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June 10, 2010

I think we are back to "normal".

The Latest Crisis is over.

I actually wrote the headline above, and the first two paragraphs below, last summer (2009) as the intro to a newsletter that I never finished. At the time, following the Dow’s crash to 6500 several months earlier, fear was rampant that the world financial system was in danger of collapsing…which obviously did not happen. Most recently, some of those same fears have arisen again, inspired by events in Europe, with this “latest crisis” suggesting the possibility the European Union and the Eurocurrency might actually fall apart and take down the rest of the world with them…I firmly believe the so called “Sovereign Debt Crisis” peaked several weeks ago (is “over” in other words) and the perspective following is just as valid today as it was when I wrote it last July.

From an unfinished newsletter, July, 2009:

I don't mean everything is peachy on the planet but I do think we have returned to a state of affairs in which we are no longer dealing with the massive financial surprises that crippled the system during the last year or so. Yes, there are worries to be dealt with, but when has this not been true? Whether it's the deficit, or social security going bankrupt, or terrorism, or wars, or oil prices, or the Middle East, or inflation, or deflation, or rising rates, or stock market bubbles & crashes, or the Savings and Loan buyouts, or Enron, or Long Term Capital Management, or the Southeast Asia Crisis, or immigration, or bitter presidential elections decided by the Supreme Court, or 9/11, or Korea, Katrina or WHATEVER---In a normal economic world, there are ALWAYS critical events and situations which need addressing by the powers that be, and all of these crises are replete with multitudes of talking heads wringing their hands in despair while complaining that "what the government is doing just isn't working!", but somehow, the abyss has always been averted and we have all gone on happily with our lives, careers and retirements...Yes, the last few years have been devastating and the damage done has been on a scale unseen in decades, but aside from the fact that virtually every government in the developed world is doing everything it can to reboot the system (which WILL result in a positive, forward moving outcome), I also firmly believe there is a massive global economic inertia in force which was spawned by the confluence of the Information Age (basically computers and globalization) and the victory of Capitalism over Communism...Today, the world is all about business and economic development, not political ideologies, and although we have recently been through a major bump in the road, what we've really done is wrench out a number of excesses, and from somewhere soon, my guess is we'll be screeching back towards relatively full throttle...Though spending habits may have changed some, the consumer oriented personality/nature of the developed world's population will still be what it was two years ago...and I suspect we will quickly be back on the same tracks we were on before. Maybe there will be some degree of subdued financial behavior for a while, but my guess is will not be long before those masses will be back to buying consumer goods and services very much like they used to...which is what keeps everything going...and several years from now, just like the recessions of 1973-74, 1980-81, 1990-91 and 2001-02, all the sad stories will just be memories...of very real and very difficult times, for sure, but NOT a collapse of the system as we know it.

The bottom line is, while there is still bad news galore, I absolutely believe we have turned the psychological corner (quite important), and while I don't expect world or US GDP to suddenly be zooming along at 5% annual growth, I do think the global capitalistic system is still very much intact, and the world and the markets, as I said before, are now very much back to normal...Based on this assumption, and my 29 harrowing years in this insane business, what follows are my thoughts as to what "normality" will mean for several areas of the commodity futures markets, and hopefully how some money can be made, and not lost, from those thoughts...Even though I was very much in synch last year (2008), which generally led to some very profitable trading, as I am always saying, and I mean it...I may be dead wrong about everything I write here...So proceed at your own risk.

BACK IN THE PRESENT…June 10, 2010.

So here we are almost a year later, and as noted before, “the latest crisis” has the pundits worried that places like Greece and Hungary (??!!, with a GDP equal to about 1/3 the State of Georgia?) could result in a collapse of the Eurocurrency, and maybe even the entire European Union, and Europe’s demise could then subsequently bring down the rest of the economic world…Yes, I know that Spain, Portugal, Italy or Ireland might be waiting in the wings but I still maintain, as ALWAYS, the powers that be have not thrown up their hands, said, “what the hell!”, and run off to Tahiti. Without belaboring the point, I’ll just say the situation IS being addressed and the world WILL be OK. The “economic inertia” I mentioned is real. I’m sure we haven’t seen the last frightening headlines, but we are, I believe, absolutely back to “normal”…and the following chart presents the perfect picture of the “inertia” I’m referring to…There have been too many devastating events and situations to name during the past 60 years, but this chart just keeps on going higher. The USA, and the World, are going to be OK.

6-9-10gdp.png

The world economy is not coming to an end.
The international currency system is not about to fail.

Inflation (much, much less, hyperinflation) is not even remotely a worry.

