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Oct. 7, 2005
Buy Cotton
As I believe Cotton is currently
one of the most undervalued commodities on the board, on September 6th I
recommended re-entering Cotton on the buy side. Cotton has
spent roughly 90% of the past 30 years at prices above the current 54
cent level, and, as it is not exactly a commodity that is being phased
out of use, I just don't see it staying at these very low levels...In
fact, I think it could easily be 25-30 cents higher by next
summer. The size of our current crop, while always subject
to adjustments, is pretty much a known, while I cannot imagine worldwide
demand, which is quite strong, doing anything but getting stronger....Although
I may be terribly wrong, I think prices have no where to go from here,
but up, a lot.
This is anecdotal, but in talking to various
individuals in the cotton business around the country, I have recently
heard something like the following from virtually everyone: "Last year,
we had cotton jam packed in the warehouses (and in some places the
overflow was under tarps on football fields), but right now, I don't
think I have ever seen the warehouses as empty as they are today". I
first started hearing this last month, which surprised me as prices are
just about exactly where they were a year ago....
Sentiment is currently quite bearish in
cotton, with the typical analysis talking about "too much supply", which
is not at all unusal at a market bottom....But, in a nutshell, something
doesn't fit....There's no cotton around compared to a year
ago (I obviously don't mean this literally) but the price is still the
same? If the USDA were to come out and surprise everyone
with a "revision" of their Supply-Demand Outlook, it wouldn't be the
first time, cotton, or any other market, suddenly exploded on that sort
of news to an entirely new price level....which I think could easily be
a possibilty in this case.
Maybe I'm wrong but I look at cotton and see
a MAJOR bottom having been formed over the past 14 months. Anybody who
ever dreamed of being bullish has probably long since given up on the
idea and has zero expectations on the upside. I love the immediate look
of this market and believe it is poised to possibly just blow out of
here and do much more than the 10-12 cent rally we experienced (both
ways) earlier this year. I am buying futures and options in
both the December 2005 and March 2006 contracts. My initial target is
somewhere in the mid to upper 60's.
Buy Treasury Bonds
We exited all of our long positions in Treasury Bonds on September
1st and have since watched them "drift" about three points lower.
I continue to think the Treasury Bond market is still in a long term
bull move and am now buying the December contract again. I look for
this market to be at least 7-10 points ($7,000-$10,000 per futures
contract) higher by late January, 2006.
VERY briefly, in spite of the Fed raising short rates for over a
year now, and in spite of all the Oil/China generated inflation
talk, and in spite of all the talk of Foreigners dumping our
paper....in spite of anything you want to name, the Treasury Bond
market has been rock solid.....As I have said for some years now,
even though the economic analytic community keeps talking about long
term rates going higher, in the real world, nobody is really selling
US Government Securities that still have 15, 20, or 25 years to
maturity and are paying 5, 6 or 7 percent rates, guaranteed by the
United States Government. Furthermore, as the Baby Boomers of the
industrialized world approach retirement, this certainly means there
is more and more of an ongoing interest in owning a 10 or 20 year
paper investment that is the ultimate in safety and currently
yielding 4.5%, ....Everybody keeps wondering why long term rates
won't seem to go up....I think the answer can be summarzied as: No
Real Sellers vs A Steady Influx of Buyers. This is not the recipe
for a bear market.
As I also pointed out in my August 24th newsletter,
Treasuries have an historical tendency to be quite firm between
September and year's end. It is my guess that the
demand for borrowed money lessens at this time of year and the price
of borrowed money (interest rates) therefore tends to fall, and bond
prices rise. This is an over-simplification and may have nothing to
do with how bonds trade, but if you return to that August 24th
newsletter (which will soon be on the website with which I have had
technical difficulties and been unable to update for several months)
you can see the evidence for yourself.
As I have pointed
out many times over the years, I consider Treasury Bonds to be THE
contrary opinion market....that when a bull move is taking place,
all you will hear is, "It's going down!!!!", and vice versa when
they are going down....Think about it....If you
had to name the one idea that today would seemingly be the most
insane trade you could think of, wouldn't it be, "Buy Bonds. Long
term rates are going LOWER"?....I assure you I am not
taking this position just because of opinion, but it is
a part of the equation....One
of the toughest things about trading futures is, to be successful,
when it's time to buy something "nobody else wants", on the surface
it just doesn't seem to make any sense at all. Those adages about
buying something "when nobody wants it" are easy to talk about, but
more often than not, VERY difficult to actually follow through
with....And in the interest rate market, which is always all over
the media, it is even more difficult to do.
