April 14, 2015
I currently see four trades that I believe have significant potential during the next 3-6 months.
Long the Eurocurrency
(This is the same as Short the Dollar but has much greater liquidity)
With all of these ideas, I firmly (more than ever) recommend using a strategy that involves buying calls and puts on both sides of all these markets. I anticipate increased volatility and major moves in every market I am trading, and the 1 & 1 approach I am now using does offer excellent odds of recouping 100% of what we’ve spent when prices go the wrong way…as well as PLENTY of leverage when we are right. As I am forever repeating, it’s all in the math…And, as always, using this strategy, if a market moves dead sideways, it can mean losing everything you have invested.
Buy the Eurocurrency
Wall Street Hates It
First up…I have positions which are Short the Dollar Index as well as those which are Long the Eurocurrency…and just to clarify, even though one position is short, and one is long, they are basically doing the same thing…The following chart, of the Dollar turned upside down and the Euro from a normal perspective, should make this point quite clearly…
To be specific, these charts are 99% identical, so there is no need to be trading both Short the Dollar and Long the Euro. That being said, the Eurocurrency market is tremendously more liquid than the Dollar, meaning better fills and greater ease in entering and exiting trades…so from here forward I will only be focusing on Long the Euro…Again, Long the Euro IS the same as Short the Dollar.
I have said it a 1000 times, but not recently. The values of all these PIECES OF PAPER are just part of a global mob psychology game that is full of sharks, sheep and lemmings…and one very normal occurrence in the markets is that all the sheep periodically BELIEVE the “logic” they hear from all corners of Wall Street and the Internet Talking Heads…and they consequently ALL end up on one side of a market…and then they ALL get WHACKED…And today, the #1, universally, unanimously held, most popular opinion in the media and among analysts is “Strong Dollar” and “Weak Euro”.
I’LL TAKE THE OTHER SIDE. I AM STAYING LONG THE EURO LOOKING FOR 10-15 POINTS ON THE UPSIDE…at $1250 per point per futures contract.
I keep showing you this breakdown of traders because this has proven to be a predictive tool so many times in the past…No, it does not give you timing but it does, I believe, tell you that sooner or later all those speculative Eurocurrency shorts will end up as BIG LOSERS…And I believe this is primed and ready to happen NOW. I do not want to be out of this trade…not for a single day.
Here is the 1 & 1 I would recommend at current levels…This uses the July options that are based on the September contract…All option costs in this newsletter include all fees and commissions.
There are two very important rules I will provide here, for this trade and all others using this 1 & 1 approach:
Rule 1 – If the market goes the wrong way, and reaches the point where you are able to recoup 100% of your total investment, you do so automatically. You do not start thinking, “Let’s see if it will go further and I can make some money going the ‘wrong’ way”. You take the money and start over.
Rule 2 – Exactly the opposite of Rule 1. If the market does start going the right direction, you do everything you can to leave it alone…and let it RUN. Do NOT start thinking, “It’s gonna pull back. I’ll get out here and get back in at a better prices”. To quote one of the most famous traders ever, “The risk is not that you are going to give back profits. It’s that you are going to miss out on more profits.”
I want to do what I know NOBODY is doing…
and that is to LOAD UP on Long Soybeans.
As I’ve written recently, I cannot recall when the analytical community was ever as overwhelmingly bearish the Soybean market (Corn and Wheat also) as they are now…generally citing last year’s record crops as well as expectations for something of the same this year.
I think they are wrong, and in general, seemingly ignoring the fact that with world consumption continually ramping higher, record crops, which have always been something of an absolute necessity (otherwise prices would go to the moon), are more important today than they have EVER been.
When I say demand is “ramping up”, I seriously mean it. Here are a few updated demand charts to demonstrate what I mean…
And then there is this… What the demand picture is from China alone…
So I think they anyone who supposes supply will EVER unfailingly match demand is kidding themselves…As I’ve said before, WORLD CONSUMPTION RARELY SLOWS DOWN but DEMAND CAN FALTER…and when production does have a “hiccup” (due to weather or farmers planting choices), the resulting commodity prices surge seems to be getting bigger and bigger which can be seen on this next chart…
As an aside, but very directly related to my argument that world demand and consumption may be accelerating even more, ARE YOU SPECIFICALLY AWARE OF WHAT IS HAPPENING IN A NUMBER OF MAJOR EQUITIES MARKETS AROUND THE GLOBE? And pursuant to that, what these very bullish stock market developments are perhaps signaling about the world economy…? AND its inherent impact on commodity consumption and demand?
