Trading Cotton Futures: King Cotton's Stealth Resurgence

Just nine months ago, we were licking our chops at cotton's blue light price special.  Cotton had been smashed from a post-Reconstruction high of over $2 to WAYYY down below the $0.70 mark.

Cotton futures have quietly dipped to their lowest levels in two years, prompting our "contrarian alert" to sound.  Likely, cotton will base out a bottom, and slowly restart an ascent likely to carry it well above $1. As we wait for a breakout to the upside, King Cotton is a nice potential trade to keep an eye on.  (Full analysis at Seeking Alpha)

Since then, The King has dusted himself off, and began his somewhat-long-awaited rally...

King Cotton picks himself up off the mat...

...and it's a LONG way back to the top of the hill. (via Barchart.com)

While the top-most chart (past 6 months) shows an impressive rally, the latter chart (past 5 years) shows recent stratospheric levels that cotton has traded at.  While a challenge of 2011 highs may be a bit much, a rally above $1 seems like a more reasonable thesis.

Going Long Cotton

I went long cotton in January upon its breakout past the $0.78 mark.  When soft commodities "base" for as long as cotton did, a breakout above the trading range should usually be bought...so far so good here.

We'll revisit the fundamentals of the trade next, but our stop-loss will be purely technically based.  If cotton hits a 15-day low, or decisively breaks current support at $0.82, we will close this trade out, book a modest profit, and wait for the next opportunity.

Cotton Fundamentals, and the Tape

Last May, we speculated that cotton supply may decrease because farmers would have fond eyes for the grains:

Corn and soybeans are not exactly cheap right now either - with corn above five bucks a bushel and 'beans in the lower teens, farmers are making some good coin on these crops. It's unlikely they'll replace this acreage with cotton at current prices.

Bloomberg today reports this is exactly what happened:

American farmers may sow 9.4 million acres of cotton in 2013, as they switch to more profitable crops, Macquarie Group Ltd. said today in a e-mailed report. That compares with 12.3 million a year earlier, government data show.

With corn and soybeans currently sitting higher than they were last spring, it's likely the bearish trend in cotton plantings will continue.

So demand is decreasing - how about supply?

This is the wild card that is more difficult to predict.  There have been reports that the real catalyst of the recent cotton rally has been China buying up as much cotton as it can.  While I find it impossible to get a macro-read on China from my comfortable office chair in Sacramento, I do have access to the cotton price chart, which does appear to be moving upwards.  Hence we'll continue to use the chart as our real-time indicator of Chinese demand for cotton.

We know the potential for a supply/demand imbalance is there.  It has been for years, and it tipped in a big way a couple of years ago.  Our working theory is that this could happen again - especially with central banks with their collective fingers on the money printing triggers.  So, we'll keep a speculative long position in cotton, thanks to the breakout as our cue.

Other Commodities to Watch

Rice and cocoa are both trading towards the lower end of recent ranges - these appear the most intriguing in the short term.  We'll also be keeping an eye on sugar and coffee...both of which continue to tumble, as cotton did in late-2011 and early-2012 before finally finding a nice base to prepare for this current rally.

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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View the full INDEX:SSEC chart at Wikinvest

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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

It's Time to Go Long the Buck

Three weeks ago, we discussed the possibility the the dollar was bottoming and poised for a major rally.

My reasoning was that:

• Sentiment was overwhelmingly negative on the buck. I noticed that even traditional contrarian investment sources appeared to be piling on. When there's nobody left to sell, that's usually a good sign that the bottom is in.

• We still appear to be in a period of debt deflation, which the Federal Reserve is basically helpless in preventing, because we have a credit based system. When credit goes away, it's gone forever. You can't print credit.

• The Japanese Central Bank, despite its best efforts, was ultimately unable to produce inflation since their credit bubble popped in 1990. And if the old joke is that their central bank was so incompetent that it couldn't destroy its own currency, I didn't know why ours would be any different.

What's happened in the last few weeks?

Pulling up the chart, the dollar appears to be forming a bottom. The 77 mark has held:

Is the buck bottoming?

(Source: Barchart.com)

The equity and commodity markets look toppy. Investor sentiment is overwhelmingly bullish. The AAII index, a very reliable contrarian indicator, is at levels not seen since November 2007.

