March 14, 2005
July Cotton closed 2.44 cents higher this past week ($1220 per futures contract) and has now moved up about 10 cents in the last month. Most of the opinion I have been reading on cotton had been consistently doubtful throughout the move but seems to have shifted a bit to the positive side following Friday's close into new five month highs. While the shift in sentiment makes the contrarian in me a bit nervous, and raises the question of, "Should I stand aside?", I believe what makes the most sense now is to just sit on our current, well bought, long positions.Truth is, what cotton does in the near term is very much a coin toss to me, but longer term, I continue to think we are going a LOT higher...In every major move, if you watch too closely, more often than not, human nature (not always a friend in commodity trading) and the fear of "giving it back" will take you out of trades when you are supposed to just accept that every day, or every week, is not going to move in your favor...and as it is virtually impossible to consistently call the wiggles in any market, we'll just sit on what we have....If July were to pull back as far as the 51.50 to 52.00 cent area, we would absolutely be buyers again.
Buy Treasury Bonds
Treasury Bonds are down about another 1 1/2 points since my last newsletter and have reached the point where I see them as a screaming buy.
Where every commodity broker loves a bull market in commodities, I believe all the recent talk of $80.00 Crude Oil and rampant commodity markets producing inflation, which is bearish for bonds, will prove to be wrong. Yes, there will be bull markets in individual commodities, but the idea that world demand will just swamp supply in everything there is on the board just doesn't fly with me....And when the media starts adding $25.00 to a $55.00 commodity that has been going up for 5 years, I think that market is getting a little "ripe" for a fall.
I believe all the talk about foreigners no longer buying, or even dumping, U.S. Treasuries is just talk. Bond buyers are inherently long term investors. The U.S. Dollar is down roughly 30% from several years ago. If, for example, you were an international bond investor sitting in Timbuktu and looking to buy bonds with a 15-20 year horizon, unless you think the United States is totally going down the tubes (and the world with it), you are going to view buying U.S. Treasuries as a purchase made at a 30% discount. Maybe the Dollar falls some more (maybe it doesn't) but is it going to hell for the next twenty years? I doubt it....And say what you will about our deficit, lack of popularity abroad, etc., the United States is still the economic engine of this planet, and, money still wants to come here.
Treasury Bonds are now back to where they were six months ago, and in my opinion, are now poised to potentially explode out of here on the upside.On a recent look at Commitments of Traders, which breaks the commodity markets down into what Commercials (hedgers), Large Speculators (funds mostly), and Small Speculators (market fodder) are doing, I note the small specs are more short than they have been at any time in, at least, the last fifteen years. They are so short the interest rate markets in general that the charts look like misprints, and they have piled into those shorts during the last month or two...If you want to see for yourself, go to http://www.yardeni.com/pub/commit.pdf and scroll down until you get to Eurodollars, which are short term interest rates, and Treasury Notes, which are long term rates....Addditionally, Open Interest, the total number of futures contracts in a market, has jumped about 20% during the last few months....This means there are a lot of traders, both long and short this market, and one side, I believe, is about to get it handed to them. You KNOW what EVERYBODY is saying about rates. Not just because Treasury Bonds are, to me, THE contrary opinion market, I want to be long Bonds. I continue to think the next move is toward sharply lower long term interest rates and sharply higher Treasury Bond prices.
I think the June 112 Treasury Bond Calls, which closed today at 1 & 7/64 ($1109), represent a tremendous amount of leverage. I still would not be surprised to see June reach the 120 mark prior to expiration.
Buy the U.S. Dollar Index
Below is a chart of the Dollar you hear so much about....As I have noted before, to paraphrase several Greenspan quotes made during the past few years, "NOBODY KNOWS where the currencies are going". Right now, however, it seems that EVERYBODY KNOWS the Dollar can only being going south.....If everybody is betting on one side of a market that Greenspan, at the top of the economic information chain, says is unpredictable, I want to be on the other side....I am working on how I want to do this and will be formally beginning to buy the Dollar Index quite soon.