Oct. 7, 2005
As I believe Cotton is currently one of the most undervalued commodities on the board, on September 6th I recommended re-entering Cotton on the buy side. Cotton has spent roughly 90% of the past 30 years at prices above the current 54 cent level, and, as it is not exactly a commodity that is being phased out of use, I just don't see it staying at these very low levels...In fact, I think it could easily be 25-30 cents higher by next summer. The size of our current crop, while always subject to adjustments, is pretty much a known, while I cannot imagine worldwide demand, which is quite strong, doing anything but getting stronger....Although I may be terribly wrong, I think prices have no where to go from here, but up, a lot.
This is anecdotal, but in talking to various individuals in the cotton business around the country, I have recently heard something like the following from virtually everyone: "Last year, we had cotton jam packed in the warehouses (and in some places the overflow was under tarps on football fields), but right now, I don't think I have ever seen the warehouses as empty as they are today". I first started hearing this last month, which surprised me as prices are just about exactly where they were a year ago....
Sentiment is currently quite bearish in cotton, with the typical analysis talking about "too much supply", which is not at all unusal at a market bottom....But, in a nutshell, something doesn't fit....There's no cotton around compared to a year ago (I obviously don't mean this literally) but the price is still the same? If the USDA were to come out and surprise everyone with a "revision" of their Supply-Demand Outlook, it wouldn't be the first time, cotton, or any other market, suddenly exploded on that sort of news to an entirely new price level....which I think could easily be a possibilty in this case.
Maybe I'm wrong but I look at cotton and see a MAJOR bottom having been formed over the past 14 months. Anybody who ever dreamed of being bullish has probably long since given up on the idea and has zero expectations on the upside. I love the immediate look of this market and believe it is poised to possibly just blow out of here and do much more than the 10-12 cent rally we experienced (both ways) earlier this year. I am buying futures and options in both the December 2005 and March 2006 contracts. My initial target is somewhere in the mid to upper 60's.
Buy Treasury Bonds
We exited all of our long positions in Treasury Bonds on September 1st and have since watched them "drift" about three points lower. I continue to think the Treasury Bond market is still in a long term bull move and am now buying the December contract again. I look for this market to be at least 7-10 points ($7,000-$10,000 per futures contract) higher by late January, 2006.
VERY briefly, in spite of the Fed raising short rates for over a year now, and in spite of all the Oil/China generated inflation talk, and in spite of all the talk of Foreigners dumping our paper....in spite of anything you want to name, the Treasury Bond market has been rock solid.....As I have said for some years now, even though the economic analytic community keeps talking about long term rates going higher, in the real world, nobody is really selling US Government Securities that still have 15, 20, or 25 years to maturity and are paying 5, 6 or 7 percent rates, guaranteed by the United States Government. Furthermore, as the Baby Boomers of the industrialized world approach retirement, this certainly means there is more and more of an ongoing interest in owning a 10 or 20 year paper investment that is the ultimate in safety and currently yielding 4.5%, ....Everybody keeps wondering why long term rates won't seem to go up....I think the answer can be summarzied as: No Real Sellers vs A Steady Influx of Buyers. This is not the recipe for a bear market.
As I also pointed out in my August 24th newsletter, Treasuries have an historical tendency to be quite firm between September and year's end. It is my guess that the demand for borrowed money lessens at this time of year and the price of borrowed money (interest rates) therefore tends to fall, and bond prices rise. This is an over-simplification and may have nothing to do with how bonds trade, but if you return to that August 24th newsletter (which will soon be on the website with which I have had technical difficulties and been unable to update for several months) you can see the evidence for yourself.
As I have pointed out many times over the years, I consider Treasury Bonds to be THE contrary opinion market....that when a bull move is taking place, all you will hear is, "It's going down!!!!", and vice versa when they are going down....Think about it....If you had to name the one idea that today would seemingly be the most insane trade you could think of, wouldn't it be, "Buy Bonds. Long term rates are going LOWER"?....I assure you I am not taking this position just because of opinion, but it is a part of the equation....One of the toughest things about trading futures is, to be successful, when it's time to buy something "nobody else wants", on the surface it just doesn't seem to make any sense at all. Those adages about buying something "when nobody wants it" are easy to talk about, but more often than not, VERY difficult to actually follow through with....And in the interest rate market, which is always all over the media, it is even more difficult to do.
