February 5, 2015

I infrequently have to take a break from actually funneling all my thoughts on to this screen and this has been the case since late October. Christmas, the kids being home from colleges, a wedding anniversary, 65^th birthday (Medicare!), New Years Eve, and some VERY active markets have made sitting down and forcing myself to write difficult (it’s NOT fun) but here we are! The year has begun. Let’s go. Lots of big stuff about to happen in my opinion. Lot of ground to cover here so some of this may be quick and to the point, but hopefully it will make sense.

Covering old recommendations first…

Interest Rates and Treasury Bonds

We have exited all long positions

I was long Treasuries for the entirety of 2014, but as of today, I am officially moving to the sidelines. My target since early last year had been in the low 150’s and as we have recently traded 152, I feel like this is a good place to step back and take a fresh look at what might be expected here. The truth is, at the moment I could make a case for either trading 10 points lower…OR…that Treasuries actually make new highs and trade up to the 160 area. With this in mind, and that fact I think there are some very clear potentially big opportunities in other markets, I’m happy to walk away from Bonds for a while...A final note, however, would be to say that if Bonds COULD make new highs from here, I probably would be right back on the long side. For the record, though…Right now, I am out.

 We are no longer Short Cocoa

We were short Cocoa for many months, some quite painful, in 2014, looking for a 20-25% decline due to an overwhelmingly large long position held by speculative traders. It took longer than I expected but the top tick finally was made in late September and was then followed by an approximately 15% decline over the next 6 weeks. We exited all remaining short positions in November. I have no further immediate interest in this market.

 Still very short the Cattle Complex.

Similar to what we have seen in Crude Oil,

I believe an absolute collapse is underway.

I may be dead wrong but I believe Live Cattle and Feeder Cattle have conclusively established major tops. In a direct contradiction of what are supposedly very bullish fundamentals, since mid November these two markets have dropped respectively 20 cents and 50 cents…which, according to 99% of the “expert” analysis out there, should NEVER have occurred…and for that matter, have yet to be explained by anyone. In fact, from virtually everything I read, all the rhetoric out there is still bleating the same old story about “the lowest cattle numbers in decades”, and this recent sell off is therefore being widely regarded as an opportunity to buy (again, even though NOBODY has an explanation for why prices have declined).

I think the Cattle market is somewhat akin to Crude Oil six months ago when seemingly 99% of analysts were bullish, and none of them would have even predicted $90 oil, much less the $45 we have recently seen…and I therefore continue to believe there is something of a bloodbath coming in both Feeders and Live Cattle...

We are still selling futures and buying puts in both Live Cattle and Feeder Cattle…

Before getting to the cattle charts though, I think a look at the Lean Hog market, which competes with beef for meat demand, is worthwhile….

Last August I referenced the Hog market as a possible guide to what I thought was coming in the Cattle markets. In my August 10^th newsletter, I specifically quoted various “expert” EXTREMELY BULLISH commentaries following the June 30^th USDA Quarterly Hogs and Pigs report (a big one), wherein analyst after analyst cited the “bullish fundamentals” for hog prices in the upcoming year, even going so far as to “thank the USDA for the sharply brightened profit outlook”. Basically, Hogs were on their all time highs and NOBODY could imagine the market being anything but strong for months, or years, to come. There just “weren’t enough hogs.”(same as has been said about Cattle).

HOWEVER, within a month’s time the hog market had dropped an almost straight down 15%...dead in the face of those so “bullish” statistics…which I then used (last August) as an example of exactly what I was expecting in the Cattle market, which was then on its highs and the bullish “story” was the ONLY story out there in the Cattle world…And, even though there was still one more pop higher left in cows, the script has pretty much been the same with Cattle, which have now come down quite a bit…BUT, have not, I believe, even completed even half of their eventual downside move.

Just as a refresher, here is the chart I presented last August…with the idea something of the same would eventually be coming in Cattle.

And here is the current spot Feeder Cattle contract…It took another few months to finish on the upside, but it now appears to be following the same roadmap as was the case in Hogs…

So, yeah, the Cattle have come down (still TOTALLY unexplained by anyone in the cattle world)…but what I consider to be far, far more important is what has occurred in the Hog market since I wrote about them last August…and just for the record, to reiterate, what happens in pork absolutely can impact what happens in beef. The two meats obviously compete for consumer dollars…So take a good look at what has done since that “bullish” report…

Here’s a daily chart…

In other words, the 15% selloff was followed by some sideways action…and then the REAL move got started…pretty much nonstop from 93 down to 65. BIG!

