August 16, 2006
Sidelines in Corn, Soybeans and Wheat
On May 9th, I started making a blanket recommendation to buy the four major USA export crops---Corn, Cotton, Soybeans and Wheat. Even though Corn, Soybeans and Wheat all had small to moderate rallies, and a LOT of volatility, they now look to have "failed" in varying degrees and I have basically moved to the sidelines in all three of them...With world stocks still quite tight in Corn and Wheat, Soybeans still trading at very low levels, and with China looming as a potentially major importer, I do expect to be buying these markets again within the next few months. Maybe I am giving up when they are "in the hole", but for the time being, I have no immediate recommendations in any of them.
Still Buying Cotton
I believe Cotton is another story...For the past few years it has been in its own world, moving dead sideways...As you have heard over and over from me, I see this two year consolidation as a major base from which Cotton will, SOONER or later, explode upward in a very big way...I continue to recommend buying slightly out of the money Cotton calls using the December, 2006 and March, 2007 contracts...If Cotton is finally going to go anywhere on the upside, I just can't imagine it being anything small.
Still Buying Treasury Bonds
Random comments: Bonds closed into new recent highs today...The Fed probably is totally done...Two years of tightening are beginning to result in lowered inflation numbers as well as inflation expectations...Considering the fact that the past few years have seen nasty inflation numbers and bonds have basically just traded sideways (NOT down), lowered inflation numbers should be VERY bullish for the bond market...I still say there are no real natural sellers of bonds, just mountains of speculation that they "have to go lower" and "rates higher". At the same time, due to the demographics of the baby boom, there should be more and more of steady influx of bond buyers...In 20 out of the past 20 years, at some time during the life of the December Bond contract, there has been at least a 10 point bull move...The current contract is now about 4 points off its lows, representing this contract's biggest bull move so far...For years, bonds have had a tendency to be stronger in the second half of the year...Even though bonds are moving up, option prices are as cheap as I think I have ever seen them, leading me to think NOBODY believes they are going up, which, from my experience, is exactly the way it should be.
I STILL SEE BONDS AS A ENORMOUS BUY AND AM STILL VERY MUCH A BUYER OF DECEMBER CALL OPTIONS.
Still Buying Eurodollar Futures
(This is not the Eurocurrency)
Still Buying Hogs & Feeder Cattle
This is a purely technical trade established on August 7th. Both of these markets are in strong uptrends while small speculators are rather heavily net short both of them. As I said last week, the meat market options routinely seem to offer a ton of leverage in that big non-stop moves are seeming almost the norm in Cattle and Hogs...
I think both of these markets are still strong buys...
Even though I have been doing technical analysis for over 25 years, in general, I am not that big on expecting 1-2-3 trendlines to be that important. However, every now and then lines do occur that just jump off the chart at me...Such is the case in of the September Crude Oil shown below...This uptrend has been so well defined, and so perfectly so, for so long that the 18 month trendline is one that I think has potentially major importance...that if definitively "broken" (which appears to be happening), it could be the precursor to a significant sell off in the crude oil market.
Whatever you read, the bull market in energy IS an old, old story and there is nothing that says we can't "suddenly" be at $50 a barrel...If there's one thing I know in this business, I don't care HOW good the market looks, or how bullish the fundamentals, any of these markets can crack wide open at any time. With all the billions of dollars in hedge fund money that have poured into the futures markets during the past 2 or 3 years, volatility has increased dramatically in virtually all the markets, to the extent that it has almost become axiomatic that bull markets are ending, or correcting, in 20-25% gulps...HOWEVER bullish the "story" may be.
Even though we are just entering the heart of hurricane threats, I am relatively certain the industry was probably heavily stocked up in anticipation of more hurricane activity than we have seen so far this year....I also note the Israeli-Hezbollah war only produced a short-lived spike into new highs...And the BP thing did even less...Bottom line is the energy market could be sitting here, at about as big a technical point as you ever get, on very thin ice.
That's enough for one newsletter I think...Call me if you have an interest in any of these ideas...or any others, even those that are dead opposite my own opinion...