AND GOLD IS THE MOST OVERVALUED COMMODITY ON THE PLANET

I don’t care what the market is, all of them rise and fall on nothing more than perceptions, emotions and mob psychology. About 10 years ago, I had watched gold spend 20 years going from $875 down to $250 an ounce, with the perception becoming more and more during those 20 years, “Who needs it?”. Now we are at the other end of the spectrum and I assure you gold is not at $1230 because of something like industrial demand outstripping supply...It is here on nothing more than speculative fervor based on at least one of the three statements made above being wrong…in other words, gold is now at record levels due to the idea the world financial system is truly about to come unglued, or, that we’re all going to be running around frantically trying to buy stuff before prices go through the roof…neither of which I see as even beginning to be a real possibility.

I have been bearish gold (and wrong) for quite some time but I think this European thing may have been the last emotional  icing on the cake…I mean, here we are at $1230, most recently on fears that Europe was about to fall apart…Last year, a major part of the hype was supposedly that the USA was going under and the world with it…So what’s next? What’s bigger than the fear that fully two continents were supposedly about to fold the tent? I say nothing…that this story has been milked about as far as possible…and within the next year (max) you are going to see this market do something like we have recently seen in Crude Oil ($150 down to $30) or the Dow (14,000 down to 6,500)…No, I’m not saying I expect to see Gold go down by 50-75% in the next year but you do need to remember that these are the commodity futures markets, that these are the fastest, most leveraged financial beasts on the planet, and 30-50% price changes are not at all uncommon…So I do believe a 30% break, or $400 an ounce ($40,000 per futures contract) could easily be in the cards.

I mean, really, think about it…GOLD IS THE ONLY UNQUESTIONABLY BULLISH STORY IN THE INVESTMENT WORLD TODAY…Try to name one other market that even comes close to the bullish media bandwagon support we now have in gold…Stocks? Bonds? Oil? Grains? The Dollar?...I say you can find a real mix of opinion on all of those markets, and while there are certainly some people who are bearish the gold market, the overwhelming sentiment in gold is not even close to, “Could it go down?”. It’s all about “Hey, how HIGH could it go?”. Again, isn’t gold the #1 bull story out there now? Is there anything you can think of that compares to it? And what does this mean?...To me, it sounds exactly like what you get around the top of EVERY massively popular bull market I’ve ever witnessed…right before they go down in flames.

Here’s a maybe useless fact but I find it significant…Several weeks ago, specifically on May 25th, the world’s largest Gold ETF (SPDR Gold Trust) had it single biggest inflow of buying in over a year. If you want to, you can obviously argue that this just shows there are still plenty of buyers in the gold market,  but for my money, when you take a purely speculative paper investment vehicle, not the actual commodity, and tell me that on single day in May, in a market that has been going up for a long, long time, more people wanted “in” than had done so in 15 months, you are easily looking at a potential bull market case of “Who’s the last fool?”.

I BELIEVE GOLD IS SET TO CRACK WIDE OPEN. I THINK THE “EUROPE IS DYING” STORY WAS THIS MARKET’S LAST PUSH, AND THE MOVE BY BARELY $25 INTO NEW HIGHS WAS A CLASSIC GOLD MARKET TRAP. I AM SELLING FUTURES AND BUYING PUTS, LOOKING FOR A TRADE DOWN TO AT LEAST THE $850-$900 AREA…AND THINK THE SPEED WITH WHICH THIS MIGHT HAPPEN COULD BE ASTOUNDING.

6-9-10goldmonthly.png

6-9-10oct10gold.png

Inflation? Hyperinflation? The evidence has been exactly the opposite…

6-10-10cpi.png

 

 The Coming Disaster in Bullish Commodity ETF’s?

The first commodity ETF was introduced in 2003 as a means for speculators to buy gold without having to actually purchase the metal itself, gold mining stocks or futures contracts. The exchanges, but really the brokerage houses who constructed the product (beware!), would do it for you… Since then, this vehicle has become immensely popular, to the extent there are now 100’s of these funds worldwide that allow investors to invest in just about any commodity you can imagine. In fact, during the past year, approximately 25% of all stock fund inflows in the USA went to commodity specific ETF’s, which, when you think about it, is an absolutely staggering percentage…After all, the stock market is the “stock” market, not the commodity market…and by the CFTC’s latest count, the notional value of all those index fund’s investment in futures is now about $216 billion…up from zero just seven years ago!

