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Oct. 26, 2006
Cotton
I am sick of this trade but every time I
look at it I see an even greater
opportunity than when I originally
started buying it over 18 months ago.
I first began to recommend buying Cotton in January, 2005. Since
then, I have off and on steadfastly maintained a major bull move was
coming in this market and have had many of you owning slightly out
of the money calls...and losing money. I have cited numerous
fundamental and technical reasons as to why I thought cotton was set
to rally 20, 30 or even 40 cents...but every rally has failed (the
best being about 10 cents) and spot cotton is now just slightly
above where it was when I first started recommending it.
On October 12 the USDA surprised mostly everyone in the industry by
increasing the estimated size of this year's USA cotton crop...They
also did the same for China...And basically made the point there
will be no immediate world shortage of cotton...On top of that, US
mill consumption continues to decline, US exports are slow, running
at about 50% of last year's pace (so far), and as would be expected,
virtually every cotton market analysis I have seen since
the report is quite bearish and expectations/hopes for any
significant rally are far out in the future...
In other words, I will tell you there is now no obvious
reason whatsoever to buy this market...which is precisely why I AM
BUYING COTTON CALLS AGAIN...GOING OUT NINE MONTHS TO THE JULY 2007
CONTRACT...
As I have NEVER seen a market bottom with bullish
fundamentals, I don't expect it to be any different this time around
in Cotton. I still look at the long term chart below
and note the recent 28 month consolidation represents the
longest sideways action in over 30 years....I also note, during the
last 30 years, July Cotton has averaged a 20 cent range (low trade
to high trade) between now and expiration (see table
following)...This is a strong argument for assuming cotton is going
somewhere during the next nine months, especially when it has
essentially done nothing for so, so long...And I can only
view the past 2 1/2 year consolidation as a solid floor, from which,
cotton, sooner rather than later, is going to lift off into a
classically dynamic bull market.
I may be dead wrong, but when I look at the cost of options out in
July, and considering the size of "typical" bull moves in Cotton, I
can only think there is incredible leverage to be had
there...and nine months is a lot of time to
see the whole thing happen. Per cotton's history, I still
believe it could easily be 25 or 30 cents (or more) above current
levels by the time July expires next year, and if this is the case,
the call options noted below will have multiplied many times in
value. Obviously, if I am wrong, and cotton goes down,
or nowhere, those options could also end up totally worthless...
Here is the long term chart you have now seen so many times...
 
Just to give you an idea as to how much cotton really does move,
the following table lists the total price ranges between Oct. 15th
and expiration (in cents, low trade to high trade) of every July
Cotton contract going back 30 years. During 14 of those years, the
largest moves after October 15 were on the upside, 16 on the
downside...There was only one year where the total range
was less than 10 cents, with the average for the past 30 years being
just over 20 cents....COTTON MOVES!
July Cotton - Price
Ranges, Oct. 15 to Expiration
Here is the July 2007 Cotton contract...The last thing I expect is
to see this just continue meandering...And if it is going up, in my
opinion, it should go a LONG way past the 63 cent contract
highs...This, to me, makes a strong argument for owning slightly out
of the money calls.
I know there are a bunch of you out there that
just hate this idea...that have heard this "same old shit" from me
for too long and have no desire to waste more money on this market
that "just ain't going nowhere"...Which I totally
understand...Believe me, I can barely get up the nerve to write what
I've written here...But being as hardassed as I am (or stupid), I
know if I were walking up to the table for the first time, and was
taking a fresh look at this generally volatile market, that has been
sitting here dead in the water for 2 1/2 years at very low
historical levels?...If this market hadn't beaten me to death for
almost two years, I KNOW I would just be ALL over it...which is
therefore what I intend to do.
To me (Dumbass Bill), IT
IS A GREAT TRADE...AND YES, A BETTER ONE THAN A YEAR AGO, AND I
PERSONALLY WANT TO OWN AS MUCH OF THIS AS I CAN...I am going out to
the July calls, which have a ton of time, writing the check,
assuming I am going to lose again, and then doing my best to
"forget" I own it....And, however much this market has cost you, I
encourage you to swallow hard and do the same as I am, one more
time, with something...especially while it is sitting here
deep in the hole and looking like it will never go up again...
Thanks...I expect to cover the other markets within the next few
days or so...
Give me a call if you want to take a look at this...or anything
else.
Bill Rhyne
866-578-1001
770-425-7241
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