If you have read my newsletters for many years at all, when it comes
to Bonds, you know I could go on and on and on....Truth is, I could
probably write another four or five pages as to why I am bullish,
but I'll just leave it with what's already been said. As I said
before, this idea will strike 99% of the world as just totally
insane and utterly stupid (which it may prove to be), and as is the
norm, practically no one will have any interest in taking this
position. At any rate, here are a few charts....
Sell Copper
Copper has been beating me to death for months, to the extent I have
almost decided, "It's never going down". But then I remind myself that
the futures markets have an uncanny way of convincing you your
opinion is just wrong, wrong, wrong....just before you are about to be
right. I really have no idea when copper is going to break, only that I
"know" it will, and as I have pointed out in previous newsletters, if
the past is any guide, when it does turn, the move down is a VERY big
one. I am now buying puts on the December 2005 and March 2006
contracts.
Sell Gold
I know there are a few of you out there who will really
come down on me on this one....
I look forward to your emails....
I think the Gold market, the perennial darling of the commodity markets,
has set a lot of people up for a major disappointment. Gold moves on
emotion, not lack of supply, and as I now have novice futures
traders calling me with extremely detailed explanations as to why Gold
is the place to be for the next 2 to 3 years, I suspect we have
reached the sort of emotional "high" I have seen more than a few times
in this business. The bullish logic is all there: How inflation is going
to run rampant, how on a worldwide basis people are going to dump paper
currencies, how foreign governments are/will be getting out of paper
investments to buy Gold, how Gold has detached itself from its tradional
inverse relationship with the Dollar, how Gold is "breaking out" (after
a 4 year bull market?), or how it is absolutely ignoring everything
related to it, is traveling in its own world, and can ONLY be headed
higher.....And I must add my favorite reason heard lately, that the
Wedding Season is coming up in India and Indians will be buying lots of
gold as wedding presents (!?)...Maybe I've got this one wrong, but I
don't think I can handle one more prediction of the CERTAINTY that Gold
is now set to take out $500 an ounce, to the extent that the next
$25-$50 on the upside is supposedly just easy money.
I am shorting Gold and look for anything from a $40 to $60
collapse between now and early 2006.
I tried this back on September 13 using units of two puts to every call
and exited the trade six days later getting back 90%-100% of what we had
on the table....and I am now ready to do it again. Per Commitments of
Traders, I note that the number of speculative longs in Gold
has jumped by 20% since I initiated that trade on September 13th,
meaning that since then 1 in every 5 long contracts in Gold is a new
one. Specifically, as of the most recent Sept. 27th figures, there are
now 290,261 speculative longs against 81,516 shorts with roughly 50,000
of those new longs having been initiated during just the last two weeks
of September....There is nothing about these numbers that says Gold
cannot go higher from here, but I would also note that one aspect of
bull markets before they top is to see a herd of late-comers pile into
the market right on the highs....All things considered, I think that's
what we've seen here. One thing I know about this business is there
ain't no easy money, and that's how a whole bunch of people see the next
$25-$50 in Gold.
Just for comparison, do you remember how nuts, and
how INCREDIBLY BULLISH sentiment was regarding the Crude Oil market as
Katrina blew in? Look at it now. In spite of a follow up from Rita,
Crude has dropped from $70 to $61 (13%)during the last month....If I am
right about Gold from here, I think the percentage drop will easily be
the same, or worse...As I said before, Gold trades on emotion, and one
of the more "emotional" aspects of futures trading is when something is
"falling out of bed".
I am buying units of 2 puts and 1 call in the December 2005
and February 2006 contracts. Like last time, I think I will
either be very wrong or very right, which, using the "2 and 1", should
work out fine in either direction. The last thing I expect Gold to do is
just sit here and go sideways.
Looking to Buy the Stock Indices
On September 6th, I recommended buying the stock indices with roughly a
200 point stop in the Mini-Dow and a 30 point stop in the Mini-S&P.
All of those positions were stopped out several weeks ago but
I am taking a hard look at reinstating those positions. My
feeling is still pretty much the same....I believe all the fears over
Energy, Interest Rates, Inflation and Hurricane Devastation have been
built into the market and the sell off this week is helping to set up
the Stock Indices as a buy. I am not back in yet but I have my finger on
the trigger (hopefully the gun is not pointed at my head). I basically
think the energy bull market is totally over, that long term interest
rates are NOT going higher, that inflation has already been accounted
for (and will be sliding back down anyway) and that all the money being
thrown at the Gulf Coast rebuild is only stimulative.....All of which
will be positives for stocks and the economy....I may be back
on this trade early next week....
Give me a call if you are interested in any of this....
Thanks,
Bill Rhyne
800-578-1001
770-514-1993
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