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September 16, 2014

 ALL OPTIONS RECOMMENDATIONS IN THIS NEWSLETTER INCLUDE ALL FEES AND COMMISSIONS.

 Still Short Cattle

They came roaring back but I am more bearish than ever.

I still think this is one of the biggest short trades ever.

The thing about tops is they can be about the most nerve wracking trade you ever can make. I liken them to a bronco trying to throw a rider, or a leaping trout trying to spit out a dry fly…They are not easy. They are volatile. They will scare the shinola out you. They will look like a rocket…But THEN, out of nowhere…they just stop. And it’s OVER. BIGTIME.

My guess is the last month’s action, in which both Feeder Cattle and Live Cattle have rallied sharply back to new highs, has pretty much convinced everybody, “You DON’T want to be short Cattle”.

I DO WANT TO BE SHORT. I THINK THIS IS AN INCREDIBLE TRADE. I CONTINUE TO BUY PUTS. I CONTINUE TO EXPECT, MINIMALLY, A 25% MOVE ON THE DOWNSIDE.

9-16-14feedermonthly.png

And when it comes down to the nitty gritty…to the numbers…Here is how I see it:

I may be dead, dead wrong but I say THIS IS GOING TO HAPPEN. At some point, Feeders ARE going to come off 20 or 30 percent…or more…And it is my intention to be there when it does happen.

And a 15% decline, from here, translates into 35 cents, or $17,500 per futures contract….A 20% decline would be 46 cents, or $23,000 per futures contract…And a 25% decline would be 57 cents, or $28,500.

And yes, those are big numbers, but as I have noted over and over in these newsletters, those ARE the percentages that futures contracts routinely move in. 20% to 30% swings ARE pretty much the norm is just about any commodity you want to examine…And no, I do not know that this will happen but I think the risk (very real) is worth the reward.

9-16-14feedermonthly2-185target.png

So I think this has the potential to be a big, big trade…that from SOME point, this market will reverse and go in the tank…and again, I absolutely intend to be there when it does.

With something like this, there are two ways to go…as always really. You can just buy puts and stick with a plan to buy more puts if the market stays up (and you lose on what you’ve already bought), or you can use the 2 &1…which is more expensive, but aside from giving you the very real chance to recoup 100% of what you invest if the market does trade higher…and then be able to reposition at higher levels with the same money…but it also pretty much doubles the size of your position when (if) the market does start down.

And here is the 2&1 that I think makes tremendous sense at current levels…It has a LOT of time. You are covered if the market continues to roar higher, and I think it has the true potential to return 4 or 5 times your money. Obviously, if Feeders go sideways here, you could also lose every dollar you invest but this is a risk that I think is balanced out by the potential reward. AND…if, for example, 5 months from now we are still trading at or above current levels, you can bet I will still be making the same recommendation, as the longer and higher this market stays up, the bigger, I believe, will be the potential gain on the downside.

9-16-14jan15feeder214puts.png

 9-16-14nov14feeder224call.png

HERE IS A MORE DETAILED EXPLANATION AS TO HOW THIS IS DESIGNED TO WORK…

The supposition and the numbers: This last new high is either the final fake out, running out the last shorts, or maybe it means we are starting another leg higher. If it was a fake out, then the next thing we likely see is fairly straight down and the call will disappear in value...and the puts will take off towards much higher values…But if it IS another leg up, all we want is to get the $7658 back which equals a little more than 15 cents in option values. Therefore, at 234, NOT far from here, the 224 call is 10 cents in-the-money and probably worth at least 12 cents. If the 2 Jan 214 puts are worth 1.5 cent each (easily), the result is you can sell the call and the puts and have the $7658 back in your pocket. You then take the money and do another 2 &1...only you are now positioning 10 cents higher.

As always, if the market goes sideways, it is entirely possible that all of these options can expire worthless…and you lose everything you have on the table…But again, if this were to happen, it would mean Feeders are still up here…and I would be recommending that you spend the money one more time.

For sure, there are various ways to do this, including just buying the puts, with no defense, but I absolutely believe the 2&1 is the best way to go…But my primary point would be that whatever strategy you employ, you need to be ready to spend the money again if the market doesn’t fall from here.

IT DOES NOT MEAN I WILL BE RIGHT BUT I DO THINK THIS IS ONE OF THE BEST COMMODITY MARKETS SHORT TRADES I HAVE EVER SEEN. PERIOD.

 

Still Short Cocoa

Still looking for 25%-30% decline

Maybe the selloff is now underway

As I have repeatedly pointed out this year, Speculative Traders are more long Cocoa  than they have ever been in the history of this market. Commercial Traders are dead opposite them with the biggest short position they have ever held.

