"Now, where was I?"

Apologies to the two people who read this newsletter. Since the last newsletter in November 2023 I have been involved in a restructure of a large soft commodities trading operation. This has taken up the bulk of the past nine months and has not left much time for pondering the markets and the opportunities out there. Until very recently, there has not been much excitement or volatiltiy in equity markets, but I am sure there are some scars on a few after the wild swings across asset classes in the last few weeks.

Before moving onto the markets. The company I have been working alongside to help restructure is Mercon Coffee. Unfortunately, for the many employees the company is no longer a going concern with a plan of liquidation approved at the end of July. I want to thank all of the employees during this uncertain and difficult period. There were a number of standout staff that did their best under a very stressful situation and I appreciate their patience with me in getting my head around a complex business. Many have already found new roles in the coffee industry or elsewhere and I wish them all the best.

On a weekly basis, the past few weeks just looks like a blip…

The dip was initially well bought, especially after the unwind in Japanese markets which started the mayhem. Since then, the market roared back to close in ATH before rolling over again. Putting fundamentals aside, the chart, for the first time since late 2021 into 2022, looks vulnerable. A move through the 2-year moving average around 5375 would like trigger more stops from trend followers. But even so, if the market retraced back to the longer term trend line (red line) that would be a 20% retracement. This is pretty standard, if we do indeed enter a recession. The jury is still out on that one in America.

Recent earnings reports from Home Depot, Walmart and Amazon were generally cautious on the outlook but certainly not pessimistic. Amazon commented that shoppers are continuing to trade down to lower priced items. If anything these reports indicate that interest rates are finally having an impact but nothing calamitous. As I said over a year ago, with the fiscal still relatively strong (and unlikely to change at the next election) US markets should generally remain supported. But momentum is definitely weaker both in the charts and in the real economy.

Before the Japan “incident” there had been some profit taking in the AI winners, in particular NVDA, MSFT and GOOG. I am no expert at all, but I would encourage all the listen to this podcast on Invest Like the Best, hosted by Patrick O’Shaunessy with Martin Casado. He argues, that the marginal cost of AI approacjhes 0, the “Limits and Margin Returns of Bigger Data sets” and the defensibility of the business models. In particular:

I think this sums up the potential upside for sector and trying to pick the winners. So given valuations in the sector and we have now had a decent pull back in sentiment, perhaps the market in general goes higher, but we see some sector rotation.

Given the recent CPI and PPI prints globally seem to be fading, the inflation genie in the short term, seems to be under control. At this point there has been cuts in few locations, and expectations are for cuts globally in the developed markets.

TLT (long bond ETF) - on the verge of a breakout if it can close above 100 pts.

I personally think, that without a recession, inflation will come back if central banks do cut too early. At this stage the RBA, is talking tough whilst the Fed has conceded a cut is coming in September. Looks like cuts are coming.. but for how long?

Grains continue to do their thing… Prices rise, supply responds, prices tank… maybe supply slows down.. maybe.. Anyway, the specs have ridden this move well with the flat price steadily going lower and spreads in carry..

Hard to see what the bullish catalyst is other than positioning across the complex is short. But that more seems like an opportunity to wait for a clean out in positioning and sell it again. Geopolitics in Europe remain the fundamental risk.. otherwise weather is benign for the time being. Nothing to see here.. yet.

Coffee and cocoa have been the stand out commodity markets for the year in terms of price and volatility.

Not a lot to say, other than what a move. The industry must be in all sorts of problems given the price appreciation in cocoa and cocoa butter. My assumption is prices continue to go lower. Even at todays price of ~$7500/MT is DOUBLE the previous highest price for Cocoa this century, set in 2011. So we could halve, from here and still be a historically high price..

Weather remains an issue across the coffee complex. Now in the 2nd half of the year, the flow of arabica from Brazil’s recent crop should start to increase. Meanwhile the Robusta situation remains an issue until we get through the next Vietnamese crop.

This has led to the spread (or “the arb” as its referred to) being extremely low..

If you believe inmean reversion, sell Robusta and Buy Arabica..

These markets are telling you something about the global economy. Iron ore and crude oil are very weak and could fall further. TLDR China’s weakness is starting to pull down prices in the region and globally as demand falters. There is no replacement for China in the short term, no matter how strong the Indian stock market may be.

For Crude oil, which had been trading in an ever tighter range, the price is telling you it wants to go a lot lower. Perhaps $60 is the next level of support.. but I don’t really have a strong view on where support is.. without a new geopolitical / supply shock, the fact there is so much spare capacity is not bullish for the balance of 2024.

Copper looks less worrisome. Perhaps it can find support at 8700 but without a new supply shock or perhaps an aggressively rate cut cycle, copper looks in trouble as well.

The market that never goes down is, well, going down. Having survived global COVID, China Shutdowns and an anemic housing sector, the wheels are finally coming off..

Over the long term you can see what I mean about a general trend upwards. What is really positive is that in a little over 10 years Iron Ore Futures are one of the most active futures markets in the world (between DCE and SGX). The lower panel in this chart has the aggregate open interest (in red)>

Well Gold has really come into its own the past 12 months. Whilst the narrative for why are many - I think it can be succintly summed up that governments outside of the US want to increase their holdings of non-USD reserve assets.

Given every country (including the US) is debasing their fiat currencies through the combination of monetary policy (already been going for 15 years) and fiscal (since COVD) it is any wonder that gold is holding up well. Add to that the propensity for tariffs and/or confiscation of other country’s assets, the need for an alternative is clear. At some point if the manure does hit the propellor it will sell off from a liquidity perspective (you sell what you can, not what you want to) that would be a great entry point.

To be clear, the USD is not going anywhere and will remain king of fiat currencies for the foreseeable future and commodities will continue to be priced in $ if not invoiced in something else.