More on Oil

This is the biggest trade I have had on for awhile, so I'm following it more closely than usual. Since (as my name says) I'm a strategist rather than a tactician, I normally spend my time doing analysis rather than watching the markets. I did all that market watching when I was trading other people's' money, and I am done with that. No more monthly numbers for me!
Several people have asked me how to trade this. I am long WTI calls starting in Dec 2020 and further out. The rationale is that the market is underpricing the long term value of crude. I don't really have a clue where the market is going to go short term, so I stay away from the nearbys. You could also trade this with an equity of an oil producer. In this case though I prefer the futures market. I don't know where the stock market is going to go. More important, if I'm wrong about crude, the downside of the distant months is maybe $10. If you are in a stock with a dicey balance sheet (as most of them are) the downside is zero. So there's that.

Here's a chart of Dec 2020 WTI vs. Feb 19:

I apologise for the poor quality. I normally use my stat language, R, to draw graphs, but this is just from Interactive Brokers website. BTW, IB is a great broker, even though their charts are only so-so. You can see that the Z20 contract (red and green bars) has held up pretty well, even if the nearby is in the pits. If we take out last Wednesday's highs, I think we are in the clear. If I were a technician, I would be adding there. But of course I'm not. I only add on declines.

The Bottom in Oil

Several months ago I mentioned that I thought a major bottom in commodities was about six months away. Well, I think it's partly here now, and I am trading it. This morning I bought crude oil.
First off, I think it's cheap. I have a ten-year price model that says its undervalued. Not only is the spot price cheap, but it's cheap all the way out the curve. Additionally, options are cheap as well. So I bought a bunch of long dated slightly out of the money calls. This is a big trade.
Soybeans are also getting into my buying zone, although not as clear at this point.
One more trade: I covered my short long dated SPY calls. I really don't know where the stock market is going short-term, but I sense there is the possibility of a fierce rally here. So I don't want the gamma to blow up on me. I still think we will not get back to the old highs for a long time, but discretion is the better part of valor.

My macro trade

I know I have written about this several times, but I think it's a big deal. So I'm writing about it again.
The US / rest of world trade has finally broken down. Here's the chart of the last 100 days...

I think this has more to go. Here's the long term chart...

We actually haven't even hit the long term uptrend. I expect this to be broken.

US vs. the Rest, Part Two

Back on Oct 22 I wrote a piece on US stocks vs. the rest of the world. I said that the outperformance of US stocks was ending. I personally sold US and bought rest of world. Since them the ratio has been in a trading range. Here's an update of the chart from that piece for the last 100 trading days:

So it's in a trading range, not really much change. That is to be expected. When there are big macro movements like the kind we are having now, people only think about the trend, not the differences. I still think it will break to the downside. Time will tell...

Bitcoin

OK. What do I have to add  to the Bitcoin conversation. Only my 35 years as a trader. That's less than you might think, but I can probably smell a manipulated market when I see one. So here goes...
So far their have been 17 million Bitcoins "mined." Of those, about four million have been lost. When you send a Bitcoin and make a mistake in the address, it goes to the wrong place. But the place it goes to is non-existent (with probability close to one) and never will be. So there's no one to give it back. It's gone.
So 13 million left. Of those, about 40% are held by the 1000 largest holders. These are people who were in at or near the beginning, and accumulated their stakes at cheap prices. Since the community was smaller then, it is reasonable to assume that many of them know each other. Many of these people are true believers in Bitcoin, but I'll bet a lot of these "bitcoin billionaires" would like to monetize their stakes. However, they really can't. If word got out that they were selling, the price would crash. Bitcoin is not as anonymous as it's made out, and there are ways of figuring out if they do. So they are mostly stuck.
That leaves 0.6 x 13 MM or 7.6MM. I don't know how many of these are HODLs, but let's say half. That leaves 3.8MM as the true free float. At today's price that is about $22 billion. Think about that when you read stuff about the"market cap" of cryptos.
I believe there is a price ceiling on Bitcoin. If it goes up too much, the large holders will let some go. Given the small float, that will cap the price.
Is there a floor? Probably. Bitcoin does have actual uses. Most of those involve breaking some rules or laws, but that still counts. A lot of people in Venezuela would be worse off today if it weren't for Bitcoin. I have no idea where the floor is.
That brings us to the other issue, law enforcement. The US SEC is now saying that just about all initial coin offerings are securities. Almost all previous offerings were thus done illegally. With this font of new money cut off, it's going to be hard to get a lot of new enthusiasm for crypto.
All this would change if actual new uses for crypto were found. There are a number of obstacles to this, mostly having to do with scalability and trust-free interaction with the non-bitcoin environment. I understand that progress is slowly being made on these fronts, so time will tell.

