February 12, 2011
Some random perspectives…
Stocks are telling you better and better news is coming on the economic front. Due to the stock market, millions of people are feeling wealthier (maybe not wealthy) about their circumstances.
Some of that good feeling will be (or already is) influencing more consumer spending.
As we go forward, I suspect the local, state and the federal governments will be receiving more tax revenue than might be expected by the pundits.
Inflation, other than Egypt, is pretty much the biggest story going right now and many commodity markets have been flying higher. Yes, in the very near term, there may be some economic numbers that “verify” inflation fears, but they will be after the fact. Six to nine months from now, we may be looking back and finding that the CPI was up something like an inconsequential .4 percent for the 2nd and 3rd quarters of this year…which should finish off this “inflation is coming!” hype that is all over the media. The result, I believe, will mean the Treasury Bond market should rally (by then) 15 or 20 points above current levels.
Crude Oil rallied $8.00 in two days on the initial Egyptian news, but has since violated its pre-event lows. The speculative community is so bulled up on crude oil (mistakenly I believe) that December Crude Oil, just 10 months out in the future, is now bid roughly $12 over the cash market. This looks like insanity to me. What it means is, if you buy December crude here, just to break even, the first thing you have to see is a $12.00 rally in the cash market…And if the current Middle East events have not rallied crude, what will? Crude looks potentially quite bearish to me…And if Crude Oil, THE most important commodity we trade, and supposedly in such tight worldwide supply, is heading lower, I can’t help but think it must blow at least one big hole in the idea commodity prices have nowhere to go but up, up and away.
If the current Middle East events have not rallied Gold, what will? There is an old saw in the markets: When bullish news does not rally a market, look for that market to do what it “shouldn’t” do, or go in the tank…and fairly soon…Gold continues to look very much like a top and I still believe any given day could be the beginning of an absolute collapse in the precious metals. I still look for at least a $100 down day as part of the move, and at least one $200 down week.
Agricultural commodities have been sizzling, aided by another bullish USDA report this week…which I believe is just confirming the already known fact that stocks are tight…BUT…in my opinion, all of that news is now “in the market”. As a trader, one thing I am sensitive to is realizing when EVERYBODY is running around chirping the same phrases to justify a market’s direction. In that vein, during the last few weeks, if I have heard it once, I have heard it a hundred times from analysts everywhere: “Prices have to go up more to ration demand”, or “Prices have to go up more to attract planted acreage (away from other crops)”. I mean, they are ALL saying the same thing and they ALL have price projections where the markets “have to go” to accomplish this actually impossible-to-predict moment in time at which “prices have rationed demand”. Nobody ever knows where that might be, or for that matter, whether this “buzzphrase” I have occasionally heard used for 30 years is genuinely meaningful at all…Anyway, believe me…After two consecutive bullish USDA reports, every bit of analysis I’ve seen is saying, “Don’t sell it here!”
I continue to recommend being short a number of commodities with my primary focus being in Gold, Silver, Soybeans, Soybean Oil and Corn. Besides that, I am very bullish the Treasury Bond market.
Here are a few charts and ideas…
Give me a call if anything here interests you…I do think this is a year in which we are going to see some truly enormous moves, and yes, many of them are trades I was anticipating last year…and was wrong…but that does NOT mean this year will be at all the same. I may be dead wrong (which means losing money) but I think there is a LOT of money to be made on the short side from here…and I mean, beginning right NOW.
Short Gold and Silver
Just to further clarify my point that Gold may be very much like the stock market in late 2007, early 2008, take a look at this chart comparison…the similarities are pretty obvious…
Let’s get real…Do YOU honestly think it will do you any good to have a few gold coins hidden away? That the day is going to come when your economic survival depends on whether you’ve got some the glitter? I sure as hell don't. This IS a game...Gold has been played to the hilt…and the next move is to blow a hole in this market.
With all of these recommendations, my first choice is pretty much to use options…but futures will obviously work as well. You just have to handle them differently and the risk management (stops) must be strictly adhered to.
