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The Ag-Trade: A Bad Date or Relationship Killer?


Many grains have hardly flinched while related stocks have caused many to fold their hands entirely.

They say a picture is worth 12.5 mln words. Well, they should anyhow. That's how many Yen are in one futures contract on the currency. As I have written about a lot recently, this has been the cheaper-than-cheap source of funding for many of the capital risks taken around the world. I will let others far smarter than I debate the endgame. I like playing the pre-doom middle innings too much.

I don't view any of those risks taken as right or wrong, I just like to try and connect the dots. If some of them get unwound it's "payback" time, and I can imagine the world's biggest bookie saying, "Konnichi wa," with a grin several billion times yesterday. That's
"hello" in Japanese. Thanks for the assist to my college roommate, the Japanese major, for the spelling which he's almost sure of and for his pause reminding me how unhelpful textbooks are when put on the spot (might some traders be similarly unclear right here?).

We closed on 2-year highs yesterday on the Yen, pictured below. Are the endless racks of chips from this cashier now returning to the window, thanks to more than a few markers being called in?

Click here to enlarge.

Here is a comparison of one of the many "risk" trades – the Emerging Market equities as measured by the EEM compared to the Yen. Is this an important inflection point?

Click here to enlarge.

Below is a side by side comparison of two of the biggest beneficiaries of cheap funding to speculate in the "stuff" trade. Natural resources coming from Canada and Australia, in part, explain the tremendous surge in their currencies. A trend that didn't change direction carefully and slowly, but rather sharply and violently as you can see below.

Click here to enlarge.

A Minyan Mailbag:

Prof. Krueger,

I am curious if you have an updated view on the dry bulk sector, especially given their recent correction. I appreciate that markets tend to swing to extremes, but, with the exception of Quintana Maritime Limited (QMAR) (congrats on the pick) the drops we've seen in the past month, particularly for sector plays with a large spot exposure seem hardly justified relative to the mild correction in fixtures as reflected in the Baltic Dry Index…with the continued supply/demand imbalance for vessels. Would seem that the stocks are cheap, but cheap can always get cheaper. Views? Appreciated.

Kind regards,

In the article referred to which I wrote last month, "For an update on this industry, I'm not sure you could do much better than listening to the guys who own the ships," in describing QMAR's decision to explore a sale, sending shares higher. Briefly. In the next few weeks, sure enough, the shippers sold-off hard.

I explained in that article that in my case, I raised and tweaked my stop-win orders and have openly shared my liberal use of those on extended moves which are not as often considered as stop-loss orders on entering a position. I use both versions.

QMAR is a position I have not been stopped out on, and still like very much, to answer part of TK's question directly. Stops answered much of the rest, however, for now for me. Longer term, I am still very long of the "food that food needs to eat" as I like to say, and many of those businesses needed to get it to the table.

What a Bean Can Mean

I'd point to interesting action yesterday in the grains markets. It was a liquidation day almost across the board in futures (think crude and gold and non-dollar currencies), along with much of the "stuff" in the equities markets trading around the "risky" commodities that were unloaded. It was a purging that told us more about the hands that were long than the secular move being right or wrong, in my view. As I wrote recently, we saw new bulls in agricultural names that were not long-term holders, which are a clue to the hunch here that they would likely not be long-term holders. Brilliant, eh?

It would be like if my daughter were to ever grow up and start dating (only the first part am I even open to considering, but stick with me for analogy's sake). Let's assume when that happens she didn't change and represented more than a decade of overwhelmingly good fundamentals setting up (think agricultural commodities). I wouldn't start worrying about her overnight, I'd worry about who she was with any night.

In the Ag-trade the guys showing up at our door with tattoos and baggy jeans are running quant funds and the closest they have come to a crop is their 140-count wool pinstripe suit that feels as soft as cotton. The big difference is that I can use stop orders to stand down during the dating period with my positions, but with my daughter I'll simply consider not saying "stop" if my Rhodesian Ridgebacks want to establish a full tooth position with this other kind of suitor.

Click here to enlarge.

The beans were speaking to me last night when I drew up this comparison above between soybeans and Dryships (DRYS). Many grains have hardly flinched while related stocks have caused many to fold their hands entirely. The Food Fight trade I have opined on for years was set up by even more years of dwindling supply now faced with soaring demand. Greeting speculators with extreme prejudice has been the stuff of every long-term secular move I've ever been a part of. The Market Gods like to handle first dates on their doorstep in their own special way too.
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Positions in soybeans, yen, AUD, CAD and QMAR.
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