Back into Soybeans and Cocoa

I dipped a toe back in beans, nickel and cocoa. I'm trading beans and cocoa from the long side, and I thought today's declines were a good starting point. I really want to buy beans in the 850s and cocoa around 2240.
Nickel is another story. I read a report on Glencore's view of the market. It's pretty bullish. Demand continues to be strong, and inventories are being drawn down. They are still not at dangerous levels. Longer term, the lack of enough capital investment will eventually lead them there. So I'm thinking that this is the start of a long term position. I'm hoping for a spike down to add.

What I Don't Trade

When I was just starting out in this business, I was a junior economic analyst at a large multinational. Most of my job was writing boilerplate reports on the same stuff over and over. No likey. However, some of the senior guys were fairly smart, and I did learn some stuff from them. One thing is: forecasting markets is easier, the smaller the market. For example, forecasting the overall rate of inflation is almost impossible (That's why the Fed has edged toward a reactive rather than a proactive mode.). OTOH, forecasting the price of tinplate is doable. The most accurate econometric model I ever built was one forecasting the price of shrimp. It was a beautiful example of an academic model, three equations and solved with two stage least squares (That was a hot technique at the time.). There was no futures market in shrimp, and no way to hedge (Seafood rots.). But we had a shrimp subsidiary, and I probably had the only model in the world.
I have mostly kept this to heart. I avoid the big macro futures: gold, bonds, S&P, even copper. These markets are too important, and there is too much intellectual firepower aimed at them. OTOH, there are few people looking at things like iridium and fluorspar. If you follow my articles on Seeking Alpha, you may note that they are about things like vanadium (my largest current position) and rhodium (out now).
Why is this so? Simply because there are fewer eyes and minds looking at it. For example, I'm bearish on gold, but what can I realistically add to the gold conversation. There are probably tens of thousands of smart and knowledgable people who have done my analysis and more. Sometimes the most important thing about playing a game is knowing when to not play.
Of course there are exceptions. Occasionally even the big markets get to ridiculous levels. This is usually because of macro news flow combined with momentum trading. That's why I'm now long soybeans. Here's one from today...

Their Soybeans Piling Up, Farmers Hope Trade War Ends Before Beans Rot

New York Times · 6 hours ago

So I'm trading ZS from the long side. BTW, I am trading this actively, and I don't update this blog all the time. So read it, but make your own trading decisions.

New Trades

I bought soybeans again.
Scaling out of cocoa.

The US vs. the Rest of the World

I'll admit that the latest fall in the US stock market was catalyzed by higher long term rates. But the valuation mismatch behind it also deserves discussion. Basically, the US has gotten very expensive relative to virtually all other stock markets in the world.
Here's a chart of VTI, Vanguard's broad based US ETF divided by VXUS, Vanguard's everything in the world except the US. Dividends are reinvested in both.

This is a spectacular chart! the US has outperformed by exactly double since the start of 2011. Moreover the outperformance has been 16% since Jan 2018.
There have been good reasons for this. First, the US dealt with the detritus from the financial crisis sooner and better. European banks are still not out of the woods. Also, the US economy is the most dynamic in the developed world, and the difference is growing. Finally, the incipiant trade war will likely shift growth from EM to the US. But still. You have to wonder if the market has simply gone too far here. I think it has.
Even if there is no crash in the US, I bet that there will be a long period in which some of this gets reversed. I'm primarily a bottom up investor, but I have made portfolio changes. I have written LEAPs against much of my US equity position. Left the non-US part alone.

More on Cocoa

I took a little off today on the upmove, but not too much. I think this one has real potential, so I'm staying mostly in.
There are a few things I like here...
- As I wrote in the last post, the price is low relative to the stocks to consumption ratio. This is longer term stuff. It will not turn the market around by itself, but if the market does turn, it will become an issue.
 - The west African main crop is forecast to be pretty good this year; that's in the market. But the early part of the crop may be light. I know this is only a timing issue, but people still get nervous when they see poor arrivals data.
- Commitments of traders is heavily short. This is another thing that can add fuel to the fire if the market does turn.
As always, time wil tell......

Taking a shot at long cocoa here

The theory is that it is undervalued relative to the stock ratio. Here's the chart I am working with...

I know it's a little hard to read, but the red circle is where we are now. I'll have more on this in a couple of days.

