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Where's the Beef?

By

Livestock the lone commodity group down year-to-date.

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There's one commodity group down year-to-date: Livestock. Among the few items I haven't seen picked apart on the much debated CPI report about runaway inflation was the fact that nine different meat indexes were down in price year-over-year. Yes, the U.S. government officially tracks "Chuck Roast" and all its cousins. But you were told everything is going up?

Here's the deal: as I started saying on the Buzz & Banter around March-April, ranchers were liquidating their herds not because they wanted to, at lower and lower prices, but because they had to. Their costs were going higher and higher.

Pressure on crops of cattle feed had supply so low that there was yet another clue hidden inside the widely discussed USDA planting report in March. Pasture land (for grazing herds) was turned into crop rows.

So what happens if tons of supply of cattle are taken off the market at the same time that, and this part might be the safest prediction I've made in my career, Americans decide they still like to eat? Below is a sneak preview. That is an April 2009 Live Cattle futures contract, predicting a much different story than 2008's falling prices.


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Are you scratching your head about why Farm Bills keep getting signed that only hasten the U.S.' problems? I have for years and years. But my theory is that the average voter isn't going to be outraged and it won't become dinner time conversation until it hits their dinner table. So far, a lot of input costs have been eaten by manufacturers and shoppers can still dance between inflationary raindrops on each grocery aisle if they really want to. But I don't see any place to hide costs between beef and the butcher paper. Nor do I see any compromise between too many bellies and those display glasses. So, I'll predict that when it finally hits the grill it finally hurts. Politicians finally get barbecued and changes finally get chewed on.

But by then, that one last food group in the CPI won't be down nine times. It might just be a sweep in the other direction. And inflation might finally start to feed the one other commodity that has so far avoided its pressure: Bonds.



K&C Trading Rule #39: The trend is your friend, until it's about to end.

You won't often read about a bubble in the bond market and yet you've quietly witnessed an almost unblemished trend of rising bond prices for three decades. The 30-year Treasury yielded 15% in 1981 when Larry Bird was wielding turn-arounds all over my Rockets to win his first championship.


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Ever since, you had one of the best trend-following trades for macro funds on their books, anywhere, over any time. You also have a dirty little secret on Wall Street that not as many clients heard about simply owning their own bonds, as they perhaps should have. Realizing that rolling a zero-coupon Treasury every year during that time outperformed the same period for stocks, including its greatest bull market, would have been a surprise to most investors. I'll never forget being laughed at routinely while on Wall Street and buying zeroes every single year when rates couldn't possible go any lower and then did, again and again.

Rising prices were born from relentlessly falling yields over that time, pictured below.


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But, then notice the one-year chart below of the price of a Long Bond Futures contract. I shared this on Minyanville earlier this month, believing this trend line was in serious jeopardy.


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Here is the update, as of today. Look out below.


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From my perch, the writing has been on the wall for some time. I'd also shared this picture earlier this year after the unprecedented Fed rate cuts of 125 points in nine days and just what the Long Bond thought about them. In the chart below I put circles around the dates of the two cuts in January 2008. The price chart underneath, however, was the price of the 30-year Treasury Bond June08 Futures contract. The world was screaming for lower rates yet this chart quietly predicted the exact opposite for long rates, right into the teeth of those concerns. The only committee I care about meets every day and gives clearer answers and the bond pits told you that rates (the inverse of this price chart) just might be done going down.


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We can manipulate short rates for good or bad reasons and debate them endlessly, but longer term bond rates are driven by demand. I believe it will slow, not grow. With a longer time frame, but with tight stops, one of my favorite of many commodity trades as I shared was a short on these IOU's that won't like the smell of inflation from the grill.

If the technicals are wrong, then I came across this other fundamental short of a corporation as a backup plan. They haven't earned a profit in a few years. They are begging their biggest customers to stay and even handing out kickbacks to the smallest in hopes they keep spending. The top line revenue is slowing while the cost of goods sold is soaring. Some high ranking officials have pointed to questionable accounting tricks to conceal liabilities. The CEO is stepping down later this year amid intense backlash and a succession plan is not yet in place for this operation, also known as the parent company of that Treasury issuer.

I guess if I put this pair to music it might sound a 'lil something like this…

Cheeseburgers When Subsidized

Tried to amend capitalism's habits
Changing rules in so many ways
Makin votes they need, wasting corn seeds
Takin' lotsa water we'll run out of some day

But at night I'd have these terrible dreams
About the future price of beef
A Big Mac is 52% corn don't they see?
This ethanol is dripping on my dinner, good grief!

Cheeseburgers when subsidized
Messin 'round with the way they are priced
Treating some millionaire farmers too nice
Can't afford my cheeseburgers when subsidized

I like mine with Brazil's sugar instead
No changing crops so I can still buy bread
Drop those tariffs and watch the riots stop
Good God Almighty just pay 'em for their crop
So my cheeseburger ain't subsidized

Heard about the old time Congressmen
They vote the same way again and again
Experts on pork but not the grains those pigs eat
Cook the taxes and duties just let farmers compete

Cheeseburgers when subsidized, medium rare over gas'd be nice
But we're wasting that too, you surprised?
That's why I'm buyin' natty, and stocks that fertilize
Just to afford my cheeseburgers when subsidized.

Position in Treasury Futures, Cattle Futures.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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