Feb. 3, 2006
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...
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...