How is the Trade War Going, and an Underappreciated Risk

It looks like a new, renamed NAFTA has been negotiated. This is no surprise; I said as much last month. All sides had too much to lose and too much to gain for it not to get done. It's possible that the Democrats will hold it up in congress just to spite Trump, but probably not. There are lots of powerful constituencies working in favor of it.
The key part of it, AFAIC, is the reduction of non-North American auto parts. China was using NAFTA as a way of penetrating the N. American car market. Chinese components were shipped to Mexico and then assembled into vehicles. The percentage of Chinese parts in Mexican production is still small (~7%), but rapidly growing. The new agreement reduced the amount of that that can go on. BTW, this is now going on all over Asia. Chinese exporters are shifting their final finishing into Vietnam and elsewhere, to avoid US tariffs. There was a good article on this in yesterday's WSJ. How long this will be allowed is questionable.
I doubt all this will hurt the US or world economy much. The increase in final prices to consumers will be quite small. The production will have to be done somewhere, even if it adds a few extra transportation dollars.
I also doubt that the Chinese economic numbers will suffer much. The government has plenty of levers to keep things almost on course. Note that I say economic numbers. The actual economic benefit from the numbers may well go down. Much of China already has decent infrastructure. Adding more will have diminishing utility. But they will be built.
One risk I don't think is getting enough attention is the financial situation in India. Several non-bank financial institutions, including one very big one, have had to get government bailouts. Apparently this is not because of macro shifts; this company has been doing badly for years, but was able to hide it in its accounts. India should be the growth story of the next generation, so it's important to keep a watch on this.

Almost out of soybeans again.

Going to continue to keep playing this from the long side. One of these days, it's gonna break out and follow through. I hope it wasn't this time!😆

How bad will the trade war get?

I have been reading and pushing numbers on the effect of a US - China trade war. Goldman, for one, says that the tariffs just instituted will raise US CPI by only 3 basis points. That's 3/100 of one percentage point. If the next round (which includes virtually all Chinese imports) occurs, it will be 8 basis points.

If that seems low, it is. The reason is that the cost of manufacturing a product is only a fraction of the final cost in a store. Also, over 60% of the US economy is services, which are not affected at all.

So what's the big deal? To the average American, virtually nothing. To the stock market, somewhat more. There are a fair number of companies in the S&P whose basic business model involves arbitraging the difference between Chinese wages and US prices. If that is cut off, there will be a lot of stranded assets in China. Longer term, these factories could be built or moved to places like India or Bangladesh. But it will cost money and time. That means lower earnings. Goldman thinks about 6% lower. Bad, but not disastrous.

For commodities, the short term question is how China responds internally. If they stimulate the economy by building new subways to nowhere, it's bullish. If they redouble their efforts to rationalize the economy towards consumer goods and services, that's bearish. Time will tell, but I bet they do both.

I took a long position in CF Holdings. This is the US's leading producer of nitrogen fertilizers. The US is an importer of fertilizer. The high cost world producer is Chinese for anthracite coal. So this is a way of playing both the comeback in US agriculture and the market's underestimation of the persistence of coal. I'm short Nov in-the-money puts.

Trade negotioations

It now looks likely that a new NAFTA will be negotiated. This is bullish for two reasons:
- It shows that Trump really wants deals, and is willing to be realistic.
- It puts this specific issue to bed.

It seems that all the trade negotiations are running on the US election calendar. The NAFTA talks have to conclude the Friday to be within the current congress's 90-day window.

The Chinese negotiation was intentionally put off until after the elections. This is much more difficult because it involves our attempt to change the basic Chinese business model. I predict that this will lead to a major problem after the Nov elections.

Long soybeans again

I intend to keep trading this from the long side. Also considering going long CF Holdings.

Out of soybeans on

the pre-market today. Nice trade.

Starting to buy soybeans today

Nov 18 futures

Bottom in the Agriculture Sector

I'm not the kind of guy who goes on about the mainstream media (MSM). Sure, they get some things wrong, they are overly conflictual, and they are horribly biased against Trump. But unless they impinge on what I know best, I usually don't talk about them.
However, they are getting things absolutely wrong on the impact of the China trade wars on commodities. Here are two headlines from today on the same MSM homepage:

U.S. LNG exports to China slump as buyers look elsewhere amid trade spat
Tellurian plans to start building Louisiana LNG export plant in 2019

