October 15, 2014

Temporarily Sidelines in Treasury Bonds

We liquidated our last long positions this morning.

While I still believe the Treasury Bond market will eventually be trading substantially higher, probably even into new highs, with the market up 5 ½ points this morning, after having been recommending the long side since January, it just made sense to take the money and stand aside. We may be sidelines for days, or weeks, or even months. For the moment though, I just prefer to be out.

 Still aggressively Short Feeder Cattle

I don’t know if we’ve seen the highs but after last week’s possibly classic limit-up-to-limit-down reversal day, and several days more since of limit down (3 cents) moves (including today), it certainly might be possible. Even though Feeders are now 11 cents off their high tick, I still look at this market and say, “NOTHING HAS REALLY HAPPENED YET”. I fully expect to see this market down, minimally, 25-30% within the next 2 to 4 months. Translated, that would mean something like 60 to 70 cents, or $30,000-$35,000 per futures contract…And yes those are big numbers but they are simply a function, I believe, of what are fairly “standard” percentage price changes in commodities. The futures arena is not for the faint at heart. This is big leverage, meaning you are risking your cash with the knowledge you can lose a lot of money…or make a lot.

Call me if you want to look at some option price numbers. We seem to be moving a lot in everything and any option price I might put in this newsletter could be quite different tomorrow…

 Still Short Cocoa

With 50% of the world’s Cocoa production bordering the countries currently at the heart of the Ebola crisis, the action in Cocoa has lately been extremely volatile. Nevertheless, the market appears to have put in a significant failure and I continue to recommend owning puts here.

 I LOVE Long Soybeans…

All the grain markets are have gone seriously in the hole and the mood out there among analysts and traders is the most bearish I can ever remember it being. Two years ago, all those same people were wildly bullish Corn, Wheat and Soybeans and yammering about “running out of” all three crops. Now, the markets have been hammered the other way and the ONLY thing I now hear is “best crops in history”, and they are so bearish, I picked up the following quote today:

“Almost every grain analyst is suggesting to US farmer to sell 2014 stocks, 2015 crop and 2016 crops on this rally.”

Read that again. Paraphrased? Almost EVERY analyst out there is telling farmers to sell what they have in the bin, and then sell out for 2 more years?

How in the hell can it get any more bearish than this? Every analyst? Sell it all?...As I am forever saying, this is a mob psychology game and I will promise you that just because some guy is classified as an “analyst” does NOT mean he has a clue about where the market is going…It just means he can talk the talk…And no, I am not always right…I do not always know what is coming…but I DO know that if you follow the crowd (which today is totally, totally bearish), you are just begging to lose your money.

The entire commodity analyst trading world seems to be overwhelming bearish this market…simply because they see a big crop out there…And the Commitments of Traders chart following clearly reflects this.

Small Speculators are the most short they have ever been. Funds are short for the first time since 2007. And the Commercials (processors and exporters) have their biggest net long position in history…most likely indicating they have a TON of business on their books…and they therefore are most likely going to be steady, and potentially very strong, bidders in the cash market…THIS WOULD BE BULLISH. This, I believe IS bullish. Right now.

Again, all the commentary out there keeps yapping about the big crop out there…What you don’t hear is the flip side of the equation…that World Demand For Soybeans Will Also Be at RECORD LEVELS  in the coming year…and the truth is, if we didn’t have record production coming, there is no telling how high this market could go. See for yourself…

I have no idea as to how high I think Soybeans could trade…except to say I think a $2.00 rally ($10,000 per futures contract) could come fairly quickly…and fairly easily. And with this in mind, when I look at the prices of call options, I may be dead, dead wrong but I think they look dirt, dirt cheap.

Here’s an example of one call option I like here…

Give me a call if you are interested…GREAT ideas here I think…

And I would add my sentiments are pretty much the same for Corn, Wheat and Cotton, all of which I think are “blind” buys here. If I was a farmer, I would be planning to hold my crop as long as financially possible…or be looking to replace sold crops with call options…I basically think you will have the opportunity to sell all of those crops at substantially higher prices some time next spring and/or summer.

Thanks,

Bill

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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, Soybeans