Oct. 26, 2006
I am sick of this trade but every time I look at it I see an even greater
opportunity than when I originally started buying it over 18 months ago.
I first began to recommend buying Cotton in January, 2005. Since then, I have off and on steadfastly maintained a major bull move was coming in this market and have had many of you owning slightly out of the money calls...and losing money. I have cited numerous fundamental and technical reasons as to why I thought cotton was set to rally 20, 30 or even 40 cents...but every rally has failed (the best being about 10 cents) and spot cotton is now just slightly above where it was when I first started recommending it.
On October 12 the USDA surprised mostly everyone in the industry by increasing the estimated size of this year's USA cotton crop...They also did the same for China...And basically made the point there will be no immediate world shortage of cotton...On top of that, US mill consumption continues to decline, US exports are slow, running at about 50% of last year's pace (so far), and as would be expected, virtually every cotton market analysis I have seen since the report is quite bearish and expectations/hopes for any significant rally are far out in the future...
In other words, I will tell you there is now no obvious reason whatsoever to buy this market...which is precisely why I AM BUYING COTTON CALLS AGAIN...GOING OUT NINE MONTHS TO THE JULY 2007 CONTRACT...
As I have NEVER seen a market bottom with bullish fundamentals, I don't expect it to be any different this time around in Cotton. I still look at the long term chart below and note the recent 28 month consolidation represents the longest sideways action in over 30 years....I also note, during the last 30 years, July Cotton has averaged a 20 cent range (low trade to high trade) between now and expiration (see table following)...This is a strong argument for assuming cotton is going somewhere during the next nine months, especially when it has essentially done nothing for so, so long...And I can only view the past 2 1/2 year consolidation as a solid floor, from which, cotton, sooner rather than later, is going to lift off into a classically dynamic bull market.
I may be dead wrong, but when I look at the cost of options out in July, and considering the size of "typical" bull moves in Cotton, I can only think there is incredible leverage to be had there...and nine months is a lot of time to see the whole thing happen. Per cotton's history, I still believe it could easily be 25 or 30 cents (or more) above current levels by the time July expires next year, and if this is the case, the call options noted below will have multiplied many times in value. Obviously, if I am wrong, and cotton goes down, or nowhere, those options could also end up totally worthless...
Here is the long term chart you have now seen so many times...
Just to give you an idea as to how much cotton really does move, the following table lists the total price ranges between Oct. 15th and expiration (in cents, low trade to high trade) of every July Cotton contract going back 30 years. During 14 of those years, the largest moves after October 15 were on the upside, 16 on the downside...There was only one year where the total range was less than 10 cents, with the average for the past 30 years being just over 20 cents....COTTON MOVES!
July Cotton - Price Ranges, Oct. 15 to Expiration
Here is the July 2007 Cotton contract...The last thing I expect is to see this just continue meandering...And if it is going up, in my opinion, it should go a LONG way past the 63 cent contract highs...This, to me, makes a strong argument for owning slightly out of the money calls.
I know there are a bunch of you out there that just hate this idea...that have heard this "same old shit" from me for too long and have no desire to waste more money on this market that "just ain't going nowhere"...Which I totally understand...Believe me, I can barely get up the nerve to write what I've written here...But being as hardassed as I am (or stupid), I know if I were walking up to the table for the first time, and was taking a fresh look at this generally volatile market, that has been sitting here dead in the water for 2 1/2 years at very low historical levels?...If this market hadn't beaten me to death for almost two years, I KNOW I would just be ALL over it...which is therefore what I intend to do.
To me (Dumbass Bill), IT IS A GREAT TRADE...AND YES, A BETTER ONE THAN A YEAR AGO, AND I PERSONALLY WANT TO OWN AS MUCH OF THIS AS I CAN...I am going out to the July calls, which have a ton of time, writing the check, assuming I am going to lose again, and then doing my best to "forget" I own it....And, however much this market has cost you, I encourage you to swallow hard and do the same as I am, one more time, with something...especially while it is sitting here deep in the hole and looking like it will never go up again...
Thanks...I expect to cover the other markets within the next few days or so...
Give me a call if you want to take a look at this...or anything else.