Now these are pretty much contradictory. No one would build a new LNG terminal if the major customer is saying no.
The point being missed is that LNG, like soybeans, is a fungible commodity. Brazilian beans are virtually identical to US beans. If China still needs beans, and they do, they will buy from Brazil. So who do Brazil's usual customers buy from. The US of course.
Now there still will be an economic loss to American farmers, mostly because of transportations inefficiencies. But that's small. Longer term, if this encourages S. American farmers to plant more acres, that will also be a loss. That won't happen at current prices, and if prices go up not for the next couple of years.
The recent bear market in corn/beans has somewhat coincided with the China spat, so the MSM have played it that way. It's conflictual, and it's a dig at T. But something else has happened during that time - wonderful weather and a beautiful, low-risk crop. That's what really did it.
I say this because I think we have made a bottom in corn/beans. Actually corn is a fair ways off the bottom. The crop is not only good, it's early. So we had an early bottom in mid July. Now the market is going to look at demand, which is good.
I'm long corn, although beans may actually be the better item here. I'm also long agricultural equipment suppliers DE and AGCO (via short puts)

Major Buy in the Materials Sector?

The real money in trading is made when assets get dirt cheap and have a value backstop. That's when you can really load the boat with relatively low risk. (Note: I 'm talking about real risk here, not day to day volatility. Vol normally goes up in these situations.) I've mentioned a few of these on this blog: rhodium, vanadium, nickel. I think we are six months or so away from a major bottom in the entire materials sector. Here's why.
There are two basic factors that determine the long term commodity cycle. On the demand side is world economic growth, particularly in the commodity-intensive developing countries. On the supply side is the amount of capital going into investment in commodity capacity. A lot of commodity capacity gets used up in normal operations (think of a mine's depletion) so capital is necessary on a sustaining basis.
We have been in a state of low investment for several years now. Most of this is due to the over-investment in the '08 - '13 period. But time marches on, and the lead time for new mines, oilfields and agricultural plantations is long. So there are many materials which will not see capacity increases, and perhaps declines, for years.
The demand side is more interesting. Many nations/regions follow a natural commodity demand cycle. As they develop and put infrastructure, consumer durables and structures in place, they become commodity-intensive. Then as development continues, the service sector, which uses few commodities, rises to the fore. The US/EU/Japan are in that situation now. The growth in commodity demand comes from emerging markets, mostly Asia and mostly China (for now).
The key to Asian development over the last 50 years has been to start with the export sector. For various reasons, that mostly means exporting to the US. Now economic theory tells us that the creation of a new pool of low-wage workers in Asia will help workers in Asia and capitalists in the US. It will hurt workers in the US. That is pretty much what happened. The failure to spread the benefits of globalism is one of the US's great economic mistakes.
Now we have a reaction. Regardless of what you think of Trump, he is making an effort to protect US workers. This has wide political support, even among Democrats. So I'll bet that this is going to be a long lasting issue. I'll bet that the US trade deficit will decline.
Will this lead to lower growth in emerging markets? The world's stock markets certainly think so. I do too. Basically, it means that the new driver of growth will not be exports to the US, but borrowing from China. This is not as strong a force.
OK, how long will it take for the markets to discount this. Not much I think. My guess is that the imposition of widespread tariffs on China will be a watershed. This will happen over the next six months or so. I would expect to see some commodities fall substantially when this happens.
At that point we have our buy. Remember, the world economy will not decline. It will just have a growth slowdown in the commodity-intensive regions. Meanwhile, the falloff in productive capacity will continue. I do not anticipate a deflation, so cost of production will provide a low risk floor.
That's what I think. Be interested in you opinions on this.

News about Russia/US

Yesterday the Wall Street Journal reported that US administration officials were planning for a Trump-Putin summit. This led to a rally in Russian stocks (including Norilsk). If true, it might signify a shift in western-Russian relations. If that happens, the Russian stock market has MUCH more to climb. Readers of this blog know that I have been saying for awhile that the current situation is in no one's interest. Let's go a little deeper.
For those readers not located in the US (most of you) here's a little background on how leaks work in the US government...
 There are three sources of leaks. One is ambitious politicians and officials who want to curry favor with journalists. By feeding the journalists inside information, they help both the politicians' and the journalists' careers. Most of these leaks concern things that are being planned or discussed inside the government. They are usually accurate and not embarrassing.
A second source is leaks that are staged by the highest levels as a trial balloon for policies they are considering. Ex-pres Obama would run things by the editorial staff of the New York Times before he took action.
The third type of leak is by an official who wants to hurt someone. Either he is trying to get back at an enemy or he is genuinely concerned that bad things are being done. Since the Washington establishment hate Trump and all he stands for, there has been a lot of this going around.
I think the WSJ leak about a summit was the second type. First, it wasn't embarrassing or derogatory. Such a summit is a logical thing to do, but administration officials are probably concerned that any dealing with Russia could ignite a firestorm. It was leaked to a somewhat friendly source, the WSJ, who could be counted on to analyze it rationally. So I believe this is the real deal and can actually happen.
If I'm right about this, here's is what we can expect to see:
- Russia being brought into the emerging North Korean solution. This is the major short run diplomatic effort, and Russia has a real interest.
- Oil prices topping out. This may have already happened.
- A reduction in provocations, particularly military ones. I do not think this has happened yet.

