June 25, 2020
Since I began my “Buy Everything” campaign on March 18, many of the markets I recommended have made quite solid to exceptionally strong bull moves…but the bottom line is that my number one trade, Long July Soybean Meal, has absolutely been the worst performer of all the markets I have been recommending…And with Meal having made new lows in April, and then gone dead sideways ever since (the worst thing that can happen with the both sides approach), and with the July options expiring in a few days, the trade has been a total bust…for me and everyone who has been on it.
Sometimes, part of this game is just STAYING in the game…which unfortunately means having to put more cash on the table…and that is where I am regarding the Soybean complex and other markets right now…As always, I may be dead wrong but I believe the odds are quite high that the rallies that have occurred in so many other markets (see charts below) is precisely what we are about to see in Corn, Wheat and Soybeans…and I therefore continue to recommend being long all three…as well as the three meat contracts, Feeder Cattle, Live Cattle, and Lean Hogs.
Coronavirus or not…The demand for feed and food will NOT be going down…While by the same measure, I do believe that the continuing spread of the virus CAN impact the supply side of the equation in these 6 markets.
And never forget, at this time of year, with none of these crops having been made, weather can always become a factor…and a very dynamic one.
First up, here’s a look at the bull moves that HAVE taken place in any number of markets…and I would emphasize that they started those moves several months ago when sentiment was almost unanimously bearish in ALL of them…particularly in two of the biggies, Crude Oil and Stocks.
And before getting to the feed and food markets that I believe are all ready to potentially duplicate some of the bull moves seen above, I want to address the current Coronavirus situation here in the USA…and what I believe will be its impact on Stocks.
Since my first “Buy Everything” recommendation, including the Stock Indices, on March 18th, I have been resolutely bullish the Dow, S&P and NASDAQ. However, due to the chart that follows, and its implication (in my view) that the “opening up” of the economy is about to result in monstrously worse infection numbers than we saw at the peak about 6 weeks ago…I AM NO LONGER BULLISH THE STOCK INDICES…I do not want to be short…but unless something is done to reverse the current trend on the chart below, I can easily envision Stocks stalling out here…and perhaps drifting sideways to lower.
Wishing and hoping will not make the virus disappear…
The self-proclaimed “genius” in the White House can keep saying, “It’s going away,” all he wants, but the numbers are unquestionably heading in the wrong direction as the ignorant (yes) masses stream into the bars, beaches, streets and businesses, maskless or not, much to the delight of the gazillions of virus particles out there that don’t care about politics or the economy…that exist to do nothing more seek out new hosts…and most importantly…to do so in EXPONENTIAL fashion…In other words, the virus does NOT just spread on a 1 to 1 basis…As an example, just doing some simple math, one person out in the public, for example, can EASILY infect four people (or many more)…and then those four carriers can then just as EASILY result in 16 new infections (or MANY more)…and then it’s 64 new people infected (or MORE) and so on…The point is, unless measures are being taken to turn the number of cases down…and keep taking them down…the number of infections, and hospitalizations, and deaths WILL expand exponentially…meaning bigger, and bigger and frighteningly bigger numbers…eventually, I believe, resulting in the need for more drastic actions (in shelter, social distancing, closings, etc.) than we have already seen…which, I am supposing, could put a cap on stocks for a while.
If you can read this chart any differently than I do, please let me know…And I assure you, the numbers are NOT going up because of “more testing.” If you believe that, try finding a bed in an ICU in more and more cities and states as we go forward from here…
So, one more time: The infection rates are NOT going in the right direction...and simple mathematical exponentials argue that if it's not going down? Then the numbers will ONLY get worse...at a faster and faster rate…I mean really…As soon as various states and entities started opening up…the numbers started climbing, and as a science, facts and numbers guy, I CANNOT IMAGINE THAT THE INFECTION RATE IS JUST GOING TO “GO AWAY,” OR FOR THAT MATTER, EVEN SLOW DOWN WITHOUT A REVERSION TO MEASURES THAT WERE IN PLACE BACK IN APRIL. And believe me, this has NOTHING to do with politics. My opinion derives from nothing more than an observation of straightforward statistics, and I think, basic common sense conclusions.
So I see stocks heading sideways from here…
And if you need further confirmation that “opening up” was a mistake…and could be leading to a bigger nightmare than we’ve yet seen, consider that Georgia was the first state to reopen…And I would this next chart argues that A PREVIOUSLY BAD MEDICAL SITUATION IS IN THE PROCESS OF GETTING WORSE…and maybe extremely so. Again, under no circumstance can I believe that the “Newly reported cases” in Georgia will just magically start to go in the opposite direction of where they obviously now seem to be heading…And I’ll reiterate, if they are not going down, they WILL get worse…exponentially so.
Three New Recommendations
Even though there are actually 7 or 8 markets that I currently see as strong buys…My focus for the next 2-3 months will be on the following three trades…as I view all three of these markets…Soybeans, Cotton, and Feeder Cattle…as being what I would classify as consistently DYNAMIC movers…that is, when they go, they often GO BIG…and that is where I want to be.
