This is one of those pieces that’s WAY too long…covering a wide spectrum. Hope you can wade through it…As noted in my intro below, 2022 was jammed full of extraordinary news and events but I look for 2023 to be somewhat closer to previous “norms.” Anyway, we are off and running in the new year and here are my old hack observations and recommendations in a few market areas.

January 22, 2023

 I remain bullish the Stock Market

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I look for new all-time highs this year

The War is old news. Covid is old news. China weakness is old news. What the Fed will do is old news. Inflation is old news. Elections & politics are old news (for a while) Even the POSSIBLE recession is old news...In other words, all of the bogeyman reasons to be pessimistic have been hyped so much that they MUST by now be behind us in having a negative effect on Stocks...And with the fact that ENERGY COSTS HAVE DROPPED BY ALMOST 50% (a massive boon to consumers) and that inflation has definitively turned down, I THINK THERE IS NOWHERE FOR STOCKS AND THE ECONOMY TO GO BUT UP...AND PROBABLY IN A BIG WAY…And really, wouldn’t you be highly surprised if there isn’t a CEO in this country who hasn’t already prepared their company for the POSSIBILITY of a recession? And that if so, whatever nasty impacts a slowdown (if it really happens) might encompass have LONG since been incorporated into stock prices?

BUY STOCKS…BUY THE STOCK INDICES! Here and now…

I have often heard, “Oh, the Dow is just 30 stocks and doesn’t truly reflect the stock market as a whole,” but it has been forever my impression that those 30 GLOBALLY RECOGNIZED NAMES are the best overall indication of the strength or weakness or direction of equities…that the Dow leads, the S&P follows…and that the NASDAQ is kind of like the tail of the whip…which is why I look at chart below and, say, “What bear market?.” Yeah, we absolutely HAD one…but now? With the Dow now over 4500 points above it October low? This just looks extremely bullish to me…Especially when every other word from the Wall Street geniuses who did NOT say “Sell!” a year ago, now being, “Recession! Don’t be bullish here!”

The Dow closed 2022 at 33147…meaning that just a 13% move this year would put the Dow into new all-time highs …which may sound big in the face of all the negative New York opinion out there…but the fact is, going back 75 years (to 1948) the Dow has closed higher in 53 years, with 35 of those closes having been up AT LEAST 13%...or about 66% of the time…So, again, DON’T sit there and think news highs this year is at all unrealistic…or abnormal.

And I’d add, keep in mind that it is highly likely that last year’s October low (again, 4500 points from here!) WAS probably the market’s final reflection of any bad news that may be coming NOW. That IS how the markets work…that is, today’s news IS “predicted” FAR in advance by the markets…

Here’s my recommendation…There are options as well…

 Interest Rates

We are still Long Treasury Bonds

When it comes to rates, at present, it’s all been about Inflation, which caught the Fed totally off guard until it got out of hand…and thus resulted in their raising rates at the fastest pace in history…And today, mostly, I believe, in an attempt to restore their credibility, they are still “talking tough” about raising even further…But with there being any number of indicators signaling that INFLATION HAS DEFINITELY PEAKED (in my opinion, see PPI chart below), whether or not the Fed goes another 1/2% from here is no longer a factor as regards the markets…or for that matter, the economy. After all, the bottom line is that if inflation IS headed south, and especially considering all the angst (misplaced I think) about a potential recession, I would suppose that any further tightening would really be nothing more than window dressing…before the Fed STOPS and then does NOTHING.

The chart below IS a leading indicator as to  the inflation picture…And I will reiterate my opinion that the better part of the inflation surge last year was due to post Covid supply chain distortions/shortages being TEMPORARILY overwhelmed by the unleashing of raging pent up consumer demand as the whole world roared out of isolation and into living and spending again…and NOT because the Fed’s monetary policy had been “too easy”. For sure, part of the solution was to sharply raise rates but “cheap” money was not the reason prices went haywire for a while…At any rate, this next chart DOES indicate that inflation is headed right back to where it’s been travelling for the past 60 years.



LONG TERM RATES –

Treasury Bonds have now traded up about 15 points ($15,000 per futures) off the lows as long term rates have gone lower, directly in conjunction with the Fed hitting the brakes…and inflation beginning to turn sharply lower. I still see US Treasuries as the safest piece of paper on the planet, and together with inflation continuing lower, and the relative STABILITY we have here in North America, and the fact that there are trillions of dollars, every day, that HAVE to buy fixed income, I EXPECT TO SEE TREASURIES CONTINUE TO TRADE HIGHER…

From experience, I don’t expect any takers here, so I’ll skip making a specific recommendation. But if you ARE interested, give me a call and we figure something out.

