February 4, 2013

Cattle, another market I see as a MAJOR SHORT

One of my long held impressions is the Cattle markets semi-frequently make what I can only call “stupidly big” non-stop, one directional moves, by which I mean, Cattle have a tendency to get  a move going, often out of the blue, and then keep it going relentlessly in one direction, sometimes seemingly beyond all reason…And they do this, I believe, more so than any other market we trade, particularly when that move is to the downside.

I’ve wondered why, and finally concluded it may be connected to the fact we are trading live animals standing in a feedlot, that cost money, daily, to feed and care for…And when those steers have reached slaughter ready weights, you really have a small window in which you need to sell them, no matter what the price… In other words, you can’t just say, let’s keep them another month until prices get better---On the other hand, Cattle owners can, however, decide to sell them a little early, and I am convinced there are times when rapidly falling prices do scare those owners into “early” sales, such that, when added to all the animals that already HAVE to be sold (again, no matter what the price), the result can be a “falling knife” sort of down move, which in itself creates more fear and more selling…and the continuing downside action can cumulatively be stunningly big and fast.

Whether or not my perception of this “JUST GET THEM SOLD!” attitude is actually responsible for some of the dumbfounding sell offs I’ve seen in cattle really doesn’t matter though. What does matter is those sell offs do occur…and that is exactly what I think this market is potentially facing now.

 All the press on this market seems to be unceasingly bullish…

Due to high feed costs and liquidation of herds due to drought, the bullish Cattle story is WELL KNOWN  throughout the commodity world, and it has been that way for quite some time now...Even if this is not a market you normally follow, I’d guess you’ve most likely seen some of the bullish press regarding surging beef prices due to “tight supplies” or the “low cattle inventory”.  And while those numbers are accurate (they’re numbers), they also are, in my opinion, already well accounted for in market prices…What isn’t accounted for, though, is the “nature of the beast” (yes, a pun), the tendency to make wide, wide swings, usually in the direction least expected by the masses.

The nature of the beast? Take a slow look at how this market has “behaved” over the past 45 years….

My observations?

One- During the past 45 years, there have been maybe four major shifts to a higher level, the most recent from early 2010 until the present.

Two- Following those shifts, years go by characterized by fairly violent, relatively frequent  15-20 cent (and more) swings.

Three- Cattle rarely seem to be trading quietly sideways…and when they have been sideways, you should be expecting something big to follow.

Really. Look at those swings…So prevalent, so sharp, that to suppose anybody could consistently predict them seems ridiculous…Therefore, realizing these are the futures markets, does it not make sense to suppose that most (if not almost all) of those moves were NOT predicted by the masses? That is, your best bet is going to arise when everybody is so obviously looking in one direction in the market, which is, I assure you, precisely the case in cattle today. Loosely stated, I will tell you, there are essentially NO bears in this market today. Sure, you can find a few people who might talk about “possible near term weakness” but truly bearish? Not at all that I can see. Cattle are “up” and everybody  and everything I see is calling for nothing but higher…to the point they are almost saying, “The fundamentals are just too supportive for cattle to go down. Higher prices are inevitable”. And, believe me, that sort of opinion can be deadly in the futures markets.

Going back the chart, I’m supposing this recurring pattern of big upward price shifts followed by violent sideways action has something to do with consumers having to “get used to” higher beef/steak prices at the supermarket. When you do get a big change in price to the upside, there IS some price point where the average shopper thinks, “Say what? How much for that little piece of meat?”, and then chooses some other animal for their protein…I don’t care HOW bullish the supply side of the equation is, which, again, is the story that EVERYBODY who trades in the cattle market is 150% aware of, the demand side does have its own limitations…and when you get to that price level where the consumer says, “not for me”, demand does turn down….and SO DO CATTLE PRICES…no matter how “tight” the numbers are.

Although I’m pretty sure the overwhelming majority of analysts will tell you: “No Way!” I look at that long  term chart and see 110 as being EASY to imagine…It’s just the way this market moves…or at least how it has moved for the past 45 years…and with all of the above in mind, I therefore recommend being short both the April and June Live Cattle contracts using either futures or put options.

Before getting to specific recommendations, here are some examples of these “stupidly big” moves that have occurred in Live Cattle since 2000…And before you see them, I will tell you that, as always, probably NONE of these moves were predicted in advance by the masses of analysts and traders that follow this market. NONE. It IS simply the way this stuff works. Markets rarely, if EVER, go down while everybody is screaming, “Get short!”. Quite the contrary, they usually go down when everybody is stuck on, “Oh Sure! It’s a bull market!”.

Certainly there were a few events (Mad Cow and 9/11) that crushed these contracts, but the rest of these almost non-stop sell offs came in the normal course of events in futures trading. They just happened…and again, they happened when all  the “logic”, fundamentals and expectations were leaning solidly In the opposite direction…

So here are the current Cattle contracts I want to be short…

Both of them are what I would call “sitting on a cliff”. In spite of all the bullish talk, these two contracts have been relatively sideways for over a year. I see them both breaking recent lows, then breaking new contract lows, then accelerating off the “cliff” during the next few months, down to, at a minimum, the  115 area.

For what it’s worth, a week ago Friday (Jan. 25), the USDA presented ANOTHER “bullish” report which produced that last little pop up from 130. Then this past Friday (Feb 1), they released the Cattle Inventory Report, which was also perceived as “friendly”.  Cattle traded higher early today then pretty much closed dead on its lows, about unchanged for the session…I am already very bearish this market but will become decidedly more so if we take out that recent low at 130…If these bullish reports are not really moving the market higher, what will?

Here’s the June contract...

If you do want to see the bullish story, the link following will give it you nice and simple, all wrapped up in a bow, with all the so very well known easons why I am going to be wrong. This came out last Friday morning (Feb 1) ahead of Friday afternoon’s “bullish” report.

http://www.bloomberg.com/news/2013-02-01/u-s-cattle-herd-slumping-to-61-year-low-means-longer-beef-rally.html .

And if you want more, let me know. I can easily find you 10 articles saying the same thing…

Be Short the Cattle market.

And if you actually own and raise cattle, I would suggest you give me a call and look at hedging possibilities. Maybe I am dead, dead wrong but I think the “can’t go down” story is about to blow up in a lot of cattlemen’s faces.

Thanks. Give me a call if you have any interest or questions…

Bill Rhyne

866-578-1001

770-425-7241

FUTURES TRADING IS NOT FOR EVERYONE. THE RISK OF LOSS IN TRADING CAN BE SUBSTANTIAL. THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THERE IS NO GUARANTEE YOUR TRADING EXPERIENCE WILL BE SIMILAR TO PAST PERFORMANCE.

Bill Rhyne does not currently maintain positions in the commodities mentioned within this report.