As these ETF’s have been marketed as “hedges against inflation”, virtually all of that money has been entering the futures markets ONLY on the buy side, which has introduced an element to the futures markets that never existed before, that being the presence of speculative monies that are perpetual longs, never go short the market, and essentially only become sellers when forced to exit long positions due to outflows from those ETF’s…The result of this constant influx of long-side-only money has been to provide what I can only consider “artificial” support to a number of commodity markets. In other words, when you have a fairly stable number of producers, users and traditional traders using the futures markets (going long and short according to their needs/opinions), and then throw in, for example, the $500 million long side only dollars that investors placed in XYZ Commodity ETF in the last month, it HAS to affect the price…no question…as an upside influence (Wall Street, in their own selfish interests, argues otherwise). The result has been, I believe, that we get markets like soybeans that “normally” might be much, much lower in price but instead have been propped up sideways, at relatively high historical levels, for over 18 months now…I mean, here we’ve been trading $10.00 Soybeans and 40 cent Soybean Oil, but every time those markets came back to their lows, and looked ready to roll off a cliff, in came the ETF buyers and popped the market back up again...

However, in this business, nothing goes on forever, and I am convinced that this whole Bullish Commodity ETF industry, which has basically been losing money for investors for several years now, is itself, on the verge of crashing as a popular idea. The “Inflation is coming! Be ready!” hype that has been SO loud is now proving to be more and more dead ass backwards (again, note CPI chart above) in the current semi-global environment of job, wage and social service cuts, and I firmly believe the in-the-past ever constant flow of funds into Commodity ETF’s must be about to hit a screeching halt…And very importantly, with that first month the usual fund buying does NOT show up is precisely when (like maybe right now) you could see, for one, the Soybean complex absolutely get hammered…Initially, maybe all you get is a surprisingly fast break into new lows. Then maybe traditional traders and soybean producers (remember, there is a giant crop just planted in the northern hemisphere) start piling in on the short side, thus pushing prices even lower, with the next development maybe being the market has then lost something like 15-20% in just a few weeks. At some point in the move, all these ETF owners start wondering how in the hell they could be losing money so quickly (hey, these are stock traders getting an introduction to commodities), and, next thing you know, some of those BILLIONS OF LONG ONLY DOLLARS START SELLING…And from there, who knows how nasty that could get? Believe me, with my experience being this stuff always goes to extremes, $6.00 Soybeans and 20 cent Soybean Oil would not surprise me in the least.

6-10-10sept10soybeans.png

I still see this as the best 2&1 I have ever seen…Rally about 4 ˝ cents and you can recoup 100% by selling the call and two puts…Sell off 4 ˝ cents and you will be making money, but more importantly, that would put the market into new lows for the past year and have this thing looking like it is fully in gear to drop another 12-15 cents…Look back at the last 18 months here…Doesn’t a 5 cent swing, one way or the other, look extremely likely?

6-10-10oct10soyoil.png

What’s the perfect trade? Being able to put a wad on the table and have a high probability of either getting it all back…or making 2 to 3 times your money…? Obviously, it doesn’t always work out that way…Sideways does kill you when you own options, but after 18 months going nowhere, I do think the odds are sky high something big is imminent in this market…

Some examples of what billions in fund money
can mean in the markets…

In the interest of substantiating my expectations for at least a 25-30% decline in both Gold and the Soybean Complex, here are some examples of very recent sell-offs in other markets…

6-10-10july10copper.png

6-10-10july10crude.png

6-10-10july10lumber.png

6-10-10july10platinum.png

6-10-10march10cocoa.png

6-10-10may10sugar.png

My sense is all these extra fund billions in the futures arena are the reason for these extremely rapid and quite high percentage price changes…

Along these same lines, I would also point out that the Index Fund (ETF’s) Long Positions now represent 33%  of the total futures open interest in Soybeans and 31% of the same in Soybean Oil…To me, those are mindboggling numbers...

And in the event the Soybean Complex IS headed south? I think you are looking at a mountain (or three) of money that is going to be FORCED, in the hole, to sell Soybeans and Soybean Oil. Believe me, there is no telling how far down these two markets might go.

Here’s one more look at the soybean oil…

6-10-10sept10soyoil.png

Ok…running out of steam…Here are some quick chart looks at other markets…

6-10-10sept10bonds.png

6-10-10sept10eurocurrency.png

6-10-10sept10s&p.png

Give me a call if you’re interested in any of this…And I’ll say it again…The Soybean Oil idea IS the best 2&1 set up I have ever seen. If you have the cash, and are not on it, I strongly encourage you to pull the trigger and take a position. If you already own it, painful as it has been, I’d say GET MORE...It is sitting here at 7 month lows. This IS the most volatile time of the year for soybeans. I think the odds that something truly big is about to happen are sky high…And I sure as hell don’t think it will be on the upside. I still think this will be a monster…

Thanks,

Bill

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