A quick note on SHORT TERM INTEREST RATES…

There is a ton of media guessing as to what the Fed will do...with all the know-nothing talking heads yapping about how much more the Fed will raise, and then, when the Fed will “pivot” (their new favorite buzzword), referring to the idea that the Fed will tighten to a point...which, since those same numbskulls are SURE we're headed for a recession, will then absolutely be followed by a “pivot” towards easing…My take is that this is all nonsense, that more than likely, the futures markets have already built in about a 1/2% move out to June…and that it really doesn’t matter whether the Fed goes that far or not, but probably will…and that after that, WE WILL SEE SHORT TERM RATES GO NOWHERE FOR A LONG, LONG TIME…AS THE ECONOMY SAILS ALONG STEADILY, AND INFLATION WANES, BOTH OF WHICH WILL CONSTITUTE A NEED FOR THE FED TO DO NOTHING…Relative to Eurodollar futures, or the new “SOFR” contract that is replacing LIBOR and Eurodollars), this makes it highly likely these short term interest rate contracts will be basically be going nowhere… I’d say, at least for the balance of the year.  

MEANING THAT EURODOLLARS, OR THE NEW “SOFR” FUTURES (replacing LIBOR & Eurodollars) will basically be going nowhere…For sure, there will be a lot of “noise” about what the Fed will do, which I suspect will be very little…

BUT…Treasuries WILL be moving…UP.

 And yes…I Remain Bearish Corn and Soybeans

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Still see this Short as having massive potential

 A brief comment on how the FUTURES markets move…

As I often note, the investing masses, whether they be professionals or individuals, are all making their decisions based on what it is out there in the media…and the media itself is populated by people who, whether they admit it or not, are mostly just piggybacking on what everybody around them is saying. And without ANY doubt, this does result in the headlines occasionally being overwhelmingly one sided, alarmist and loud in describing what HAS happened as representing what WILL happen…thus influencing the masses into thinking, “Oh, yeah. That makes SO much sense! I’ll go with that!”, which, more often than not leads to the classic error of “buying when you should be selling”, or vice versa, which IS precisely why the general public, and even the supposed “pros,” are forever bemoaning their missed opportunities, or losses, while uttering the dreaded, “I knew I should have…”

And I know I’m always beating this drum…that you HAVE to understand that when the whole world is on one side of a market, or an idea, you’d better be looking in the opposite direction…and could provide 100’s of examples, but for starters, just look at this one very recent example, the Oil market…

Surely you’re aware that late last Spring, opinion was roaringly bullish regarding, really, all forms of energy…and without going on at length, these few headlines from these first few weeks of June really DO say it all…

EARLY TO MID JUNE LAST YEAR…Mass opinion was that energy was headed to the stratosphere…

 And look what happened…IMMEDIATELY thereafter…The supposedly headed-for-the-moon Crude Oil market stopped dead and has since dropped by almost 50%...

As for what comes next in Crude Oil, I would say relatively sideways and “stable,” that the big trade, from $120 down to $70 (much of which I called for last spring), is over. You’ll hear lots of talk about how OPEC, Russia, China demand (or not) and the World Economy will be affecting prices, up or down, but I’d look for something like a “going nowhere” $20-$30 range at least out into the fall.

AND next in line… do you remember all the stories last summer about how Russia was cutting off Natural Gas supplies to Europe...and that this market was probably going to go nuts when the cold of winter set in? I mean, according to all the headlines, there was NO WAY this market could go down...But look at it...IT HAS LOST ROUGHLY 65% OF ITS VALUE…and here we are halfway through Winter and it’s STILL been sinking.

 I never trade this market but would say the outlook would be very much like Crude…

AND here’s another bull market that had attained “rocket” status…

Back in the summer, I was calling for 90 cent Cotton, which we’ve seen (and  MORE), but from here, WITH STOCKS, AND THE WORLD ECONOMIES, ON THE UPSWING (again, I remind you that the markets are looking AHEAD of the present), I THINK COTTON IS A BUY HERE…THAT SOME SORT OF RALLY BACK UP TO AT LEAST $1.05-$1.10 IS WHAT WE SEE NEXT…In the interest of brevity, I’ll make no recommendation here but contact me if you’re interested.

And yeah…one more time…as a last example…The Wheat COLLAPSE, which was probably THE most directly impacted market of the Ukraine War.

 And moving on to the present…

The point is…Just because Soy and Corn have managed to sit up here sideways for all year DOES NOT mean that the crap-out isn’t coming in them (or that I am an idiot for hanging here on the short side). So don’t kid yourself and ignore the fact that today’s crops prices WILL inspire amped up acreage & production by every farmer on the planet…on every extra square foot of ground they can find…AND…Do NOT think that the bullish price impacts of the war and Covid disruptions are anything but in the past…OR that the much hyped weather stories (lately in Argentina) will continue endlessly…And then understand that virtually EVERY crop bull market in history, HOWEVER bullish the scenario, has ended and been followed by price drops, much more often than not, in the 30-50% range.

As for example…what you can see here in Soybeans during the past 50 years…

And I know I’ve shown you most of this before (and I could give you zillions more) but the point is: In spite of my having pounded and pounded away on being short the two markets below, Corn and Soybeans…and while both topped out more than six months ago, they have essentially been sideways ever since…leading just about everybody who views my work to think, “How wrong/dumb/stupid can you be Bill? Stocks are too tight. This stuff ain’t going down!”

