MARCH 17 , 2006
Calling a spade a spade...
I have basically been sitting on three ideas for six months, two which have gone sideways (Cotton & Treasury Bonds) and one that has mostly gone dead against me (Copper). Having owned options in all three, as a consequence, my clients have been steadily losing money...I hope I am not being bullheaded, but, nevertheless, my opinion remains the same in all three of these markets...I think they all have large profit potential or I would not continue to recommend them...and I would also say the fact I have been wrong for six months does not mean I will continue to be so.
Still see Cotton as a MAJOR trade...
By now I have certainly said it all as to my expectations for a bull market in Cotton. Exports sales are setting records. West Texas, the biggest Cotton producing area in the country still remains bone dry (Texas accounts for about 1/3 of U.S. production)....And Cotton remains in an unbelievably long, tight consolidation that just screams to me that something BIG is coming, sooner or later.
With July having a 4.36 cent range since January 31st, and having averaged almost a 20 cent range between January 31st and expiration during the past 30 years, I cannot help but expect that BIG move to get started any day now....Although the move could be to the downside, I just can't imagine this to be the case...I continue to see all of the action since July 2004 as a major base from which Cotton is going to, at some point, lift off and go a long, long way on the upside, most likely do so for several years at least.
I consider the recent 3-4 cent decline in both July and December to be an excellent opportunity to buy slightly out- of-the-money calls in both months. I may be dead wrong and cotton could be going south, or even more incredibly sideways, but if I am right (and I strongly believe I am), what's coming is not likely to be some tiny sort of move.
There is an old market adage, "Big consolidations are usually followed by equally big moves"...Futures are inherently volatile and I firmly expect that adage to be validated once more in the Cotton market...This trade has worn me (and many of you) out but I still think it's coming, and again, in a BIG way.
Copper still at historical highs...
All I can do here is show you the charts and reiterate Copper's history has been one of outright collapses when the top finally is in. After climbing steeply into December, Copper traded sideways for several months, but is now making new highs as I write and whether these new highs will lead to a further "leg up" remains to be seen...I have seen any number of roaring bull markets do just what Copper is doing, that being, briefly consolidate at stratospheric levels, then "break out" into new highs and look like a rocket...then stop dead in their tracks. I certainly have no idea if this will be the case here but I do have to respect the new highs and therefore have no immediate recommendation to make. But it is going to stop somewhere, and when I see some evidence of a failure, I fully intend to re-recommend establishing new shorts. When this pays, I think it will be big.
Buy Treasury Bonds
In spite of the fact bonds have recently come back to their last November lows, I am still very bullish. I continue to believe the oil driven inflation bulge ended last year and that the Fed's almost two year tightening campaign is having (or will have) its desired counter-inflationary effect. As I have said for some years now, I think there are no real sellers in the fixed income market, that anyone owning quality long term paper, bought, for example, in the past 10 years and paying 6,7, or 8%, has zero interest in selling it. Conversely, the demographics of the Baby Boom represents a steady influx of fixed income buyers for many years to come.
I also believe the world has returned to an era of generally lower interest rates on all fronts, as it was during the 1950's and early 1960's, when long term rates were as much as 2% below today's 4 3/4 % 30 Year Treasury.
The bond market has had everything in the world thrown at it during the past few years (Fed tightening, inflation, budget deficit, etc.) yet yields are still actually lower than they were when the Fed started raising short term rates....Through all of that, if Bond prices haven't gone down (or long term rates gone up), I don't know why they should start now....
I am still a buyer in Treasuries and still look for, to begin with, a 10-12 point rally.
Give me a call if you have an interest...