Furthermore, China, the posterchild of this rally, has turned down - the Shanghai Index rolled over a few weeks ago...along with several key commodities. Gold is yet to break $1,000 decisively, despite the widespread belief that the Fed has successfully created inflation.

Add it all up, and we've got some very bearish pieces staring us in the face. And if we do see another massive deflationary wave down...is there any reason to believe it will behave differently than the last?

I don't think so. So I'm taking some cues from the markets, and positioning myself in the only asset that held up and even rallied the last time around - the US dollar.

Take Note When Bears are Bullish

One of our astute readers took me to task when I said Robert Prechter was not a perma-bear. In fact, this reader made a very good case, pulling up some old doomsday calls of Prechter's that look silly in hindsight.

We had a good back and forth debate - I accepted his points, but added that Prechter has called this rally to a tee, which was a bullish call.

Ultimately our reader summed it up perfectly:

Funny thing is he has called 2 rallies well 1980s bull market and this most recent rally.

He gets in trouble once he goes bearish (which he has been 18 of the last 20 years). Had he gotten away from this stupid (dow 400, great depression II) perma outlook of his, he would be much better. Then again, maybe its this permabearishness that somehow, someway gives him the ability to call rallies.

Maybe the real take away - the lesson of the last 20 years, is heed his calls of rally, ignore his calls of doom. Imagine how well we would have done!!! ;

A hilarious, and very insightful conclusion! We should especially take heed when the bearish types turn bullish!

I suppose the counterpoint would also be a wise one - be wary when perma-bulls turn bearish!

Positions Update

Still holding cotton - barely - and now we're taking a flyer on the buck.

It's tough to sell cotton here - and also tough to get excited about it. In a healthy global economy, cotton's fundamentals would appear to justify higher prices right now. The fact that we don't have them gives me pause that something is amiss - perhaps cotton is telling us that things may not be so fine and dandy.

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Current Account Value: $23,891.64

Cashed out: $20,000.00
Total value: $43,891.64
Weekly return: -2.0%
2009 YTD return: -53.0% (Yikes)

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

Initial trading stake: $2,000

Why the Dollar Probably Bottomed Last Week

It's pretty tough to find investors who are bullish on the US dollar these days. Judging from our dollar sentiment survey results last week, it seems like most dollar bulls probably read this blog!

When I consider:

• Not a day goes by without an investment newsletter popping into my email Inbox that highlights the dollar's pending demise.

• There are YouTube videos circling the internet, with guys breaking stuff in their garages while lamenting the dollar's loss of purchasing value since the gold standard was removed.

• Even Barron's is piling on, saying The Greenback Is Broken.

The dollar may very well be broken, but I can't see this decline lasting much longer with sentiment as negative as it is. Bearishness on the buck probably hasn't been this low since the last time it bottomed - which was even below current levels, by the way.

How is this possible? How could a currency as sick as the dollar rally?

It's not without historical precedent - take Japan's Central Bank, where the old joke is that they are so incompetent they couldn't even destroy their own currency.

Is it possible our Fed is just as incompetent? I wouldn't bet against it.

We're in a period of debt deflation that could be around for some time. It's unlikely that the Fed will be able to "print" enough money to create inflation this period is over.

Because with a credit based economy that peaked around $52 trillion in 2007, printing a few hundred billion here and there doesn't really "move the needle" when credit is getting wiped out at a much faster rate.

Finally, it's interest to note that on Friday, the dollar was up sharply while all major indices were also up big. That strikes me as a pretty bullish move, because the dollar had previously been getting killed everytime stocks were up.

Bottom line: Just because many pundits and experts believe the dollar SHOULD fall, doesn't mean it will. And my bet is that, at least for the next few months, the exact opposite will happen - because markets usually move in directions that frustrate the highest number of investors.

What You Can Learn From Tracking Hedge Funds

Last week we started a fun back and forth interview with Jay from MarketFolly. For those of you not familiar with MarketFolly - please go there now! It's an excellent site for tracking the latest holdings and insights of the greatest investors in the world.

Here's part 2 of our interview with Jay about his investing strategy, and the complimentary piece where he grilled me a little bit.

CBM: What do you learn from the investor holdings you cover?

