Cotton Surges "Limit Up" For Second Consecutive Day

Our soft commodity flavor-of-the-month, cotton, has seen its near term futures surge "limit up" for the second day in the row.  Was our case for cotton perfectly timed for once?  (See: Cotton's Blue Light Special)

Cotton's sharp reversal sent shorts running for cover. (via Barchart.com)

While there have been additional acreage reductions announced in the past week, this sudden rally is being attributed to fast and furious short covering.  I'd hate to be short any commodity in a secular bull market, let alone when Bernanke has a microphone in front of him!

We'll keep an eye on a potential breakout - I prefer to see a 20-day high, at least, when entering a cotton position, and this didn't get us there.  Which is fine, as I also hate to trade V-shaped moved in the softs - they rarely happen.  I would expect the trend in cotton to remain sideways to down for a bit, with the potential for stimulus-driven swings.

Attention Commodity Shoppers: Cotton's Blue Light Special

Cotton futures have quietly dipped to their lowest levels in two years, prompting our "contrarian alert" to sound. King Cotton, since rocketing to levels not seen since Reconstruction, has since plummeted:

Cotton spikes, and crashes. (via Barchart.com)

Two months ago we mused that cotton and rice, both off significantly from their highs, may have piqued the interest of Jim Rogers, who recommended that investors interest in agriculture start by looking at what's down the most. Since then, cotton has drifted nearly seventeen cents lower, and is now sitting at levels not seen since early 2010.

On Cue: Supply Cuts Have Arrived Just as high prices tend to cure themselves with increasing supply and/or decreasing demand, low prices commonly exhibit the equal but opposite effect. And we're already seeing signs of supply going away, as China will decrease cotton plantings by nearly 10% this year...

Please read my full cotton analysis on Seeking Alpha.

So Long, Cotton...I'm Just Too Wary of Deflation

I have to admit - I think the Great Deleveraging permanently seared my psyche. I haven't been the same since.

It's for the best. Until you live, and invest, through an event like that, I don't think you can appreciate the awesomeness of the destruction. A history book just doesn't do it justice.

When it came time to roll my cotton position last Friday, I reflected on whether or not I wanted to keep the position. That's one nice thing about trading futures - when it's time to roll, you have a check point of sorts that forces you to reflect, even if for only a second.

My plan with cotton has been to hold as long as it stays above it's lower resistance points (which is has...but just barely), and sell if I was fortunate enough to see it hit its upper resistance.

Well, I got lucky and cotton broke $0.62 - and with some serious resistance here, I was happy to sell my position.

Cotton has been doing the range trading thing.

(Source: Barchart.com)

Why not wait for a potential breakout? After all, cotton has traded north of 90 cents in the past two years - perhaps a decisive break above 63 could send it on a moonshot?

Perhaps. But like I mentioned before, I'm still gunshy. I fear that the deflation monster is still lurking in the shadows. Last time I stayed stubbornly long - big mistake. I hope that next time, I can at least make a new set of mistakes, rather than repeating the same old ones!

Remember what happened last time deflation took hold of the markets - it took hold of all of them. All assets traded together - correlation went to 1. So much for diversification...it doesn't really help to have your eggs in a few different baskets when ALL of the baskets hit the ground, and ALL of the eggs crack in half!

I guess I can't see why things would be different if we see another wave of deleveraging. The dollar would rally. Treasuries may as well. And everything else would get slammed.

At the very least, I think we're due for a correction in most assets. Optimism is quite high on, well, just about everything. Gold is everyone's darling, stocks are in the midst of a rally for the ages, and the Fed is being heralded as the saviors of the financial universe.

I'm just not completely sold on this story, at least just yet.

So, for the meantime, I'll be mostly in cash. And that means even a commodity with favorable fundamentals - such as cotton - is something I'll be casting a skeptical eye on at these prices.

Popular Posts for the Week Ahead

In case you missed them - here are the most popular posts from the past week:

• Natural Gas - In a Death Spiral?

• A Great Inflation Debate: Prechter vs. Puplava

• Marc Faber: There's Too Much Enthusiasm for Gold Right Now (Free Audio)

Positions Update - Still Like the Buck

We bid cotton a farewell, at least for now. My favorite trade is still the US dollar - I think it's due for a massive rally, at least in the short to medium term, if for no other reason than the fact that absolute everyone is bearish on the buck.

