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.