MF: I think the main thing to take away from hedge fund tracking is ideas. Often times you will see them invest in companies you've never heard of or are less familiar with so it gives you something to look into. It's also good to see what sectors they are leaning towards and what themes they might be playing (at least for some of the macro thesis oriented funds). And, it gets really intriguing when you start to see multiple funds adding the same position. We've noticed this a lot when we track the 'Tiger Cub' hedge funds.

Read the rest of the interview here...

Quick Market Hits for the Week Ahead

• Look out FDIC! Here's why they will soon require hundreds of billions of dollars in bailout funding.

• A debt deflation case study from an industry many believe to be recession proof.

• Goldman's CEO tells his employees to "lay low".

• Finally some solid entertainment - a redneck economic rant that's hysterical, and The Daily Show highlights Tim Geithner's real estate prowess!

Daily Updates

For our weekly subscribers - we now have a daily subscription option as well (check out the upper left corner of the page).

It's powered by Google - they send you one email each afternoon, with a wrap up of posts from the day. They do a nice job with it - so if you'd like to add a daily subscription, you can enter your email address in the box there.

Positions Update

No new trades this week - cotton had a great week, along with just about every other asset class in the world.

Cotton continues to "range trade".

(Source: Barchart.com)

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

Current Account Value: $26,388.91

Cashed out: $20,000.00

Total value: $46,388.91

Weekly return: 5.2%

2009 YTD return: -48.1% (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

Dollar Sentiment; Contrary Thinking as an Art; MarketFolly; and More!

How Low is Dollar Sentiment?

Not as low as I expected, according to an ad hoc reader survey we conducted this week.

Earlier in the week, I read that the percentage of dollar bulls was reported to be under 10%, indicating that the dollar may be setup for another long, powerful rally - with sentiment readings resembling those recorded at previous dollar bottoms.

So, I decided to conduct a little experiment, and asked readers if they were bullish or bearish on the dollar - here are the results:

• 44% dollar bulls

• 56% dollar bears

Incoming results had a slightly bearish slant throughout the voting period. What can we conclude? Possibly that:

A - Dollar sentiments is not as bearish as believed

B - Many of our readers are contrarian in nature

C - Some combination of A and B

Care to weigh in on this topic before we turn it over to the final arbiter, the market? Please do!

The Art of Contrary Thinking

A few weeks ago my wife sent me to a used book store to attempt to sell back some old books at our place. While browsing the investing section (of course), I came across The Art of Contrary Thinking - a book written in 1954 by Humphrey B. Neill.

Neill was editor of Neill Letters of Contrary Opinion, a newsletter that reviewed investment themes and ideas that were contrary to public sentiment. So being an "aspiring contrarian" myself, I had to pick up a copy! (My wife rolled her eyes when I brought it in the door...)

It was an entertaining, insightful, and fast read - I'd recommend it. There is one part in particular I'd like to share.

Let me start by saying that I've come to enjoy reading old books, because they reflect the sentiment of the day. I now prefer reading books that are "dated", and thus not tainted with the biases of today - I'd rather experience the biases of yesterday!

Regular readers know that I'm a flip flopper when it comes to the inflation/deflation debate. I previously believed we were destined for inflation/hyperinflation - and recently changed my outlook when I realized that EVERYONE believed just about the same thing!

Even if that view is correct - it will be very difficult to make money off of "deflation now, inflation soon" - because it's already priced into the market.

Many inflationists become quite livid when you suggest the possibility that inflation could take longer than most believe. The common belief is that inflation is baked in the cards, because Ben Bernanke and Co are determined not to repeat the "mistakes" of The Great Depression. Thus, they will err on the side of caution, which will result in high inflation, possibly hyperinflation.

For some historical context, I'm going to quote Neill on page 59...and remember, these words were written in 1954:

It seems evident that the psychology of inflation is fully as important to study as the economic factors.

In the early 1930's when former President Roosevelt took us off the free gold standard and commenced to experiment with a different price for gold each morning, printing presses commenced to hum with books and pamphlets pertaining to inflation. Any modern bibliography on inflation contains numerous articles and pamphlets dated in the 1930's. We were all warned time and again that inflation would soon overtake us and ruin us. Yet a contrary psychology prevailed.

