A Historic Shorting Opportunity in Cotton
May Be Near
Justin Rohrlich November
9, 2010 12:30 PM|
a commodity is up nearly four times more than gold,
would that indicate a good sign to start betting against
MV’s Josh Lipton wrote that, year-to-date, gold is up
16%. The SPDR S&P 500 ETF (SPY), which includes
holdings like Exxon Mobil (XOM), Apple (AAPL), Microsoft
(MSFT), IBM (IBM), and Bank of America (BAC), is up
5.5%. According to Bloomberg, oil is up 3.8% YTD. Copper,
He also pointed
out that cotton is up 62%.
Markman of Markman Capital Insight provided a chart
that compared the price of cotton as tracked by the
exchange traded note iPath Cotton (BAL), contrasted
with gold and the S&P 500 this year.
founder and president of Hackett Financial Advisors,
a money-management firm with a focus on agricultural
commodities, tells Minyanville that cotton’s spike began
with the floods in Pakistan, coupled with rising demand
contrary to what numerous breathless reports warning
of $85 undershirts and $50 socks, Hackett believes cotton’s
stratospheric rise is due for a fall. In a letter to
clients sent out yesterday, Hackett wrote:
have had a tendency to put its bull market peaks in
right near the 30 year cycle peaks in overall commodities.
So with the expectation that a major 30 cycle peak is
near at hand in overall commodities over the next 6
months, cotton could be in the process of setting at
least a decade high as we speak in the very near future.
increase during the 3 greatest bull markets in the history
of cotton since 1900 was a 4.1-fold rise. The current
rise in cotton has reached a 4.1 fold increase since
the bull market began in November of 2008 putting cotton
in lock step with historical precedent. Understand that
this bull market has seen the greatest velocity increase
over the shortest period time over the last 100 years.
This puts the cotton market into a very rare psychological
condition that is usually associated with a crash ending.
The average decline in cotton over the last 3 greatest
bull market moves has been 50%. Given the extreme nature
of the current bull market, I would expect the decline
to exceed the normal decline.
of cotton/merchants are buying in a panic parabolic
fashion that is a classic late stage warning sign that
a bull market is about to come apart at the seams,”
Hackett wrote. “Once the commercials finish their panic
buying spree, a buyers strike will likely emerge leaving
cotton in an air pocket of no support for many days
on end. This is what causes the crash back down as greedy
producers try to capture what is left of the riches
they thought they had while rational commercials have
no interest at buying at irrationally higher levels.
Also during such times it is typical for cash contracts
to be cancelled and renegotiated at lower levels creating
even further selling that exacerbates the selling panic.
That day is coming in cotton.
“These high cotton prices are telling every cotton farmer
in the world, ‘Go plant more, go plant more,’” Hackett
tells Minyanville. “In the past, no farmer on the planet
could make any money growing cotton, but now cotton
farmers are going to be driving Maseratis.”
do seem to be acting a bit exuberant in the face of
record prices for their crops.
is running a story today that begins:
time and the livin's easy for some Oklahoma farmers
who're in tall cotton. Hollis, OK grower Kelly Horton
said, "We'll make more money than we have in a
This is exactly
the mindset to which Hackett is pointing.
this sort of production response, and farmers will plant
a tremendous amount of cotton, likely leading to overproduction
and a market crash,” he says.
Chronicle makes the same case this morning, noting that
“the cotton rush may not last long, particularly if
more producers around the world start growing more cotton
in response to the price increases.”
“You’ll see supply going up, with demand having fallen
off from higher retail prices, right before the market
drops. We’ll recognize the first signs of demand destruction
-- retailers will tell you sales are down, more cotton-poly
blends will start hitting stores… Mid-February into
summer could be a fairly ugly period for cotton.”
One of the first signs of cotton demand destruction?
avoiding the clothing retail sector and apparel producers
at the moment.
the biggest one-way trade we’ve seen in cotton in 100
years,” he says. “It’s a historic move, a historic shorting
opportunity. The greatest shorts are when everyone’s
bullish -- and we’re getting very, very close to that