Martin Kronicle

It’s not Billy Crystal’s coffee grinder that’s spooking the cattle.

CME Live Cattle

(click for larger image)

Barry Ritholtz had an interesting post on Cattle prices. Yes, beef is going to cost more, because protein is going to cost more. But not the protein you think, but yes, that protein will go up in price too. Get it? Read more…

Cattle need to be fed protein so they can be fattened up so they can, of course, be slaughtered. That protein comes from corn, wheat, or soybean meal for the most part. That’s the first “protein” above. All of these commodities trade at the CME and CBOT. You can follow the CME Group on Twitter with the @CMEGroup handle.

Each of these commodities has a percent protein by weight. The feedlotter needs to be aware of the costs of the cattle feed protein. If the grains and oilseeds have bearish supply numbers, then higher cattle prices are going to follow. That’s the case today.

If you look at prices for live cattle, soybean meal, corn, and wheat, you’ll see (in the charts below) that they’ve risen quite dramatically compared to cattle prices themselves. Since June 1, 2010 prices have risen accordingly:

Live Cattle – 15.36%
Soybean meal – 52.63%
Corn – 68.06%
Wheat – 52.11%

Corn looks to have appreciated the most, so entities that need protein will look to find a cheaper cost of protein by weight that what their afforded via corn. Remember corn and wheat trade in bushels, which is volume, not weight. Soybean meal trades in metric tons and cattle in pounds.

Some sharp pencil will figure out a model to take advantage of this, as well as how much the increase in protein from grains and oilseeds will result in an increase in live cattle or feeder cattle.

The second protein is from fish, chicken, or pork. If cattle prices rise, the substitutes might rise from all the new buying that otherwise would have purchased beef because the substitute is cheaper – pound for pound.

If feedlot protein costs rise, or are expected to rise, feedlotters can buy grains and oilseed futures to hedge their costs. If the price of their cattle rise, they may decide to hold off selling cattle futures today, in order to take advantage of higher prices in the deferred months. That can lead to a one-sided market if there are only long speculators and no commercial selling hedgers.

CBOT Soybean Meal

(click for larger image)

CBOT Wheat

(click for larger image)

CBOT Corn

(click for larger image)

I interviewed Andrew Warner of Mixergy.com for Huffington Post. He’s a very successful and intelligent guy, and he’s one of the most prolific interviewers out there.

With March Nasdaq futures down about 20 overnight, you can see that traders are figuring that the news of Steve Jobs medical leave will be adding significant downward pressure on AAPL and thus the index.

Jane Wells just sent a Tweet about analysts thinking. (She works on air at CNBC…it’s a cable tv info-tainment network.)

I’ve seen AAPL down more almost $30 intraday. If AAPL is down $20-$30 tomorrow, this poses a great opportunity to employ Victor Sperandeo’s 2B Reversal trade intraday if there is substantial weakness. If you’re not long, read the tape and wait for the intraday reversal, and then go long.

If you’re long, and you can’t take the uncertainty, you first loss is your best loss.

(click for larger image)

The long trend line runs through $330, about $18 below Friday’s close of $348. Support looks to be around $320 and then at $300. I’ll see about updating this post with an intraday chart.

Podcast: Play in new window | Download

Jeffrey Hirsch is the author of the 2011 editions of the Stock Trader’s Almanac and the Commodity Trader’s Almanac. I spoke with him last week. As a teacher, I find it hard to believe that more investors don’t learn to time the market when there is ample evidence that it is not only possible, but that the patterns have historical backing.

(click for larger image)

A reader of mine (Jaytrader) brought up some good points about the relationship between gold and silver, so thank him for this post. Not only can you trade gold and silver outright, but you can trade the relationship between the prices, in this case, the quotient of the prices.

Jaytrader noticed that the price of the spread had been as high as 71 and has since decreased (I was going to say plummeted*, but I didn’t) to the mid 40s. Clearly, the ratio has been in a 3-4 month down trend.

Let’s look at what the quotient is and then we’ll look at how to position yourself for such a move. This quotient (Q) is comprised of dividing silver into gold, that’s it. Gold is about 1385 and silver is around 29.50, so 1385/29.50 = 46.

Now you’re not trading gold or silver, but the relationship between them. So what makes the quotient go up or down, that’s the question you ask yourself. Let Q = N/D, where N is the numerator and D is the denominator, the following solutions will arrive at a lower Q:

1. N and D both increase, but D increases at a faster rate
2. N stays flat and D increases
3. N decreases and D stays flat
4. N and D both decrease, but N decreases at a faster rate

To explain this chart, I believe that #1 is the solution, although all could be profitable. I caution you to look at the % changes in the individual commodities. The notional values of the contracts are close, but not exact. If the rates of change vary too much, you’ll need to offset the risk by using a ratio of contracts that is NOT 1:1.

gold = $1385 x 100 oz
silver = $30 x 5,000 oz

Crude oil and natural gas

You can also look at crude oil as it relates to natural gas, as in the chart below.

(click for larger image)

The relationship between crude oil and natural gas can be expressed like that of gold and silver, so I’ll spare you the details. If you want to go through it and email me what you think of how it’s done, I’d be happy to go over it with you.

* A word like “plummeted” makes the reader feel like someone’s lost a lot of money or that the price of a trading instrument decreasing in value is something to avoid. That’s not the case here. When you read anything in MSM, look closely for these types of words. Even if they’re used inadvertently, they oftentimes leave the reader walking away with a bias. That is poor writing.