November 19, 2021
THE most popular and seemingly unanimous opinion in the markets today?
I totally disagree and recommend being Short all of these markets:
Corn, Wheat, Cotton, the Soybean Complex
This intro is far too long, but the opinion here is based in my conviction that we are at a fairly major turning point in any number of markets…Hope you’ll read it…not skim it…then go on to the charts and numbers.
In the spring of 2020, with commodities and stocks in the midst of gigantic crashes as the pandemic was in its earliest stages of freaking out the entire planet, I initiated a “Buy Everything” campaign that recommended buying the stock indices and a number of commodities…all of which staged quite large percentage rallies throughout the balance of that year…with some continuing on into 2021. Quite understandably, when we were all holed up at home and honestly scared to go out anywhere, and the USA and world economies were absolutely SHUTTING DOWN, buying “anything,” that is, buying ANY market, was NOT a popular idea.
And I don’t throw this out there to say, “Look how smart I was.” Not at all. We did quite well with many of those markets during the next six months, but late in 2020 I reversed my opinion on some of them and started getting short, Soybeans in particular, which was definitely wrong, and costly…and not “smart.” And also not to ignore my remaining bullish cattle for FAR too long, as they totally crapped out, which I regard as having been one of my worst opinions in years…So no, it’s not to say I’m smart…but rather to EMPHASIZE that there ARE times in the markets when everybody IS on one side of the markets, as in this early 2020 case, screaming “Sell!” (or “for damn sure, don’t Buy!”), when smart investing means doing exactly the opposite. Or, from another standpoint, understanding that, “Popular ideas tend to lose money.” One more time, let’s get real, in April,2020, NOBODY wanted to buy ANYTHING.
And right now? Without any doubt, AFTER so many of those markets have been going, going, going on the upside since early last year, I think there is now a fairly unanimous attitude among all the genius talking heads…and consequently/subsequently by the public as well…to be LONG EVERYTHING…to bet on inflation…with the major focus of all this bullishness being, you know where…in COMMODITIES…Today, analysts are talking $100 Crude like it’s a foregone conclusion, when 18 months ago the headlines were suggesting we’d never see it above $20-$30 again. Today, there’s talk of grain and oilseed shortages going out forever, when 12-18 months ago those same analysts were telling farmers to lock in as many bushels of $9.00 Soybeans, $3.50 Corn, and $5.00 Wheat as far out in the future as they possibly could…AND, for the entire past 18 months, while Cotton was rallying from 50 cents to over $1.00, virtually every commentary I ever saw (in this smallish Cotton world) would have been, at best, AMAZED if it could even rally another 2-3 cents…when it was at 50, then 60, then 70…and so on…ALL the way up…analysts were talking, “Sell!” BUT, after it recently “miraculously” (to them) blew through $1.10, those same people seem to have now turned rabidly bullish…and they NOW regard any decline as a “pullback,” that is, an opportunity to NOW get long…that Cotton will easily trade $1.35 or more.
Okay, that was too long winded, but it’s intended to make the point that I believe we have reached the polar opposite of where we were 18 months ago…and with everybody now bullish “everything,” my extremely strong opinion is that it is time to “SELL EVERYTHING,” and I don’t say that just to be contrarian. I don’t care what the market or commodity you look at, all of them DO go up AND down…driven, yes, buy fundamental forces at times, but more so by nothing more than mob psychology, more so than ever, by oceans of speculative funds chasing, and fleeing, whatever markets are hot and in the headlines…And I have YET to see a commodity that doesn’t exist in an almost perpetual swing between bullish and bearish phases…And right now? With all of these markets, especially the row crops, at severely elevated price levels, I think it is utterly foolish to think that supply won’t soon match and then outstrip demand…and with prices being where they are…and not to mention that the markets are LOADED with long speculators…what generally comes next, minimally, are classic 25%-30% declines.
I am Bearish all of the markets following…and would recommend owning “units” of relatively equal dollar amount put positions in each of them…with the general idea being that if just one of them works, and the rest go to zero, you still have a decent shot at making money…And obviously if they all go, more or less in unison, the potential gains are quite large…And yes, just as obviously, if none of them work, you could lose 100% of what you put on the table…Bottom line is there are numerous permutations as to how this could work out…and how it does is just a function of the math as to what any of these options might become in dollars.
While it is not an absolute, it IS the nature of commodities to go down much faster than they go up…which is partially attributable to the average speculator generally only approaching the markets from the long side…and quite often a major aspect of falling markets is due to speculators “getting out!”, that is, SELLING. With this in mind, if I am right that all of these markets have topped, I would be surprised to see any of them just slowly drift lower. That ain’t the way the markets work. Not at all, and especially in today’s world where, as previously inferred, monster bucks are sloshing in and out of everything.
All of these markets/charts came up together…and will probably either go down…or up more…together. The question is, do you think that supply will CONTINUE to be short…to not be able to catch up? In all of them? I think not. Why? Because High prices DO stimulate production and DO curtail demand…since the beginning of time.
Enough talk…Here are my recommendations. Right here. Right now…I think all this immediately happening…
So, owning all 5 markets as one “unit” would cost about $8150…If all five of these options expire worthless, basically meaning that all five markets have either gone sideways or higher, you will lose the entire $8150…Aside from that, I encourage you to do the math as to what happens dollarwise if one, two or all five of them work…to whatever extent you want to surmise.
And obviously, if you want to pick and choose…or just do one (which would be the Soybean Oil for me)…that’s fine.
And as always, my advice is to spend the money, and then, to begin with, forget you have this position until, let’s say, New Year’s Day.
Due to MUCH pricier option costs, I have left Crude Oil out of this “unit,” but for anyone who might be interested, I think it could trade down to $60…And no, that is NOT what you’re going to hear from Wall Street or any of the internet Yakheads.
One last thought…If you do follow the agricultural markets, ask yourself this: DO you hear ANYBODY talking about the downside in commodity prices? ANY talk about $9.00 Soybeans…or $4.00 Corn…or $6.00 Wheat…? ANY of that at all, or even close to it?
And an update on Interest Rates
and our Eurodollar trade
On the chart below, note the VERY interesting end to the week today...Fairly big range, starting higher, then closing dead on the lows, and just 2 ticks off the lows so far in the move…The fact is, today’s passing of the $2 Trillion spending package DOES mean MASSIVE borrowing by the private sector to build everything that's on the list...And MASSIVE borrowing/demand for money DOES mean upward pressure on short term interest rates...REGARDLESS of what the Fed does or doesn't do. As I keep writing, THE MARKETS LEAD THE FED, NOT THE OTHER WAY AROUND…And I’d also bet that every single one of those Fed governors MUST have SOME small fear that they’ve got it wrong…which can, I assure you, lead to and “emergency meeting” and the announcement that, “We have revised our forecast and now see the need to move faster.” Believe me. It HAS happened before.
Lot of good stuff happening here I think…
If you think what is here makes good sense, and see the potential, I urge you not to just “watch.”
Give me a call if you want to talk about anything here…whether you agree, or disagree.
All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Soybean Oil, Corn, Wheat, Cotton, Sugar, Eurodollars