NY futures continues to advance

17 Apr '09

6 min read

Fortunately there is still the delivery mechanism that can force the futures market to reflect reality from time to time, namely when the spot month enters the notice period. If the futures market gets too far ahead of the cash market at that time, then the trade can exploit the extra difference by throwing some of that unsold cotton on the certificated stock, which could temporarily derail an uptrend.

However, as we enter the May delivery period on April 24, we have yet to see any move in that direction, since the certificated stock is still at only 215'000 bales with just 3'000 more awaiting review. There is still time for this inventory to grow, but the window is rapidly closing. Once the May contract is gone there is another reality check in July, but after that the specs will have free reign until December.

Therefore, the stage seems to be set for the specs to take over the show until later this year. Whether they choose to show up in greater numbers remains to be seen and probably depends to a great deal on what happens with outside markets. We are primarily referring to competing crops, the stock market and the US dollar. The stock market too has rallied and is nearly 30 percent off its low, while the US dollar is trading sideways at the moment.

Even though some pundits feel that the economy is gaining traction, we believe that this recent 'strength' is merely an illusion created by the Fed's money printing efforts. Structurally nothing has changed in the economy; jobs are still disappearing and no new ones are being created outside the government; businesses are not investing and consumers are still up to their eyeballs in debt.

However, the flood of money the Fed is injecting has started to show results, mainly by stirring up inflation fears among investors, who are putting some of their sidelined money back into the markets. Commodities are an obvious choice when it comes to an inflation hedge, although an industrial commodity like cotton is certainly not at the top of the list. But since only about 0.8% of global investments are in commodities, it does not take much of a shift out of other assets to have a big impact.

So where do we go from here? With the trade on the sidelines, it is now up to the specs to decide the next move. So far we are missing the necessary momentum to fuel this rally further, but if the market manages to close above 50 cents it could spark another round of spec short-covering and new spec buying. With no serious sellers around, a rally could feed on itself with relative ease. However, if such a rally were to occur over the next few sessions, it would probably attract deliveries against the board as we head into the May notice period.

Cash prices have increased, but are still lagging the 8 cents advance of the futures market and any further gains would probably be an invitation to tender excess inventory. This would quickly cap any such breakout attempt. On the other hand, if the market can hold still for another two or three weeks, then the odds for a rally to get legs will be greatly improved. We still favor a sideways market at the moment, but are keenly aware of the upside potential should the specs decide to make their move.

Plexus Cotton Limited

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