Who wants coffee?

Not many traders, apparently. Sentiment has been low for most of 2012, never even once reaching 50% bulls according to DSI. The latest slump has made futures traders extremely bearish on the beans for three weeks now, but in the first half of 2012 we saw this condition sustained for longer than I’ve ever witnessed on a contract. Despite a preponderance of bears, the price continued to slide, even at an accelerated pace, before a small rally this summer. Prices and sentiment have since returned to their lows.

Daily close, cents per pound:

Despite all of this bearishness and a 50% decline, coffee is still not particularly cheap by historical standards. It has been working off a mania that resulted in a parabolic doubling in 10 months from summer 2010 to spring 2011. I can’t publish the data, but picture bullishness alternating from medium-high to very high for the duration of that rally. This probably goes a long ways towards explaining the steady decline and bearishness. Prices have now returned to the base of that ramp, but if we look at a long-term chart, we can see that the spike was the final blowoff of a bull market coinciding with the general commodity boom, and that today’s price is still triple the 2001 lows. Commodities are cyclical and tend to swing from extreme to extreme, adjusted for inflation, so coffee wouldn’t be historically cheap today unless it were under $1.00/lb.

Monthly close (through Oct):

Indexmundi.com

I don’t see any great opportunity in coffee either way at present. It just makes an interesting study in herding behavior.

BTW, has anyone else noticed that retail bean prices at fancy grocery stores increased from the $7-10 range to the $10-13 range a couple of years ago? This coincided with the futures spike, but the correction hasn’t been passed on to consumers. Some players in the supply chain are likely enjoying fatter than usual margins.

Trading sardines vs. eating sardines

I have no strong opinion on near term market direction. I was prepared for this little downward correction, as for the larger bounce off 666 on the S&P500, but am highly ambivalent about where we go from this juncture.

Has this been a four month flat correction?

A case can be made that the entirety of market action since November has been one giant zig-zag correction that terminated last week, in which case we are now about to plunge to 550 among the kind of panic conditions that were so lacking at the latest lows. In support of this scenario we have the death-defying performance of a great number of tech and consumer stocks that have failed to even re-approach their November lows, as well as some of the most extreme readings on retail bullishness since the start of the bear market (Rydex bull/bear fund assets, put/call ratio, NYSE Tick). Remember, the ’29-’32 market corrected from its initial crash with a 48% rally from November ’29 to April ’30. If this is the Greater Depression (and by the looks of the latest trade and manufacturing numbers, let alone the scale of the debt saturation that caused this situation, it is), perhaps a big zig-zag is all the enthusiasm society can muster this time.

Or was it actually a washout?

That said, more likely in my mind is a protracted rally extending to 900 or higher by summer, then rolling over to meet a date with 400 next winter. Look at last year’s rallies from March to May and July to August for an idea of what this might look like, though on a larger percentage and time scale because we are correcting a larger sell-off. The case for such a move is bolstered when you hear major investment banks’ strategists calling this a dead cat bounce. Too many people are still afraid to call a bottom, and they need to be suckered into long positions before this is over (along the same lines, too many traders are embracing the dead cat bounce and need to be shaken out before it can get back to leading the buy-and-holders to slaughter).

I am highly skeptical, though respectful, of calls for a the mother of all bear market rallies. Robert Prechter and some other Elliott Wavers, as well as Tim Knight (slopeofhope.com) seem to be anticipating a 6-month or longer rally to as high as 1050. I simply don’t see why that is necessary in this environment. This is a depression, and the last one was accompanied by bear market that, after the first 6 months, maintained the momentum of a cruising supertanker. Rallies of 20 percent and 2 months were about all you got from April 1930 to July 1932 as the Dow dropped from about 295 to 41. That deflation-driven event was a much more orderly bear market than the jagged trajectory of the dot-com crash, which occured while the credit bubble continued to expand. Interestingly, the 1966-1982 secular bear (a brutal 75% loss in real terms) also traced out such a series of steep plunges and rallies as the bubble kept inflating thanks to a compliant Fed and the abandonment of the last trace of the gold standard. Employment was down, but animal spirits were still running high with the computing boom, the advent of securitization, and new innovations in consumer credit.