I outlined my hypothesis for going long the buck a few weeks ago, and I don't think the story has changed. Sentiment still appears to be overwhelmingly negative, and I am still not (yet) a believer in the inflation story.

If the facts appear to change - or, more importantly, if the chart proves me wrong - I'll definitely reevaluate this position.

The dollar still sits well above its 2007 lows - at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $25,119.83

Cashed out: $20,000.00
Total value: $45,119.83
Weekly return: 6.6%
2009 YTD return: -50.6% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Holding Gold and Cash, Nonconfirming Indicators, and Cheap(er) Toilet Paper

On Tuesday evening, we had our monthly meeting of local Casey Research subscribers. Really sharp investment minds in the group - it's a real pleasure and treat to chat about a wide variety of finance and investing related issues.

The general consensus of the group (fairly contrarian in nature) is that gold and cash are the places to be right now. Gold because it's a store of value, not because it's going to $1,500 tomorrow. In fact, there was some trepidation that gold is due for a pullback from here. But everyone agrees that holding physical bullion is a good thing.

Short term market outlook is very cautious on the whole, to say the least. We are all expecting a pullback of sorts, and believe that if/when that happens, we could again see asset deflation across the board. So while most of us are long term believers in gold and energy plays, caution is being exercised right now.

Consumer Credit Plummets in July

I noticed a big time deflation headline on the USA Today earlier this week: Consumers Cut Outstanding Credit By Record $21.5 Billion.

As much as the Fed may be running the printing presses, it doesn't matter if the American consumer is choking on debt. Remember that shrinking credit is really the cornerstone of the deflationary hypothesis.

Because we have a credit based monetary system, credit can shrink faster than the Fed can print. At least in the short term - say the next 2-3 years. Of course, we could see inflation, or hyperinflation after that - but possibly after a huge wipe out in asset prices.

If the Fed can reinflate the credit bubble one more time, soon, then yes, all bets are off. But there doesn't seem to be any indications of this actually working - yet. Though perhaps $1,000 is an early warning signal. We shall see!

Wages Continue to Drop

Nice article by Rob Parenteau in Wednesday's Daily Reckoning about labor costs entitled Unlabor Day. I like his stuff - it's quite thorough and balanced.

According to Rob, the recession is doing it's job, and America's businesses are becoming more productive. I believe that 100%, and it's something I wrestle with when thinking about where our economy is heading. A lot of excesses are in fact being wiped out - which is exactly what should happen. Unfortunately, the government may be creating enough distortions to nullify all the positive that's happening.

Anyway back to his article - labor costs are typically an important component of inflation (or the lack thereof). It's hard to see rising prices without rising wages. Thus for now, Rob believes inflation is on hold until we see the government's inflationary actions start to take hold:

The question remains what lies ahead after the massive quantitative easing operations of the Federal Reserve have lapsed and the bulk of the fiscal stimulus is behind us. In the very near term, we can surely expect auto sales to wilt following the end of the cash for clunkers program, but we remain impressed by what supply managers in the most cyclical part of the economy, namely manufacturing, have to say about new orders, production and export conditions. Policymakers panicked and adopted a “whatever it takes” stance, one that has proven to be the most radical outside of major wartime conditions. Looks like something took – and not surprisingly, gold is taking out the $1,000 per ounce mark at the same time.

It's Even DE-flation in Toilet Paper

Procter & Gamble announced last week that it will be cutting prices across nearly 10% of its household brands. It looks like we're at least seeing deflation in laundry detergent!

That reminds me of an interesting point Bob Prechter made in the interview we linked to last week (inflation/deflation debate with Prechter and Jim Puplava - highly recommended).

When Puplava said that he didn't see prices coming down in his neighborhood, Prechter countered and said that we're seeing rising prices in a lot of sectors that have high government involvement. Like medical care - highly regulated industries. And these price increases are due to the inherent inefficiencies of government meddling, and nothing more.

In mostly privatized industries, he says we're seeing more deflation across the board. An interesting though to ponder.

If It's a New Bull Market, Who Forgot to Tell China?

It seems ominous that China, the posterchild of this rally and lone economic hope for the world, has turned south. Remember that China turned south ahead of the US markets tanking last time. Maybe they get the news faster in the Far East thanks to the time difference?

