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NY futures collapse this week
19
Sep '08
NY futures continued their collapse this week, with December falling another 310 points to close at 60.76 cents, while March dropped 348 points to close at 65.34 cents.

Fear and panic ruled in the financial world this week in what has quickly become one of the most unsettling periods in Wall Street's history. Due to a credit crunch of epic proportions, the Federal Reserve and the Treasury have been busy bailing out companies deemed 'too big to fail' and in a concerted effort with other Central Banks they have further injected record amounts of liquidity aimed at averting a systemic collapse.

The takeover of AIG was particularly disconcerting, because it signaled that the Federal Reserve is not longer just a lender of last resort to the banking system, but it has now assumed the role of 'buyer of last resort', which presents a huge moral hazard as we head into an uncertain future.

This debt implosion has caused a mass exodus out of all sorts of investments, including emerging market shares - leading to a temporary rally in the US dollar - and commodities. While some of this selling was done in an effort to de-leverage and re-liquefy balance sheets, a lot of it has been attributed to sheer panic and a flight to safety.

For several days now many markets have seen an overwhelming amount of selling while buyers were few and far between, which has allowed this massive collapse in prices to take place. Nobody knows for sure when this downward spiral will finally run its course, but when it does and the crowd comes back to its senses, it may realize that in many instances the baby was thrown out with the bathwater.

While many commodities witnessed substantial liquidation of positions, we have seen relatively little long liquidation in cotton, simply because there weren't too many spec longs there to begin with. The latest CFTC spec/hedge report as of September 9, which is already a bit dated in this fast paced world, showed large speculators just 26'000 contracts outright long and 39'000 contracts outright short for futures and options combined.

Since this rout began on June 30, spec longs have liquidated some 20'000 contracts, while short specs have added around 23'000 contracts. In other words, we had more or less an even contribution from spec long liquidation and new spec selling. But as you can see, before this latest round of selling, spec longs had only about 26'000 contracts more to liquidate, meaning that once this position is gone any additional spec pressure will have to come from new shorts.

However, while the above pertains to regular spec and hedge funds, there is still the risk of index fund investors getting out of commodities and we may have seen some of that take place over the last few days. Index funds represent by far the largest block of longs in the cotton market, as they held some 95'000 contracts as of September 9, down about 10'000 contracts since June 30.

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