It has been my very firm conviction this “imbalance” will at some point precipitate a classic commodity market collapse…and I still believe Cocoa WILL trade down AT LEAST 25% from its contract high ($3300 a ton), which now translates into about 800 points, or $8000 per futures contract.

9-16-14cocoacommitments.png

For sure, the fact that so many specs are so long does not mean the market HAS to sell off…There are no absolutes in this business…But this IS a game in which buyers and sellers do dictate the action and I have seen this script play out too many times to ignore the idea that, sooner or later, all those spec longs WILL have to exit those positions, and they most likely will be doing so as BIG losers, NOT as winners. I mean, really, when have you ever seen it work out any differently?

And then there are the following 30 year stats from a newsletter earlier this year…

SINCE 1984, IN EVERY YEAR, WHETHER CUMULATIVELY BULLISH OR BEARISH, THERE HAS BEEN A NOTABLE DECLINE AT SOME POINT DURING THAT YEAR. THE SMALLEST DECLINE HAS BEEN 12.6%. IN 23 OF THE PAST 30 YEARS, THE DECLINE HAS BEEN AT LEAST 20%.

Cocoa – Largest Declines Observed During Calendar Year- The highlighted column is definitely the main point here.

Year

Contract month

High Trade

Low Trade

Net Change

Percent Decline

2013

Dec

2449

2140

-309

-12.6 %

2012

Dec

2555

2050

-505

-19.7 %

2011

Dec

3600

1898

-1702

-47.2 %

2010

Sept

3511

2562

-949

-27.0 %

2009

May

2917

2188

-729

-25.0 %

2008

Dec

3273

1867

-1406

-42.9 %

2007

Dec

2164

1750

-414

-19.1 %

2006

Dec

1767

1396

-371

-21.0 %

2005

Dec

1887

1315

-572

-30.3 %

2004

July

1705

1299

-406

-23.8 %

2003

Dec

2290

1360

-930

-40.6 %

2002

Dec

2405

1705

-700

-29.1 %

2001

July

1214

854

-360

-29.6 %

2000

Dec

1037

674

-363

-35.0 %

1999

July

1475

860

-615

-41.7 %

1998

Dec

1799

1395

-404

-22.4 %

1997

Dec

1777

1490

-287

-16.1 %

1996

Dec

1479

1286

-193

-13.0 %

1995

July

1487

1200

-287

-19.3 %

1994

Dec

1580

1169

-411

-26.0 %

1993

July

1056

845

-211

-20.0 %

1992

July

1325

785

-540

-40.7 %

1991

July

1290

860

-430

-33.3 %

1990

Sept

1541

1060

-481

-31.2 %

1989

Dec

1538

890

-648

-42.1 %

1988

Sept

2029

1160

-869

-42.8 %

1987

Dec

2160

1720

-440

-20.4 %

1986

July

2376

1641

-735

-30.9 %

1985

July

2341

1963

-378

-16.1 %

1984

Sept

2747

1960

-787

-28.6 %

What do I get from this?

Firstly, there is nothing that says a 20% decline HAS to take place this year.

However, statistically speaking, I DO think having a 20-25% lower target, sooner or later, is a realistic objective…and considering the overloaded spec long position, I am quite comfortable in looking for AT LEAST 25%...which translates into a minimum objective of about $8000 per futures contract.

Enough said, except to once again point out that EVERYTHING I read refers to “strong demand” and “annual production shortfalls”, and NOTHING I read suggests Cocoa could take a hit…But if you know anything about futures, you must know this is pretty much exactly what you hear at every commodity top.

I CERTAINLY DO NOT KNOW IF A COLLAPSE HAS BEGUN BUT I’M NOT GOING TO SIT HERE AND WONDER IF IT WILL RALLY AGAIN. FOR MY MONEY, YOU GET SHORT NOW, OR ADD TO EXISTING SHORTS, AND GO WITH THE IDEA THIS MAY BE WHAT I’VE BEEN WAITING FOR.

9-16-14dec14cocoa2&1.png

 I am still long Treasury Bonds…

My last newsletter, titled “FLY OR DIE”, in Treasuries, was spot on…only the latter is what they did. For the umpteenth time since January the Bonds made new highs, looking like they were ready to run…then backed up again. And even though the 2&1 I recommended would have worked perfectly on the defensive side, I’d be lying if I said I wasn’t surprised by the extent of the down move…now totaling almost 5 points.