And here is what that downturn looks like on a longer term basis…

The big picture? As noted, HOG PRICES HAVE DROPPED BY 50% SINCE LAST SUMMER…So I would ask, how can this be anything but a MAJOR NEGATIVE FOR THE CATTLE MARKET? And, to be clear, just like what has recently happened in Hogs, and in Crude Oil, NOBODY predicted the collapse...and furthermore, I am dead positive NOBODY in the cattle business had a 50% break in pork prices, and its impact, built into their plans for 2015. To the contrary, I think there are a zillion cattle owners who thought they could get rich, or stay  rich this year...and consequently, there are a hell of a lot more Cattle out there than anybody is thinking…and besides the fact I cannot, under ANY circumstances, imagine how this move in pork is not detrimentally competitive with beef prices, I would also make the point that just about anybody who has put a steer in a feedlot during the past 3-4 months is already losing a ton of money…and with the fact they STILL have to feed, pen and doctor that animal until they it reaches a sell weight, they probably still have a whole lot more money to invest…and lose. Bottom line? In my opinion, this is a RECIPE FOR A DISASTER THAT IS ONLY, JUST NOW, REALLY GETTING STARTED. Cattle will more and more become a market FULL of sellers…and very few buyers.

Hogs have dropped 50%. SO FAR, Feeders have dropped about 17% and Live Cattle have lost about 12%. Do they have to get hit for 50%? No, but 30 or 35%? WHY NOT? So, doing the math…A 35% break in Feeders takes them down to 160…in Live Cattle the number is 110…both, which are still a long, long way below us…

As I am forever pointing out, there is NO formula for what ANY price should be for ANY commodity (or stock) in the marketplace. Yes, fundamentals are a factor, but the markets are more driven by the media and mob psychology and oceans of hot money than anything else. HAS Crude Oil actually changed in intrinsic value by 50% in the last 6 months? Has the value of a Lean Hog done the same? Really? I seriously doubt it…But, hey, those “value” changes are what we are trading, and whether they are real or not, this is the game we are playing.

In recent years, we have seen commodity bull markets end in the following fashion:

Corn – down 60%

Wheat – down 44%

Soybeans – down 50%

Gold – down 40%

Silver – down 70%

Copper – down 48%

Cotton – down 70%

Crude Oil – down 60%

Unleaded Gas – down 60%

Natural Gas – down 50%

Sugar – down 60%

Coffee – down 65%

Lean Hogs – down 50%

So, I ask you…That list encompasses just about every major market we trade….So WHY should Cattle be ANY different?

I REMAIN EXTREMELY BEARISH FEEDER CATTLE AND LIVE CATTLE. I DO THINK THERE IS STILL TREMENDOUS DOWNSIDE POTENTIAL IN BOTH MARKETS.

 I still see row crops as a major buy.

I LOVE LONG SOYBEANS AND LONG COTTON.

The OVERWHELMING  majority of research I see regarding row crops has now become as bearish as it all was bullish 2 or 3 years ago when all of these markets were trading at sharply higher prices (and about to head south). All I hear is “record crop” everywhere and all I see are recommendations for farmers to go ahead and sell their crops now…Don’t keep in the bin hoping for higher prices…because “There’s just too much of it”.

I totally, absolutely disagree ….

Without going into detail, I’ll just tell you that virtually EVERY major agricultural bottom I have seen for the past 35 years was accompanied by “record crops” and “record supplies”, which is why, in almost every case, the price HAS come down. It has nothing to do with why the next thing you see, sooner or later, is prices going up.

Right now, supply (harvested last fall) is known. It IS “in the market”, while demand is NOT…And in the case of Soybeans, I would note that exports for the current year are already running at RECORD LEVELS...and who knows, may get even stronger…which is seemingly being ignored by all the bearish analysis I see…In fact, astoundingly, I have seen recommendations that farmers should have by now sold 90% of their Soybean crop…meaning, “give it all to the middlemen while we are here, DEEP in the hole” and have no chance to see prices improve as we move through the year.

With respect to my belief that all of price discovery is mostly a mob psychology game, take a look at the following Commitments of Traders breakdown…

To explain, very briefly…

The Record Long by the Commercials is primarily a reflection of exports they have on their books. Simply stated, Commercial Traders are the most long they have ever been is because they have record business on their books, meaning they generally have record quantities of soybeans they have sold abroad and have to deliver throughout the coming year…And to deliver those Beans, they first have to BUY them…and at some point, sooner rather than later I think, all that buying will NOT be done a lower levels…Their buying will most likely be done at higher and higher levels. THEIR RECORD LONG POSITION IS CERTAINLY NOT BEARISH.

