I’ve spent this entire Sunday afternoon getting this finished (really hard to do when the markets are open), and having spent 9 to 5 yesterday sorting MOUNTAINS of donated clothing at a MUST Ministries warehouse, I am now ready to have at least a few relaxed weekend hours before returning to the insanity of commodity trading tomorrow…so this one goes out without any final edit…Apologies (but who really cares?) if the lack of proofreading makes for any incoherence.

January 29, 2012

As my last newsletter was solely devoted to my VERY bullish opinion on Stocks and my VERY bearish view of Treasury Bonds, I’ll just hit them briefly before covering some of the other markets in which I want to be positioned.

Several weeks ago, my 17 year old son said he wanted to buy stock in some tech companies. As we two share this office, he is surrounded by charts, market information and trading reminders (and me) posted all over the walls…and his comment led to some long winded, purportedly sage advice, in its purest form, from the old man. My “wisdom” boiled down to two basics:

One---Buy great companies you think will be there forever…and pretty much plan on holding them “forever”.

Two---Trust the chart below. The USA and world economies will continue to expand for the foreseeable future, and over the next 20-30 years, ownership in solid, well run companies will probably  tremendously expand your wealth as this happens.

HIGHLY SIGNIFICANT! The NASDAQ IS NOW MAKING NEW 10 YEAR HIGHS...Do you hear a word about in the media? One of the strongest signals I know is when a market is making new highs, especially one as closely watched as equities, and there is not even the slightest degree of "euphoria" present...ANYWHERE...it usually means, "Get on this horse!"...To me, the odds are extremely high somewhere in the not too distant future you will see ALL the talking heads screaming, "Look at what stocks have done! Buy it NOW!", but they'll be doing it AFTER we've seen something like another 500 points in the NASDAQ or 2000 points in the Dow.

But we are trading what happens for the next 3-6 months, so here is what I would be doing in the nearby futures contracts…

Treasury Bonds at are NOT a “safe haven”.

Nor would I even call them an “investment” at current levels.

I think anyone who invests in a US Government 10 Year Note at 2.0%, or a 30 Year Treasury Bond at 3.0%, needs their head examined. The USA Consumer Price Index has averaged 2.55% annually for the past 20 years. Therefore, buying Notes or Bonds at these levels means, unless we go into an outright Depression where prices crash for everything, inflation will most likely eat up every dollar of that 2 or 3 per cent you are earning for the next 10,20 or 30 years…and then, you still will have to pass taxes on that interest!

 “Flight to safety”, “Safe haven”?

You’ve heard the expressions many times, most recently as fears of European collapse created an enormous flow of funds into US Treasuries, resulting in an almost straight up rally in our Bond market last summer (about 25 points in less than 2 months). However, it is extremely important to understand the overwhelming majority of these funds were not “invested” in Bonds, but rather they have been temporarily “parked” in them, as in, “I don’t want this money in an European bank. I want it somewhere else, where it is ‘safe’ for a while”. And I do mean, only “for a while”, as the safety of buying US Treasuries at 145+ is a double edged sword. Yes, the money is safe. Our debt market IS the safest piece of paper on the planet and if you intend to hold the instrument until maturity, you will collect your meager interest and you will get 100% of your principal back…BUT, and it is a very big “BUT”, if your intention is to take those funds back out of Treasuries when these latest economic fears have been “calmed” (which I believe is absolutely happening now), you do have to sell this instrument in which those funds have been parked, and you CAN therefore very easily end up selling them at a loss…especially if you are not one of the first safe haven seekers to realize it’s time to get out…

In other words, your money is NOT permanently “safe”. More specifically, if you own bonds at 144, and end up cutting the cord at anything less than 144, you are going to be losing money on your “flight to safety”, and when you consider that  7-10 points is NOTHING into today’s bond market, you could easily end up getting socked for 5 to 7% right off the top, in just a few months time, which IS a big, big deal in the investment world…And again, a 10 point decline would be no surprise at all…and believe me, even 20 points could also be called almost “routine”. Go look at the charts…see for yourself.