BUT, this retracement does not change my opinion. In fact, with 99% of the pundits now yapping about what the Fed’s “language” regarding rates will be following their meeting tomorrow (this is Greek if you don’t follow the Treasury Bond market), and with 99.9% of financial analysts dead certain long term rates can ONLY be going up, RIGHT HERE I BELIEVE YOU ARE SEEING THE PERFECT PLACE TO GET LONG THIS MARKET…AND THAT RIGHT HERE, RIGH NOW, IS WHERE YOU CAN BUY BONDS WITH THE EXPECTATION OF HAVING THE FAIRLY STRAIGHT UP RALLY I HAVE BEEN PREDICTING OFF AND ON FOR MONTHS NOW…No, I’m not just being stubbornly bullish…Bonds ARE still in an uptrend. And in spite of the fact 99.9% of the talking heads will tell you that if the Fed does indicate they are ready to raise short term rates, then Bond rates will go up as well (and bond prices go down), I am going to tell you, “They are just as dead wrong as they always are…and have been all year”. This is just my own opinion, but for a variety of reasons, I think any indication the Fed is actually ready to raise short term rates will be BULLISH (not bearish) for Bonds. Much of my reasoning can be found in earlier newsletters this year, and even though Bonds have just backed up 5 points (actually quite normal for them), none of my analysis has changed.

In the interest of brevity (not one of my strengths), I’ll say that if you want my full spiel on the subject, give me a call. For the moment, I’ll just say that, no matter what the Fed’s “language” is tomorrow, five minutes later there will still be many billions of dollars ready and waiting to buy every Treasury instrument the US government wants to issue…and all that money won’t give a hoot as to whether short rates are at .25, .50 or whatever. Deflation is currently more of a fear than inflation. US Government Debt Instruments are STILL the safest piece of paper on the planet…and there is a WORLD of money looking to buy it, in the billions, EVERY DAY the sun comes up.

 Buy Treasury Bonds Now

I think this is finally the big one…

when they don’t start, then stop again.

9-16-14bondsspotdaily.png

9-16-14bondmonthly.png

9-16-14dec14bond2&1.png

 Returning to an old recommendation

Buy Soybeans

(and Corn, Wheat and Cotton)

I am out of gas so this section is going to be quick…

The bottom line is I have to go back decades to find a time when I have seen traders and analysts as BLINDLY, OVERWHELMINGLY BEARISH as they now are in the Corn, Wheat, Cotton and Soybean markets…The whole trading world is locked in on these “best crops ever” and assumptions are rampant that prices will be staying “down” for years to come…And you readily agree with all that bearishness, you’d better understand that all that bearish “logic” is coming from all the same people who were cawing about us “running out” of Corn and Beans just a few years back…and sounding like prices would stay up forever…when both of those markets were MANY dollars higher in price than they are now.

One more time, the markets are nothing more than the world’s biggest mob psychology game. No value is real. There is no equation out there that can be formulated as “x” supply vs “y” demand = “z” dollars in price. It’s as simple as noting: If Soybeans can go from $13 to $11, then back up to $12, and then down to $10, all within the space of a7-8 weeks (as recently was the case), to suppose that the markets are actually based on “fundamentals” is absurd to me. Undoubtedly, supply and demand do matter, but what matters more, I firmly believe, are the cash flows of buying and selling…who’s getting in, who’s getting out, what’s hot, what’s not…

As stated above, I can’t recall seeing all the chatterboxes as bearish as they now are…and from what I can see, EVERYBODY has now TOTALLY bought in to the short side of row crops…and this can be readily seen in the first of those markets I want to focus on going forward from here…that being Soybeans.

Very quickly…Here is where the “mob” is currently positioning…

9-16-14soybeancommitments2.png

It’s late in the day so I’ll end by just getting straight to an option I like here…

9-16-14jan15soybean1000call.png

FIND A SOYBEAN BULL…ANYWHERE…THEY DON’T EXIST.

I’m done. More on the grains the next time around…

The truth is, I think one of the smartest blind plays you can make now would be to go out and buy equal dollar amounts of at-the-money calls in July 2015 Corn, Cotton, Wheat and Soybeans…and then forget you own them until next summer…This is an idea I will develop in another newsletter but some of you will easily see the logic…and potential…of just such an idea.

And one more thing…The cattle market has priced in cheap corn for the next few years. Cattle guys, just like grain people, are SURE feed is going to stay cheap…and I think they are in for a major surprise…Where will Feeders be if Corn “surprisingly” rallies a dollar? I’d say they sure as heck won’t be anywhere near $2.30, or for that matter, even $2.00.

Enough for now,

Give me a call if anything here looks like a decent idea to you…or just to talk. I always like hearing from all of you.

Thanks,

Bill

866-578-1001

770-425-7241

The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Feeder Cattle, Cocoa, Treasury Bonds, Soybeans

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