I continue to look for lower Crude Oil
Here are a few charts which illustrate how bearish the Crude Oil market may be…as well as evidence of how extreme the bullish speculation (doomed to be ripped apart market realities I think) has become…
This first chart shows the difference in price between March and December Crude…To clarify what you’ll see here: In a nutshell, just 2 ½ months ago, March and December were trading at the same price…Lately however, March Crude, representing the real world, has dropped by $12 compared to the further out December contract…Why is March (representing the cash/spot market) down? There is NO shortage of product….Why is December still up near its highs? Because both speculators and hedgers (crude users) are so CERTAIN the market is going higher they have ALREADY bought the hell out of the back months…
The markets are moved by buyers and sellers…Again…if March does what I think it appears to be doing, which is heading into the low 70’s (at a minimum), what do you think all those owners in December (and all the other further out months are going to be doing? Buying more Decembers at $15 over the cash markets? I doubt it…I don’t think they will be (or already are) interested in adding a single long contract to their positions…On the other hand, PRODUCERS will be more inclined to say, “Do I want $75 for my Crude in December, or do I want to sell the futures at $95?”. You can bet they’ll be selling more…and the next event is where all those buyers get trashed (and start selling as well) while the back months of this market head decidedly lower in a return to the reality dictated by the cash market…
Short Corn and Short Soybean Oil
This week we had another monthly USDA World Supply Demand report that re-stated that supplies are tight. Quite naturally, with many ag markets on their highs, food prices have been all over the headlines and the current rhetoric is now overwhelmingly screaming, “Prices Are Going Higher!”… The Wall Street Journal followed its January 24th FRONT PAGE HEADLINE, “Global Price Fear Mount”, with “Inflation Worries Spread” just this past Wednesday…OK…These are front page headlines from the most respected business newspaper there is…BUT…Does that Gold chart (the supposed “inflation hedge”) above look like it’s taking off? Or ready to roll over? And does the Crude market look like its ready to erupt on the upside? Au contraire (sorry), they are basically dead on their lows for the past 3-4 months, and I will repeat that whether it’s metals, or crude, or corn, or soybeans, or wheat, or sugar or cotton or whatever, I firmly believe this whole bullish commodity story has seen its peak…and there is now a ton of potential profits to be made this year being short…to a degree, almost blindly so…in whatever commodity you wish to trade. I will remind you this is pretty much the way I have been leaning for quite some time now, which has been costly, and if I am wrong, will probably mean, losing money…but I will also reiterate, as noted in several recent newsletters, (http://www.crokerrhyne.com/newsletters/01-12-11.htm and http://www.crokerrhyne.com/newsletters/1-28-11.htm ) that EVERY top any of us has ever seen is accompanied by nothing but bullish news, and they ALL, at some point, just stop dead (in the midst of that news) and then start lower…and frequently do so by then going relatively straight, straight down.
It is not often that I am foolish enough to consider scale up selling in a futures contract, but this is one time I will. You just must be sure to do it in measured steps and not go overboard…You do the math…For example, if Corn is at $8.20 and you are down a dollar (5k or 1K), you have to be ready to add if that has been the plan…You can’t, in other words, decide you are wrong because the market has moved against you and the headlines have gotten even more bullish…Again, I would suggest you go look at those 50 years of corn histories on my January 28th letter. When this stuff quits…it QUITS.
And this is the trade I love, not out of “spite”, but because I see it as having some truly incredible numbers to work with…
Interestingly, in spite of all the bullish press, Soybean Oil actually closed LOWER last week.
And I LOVE the numbers on this next chart. What I DON’T see…at these levels…is sideways (again). With the bullish fervor that is everywhere, if it does go higher it should do so enough to easily recoup 100% and then allow you to re-short the market using higher strike prices.
And remember, just because this market cost us money being short before does NOT mean the result will be the same this time…At one time or another, I have made and lost money in pretty much every market we trade…If futures are something you would ever invest in, I think these are undeniably two incredible trades to take…They both have manageable risks, and I believe, very big profit potential…and again, if you ARE going to do this, get it done now.
Buy Treasury Bonds
Here’s one more market…and I won’t waste much time on it as I know, from past experience, that virtually no one will be interested. I would also add that this is the market that I have been more right about…many, many times during these past 30 years…than any other market I trade…As ever, when this market is a buy, which it is NOW, there is just too, too much logic out there unanimously screaming “Sell it”.
I see Treasury Bonds as an enormous buy. Long term rates are NOT going up. Six months from now, when “inflation fears” have fallen flat on their ass, the Bond market could easily be 15-20 points higher ($15,000 to $20,000 per futures contract). Never forget there are billions of dollars, every day, that HAVE to buy some piece of fixed income paper and US Treasuries ARE still the highest quality debt instrument on the planet…Why in the hell, for example, do you think that Japan, China and everybody else is the world owns those trillions of dollars of our Bonds?
Anyway…here’s the chart….