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Feb. 22, 2006
Cotton (reminds me of Corn 18 years ago)
Maybe a useless reminiscence...but maybe not
In August,1987, at age 37, I left my Atlanta
job as a futures broker at Merrill Lynch Commodities with the intention
of spending a year traveling throughout South America. I departed with
the idea I might write a book in some cheap bungalow on a Brazilian
beach, maybe find a Brazilian wife, and maybe get rich by owning call
options in the Corn market while I was gone. As it worked out, six weeks
into the trip I met an incredible Chilean girl who I proposed to six
days later and to whom I have now been married for 18 fantastic years. I
ditched my backpack for a used VW van which we converted to a full blown
camper and drove to the southernmost tip of South America (Tierra del
Fuego), then up most of the eastern coast of the continent (Argentina,
Uruguay, Paraguay, Brazil) to the mouth of the Amazon River. The camper
was then loaded on the upper deck of a mammoth riverboat and we sailed
up the BIG river for seven days to Manaus, Brazil, the economic heart of
Amazona. As, at that rainy time of year, there were no passable roads in
any direction out of Manaus, we then put the camper on the front "lip"
of a barge and sailed south down the Madeira River for six days
before disembarking in Porto Velho, Brazil (It's a big country). From
there we drove all out for 15 days straight and arrived back in
Dorka's home town of Puerto Montt, Chile (It's a big continent).
After selling the camper (for 100% of what we'd spent on it after having
driven for some 20,000 miles over a seven month period) we flew to the
United States, and arrived at my parents' Florida home in August, 1988,
about a year to the day after my having left Merrill Lynch....Thanks to
the Corn market, we still were not broke (but not rich, which I'll get
to) so we bought an old VW Westphalia camper which we drove to Alaska,
back down to San Diego, then up to Salt Lake City for two weeks of
skiing before arriving back in Tallahassee for our first Christmas in
the United States....with $5000 left in the bank. In January, 1989, I
sat down at my Merrill Lynch desk again and went back to work.
So, I wrote no book, I found no Brazilian
wife, and....I didn't get rich in the corn market.
I had had the right idea and I made some money
but nothing approaching what might have been had I just done things a
little differently...which is what this "newsletter" was supposed to be
about before I got off on memory lane and our glorious one year
honeymoon.
Going back to August, 1987....Spot Corn was
trading around $1.50-$1.60 a bushel, which, at the time was a 15 year
low and still remains the lowest price it has been for over 30 years.
Very much like Cotton today, I had been a buyer for the previous six
months (some of you old guys may remember it) and had watched it make a
few upside attempts but then go nowhere. As I prepared to leave for
South America, I viewed Corn as the biggest "lay-up" I'd seen since
entering the commodity business seven years earlier and was certain
there had to be at least a $1.00 move during the year that would follow.
I therefore took about $30,000 (roughly half of my net worth at the
time) and bought all the December, 1987 and March, 1988 slightly
out-of-the-money call options I could get. I was set up such
that if Corn did make that $1.00 move during the next 6 months, my
$30,000 would turn into about $500,000. My plan (which I
followed) was to hit the road, forget about the trade and check in once
a month. I left my broker instructions to liquidate specific positions
if the market really got going and certain price levels were hit.
And off I went...Corn did start up from
there (charts below) but on the December expiration was still only about
10 cents above where I'd bought it in August. All of my
December calls expired worthless. By the expiration of the
March contract, corn had gone still higher but was still only about 20
cents above where I'd bought it in August, the result being my $30,000
had become $3,400...and I was out of the market. I then had
charts FedEx'd to me of all the markets and from those charts
made the decision to by one Soybean contract with a $500 stop...and
continued traveling...A major part of this story was that about a month
later, on a backwoods road in Northern Brazil, we slammed into a cow at
60 mph (blinded by an oncoming truck's headlights on a two lane
blacktop) which I never even saw...just suddenly experienced what was
like crashing into an invisible granite wall, no brakes, NO idea what
had happened and then rolling in the pitch black darkness off the ten
foot roadside embankment. We were very lucky,
just some cuts and cracked ribs between us, but the accident laid us up
for a month while we recovered and had the van put back together. A few
days afterward, I called Atlanta to have money wired and charts sent
again....and discovered Beans had moved up some, as had corn (which I
didn't own). I bought some corn futures to go with the
soybean contract....I'll skip ahead and just say that in
June when we got off the boat at Manaus, I checked in to find
corn at $3.40-$3.50 ($2.00 above the previous year's low) and the
account at $44,000, which was not a fortune by any means, but did put me
a little ahead of the game from the previous August when I'd begun. I
sold everything. The story goes on from there but that is
where I'll end it in this newsletter, just show you the charts that
accompany the story....and then relate this all to today's Cotton
market...and also thank you for permitting me to indulge myself by
telling my tale
This is where I began....Buying December
1987 and March 1988 calls...Spending $30,000.
It had formed a big, slightly ascending base
during all those months I owned calls...and then bad weather hit the
market...
So how does this have anything to do with
the current Cotton market?
It does not mean I will be right
but I see the Cotton market today just as I did Corn back in August,
1987....I think it has no where to go but up, a minimum of 25 to 30
cents within the next 12 months, and if I were in a position to do so, I
would absolutely buy Cotton calls and hit the road again....The
big difference here, however, is that I think those six months where
corn was crawling higher as my options were becoming worthless has
already happened in the Cotton market....that the last six
months (or more) have been the final steps toward building a massive
base from which cotton is going to erupt any day now....
Led by China, world demand
for cotton is enormous and I see NO REASON to expect this to change,
especially with the price of this basic raw material still sitting
at the low end of where it has traded for the past 30 years. Low
raw material prices generally mean better profit margins and do
stimulate more fabricator demand. Much is being written about what
the growing developing middle class in China (and India) can mean as
regards rapidly increasing demand for electronics, automobiles,
etc?...Well, I haven't seen it really mentioned anywhere but I
believe the same can be said for textile goods consumption in those
countries as well....At any rate, it seems that every
time an official estimate of world demand comes out they keep
ratcheting the numbers higher.
Meanwhile, the
weather in West Texas (probably the single most important cotton
producing area in the US) has not changed. The drought there is now
3 1/2 months old and according to one contact around
Lubbock, when it starts out like this, it usually doesn't get
better. Weather and market action can be curious. Bad weather can be
taking place, and you wonder why nothing big is happening, then
suddenly, for some unknown reason, the weather factor does kick in
and the market starts running. What I mean is, I don't know when the
Southwest's drought will become a market influence,
but I do know if the drought continues, at some point
Cotton will just gap up one morning and start flying.
I am still buying July and December
Cotton....In spite of the wear and tear from months of waiting, I am
more bullish today than I have ever been. I don't just throw this
stuff about "explosions" out there for effect. ....What I have
easily seen happen many times is there is no convenient news to
explain it, but after laying around comatose forever, a market just
starts moving in chunks...As nobody knows "why" most people just end
up "watching it" while it runs away.....Which is precisely what I
think is coming in Cotton.
Is this just about where the 1988 Corn
market was when it finally got it going?
When it comes to speculation, nobody
ever knows if they are just throwing money away or really do have a
shot at making a real "hit"....But if you ever are
inclined to speculate on a commodities market, I really don't think
it gets much better than this...
GIVE ME A CALL....?!!....And thanks if
you actually read all this.
Bill Rhyne
800-578-1001
770-514-1993
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