NY cotton market continues their remarkable ascent
18 Dec '10
5 min read
A true bull market is always demand-driven and that certainly seems to be the case here! Despite a doubling of prices we have yet to see evidence of any significant demand destruction, especially in fast growing markets like China and India. China reported the second-highest yarn output number ever for November, a sign that these higher prices have yet to curb demand.
This week PricewaterhouseCoopers in Hong Kong released a report according to which retail sales in China are expected to double to 4.6 trillion dollars by 2014. For the next four years, average growth of China's retail sales will be around 13%-14% annually, which compares to an overall 6% increase for the entire Asia-Pacific region.
In the first eleven months of this year retail sales in China grew by 18.4% compared to the corresponding period last year, according to the National Bureau of Statistics. The main drivers behind this strong domestic growth are increased worker incomes and government measures that stimulate domestic consumption.
Car sales are another gauge for China's phenomenal growth. Between January and November of this year China sold more than 16 million vehicles, which represents a 34% increase over the same period last year. This marks the second year in which Chinese consumers have bought more cars than their US counterparts. US sales totaled 'just' 10.4 million units for the first eleven months of this year. Vehicle sales in China are expected to grow to 20 million units in 2011 and one has to assume that if Chinese consumers can afford that many new cars, they will also be able to buy clothes and home textiles in increasing numbers.
So where do we go from here? The market has now moved within striking distance of its record high, which for March is at 151.23 cents on a closing basis and 151.95 cents intra-day. If these highs are taken out, we will likely see additional momentum players come in on the long side, which has the potential to trigger a short-covering rally similar to the one we experienced in early 2008.
The bears are of course hoping for the market to stall out at around 150 cents, which could form a double top on the chart and set a sharp correction in motion. Needless to say the market is approaching a critical juncture, but given the circumstances we would feel more nervous being short than long. We still believe that unless a trader has a convincing reason to be in the market - and the necessary money to back up his bet - it would be best to get out of it altogether since it will only get thinner and more volatile as we move through the season.
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