Sure China could break out from here. But I can't help but think that the five-year chart shows a classic Fibonacci retracement since March, and nothing more.

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.

Positions Update

Rolled over my dollar index position to the December contract. I love getting the Friday morning call from my broker that I need to be out of a position, haha. Haven't had that one in awhile. My wife always jokes that if I got hit by a truck, my lasting curse to her would be a delivery of cotton and soybeans to our front lawn!

Still holding these (dogs) of positions for now. I'll repeat what I said about China for cotton - if it's a new bull market, why doesn't cotton know?

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $23,557.10

Cashed out: $20,000.00
Total value: $43,557.10
Weekly return: -3.4%
2009 YTD return: -53.6% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Robert Prechter and Jim Puplava: A Great Inflation / Deflation Debate (Free Audio)

I hope you had a good, long holiday weekend. I sure did...I mentioned at the end of the week that I'd be blogging when I wasn't drinking beer. As you can probably infer from my lack of posts, I managed to put back a few with some good friends!

Back in the saddle now, I listened (twice, actually) to a fantastic interview and inflation/deflation debate as Jim Puplava chatted with Robert Prechter on his Financial Sense Newshour. Here's the link to the interview: http://www.financialsense.com/fsn/main.html

Note: It's the September 5, 2009 post that you want to look for. And as a bonus, he also interviewed Neil Howe, author of The Fourth Turning! I've got that one next on my iPod, and will do a post on that afterwards.

Despite gold approaching $1,000, and the equity markets rallying north of 50% over the past few months, Prechter is holding strong to his deflationary stance. In fact, he goes as far as to say he can't see a hole in the deflationary argument!

Listening to Prechter's answers, I have to say it's real tough to poke a hole in his line of reasoning, which is always very thorough, and usually contrary to popular opinion.

Here were a few of the highlights for me:

• Prechter actually called the Fed's actions "fairly conservative" - not quite as conservative as the 30's, but conservative nonetheless.

• He believes that the Fed can do NOTHING to prevent deflation. Basically, because we have a credit bubble. And as that credit goes away to money heaven, even if the Fed were to print the money to replace it, at best that would be a wash.

• The core of his argument is that most debt outstanding will go unpaid. The lenders are carrying the value of this debt on their books at values that are not realistic. He says in 2007, the world woke up to the fact that these debts will go unpaid, triggering the onset of deflation.

• He's not at all concerned with the current rally - in fact, he predicted it (I can vouch for that - I've been a subscriber of his since the spring).

• Prechter is not quite as bearish on gold as he's been in the past. In fact, he admitted it will likely strike a new high during this move. He also now thinks that gold will hold up better than most assets, and even recommends a GoldMoney account for diversification purposes.

• He's looking at 2010 to be a huge year for deflation.

• When Puplava asked for a historical example of a fiat currency of a debtor nation that did not suffer from inflation or hyperinflation, Prechter cited four examples of credit bubbles in history, saying that everytime a credit bubble ends, it results in deflation (with Japan being the most recent example).

• Prechter posits the question: if inflation is a threat and a repeat of the 70's, why aren't interest rates at 5, 10, 15%?

• He also says that social mood has permanently turned towards a deflationary mindset. Thus, the Fed is "pushing on a string", and zero interest rates will not reinflate anything (a la Japan). (Brett note: I read a similar social mood comment about the Great Depression, that inflation "did not take" despite the Fed's best efforts, because of investor's mindsets).

I'd highly recommend you set aside an hour of your time to listen to this interview. Puplava's a super sharp investor, and also currently in the inflation camp - so he tosses a lot of good questions towards Prechter.

As you probably know, I've been in the deflationary camp for the past couple of months - though I am always rechecking my assumptions.

Side note: If you're interested in reading a recent newsletter from Prechter, they are actually giving out the July issue for free until this Wednesday - you can check that offer out here.

It really feels like this whole inflation/deflation debate is going to come to a head soon. Prechter believes the next wave down will be more powerful than the first, and also that it will be quite soon...as soon as now.

On the other side of the fence, we've got gold making a solid run at $1,000 (and I'm wiping the egg off my face right now from selling out in June). And some really sharp gurus predicting hyperinflation and insisting that the rally has been driven by printed money - as evidenced by the fact that bank stocks have led the charge, and they are usually the first to lead in inflationary wave.