If you have read my newsletters for many years at all, when it comes to Bonds, you know I could go on and on and on....Truth is, I could probably write another four or five pages as to why I am bullish, but I'll just leave it with what's already been said. As I said before, this idea will strike 99% of the world as just totally insane and utterly stupid (which it may prove to be), and as is the norm, practically no one will have any interest in taking this position. At any rate, here are a few charts....
Copper has been beating me to death for months, to the extent I have almost decided, "It's never going down". But then I remind myself that the futures markets have an uncanny way of convincing you your opinion is just wrong, wrong, wrong....just before you are about to be right. I really have no idea when copper is going to break, only that I "know" it will, and as I have pointed out in previous newsletters, if the past is any guide, when it does turn, the move down is a VERY big one. I am now buying puts on the December 2005 and March 2006 contracts.
I know there are a few of you out there who will really come down on me on this one....
I look forward to your emails....
I think the Gold market, the perennial darling of the commodity markets, has set a lot of people up for a major disappointment. Gold moves on emotion, not lack of supply, and as I now have novice futures traders calling me with extremely detailed explanations as to why Gold is the place to be for the next 2 to 3 years, I suspect we have reached the sort of emotional "high" I have seen more than a few times in this business. The bullish logic is all there: How inflation is going to run rampant, how on a worldwide basis people are going to dump paper currencies, how foreign governments are/will be getting out of paper investments to buy Gold, how Gold has detached itself from its tradional inverse relationship with the Dollar, how Gold is "breaking out" (after a 4 year bull market?), or how it is absolutely ignoring everything related to it, is traveling in its own world, and can ONLY be headed higher.....And I must add my favorite reason heard lately, that the Wedding Season is coming up in India and Indians will be buying lots of gold as wedding presents (!?)...Maybe I've got this one wrong, but I don't think I can handle one more prediction of the CERTAINTY that Gold is now set to take out $500 an ounce, to the extent that the next $25-$50 on the upside is supposedly just easy money.
I am shorting Gold and look for anything from a $40 to $60 collapse between now and early 2006.
I tried this back on September 13 using units of two puts to every call and exited the trade six days later getting back 90%-100% of what we had on the table....and I am now ready to do it again. Per Commitments of Traders, I note that the number of speculative longs in Gold has jumped by 20% since I initiated that trade on September 13th, meaning that since then 1 in every 5 long contracts in Gold is a new one. Specifically, as of the most recent Sept. 27th figures, there are now 290,261 speculative longs against 81,516 shorts with roughly 50,000 of those new longs having been initiated during just the last two weeks of September....There is nothing about these numbers that says Gold cannot go higher from here, but I would also note that one aspect of bull markets before they top is to see a herd of late-comers pile into the market right on the highs....All things considered, I think that's what we've seen here. One thing I know about this business is there ain't no easy money, and that's how a whole bunch of people see the next $25-$50 in Gold.
Just for comparison, do you remember how nuts, and how INCREDIBLY BULLISH sentiment was regarding the Crude Oil market as Katrina blew in? Look at it now. In spite of a follow up from Rita, Crude has dropped from $70 to $61 (13%)during the last month....If I am right about Gold from here, I think the percentage drop will easily be the same, or worse...As I said before, Gold trades on emotion, and one of the more "emotional" aspects of futures trading is when something is "falling out of bed".
I am buying units of 2 puts and 1 call in the December 2005 and February 2006 contracts. Like last time, I think I will either be very wrong or very right, which, using the "2 and 1", should work out fine in either direction. The last thing I expect Gold to do is just sit here and go sideways.
Looking to Buy the Stock Indices
On September 6th, I recommended buying the stock indices with roughly a 200 point stop in the Mini-Dow and a 30 point stop in the Mini-S&P. All of those positions were stopped out several weeks ago but I am taking a hard look at reinstating those positions. My feeling is still pretty much the same....I believe all the fears over Energy, Interest Rates, Inflation and Hurricane Devastation have been built into the market and the sell off this week is helping to set up the Stock Indices as a buy. I am not back in yet but I have my finger on the trigger (hopefully the gun is not pointed at my head). I basically think the energy bull market is totally over, that long term interest rates are NOT going higher, that inflation has already been accounted for (and will be sliding back down anyway) and that all the money being thrown at the Gulf Coast rebuild is only stimulative.....All of which will be positives for stocks and the economy....I may be back on this trade early next week....
Give me a call if you are interested in any of this....