January 19, 2006
Still Buying Cotton
In this marketing year (begun Sept 1st), China has now booked almost 5 million bales of cotton from the United States for export----compared to approximately 1 million bales at the same time last year.
This is an incredible year over year change, but amazingly, I have seen a fair amount of bearish commentary suggesting we do not have the "infrastructure" to handle that volume of exports and the almost 500% increase in Chinese bookings therefore will not significantly affect prices. I may end up being the fool, but I find that kind of logic so ludicrous I could almost believe those stories have been "planted" in the media in the interest of keeping a lid on bullish opinion....that is, until all the cotton has left the farmers' hands (at low prices) and is then held by the merchants, who, I promise you, will find a way to get that cotton bound for China.
And from what I am hearing, farmers are anxious sellers....With the market having been at low levels for 18 months, the mood among cotton producers has become decidedly pessimistic, with hopes of higher prices having become almost non-existent....So, instead of sitting on their harvested crop and waiting for higher prices, they are going ahead with sales....I can't count the number of times I have seen demoralized farmer's sell their crops into low prices, then watched as the market takes off without them.
I continue to recommend buying July Cotton and look for a move up to, at least, the mid 70's before July goes off the board.
Cotton is still very cheap.
Worldwide demand is at record levels.
China accounts for one out of every three bales used on this planet....and China is not going away....
I think the chart following is looking more and more explosive with each passing day....that somewhere in here, Cotton is going to shift gears and suddenly be, for starters, 5 or 6 cents higher.
I keep saying this in every newsletter but I would remind you the past 18 month/10 cent range is what I would classify as cotton "doing nothing"....I believe this is about to change in a BIG way....
I am buying "units" of 2 July 60 calls and 1 May 57 put, totaling about $3,800 per unit.
If you have any inclination to make this bet, it would be far better to do so now, as opposed to when it has started running away and the "excitement" begins...
Still Shorting Copper
This one I really feel like a broken record on but I am absolutely staying on this trade....Even though the May contract shown below has moved higher over the past few weeks, I think there is an excellent chance Copper made what will be its all time high (228) in the December contract...At that time, there was all sorts of news about a "rogue" Chinese trader getting caught in a short squeeze (which may or may not be true), which is just the sort of left field type of story common to tops....But who knows?
What I do know is Copper is about as overdone as any market I have ever seen and I will continue to own puts in it, with the expectation in any given month it might drop as much as 50 or 60 cents a pound. As I have pointed out in previous newsletters, copper has had a history of turning down quickly and sharply from historical highs...Also, as was covered in my January 5th newsletter (http://www.crokerrhyne.com/newsletters/01-05-06.htm ), due primarily to the massive presence of hedge funds now involved in the futures markets, to see markets drop 25% from major highs in a matter of weeks has almost become routine....And I doubt it will be any different with copper.
Picking tops is generally a stupid trade to make but I think the potential gain in this one is worth it....
I continue to recommend buying puts in the May contract....They are expensive but I think they will pay off in a big way. At today's close, I like the $2.00 put for about $2200.
Still Long Treasury Bonds
This is just for the record I guess...I have been long Treasuries since Oct. 14....I knew when I recommended the trade I would get no takers as the idea of interest rates declining (and bond prices rising) just seemed too insane....I continue to think Treasury Bond prices will continue to rise and am therefore still a buyer. If you are interested in my reasons, the following link will take you to excerpts from recent newsletters in which interest rates were discussed: http://www.crokerrhyne.com/newsletters/12-6-05.htm
At some point soon, I think the recent "crawl" higher is going to bust out and start running....
I would note the US will begin to sell 30 Year Treasuries again on February 9th and I think the demand for them is going to be enormous...
The all time highs in Treasury Bond Futures is up around 124....I think it won't be too long before we get there again....
Give me a call if you are interested in any of this...