The reason I point this out is to help you understand, with bonds perched up here at record prices, virtually all of that “safe” money WILL end up on the sell side…and believe me, you are talking about a LOT of selling. I’d also say you’re not talking about 2 years from now. I’ve seen these “flight to safety” events enough time to know that they generally don’t last long, and from here, experience has taught me we could easily be back down 15 points ($15,000 per futures contract) in just a few months time…

SO I REMAIN SHORT BONDS, AND WHILE I MIGHT BE WRONG, I SEE THIS AS A MONSTER TRADE.

One last thought on the subjects of Stocks and Bonds…There are basically three major “paper” investments…Stocks, Bonds, Cash…I could elaborate (as always) but I will simply say this: At the end of 2012, one big story will be that during the year many billions of dollars left the Bond market…and bought stocks…Bonds will be MUCH lower and Stocks INCREDIBLY higher as a result…My old hack opinion anyway…BUY THE STOCK MARKET. SELL THE HELL OUT BONDS.

 Still Short (and shorting more) Corn

All through last summer and into early fall, seemingly the ENTIRE world of grain analysts was preaching bull market fundamentals unlike anything I’ve ever seen. There was supposedly no way world supply would be able to meet demand and talk of $10 corn was everywhere...The chatter was so bullish that a hefty percentage of farmers bought into the story and therefore held off selling much of their harvested corn at what were then record price levels…However, next thing they knew, during a single month (September), Corn dropped about $2.00 a bushel, off no particular news whatsoever, catching farmers totally unaware, and relatively no one  got ANY Corn sold. Since then, the market has bounced around in a 50 to 70 cent range…And STILL I hear farmers are waiting for higher prices.

In fact, all of those same (wrong) ultra bullish analysts from last year are now suggesting farmers, “won’t sell their crop at current levels” and corn prices “will HAVE to rally to induce them to sell”. Otherwise, the logic goes, the world’s corn needs won’t be met.

I’ve seen this “logic” expressed  (that prices offered to farmers have to rise to get  product into the user pipeline) on countless occasions over the years but my own impression has been exactly the opposite…that whenever farmers are grudgingly holding their crops expecting better prices, what usually happens is they all watch prices slide sharply, then end up fearfully dumping at rock bottom levels…

 Farmers have loans and taxes coming due…

Most crops are planted with borrowed money, with notes that have to be paid off before the next year’s planting begins the following spring…and to pay those notes, and set up the loans for the coming year, generally means farmers must sell some major portion of the harvested crop…In other words, they can’t just sit on those crops forever…They DO have to cash them in…When you combine that coming deadline, about March 1^st  or so, with an April 15^th taxes due deadline in an environment that has been quite profitable in recent years (meaning more taxes), you can easily come up with a scenario in which all of those farmers who have been sitting on product, waiting for higher prices, quite “predictably” will end up selling their crops, once again, deep in the hole…and probably a hell of a lot lower than anyone would imagine right now (and remember, 6 months ago, they would have thought $6.00 was impossible)…And beyond those cash flow needs, we ALSO have the southern hemisphere harvests (primarily South America) just about to begin, meaning more fresh supply hitting the market as well…

IF YOU ARE A FARMER, I THINK THIS IS A TERRIBLE ENVIRONMENT TO BE HOLDING ONTO OLD CROP CORN…

I CONTINUE TO LOOK FOR CORN TO TRADE AT LEAST TO THE $4.50 AREA. I STILL RECOMMEND SHORTING FUTURES AND BUYING PUTS.

Baring extreme weather (I NEVER try to predict it and basically think ALL long range forecasts are useless) I think the July Corn contract shown below will go off the board dead on its derriere...All the way down you will see stories about "tight supplies" and “strong demand”, BUT, that is exactly what everybody was talking about when Corn was $2.00 higher...I FIRMLY believe all the swings you see here for the past year are the formation of a giant top, classically made, while the whole commodity world has been talking nothing but BULL.