Large Funds, who you might expect to be smart guys…AREN’T. All you have to do is match up those peaks of the green line to see that they were always the MOST LONG at every market top. In other words, their heaviest long positions were generally held exactly when Soybeans were about to go south. And now? They are short for the first time in 9 years? THIS ALSO, TO ME, IS NOT A BEARISH INDICATION.

And finally, the Small Speculators, traditionally commodity market fodder, perennial losers? They have bought into all the bearish “expert” logic out there and are MORE SHORT THAN THEY HAVE EVER BEEN. THIS, TO ME, IS JUST INCREDIBLY BULLISH.

I really don’t need to say a lot more (I could). As always, I might be dead, dead wrong but I will take this set up, and this bet, 100 times in a row. I think there is incredible leverage here, and right or wrong, consider the odds of an imminent substantial rally to be extremely high. I AM A BUYER. I THINK A $3-$4  RALLY IN COMING MONTHS WOULD BE EASY TO SEE.

 And Buy Cotton also.

BUY THEM BOTH

I am running out of gas and I still have one major idea beyond this one to cover so my comments on Cotton will be very brief…

For the first time in many decades, this year there will be no government subsidy for Cotton growers. In a nutshell, this is big. It does mean that some people who have grown Cotton throughout their lifetimes WON'T do so this year. They may be switching to other crops that ARE subsidized. Meanwhile, I have heard from various cotton contacts, that, due to low prices AND the lack of a subsidy, many banks will be reluctant lenders to growers. All that being said, I have no idea what sort of acreage we will plant in coming months here in the USA but I can’t imagine there will be anything but lower numbers. Again, how much less I don’t know…On another front, I cannot count the number of analysts I have read who keep beating the same drum that, “China has too much cotton. There is NO WAY cotton can go up.” BELIEVE ME FOLKS, NOBODY IS BULLISH THIS MARKET.

For my money, and I am putting it there, Cotton is pretty much the most undervalued commodity on the board...I would also point out that this is no throwaway commodity that the world can ever do without. It is a basic and pervasive staple throughout the world economy, and I very much consider it an investment proxy for what, to me, can only be an vastly improving world economy…that as the world economy strengthens as a function of cheap money, cheap energy, and a massively expanding Asian (and elsewhere) middle class, Cotton, I believe, has nothing but major upside potential from here…

Statistically, for the past 40 years, between now and the expiration of the July Cotton contract, off the top of my head (I will present the exact numbers in another newsletter) I can tell you that Cotton has averaged something close to a 20 cent range. In other words, between now and July, this market swings up, or down, or both….A LOT…And when I take those stats together with how bearish I know everybody is, and when I’m pretty certain acreage will be down, and when I “know” there will be at least one weather scare before this year’s crop gets harvested, and ALSO, when I KNOW that last week the USA recorded the second largest weekly export sales number…EVER…then I “know” there is probably a whole lot more demand for cotton than anybody is counting on…And I KNOW then….I WANT TO OWN THIS MARKET.

I hear farmers and analyst wondering if cotton, if with the best of conditions, can make it up to 70 cents. I think this ludicrously small thinking I would say that this market easily should have a target somewhere ABOVE the $1.00 mark. One dollar USED to be a big deal in Cotton, but I think those days are long gone…The world economy IS gigantically larger than it used to be, equities are making new highs everywhere (generally) and liquidity is all over the place…So, with cotton being a semi-industrial commodity, seeing it reap major price gains as a result of those factors (and many more) would not surprise me at all…In fact, I expect it.

I AM BUYING COTTON. LIKE I SAID, I CAN EASILY ENVISION IT RALLYING TO A DOLLAR, BUT ALL IF WE CAN GET FROM HERE IS 20 OR 30 CENTS (10-15K PER FUTURES CONTRACT), I WILL CERTAINLY NOT BE DISAPPOINTED.

 Buy the Eurocurrency

HOW MANY TIMES do you need to see the supposed “logic” presented by all the supposedly smart Wall Street guys from the banks, brokerages and fund management firms blown to smithereens? How many market collapses or market eruptions do you need to see before it forever sinks in that all those people yakking away on the screen really DON’T know what is coming in the markets.? For sure, they can get it right for 10% of a move, but over and over and over again these opinion shapers either totally miss or are endlessly espousing the wrong direction in whatever is going on in the markets…And they all sound so good, and look so professional while they are doing it, but in the end, 98% are nothing more than sports announcers for the markets…As just ONE recent example, look at oil. Six months ago, they all loved ANYTHING to do with energy. Today? they are ALL “revising their forecasts” and ranting confidently about the now bearish fundamentals in the Crude market…The lesson? THE MAJORITY OF WHAT YOU READ AND THE PEOPLE YOU HEAR BLEATING THEIR OPINIONS ARE PROBABLY WRONG…And like I said before. Their “logic” and “knowledge” (more realistically, their grasp of recognized talking points and buzzwords) may seem to make a lot of sense, but in the end? They are still usually just damn wrong…

So….What is it you are hearing from all corners now? What is the one thing they ALL, ALL, ALL (!) agree on?