Feel like a depression yet?

Though the current bear market is half over in terms of price (three weeks ago we hit -57% and you can’t lose more than 100%), we are still early in the game as far as the economy goes. Official (read: bullshit) unemployment is still just a tad over 8%, and while the old measure (U-6) is reading 14%, we are headed for 25% in a hurry. Baring a catalyzing event, Obama’s approval rating has nowhere to go but down — in terms of historical context his term is positioned like that of Hoover, not FDR, who took office after the market had bottomed and already doubled.

This all spells a continuing deterioration in mood, possibly even at an accelerated pace, but because the market is not efficient and couldn’t care less about the economic fundamentals, an aggressively bearish trading stance is still only warranted when the market is highly overbought in multiple time-frames. Right now, we are only mildly overbought on a week-by-week scale (on Friday we were very overbought on this scale), while of course oversold on a daily scale and still somewhat oversold to neutral on a monthly scale (picture a 1-year chart). It is the 3-10 year chart that makes me nervous about being too quick to load up on shorts again. All things being equal, does this look like a good spot to go short?

3-year view here from bigcharts.com:

To deal with this situation I have lately been slowly accumulating December 2011 OTM puts on the S&P, scaling up purchases as the market rises. These positions are for keeps. I do not intend to part with them until the market has fallen well below 600 if not 500 (32 months should be more than enough time for that to happen, no matter how things girate in the interim). For trading the twists and turns along the way, December 2010 and even 2009 puts do very nicely. They are highly liquid and responsive to the market’s daily moves.

I am still bearish on the precious metals from a trading standpoint, and exercise this opinion mainly through the silver futures market and various equity puts (that said, if you don’t already have a nice pile of physical gold, get some and you’ll sleep better). Here and there investors are still losing their minds over certain stocks (ahem, Best Buy), and I always stand ready to short such silliness.

Quick opinions:

S&P earnings: Analysts still have their heads in the clouds and the I-banks are still getting away with talking about “expected operating earnings.” NET NET NET trailing report earnings are all that matters, and those will fall under $20 and stay there for many months before they start to grow again. Put a PE of 8 on that Jackson for your stock market bottom.

US bonds: bearish but not shorting

US dollar: bullish

Euro and Swiss Franc: bearish

Yen: neutral

Oil: neutral but prepared to start shorting at 60

Base metals: neutral to bearish (will short again if higher)

Grains: still waiting to buy

US real estate: wait until 2012 and figure on a cash market, but maybe buy in late 2010 if you can still get a low fixed rate loan.

NYC real estate: wait a year longer than the rest of the US — amazingly, denial still runs deeper there.

Guns ‘n ammo: good to own, but worthless if you don’t learn how to use them intelligently.

Obama: To appease and distract the masses, will he be crucified like Nixon?

So, where are we now?

When I started this blog in early August, I was living near the equator in a city overlooking the Pacific, having packed up and shipped out of New York just after Bear Stearns blew up.  18 weeks ago, the Dow was solidly over 11,000, the 30-year bond was 4.6%, gold was $900, oil was $120 and the latest CPI figures were showing double-digit annualized inflation. I was holding a huge array of LEAPS and ETFs that put me massively short equities (including mining and energy), net short gold, and long Treasuries.

I was then constantly emailing friends and family with my latest reasons to get out of stocks, miners included, and to buy into Treasury MMFs and index puts. For the previous nine months I had been endlessly explaining the logic of deflation and its implications, having been dissuaded of Schiff-esque conclusions by the likes of Mish and Prechter, and I wanted to go on the record more publicly with my calls. Besides bragging rights, I wanted the pressure to dig deeper and get the details right.

I called for a depression worse than the 1930s. I said that the Dow was on its way to below 3500 (under 9500 by Christmas, I suspected), that commodities would tank, that gold would fall well under $700, that there would be huge bailouts for the crooks who blew the bubble (though I never thought we’d see anything like $9 trillion by the end of ’08), that Obama would win and back a “new New Deal” and that the long bond would yield less than 3% anyway.