OK. Start with China, the world’s second largest economy…I hear all this talk about China being in a bubble and that “GDP growth is slowing to 7%”, and think, “Hogwash”. This market has attracted attention in the past week with an 8-10% surge…which I think could just be the precursor to something like we saw here in 1982…that is, a sort of lift off that will carry higher for years to come. I’ve seen estimates suggesting that the Chinese middle class could double from roughly 300,000 million to 600,000 million in the next 4-6 years…which, considering that this would be like adding the entire population of the USA…AS CONSUMERS to the world demand equation…is quite stunning to think about…and definitely, I would think, should quite BULLISH for food demand.
Just BUSTING out into new 6 year highs, and a chart guy, it’s easy to see that high at 32000 getting blown away…Sure, it could stop anywhere. Charts aren’t magic…but I don’t think this awakening giant is going backward from here…And just to give you some idea of how BIG the numbers can be when you’re talking about China, I recently read that they had opened 5,000,000 new stock accounts in the last week.
And India’s Stock Market, with its 1.25 Billion people, is also pointing towards expansion…and most likely putting greater pressure on world demand.
Europe? Supposed to be on its last legs and going to fall apart? This is NOT what their equity markets are suggesting…Up maybe about 23% already this year? If you want to argue, “It’s just because of Europe’s QE. It’s not real”, you’ll be making the same mistake everybody made about our own stock market 3-4 years (an 1000’s of Dow points) ago.
And Japan, the world’s 3rd largest economy? No, it has not returned to its all time highs made in 1989, but the Nikkei ALSO looks strong, making new 15 year highs…
And of course, there is our own market…which also shows, I believe, no sign of stopping…
Which, alone, cumulatively represent about 4 billion people?
I think the equities markets around the world are telling you that all the residing pessimism generated by the recent Great Recession is now totally unfounded. Energy is cheap. Interest rates are low (and NOT going up soon…or if they do…will not rise noticeably until, or if, prices get out of hand…which can only be in the semi distant future). You have a planet full of new consumers…literally in the billions…who formerly were oppressed, non-capitalistic communist citizens. Put them together with a worldwide galloping array of newer, and newer and newer technological gadgets/developments for consumers and businesses to desire and spend money on…And then combine all that with governments everywhere doing everything they can to work, develop and spend their way into expanding their economies, and improving the lives of their citizenry through expansion of the middle class? PUT ALL THAT TOGETHER AND I DON’T SEE HOW IT CAN DO ANYTHING BUT INCREASE THE DEMAND FOR ANY NUMBER OF AGRICULTURAL COMMODITIES…MANY OF WHICH HAVE TO BE REPLENISHED, IN THEIR ENTIRETY, YEAR AFTER YEAR AFTER YEAR.
Just for good measure, here are a few other pieces of research that I find interesting…
No, wages in China cannot begin to compare with wages here in the USA but this chart is a definite indicator that the Chinese DO have more money in their pockets to consume and spend with…In truth, I can’t really comprehend what a 12 year, 500% increase in average wages really means when it comes to consumption…but I do know it’s not a bearish commodity factor.
And then this…a comparison of the Chinese Stock Market and Soybean Futures…While the correlation is not perfect, at times they are definitely moving somewhat in tandem…which would seem to make sense? I mean, if conditions are getting better in the world’s most populous country, IT CERTAINLY WOULDN’T BE BEARISH FOR THE SOYBEAN MARKET, which I never forget, IS THE WORLD’S SINGLE LARGEST SOURCE OF VEGETABLE PROTEIN.
Note how China DOES seem to pull and push Soybeans at times…and I just can't envision how the latest Hang Seng breakout could be anything but "friendly" to Soybean demand...and PRICES.