The public went serenely on its way, paying little heed to the dreaded fears and maintaining confidence in the dollar. The fact the dollar had been clipped in gold value meant nothing to the average person. The paper dollar in his pocket was still good. That was all he cared about. Result: no ruinous inflation. Indeed, dollars remained dormant. Turnover of money remained quiet. Inflation did not "take".

Is it possible that a contrary psychology prevails again - with the average person more worried about paying down their debts, which are denominated in dollars, than the price of gold? Perhaps.

I've learned that contrary thinking is not about figuring out common wisdom and doing the opposite. Rather, it's about considering ALL possible scenarios in your thought process - no matter how outlandish they may sound!

Again, the book was a great read. And we'll continue to increase our focus on public sentiment, because I'm really starting to believe it's something that most investors do not rely upon nearly enough (myself especially included!)

Interview with Leading Investment Blogger, MarketFolly

This week we started a fun back and forth interview with Jay from MarketFolly. For those of you not familiar with MarketFolly - please go there now! It's an excellent site for tracking the latest holdings and insights of the greatest investors in the world.

Here's our interview with Jay about his investing strategy, and the complimentary piece where he grilled me a little bit. Part II will be out this week.

CBM: Jay, can you give us a little background about your investment philosophy?

MF: My investment philosophy is really a hybrid of multiple styles but it really comes down to just long/short equity. Firstly, I like to focus on macro/secular themes. Then, I like to drilldown the fundamentals of whatever the sector/industry may be that I'm looking at for the 'why'.

Read the rest of the interview here...

Quick Market Hits for the Week Ahead

• HUGE oil inventories were reported last week...could this be setting the stage for a crash in the price of oil?

• Foreign investment in the US is going down, down, down...how exactly are we going to fund this multi-trillion dollar deficit?

• Taxes on stripper poles??? How's a girl supposed to make a living these days?

• Jim Rogers AND Marc Faber say they would not be buying Chinese shares right now...anyone buying China now must believe they are smarter than these two.

• Think Natural Gas is cheap? You might think again after reading this analysis.

• How did Intel report such good results? We got the inside scoop...direct from an Intel senior executive!

• Finally, for the novice - and veteran - trader, here are the three things you need to do to trade markets properly.

Daily Updates

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It's powered by Google - they send you one email each afternoon, with a wrap up of posts from the day. They do a nice job with it - so if you'd like to add a daily subscription, you can enter your email address in the box there.

Positions Update

Still long cotton...

I'm considering shorting the S&P if/when the next wave down hits. Doesn't look like we're there just yet...public sentiment is bullish, but not quite wild enough to indicate a top.

Shorting oil may also be a potential play...though every commodity analyst on the planet seems to concur that oil is overpriced with respect to fundamentals right now.

Current Account Value: $25,088.91

Cashed out: $20,000.00

Total value: $45,088.91

Weekly return: 1.1%

2009 YTD return: -50.6% (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

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

Weekly Futures Positions Review - December 7, 2008

Top posts from the past week:

• Should the Big Three Be Allowed to Fail?
• How to Determine a Market's Trend
• Gold Buyers Smash Records
• More Downside for the Dow Could Be Ahead
  

A review of my futures trades from the previous week:

• Covered my cotton position. It appears I may have been too early in going long cotton, so I have closed this position and will watch from the sidelines for now. I reflected on Friday that it was not wise to jump into this trade while the longer term trend remains down.
  

Other existing positions I've got:

• Short the British Pound - I plan to hold this position until the GBP hits a 15-day high against the US dollar.

My wish list...and it looks like these commodities are at least starting to form a bottom, at last:

• Sugar
• Coffee
• Cotton
  
• Natural Gas
• Silver
• Crude Oil
  

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
10/10/08	Short	1	DEC 08	British Pound	1.6870	1.4742	$13,300.00
Net Profit/Loss On Open Positions							$13,300.00

Account Balances

Current Cash Balance	$37,270.43
Open Trade Equity	$13,300.00
Total Equity	$50,570.43
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$50,570.43

Cashed out: $20,000.00
Total value: $70,570.43
Weekly return: 1.7%
YTD return: -8.3%

***"Cash out" mostly means taxes, but lately I've also been using it for living expenses, and also to finance a cool new time management software startup that is starting to lift off.

Cotton Downtrend Continues

The downtrend in cotton continues, much to my chagrin. It closed limit down yesterday, and is down almost another $.02 as I write this.

