April 6, 2020
Two weeks ago, I made a recommendation to essentially “Buy Everything,” except Gold and Treasury Bonds…with my Buy List including the Stock Indices and a number of commodities…And I continue make that very same recommendation.
During the week just ended, led by fears of a further collapse in Oil Prices (and the story that was everywhere, “There’s nowhere else to store it all!”), on April 1st (Wednesday), with just about EVERY traditional commodity trading either limit down, or severely lower, I think we saw the same “capitulation” in commodities that I firmly believe occurred several weeks ago in Equities…which is clearly (in my opinion) evident on the chart following…
And as I stated above, I think we saw the same sort of thing this past week in commodities…where, virtually every commodity on the board closed moderately to sharply lower for the week…with the interesting exception being Crude Oil, Heating Oil, Unleaded Gas, Natural Gas…the energies…ALL having closed higher for the week in the face of all the press about “nowhere to store it!”
I consider the story about Oil Storage, which has appeared at every major Crude Oil bottom I’ve ever seen, as being just as ignorant today as I believe it has always proven to be…If you want a lengthier explanation as to why, give me a call…but for the moment I’ll simply state that pretty much ALL of that oil in storage has ALREADY been shorted in the futures markets or through forward contracts by the energy companies…WHEN THEY PRODUCED IT AND PUT IT IN STORAGE. I can assure you that Exxon, for example, is not in the business of speculating on oil prices…Their business is to take it out of the ground, refine it and sell it…and make their margins. And while making profits for them is easier in a rising market, they are ALWAYS short hedging their production at every stage of the cycle, such that when prices are falling, they are not watching trillions of dollars of product value disappear…The point is, if you can imagine all of the stored oil in the world as being in one big tub, and it is filled to the brim (as is now being touted in the media), there are two things that will happen…The first is that the oil companies WILL slow their production (the tub is full remember) and secondly, as they remove barrels from the tub, they will be BUYING back their short futures positions…and guess who the sellers will be? SPECULATORS, who were most likely NOT short $30 higher, but who are NOW convinced that, due to this “glut” of oil, there is easy money to be made on the short side.
OIL IS A BUY. I continue to recommend being long here and now…Whatever becomes of the Saudi-Russia story…
And secondly, as for the weakness in other commodities, the latest semi-unanimous “logic” I’m seeing suggests that the out-of-work public won’t have funds to buy anything more than the basics, meaning dramatically lower demand, meaning prices for everything can only be heading lower…Additionally, I am also seeing the mind boggling rhetoric that, “Oh yeah. Production for many of these markets is going to be higher, which is also bearish.” While it is certainly true that the general public will NOT have the same spending power they had prior to the crisis, I firmly believe that the commodity markets, like the stock market, WILL turn up long BEFORE the news begins to get positive again…Also that the futures markets, with the massive moves down we have already seen, most likely have already priced in what is happening today…in the present, as that IS the way the FUTURES markets work…and is precisely why they are referred to as FUTURES…In short, I BELIEVE MASSIVELY BAD NEWS HAS ALREADY BEEN ACCOUNTED FOR IN THE DIASTROUSLY LOW PRICES WE NOW HAVE IN SO MANY MARKETS.
And as for increased production…the idea of which I think is beyond absurd? I would offer that when crop and product prices have fallen astoundingly below what it costs to produce those commodities, PRODUCTION WILL BE CURTAILED…Whether it’s bankers saying, “Sorry but I can’t lend you money to plant 50 cent Cotton when it costs you 70 cents to grow it.”, or simply that with some percentage of farmers, ranchers or growers either close to bankrupt or just choosing not to plant, I cannot imagine ANY scenario in which production will be increasing for anything…
As always, I might be dead, dead wrong but when I also realize that we have just hit April…and with virtually none of the row crops (Corn, Wheat, Cotton and Soybeans) even close to being in the ground yet, I remind myself that even when they do get planted (which weather can also delay) we are a LONG way from harvest…and who knows what weather problems, or just weather “scares,” might become a factor in prices? And if something like that comes along? My opinion is there is no telling what could happen on the upside.
Enough talk…I THINK ALL OF THESE MARKETS ARE BUYS HERE…USING THE “BOTH SIDES” APPROACH, WHICH DUE TO THE INCREDIBLE VOLATILITY WE’VE BEEN SEEING, HAS BEEN AN INVALUABLE TOOL FOR THE PAST FEW MONTHS.
Here are charts, a few comments and some option possibilities (which can change quite a bit from day to day)…
BUY CRUDE OIL
Temporarily Sidelines in Soybean Meal…and now focusing on BUYING Soybean Oil.
Soybean Meal, which I had been strongly recommending since January, looked like it was starting the 20+% rally I was positioned for…but as can be seen below, stopped at up 10%...and has since come straight back down...Fortunately, we did roll our positions up while in the 320 area...and in spite of having lost several months of time value, are pretty much sitting on the same money we started with...While I am disappointed after having seen an approximate double while Meal was at those highs, other than getting out totally…and thereby abandoning my “sit tight for the bigger move” game plan…there was really no way to have avoided seeing our profits disappear.
And no question, I did NOT anticipate the absolute reversal and the return to where the move started…But I also am aware that this contract has a history of continuing volatility, and rallies, between now and expiration…and that sell-offs like this one can definitely be followed by large percentage rallies…so, while I am more or less moving to the sidelines here, I fully expect to be back on this at some point soon.
SIDELINES IN SOYBEAN MEAL
BUT ABSOLUTELY BUYING SOYBEAN OIL…
In some ways, I think Cotton could be THE MOST UNDERVALUED COMMODITY ON THE BOARD…and is probably where I am personally being the most aggressive as a buyer right now…Let’s get real…Cotton in the low 50’s should result in dramatically reduced acreage, if not outright bankruptcies among cotton producers…This contract has a history of big moves between now and late summer and I don’t think this year will be any different…And I would remind anyone who has an interest in this market that we are sitting here at 10 year lows…and barely a seed has gone in the ground yet…and ANY weather issues could easily take this market back into the 80’s…
This could easily be a stupid statement, and I could be totally, totally wrong…but I think there is no way that this contract can stay down here…and furthermore, if it were to have some sort of further decline from here, it would only be temporary…I truly believe we WILL see the 70’s before this contract goes off the board…And yeah, one more time, I might be dead, dead wrong about this…
Still Buying Sugar
We started buying Sugar when it was 1 – 1 ½ cents higher using the “1 & 1,” which worked perfectly during the ensuing decline, allowing us to reposition most lately (with the same funds) from the 11.50 calls down to now owning the 10.25 calls.
I CONTINUE TO SEE THIS
MARKET AS A BUY…AND AM FAIRLY AGGRESSIVE ABOUT DOING SO…ABSOLUTELY USING THE
BOTH SIDES APPROACH
I’m out of gas…Here are the other markets I am currently buying…Some with futures only…Some with options…Give me a call if you want real numbers on any of them…
BUY LEAN HOGS
BUY LIVE CATTLE
Take your pick…But my three primary trades are Soybean Oil, Cotton and Sugar…and also definitely STILL LONG WHEAT…but missed doing the charts here…
Give me a call if you want to talk about anything here…or if you just have cabin fever and want to shoot the breeze…
Stay safe. Stay home if you can…
All charts unless otherwise noted are by Aspen Graphics.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Everything