How to leverage the lag time between commodity demand and supply into 183% gains.

The quote is commonly attributed to architect Ludwig Mies van der Rohe, who certainly adopted the motto wholeheartedly. He and his fellow Minimalists, Walter Gropius and Le Corbusier, invented an entirely new style in which the most perfect home was an empty box, entirely devoid of furniture, or even occupants.

It seems that people – with their casually tossed clothes, un-shelved books, old newspapers, and (horror of horrors!) half-empty coffee cups and saucers – only screwed up the sight lines within buildings that could only vaguely be called “dwellings.”

People are so… messy, illogical and organic. They are the fly in the ointment for so many pristine systems and ideas. That is why I use both value analyses and technical analyses when I attempt to figure out where a company’s share price – or even a whole economy – is headed.

Thank God for Flawed People

Value analysis uses all sorts of facts and figures to tell me what a company ought to be worth, if anyone in the world had an ounce of common sense. Fortunately for us, value analysis is deeply flawed in that specific area. After all, if everything were “perfectly priced,” it would take a lifetime to make any real money.

As my wife likes to say when her gumption is up: “Common sense is the least common thing about. Greed, fear, avarice, self-deception and self-destruction? Now those are pretty darn common.” And so we have Technical Analysis, which depends utterly on those common repetitive behaviors peculiar to large groups of investors.

That said, let’s come back to that whole “less is more” idea for a moment, as it fits better in capitalism than in art and architecture.

Demand Down…

For example, the U.S. Department of Agriculture has forecast that cotton demand will drop by 10.5% by the end of 2009. This is the largest annual percentage decline since Washington began totting up such stuff back in 1920.

Unlike so much of the verbiage that pours forth from Washington, this report is quite specific: “Cotton consumption shows no sign of recovering, given the weak global economic outlook and the resulting low demand for textiles.”

So the price of cotton ought to be headed down, right?

… Price Up!

Wrong! As I sit to write, cotton futures are up to around 53 cents per pound, making for a an 8.5% rise so far this year. Cross-eyed yet?

This is where one of the more perverse folds of the “Less is More” principle comes into play. Less cotton demand means that U.S. farmers (still the number-one global producers of same) are planting less acreage this spring, the least in fact, since 1983.

And any production drop that large gets the speculators drooling – and bidding. Their trading theorem notes that at the same time American farmers are locking in record-low acreage, the Chinese Purchasing Managers Index is coming above 50 for the second month in a row.

As with so many of these indexes, any CPMI reading above 50 indicates growth, leading many to the suspicion that China – the primary manufacturing consumer of our cotton – is going to want more than we have. Thus “Less” is once again leading to “More.”

The “Worst of Times” Leads To…

We are seeing the same thing crop up in the oil biz. Supertanker operators are mired in the worst market since the 1973 oil embargo. Last July, they could command $177,036 a day to sail about the world’s oceans delivering crude from well to refinery. As of this April, they were barely pulling down $7,173, an amazing falloff of some 96%.

Needless to say, owners are scrapping most every older ship in their fleets, as the steel they are made of is worth more than the poor vessels can garner via operations. What’s more, ship builders have almost no book looking forward. As Overseas Shipholding Group’s Morten Arntzen put it in a recent interview with Bloomberg: “The amount of money needed to complete the order book does not exist in the world today. We see a net reduction in the shipping fleet next year.”

Ah, but then there is that pesky CPMI report again, wherein the Chinese are thinking that this whole recession is over for them, and will be over sooner rather than later for the rest of us as well. Combine an increase in Chinese production with a decrease in the oil shipping fleet, and you get a projected doubling of the cost of shipping oil about the world in the very near future.

… The Best of Times

Once again, falling demand leads not to falling prices but rising ones. “Less becomes more.”

It may seem counterintuitive at first blush, but it’s really all about varying response times. The farmers and shippers are out of cash and cannot borrow more during these tight banking times. They must act now on past information regardless of any inkling that said information may be wrong in the near future.

But demand is far more fluid than that. Already we are seeing signs of a global turnaround in the offing. It may be months, maybe even a year or more, before we see genuine fruits from these wee little “green sprouts.” There’s a phrase we use here at Taipan Publishing Group for that moment when the trees are heavy with financial fruit: “Time to sell.”

Now Is the Time to Buy

It’s now, when things look like crap, that you have the chance to buy stuff on the cheap. For example, Chevron (CVX:NYSE) just announced that low oil prices drove its Q1 profit down 64%. As I write, CVX shares are available for $66 and small change. When I look to their chart, I see a solid double bottom downside limit at $55.

Add that rise in Chinese demand to that bottleneck in shipping capacity, and it’s a good bet that six months from now, oil prices, CVX’s quarterly report and CVX shares will all look very, very different.

You could play shares to the upside looking for a 30% gain over six months. Or you could buy long-dated CVX calls and leverage that rise into 188% gains.

Now that’s turning “less” into “more” with a vengeance.

Other Related Topics: Commodities Investment , Crude Oil , Editor Adam Lass , WaveStrength Options Weekly

Article brought to you by Taipan Publishing Group. Additional valuable content can be found at www.taipanpublishinggroup.com. Republish without charge. Required: Author attribution and links back to original content.

Comments (1)