"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, July 11, 2014

Hedge Funds Bet Big on Corn - and Lose Big

Here is something that one does not see too often in the futures markets - trend following hedge funds on the wrong side of a market. I am referring to the corn market which has been hit hard by selling ever since the acreage numbers first came out and the weather became nearly perfect. Throw on top of that USDA supply and demand numbers and the downtrend has been relentless.

Take a look at the following chart and you will see what I mean. The price of corn has gone from near $5.20/bushel to its current $3.78, a drop of 27% in two months time.

Now take a look at the chart noting the positioning of the various players in the corn market.

While it is not unusual to see long liquidation from the hedge funds accompanying a move lower on the price chart, what is unusual is the fact that even though corn has taken out both its November 2013 and its January 2014 low - the point at which these hedge funds began building their massive net long position which took the market up - these same hedge funds remain net longs. As a matter of fact, they even added slightly to that position in this latest COT report. They are massively underwater on these long positions; something rather uncommon to see in this day and age of computer-driven markets.

Even more interesting is the fact that the little specs, the small traders, the general public, usually the guys on the wrong side of the market, are all on the correct side and are making money at the expense of the gigantic hedgies. Chalk up one for the little folks!

One shudders to think what might happen to corn price should the hedge funds actually totally abandon the long side of this market and start moving over to play it from the short side.

Here is a quick shift over to the soybean market. Look at the price action over the last six weeks. They have imploded lower dropping from up near $15.40 all the way to today's 11.95 close.

The COT report for beans clearly shows why in terms of money flows. Since March of this year, hedge funds ( managed money ) have been liquidating longs as the price has continued to move lower. What is also remarkable is that even though prices have broken below the January lows - the point at which the already net long hedge funds really began to ramp up longs - this category of traders remain net long as of Tuesday this week. In other words, they have also been losing money in the beans as well as in the corn.

Based on the carnage that today's USDA report unleashed in the grain complex, my educated guess is that they have finally moved over to the net short side of the beans although I would not think the position is up over 25K net short at this point. Maybe by next week it will be.

The point in all this is that if the hedge funds decide to press the short side of the bean market - and in the face of what is now expected to be a massive crop this year - beans could see even more selling. USDA today shocked the market, as it did not that long ago, with an even larger than expected acreage number of 84.8 million acres. They left yields the same but that larger acreage number means a lot more beans are expected than what the market was trading prior to the report. Right now we are looking at a 3.8 billion bushel number. That was up from the June estimate of 3.64 billion.

What saved this market from even more selling was the fact that today is a Friday and the USDA report hit the wires after a week during which beans had already been moving lower. Some shorts decided to go ahead and book some profits before heading into next week. That short covering took the price well off the worst levels of the session. There was also a bit of sentiment that unlike corn, it is a bit too early in the growing season to completely remove all the weather premium.

Bean traders will be looking at the longer term forecasts, particularly for the month of August to try to get a handle on the weather during that all-important time for this market. If the forecasts continue to be benign, hedge funds will be at work selling.

We will see what we get next week.

I will leave you with an updated chart of my Trader Dan's Grain Index. It hit a 45 month low this week.

USDA Supply - Demand Report Obliterates the Grain Complex

I will have more on that huge USDA report later on, after I can find my stomach and my head, both of which are still spinning after seeing those numbers.

For the immediate time being, let me just put up a quick chart of the Goldman Sachs Commodity Index so that the reader can see for his/her self how much damage has been done to the complex. With crude oil collapsing lower today and with the grains imploding in reaction to an overwhelming bearish report, there was little to support the various commodity indices.

The GSCI not only confirmed a double top on the charts but has now lost all of its gains on the year and has gone negative.

Gold bulls has best rejoice in the woes in the Portuguese bank sector and the turmoil in Israel ( one has to feel sadness for those folks having to endure that sort of thing ) along with the Iraq mess, because that is what is keeping gold afloat right now as the prices for tangibles are sinking.

Rising commodity prices tend to support higher gold prices just as sinking commodity prices tend to undercut its price. Safe haven bids are still at work however due to the events mentioned above. Any change in those and gold bulls had best watch out!

Here is the chart... It is not pretty. The price has collapsed vertically over the last three weeks.