I’m gonna finish it out. Your favorite? Give me three of your favorite movies that have to do with Memphis. I could give you the list if you want. I came up with a list, but what do you got off the top of your head? There’s one obvious answer, right? One.
Stephen Davis 1:06:11
Well, so not really about Memphis, but Memphis Belle. I really enjoyed that movie a lot. Memphis. I don’t obviously, you know, oh, it’s really good! World War Two movie, and the plane was called the Met the Spell.
Jeff Malec 1:06:24
Got it. Yeah, yeah, yeah.
Stephen Davis 1:06:28
Obviously, you have to to say the the new Elvis biopic. You know, I I I was too young to really remember Elvis in his heyday. And then the other one was the firm.
Jeff Malec 1:06:40
The firm. Yeah, that was my obvious one. That was on the other night, and I got sucked in. I’m like, that’s so good. Okay,
Stephen Davis 1:06:45
so what’s your list?
Jeff Malec 1:06:47
The firm, but then all those. I think Rainmaker and the other Grisham one. I can’t remember. Were in there, right? Yes, all in and around Memphis. Blindside.
Stephen Davis 1:06:56
Oh yeah, that was a good one.
Jeff Malec 1:06:59
Castaway, a little weird, but he’s based at FedEx in Memphis, right?
Stephen Davis 1:07:04
Correct, correct. Yes, FedEx was was founded in Memphis, but
Jeff Malec 1:07:09
and walk walk the line that Memphisy.
Stephen Davis 1:07:13
Ah, that’s more Nashville,
Jeff Malec 1:07:14
Nashville. All right,
Stephen Davis 1:07:15
yeah, Johnny Cash. That’s more Nashville. Yeah, the all the John Grisham stuff. So John Grisham went to University of Mississippi Ole Miss down in Oxford, and so all of this stuff is Northern Mississippi, Southwest Tennessee kind of based.
Jeff Malec 1:07:33
Got it. Awesome, Stephen. We’ll leave it there. Thanks so much.
Stephen Davis 1:07:37
Thank you, Jeff. I appreciate the time.
Jeff Malec 1:07:39
Yeah, we’ll put it where everyone can get a hold of you in the show notes, and we’ll leave it there. Okay, that’s it for the pod. Thanks to Stephen for coming on. Thanks to RCM for sponsoring. Thanks to Jeff Burger for producing. We’re back next week with a guy who runs a whiskey fund, a what? Yes, that’s what I said. So, wanted to hear more. Just coming on the pot. Peace.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