more to come...

Stopped out of the rest of my corn this morning

Nice trade though.
The crop looks quite good at this point. I continue to believe that demand for corn is growing and will eventually push up prices. However, there is no fighting the US crop during the growing season. So I'll probably be out till the fall.
Tactically, this shows the virtue of scaling out instead of always letting your profits run. Lesson confirmed.

Why don't Neural Nets Work?

There have been a few high visibility funds that have proclaimed they are going to trade on signals from the neural network type of artificial intelligence. Several of those have not done well, and I hear that there will be some other disappointments as well. So why isn't this technique working? After all, it has had great success in image and speech recognition, and is making some progress in language recognition.

There's been so much hype in the popular press about AI that it seems journalists have suspended their critical thinking. Here's the story. Virtually all machine learning, include the neural nets, are basically automated statistics. The algorithms range from simple curve fitting to extremely complicated, but they are all about finding regular patterns in data. For example, suppose you want to identify an image of a cat as a cat. The algorithm takes the pixel information and performs a very complex optimization that essentially relates every pixel to every other pixel. It gets fed in data for possibly millions of images of cats (and non-cats) and finds the optimal relationship that makes the images "cat-like." This can work pretty well because cats don't change much. They may get bigger or smaller or change color, but there is something about their look that remains cat-like. In stat terms, the basic look of a cat is a stable system.

If the system thats being analyzed is not stable, this will not work. Liquid assets returns are not stable. There's been a lot of work on this. They were somewhat statistically stable years ago, and that's why the systematic guys were able to print money for so long. But these have been arbitraged out. Not only are asset returns not stable, but they are like a game in which the players are intentionally working to destroy whatever stability there is.

OK, enough of my being Debbie Downer. There are regularities in liquid assets returns that can be traded. The key is to look for regularities that are hard to arbitrage with leverage. People who have read this blog for awhile know that I believe long-term trades are included in this. There are some others as well, which I'll go into as time goes on.

Norilsk and Palladium

I have had a position in the Russian company Norilsk for almost two years. It's done well, although it has huge ups and downs. It took a 15% hit the day the US put sanctions on Rusal. Rusal and Norilsk have some cross ownership by O. Deripaska, who was also sanctioned. There was a fear that Norilsk would also be sanctioned. It hasn't happened so far, and it's possible that Norilsk will be controlled by V. Potanin. Potanin is not being sanctioned, and his view of the company's future includes smaller dividend payouts and more spending on capex.
I agree with the increased capex. Norilsk's products are going to be in short supply over the next few years because of low worldwide capex. So the added investment will be value-producing. However, the foreign investors who set the price on a day to day basis probably do not agree. They have a higher discount rate for any Russian company than the large Russian shareholders do. So I expect some kind of move down when and if the new dividend policy is announced.
I also want to point out that Norilsk share prices seem to be following the price of palladium rather than the price of nickel. Norilsk gets about the same revenue from both, but nickel prices have been rather stable. Here's a graph of NILSY (in $US) and palladium over the last 100 days indexed to 1.00.

The two lines do move together pretty well. The big one-day fall in NILSY was when sanctions were announced.

Long term there has been little investment in both nickel mines or in S. African precious mines. So I think prices will be a tailwind for Norilsk. There may be a switch from palladium to platinum, but I do not think it will be major.
As far as the Russian risk goes, I have posted before that I think the "new cold war" is silly and not in Russia's interest. But I don't make policy; I only react to it. So I do think that US-Russian tensions should abate, but only time will tell.

Corn progress and more Lynas

As of the May 14 report, corn planting was about even with the five year average. So that's one risk that has passed. The weather for most of the corn belt is expected to be average for the rest of the month. So we probably won't get another scare until and unless we get abnormal heat later in the season.
OTOH, demand for US corn is still pretty good. And acreage is way down. So I doubt the market can have a steep decline until the crop is made. I'm keeping some of my position and hope to add on weakness.

