Market Plus: Darin Newsom

Nov 4, 2016  | 14 min  | Ep4211 | Podcast


Pearson: This is the Friday, November 4, 2016 version of the Market Plus segment. Joining us now is Darin Newsom. Darin, welcome back.

Newsom: Thank you, Mike.

Pearson: Cotton market, we did not discuss it. Down $2.29 on the week. Downward move suggestive of future moves?

Newsom: Cotton, it could be. We've had a lot of selling coming from both sides of the market. We've had investor selling and we've even had some commercial selling going on, which seems odd given all of the weather problems, floods, hurricanes and everything else that has moved through parts of the southeast. You would think that okay, there's some sort of fundamental problem in the cotton market, and there still could be. Next week when we get our next round of supply and demand numbers that could lower cotton production and ending stocks and so on, so that might bring some of the buyers back. But it just seems like we ran out of interest, we ran out of new news items here over the last couple of weeks and that has really put a great deal of pressure on the cotton market.

Pearson: Just the exuberance that fueled that big jump two months ago is gone.

Newsom: I think so. It has just been sucked back out of the market and now it needs that next something to start getting excited about going up again.

Pearson: Okay. If it would, or rather if it doesn't start to go back up, from a technical perspective are we watching a drop all the way back down into the low 60s?

Newsom: I don't think so. I think we broke out on the long-term charts. So it's just pulling back, if nothing else we're seeing a healthy retracement here. So it would not surprise me over the next four to six weeks that we really start to stabilize this market.

Pearson: Okay, now next I want to jump to a bunch of our questions from our followers on Facebook and Twitter. We've got a question here from a man who is a very dear friend of yours, was featured in your column this week. Phillip Shaw in Ontario, Canada notes that the Cubs are the story of the year. So now as we look long into 2017, what is the story in the grain markets?

Newsom: Well, I think the story of '17 and maybe this means the Cubs are going to repeat as champions next year, I think the story in '17 is going to be similar to what it was in '16, over supply. I think that is the story. Now, I say that, a sidebar to all that is going to be is demand going to continue to get stronger? And that brings in a whole bunch of other things. That brings in the election, that brings in the dollar, that brings in the Fed, it brings in all of these things that play a part in overall demand. So I think supply, how much are we going to produce again in 2017? If we have our fifth record year in corn and soybean production consecutively that's going to be a problem, it's going to make it a very similar problem to what we saw here in 2016. We are going to have to keep a very close eye on all these different aspects of what makes up demand.

Pearson: These other factors that are swirling around us right now.

Newsom: Absolutely.

Pearson: Now, I know you're not a headline guy. But, there has been talk of four to five million more bean acres going into the ground this next year. Oof. Actually, let's just roll down this, we’ll get to that question.

Newsom: Well, that's on top of 101 to 102 million metric ton crop out of Brazil.

Pearson: Right. We'll get to -- we've got a good question about that actually. I didn't mean to jump over it. Carl in Renner, South Dakota is asking, should I roll December basis contracts if the corn market trends down to the end of the month?

Newsom: Rolling Dec to March in a little bit of a downtrend here, it's going to depend on what the Dec-March spread does. It's sitting at pretty neutral levels right now. If you have it hedged overall at a good level, yeah, I would say go ahead and roll it out, particularly if you can get some appreciation in the Dec-March spread because as we mentioned in the show basis should strengthen from here. Even if the futures market stabilizes and starts to go back up what we normally see is basis appreciation and that would play into a rolling of the hedge and hoping for better things again down the road.

Pearson: Okay, here's the question that I was jumping over. I was jumping the gun. This is from Ben in Jesup, Iowa @BEnRiensche there on Twitter. He says, Darin, you're not a fundamental guy, but if South America raises a normal or better bean crop, and let's assume that we predict 89 million acres of beans going in the ground, where is the technical bottom for Nov '17 beans?

Newsom: I haven't actually looked at the Nov '17 contract and that's my fault, Ben, I apologize for that. I should have looked at it. From a long-term perspective in the soybean market the low is in. I'm not overly concerned if Brazil raises 101 million metric tons, if we increase three to four million acres, because the beans continue to get used, they continue to disappear. China's demand was supposed to go away. It didn't. Their economy is doing just fine. If the dollar collapses following the election, if it follows its long-term patterns and goes down over the next year, more demand is going to be coming to the United States, we're going to be very competitive. Could it wreck the market? Yeah, I'm going to play along and say yes. Do I see us going to a new low? No I don't.

Pearson: So lows in 8.50s.

Newsom: Yeah.

Pearson: Okay. Well that's got to be reassuring and that's probably going to help push some more acres into beans.

Newsom: Well, and that's a problem. If we plant three, four, five, six million more acres it's going to be a problem. It could certainly open the door and make it easier to go to new lows. I'm saying, as Ben pointed out, looking at my long-term charts the soybean lows should be in.

Pearson: Now, let's just put on our, gaze into our crystal balls here, if we grow let's call it six million, 90 million acres of soybeans this next year, what would the basis situation look like come harvest?

Newsom: It's going to get crushed.

Pearson: It would be terrible.

Newsom: Yeah, it's terrible this year. We're national average basis 80 to 85 under right now. We could be looking $1 plus under. So the argument automatically turns to how can you be an analyst that says we're looking at $1 under basis yet the lows are in the futures market? It's a tough argument to make. I've got to look at two different things here. One, basis yes would collapse. Long-term charts showing the lows are in, maybe they're lying to me this time.