Taking all of the above into consideration, and my current sense that THERE ARE NO BULLS ANYWHERE IN SOYBEANS…and it leads me to be aggressively intent on owning as much of this market as I can from NOW until next fall. I am on record as looking for $2-$3 on the upside but I would confess to supposing the potential could be much greater…Knowing how Soybeans CAN move, I look at that previous chart and seeing them up around $14-$15 just doesn’t look like a big stretch.
Cattle have formed a MAJOR TOP
I have been on this trade, painfully, since the middle of last year, and I would be lying if I told you my desire to be short has not waned a bit as each of the three sell offs since the high tick in October has then been followed by a fairly sharp rally.
BUT, when I stand back and look at this market, and I recall that EVERY MAJOR COMMODITY BULL MARKET I HAVE EVER SEEN HAS ENDED IN SOME DEGREE OF A COLLAPSE, I then remind myself that the Cattle complex is just going to be one more bull market in which attitudes became, “No way it can go down”, not at ALL unlike $150 Crude Oil, $1900 Gold, $50 Silver, $18 Soybeans, $13 Wheat or $8 Corn…just to name a few notable commodity crashes in recent years. So, I’ll say it again: EVERY MAJOR COMMODITY BULL MARKET I HAVE EVER SEEN HAS ENDED IN SOME DEGREE OF A COLLAPSE. AND CANNOT, FOR ANY REASON, BELIEVE THAT CATTLE WILL BE ANY DIFFERENT.
I view all of the
action since last fall as nothing more than the complex development of a
commodity top…and see the most recent rally (now ended I think) as potentially
the LAST rally before this market DOES produce the fairly straight down monster
bear move I have been predicting for months.
I continue to believe this whole cattle thing will end BADLY and will result in
whole “herds” of cattlemen losing their shirts on animals they currently own. I
continue to think the Cattle prices will get hit in very much the same way as
has been the case with Hogs during the past 8 months…down over 50% since last
summer’s VERY BULLISH USDA reports…my bottom line being I STILL SEE FEEDER
CATTLE TRADING DOWN TO THE 160-170 AREA…at
Tired of thinking and trying to coherently show you why I think what I think…so I’m going to stop here and will try to get something done on the Cotton market soon…
Final thoughts would be to again emphasize how strongly I believe in this approach using 1 call & 1 put as my basic unit, simply because the math of the equation is the following:
Takes less money. Instead of buying 3 options (2 calls & 1 put, or vice-versa), I am now buying 2 options…meaning about 33% fewer dollars per basic unit. And aside from costing less, it also means having 33% less option premium to overcome.
From a mathematical standpoint, any market move in the “wrong” direction should result in being able to recoup 100% MUCH more quickly as you have less money on the table going the wrong way (1 option instead of 2)...that is, the market doesn’t have to move as far the wrong way to become “whole” again.
There is PLENTY of leverage using the 1 & 1. All you have to do is look at the numbers on any of the recommendations above and ask yourself if you would be satisfied with any of those potential returns…especially when you combine these “ample” profits with the probability of the 1 & 1 leading to far less frequent outright losses.
And lastly, this strategy DOES, I believe, allow me to commit to a market, be wrong for a while, but still be there in full force, with my original investment in hand…and in the market…when the move I am anticipating actually does come…And it should be understood, but I am always obligated to say it, that the markets can definitely NOT do anything I am expecting, and this can absolutely mean losing whatever you have on the table.
And a few more comments that I jotted down but never found a place for…
What are the odds all of these markets will flatline until expiration? Very low I think… And if they do move against me, and I can reposition at better prices, perhaps with more time, I am happy to do so…I AM STAYING ON THEM. Sooner or later (and I do think sooner) I believe something will set these markets on fire…as this IS the nature of the commodity futures beast.
The hardest thing to do is get excited when the markets are NOT going your way. But I have been there too many times…And when you just think, “No more!”, is precisely when you are supposed to be stepping it up and getting in…as always, using some form of risk management…the best being, I believe, the 1 & 1.
And I am writing this newsletter to convince you to follow me and DO THIS…with something.
The time to get excited is when nobody else is. And believe me, NOBODY out there is the slightest bit excited about Buying the Euro or Buying Soybeans. NOBODY. Think about it.
Pick up the phone if you think any of this is worth risking you hard earned cash on…
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Eurocurrency, Soybeans, Feeder Cattle