So I really know how to time Lynas! Just as I wrote the post, the stock took a deep dive. The trigger was a report in a Malaysian online newspaper saying that some local officials wanted to look again at the risk in Lynas's facility. I read it, and it seemed like the same old guys saying the same old things. Is it possible that the new regime will give into them? Like I said a few days ago, I don't think so.
- There really is very little risk, and
- Malaysia needs to show it believes in the rule of law.

I'm going to wait this one out. Time will tell.

Lynas Article

Yesterday I published an article on rare earths and Lynas on Seeking Alpha.

I am blown away by the response to this article. It's has one of the highest page views I have written. I thought I was analyzing a small, underresearched industry. Turns out there is a large cohort who were already following it. That's not necessarily a good thing.

Now, the Malaysian election. As far as I can tell, the new party is not "populist" in the sense that the new government in Italy will be. Rather it's a reaction to corruption on a very large scale. It's also a reaction to a recent drop in economic growth. However, if Malaysia wants to get out from under the "middle income trap" it's going to have to upscale its exports. That means foreign capital and foreign technology. So they would be foolish to punish Lynas simply to appease the scaremongers. However, this all depends on Lynas continuing to run without environmental problems. If they screw up, all bets are off.

I bought a little more Lynas on the dip last night. This company has a beta to the S&P of 3, so be careful.

Link to Seeking Alpha Article

...on rare earths and Lynas.
https://seekingalpha.com/article/4171588-rare-earths-groaning-please?v=1525871160&comments=show
This is a "non-pro" article so it will be available to everyone. I don't get paid for it either, but that's not going to change my lifestyle.

Rare Earths and Lynas

I just wrote an article for Seeking Alpha on rare earths. In it I say I like Lynas, the Australian producer. I am also long. The article will probably be posted in a day or so, and I'll link to it.

Vanadium Update

In my Vanadium article on  Seeking Alpha (behind a paywall now, which is why I restarted this blog), I recommended two vanadium stocks, Largo Resources (LGO in Toronto) and Advanced Metallurgical Group (AMG in Amsterdam). They both have reported earnings and both have profited by the upmove in Vanadium prices.
 Largo reported diluted earnings of $.07 for the last quarter, up from a loss of ($.02) a year ago. Production was up, so this was not only a commodity price story. If we annualize this it comes out to $.28 per year, or a P/E of 6.2! I doubt that the V price will go much higher, but I am hopeful that the multiple will expand. I am keeping my full boat.
AMG is a more complicated company. They produce many "tech" metals, and they have a large engineering business. Their EPS was up 16% to $.59 per share. The works out to a P/E of 19.5. That's pretty much in line with what a growing company like AMG should be priced at. I also still like this name, although not quite as much. I did take some off.

Couple of things

- I took off some of my corn this morning. The basic thesis is still intact, but I don't see this as a breakaway market yet. So I'll trade a little. Of course, I said the same thing two weeks ago, and the pullback was less than I expected, so who knows.....

- I wrote a piece for Seeking Alpha on Vanadium a few months ago. In it I recommended Largo Resources (LGO). It's gone up a lot. At this point, I think the current market for Vd is pretty fairly priced. Any further upmoves will have to come from non-traditional demand, i.e. Vd flow batteries. This is really a tech rather than a commodity story. The tech is obviously not there yet since we haven't heard of any big players going into actual Vd battery production. I'm holding most of my position and waiting. I generally do not like to be in tech, since I do not have access to the latest lab reports. But this one has so much upside optionality that I think it's worth keeping.

Corn update

I never was able to get a full boat on in corn futures. I did add on the dip, but I thought the market was going to punish the long specs more than it did. So I'm at about 60% long. The weather in the corn belt has warmed up, and the soil is getting warmer. Still, the forecast is for slightly below average for the first 2/3 of May.
At this point, the upside of the corn market is all optionality. There is nothing in the stats that could be called tightness now. But with the lower plantings and the possible poor planting weather, I think prices should be firm for the next week or so at least. After that, we will have to see.

Egg Consumption

Eggs are one of my favorite commodities. Why?
- There is no futures market, and therefore little research is done.
- There's a pure way to trade it, Cal-Maine Foods Inc.
- It exhibits strong mean reversion, important  for a value guy like me.

However, even though eggs should be the essence of a stable commodity, something weird has been going on. US consumption has been increasing fairly fast. You wouldn't think this would happen. After all, humans have been eating eggs since the stone age. I would think that people's egg patterns would be pretty stable. But no. Here's a graph of US per capita egg consumption.

