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Expat finance professional living and working in Hong Kong.
  • My April-15 Strategy

    April is here with us and if you survived Fool's Day without much damage I invite you to place your bets on following commodities. Or, strictly speaking, against them as this month I will be giving entirely bearish calls. I note that being a bear has become a habit of mine and in order not to make it a bad habit I made two bullish bets last month - natgas and soymeal. Natgas was discussed here in my blog, soymeal bet was not as I made the bet later during March and I closed position in the very end of March. I do not like being a bull these days. I think that we have entered in a bearish phase - Bloomberg Commodity, UBS Bloomberg CMCI Composite , RJ/CRB Commodity, Rogers International, S&P GSCI - all these major commodity indices lost 5-6% from 1st of January. And they lost a great deal in 2014. What drives commodities is economic growth which is dismal. At the same time resources prices have reached their highs not long ago. Now think of a wave - it reaches its top and falls hitting the rock bottom and bounces from there. We touched the top when many markets were in a bullish spree - buy, buy, buy - oil, gold, ags, everything was green, green, green non-stop. Now the party is over and we need to restate the status quo - shake off excitement of bull markets, take pain of bear markets and find the golden middle. But we have not touched the rock bottom yet. We barely begin to realize the meltdown. OK, maybe 'meltdown' is a bit of a strong word, exaggeration, but I do believe that the World economy have used up its potential for many years ahead - too much of bad debt, loose regulations, swarm of fruitless investments in projects aka "growing bananas on Mars" and now need to replenish itself. We are in thin years period.

    OK, my thoughts become too lengthy and by the time you finish reading this wall of text April may end. This month I bet against:

    Wheat - reserves are very high, crops in Latin America are high, price differential with corn is nearly USD1.50, currencies of two main rivals Russia and Ukraine are severely under water meaning they will accept any USD price and still benefit from it - all these factors are bearish. Wildcards are planting acres and crop conditions. These wildcards will come into play but I do not expect them to be the tide changers. There is a talk of draught but I do not see much of it when I look and precipitation maps.

    Soybeans - crops in South America are at record highs while their currencies are weak - they will sell at any price and still benefit cause every dollar would give them more pesos and reals than it gave last year. USDA reported stocks of US soybeans 32% higher than a year ago. Now, beans are a wasting asset - think what happens when farmers begin to dump this stock, they can't sit on it for too long. And planting surveys point at high acreage of soybeans coming year too. I see nothing bullish. In fact every small bounce is a selling opportunity. I think USD8.00 price is not a distant dream. In fact we may see even USD7.00 if weather be fine. I prefer to sell Soymeal calls cause they offer better premiums. Soymeal is highly correlated with Soybeans and one needs no big brain to understand why.

    Cotton - my cotton position is not large and my bearish stance is not too firm either. Last crop was high, Chinese and Indian reserves are high. What prevents me from going heavily bearish is the fact that the price is low already, and wildcards are weather conditions and planting acres. But these should be revealed soon.

    Coffee - good rains moisturized soil in coffee growing areas of Brazil. Weakened real may encourage farmers to sell now instead of waiting for currency bounces. However be reasonable - the price is low enough considering the poor state of coffee plants after last year draught and no one can tell for sure what the crop will be, forecasts point at similar figures as last year. Do not go recklessly short. I do not rule out seeing coffee at 1.10-1.20 in coming months but any bad news can take it up easily. Recall 2014. I have short position in July coffee but I hesitate if I want to extend it in September. Time will tell.

    Cocoa - main crop harvesting is over and good, mid crop harvesting is getting closer and expectations are good for Ivory Coast but medium-bad for Ghana. However it should be noted that news about Ghana problems are no longer news. They were news in early February. At the same time weather was quite favorable for crops development during February and March. Important events will be a chain of grind reports to be released in 2 weeks by US and EU processors and Asia processors report will be live 10 days after them. Overall expectations have been bearish.

    Lean Hogs - last Hogs and Pigs report shown increase in inventories comparing to ill last year. This is understandable, PEDv is gone. What should be accounted as well is cheap price of feed grains and weaker commodity markets in general. However I do not expect big moves down as prices came down a lot compared with 2014.

    That is it for April. Good luck!

