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Feb. 3, 2006
Buy Cotton
After trading sideways for most of January,
Cotton broke through and closed new recent highs this week.
Continuing strong weekly export numbers may have been the
catalyst, as well as Congress having passed legislation reducing subsidies
to the cotton industry on Wednesday. This legislation was passed in response
to the World Trade Organization's ruling that cotton subsidies gave US
farmers an unfair advantage and were depressive to world prices. In the long
run, the fact the US is now beginning to reduce/eliminate those subsidies
certainly may result in limiting cotton acreage here and certainly may
represent a longer term bullish influence on cotton prices.
As I pointed out in my last letter, Texas produced about
35 % of the US cotton crop this past year, also that West Texas is where
most of that cotton is grown....The record drought in West
Texas has now reached 98 days and I am told the ground out there is as hard
as concrete, virtually without any "subsoil moisture" and unsuitable to
plant anything....Rain, and a lot of it, is desperately needed
there within the next month or so, or a lot of un-irrigated acreage will not
be planted. With the United States being responsible for about 1/3 of the
world's exported cotton, any such reduction in acreage could have a major
impact on world prices.
I continue to recommend buying Cotton, in both
the July (old crop) and December (new crop) contracts. I look for July to
trade at least to the mid 70's prior to expiration.
Buy Treasury Bonds
As usual I'll preface this by saying I know I will get no
takers on this idea. At a time when all your hear is, "the Fed is
tightening", the idea that long term rates could go into a major decline
(and Treasury Bond prices go up) just doesn't make sense to most
people....The only comment I immediately have is to reference today's
unemployment report in which the nation's unemployment rate surprised all
the analytic community by dropping from 4.9% tp 4.7%. This sort of news,
implying a strong economy, "should have" pounded the Bond market....Instead
quite the opposite happened. Treasuries did sell off, but then turned up and
put in a very strong close....Paraphrasing an old market adage,
"When bearish news is met by a bullish response, you need to be looking at
the bull side". I was a buyer today and I will continue to do. It would not
surprise me at all to see Treasury Bonds be 8-10 points higher ($8000 to
$10,000 per futures contract) before the June contract goes off the board.
Long term rates have had every reason in the world to go
higher (and bond prices lower) during the past 18 months and they have not
even come close to doing so....I continue to believe this is a
market that has no real sellers (other than issuers) while at the same time
there is a domestic and worldwide investment community ready to buy quality
long term fixed income instruments at any price....And on this planet, there
is no better government paper than that of the United States Treasury.....Next
week the United States will sell 30 Year Treasuries for the first time since
2001 and I believe the response is going to be incredible.
I think the June 115 calls shown below
represent enormous leverage. I've been here before, and been a
dead wrong loser, but I have also seen slightly out-of-the-money bond
options for $1000, with three months of time on them, turn into some very
big money. As many of you have experienced with me, eight to ten
point moves (and bigger) are quite common in the Treasury Bond market and
getting on the right side of them can be about as much "fun" as their is in
this business.
For extensive commentary on why I am bullish this market,
excerpts from previous newsletters can be found by clicking on the following
link:
http://www.crokerrhyne.com/newsletters/12-6-05.htm
Here's the chart...
Sell
Copper
This market has just beaten the hell out of me
any time I have recommended it for months. If you've been
reading these newsletters, you know what I think....I obviously have no idea
when it is going to crack but when it does it should do so in a BIG, BIG
way....
If you are inclined to close your eyes and spend some
money on the short side, here is the May contract I would currently
recommend positioning in....
My own attitude is simply that, from here, come what may,
I will keep some money on this bet....This is not for ego's sake...When a
market just makes you feel hopelessly stupid, my experience is this is
exactly when you don't need to give up....
For some previous research on how bull
markets in futures seem to be ending during the last few years, click on
the following link which will take you to my January 5th newsletter
(when Copper was 20 cents lower):
Give me a call if interested in any of this...
Thanks,
Bill Rhyne
800-578-1001
770-514-1993
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