So consumption has really taken off in the last five years. In my experience, when long time patterns get disrupted, big things happen in the associated markets.

Russia

I don't normally comment on macro stuff, but here's one...
I simply do not understand what Putin is thinking about geopolitics. He seems to be going out of his way to antagonize nations with natural alignment of interests. It seems obvious to me that Russia's long term security problem, if it has one, is hegemony by the US or China. Mind you, I really do not even think that's a real problem, but it's possible.
If so, Russia's natural friend here is Europe. There is also a natural economic relationship as well. So why is he refighting the cold war? And while we are questioning things, why is he emphasizing the natural resources industries over all other? Russia has an immense store of human capital in tech. Most people know that Russian emigres have created great value in the US (for example, Google and Ethereum). He could have developed this locally.
Of course, I'm just a speculator. I don't make the rules, I just try to forecast what they foretell.

The technical situation in silver

There's an interesting technical situation in silver. The speculative community, which is normally bullish, has actually gotten short of silver. According to the CFTC  commitments of traders report, "non-commercial" traders (another word for specs) are now a total of 85 million ounces short. This is the largest in recent memory. This is very unusual, since specs are traditionally bullish on both gold and silver.
Now just because a group of people who are normally bullish have turned bearish, doesn't mean that the price is headed higher. There are good reasons to be bearish on silver. However, one can assume that these are weak hands. They probably don't want to be short, but are following trends. So if something happens to change the trend, they will head for the exits ASAP. In that case we will get a fierce rally.
Is this enough to go long silver. Probably not, unless you have some idea of the catalyst that will turn the trend. If you do, it's a nice risk/reward situation. Making it even better is that option volatility is on the cheap side, so you don't have to risk much.
I'm thinking about it - will let you know if I pull the trigger.

Ruthenium, Part Three

So how do you invest in Ru? There is no company that specializes in it. Also, there is no ETF, as there is for Rhodium. So you have to physically buy the metal. Most precious metal investors like to buy bars or coins. They are easy to store, and you have something to look at/show your friends if you are into that sort of thing.
But Ru is an industrial rather than a precious metal. It is value dense, but all its usage goes to industrial applications. So I believe buying the industrial form is better. This is in the form of a sandy powder. You buy a can(s) of this. This blog will not recommend any vendors, but you can find some if you search the web. Make sure they are reputable, both the seller and the manufacture who produces the material.
I only buy physical commodities very rarely. There are a lot of disadvantages, including trading costs, counterparty risk, and storage risk. But in this case, I simply don't see another way.

Ruthenium, Part Two

Because of the large move Ru has had, one might think that its price is historically very high. However, after adjusting for inflation, it's still in the general range it has been for a long time. Here's a chart of the price in 2018 dollars going back to 1972.

It's at the top of its normal range. If I'm right about the fundamentals, it should eventually break out of that range.

Tomorrow I'll talk about the hardest question: how to find a vehicle to invest in it.

Ruthenium and Iridium

These are two minor platinum group metals. I am very bullish on both, especially ruthenium. It is not used primarily for internal combustion engine cleanup, as is platinum and palladium. Instead it is used in many high tech applications, especially electronics and chemicals. These are expanding sectors of the world economy. So demand is good.
No so for supply. As palladium's price has risen vs. platinum, the southern African miners have shifted their capex to Pd - intensive regions. These produce lesser amounts of ruthenium.
The price of  Ru has already more than doubled, but I believe it has further to go.

More on this over the next few days. In the meantime, check out:
http://www.platinum.matthey.com/ for a chart, and:
http://www.platinum.matthey.com/services/market-research/pgm-market-reports for some stats.

Here's a graph of soil temperature over the last 16 years at 4 inch depth for April 9th. This year is the lowest ever.

More on Agriculture

As of yesterday, the soil temperature in Slater Iowa at two inches below the surface was 36.0 degrees F. The 10 year average of temperature on this date is 50.6 degrees F. Corn requires a minimum of 50 degrees to germinate, but it's better if it's higher than that.
The cold weather has added another risk to the crop. If the crop can only get in late, it will be at risk for an early frost. Until the weather turns, I will buy any dip.

Added a little to my corn long

Fundamentally, I like it. However, the specs have gotten quite long, and this seems like a good excuse to cause some pain. I will continue buying scale down.