To reiterate, it often happens that part of this game comes down to just STAYING in the game. And this is very definitely the case when it comes to having owned Corn, Wheat and the Soybean Complex this year…which have all been essentially sideways while all of those other markets were rallying for the past few months…But I DO think that is about to change…
For one, in spite of what I believe might be coming for the economy, I maintain that the demand for feed and food can ONLY be going higher…while at the same time coronavirus problems COULD negatively impact production and the supply side…As in, what happens when/if the virus worsens in rural America…or when local farm machinery/seed/fertilizer dealers have to shut down due to infections or quarantine? Or if we start seeing even a small percentage of farmers fall ill? Not to mention that weather, as always, can become a bullish factor as we go through the summer…
For sure, I don’t know what the specific effect could be if the pandemic gets worse, but I will say it again, I DON’T THINK IT WILL LESSEN THE DEMAND FOR FOOD…but it COULD affect being able to get it…We all know that prices at the grocery store are soaring…which doesn’t automatically impact prices at the producer level…But, in these times? Who knows? WE HAVE NEVER BEEN HERE BEFORE.
I’d also say that a very definite part of my mentality right now is that when markets “look like they are starting to go”…to expect BIG movement…to not, after suffering though the recent trade in the Meal, get antsy about grabbing the first decent profit I see…to truly expect action similar to what we have seen on so many of those charts above…And to have the psychological fortitude to sit tight and ride as/if any of these three markets gets going on the upside…I’d also add that I keep reminding myself that when markets are moving, they USUALLY go a LOT farther than anyone, myself included, ever even comes close to expecting…and with all the moves we’ve been seeing of late, I believe the tendency towards giant swings becomes even more of a possibility.
And finally, especially in this atmosphere of such high volatility, I cannot do anything but recommend religiously sticking with the Both Sides Strategy…And if possible, to be in all three of the markets listed below…As I have often noted in the past, if just one of them gets it going, and the other two have the worst possible outcome…that is, go dead, dead nowhere…that one winner CAN still easily do enough to have you come out ahead. It goes without saying that if all three just sit there, you could easily lose everything you have on the table…but the flip side is, obviously, that having two, or all three, working for you would likely mean a dramatically positive result.
Here are the trades and options I would recommend at current levels…
They DID make their low in April…and I believe are just one decent upside day away from breaking into new highs…and “starting to go.”
This market has been “crawling” higher…Similar to Soybeans, I think it is just one good day away from erupting to the upside…And if you are a “cotton guy,” you must be aware that not a single analyst I’ve seen has been “friendly” to Cotton for the entirety of the move since April 1st, totaling 15 cents…and they STILL aren’t…And the next thing I’d remind you, and you MUST know this is accurate, that when Cotton IS ready to quit on the upside, pretty much every analyst that ever comments on this market will be hopping-up-and-down bullish…talking about the “next 10-15 cents,” instead of the “over-priced,” or “can’t go any further,” or “due for a setback,” sort of talk that is STILL present in just about any analysis I see regarding Cotton.
We are in a bull move…and nobody is bullish…Which you KNOW they will be…but AFTER we’ve had a run up into the 70’s. Really. How many times do you have to see this to not understand NOW is when you need to be LONG.
Buy Feeder Cattle
For decades I have been of the opinion that the Meat markets routinely make the biggest, craziest and often non-stop moves of any market we trade…and therefore, if you can get on the right side of what they are doing, there simply is no greater ride you can take in futures…Obviously, getting on the wrong side can be just the opposite…a nightmare of sorts…which, when you get down to it, makes them perfect for the 1 & 1 approach.
Similar to so many markets, Cattle made their low in early April and have been holding higher ever since…AND…like Soybeans and Cotton, are just one good day away from breaking into new highs, and I believe, going kind of nuts on the upside.
What all the Cattle guys are talking about…
Regarding the market “chatter” among cattle traders, I will tell you that there are three MAJOR reasons, KNOWN to all, and repeated over and over by analysts, NOT to expect a bull move from current levels:
And OK, as always, that “logic” seems to make sense BUT…I would argue, as ALWAYS, all of that information has already been factored into market prices.…That the massive sell off we had back in March (chart below), and the April 6 hard reversal low, were when the FUTURES markets WAS accounting for points 1,2 and 3 above…and that we are now headed in the opposite direction…same as has been the case in Stocks, Crude, Copper, Lumber, etc…NONE of which, according to analysts and talking head should ever have gone up at all…Really. One thing I “know” about the markets is that when you ask anybody in an industry, “What’s bullish?”, and the answer is “Nothing!”, but they then can give you a solid LIST of reasons to be bearish, you definitely need to be looking at the long side…ESPECIALLY when, as is the case now, that market is trading more towards its recent highs than its lows…with STILL, virtually all of the “analysis” arguing the sell side.
And yes, the Feeders are more expensive than the Soybeans and Cotton, but the obvious reason is that 20-30 cent moves ($10,000-$15,000 per futures contract) are not at all uncommon here.
Enough for one day. Give me a call if you want to talk about anything here…or the lousy experience of having been long Soybean Meal…and Corn…and Wheat.
All option prices in this newsletter include all fees and commissions.
All charts, unless otherwise noted, are from Aspen Graphics.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Milk, Soybeans, Cotton, Feeder Cattle