February 3, 2014

The real subject of this newsletter is the Feeder Cattle market but I guess I should make some sort of comment on the Stock Market and Treasury Bonds…as they are certainly making some headlines lately.

Per my late December VERY strong recommendations on both markets, I AM STILL SHORT THE STOCK MARKET AND STILL LONG THE TREASURY BOND MARKET…but considering the fairly substantial moves already seen to begin the year, I would be lying if I told you I wasn’t considering taking some profits. As yet however, I am pretty much still sitting on my initial positions...Unemployment comes out Friday and I’m pretty sure the talking heads have FINALLY started turning scared and their fear (formerly TOTALLY nonexistent) will probably only grow for the rest of this week…and I would therefore not be at all surprised to see those boobs start touting the idea of an impending “lousy” unemployment number…and along with it a good dose of “this market and the economy are in trouble”. A month ago, they all loved the market and thought the economy was doing great…but you watch…a 1000 points down in the Dow will change their “logic” dramatically…Amazing how it works?

Like I’ve said so many times folks, It’s at mob psychology game…Is there any REAL reason why stocks suddenly just decided to go in the tank? Has the world changed SO much since December 31st...when the Dow made its all time high?

The truth is, the short term aspects of this trade (Short Stocks, Long Bonds) have got me feeling the need to be “nimble” this week…and how I handle those positions will probably be a day to day affair…and I most like will take some money off the table this week…But I can say I DON’T think we are about to see stocks suddenly stop falling and turn back up towards new highs…Nor do I see the Bond market ending its bull move here.

Here are charts of both markets…

But here is the real subject of this newsletter…

 Short Feeder Cattle

Anatomy of a trade idea…

What I try to do with this newsletter is show you some of what goes into forming my opinions…and a substantial part of my analysis is frequently based on historical observations of how markets have moved in the past…

In the end, speculative commodity trading is a form of gambling, and as I’ve said many times, I see trading as making educated guesses and taking calculated risks, with the intent of seeing the extreme leverage we have produce profits that are in the large multiple range…which sometimes works, and sometimes doesn’t. That’s not very eloquently stated, but to me, this IS the essence of what I am trying to do. And the “bet” outlined here is a perfect example of the sort of situation I am always looking for. I love what I see on the accompanying charts, both long and short term, and I love the ultra-bullish “Low Cattle Numbers” story that is all over the place (and has been for a long while) and I love the potential leverage on just about any put option I consider...And it definitely does NOT mean I will be right but I wouldn’t be making this recommendation if I didn’t see MAJOR profit potential…Obviously, if I am wrong you can lose 100% of what you have on the table…

To start with, Feeder Cattle are steers (castrated males) or heifers (females) mature enough to be placed in a feedlot where they will be fattened prior to slaughter. They generally go on feed weighing maybe 600-700 pounds and come off the lots, ready for slaughter, averaging maybe 1200-1300 pounds...The price of Feeders goes up and down (quite a lot as you’ll see on the charts) depending on whether or not enough people think it is profitable to BUY those animals, then pay to feed them, keep them healthy and take up space on a somebody’s feedlot, and then be able to sell them for more than the whole process has cost them…and sometimes it absolutely does NOT…There is certainly more to the equation but that’s where I’ll leave it in the interest of brevity.

Ultimately, what you are often trading in futures is nothing more than volatility…the idea that these markets make big moves…Up AND Down…and Feeder Cattle are no exception…Here they are longer term…

Getting more specific…Here is what REALLY gets my interest…Here are small shots of every Feeder Cattle contract for the rest of 2014…Note that, for all practical purposes, THEY ARE ALL ESSENTIALLY TRADING AT THE SAME PRICE…In other words, the CURRENT PERCEPTION of the future is that these 7 contracts are valued at $1.68 to $1.70 a pound…Check out the charts, noting how they all ARE about the same price (in the futures market), and then I will explain why I find this so significant…

OK? Pretty clear that they are all the same?

Now take a look at another longer term Feeder Cattle chart, a weekly going back to 2000…and note how often…basically never…Feeders do trade sideways…THEN, ask yourself, “IS THERE ANY WAY FEEDERS ARE GOING TO SIT HERE AT 170 FOR THE NEXT 3, 6 OR 9 MONTHS?”. In other words, are all those contracts that are currently parked around the 170 level going to still be trading there for much longer AT ALL?...I urge you to take the time to observe on this chart how, again, BASICALLY THIS MARKET “NEVER” TRADES SIDEWAYS.

EVERYTHING in the future is only a perception…And the further in the future they are, the more distorted they are likely to be. I think Feeders could EASILY trade down 20-25 cents ($10,000 to $12,500 per contract) between now and almost any time frame you want to consider this year. I HAVE BEEN WAITING ON THIS TRADE FOR SOMETHING LIKE 6 MONTHS. I THINK IT IS TIME TO GO AND I AM NOW BUYING PUTS, BEGINNING WITH THE APRIL CONTRACT. MY ATTITUDE IS PRETTY MUCH TO OWN PUTS UNTIL THIS MARKET DOES BREAK, AS, I HONESTLY SEE NO WAY THAT IT CAN’T. MAYBE I’M DEAD, DEAD WRONG BUT I SAY FEEDERS ARE READY TO RETURN TO THE “NORM”, AND THE NORM IS NOT JUST THE “UP” WE HAVE SEEN FOR ALMOST A YEAR…IT IS TIME FOR THIS MARKET TO GO SOUTH.

One of the great aspects of Feeders is there is no delivery to worry about as this is a cash settlement contract, meaning you can stay in this market until the last minute of trading, literally, at no extra risk…And what I especially like is that the options expire at the same minute as the futures…in other words, on the very last trading day…What THIS means is you don’t have options that expire 3 weeks before the contract does…and then you watch the real move take place after you have been taken out of the game.

With Shorting the Cattle Complex, I always want to be positioned relatively close to the front of the market as my experience has been that when Cattle DO go down, the fastest, biggest move is usually in the earlier contracts. I am therefore beginning with the April contract shown below…

Here are a few possibilities…I’m tired…It’s 9:30 so this will be quick…I have more research coming on this market in a few days but I want to be immediately short this market…

Give me a call if this interests you, or if anything here does. I always like to hear your voices…and what you are up to in your own lives. Truly.

Thanks for reading,

Bill

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The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Dow Jones, Treasury Bonds, Feeder Cattle