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Market looks extremely strong
26
Feb '08
NY futures rallied this week, with March gaining 150 points to close at 69.91 cents, while December added just 33 points to close at 77.03 cents.

The commodity juggernaut continued, with the CRB index racing to a new all-time high of 396.70 today, up 30% year-on-year, while corn and soybeans posted new contract highs of their own, with December corn finishing today at 5.53 dollars per bushel and November soybeans closing at 13.79 dollars per bushel.

Even though many in the cotton trade are befuddled by this renewed strength in the market, especially since it is happening during the usually weak spot month liquidation period, it seems that cotton is simply trying to keep pace with these roaring outside markets and in doing so it is inflicting some financial pain on hedgers.

As of February 12, the CFTC report showed commercials still at 18.7 mio bales futures and options short, which means that for every cent the market advances, these short hedgers will get a 93.5 million dollar margin call.

We don't know where exactly the threshold of pain is for these hedge shorts, but we know that they don't have unlimited funds to pay these kinds of margin calls. There are plenty of stories from the corn, wheat and soybeans markets in this regard, where commercial short hedgers were ultimately forced out because there was not enough free cash or credit left to meet margin calls.

Therefore, the next leg up may well be sponsored by trade short-covering and with speculators continuing to buy into this uptrend in commodities one has to wonder where the short sellers are going to come from.

The fact that overall open interest has held up so well lately is quite a departure from the usual routine we have grown so accustomed to during the spot month liquidation. Just three months ago, when December was liquidated, open interest had dropped to 210'000 contracts, which compares to today's open interest of over 264'000 contracts.

Open interest continues to grow rapidly, as investors and hedge funds are jumping with both feet into commodities, since they have been outperforming stocks and bonds by a wide margin recently.


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