    Apr 02 12:18 AM | Link | Comment!
  • My March-15 Strategy Review

    March is over and revision of my predictions is below:

    NatGas - I was wrong expecting colder times and higher prices. In fact I was expecting storages to fall below 1,400 Bcf before they begin to replenish but end of March revealed normal temperatures in April and I decided to leave this trade. In March NatGas lost 3% if you compare opening and ending prices, I was betting on price appreciation but I did not lose money, I made 20% on this trade. How? Read Dr James Cordier's book on options selling, answers are there. By the way he is active here at Seekigalpha.

    Cocoa - prices declined even more than I expected and I made good money.

    Cotton - prices dropped severely, then recovered part of damage and declined slightly again. I have been bearish this market so it works fine for me.

    Lean Hogs - prices declined here too and I made money shorting hogs.

    Coffee - good rains in coffee-growing areas in Brazil helped to develop new crops and replenish water levels and kept prices under pressure. Just as I expected.

    Good month. Moving into April.

    Mar 31 11:22 PM | Link | Comment!
  • My March-15 Strategy

    Here is my plan for March:

    NatGas - I opened first longs during last week of February and I continue to build position. Historically, this is good time to open longs. COT report is also in favor of bulls. This market has been controlled by bears for a long time and bears party has gone too far. Warmer than normal times are behind and lately we had very cold weeks, they deplete storages at fast pace. Also, cold times will continue into March so withdrawals can be significant for coming couple of weeks. I am not saying that storages will be depleted completely but the damage will be significant and prices are not fair. OK, let's bring some numbers in for exactly this time of year - in 2012, when reserves of natgas were 30% higher, prices were at 2.50 level. Last year, when reserves were 30% lower than they are today prices were at 4.50 level. So, a very simple extrapolation points at 3.50 price levels.

    Cocoa - I have my shorts open and position has bled during February. At the same time early days of March is time for local peak. Assuming that Harmattan is over and main crop is good there may be potential reduction in bulls activity. I overestimated effect of bearish grind reports so I do not exclude that some options I wrote may expire in the money.

    Cotton - I am bearish cotton in March. I do not know if this market is in a long-term bearish phase but recent fundamental developments - poor cotton reform in China and India selling its reserves, point at price weakness and reluctance of foreign buyers to buy at high prices.

    Lean Hogs - I continue thinking that herd population will keep on incresing with cheap grain feed and market recovery after last year's PEDV. That epidemy is a distant memory now but market lost only a fraction of that price increment - pork for June delivery is still higher than 80 cents. I believe that shorting June to 65 cents is reasonable.

    Coffee - if you followed weather development in Brasil than you probably know that this year is entirely different from the last year. Rains are plentyful and will continue for observable time. No wonder prices have been under pressure for a long time. Bulls surrendered nearly all gains of last 12 months therefore do not go wrecklessly short. This market is a roller-coaster and reversal may happen any moment. Shorting coffee now is a good seasonal trend too.

    At this moment of time I avoid two sectors - grains and oil. Grains have been in a bearish mode for quite a long time but we have two factors in play - crop planting and war between Russia and Ukraine. Starting from April Ministry of Agriculture will resume weekly progress reports and we shall know more. War of Russia against Ukraine can potentially harm both economies so shortages of corn and more important wheat are possible. Note weakened currencies in both countries - they won't be worried much to sell at lower dollar prices, they will still gain on exchange rate differences when they sell US dollars domestically. Beans is something unclear too - good crops in place but seasonal trend is used to be bullish this time of the year. Will it be the case this year? Who knows. Moving to oil I have the same advice - stay on the sides. Oil is very unstable these days - wild daily fluctuations are a new norm. Market has to decide which way it wants to go. Fundamentals do not matter much, politics does - I said this before and I say it now. Although my heart is with bears, my mind tells me that markets have no respect for fundamentals today and I prefer to wait. 10 mln weekly injection and in an hour prices add 2 dollars simply because some guy in Saudi Arabia says that demand is improving. Should he add another word - "NOT", market would crash. No one cares that for weeks inventories are at highest, they grow like mad and there is not a single sign of slowing this pace. This can be a bubble but I am not sure yet. First crashes in rig count numbers csame in late January. They say it takes 3 months for markets to see physical damage to inventories. So late April is the time for first realistic but yet imperfect conclusions. OK, I'll wait.

    Mar 09 5:41 AM | Link | Comment!
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