March 29, 2009
Stay Short Commodities
After falling sharply during the second half of 2008, commodity prices have basically traded sideways since early December. As a result, the conventional "wisdom" (which is seemingly never right) now seems to be that these last 4-5 months of consolidation represent a bottom and most of the "expert" analysis I see argues for buying various commodity markets...to which I strongly disagree.
I continue to believe a number of markets still have a LONG way to go on the downside and continue to recommend maintaining short positions, particularly in the agricultural complex and especially so in front of this coming Tuesday morning's USDA Prospective Plantings report for the 2009-2010 growing season. As such I will be adding to our short positions in the Cattle and Soybean complexes tomorrow ahead of the report, and probably do so again on Tuesday after the report.
A few quick reasons/observations as to why...
1. High prices stimulate production and decrease demand...The truth is, we are only 6-9 months removed from the all time stupefying record highs in a number of markets, and it is therefore safe to say, as yet, there have been very few producers deciding they want out of this or that business. Meanwhile, in spite of all the government stimuli taking place, the world economy is still solidly on its heels and I seriously doubt we are about to see ANY commodity demand suddenly begin to outstrip supply...which is what you do basically need to see rising prices.
2. Even though commodity prices have fallen dramatically, they are still at EXTREMELY high historical levels...The fact is, the world is in the worst economic shape any of us have ever experienced. Right now, and for at least the balance of 2009, in my opinion THERE IS, NOR WILL THERE BE, NO SHORTAGE OF ANYTHING. This is not the recipe for a bull market. And if markets are not going up, the only other options are down or sideways, and in the current environment, I will definitely go with DOWN, and potentially in a very big way.
3. My own perception is that relatively no one is looking at the short side of any of these markets. Most brokers and traders prefer buying the markets and my guess is the sideways moves since December have come as a result of traders attempting to own what they think will be a bottom. At some point, and I think it''s coming quite soon, these markets will start to roll into new lows and all those accumulated buyers will then become sellers as various commodities go in the tank again.
4. The direction of most commodities appears to be on the southside. I KNOW the average stupid commodity trader (I have been one and will be again I'm sure) has his or her favorite market they are trying to buy and nothing they want to be short. Six months ago everybody was thinking we were about to run out of every commodity there is...which was obviously grossly in error...IOn the flip side then, I basically think most commodities may keep going down until, perversely for sure, you start hearing stuff like, "There's too much! We'll never get rid of it all!"...and that could be a long, long, long way from here.
I'm staying short, and aggressively so, using the "2 and 1" as my guess is the last thing we're going to see for the next 3-4 months is more sideways action. I strongly believe it's time for the markets shown here to start moving again and I want to be on all of them.
Give me a call if you're interested.
A few chart and risk related observations...
You'll easily note all of these markets look very much the same...and I want to be short all of them...If I'm right, you never know which will be moving first, fastest or biggest.
I would also say the I can easily envision all of these markets at substantially lower levels than I have indicated on the charts.
Additionally, with the fact all of these markets have now "done nothing" for the past 4-5 months, I think it is safe to assume the odds for a sizeable move, one way or the other, have moved up substantially. This, then, is our perfect set up for owning units of 2 puts and 1 call...
As a specific example of the how the "2 and 1" might work in July Soybean Oil, start with this: Buying two July 32 puts and 1 July 33 call would cost about 6 cents or $3600.
If between now and expiration July Soybean oil traded up to 38.5 cents, you would easily be able to sell the now more valuable in-the-money call and two less valuable puts for $3600, recouping 100% of your investment.
Conversely, if July goes to down to the 25 cent area, the two 32 puts would each be 7 cents in-the-money and therefore worth at least $8400 total. At the 20 level, they would together be worth $14,400.
If July Soybean Oil expires between 32 and 33 cents, and you stayed in the position right up until expiration, you would lose the entire $3600.
I may be dead, dead wrong, but my guess is Soybean Oil, and all these markets, are NOT going sideways much longer, if at all....And I am therefore initiating new positions immediately.
And Cattle? Who in the hell is out buying steak? The cattle guys keep talking about short supplies of cattle but I just don't see how demand can do anything but continue to contract, and sharply so, in this economy...I still keep expecting to see this market really fall off a cliff any day now.
I have been working on a too long winded newsletter detailing my thoughts on the markets as a whole. I hope to get it out within the next week or so but wanted to get this piece out for tomorrow's (Monday) trade ahead of the USDA report due out Tuesday morning before the ag markets open.