Actually I find it interesting that since March, Prechter's script has been identical to that of the inflationist point of view. The inflationists say the rally is being led by the banks, which is typical. It will then spill over into other areas (gold, etc), and away we go. Prechter and his guys, on the other hand, say that this rally was due to happen, but it's a false hope, being driven by crap (banks, etc), and it's about run it's course.

So we seem to be at a fork in the road of sorts. The next turn may be the game decider! We'll stay tuned in for more clues here.

Sugar Money Looking For a Home?

I got a ring on Thursday from my commodity broker in Chicago - I have an IRA managed by his firm, that's separate from the one featured in this blog. I asked him what he thought of cotton - he still likes the trade, citing the fact that cotton traded up towards 90 cents fairly recently.

He also mentioned that the sugar trade is looking a bit long in the tooth, and that fund money may flee sugar soon looking for the next big ag trade - which could be cotton. Check out the money running for the sugar exits already!

Sugar traders are stampeding for the exits!

(Source: Barchart.com)

Recent sugar reading: Sugar Prices Hit 28-Year High: How's Jim Rogers Playing It?

Positions Update

No new trades. I still like the buck. And still holding cotton to see what happens from here.

While I am currently in the deflation camp, I also realize it's very possible that I'm wrong! So we'll keep an eye on the charts.

As always, thanks for reading!

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Current Account Value: $24,386.64

Cashed out: $20,000.00
Total value: $44,386.64
Weekly return: 2.1%
2009 YTD return: -52.1% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Is 2009 A Repeat of 1930? Why Depressions May Rhyme

As financial pundits and common investors breath collective sighs of relief that "the worst is over" and "the bull is back", let's explore the possibility that 2009 may be following a script that was originally penned in 1930.

After the initial crash in 1929, the markets staged a powerful rally that retraced 60% of these losses...

Images source: Mywealth.com

Since the March 6 lows, the 2009 S&P has also retraced a significant portion of its losses - rallying over 50% in the last 5 months - one of the sharpest rallies ever!

By the summer of 1930, just as the markets were peaking, Herbert Hoover and his team were declaring:

• "The worst is over without a doubt." - James Davis, Secretary of Labor

• "The Depression is over." - Herbert Hoover

We are seeing the same types of self-congratulatory talk from our modern day heros in the summer of 2009:

• "We have avoided the worst." - Ben Bernanke

• "I can tell you, without question, the Recovery Act is working." - Joe Biden

What "solutions" were being heralded in 1930 as saving economic graces? "The coordination of business and government agencies in concerted action," according to Hoover.

Sound familiar?

Finally, I find it very interesting that during these times, the Fed's actions were viewed as wildly inflationist. From Murray Rothbard's America's Great Depression:

If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state.

President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates.

Bottom line: While history may never exactly repeat, it certainly has a tendency to rhyme (to quote Mark Twain). Cast a skeptical eye on folks who believe that we're through the worst - we're not through anything yet!

Right now, we're exactly on pace with 1930. While we can't be sure that history will repeat (or rhyme) - it's too early to rule out this possiblity as well. Proceed with caution!

Recommended further reading: How Herbert Hoover Put the "Great" in the "Great Depression"

Quick Market Hits for the Week Ahead

• Natural Gas fell below $3! Here's why oil may be next to slide.

• Private sector valuations and VC/angel funding are still in the tank - despite the run-up in the public equity markets.

Positions Update

No new trades this week...I am less than thrilled with cotton's weak performance. With oil and the S&P index hitting new 2009 highs, I would have liked to have seen cotton confirm these highs.

I don't think it bodes well, but with cotton prices appearing to be at solid points of resistance, I think it's a hold for now.

Cotton continues to "range trade".

(Source: Barchart.com)

And, as mentioned in previous weeks, I'm planning to "go long" the dollar index very soon.

Current Account Value: $24,378.91

Cashed out: $20,000.00

Total value: $44,378.91

Weekly return: -4.4%

2009 YTD return: -52.0% (Ouch, that's gonna leave a mark)

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Why Commodity/Shipping Weakness Could Predict Next Leg Down in Stocks

Interesting times in the markets. US equities have now completed a standard fare "Fibonacci retracement" off of the March 6 lows. Now, where to from here?

Bulls and bears alike conceded that a strong rally was quite probable. Now that it's happened, what can we expect?

