January is of month of optimism. It's the first month in a fresh, new year - new opportunities, new resolutions. It's also a favorite time to make predictions.
Predictions, however, are for fun. Picking what is going to happen in the future is one of the hardest things anyone can do - in the markets or otherwise. Despite what many pundits and even seasoned investors may believe, there are much better ways to invest than trying to predict the future.
I may have my beliefs about which way the market is headed. But I always hedge my bets. I don't actually put money on the line betting the market is going my way. I'll simply take the least likely scenario and bet on that not happening.
As an option seller, you can do that too. Predictions are for fun. Making money is quite another matter.
That being said, below are my 3 Big Predictions for 2016.
No. 1: Crude Oil Prices Stabilize and Trade Higher into mid-2016
As I outlined in this newsletter in November, (as well as on CNBC and MarketWatch), we thought crude oil prices would make a major low in December. Crude prices remain under the influence of 3 bearish fundamentals: Record supplies in both the US and World, OPEC's refusal to cut production, and US frackers not backing down in the Global price war.
Crude Oil (Daily Continuation)
Crude Oil Prices made new lows in December
Its hard to see how fundamentals could get any more bearish. But the market has already priced much of this into the market. Moving forward, the path looks a bit brighter. US production is expected to drop this year. At the same time, global demand has been robust at current price levels and is expected to rise by 1.2 million barrels per day in 2016. While continued dollar strength helped punish prices in December, we think the market is at or near a low - if it didn't already make it last month. Look for seasonal strength to begin supporting prices as early as this month. We don't see crude prices running away. But we see a climb back to the mid 50's as a likelihood by summer 2016.
No. 2: Grain Prices Remain Depressed into Summer
As 2016 begins, grain prices are burdened by massive oversupply (See this month's Premium Sniper on Wheat - beginning on page 5.) In the meantime, one of the strongest El Nino weather patterns on record is expected to peak in late winter, early Spring 2016. As a result, the NOAA projects both warmer and drier weather over much of the US grain belt during this time period. What does this mean for farmers? It means we can likely expect A. an early start to the planting season and B. faster planting progress (thus an earlier end to the planting season). This could minimize much of the seasonal price strength often associated with US grain futures as planting anxiety is most pervasive in the Spring. El Nino's effects, however, will linger well into summer. A warm, dry spring is one thing. A warm, dry summer is quite another for a grain crop. We thing writing calls on grain markets will be a solid portfolio builder for at least the first half of 2016. After that, we'll have to play it by ear. There are much better ways to invest than trying to predict the future.
No. 3: New York's FCOJ Orange Juice Contract Becomes a Headline Grabber
You may not know it but a quiet tragedy is unfolding in the Florida orange industry. Huanglongbing, better known as "citrus greening," has been steadily destroying Florida orange groves since its arrival in 1998. Spread by an Asian invader - a tiny winged insect called the citrus psyllid. Once trees are infected, there is no known cure. Florida's 2015-2016 orange harvest will produce 74 million boxes of oranges - down 24% from last year and the lowest production since 1964. The Florida department of citrus estimates that production could plunge to 27million boxes by 2026 - a virtual destruction of the industry. While Brazil has managed to pick up some of the slack to date, that country is now dealing with citrus greening itself. And while Florida growers are fighting desperately to save their groves, the industry would need to plant more than 20 million trees in the next 10 years to restore production to pre-greening levels. We think 2016 will be a "tipping point" in the orange juice market. With Florida production halved in just the last 10 years and the struggle of Florida growers, mainstream media will be hard pressed to resist the story. That means new speculators coming into the market. Than means option buyers. And that means opportunities for option sellers - potentially on both sides of the market. Stay tuned to the Option Seller newsletter in 2016 for the real fundamentals on OJ.
Those are my predictions. Take them in the spirit in which they were intended. Remember, predicting market direction and making money are two different things. There is no place for pride in investing. Should any of these fundamentals begin to shift during the year, I'll be the first one to be selling premium on the other side of the market.
2016 may not look like a great year for investing. But you have the power to make it one. When you're ready to exercise that power, we'll be here. Happy New Year!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.