September 1, 2015

Stocks aren’t Dead.

Neither is China.

Nor is Europe.

How many times do you need to see all the talking heads be wrong to finally understand they don’t know “diddly”?

With the exception of one brief interlude, I have been quite bullish stocks going all the way back to August, 2010…and in fact, earlier this year, I wrote that I thought we would see the Dow hit 20,000 before we got to 2016…Although that target obviously (but not definitely) now seems out of reach for the year, my overall opinion of the USA and World Economies, and the Equities Markets (especially the USA), has not changed in the slightest. Interest rates are low…and going to remain so for a LONG time. Energy is cheap and also going to remain so. Communism has died as an economic system and the world is now all about Capitalism, Business, and Consumption…which now includes at least several billion new capitalists and consumers courtesy of China and the former Soviet Union (in other words, everybody behind the defunct Iron Curtain). As I have been saying for years: Ideology really doesn’t matter anymore. It’s all about making (and spending) money.

All the recent hullabaloo about China (every yakhead on the planet is now an expert on the Chinese economy?) dragging the planet down is absurd. China, and its 1.35 billion people, are just waking up economically and they are NOT going to just crumble in the dust…Is their stock market volatile? Sure. But has it crashed? Absolutely not. Again. The Chinese markets are simply volatile. Check it out for yourself…

Do I know what comes next? No…but unlike all those “instant Chinese experts” who think China is headed for economic Hades, I’d guess that the next move here IS back up…or at a minimum, that in the midst of all the media attention/noise, the down move is already over…I see all the talking head handwringing and condemnation of the Chinese authorities as “bumblers” as nothing more than the usual after-the-fact internet hot air…Though it’s not the same, I would compare all the now in vogue “China is doomed” analysis to the sort of talk that was going on here in the USA in Spring, 2009, when the Dow bottomed at 6500 and all the “heads” were screaming “5000”.

And contrary to what the media sheep would have you believe, economic growth in China is still NORMAL.

Really, for 2-3 years now all the painted face morons have been telling you that Europe and Greece were going to take us all down…And they DIDN’T…And so now, they say it’s China? Come on! Do you really think that Home Depot, Microsoft, Walmart, General Electric, Google, Amazon, the Dallas Cowboys, your corner Starbucks and any other major business entity you want to name is going to fold up shop because China’s stock market is fluctuating…or if their annual GDP rate of growth has shrunk from 7% to 6%? ALL of the headlines and market chatter are just gibberish. Yes, the markets may react to them (the markets are just a giant mob psychology game after all) but in the big picture, especially the one here in the USA, big swings in the Wild West Chinese Stock Market really don’t matter…WE ARE IN THE BEGINNING STAGES OF A BOOM HERE IN AMERICA fueled by cheap money, cheap energy, LOW household debt (yep, see below), SOLID job growth, and a never-ending explosion of products and services in Technology, AND an Automobile Industry that is now pushing towards annual sales records, AND the fact that Housing & Construction are both vigorously reviving (and just beginning to benefit from 6-7 years of pent up demand…when nobody could, move, buy, sell or build anything)…WHAT MORE COULD YOU ASK FOR?

As just a bit of evidence, here are just a few indicators that I think are relevant…and indicative of why I believe the really good times are just getting started…

The truth is, I could show you a bunch of economic indicators that reflect how positively forward everything is moving today but I think all you have to do is look out your own window (not you Ed J)…or hit the streets in your car with a zillion other drivers out shopping and spending…or bump your way through the crowds in the airports…or note the NOW HIRING signs I see everywhere…and conclude what I have (long ago really)…that IT’S JUST OBVIOUS THAT PEOPLE AND BUSINESSES ARE CONFIDENT AND THE ECONOMY IS TRULY HUMMING (again, cheap money, cheap energy, plenty of job growth doesn’t hurt). For sure, there’s nothing that says it  can’t all just stop at any given moment but my guess is we’ve at least got some more YEARS before excesses build to the point where some air has to come out…and only THEN might we see a period of truly declining stocks…But for now, I just don’t see it. RIGHT NOW, I THINK IT’S ONWARD AND UPWARD…TOWARDS THAT 20,000 MARK IN THE DOW.

But yeah, it’s easy to understand that seeing the Dow drop 2000 points in the space of a week certainly gets everybody’s attention…and quite naturally leads to fears that “This is the big one again”…but but I’d note the following:

One old trading adage: Reactions against the trend tend to be hard and fast...which refers to the idea that trends tend to grind away in one direction, but periodically (out of nowhere) often experience quick, hard (and scary) moves against that trend…thus inspiring a ton of analysis that the bull market is in trouble (in this case and on about 50 other occasions in stocks during the past 6 years) but then the market quietly recovers and resumes the “grind” higher, generally having reinforced in all the idiot commentators, once again, that everybody should be “cautious about owning stocks here”.