Let it be known…

I believe that the only market call that I got wrong was my early preference for the Swiss Franc over the dollar, but I switched out of that on the first real signs of dollar strength. Please call me out if you know of any others. I also sold my Proshares inverse ETFs very early in the crash (over the week or two following the late September shorting ban), and of course they did not proceed to fail from a swaps default, but given the lack of disclosure regarding counterparties and collateral, that was the right call, especially for a portfolio stuffed to the gills with puts anyway.

Living history.

And so this is Christmas, and where are we now? Well, I’ve ditched the volatility of Latin America for frosty and gorgeous Zurich, and the world is falling apart more or less on schedule.

I haven’t traded much since November, other than to close some more shorts on dips. I’m not a short-term trader. Starting in mid-2007, I recognized a rare opportunity to catch a tidal wave, and positioned myself for the big move. I wound down my business by early ’08. I got out of all long positions. I put most of my eggs in one basket, and I watched that basket!

By August I was glued to the computer, tracking dozens of data streams. At times this fall I was sleeping 4 hours a day, waking up at 3AM to watch the crash wash around the globe and plan out the day’s orders for several different accounts. Naturally, this blog was a big part of that routine, as it helped me to organize my thoughts. It was also fun to see all of the traffic come in, 600 visitors a day at times.

Man, the action was fantastic, wasn’t it? What thrills! The weekend that Lehman was thrown to the dogs; the desperation and collapse of Wachovia; the ETF scare when AIG folded (swaps mayhem!); the 4% TED spread; even worries that the Options Clearing Corporation might default. This was uncharted territory. Nobody knew exactly how fragile the system was — clearly, it had been built by schmucks who hadn’t read history and wouldn’t give a damn anyway, and we didn’t know how much stress each component could take.

So for now “the system” still stands, though I have a few more gray hairs.

Politics is (really) theater.

Team Obama is of course the same Team America that has been running this show for time immemorial, the face change being a tried and true steam release for public discontent. But this time around, with the internet allowing any inquiring mind to look behind the curtain, it is still astounding to me how even intelligent people are relieved to see a ‘change’ in the White House, even as well known made men line up for posts at Treasury and such.

The Who knew this game:

We’ll be fighting in the streets
With our children at our feet
And the morals that they worship will be gone
And the men who spurred us on
Sit in judgement of all wrong

They decide and the shotgun sings the song
I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again

The change, it had to come
We knew it all along
We were liberated from the foe, that’s all
And the world looks just the same
And history ain’t changed
‘Cause the banners, they all flown in the last war

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

I’ll move myself and my family aside
If we happen to be left half alive
I’ll get all my papers and smile at the sky
For I know that the hypnotized never lie

Do ya?

YAAAAAH!

There’s nothing in the street
Looks any different to me
And the slogans are replaced, by-the-bye
And the parting on the left
Is now the parting on the right
And the beards have all grown longer overnight

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no!

YAAAAAAAAAAH!

Meet the new boss
Same as the old boss

Travel, sleep, extracurriculars.

I apologize again to those of you who miss the active posting. Everything is fine. I’ve just been away from the markets (relatively speaking) since November, since I’ve been on a lot of airplanes and have lately been taking some time out to attend a German course.

Besides, I never really intended for this to be a news blog. I don’t have much new to say on each bailout measure or report of economic distress, since they are all just color at this point. They shouldn’t surprise anyone now, nor should they change anyone’s expectations. This is a depression and the government is only making it worse. It will last for years, and the US will become much less free in the meantime. At some point in the next few years, the Treasury market will buckle. Things will get very interesting when the government has to default on its promises. In the process, the global paper money system may change dramatically, from a fracturing of the EMU to unprecedented inflation in the US. We don’t know how or when these things will happen, but we do know that holders of all kinds of government paper will get stiffed, so we just have to keep buying gold at a measured pace — less now, more later, much more under $600.