Pearson: Now, another crystal ball question, you've mentioned the election. What if we elect a president who is not on friendly terms with China? Let's say we upset that apple cart, is demand strong enough there to overcome political headwinds? They need to feed their people --

Newsom: Not if we get into a trade war because, again, right now we're going to continue to move soybeans. But as soon as the South American harvest comes in, and if it is as big as what's being talked about and we have elected a government that, or however you want to phrase that, that all of a sudden finds trade with other countries difficult, we could be looking at having some problems because, again, over supply is the main issue. Demand is what has tempered it. If we erase that, then all we have is over supply, everywhere, in every commodity and that's not a good situation.

Pearson: No, demand is the solution to over supply every time.

Newsom: That's the only thing you've got.

Pearson: And actually this next question, Brock in Baxter, Iowa builds on that. With the carryover of '15 crop and abundant '16 crop, will this pollute the '17 markets? And he's asking, where is the demand? I want to ask you, how aggressive do I need to be making sales in here today?

Newsom: If we're looking at corn I wouldn't be too aggressive because if we're going to go five, six million more acres of soybeans it's going to come from somewhere, most likely it's going to come from corn and we've got good demand going on for corn right now. If we're talking about soybeans and we're saying how aggressive do we need to be out in 2017, I hate to do it after the fact, but Tuesday is going to tell a big part of the story. We either should have been 100% sold on '17 or not much, very small percentage.

Pearson: Okay. Tuesday's coming up. It's a day, Tuesday and Wednesday we're going to have election reports rolling in all day and into the middle of the night, there's going to be lots of uncertainty, there's lots of strong emotions rampant in this election. How can a trader profit from this uncertainty? Is there a way?

Newsom: Volatility is going to go up. Volatility is going to explode higher. At least that's what it looks like right now and again going back to last Friday certainly an indication that that should be the case. So what I would look for if I'm just a speculator is some market, whatever market, where volatility is relatively low right now and then look at doing an option straddle on very short-term options. So let's just take soybeans. I'm not professing a trade here. I'm not recommending a trade.

Pearson: We're not advising anybody to do this.

Newsom: Absolutely. But what a straddle is, is where you go into a market with lower volatility and you buy both an at the money call and at the money put. So you've basically got a straddle, imagine straddling a fence at that point, if the market shoots up you just let the put expire and you sell the call for more than what you paid for it, if it goes down you do the opposite. Volatility is going to kick up and that's going to increase the premium, even if it is a short-term option, that immediate reaction is going to up the volatility and volatility is a key component of option premium.

Pearson: Is there a way to hedge any of my, it's not a hedge, but would this be a way to protect some of my pricing for '17s crop?

Newsom: Depending on how friendly you are with your accountant anything can be called a hedge. I used to have a gentleman who would hedge his soybeans with silver contracts, long and short. So anything is possible. This really, in a way you can always argue you're buying the put. So if the market goes down then that's risk management, price protection. If the market goes up you're still taking advantage, if you've already got --

Pearson: You're putting a couple pennies on.

Newsom: That's called price enhancement.

Pearson: Right, building a price.

Newsom: Building a price. It's not necessarily a hedge but that's open to discussion.

Pearson: Alright. And finally, two final questions before we go. Talk to us about the intersection between the U.S. dollar and the Federal Reserve interest rates. There's a lot of talk that we're going to see rates increase in December but we're also watching this dollar pull back. What are your thoughts?

Newsom: Again, I've been a dollar bear for quite some time. I even rode through last December when the rates were raised and the dollar went to a new high right over 100 points. And I still think it's going down. Charts still tell me, again, that it's going down. So what does this say? Okay. Number one, could be reaction to the election. So if that happens in November and it drives us down then we get a rate increase in December that has been factored in for three or four years we'll get a bounce in the dollar off the headline but it may not take us to a new high and so it might just be a pause in the longer term downtrend, then we go into 2017 again where Federal Reserve sits back and we wait to see what kind of economic situation plays out not only here but abroad as well. So yeah. I think the dollar should continue to come down. And that should help our export situation.

Pearson: Okay. Final question, Darin Newsom. We use this phrase on the show, it's a phrase that gets used quite a bit in the commodity and financial markets. What is a dead cat bounce?

Newsom: This goes back a long ways in the financial markets. The idea, and it's graphic, is you can drop a dead cat from any height and it's going to bounce, but it's still dead. So it usually applies to a market that has bearish fundamentals, it has been falling, falling and falling, it hits a point and immediately bounces back up, but just as with the dead cat that bounces, it comes back down.

Pearson: It's not landing on its feet this time.

Newsom: It's not landing on its feet. Again, it gets applied to a number of different market situations.

Pearson: Live cattle for the past 18 months we've seen a number of dead cat bounces.

Newsom: The problem is, that's more of a bounce, more of a drilling situation because it drills down to new lows, so I don't know if you'd be a cat or what.

Pearson: It's a cat that falls off a skyscraper, bounces into a canyon.

Newsom: Yeah, that's exactly what happens.

Pearson: Alright. Well, Darin Newsom, thank you so much for taking the time to join us.

Newsom: Thank you, Mike.

Pearson: Thanks to all of you for sending in questions via Facebook and Twitter. Please continue to do so and we will get expert analysis right to you. Thanks for watching and a have a great week. 

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