Along these same lines, as I have written so many times, my observation is that market tops are “never” accompanied by a host of talking heads calling for the top…which is easily the case now, whether they are just yakking about “the correction has begun” or whether they believe we may actually be entering a bear market…which is exactly what I’ve been seeing everywhere. For sure, there are people talking the upside but in general, there appear to be two very distinct (mistaken) “fears” out there that are inspiring an avalanche of bearish commentary regarding stocks…And those two “fears” are easily summarized by this headline from yesterday morning.

Yep…That’s it. Right there you have your two latest “reasons” for all the yakheads to justify their existences…And putting that together with the following sort of sentiment I’ve seen, again, EVERYWHERE…I’ll say that if Stocks ARE going in the tank, this will be the first time in my memory that all of the idiots actually got it right…As evidence, here are just FEW headlines from the last week or so…

Really…As I am forever pointing out…When have you EVER seen all the TV and internet and brokerage house guys get it right? Those guys DON’T know…and like I said, there are PLENTY of them still bleating the same bearish hogwash they’ve been flogging since 2009.

And finally (keeping this brief), I come back to my most preferred longer term chart for perspective…And state that even though the media may be acting like the world has potentially begun to fall apart, all I see is a year (2015) in which the market has basically done nothing…EXCEPT continue to remain within the confines of what has been, and is, a very long term upswing.

I AM STILL LOOKING FOR 20,000 AND MAINTAIN THAT IT IS NOT THAT FAR AWAY…EITHER PRICEWISE…OR TIMEWISE.

Enough on stocks…The bottom line is even though I sometimes comment on equities, 98% of the time my true focus is in other markets…After all, I am a commodity futures broker, not a stock jockey…

As summer comes to an end, I am most heavily committed to the following 3 markets…

 Still Buying the Eurocurrency

In a nutshell, the whole “Europe is going to die” thing has pretty much moved to the back pages of the news media…And, what a surprise! After all the stupid press suggesting an entire continent was going to sink into oblivion, Europe is still there and still fully functioning…And my very strong guess is that 6 -12 months from now you’ll be reading about how dynamic the “recovery” has been in Europe and all the talk about the Euro falling into non-existence will be long forgotten.

As I wrote earlier this year, Short the Euro (and Long the US Dollar) had become about the biggest speculative trade on the planet…and I still fully expect to see all those shorts get it handed to them as the Euro rallies up into the 120’s…So far, we’ve been as high as 117 (last week) and I still believe we ARE headed towards the 125 area.

I AM THEREFORE STILL LONG THE EUROCURRENCY AND STILL BUYING…USING THE 1 & 1 APPROACH RELIGIOUSLY WHILE DOING SO.

Here is one way to do it from current levels…

All option prices in this newsletter include all fees and commissions.

I would note that this appears to be an upward sloping bottom that could/should begin to rapidly accelerate from here…to get some genuine direction instead of the back and forth action we’ve seen since March…

 
Still Buying Soybeans

While I still consider all four major row crops…Corn, Cotton, Soybeans & Wheat…as major BUYS, my immediate primary focus is on Soybeans.

As I have noted for months, the whole commodity world has gone full blown bearish these four markets…quite the opposite of where they were at the top 2-3 years ago when they all wrongly thought the next target for commodity prices was somewhere close to the moon…In fact, amazingly (but understandably as it’s simply how market psychology works), probably the number one virtually unanimous talking head opinion now has become that commodities are the biggest dog on the globe…something akin to Greece a year ago…and that AFTER watching prices fall since 2011 (sharply during the last year), all their ludicrous after-the-fact logic now predicts that prices will KEEP falling…Really? What happened to all the junk those same ever-wrong people were touting the past few years with their so backwards cries that, “Hyperinflation is coming due to the Fed’s unlimited QE’s!”?

It never fails in this stuff. Most of the people who yak their heads off don’t have a clue as to how the markets actually work…And right now, as we head towards the last quarter of 2015, I think being short all these markets that HAVE GONE DOWN is going to be nothing but a loser…In other words, I WANT TO BE LONG, and as I am constantly reminding myself, “Futures are inherently volatile”, with this first 9 months of the year having been so sideways, I think the odds are quite high the remaining four months will be quite the opposite, that is, WE VERY WELL MAY SEE SOME BIG SUSTAINED MOVES IN A NUMBER OF COMMODITIES BETWEEN NOW AND JANUARY (and beyond).