“The Strong Dollar”. In my opinion, from my very impartial and singular listening post out here in the boonies, THE number one  talking head assumption in the markets today is, “The Dollar will stay strong”. The “strong dollar” is everywhere…with EVERYBODY blindly confident it CANNOT go down…And in particular, versus the Dollar, the one currency all those same endlessly wrong painted faces are trashing more than any other is the Euro…Same as it was back in mid 2012 when I last made a recommendation to buy the Euro (followed by a rally from 120 to 140 over the next 15 months), they are once again all SO sure the Euro is headed for oblivion.

IT’S NOT. THE EURO IS A BUY HERE.

Guys, this is a piece of paper (like all this stuff). And once again, I will tell you its value is basically a matter of perception more than anything else…and again, its value is always changing based on mob psychology more than anything else. And going all the way back 30 years to my decade with Merrill Lynch, I can SWEAR to you I have seen the bluest of intellectual, international currency expert bluebloods be so damn backwards about the currencies as to truly be unbelievable…and on MULTIPLE occasions. Believe me, I am not some sort of information anarchist, a cynic who thinks that “nothing ever means anything” but I will say that ANY time I hear anybody citing the “fundamentals” driving currencies, my ears just freeze over. All that talk is just garbage…

In fact, any time I get involved with the currencies, I pull out several quotes from Alan Greenspan, a guy who definitely had more economic expertise, information and statistical data at his fingertips than any human being ever will (other than succeeding Fed Chairmen). These are verbatim quotes:

July 16, 2002 – “Given the recent intense interest in the future course of the dollar, I would like to raise a technical issue and a flag of caution regarding those forecasts—or, for that matter, any forecast of exchange rates (currencies). There may be more forecasting of exchange rates, with less success, than almost any other economic variable.”

November 19, 2004 – “Statistics have shown that forecasting exchange rates (currencies) has a success rate no better than forecasting the outcome of a coin toss.”

Both of those quotes were made by the guy who was at the top of the economic information chain, and regardless of whether you think Greenspan’s policies were correct, if this guy is telling you that nobody ever knows where the currencies are headed, you’d better believe it. Therefore, ANY time I can detect that EVERYBODY THINKS THEY DO KNOW, that EVERYBODY IS LOUDLY AND UNANIMOUSLY CERTAIN ABOUT THE DIRECTION OF THIS PIECE OF PAPER, IT IS ABSOLUTELY TIME TO GO THE OTHER WAY. Again folks, it’s all about perception, the players in the game, and money getting in and out of positions.

Here’s you “proof” as to whether or not everybody is on one side of this market or not…The first chart is the Euro vs the Dollar…The Commercials (who use the currency) are long. The Specs, large and small, who are just making bets that they think will win, are VERY short the Euro…And to be clear…Sooner or later, Speculative Traders, large and small, tend to get it handed to them…

Here’s the picture seen from the other side…The Dollar Index “measures” the Dollar against six major currencies…In this chart, you can see how EXCEEDINGLY LONG all the Speculators are…And if you look closely, you can see how they’ve been piling in recent months…Like sheep, “Buying in” to all the talking head “logic” (“intelligent” hype).

If these charts are confusing, just know this: Speculative Traders are outrageously long the Dollar.

And here is more perspective as to how speculatively long everybody is…The following chart gives you a picture of how many players are now in the game…

And here’s one more reason to assume all the yakkety-yakkers are wrong…If Europe is in SO much trouble, why is this index making new highs…?

Here’s one option that I like here…

OK…Enough for one day…I’ll try to get more out on individual markets in the near future…

I think these are all KILLER ideas….with sound reasoning (my “logic”?) as to why they all might work and all of them with major leverage potential (or I wouldn’t be doing them). My firm recommendation is to take all four positions…Cattle, Soybeans, Cotton, and the Euro…and then do your best to forget you are in them.

Give me a call if anything interests you here…or just to talk. You know I always enjoy talking to all of you and hearing what is going on in your lives.

Thanks,

Bill

866-578-1001

770-425-7241

LOOKING TO HAVE A VERY SUCCESSFUL YEAR.

The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Cattle, Soybeans, Cotton, Eurocurrency

All unlabeled price charts in this newsletter use data from CRB or Interactive Data Corporation.