The Market's Fine Print

Cattlegate

John Harrington
By  John Harrington , DTN Livestock Analyst
President Gerald Ford appearing at a House Judiciary Subcommittee hearing regarding his pardon of former President Richard Nixon. (Public domain photo courtesy of Wikipedia)

Forty-one years ago this summer, Gerald Ford stared into the barrel of constitutional chaos and recited the shredded remains of the presidential oath. With pardon in pocket, Tricky Dick tearfully waved from his helicopter and the threatening sluices of Watergate began shutting down.

"Our long national nightmare is over," the accidental commander-in-chief famously assured.

It was music to a troubled nation's ears, exactly the kind of comforting voice cattlemen currently crave as they struggle through the most devastating market scandal experienced in decades. "Scandal" may strike some as an inappropriate way of describing the ongoing price crash. Yet I remain at a loss for a better way to characterize the mysteriously negative action of the last 60 days.

Shouldn't a "respectable" bear market be able to claim some proportionality between lower prices and adverse fundamentals? One would think so.

Yet where's the prim-and-proper explanation for the $33 drop in fed prices since mid-August? Where is the surge in either beef production or competitive meat tonnage? Where is any demand-crippling event like a new case of BSE in the Heartland of America, a coast-to-coast recall of ground beef tainted with E.coli, or a ruinous-to-exports hike in the U.S. dollar (i.e., significantly stronger than what we lived with through the second quarter)?

Watergate investigators finally found a "smoking gun" in the White House taping system. But the best evidence surrounding the cattle market doesn't even point to a broken slingshot. No, until the facts add up more politely, I think I'll stick with calling it a scandal, just as oddly sinister as G. Gordon Liddy's hit list and bag of dirty tricks.

So where are the likes of Gerald Ford when you need them? Whence comes the leadership necessary to free commercials and specs from this bearishly spiraling maze? I actually have a few suggestions as to which way to turn toward blue sky. Yet be forewarned: Some may sound no more scientific than theories on how we got lost to begin with.

First of all, extreme markets inevitably die of exhaustion. Even the wildest of Roman orgies eventually runs out of wine and Viagra. Similarly, when the last sailor on board pukes his guts out with seasickness, the ship's infirmary should soon start to clear.

If you think that lacks analytical detachment and clarity, let me put it a different way: All trading positions move toward increasingly unattractive risk/reward ratios. When price reaches its bang-for-your-buck nadir, the market starts to swing in reverse.

To be sure, it's tough to hammer such truth into specific market orders for your broker. Nevertheless, I think it's helpful in setting your general radar. While it may not seem like a stroke of genius, the ability to sense that a market is closer to a bottom than a top (or vice versa) constitutes a game-winning strategy over the long-pull.

Second, aggressively trending markets typically sow the seeds for their own reversals. Over the last two months, buyers of cattle and beef have learned a very profitable lesson: Don't own a single extra hoof, box, steak, or burger than is absolutely necessary. Given the fact that your cost of goods sold is lower each time you pick up the phone, minimum inventory management simply represents money in the bank.

Yet once prices turn higher and bullish psychology begins to feed on itself, all these short-bought positions will be the driest of kindling for a sustained fire to the upside. It doesn't take much to see that the longer short-bought strategies prove profitable, the greater the reversal potential becomes when pipelines need to be re-primed.

Finally, extreme markets reverse when the previous two factors cause commodity charts to score large "V" bottoms (AKA "spike bottoms"). As a matter of fact, cattle futures have a long tradition of turning on a dime, exactly the kind of abrupt pivot known to create "V" bottoms. October and December live cattle have the makings of a promising "V" as we speak.

So, is the long nightmare of cattle nation finally over? For what it's worth, I think daybreak is close at hand. Just keep in mind that President Ford was also known for erroneously liberating countries from Soviet domination and falling down the occasional flight of stairs.

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(AG)

John Harrington