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Edward Rooster
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Investor, Trader and commentator with both top-down focus for futures trading, and an interest in bottom-up equities investment ideas.“OFTEN IN DOUBT, BUT SOMETIMES RIGHT” Our ideas are based upon a perceived structure to speculative activities – which we characterize as falling within four... More
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  • Sugar: The SWEET Smell of Success (or Excess)? 0 comments
    Aug 25, 2009 12:15 AM | about stocks: SGG, IPSU, ALEX

    It's no secret that sugar has attracted a great deal of attention, just look at the headlines and feeds many of us subscribe to, and at the number of impressive articles on this site.  Many on Main Street, USA have learned about how too much rain in Brazil, and not enough in India in recent weeks can spark a sugar rush, just as last year many of us learned about the role of Thailand and the Phillippines in the global rice market. Will we remember, however, how the rice trade ended last unfolded last Spring? 

    We are of a mind that yes, sugar will go up even higher...eventually.  To provide a sense of what some are hoping for, recall that the world raw sugar price, during President Nixon's term of office, was priced at just shy of 3 cents per pound back in the Jan 1969, would end up selling for 31+ cents per pound by the time Nixon enjoyed his last helicopter ride off the White House lawn, a 10 bagger filled to brim.  The world price would peak to just over 57 cents per pound by the time of President Ford, and millions of Americans "whip"ed by inflation, would enjoy their holiday turkey (or was it more like Spam, as is the case for many now?). Since then, the price would ultimately bottom during the second term of the Great Communicator, Ronald Reagan, forgotten in the midst of the Equities bull market of the "Roaring Eighties".

    We think by rough analogy, where sugar to meet and surpass it's last bull market high, as many investments do in successive bull markets, then we're looking at 70+ cents per pound.  If we adjust that last peak by just the change in the value of the dollar (go to westegg.com/inflation, go ahead, we'll wait) then we might very well be looking at 2.50 to 3.00 (that's dollars) per pound on a very inaccurate Back of the Envelope basis.  Sound unlikely? Certainly, but then think back to where ever you were in 2007, the past two years haven't unfolded as imagined have they?

    Do we expect a pullback? Yes, in fact it maybe unfolding, since we see that we're in the middle of a back and forth gyration in the sugar futures prices as summer winds down.  No surprise, given the near-parabolic explosion in the price since the spring.  Yes, the fact that this is being written on the heels of so many articles about sugar may precede a period of price declines. But some food for thought: is this less about distribution, perhaps by traders already in early when sugar traded for the 'teens per pound, or consolidation in the price, as the sweet stuff seeks "support"?  We confess a trend-following bias, but the trade makes our teeth ache as well, and so we may have "flattened" our exposure by the time you read this, and gone on a sugar free diet... at least until we see better signals.

    ETF traders might consider (NYSEARCA:SGG), iPath Dow Jones-AIG Sugar Total Return Sub-Index ETN. Folks across the Atlantic could trade ETF Securities' (SUGA) we suppose.  Bolder Europeans can go for ETF Leveraged Sugar (LSUG) for something twice as sweet (leveraged that is), but we demur, having seen how horrible some leveraged ETFs have operated for some poor folks' P&L lately. The streak we saw in SGG's price history, from about April 24/25, with a brief pause during the first half of June 2009, may have taken another pause in mid-August.  If you're still inclined to trade SGG with a mind for riding a trend, or you're already in, we urge a trailing stop loss in the order of $6 per share for really gutsy traders, down to $2 for those who enjoy playing Counter-Strike. 

    Those who wanted to trade by a pure equity as opposed to "pure sugar" play, may continue to prosper in something like Imperial Sugar (NASDAQ:IPSU) which started it's sugar spike on about May 5/6, marred only by a bitter sweet drop July 8.  Others might consider a less direct idea like Alexander & Baldwin (NYSE:ALEX) which got going only last month, mid-July, but it's streak may have ended already on August 18.

    For those of you trading around the front-month in Sugar, October 2009, may want to have no less than a 1.8 to 3.6 cent trailing stop, unless you're those deep pockets who have been in this for some time, looking to sell to small fry like us, but we're playing further out on the "curve" in a bid for time.

    Disclosure: Long Sugar futures, may add, reduce or exit at any moment.

    Stocks: SGG, IPSU, ALEX
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