We are back to one of “those” markets. You know the kind… Where a cranky old corporate raider tweeting about taking a position in the world’s largest stock can add $25 billion of market cap in a session. Or where 29 year old social media tycoons can pay obscene amounts for unproven companies – only to find their own stocks exploding higher on their “exceptional business acumen”.
Friday’s news that Amazon had applied to the FAA for permission to test their outdoor drone delivery system added almost 10 billion dollars of market cap to the online retailer. The stock gapped higher in the morning, and was bid for the rest of the day, finishing on the highs of the day as investors chased the next great wealth creator.
As for my positions, at this point there can be no denying that my call for a correction is looking increasingly wrong. Like the American student that recently mistakenly wedged himself into a giant stone vagina statue in Germany, I am finding myself stuck with a pretty horrid call.
The MacroTourist’s portfolio stuck inside a giant stone vagina</a> </div>
At a certain point this American student realized his great idea to get a picture of himself within the giant vagina had gone horribly wrong. No amount of wriggling was going to save him. All he could was admit defeat and wait for the 22 German firefighters that it took to free him.
This is where I am with my short stock market call. No more adding to the position. No more fighting against this trend. I missed my chance to cover during that gap lower a few days ago and since then, my whole portfolio seems to be ticking against me at every turn. When this happens, I go into defensive mode. No matter how stupid it is to add $10 billion of market cap on Bezos’ drone hobby news – you can’t fight this sort of insanity. I am not covering yet, but I am going to err on reducing risk in my portfolio and try to hunker down through this period.
The perfect storm in ags
I have been long the ags, and although I have not yet written about it very much, it is a position that I feel strongly about. This spring the position was going my way nicely as corn, wheat and soybeans all ticked higher.
Unfortunately, as usual the strength attracted the attention of the dreaded hedge funds. They quickly piled into the long side in a big way.
Corn long spec positioning</a> </div>
This created another “mini-bubble” where the price action attracted more buying, making the price action all the more positive, which resulted in more buying, etc… Pretty soon the ags were filled with over levered hedge funds.
Although I was aware of the hedge funds’ over enthusiastic positioning, I did not have the where-with-all to sell them my long term position.
Over the last couple of of months the ags have been hit with a perfect storm of “great news” in terms of supply.
The high beef and pork prices have caused a lot of animals to be culled resulting in a lot less feed been required. Then the weather over the past couple of months has pretty well been perfect for growing. And finally, the nail in the coffin has been the fact that China has restricted the imports of American corn.
All these factors has resulted in a vicious sell off that has caused American agriculture products to become the cheapest in the world. Here is the price of Corn in the US versus China:
US Corn vs Chinese Corn</a> </div>
And the price of US soybeans is also hitting relative new lows:
World Soybean prices</a> </div>
This has turned what was a great trade of the first quarter into another terrible call.
Recently the market had been awaiting for the latest crop condition report, which on Friday caused another push to new lows.
Corn prices plunge to new lows</a> </div>
Soybean prices also hitting new lows</a> </div>
Wheat is no stranger to new lows either</a> </div>
I am of the opinion that the carnage in the ags over the last couple of months has shaken out the momentum chasing hedge funds. There is no way that they are going to sit through this kind of pain, and if I had to guess, given the severity of the decline they are probably erring on the short side now.
I still love the long term story, but I will save that for another post. This is more of a market call. I think it is time to load up the boat on the ags.
There has been a virtual onslaught of “perfect’ news for the ags. I don’t think it will take much for something to go slightly wrong. Whether it is China realizing that paying twice as much for corn isn’t worth the political gains of the boycott, or the weather doesn’t cooperate, or the hedge funds simply puke into the lows, I think the risk reward favours taking a bigger position into Friday’s onslaught.
I am of the opinion that Friday’s big crop condition release will prove to be an “all baked in” situation. Markets often turn when the news looks worst (or best). I don’t see how news can look any worse for the ags, so I am going to load up the boat on the long side.
Ags vs. gold
I can’t keep adding to my long commodities versus short financial asset trade, so into Friday’s dip in to the ags, I did not simply buy corn, wheat and soybeans naked.
A month or so ago, I was fortunate enough to have ramped up my position in the Gold Miners ETF. This has been my portfolio’s biggest position and it has basically saved me from having a really terrible last month.
At the risk of reducing the position that is working best for me, I halved my GDX and gold position so that I could buy ags.
GDX – selling into the strength</a> </div>
I am nervous that the recent weakness in the CRB Index is harbinger of bad things to come in the gold market. Have a look at this chart of CRB vs gold:
CRB (white line) vs Gold (yellow line)</a> </div>
Given the ferocious bid in financial assets, and the corresponding dump in commodities, I am worried that gold is vulnerable. I am even more concerned that the hedge funds have piled into the gold mining stocks trade, and you know how much I hate being long the same stuff as them.
So I am selling some of the commodity that the hedge funds are still buying (gold) and buying the commodity that they are selling (ags). Don’t get me wrong, I like them both. But given my big overweight in gold, a little selling of the winner to make room for the laggard makes sense. Given my poor timing recently, you might want to wait before tagging along.
This morning financial assets are spiking higher, commodities are still sagging badly and my portfolio is getting more firmly wedged in the giant stone vagina.