There seem to be two or three prevailing market outlooks today - and all 3 are quite different!

1. We've averted armageddon. Now it's back to business as usual, albeit at lower levels. How much lower is the big question.

2. We haven't yet seen the bottom of this, and the March 6 lows are destined to be taken out. This is nothing more than a parallel universe to 1930.

3. This rally was engineered by the government and driven by the printing of money. Inflation has shown up sooner than expected - thus we should pile into gold, silver, and metals while we still can.

If you discount the less dramatic "Golilocks scenario" of #1, then you're left again with inflation and deflation staring you in the face.

Both sides of the debate have strong arguments for - and against. It's one of the most intellectually challenging forecasts that I can remember seeing in my (young) investing career.

I've accepted the fact that I'm not as smart as the gurus on both sides of the debate...if they can't figure out which it will be, how can I!

While, as regular readers know, I've recently warmed to the deflationary outlook, I'd still like to hedge my bets in case I'm wrong.

So, though I'm not doing much trading, I am watching the commodity sector closer than every. You'll recall that commodities, one by one, rolled over in early 2008, prior to the equity markets. I've come to believe that commodity prices are "smarter" economic forecasters than, say, the S&P 500.

Here are three charts that I pulled up this evening, which appear potentially ominous, at least in the short term.

The Baltic Dry Index shows that, well, less stuff is being shipped:

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View the full INDEX:BALDRY chart at Wikinvest

Where has everything been shipped to? China, of course!

Uh oh...looks like China is starting to turn down:

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Finally, let's take a look at oil - which last peaked in June of 2008. Oil looks like it's forming out a "lower high", and is having trouble holding onto the $70 mark.

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View the full FUTURE:CL00 chart at Wikinvest

Bottom Line: There appears to be A LOT of optimism priced into, well, just about everything right now. If US/global growth disappoints later this year (hard to imagine it won't), we could be in for another leg down. So, take heed to these potential leading indicators!

How Productivity May Hold the Secret to the Inflation/Deflation Outcome

My good friend Jonathan Lederer, President of Lederer Private Wealth Management, an investment advisory firm based quite close to my home here in Sacramento. Every quarter, Jon creates a fantastic update and outlook for his clients, where he dives into the current economic situation, and often applies a unique approach to the markets.

Jon really outdid himself in his Q3 update for 2009 - when he was kind enough to forward me a preview copy of his newsletter, I said: "Jon - this rocks! Can we please post this on the blog?"

Lucky for us, he was all for it - and you can read this great inflation/deflation piece here.

Quick Market Hits for the Week Ahead

• Robert Prechter, the "ultimate contrarian", lays out a very convincing argument for an upcoming powerful rally in the US dollar.

• Our old favorite sugar surged to a 28-year high this week. Here are the details...along with some updated thoughts from Mr. Sugar himself, Jim Rogers.

• Finally, a hilarious video reviews Bernanke's Greatest Hits as an economic prognosticator.

Positions Update

No new trades this week...cotton closed "limit down" on Friday after rallying earlier in the week.

Fundamentals for cotton appear to be quite favorable, and these prices should be a bargain. However if we are, in fact, in a Global Depression, we may very well see cotton, and other commodities, roll over.

Recall in early to mid 2008, commodity prices peaked before the broader equity indices - rolling over one by one as a precurser to the Great Deleveraging. Keep an eye on the commodity sector this time around, as it may serve as our canary in the coal mine.

Cotton continues to "range trade".

(Source: Barchart.com)

And, as mentioned last week, I'm planning to "go long" the dollar index very soon.

Current Account Value: $25,488.91

Cashed out: $20,000.00

Total value: $45,488.91

Weekly return: -3.4%

2009 YTD return: -49.8% (Ouch, that's gonna leave a mark)

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Low Acreage Propels Cotton "Limit Up"

The smallest acreage for cotton in 26 years has propelled the fluffy material "limit up" for the day, in what amounted to almost a delayed reaction from traders, as cotton was initially down yesterday when the report came out. Likely due to the weakness shown by the other grains.

You'd think that with cotton supplies continuing to shrink rapidly, a run up toward $1 is only a matter of time. October cotton futures closed today at 58.63.

Taking a look at the chart - maybe cotton is indeed getting wound up to make a run here. A solid pop over 60-cents would be a strong cry to "hop aboard"!

