Our business focuses on the commodity complex. We rely on the Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report to sort out what the major players are doing in the commodity markets. Our focus lies with the commercial trader category of this report. These are the traders who either have the commodity to sell or, will be using the commodity in their manufacturing processes. Following the commercial traders category, as a whole, for a given commodity can provide us with a consensus opinion from the world’s largest producers and end users of a commodity. There are times, like now, when their collective actions in the commodity markets can pay direct dividends to equity traders, both in individual stocks as well as commodity based ETF’s.
Every market has built in fear premium. This shows up empirically through the skew of an option chain. The idea is that two strike prices with the same expiration date that are an equal distance away from the market’s current price should have the same value, everything else being equal. We can also measure this through common sense. The skew is aligned with a market’s fear. This is what creates the fat tails on index put options as well as call options in the grains. Historically, fear in the Middle East leads to higher oil prices as the possibility for supply disruptions increases in times of uncertainty. This week, we’ll examine how oil prices affect ISIS and how this could affect the oil market as a whole.
Obviously, China has dominated the news this week. There has been rampant speculation regarding the, “first roach” philosophy which suggests there’s much more to come in the way of Chinese Yuan/Renmimbi devaluation. I’m not very good at projecting political developments along an investment front. However, I do know enough to hunt down the information no one is talking about amid the hyperbole. What follows are a few actionable ideas based on the historical context of recent US economic developments and the transference of these principles to the Chinese economy’s cyclicality.
It is time to look at alternative ways to hedge against rising interest rates. Unfortunately, with the huge increase in volatility due to so many headline issues from Greece to trading halts on the NYSE, that it makes it tough to hold onto positions. Fortunately, the most liquid interest rate market is structured in such a way that hedging against inflation can be done with a reasonably fixed amount of risk.
Clearly, we hit a hot spot with last week’s piece. So much so, that I kept digging. I came up with more questions than answers but in asking those questions I came up with some data points and open ended questions worth pondering. We’ll look at the push and pull relationship between public and private spending and their combined effect on inflation. Then, we’ll finish with the spark of wage inflation struck by the competition between governmental subsidy programs versus rising wages in entry level retail positions.
This was a light week thanks to those who gave their all. Thank you to those we honor and support and kindness to the families they’ve left behind.
We began with the development of a classic small speculator short trap in the cotton futures market for Equities.com. We’ve been watching it build all week and finally issued an official COT Buy signal in our nightly discretionary email. Free Trial Available
Thanks in part to the lightened writing duties this week, I was able to step back and survey the markets as a mosaic. I find this exceptionally helpful in determining the big picture themes. In this case, we determined that these 9 charts are screaming DEFLATION. The world’s bankers may be trying talk rates higher but the boots on the ground are still mired in excess capacity and economic slack.
The recent bond market sell off came on the heels of Bill Gross’ comments regarding the German 10-year Bund as, “The short of a lifetime.” We had already noted the negative yield situation in mid-
March along with the increasingly negative tone that commercial traders were taking. Positioned accordingly, the bond sell off was a profitable experience. Over the last two weeks, however, there has been more and more talk about inflation and frankly, I just don’t see it coming. Therefore, the generational bond rally may not have come to the screeching halt that the media is leading us to believe.
Two weeks ago we detailed the issues facing the Fed’s seeming inability to get the notion of higher rates going forward through the thick skulls of the interest rate market’s participants. Specifically, we referred to Janet Yellen’s approach at the International Monetary Fund’s meeting in Washington two weeks ago. It appears that her primary purpose was to make clear to world leaders what data she would use in determining when the US would raise interest rates. The new era of Fed transparency left the attendees in good spirits and high hopes that they were all on the same page. Until….
The general gist of these headlines is twofold. Janet Yellen and the U.S. Federal Reserve Board of Governors is doing everything they can to talk the market into behaving in an orderly fashion as the Fed prepares to enact the shift in interest rate policy that they’ve been telegraphing since the end of the taper announcement last summer. Secondly, the reason the Fed is trying to talk some sense into the markets is because the markets don’t seem to believe the in the Fed’s intentions.
There are three markets in the meat futures sector with enough volume and liquidity to attract both hedging and speculative activity. These are the lean hog futures along with the feeder and live cattle markets. The live cattle market is best thought of as cattle on the farm while feeders are the cattle that have made the journey from the farm to the feedlot for fattening prior to slaughter. We’ve written extensively on the broad nature of global supply and demand fundamentals within these markets and included links to our previous research at the end. This week, however, these three markets appear to be setting up for a classic trading opportunity.