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.