Cotton prices have resembled one of those lame kiddy park rollercoasters this year.

(Source: Barchart.com)

Why Agriculture Prices Have Held Up Remarkably Well

A recent piece in The Economist highlighted the recent strength of agriculture prices in the face of the downturn, and the reason for it.

Though prices of the meats, grains, and softs are still off their 2008 highs - they're not off by much anymore - as commodities such as cotton, soybeans, and sugar are starting to rally in a big way. 

How could this be?  Aren't we in a Depression?  Perhaps, but supply has come offline in a big way, while demand has remained strong.  As the Economist piece points out: "No matter how bad things get, people still need to eat."

It's looking like, though there were many bubbles in 2008, China's food consumption was not one of them.  Back to the article, with some staggering numbers:

China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.

And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.

And remember, many food stock levels are at historic lows.  Unless new supply comes online soon - and I don't know where that supply is going to come from - we could be in for a whale of a rally in food.

Read the full article in The Economist...

Further reading about investment opportunities in agriculture:

• Soft Commodities are Starting to Scream: "Inflation!"
• Sugar Futures Rally, OJ Takes a Breather
• Time to Invest in Orange Juice?

The Snowball Effect of Agricultural Subsidies in America

The folks at Reason TV recently put together an excellent 8-minute video about agricultural subsidies in America, from their roots in the Great Depression, to their effects today on commodity prices and economies around the world.

As a commodities trader and/or investor, it's extremely important for you to be familiar with these subsidies.

I should warn that you may get a little riled up and enraged in exploring the absurdity of these subsidies, and the collective ignorance of the politicians who allow them to continue.  

Just be sure to regather your personal Zen before trading reopens on Monday. While agricultural subsidies are obviously complete bullshit, their existence, and more importantly, future changes to them, can have drastic effects on commodity prices, and hence our trading. So it's important that we anticipate their effects with a clear head.

For example, if there was a real chance that cotton subsidies could be reduced or eliminated in the US, you can believe that the futures markets would quickly take this fact into account, and you'd see cotton futures prices start to really take off.

And if you want some cocktail party fodder for riling up any liberals in your life - higher cotton prices would indeed help many poor Africa nations, whose farmers are not cost competitive today because they don't have a government behind them printing money and subsidizing their farming.  So there you go - we can profit by speculating on cotton, and also help the poor kids in Africa.  

Yes we can!

Three Soft Commodities Poised to Rally - OJ, Sugar, and Cotton

For a few weeks now, we've been watching the commodity markets with rapt attention, asking ourselves: "Has the next commodity bull market officially begun?"

From the charts, it looks like broader commodity indeces may have finally formed a bottom.

Source: BarChart.com

So if the wind is indeed once again at the back of us commodity investors, which commodities hold the most promise right now? Let's dive in and review three very intriguing soft commodity opportunities.

Orange Juice

Orange juice futures continued their recent rally this week, with July OJ breaking out to 6-month highs this week, closing at 88.25.

Last week we were drooling over OJ, citing potential bullish catalysts of:

• Dry conditions in Florida that could hurt supply
• Reports of a weaker orange crop in Brazil
• A favorable technical back drop

Also my commodity broker gave me a ring on Thursday, recommending some summer OJ calls - he also likes the bullish setup, and mentioned that OJ is seasonally strong in the summertime.

Orange juice, after a long drop, appears to be showing some signs of life.

Florida did get some rain this week, which set prices back temporarily midweek, but this proved temporary as OJ surged ahead on technical buying and traders starting to pile in.

Bottom line: OJ's rally looks poised to continue, and we're looking to add to our exisiting position on further strength.

Sugar

On February 27, we went long one May sugar contract (which reminds me - I need to roll that baby over tomorrow 1st thing! The wife would not be pleased if we took delivery on that contract!).

At the time, we cited these bullish fundamental factors:

• The global sugar deficit is expected to rise this year
• India, the world's 2nd largest producer of sugar (after Brazil), will have lower output than forecasted, and may be forced to import sugar this year

Sugar has been rangebound.

Since then, sugar has been rangebound, failing to break up or down. I've read many traders recommending short positions on sugar in the short term, though sugar has not yet broken down in the short term as these folks have expected.

Bullish supply news came out this week, with India's sugar industry reporting that this year's production will fall 8.4% below previous estimates.