But…They WILL…and just like the 1000’s of identical examples I could give you of markets that “couldn’t be going down,” I REMAIN 150% STEADFAST IN MY BELIEF THAT IT COULD HAPPEN ANY DAY NOW…AND THAT THE MOVE WILL BE, MINIMALLY, FOR 30% ON THE DOWNSIDE. Believe me, this idea has  worn me out, but I haven’t survived 42 years in this dumbass business of predicting the future because I let frustration, and losing, convince me that a GREAT TRADE should be abandoned.

I CONTINUE TO THINK THESE ARE BOTH MONSTER TRADES AND THAT THIS PAST YEAR OF SIDEWAYS IS NOT WHAT WE’LL SEE IN 2023.

The last USDA report showed farmers still holding 50% of their Soybeans and 38% of their Corn from last fall’s harvest…which represents a LOT of selling that HAS to be sold at some point this year, and it would be naïve to think that they will all get these crops sold at higher prices…That ain’t the way this stuff works…BELIEVE ME: FROM THE BEGINNING OF TIME, UNEXPECTEDLY LOWER PRICES IS WHAT INSPIRES HEAVY SELLING FROM PRODUCERS…WHEN PRICES SURPRISE THEM BY FALLING INSTEAD OF RISING…AND FEAR  SETS IN…AND FARMERS DO, AS A CROWD, START SELLING…AND SELLING…AND SELLING, WHICH IS WHY THE LAST 50 YEARS OF FUTURES HISTORIES INDICATES THAT THE NORM IS 30-35%, 2-3 MONTH DROPS WHEN CROP PRICES DO FINALLY BREAK.

Sideways proves you wrong, and loses money, but does NOT mean you will continue to be wrong. Part of this business is being able to stick with a sensible idea…And every instinct I have in predicting what markets will do says, “Stay short $15 Beans, $6.75 Corn. Period.” And expect them to go in the tank…as Crude, Unleaded Gas, Lumber, Natural Gas, Cotton, Oats, etc. have already done…

So yeah…My bet STILL is that Soybeans and Corn will both come off AT LEAST 30%, which translates into a decline of roughly $4.00-$4.50 in Soybeans ($20,000-$22,500 per futures contract) and $1.75-$2.00 in Corn ($7500-$10,000 per futures contract), and furthermore, that they will do so just as fast and straight down has been that norm for the past 50 years. Obviously, if I am wrong, it will likely mean continuing to lose money on this idea…But one more time, I’ll go with what history, and my instincts, keep “screaming” at me.

The Long Term perspective…

Ok, other than a Wheat vs Corn spread idea, this is definitely enough of my glorious opinion for one newsletter (apologies) so here are the immediate recommendations I have…And YES, THEY ARE THE SAME DAMN TRADE I HAVE BEEN MAKING, but as I’ve mentioned, just because a trade has NOT been working has nothing to do with whether it WILL…excepting the fact that the FUTURES MARKETS ARE INHERENTLY VOLATILE…AND THE ODDS FOR A MAJOR MOVE DO GO UP WHEN MARKETS “HAVE BEEN DOING NOTHING FOR A LONG TIME,”(from my philosophy of trading page on the website).

I definitely recommend owning both options as a “unit,” for about $3526 total…I would also add that there are a number of other ways to go about this…with MORE leverage…that do make a lot of sense in that I DO think the odds of a very large (but normal) move have gone through the roof. As always, I might be dead wrong, which usually means losing money, but I’d say that there are two things we’re NOT going to do---Go sideways, or just break down slightly and/or slowly. I THINK THESE TWO MARKETS ARE TOTALLY READY TO GO IN A VERY BIG WAY, again, just as eventually has ALWAYS been the case.

 Wheat vs Corn

Throughout history, for various very practical reasons, Wheat has always been more expensive than Corn, and for just about as long as I have been in this business, I’d say the average difference (or spread) has been that Wheat was $1.75-$2.00 higher, per bushel, than Corn…However there are times when this spread gets “out of whack,” in both directions, and I believe that is now the case, with Wheat having dropped severely, while Corn has just been hanging here at historically high levels.

Without getting into any detail, I’m just going to say that I think this spread, which for months I have been watching get more and more out of line with “reality,” and now think it is ready to reverse. THIS IS A FUTURES TRADE, MARGINED AND WITH UNLIMITED RISK, in which, no matter what direction the two markets move individually, you are betting that Wheat will “regain” the premium that it has lost to Corn during the craziness of the past year…And you do so by Buying a May Wheat Future while at the same time Selling a May Corn Future…

If you are unfamiliar with Spread Trading, hopefully the chart below will help make sense of this idea…If I wasn’t sick of writing I would go into more detail…

Buy the Spread. You basically exit if it closes into new lows, and take the loss…Then look for another sign of an upturn as this spread WILL turn up at some point and head back towards a “normal” price differential.

That all for now, and yeah, too much. I salute you if you’ve actually read all this…and whether you want to do anything or not, would love to hear what you think about the outlook for this year.

Over and out…Whew!

Thanks,

Bill

770-425-7241

866-578-1001

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: All of them