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October 21, 2011

"Run, Forrest. Run!"

Apologies but some of this has been done in stream of consciousness…Hope it all comes across coherently…

One more time: Investing is nothing more than an massive mob psychology game. All values are more a function of perception than anything else…ESPECIALLY, I believe, in the paper arena…that being Stocks and Bonds…And if you are prone to trusting all the media and analyst generated “logic” as to what matters in the market, I think you will perpetually find yourself always leaning in the wrong direction on the turns…

Remember the scene in Forrest Gump, where he’s a kid and the local bullies are chasing him? His girlfriend is yelling “Run, Forrest, run!” and he starts hobbling-running down the road, slowed by his leg braces…until the braces start shattering and falling away…and then off he goes, running faster and faster? Well, that’s my image of the stock market right now…Here you have all this worry with our “jobs crisis”, Europe’s “debt crisis” and China maybe slowing (from 9.5% GDP to 9.1%?), and a mountain of financial “logic” that argues for ANOTHER recession…and how “buy and hold is dead”…and that the market’s been stuck here for 10 years…and “Look at what happened to the Japanese market. Going down for 20 years. The same may be happening here”…and that 90% of the talking heads telling you the market is going in the tank...BUT, somehow THE DOW IS NOW 1400 POINTS OFF ITS LOW MADE JUST THREE WEEKS AGO …while everybody is still yapping about volatility and the last two months of sideways quaking…and all we are seeing is just a “short covering rally”…and wondering now if the market can break through the recent two month highs…

To me, all of the above represent those  braces on Forrest’s legs, which are now in the process of being violently shaken off…and we are now in the very early stages of a truly explosive rally in the stock market that could easily take the Dow into, AT LEAST, the mid 13,000 area before we get to 2012.

I continue to recommend owning futures and call options in the Mini-Dow contract shown below….

 

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The time to worry about owning stocks is when nobody is worried…and as one of my excellent market sentiment contacts remarked yesterday, “Everything I hear is bad”.

Stocks, Bonds, Cash…Money is always flowing in and out of all three. All three will continue to exist as repositories of value. And right now there is an entire mountain range of money in the Treasury market…With stocks relatively on their ass (if you listen to the pundits anyway), it only makes sense that the next major outflow is going to come from Bonds, and the next major inflow will be into stocks…Along those same lines, I cannot help but think SOME, maybe large, percentage of Treasury profits in China and Japan will now be invested in equities?

 The Fed may be buying…but I remain Short Treasury Bonds

I continue to believe the bull market in Treasury Bonds has ended and am still short with an immediate target in the low 130’s-high 120’s. Even though the Fed may be buying $3-4 Billion of longer term Treasuries every day, this is nothing more than a psychological drop-in-the-bucket when you consider the world’s daily trading volume in US Government Securities is something over $800 Billion…Also considering the following…Six months ago, when 99% of the suits in New York were totally backwards in saying, “Sell Bonds! Rates are going higher!”, one of their bearish mantras was, “What if the Chinese start selling our paper?”, the idea being their selling could CRUSH our Treasury market…Well, here we are now, having just visited the stratosphere in bond prices, and I can easily imagine, that NOW, in China & Japan (the two biggest foreign holders of our debt) those guys ARE saying, “Let’s take some BIG profits here”, and NOW ARE SELLING “a little” each and every day…And when you take into account that China alone owns an estimated $1.5 TRILLION  in US Government paper, that “little” bit of selling can easily dwarf the idea of Fed buying being able to keep US Treasuries at semi-perpetually very high levels…No, I DON’T think bonds are going into a massive bear market but I do think they have a shot at being in the low 120’s by early next summer.

I AM STILL SHORT BONDS…STILL SELLING FUTURES AND BUYING PUTS…

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 Still Selling Corn and the Soybean Complex

I believe they have finally broken the back of the grain markets…I continue to look for Corn in the low $4.00 range and Soybeans under $10.00 (at a minimum). My impression is, due to the almost stupid degree of recent bullish sentiment towards crop prices, there are a LOT of farmers who were waiting for ever higher prices to begin marketing (selling) their soon to mature crops, and they virtually ALL neglected to get any significant selling done a month ago when Corn was approaching $8.00 and Beans were pushing towards $15.00 …Prices then dropped quite sharply in September and most of those same farmers now have crops coming out of the fields, some of which HAS to be sold now, no matter what the price. This is not a never-before-seen scenario…All year analysts have been yelling “Shortage! Shortage! Shortage!”, but here we are now at harvest, and at this moment, THERE IS NO SHORTAGE…but there IS a ton of supply that needs to be sold…Under these circumstances, my guess is product users are NOT currently anxious buyers…while the same cannot be said for sellers…I firmly believe this is a set up for steadily, and SHARPLY, lower prices for many months to come. I don’t care how bullish the fundamentals supposedly are, all markets experience periods when there simply is a lot more selling than immediate buying can support…and prices can, and do, drop precipitously …I still recommend being short both Corn and the Soybean complex, with Soybean Oil Puts being my preferred vehicle to do so.

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 An Ag Market I Am Buying…

The Cattle Complex is the one traditional commodity area in which I am a buyer…Yes, they are high, but as I’ve said for some months now, I think the Cattle market could be the next CRAZY bullish commodity  market…similar to what we saw earlier this year in Cotton (chart below). Relative to what many other commodity markets have done the past 4-5 years, Cattle are still relatively “cheap”, maybe even extremely so. Meanwhile, we have seen Cattle numbers reduced due to this year’s drought (no grass to graze on) AND high feed costs, while at the same time exports have been surging, particularly to China, with beef exports up over 26% in the past year…and that is a BIG number...Additionally, with prices being at historical highs, I am seeing all sorts of analysis that pretty much unanimously reads, “I know cattle numbers are down, but with the economy so slow, consumers are not going to buy at these prices”, which to me is the classically wrong bearish argument (that people won’t pay these prices) you find in every commodity bull market. The fact is the meat processing industry will continue to provide beef for grocery stores and restaurants…and exports will continue to be strong…and Cattle prices, I believe, will continue much, much higher…and there is a good chance they will do so at a blistering pace.

I am buying futures and call options in both the Live Cattle and Feeder Cattle contracts.

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Here is what the Cotton market did earlier this year…

10-21-11march11cotton.png

And here is the other half of the Cattle Complex…Feeders are cattle that go into a feedlot, at about 600-700 pounds, to be fattened for slaughter, having become the Live Cattle contract animal some 4 to 6 months later.

10-21-11feedermonthly.png

One of my personal trading reminders, posted as signs on the walls around my office, is:

“The best way is going with it.”

While I am often involved in trades looking for a major change in direction, I am well aware that the “easiest” trade is one in which you simply "go with" the direction the market is pointing…which seems to be the case across the board in the cattle complex…Sure, one may have fears of “buying the top”, but fear of failure, or looking foolish, does not belong in any trader’s mentality.

 

Ok…That’s about it. This was a big one, but I put all this out there as I believe every one of these ideas has major potential. As always, I may be dead wrong about anything here, and if (when) I am, it will probably mean losing money.

It’s a little late now…a Friday night…but I’ve been listening to some good 70’s music while I finished this and it put me in a mood to add a small personal touch…

It occurred to me that I have never met many of you who receive this newsletter…some whom I have known for going on 20-25 years (what a lazy ass you are Bill!), so I impulsively just decided to throw in a picture of yours truly and his family (at a Colorado wedding this past summer).

 

Now you know the old boob you are talking to…

Give me a call if anything here interests or perturbs you…I DO think there are some great trades here…

Thanks,

Bill

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