Friday, March 4, 2011

Huge bubble in the making

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

A few weeks ago, I went into detail on how depressed the Treasury bond market was and how it was almost impossible to find any bulls in So Bad They Are Actually Good . That led me to the contrarian conclusion that treasuries were likely close to at least a short-term, if not longer-term, bottom.

This week, I am going to go to the opposite end of the spectrum and talk about bubbles. In my Shockers 2011 issue, I spoke about cotton, sugar and coffee being in speculative bubbles that would end very poorly. Let's go into the charts for a peak in cotton. I'll come back to sugar and coffee next week.

The key thing to remember about bubbles is that they always last longer than anyone believes. Declines that appear to be the bubble bursting tend to end and another, even more parabolic, move begins until finally the whole thing comes crashing down. Positioning to profit on the collapse is very difficult since, as we've all learned and heard from John Maynard Keynes, "the market can stay irrational longer than you can stay solvent".

Cotton is a VERY volatile commodity that's known for dramatic, often straight up rises and gravity defying declines. The chart below doesn't even begin to describe the craziness until you pay close attention to the scaling on the right. 30 to 90 and back and back. Try living through that!

Now, multiple moves from 30 to 90 can certainly be classified as bubblesque.  But what happened next is unbelievable! From the crash low in 2008 at the far left of the weekly chart, check out where cotton is today.  200!!!

Zeroing in a little more, you can see a daily chart below.

I vividly recall thinking that cotton was heading for a grand collapse from the 150 level in November. All the signs were there!

But someone forgot to tell the commodity!

So once again, cotton has all the signs of a bubble bursting. And in hindsight, it will be clear as day. But how many times can the bears afford to be wrong and totally blown out of the water? That's exactly why bubbles are so easy to spot but so hard to profit from on the way down. They never make it easy!

I stand by my shocker that the bull market in cotton will end very poorly this year, whether the collapse is starting right here and now or later during the first half of 2011.

FYI, I will be on CNBC’s The Call on March 9 at 11:05am

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

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