Even though Soybeans recently made new lows following the latest USDA report in which supplies were “greater than analysts expected”, the market has essentially been trading in a sideways range for the past 11 months, and is, in fact, pretty much exactly where it was last September…I therefore view all of the past year as nothing more than a classic long term bottoming formation and STILL look for the next major move to be up…Furthermore, I see this last little dip into new lows (see chart) as a classic fake out trap (sucking in more selling) and fully expect to see the market do nothing but rally from here.

I AM STILL BUYING SOYBEANS AND LOOKING FOR AT LEAST THE $12.00 LEVEL.

Again, do understand that the last 11 months have been an example of Soybeans "going nowhere", the point being, in this traditionally quite volatile market, to have a $2-$3 bull move now, when it’s least expected (as it always is in this business) would be no big deal at all...

I’d also add that one of the “comforts” of the buying this market with the 1 & 1 is that it DOES dramatically reduce the fear of being wrong…I look at the chart below and feel confident in the idea that I am either making a GREAT buy precisely when EVERYBODY else has wrongly become completely convinced Soybeans are headed even lower…OR…the masses are all miraculously right, and if so, I WILL get the chance to recoup 100% of what I’ve spent and get long at lower/better prices…in which case, being wrong will actually have benefitted me.

So here is what I’d do with Soybeans here and now…And yes, as I was reminded by one of you today, I KNOW I am buying this market when everybody else is saying “Sell”. And I wouldn’t want it any other way. I LOVE THIS MARKET HERE.

Still Short the Cattle Markets

I still think this is the next commodity market “disaster” for producers…

not at all unlike what has happened in Crude Oil

FACT: The Cattle market made its highs almost a full year ago. Feeders topped out at $2.45 a pound and are now trading in the $2.00 area (45 cents lower). Live Cattle got as high as $1.72 and are now trading at about $1.41 (31 cents lower). Even so, everybody in the Cattle business still believes they are in a bull market. Everybody is still convinced that due to “low cattle numbers” there is no way that prices can be anything but “strong for another year”.

I literally cannot count the number of times I have seen this story play out during the past 35 years…You get a bull market. You get roaring “bullish fundamentals”. The market goes to crazy levels…Then everybody that deals in the commodity (and all the analysts) believes that the ride will never end…or “not yet” anyway…and so they keep buying and keep owning the market at exorbitantly high levels, many of them with the idea there is still at least “one more good run” and they will “get out then”…But what they don’t realize is…until it’s far too late and big losses have been incurred…THEY ARE LONG IN A BEAR MARKET…And in this case, my opinion is they are long a bear market which actually got started 11 months ago…and ANYBODY who owns or buys cattle at current prices (and many people own them higher) is going to end up losing a lot of money. Obviously, this is only my own opinion, and I may be dead wrong but I think this is major speculative opportunity…OR if you ARE a cattle producer, potentially your last chance to get yourself hedged against FURTHER losses.

I FIRMLY BELIEVE THAT CATTLE HAVE BEEN FORMING A MAJOR TOP FOR THE PAST  YEAR AND DO HONESTLY BELIEVE THAT WITHIN THE NEXT 3-6 MONTHS YOU WILL BE HEARING STORIES ABOUT THE “COLLAPSE IN CATTLE PRICES”.

I know I keep beating the same drum, but what I am expecting DOES happen over and over and over in commodities (most recently in the other meat market, Lean Hogs, which have dropped over 50% in value during the past year…or in Crude…or in Copper…etc.), and CATTLE ARE NO DIFFERENT. Just like EVERY bull market I have ever seen, too many cattle people (like everybody in the business) still believe this is a solid market…that it is still a bull, even though the highs were made almost a year ago…And quite typically, everybody in the business has seemingly now forgotten that  something like 1.30 in Feeders (70 cents lower than today’s market) used to be a SKY high price or that the same is true with Live Cattle at $1.41 when a few years back $1.15 would have been perceived as being in the stratosphere…I have seen this scenario too many times to count…You get a bull market in a commodity and all the producers think it can never go back to where it was 2-3-4 years ago…But it always does seem to do so…or at least get a HELL of a lot lower than anybody would ever dream. 

