Monday, July 10, 2017

Macro Tourist on Wheat

Back in April one of our looks at the grains was a link to Macro Tourist:
"The Last Remaining Cheap Asset"
With the intro:
Ah hell.
I hate seeing stuff like this in print.
It's true but I hate seeing it.
And it gets worse. He profanes an image of Julie Andrews along the way.
This Julie Andrews:
"It would surprise no one, perhaps, to learn that Julie Andrews travels with her own teakettle."
No. No it would not....
Not because he was wrong but because he was very right. These are small markets compared to equities or govvies or FX or even oil and hot money flows can crush you despite you being correct about the underlying supply/demand situation. As an example, from Thursday's high to Friday's close the extra-tiny hard red spring wheat contract dropped 12% because....the same reason it jumped the week before:

Market data delayed 10 minutes as per exchange requirements.

Here's Macro Tourist with a follow-up, July 6:

“Don’t use the east bathroom” the young kid in the yellow jacket announced, “it’s happened again.” The year was sometime in the early 90’s and I was visiting the Chicago Mercantile Exchange. Huddled around a bank of phones crammed onto a tiny desk facing the D-mark pit, the other yellow jacket clerks and the two CME members with their distinguishing red blazers, just nodded at the information and went back to work taking orders from the ringing phones. Thinking someone would surely take a moment to describe why we shouldn’t use the east bathroom, I stood quietly waiting for the explanation. But it never came.
Thinking it must be some sort of gross waste accident, I imagined the worst. Overflowing toilet, water on the floor, plumbers desperately trying to fix it. Eventually my curiosity got the better of me and I whispered to the clerk, “what happened again?”
“Oh, stay away from that bathroom. You want nothing to do with it!” he urgently whispered back.
“That gross, eh?” I responded.
“Gross? Shit no. Even worse! There’s a f’ng nickel in the urinal!”

Traders are a superstitious lot. For this crew at the CME, using a bathroom with a nickel in the urinal was symbolic of pissing away money. And I get it. I know it logically makes no sense, but why tempt fate? There are plenty of other bathrooms. To this day, I still hightail it out of any bathroom with coins in the urinal.

I wish I could say my worries about superstitions don’t affect my writing, but I can’t. I fret that any sense of celebrating a winning trade will cause the Market Gods to instantly goocher it.
This concern has stopped me from writing about wheat for the past week, yet I can put it off no longer.

Proving that even stopped clocks are right a couple of times a day, I have been fortunate enough to be long. I won’t rehash my bullish reasoning, instead direct you to my late April piece The Last Remaining Cheap Asset.

This morning wheat is due to open down 22 points, so I suspect the short term top might be in. With this sort of extreme volatility, there is no rush to run out and buy wheat, but I wanted to highlight the recent action and discuss what this might mean.
First, let’s look at the chart.
From 470 to 600 in a week is a big move. That’s up about 27.5%, and to think we aren’t due for a little back and filling would be naive.
I want to point out that this move in wheat was actually led by the Minneapolis Exchange wheat contract.
Tough to find a chart more beautiful than that. A huge base with a clean break that runs in a controlled steady fashion straight up. A technician’s wet dream.

I realize this is a weather driven bull market. Yet these are the sort of bullish moves you get when the entire agriculture community is so bearish on grain prospects. After years of a continual drip lower, there are few long term grain bulls. Remember what Donald Coxe used to say, ““The most exciting returns are to be had from an asset class where those who know it best, love it least because they have been burnt the worst”

And proving once again that in this day and age of limited alpha, nothing is so toxic as crowded trades, the speculative community that was record net short wheat at the end of April, had their face ripped off once again....MORE
HT: David Keohane at FT Alphaville's July 6 Further Reading post.