Closing Gold

Gold appears to have overstayed it's welcome. Although it has had a strong run, it has overshot it's historic ratio to the USD/EUR by a substantial margin. The market is now excessively long the commodity. In addition, the potential for the IMF to sell gold positions into the market in order to fund it's budget deficit poses a serious downside risk. This, among other issues, has the potential to tip the speculative position over, as it cannot remain this extended.

Streetracks Gold Trust (GLD) recently added 8 tonnes of gold to it's holdings, and now controls close to $20bln of the commodity. This is largely held by retail investors. The volatility of this investor class and trend-following nature of their trading is concerning whenever they are so long of a single position. Although dollar weakness will most likely persist through the middle of this year, the long gold position is no longer a good method of playing this. The Gartmann letter believes gold will hit $1000 shortly. I would rather take substantial profits off the table rather than risk them for a marginal $50 gain, and look at investing in other (net creditor) currencies in order to play the dollar weakness. It is also unclear that the Euro will be able to sustain it's current positon, versus the Dollar or globally. This trade, however, deserves much more research.

Short SPX, Long CT

Cotton

The recent run-up in agricultural commodities has left one crop relatively untouched. Cotton has failed to rise in the same manner that other agricultural commodities largely due to the fact that it is not a food product which, with an increase in global wealth, benefits from the increased global consumption of meat as opposed to plant protein, a process which is far less efficient in terms of energy, food and water. Cotton lags badly behind its all time high, while other crops are experiencing dramatic price increases due to increased consumption and the drop in the USD purchasing power.

Given the high price of Corn and Soybeans, and relative un-profitability of Cotton, especially as agricultural input costs increase, I believe that spring farmers will devote substantially more acreage to the former crops, creating supply constraints for cotton at the end of the season. This is good news for holders of Cotton futures.
Although there remain several risks, notably the growing use of GM cotton in India, which is materially increasing yields and the global slowdown which could impact China's consumption of the crop, I believe that the fundamental factors are strong enough to push cotton prices higher. It enjoyed a material gain today, and I am going to look to add to my position at lower prices. A relative-value method of placing this bet would be to go long cotton and short the DJ-AIG index, which would hedge against the coming macroeconomic slowdown, however given the recent volatility of this index, I believe placing the straightforward purchase of CT contracts represents a less risky position than the hedged position, at least at the present.

Long Gold, Short SPX, Long CT

Cotton versus other agricultural commodities, and cotton acreage planted (only updated annually) versus price.

Some pertinent articles:
http://southeastfarmpress.com/cotton/commodity-prices-0219/
http://southwestfarmpress.com/cotton/future-prices-0215/

Recession

It appears confirmed that the US is indeed entering a recession, though definitions of that term are somewhat subjective. Startlingly weak consumer spending will undoubtedly cause great pain for all companies in the consumer value chain, most notably those that are the most levered and sit closest to the consumer (retail, credit cards etc). Most likely, consumer advertising, and other discretionary business expenses will also suffer sharp, if delayed, reductions as spending a large amount of capital on gaining the attention of consumers who are not willing to spend will no longer be justifiable on an ROI basis. These points may be obvious to most investors, however, there is still a substantial short opportunity here, as the plummeting broad equities markets will impact the weakest companies most severely.

Short SPX, Long Gold

The great unwind

Global markets continue lower today, with US markets closed. JPY is up substantially, with carry trades being unwound rapidly and the Bank of Japan mulling a rate hike. This bodes poorly for Japan's trade-based economy. It also has serious repercussions for net debtor currencies, or any economy that has positively benefited from the carry trade in the past. I would look to go long JPY and CHF, however as this trade has already moved fairly substantially. Start with a small position then attempt to buy dips (if any).
SPX futures are down over 3% overseas. This, unfortunately, is still the beginning of the decline. The steepness and severity over the next few weeks will tell us a great deal about how long and deep the full recession will be. Full position short SPX futures.
Gold is being pulled down by equities, however, again, with the activity in equities and FX it "should" be higher rather than lower. Unfortunately, Gold ETF's are being redeemed. I am holding a small position in the metal, and am looking to add to it over time, especially once the correlation between Gold and equities disintegrates.

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Ugly

Equities finished the day substantially lower today, following poor readings from the Philadelphia Manufacturing Index. This is substantial because it appears that, with the close nearly 40 points below yesterday's close, the SPX has broken any support levels that previously held it in place. The equities sell-off also prompted traders to reduce positions in precious metals, when, in theory, this news should have been bullish for these commodities. This appears to be the beginning of a multi-year sell off, and the data offers little reason to believe that this correction will be less severe than that which began eight years ago. While a 30% decline in the SPX may be appear unlikely to many long investors, the chart shows more exaggerated moves have occurred in the last decade, during a crisis that did not have as strong roots as the housing/wealth effect/consumption decline we are currently in the beginning of. I do not believe it is too late to go short, and today proves that this bear market will have longevity.
Short SPX, Long Gold
 
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