After reflecting on my previous guest post about determining a market's trend, I decided it's time to eat some of my own dog food. So, I have sold my position in cotton. It will be interesting to see if the bottom holds around $.39. But I will watch from the sidelines until a longer term up trend establishes itself.

Cotton Futures Stand Strong Admidst Today's Slaughter

In the midst of yet another slaughter of commodities and stocks, cotton futures held up remarkably well today.

The March 2009 cotton contract closed down 0.88 to finish at 47.03, thanks to a steady rally after an initial drop. A push above the 48-cent mark would be impressive, as cotton continues to retrace some of it's recent pummeling.

Weekly Futures Positions Review - November 30, 2008

Top posts from the past week:

• Are Any Grains Worth Buying At These Prices?
  
• US Government Continues to Print Money at Breathtaking Pace
  
• Food Supply Problem More Acute Than Ever
• Jim Rogers: Dollar Will Be Devalued; Buy Commodities
• Casey Research: Get Ready for the Commodity Comeback
  

A review of my futures trades from the previous week:

• Went long cotton. Cotton futures are the most attractive investment opportunity I see today. They are actually trading below the prices they were at when the entire bull market in commodities began.

Other existing positions I've got:

• Short the British Pound - Last time I shorted the British Pound, it turned out to be a quite profitable trade. I plan to hold this position until the GBP hits a 15-day high against the US dollar.

My wish list...and it looks like these commodities are at least starting to form a bottom, at last:

• Sugar
• Coffee
• Natural Gas
• Silver

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
10/10/08	Short	1	DEC 08	British Pound	1.6870	1.5371	$9,368.75
11/26/08	Long	1	MAR 09	Cotton	46.42	48.00	$790.00
Net Profit/Loss On Open Positions							$10,158.75

Account Balances

Current Cash Balance	$39,577.74
Open Trade Equity	$10,158.75
Total Equity	$49,736.49
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$49,736.49

Cashed out: $20,000.00
Total value: $69,736.49
Weekly return: -4.1%
YTD return: -9.4%

***"Cash out" mostly means taxes, but lately I've also been using it for living expenses, and also to finance a cool new time management software startup that is starting to lift off.

Cotton Futures Continue Their March Towards Zero

Can you spot the trend?

Trading below 40 cents, cotton must be one of the most underpriced commodities in the history of western civilization.

Supply was already under pressure, as farmers neglected planting cotton in recent years in favor of higher priced grains, such as corn and soybeans.

Lock and load, because we're going to see cotton skyrocket at some point over the next few years. Prices are now at their lowest levels since 2001 - before this whole commodity parted really got started!

A Couple Jim Rogers Interviews

Some good recent hits from Jim Rogers:

• The US dollar is in trouble
• Oracle Rogers sees worse recession ahead
  

Says he's currently long the Swiss Franc, Japanese Yen, and airline stocks (as a contrarian play).

Also thinks coffee, cotton, sugar, silver, and zinc look potentially attractive (this is usually Rogers' code for - these are screaming buys).

Deflation Everywhere You Turn, Get Comfortable

My morning glance at the Futures screens revealed that, well, just about everything is down across the board. Of special note:

• Cotton flirting with the 60-cent handle (wow, that looks cheap)
• Silver getting kicked in the teeth again
• Oil off big again, flirting with $90

Not to mention global stock markets getting slammed across the board.

In fact the lone positions weathering this storm appear to be our old friend, the Japanese Yen, and US Treasuries - both due to this flight to "safety".

Maybe "perceived safety" in the case of Treasuries - is it really safe to lock in a long-term yield that is below the rate of inflation, to a heavy debtor with an awful balance sheet?

I'm playing this mostly from the sidelines. I've got my long Japanese Yen position, which is performing nicely. While adding another contract may be the trade to make, I'd like to see how the rest of the week goes at the very least. I don't like buying the Yen, and the Swiss Franc for that matter, on these spikes, as I've seen them give back these gains before.

Also have my short Soybeans contract - which looks like it wants to bust through that lower level of resistance.

All in all, we may need to hold tight on the commodity front until the global economy gets through this soft spot. My suggestion would be to get comfortable. When the global economy reheats, we will have some fantastic buying opportunities.