So here are some new predictions for the next 24 months:

Unemployment as reported will hit 12%. Real unemployment (U6 — see shadowstats) will be 25%, as in the ’30s.

GDP will fall at least 15% from peak 2007-2008 levels. GDP is a bogus stat (why are consumption and government expenditures included?), but I’ll defer to convention.

The Dow will have breached 3000, with a few 20% rallies along the way, a couple of which lasting a few months.

Home prices will continue to drop, and Case-Schiller will register a 40% decline from peak by the end of 2010.

Trading notes

As far as trading goes, nothing is very compelling to me at the moment. I’m still holding a large, though much smaller, basket of 2010 puts on the S&P and various and sundry industrials, retailers, REITs and miners. I’m still holding real money of course, though I still have some hedges on it via GLD, and I have put the bulk of my shorting profits in T-bills, where they will sit until I am compelled to go more heavily short by a more heartfelt equities rally or heavier into the heavy metal at the right price.

Agriculture, as I have mentioned, is interesting. Grains never go out of style, depression or not, and prices are not in bubble territory anymore. Except for the last couple of years, farming has not been very profitable for decades, so the sector could be in need of investment. Also, a less free global market and greater political tensions (both a consequence of government responses to depressions) could mean shortages.

Energy is also getting tempting. Crude production peaked in the first half of 2005 — we will never again get as much out of the ground as we did then. The stuff is really, really, cheap. It was also cheap at $147, but I still shorted Suncor. $25 is not out of the question, but really, waiting for the bottom of the bottom is a fool’s game. I’ll be looking for ways to scale into oil and uranium slowly over the next couple of years.

No final bottoms.

I don’t think we have seen bottoms in anything yet: neither grains, nor metals, energies, foreign currencies, corporate bonds, munis nor equities (other than those at zero already). We have only seen the first move, but this move tipped the market’s hand.

All the same, I don’t like to be in the way of such a compressed market. Make no mistake — a rally and general improvement in mood could last a year! At all points in this bear market, consider what would happen to your portfolio if prices were higher 12 months out. Being right but early is being wrong if you lose so much that you compromise your ability to trade within the limits of prudence. Look for the layups and buy yourself as much time as possible. If you are going to short, find far-out LEAPS and buy them cheaply. Be a miser. The profits (and losses) are all in the buy.

Careful shorts, don’t press your luck.

This sell-off is nearly overextended. Sure, the odds of a real crash are as high now as they will ever be (markets crash from oversold), but all the same, those are extremely rare events. Bear markets of this magnitude last for years, and there will be lots more rallies to short on the way down. Be prepared for one heck of a dead cat bounce when this panic subsides. The Ministry of Truth is full of fools and knaves bearing advice about averaging down, and there are still lots of buy-and-holders out there whom the market hasn’t sufficiently demoralized.

I started to close out my near-term puts last week, and hope to take care of a bunch more in the coming days. There is nothing wrong with cash. It gives you ammo to do this all over again. And if you don’t want to abandon shorting/hedging altogether, consider switching to long-term puts, like SPY Dec 2010s. They will go down less in a bounce.

That said, I have never seen a more powerful decline than this one, and it could easily take us below 9000 on the Dow by Christmas. It is just that there is no need to swing for the fences when this game lasts your whole life.

Sell the News: Oil Falls as Mid-East Troubles Escalate

Last Thursday, news arrived that US client state Georgia had invaded the predominantly Russian breakaway region of South Ossetia, and we also learned that two more carrier groups were headed for the Persian Gulf.

You might think that open warfare in the petroleum-rich and strategically important (think pipelines) Caucasus and additional preparation for a potential bombing of Iran would put an end to the slide in oil prices. But you would be wrong. Oil lost $10 on the week and closed at a 4 month low.

Does this tell us that the odds of war with Iran did not actually increase last week? Or that the conflict has already been priced in for more than a year? It is remarkable that even these heady developments could not make up for the shift in trader psychology as demand slacks with the global economy sputtering towards stall speed.

It just goes to show that there is no money in buying the news and no sense in trying to explain away day-to-day price movements by the headlines or changes in ‘fundamentals’.