We're holding our exising position until the market gives us a clear signal on which way sugar is heading.

Cotton

Cotton futures have been slammed since the financial collapse, as significant cotton demand from India and China has evaporated overnight.

This demand and price wipeout has accelarated the decline in farm acreage devoted to cotton - this year's US cotton acreage is projected to be 7% below last year, and the lowest total amount since 1983, due to high production costs and low prices.

Although supply is coming offline significantly, thus far demand has dropped faster than supply. This may not last for long though, as the best cure for low prices is often low prices.

Has cotton formed a double bottom?

As you can see from the chart above, cotton has put in a double bottom of sorts, and is approaching an upward resistance point in the low 50's. 

Cotton futures have rallied to a 10-week high on continued strength in soybean futures, which surged to 6-month highs themselves.  Because cotton and soybeans compete for acreage, high soybean prices make it more likely that farmers will switch acreage from cotton to beans.

We're watching closely to see which way the price breaks from here, as a breakout to the upside could have some room to run, given the tight supply conditions. A small rebound in demand could set prices off to the races.

Current Futures Positions

No changes this week. Thinking about adding another OJ contract on further strength.

Date Position Qty Month/Yr Contract Entry Last Profit

04/08/09 Long 1 JUL 09 Orange Juice 81.95 88.40 $967.50

02/27/09 Long 1 MAY 09 Sugar #11 13.79 13.19 ($672.00)

Net Profit/Loss On Open Positions $295.50

Current Account Value: $26,005.31

Cashed out: $20,000.00
Total value: $46,005.31
Weekly return: 3.6%
2009 YTD return: -48.8% (Don't call it a comeback!)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

Cotton Ready to Bounce off its "Double Bottom"?

Cotton put in a strong effort today - up 1.21, on a day when many of the softs were down - so I perused the short and long term charts for May futures.

Looks like cotton definitely has put in a double bottom, which is usually seen as a bullish indicator, and is rallying off its lows.  If cotton breaks above its highs from earlier this year, we'll be very interested in potentially taking a position here.

Source: BarChart.com

USDA Planting Intentions Report Sparks Rally in Grains

Corn and soybean futures each jumped roughly 5% today after the USDA released its Planting Intentions Report.

Some quick highlights from the report reveal that there appears to be plenty of corn and beans coming our way, but cotton will continue to be neglected, as we had anticipated.

• Corn acreage is down 1% from last year, but is still projected to be the 3rd largest acreage in over 50 years.

• Soybean acreage is on track for a record year, up slightly from 2008.  This is below expectations though, hence the rally.

• Cotton acreage is projected to be 7% below last years total, and the lowest since 1983.  The Associated Press reports that low acreage and high production costs are being blamed.

Cotton futures rallied on today's planting intentions report.

Cotton Futures Hit 2009 Low - Weekly Commodities Review

Cotton Futures Hit 2009 Low

Cotton futures slumped to a 2009 low on bearish supply/demand news. Cotton's projected world stocks-to-use ratio hit their highest mark since 2004-2005.

We were stopped out of our position at $0.45, and this one hurt - I hate the idea of selling cotton at these prices - BUT, we always have to respect our stops, no matter how strong the desire to get some of these losses back.


Cotton has been dropping about $0.01 after going "limit down" $0.03 earlier in the week.

Next support for cotton appears to be at $0.41 - we'll continue to watch cotton and see if it retests it's old lows.

Looks like cotton may continue to circle the bowl until demand is able to stage some sort of recovery. I still believe we'll see $1 cotton sooner rather than later, as soon as these stimulus packages begin to take hold. All of this newly printed money will be looking for a home.


Coffee's Rocky Week

Coffee did not fare much better this week. We are holding on to our position right now, with a stop around the 113 mark.


We discussed coffee's long term supply/demand situation last week. We'll soon see if our timing on this trade was appropriate.


Gold Stocks Starting to Catch Some Air

The rally in gold, and gold stocks, continues to look very strong.

Gold set a 100-day high on February 12th at 954.0, and closed Friday at 942.2. While the barbaric relic may be due for a pullback, the chart undoubtedly goes from the "lower left to the upper right", as Dennis Gartman is fond of saying.

Even with gold rallying, gold stocks are following, but somewhat reluctantly. The Gamco Gold fund, where my wife's entire 401K resides, has doubled off its October lows, but is still about 30% below its highs from last spring.