I continue to recommend being short the Cattle complex. I continue to think “the big one” is right in front of us…

Just about everybody who has bought actual Feeder Cattle during the past 3-4 months is losing money on every animal they own. At some point, and I strongly suspect we have reached it, this market is going to encounter a total vacuum of buyers…In other words, NOBODY is going to want to spend the roughly $2000 a head it will cost you to buy a feeder and fatten it up to slaughter weight during the next 5 months…I don’t care what “low cattle numbers” you hear about, all it takes for a market to break hard from one level to a totally new (and shocking to the industry) level is a 2-4 week period where there are plenty of sellers…and buyers just have had all they can stomach of losses…and the vacuum I refer to occurs…And the next thing you know? Feeders ARE 30-40 cents lower. AND THIS IS EXACTLY WHERE I THINK WE ARE NOW. WHEN EVERYBODY HAS CATTLE TO SELL…AND NOBODY WANTS TO BUY THEM. NOBODY WANTS ANY MORE.

Here’s the big picture in the Live Cattle contract…

The Cattle Cliff…

What I see on the chart below is that Cattle have returned to the “cliff” they’ve managed to rally from 2 or 3 times in the last six months…but this time I think the stage is set for them to absolutely fall through these highly significant year long lows and then we will truly see a “panic” will begin to accelerate on the downside…It doesn’t have to come in a bunch of mind boggling limit down days (although it can) but the result easily can be that people look up in a month and realize that Feeders have “quietly” been knocked for 30-40 cents and Fat Cattle are at 125 instead of today’s 141…It doesn’t mean I will be right but this chart, to me, is the highest probability set up that I think we ever see in Futures…A giant sideways range. The market on its lows again. The rhetoric everywhere is still that “Cattle are in a bull market”…I WILL TAKE THIS TRADE 1000 TIMES IN A ROW. I THINK THIS TRULY IS A “BOTTOM FALLS OUT” SORT OF SITUATION AND WHAT I CONSIDER TO BE THE “PERFECT 1 & 1”. As I see it, this thing is about to either dynamically “fall off the cliff” or at least pop back up enough to get my money back via owning a defensive call.

I am personally trying to contain myself and not go overboard trying to load up here…but I DO love this trade.

While I am short both Live Cattle and Feeder Cattle, my primary position is in the Feeders…I AM in the October Live Cattle shown above but they are now down to about a month of time, which means more leverage in options…but also more risk that time will run out…If you do want to look at some numbers there, give me a call. Otherwise, here is where I DO think there is a combination of enough time AND big leverage…in the October Feeder contract.

Bottom line? I say either this market either TOTALLY collapses from here...or it at least trades up 7-8 cents and we recover the entire $3872...and go again. Maybe I’m dead wrong but I do not think the percentages EVER get any better than this.

If you actually own Cattle…

And one last little note and probably only you cattle guys will know what I mean here…If the recent two week, 90 cent drop in Corn prices didn’t turn Feeder prices up…? What WILL? IF YOU OWN CATTLE AND YOU HAVE BEEN WAITING FOR A RALLY…AND THINKING THIS MARKET OUGHT TO GET GOING ON THE UPSIDE AGAIN…OR THINKING ABOUT SOME SORT OF PROTECTION, DON’T JUST SIT THERE…GET SOMETHING DONE….AND DON’T START SUPPOSING “IT’S TOO LATE” DUE TO THE FACT YOU KNOW YOU ARE ALREADY LOSING MONEY. I’M NOT TRYING TO BE ALARMIST. ALL I AM IS AN IMPARTIAL VOICE (I NEVER CARE WHICH WAY THE MARKETS ARE GOING. I JUST TRY TO READ THEM) THAT DOES SEE THE SIDE OF THE MARKET THAT MAYBE YOU DON’T WANT TO SEE…I DON’T CARE HOW BULLISH THE CATTLE NUMBERS ARE SUPPOSED TO BE…I’VE SEEN THIS STORY BEFORE…AND IF YOU’VE BEEN IN THE CATTLE BIZ FOR MORE THAN THE LAST FEW YEARS, I’M PRETTY SURE YOU KNOW WHAT I’M TALKING ABOUT…THAT THIS MARKET CAN GET VERY NASTY, VERY QUICKLY, AND FOR MUCH LONGER THAN MOST GUYS CAN STAND…SO GIVE ME A CALL IF YOU ARE UNPROTECTED AND AT LEAST LET ME GIVE YOU SOME IDEAS…

 Give me a call guys…The 1 & 1 has changed the landscape around here…And all three of these are great, great trades I think.

Thanks,

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: Eurocurrency, Soybeans, Live Cattle, Feeder Cattle