Full boat in CALM

I forgot to post this yesterday. I finished out my position in CALM. The egg market has healed, and I believe this will once again be a very successful company. Over the past 20 years, CALM has given an annual total return of 21%! That's what being the low cost producer in a commodity business will do for you.

Stopped out of cocoa short

during the session.

Corn

Bought a small (20%) corn position.

Long sugar

Why?
- Brazil ethanol/gasoline differentials will lead to major reallocation of cane.
- COT is bazooka spec short.
- Sugar is cheap on my long term valuation graph.

Went short cocoa today

The last part of the rally seems to be specs reversing a short position.

Materion

Materion (MTRN) produces high-tech metals for industry. It also has a near monopoly position in one minor metal, Beryllium (symbol Be). I believe the company has off-book assets and intellectual property that make it an undervalued situation. However, I do not see a catalyst for a move now, so I’m watching, but do not have a position.

MTRN was founded in the ‘30s based on the work in the ‘20s at Brush Laboratories. This involved the element Be. Be is an extremely light and strong metal, but is quite difficult to produce and to alloy with other metals. MTRN mines its Be from a unique deposit at Spor Mountain, Utah that produces about 75% of the world’s Be. In fact, the major competitor to MTRN, ULBA in Kazakhstan, doesn’t do any mining. It sells off the remaining Soviet stockpile.

Be is used in two main ways. About 80% is alloyed with copper to produce a metal that is stronger than some steels, formable, nonmagnetic and has much greater electrical/thermal conductivity than other strong metals. It’s used in a wide variety of applications, from springs to oil drilling to electronics.

Be is also used in metal form for applications that need ultra-high performance, like aerospace and defense. The DoD was so concerned about the supply of Be that it built a plant in Ohio with MTRN to ensure supply. This is still running; about 70% of its output goes to DoD. To illustrate how high performance this is, it was banned from F1 racing to prevent the McLaren team from getting an overwhelming advantage.

Over the years, MTRN has extended its product line beyond Be. It now produces a wide line of clad metals, high performance alloys, and metallic chemicals. Many of these products only have niche markets, but are superior or irreplaceable in what they do.

The end markets for MTRN’s products, as you would expect, are mostly high-tech industries.

Consumer Electronics	28%
Industrial Components	15%
Medical	11%
Defence	9%
Automotive Electronics	8%
Other	11%

Source: Company Filings

Most of these end markets are growing at above overall economy rates.

INVESTMENT THESIS

MTRN is estimated to earn $2 / share in 2018. This gives a PE of about 25. That is high, but this is a company in growth segments of the economy. But the case for MTRN is really in its assets. In particular, the Be segment could only be duplicated at extremely high cost. In fact, other companies that also produce Be-containing products buy their raw material from MNTR.

MTRN’s other segments do not have that underlying market power. But they are all technology intensive. One has to think that it would take a large investment in intellectual capital and in working up the learning curve to duplicate MNTR’s operations.

One issue with MTRN is that their bulk Be business has large customers who actually compete with MTRN in the end products. So this gets into the situation of monopoly vs. monopsony. The resulting negotiations can lead to protracted fights. This happened a couple of years ago, and MTRN’s sales suffered. For now, this seems to be settled.

MNTR recently completed acquisition of Heraeus Precious Metals. This company may be familiar to those SA readers who invest in precious metals. It’s main asset is its facilities and expertise in precious metal technology, particularly platinum-group metals. This is a natural fit with MTRN, where it will now compete with Johnson-Matthey (JPMLY).

MTRN aims to grow EPS in the low double digits. In view of the strengths it could monetize, I think this is doable. However, there are a lot of pricing issues that will have to be worked through. My guess is that the market will only recognize this growth as it happens.

MTRN is financially very strong. It has virtually no debt; most of its liabilities involve the running of the business, such as accounts payable, accruals and pension contributions. Would it be possible for an outsider to take control and lever it up? I think so, as ownership is diffuse. However, I am not basing the case on this possibility.

HOW TO TRADE IT

I do not own MTRN now. The thesis here will only play out over the long term. If things go as promised, MTRN will have a PEG ratio of less than two. For a company with its market position and balance sheet, that would be quite low. In the meantime, MTRN trades like the typical small cap with little analyst following. Moves of several percent a day are frequent, and its long run annualized volatility is 47%. So don’t try to surf the short term trends. For a retail investor who will not move the market, I recommend buying dips and letting at least some go on short term rallies. As you do this, try to keep in mind the long term. They stock will fall on bad news, probably related to earnings dissapointments or large contract issues. But I plan to fade these. The underlying situation is strong.