I recently read that last spring's valuation on gold stocks really had $1100 or $1200 priced into them, which may explain why we're not back to that point, even with gold rallying to where it is.

It's also possible that gold stocks are a fantastic bargain right now, and are poised to start doing moonshots when gold takes off. Chris Mayer, my favorite Agora analyst, expects gold stocks to make all-time highs in 2009, partly thanks to lower input costs that will fuel (no pun intended) record earnings.

For more information on gold and gold stocks, I'd recommend checking out some of the articles written by Casey Research and Big Gold editors on our blog, such as this one.

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	363 1/2	($562.50)
01/20/09	Long	1	MAR 09	Corn	397 1/2	363 1/2	($1,700.00)
02/06/09	Long	1	MAY 09	Coffee 'C'	121.95	114.75	($2,700.00)
Net Profit/Loss On Open Positions							($4,962.50)

Account Balances

Current Cash Balance	$36,354.04
Open Trade Equity	($4,962.50)
Total Equity	$31,391.54
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$31,391.54

---------------------------------------------
Cashed out: $20,000.00
Total value: $51,391.54
Weekly return: -17.1% :(
2009 YTD return: -38.2% :(

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

Coffee Perking Up? - Weekly Commodities Review

Coffee Perking Up?

Long-time readers know that we've been quite bullish on coffee for some time in this space. So on Friday, when I received an email from my commodity broker, Robert, about possibly initiating a coffee position, I was extremely intrigued.

We wrote this article about coffee for Seeking Alpha last August.

Long-term fundamentals are very favorable for long positions. The world continues to increasingly caffeinate itself with coffee, driven by - you guessed it - China and the rest of East Asia. A small but growing coffee market continues to gain ground on tea, the traditional caffeinated drink of choice.

On the supply side, most of the world's coffee comes from Brazil. So coffee supplies are heavily dependent on the quality of the Brazilian harvest, for better or for worse.

Coffee fundamentals are set up for us to see a super spike over the next 5 years. I firmly believe we'll see $2+ coffee at some point. And coffee has not yet had a major run up, like many of the other agricultural commodities - so it's certainly due.

As you can see from the long-term chart, coffee has been in a bull market since 2001 - due to many of the reasons we've discussed above:


Here are the near term factors that may spur an upcoming coffee rally:

• Coffee demand in China is projected to continue to grow 20% annually, despite the current recession/depression

• Coffee consumption has a tendency to increase during recessions - consumption in coffee shops takes a hit, but people brew more at home
  

• The International Coffee Organization said earlier this month the 2009-10 crop could see a 5-million 60-kilogram bag shortfall in world supplies - note: coffee harvests have off-years every other year
  

More bullish/bearish factors for coffee:
http://www.insidefutures.com/article/94842/Foods%20and%20Softs%20Outlook%20for%20February%206,%202009.html

In summary, expect demand to stay strong, and let's keep an eye on the supply picture for potential shortages. Anyone in Brazil care to share a weather report with us?


Stopped Out of Soybeans - Corn Flat

We were stopped out of our two mini-soybeans positions mid-week. Beans rallied to finish the week, as did corn and wheat.

I like the double-bottom formed by corn this week. Had our stop in at 350 and it held.

Looking at this chart - wow, if this isn't a classic Fibonacci Retracement - gaining back 50-62.5% of the previous move down. If anyone knows how to identify the bottom in real-time, let us know!

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
01/16/09	Long	1	MAR 09	Corn	374 3/4	377	$112.50
01/20/09	Long	1	MAR 09	Corn	397 1/2	377	($1,025.00)
12/31/08	Long	1	MAR 09	Cotton	48.52	49.80	$640.00
02/06/09	Long	1	MAY 09	Coffee 'C'	121.95	121.50	($168.75)
Net Profit/Loss On Open Positions							($441.25)

Account Balances

Current Cash Balance	$38,296.35
Open Trade Equity	($441.25)
Total Equity	$37,855.10
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$37,855.10

---------------------------------------------
Cashed out: $20,000.00
Total value: $57,855.10
Weekly return: -2.5%
2009 YTD return: -25.5% :(

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

(Had to add these historical facts in to keep me from smashing my head into my keyboard).

***"Cash out" mostly means taxes, living expenses, and startup capital for our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.