 The Soybean Complex is also STILL a short…

For pretty much all the same reasons as Corn, I still believe Soybeans have a long way to go on the downside…Last fall, with Soybeans up around an enormously profitable $14.50, farmers and analysts were holding out for $16.00…Same as in Corn, last September brought an “inexplicable” break of roughly $3.00 a bushel and we’ve since been hanging here sideways…I firmly believe the next leg down, extending into the summer months, will take Beans down into the $9.00 area (at least)…

I still prefer and see the biggest leverage/potential in being short the Soybean Oil contracts…

 I still want to be long the Cattle markets…

Any time a market is into new historical highs, it is psychologically difficult to say, “I want to buy it”, as there is always the fear you will buy it, and immediately suffer losses as it craters on you…But the truth is, whether you are buying a sideways market, a market that is totally on its ass, OR a market that is screaming on the upside, in reality, the risk of loss is still the same…It’s just your perception that buying something “cheap” is less risky than buying a market making new highs…And believe me, having picked more than my share of bottoms over the years, I can tell you there is really no difference.

In the cattle complex, I am fully aware of all the quite logical arguments for expecting a turn to the downside (which are primarily based in the idea, “Consumers won’t pay these prices”), but as I’ve said for many months now, I believe Cattle could be the ballistic Cotton market of last year, when Cotton prices, in about 7  months, ZOOMED from 75 cents to $2.25 in one of the most spectacular runs you will ever see in futures…then 10 months later the market collapsed back down to 85 cents…And I would maintain there is no one, anywhere, who could even begin to present a truly logical explanation as to why this happened…Sure, they might repeat some two cent story that was in the papers, but to me, this was just one more classic example of the “markets game” being played to the hilt…This stuff doesn’t have to make sense…Put this together with my long held perception the Meats periodically make absolutely STUPID one way moves (VERY big and very non-stop) within quite short time frames, as well as my also long held observation that if a market is making new highs and there are plenty of people predicting a top…then it AIN’T the top, and you have some of my reasons for thinking the Cattle complex could be on its way to going nuts…

Also, you’ve even got a little truly fundamental fodder to work with…

Aside from the fact this is a relatively small market, and therefore possibly subject to some degree of manipulation (I can’t prove it but I am pretty sure it is sometimes a factor), I also note the Meat complex as a whole has not even come close to matching the magnitude of bull markets we have seen in recent years almost across the board in other commodities…like $1900 Gold, $50 Silver, $150 Crude, $4.50 Copper, $16 Soybeans, $13 Wheat, or $8 Corn…and it therefore seems logical (to me) to expect something of the same in Cattle, especially when you consider that with China (for one) now gobbling up commodities all over  the planet, during the past year the USA has become a net exporter of Beef for the first time ever.

As I’ve said for some months now, this is one you just get on…and see what happens…and it could be big…VERY big…No guarantees, and not without risk for sure…But that’s the way it always is in this business.

In the Meats, if you are bullish, you pretty much want to stay close to the front of the market as that is where the biggest action usually is…and the most leverage.

To some of my guys who are actually in the cattle business, I have jokingly called Buying Feeder Cattle here as “the dumbest trade ever”...but I AM joking. What I’m really trying to say is that 99 out of 100 of your average cattle traders would argue that it is impossible to make money putting cattle on feed at these current record prices, with everybody so convinced Corn is going up (cost of beef production goes up with it), AND this supposedly lousy economy/stock market which is about to die (Europe fears) and kill consumer demand for beef…Throw in that everybody knows the bullish side of the story which has developed over the past few years, but virtually ALL of the commentary I see is looking for either an outright top, or talking overbought, or warning of a serious pullback, or “what if stocks tank”, or “what if corn takes off”, etc…but nobody (relatively) is saying “JUMP all over this, here! But it now!”. Nobody!

Lastly, my impression has long been that the Cattle market usually ends a bull market with enormous fireworks…NOT quietly…as would be the case if they stopped going up now…

I AM A BUYER. AGAIN I’LL SAY, AND YES, MAYBE I AM DEAD, DEAD WRONG, BUT I BELIEVE  THERE IS NO TELLING HOW HIGH THEY MIGHT GO IN THE NEXT TWO TO THREE MONTHS.

OK, that’s it…I have several other ideas which I think are big but they will have to wait a bit…

It’s the new year. I think six months from now we’ll all be looking back and have seen some really big trades have occurred…and I obviously believe these will all be part of that picture.

Give me a call if anything interests you…

Regards, and hoping you have a great 2012.

Bill

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