January 30, 2020
I am certainly not a expert on pandemics, and like 99.99% of the planet, I had never heard of the Coronavirus until about a week ago. Now it’s all over the news and definitely producing some very sharp moves in the markets, generally with the idea that the World Economy could nosedive as the virus potentially spreads out of China.
Here are my totally uneducated ideas regarding what is happening…and will happen…and what the effects will be on various markets.
My general impression is that the ill effects of the virus are being incredibly overblown by the media and the markets…that this is just the next Information Age Instant “Crisis” that will have a short front page shelf life as it becomes apparent that this virus is not the Bubonic Plague, nor rampant Ebola (which WAS very dangerous)…and that it is essentially just another version of the Flu, which, by some estimates, was fatal to almost 60,000 people here in the United States during last year’s Flu season. Doing some quick calculating, with the peak Flu season being about 4 months long, this translates to maybe 500 people a day…So, and I know I might be opining on something I know nothing about, when I see that, so far, 170 people have died in China…with their 1.4 billion population being about 4 times our own…I just can’t help thinking the media is getting a bit ahead of itself in sounding what has become a worldwide alarm.
Though it’s not the same thing, the current market reaction seems a bit like another “crisis“ that, overnight, hit the world out of the blue back in 2016…that being the Brexit vote, which in July, 2016 just SLAMMED the markets when the Brits TOTALLY surprised the world by voting to exit the European Union…If you recall, the media, economists’ and analysts’ virtually unanimous reaction was that this supposedly gigantic event, without any doubt, would severely impact the European and World economies…and as a result, the stock markets of the world, similar to today, just totally went in the tank…BUT…THEN, within days, Stocks had completely reversed back up and were off and running into new all-time highs…Do you remember? Do you remember all those “strategists” preaching the collapse of Europe? And how 180 degrees wrong they were?
And here are some charts of what we are seeing in some primary commodity markets today…as the FEAR spreads via all sorts of “logical” predictions about this industry or that being shuttered, thereby potentially leading to a Global Slowdown…Which, if I’m not mistaken, would be the first such event in my 70 year lifetime…that a SEASONAL (as I understand it) virus that might produce anything from cold symptoms to pneumonia…and yes, some deaths… could turn the world economy on its head?
Sharp drop in Crude Oil…
And in agriculture? We’ve seen the same hard selloffs in various markets but THESE two, I believe, have reacted somewhat differently…which definitely has grabbed my attention…
And I AM STILL A BUYER…Very much so…
As noted several days ago, this market has put up double digit percentage rallies...at some point between now and July…in 19 of the last 20 years. This absolutely does not mean it will happen again…but as can be seen in the following table, those are the facts.
Rallies in July Soybean Meal Mid-Jan to Expiration
And KING COTTON?
Relative to other markets, Cotton has also looked rock solid to me for the past month and I FIRMLY continue to believe Cotton is in a bull market...Even so, virtually ALL of the industry analysis I see is currently only wondering if we can get back up to 73 cents again...(in other words, a few cents higher) which is pretty much the only mentality I've observed in this market all the way up from last September’s lows...which during the entire 12 cent run has repeatedly, at each stage or pause of the move, has been something like, "Farmers should be ready to market (SELL) if we can get up another 2-3 cents." That’s all I’ve seen…AND that’s still what I’m seeing…I may be dead, dead wrong but I think we’re headed at least to the high 80’s or low 90’s…And believe me, I don’t just throw those sort of numbers out there just to get anybody’s attention…That’s what Cotton has routinely done for the past 40 years…
This is what I’d buy here…
Finally, If you “know” Cotton, you will “know” (remember) that when it actually IS about to stop going up, everybody and his brother will be screaming, ”Buy it! Dollar Cotton!” That’s the way it’s been and every top I’ve ever seen in this market and suspect that’s the way it always will be…And so, if you can find me anybody who IS TRULY bullish this market, and not talking “bearish fundamentals,” or “resistance over the market,” or “we just don’t know how much China will buy,” please me know.
Like I said earlier, I think there are a number of commodity markets that should be bought here…into this severely EMOTIONALLY FEAR-RIDDEN WEAKNESS…I’d almost say that any commodity market we trade (with the exception of Gold, which is another story) will be looking at a bull move for, at least, the next 12-18 months.
And I put these two option ideas out there today because I think they could be an terrific one-two combination…so my most modest recommendation is to AT LEAST get something in both of these markets. Whether it’s just straight up calls…or using the 2 & 1, get something. It does not mean I am right, by any means, but I shouldn’t have to tell you that, in futures, timing can be everything…and my perception is that now, in the midst of this “blood on the tracks” moment, is when it IS time to be buying…As always, these are my opinions and it is entirely possible that everything I believe might be dead wrong, and if so, you certainly should be aware that taking my advice could mean losing every dollar you put on the table.
Please give me a call and talk about this.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Soybean Meal, Cotton