CROWN VALUE INVESTING LETTER
Prepared by Crown Futures Corporation
It's A Whole New Ballgame!
(May, 2000) I've said this many times over the last several months and it seems that the investing public is now catching on. Since last fall I've been declaring deflation dead and that we are now in a potentially golden era for scale trading. In case you have been hiding out in Mongolia for the last several years I'll briefly review the history. Remember, in 1995/96 commodities looked like they would go up forever. Then in November 1997 the Asian crisis hit and it looked like commodities would go down forever. The idea of some commodities going to zero started to look reasonable as cash hogs dropped to inflation adjusted prices that were lower than the great depression. At one point farmers were getting less than $20 a head for full grown hogs and many breeders were giving feeder pigs away for free!
Last fall I declared that deflation officially died in August of 1999. A glance at the accompanying chart of the CRB Index seems to bear that out. Since the lows of last summer the index has moved ever higher. For all of you technicians the index has now exceeded the minimum Fibonacci retracement of 31.8%.
The financial press has recently been actively discussing inflation. According to government statistics we are running in the neighborhood of 3% inflation. In the commodity sector I will be willing to get excited about inflation if the CRB goes above the 230 region. In the near term it looks to me as if the financial press will be late on the scene again. Having missed the end of deflation they may also be discussing inflation at the wrong moment.
A brief lesson on Fibonacci will help illuminate why I believe the commodity indexes are about to suffer a setback. Fibonacci was an Italian mathematician who lived in the 1400's. He is the person who introduced Arabic numerals to Europe. (As an aside, it is interesting to note that "Arabic" numerals are not Arabic at all but rather from India.) In his book on the subject he demonstrated the usefulness of the new numerals with a problem relating to the reproduction rate of rabbits. The ratios generated by this problem are what have become known as Fibonacci numbers. I do not know who introduced them to the trading world, it may have been Ralph Nelson Elliot of Elliot Wave fame, but they are widely used today. The most common use is for the purpose of measuring retracements. If a market has made a move in one direction, the theory is that it will correct back to one of several Fibonacci points. These are 31.8%, 50% and 62.8%.
These numbers are widely used for support and resistance. So the CRB Index is now at Fibonacci resistance. It has been my experience that if a market encounters a resistance area such as this, it has better chance of stopping there, if there is at least one other reason why it should. It turns out that there is at least one other reason here. The seasonal tendency of the CRB Index is to start a decline by the end of May that lasts into July/August. Take a look at the seasonal chart below.
Given the increase in production by OPEC leading to an easing of oil prices, the upcoming wheat harvest and the seasonal tendency for copper and grains to drop in the summer, I am anticipating the likelihood of a decline starting sometime soon in the CRB. Should the recent declines in tech stock values continue there could also be a slowing of the economy which would lead to a softening of commodity prices as well.
With these factors in mind I view the current landscape with eager anticipation. If I am right about a seasonal decline coming soon in commodity prices, I believe this would be one of the most ideal times in recent years to commence scales. By later this year we could see much higher prices in a number of commodities that have been depressed for the last few years.
Gold
Last month I published an August gold scale starting at $290, buying every $8 lower and taking $4 profit on each contract. Had you followed that scale you would have an inventory of 2 contracts right now which would be at a drawdown of $1720 but you would also have been able to get four oscillations off at $400 apiece for a gross total of $1,600 before commissions and fees.
Now, I am concerned about Swiss plans to sell 1,300 tonnes of gold and continued sales by the Bank of England. I am also concerned about a revival of Russian shipments. Furthermore if I am correct, that commodity prices can be expected to decline into summer, any support in gold from ideas of inflation could go away. With these concerns in mind I recommend suspending any further buys for now but hold your existing contracts.
Platinum
I published a new platinum scale last month but we never got prices down low enough to buy. You may still want to wait and see if we get any but the probability is becoming more remote. Platinum was undervalued for years and gave us many years of good trades. Now we are trading at prices I thought it should have been trading at years ago. These prices are a lot closer to fair value and therefore are no longer the bargain we used to get.
When April futures went off the board at some $800 an ounce it set the stage for a possible strong move up by July futures. As I write this on April 28th, the price of July is up some $25 today. At this point, it appears very unlikely we will get a chance in the near future to buy platinum, but traders willing to watch carefully may be able to find opportunity. If an announcement of Russian shipments comes out and prices dump, you might consider enacting a scale to take advantage of that. As it is difficult to know when they might make such an announcement and what price levels we might be at then, I will not publish a new scale at this time. Keep in touch.
Copper
In the last newsletter I recommended lowering your sells by 100 points each and canceling the scale if you got out of it. You should have sold one of your two contracts in inventory and be holding one or two, if you re-bought the one you were able to sell, which you would have rolled over by now. Had you changed your buys to July and lowered them by 100 points, as I recommended, you would have bought at 7600 twice and oscillated out of those. You would still have the remaining one or two contracts. I recommend sticking with this new scale but as there are only 7 to 8 weeks left to trade July contracts you may want to move to the September contract at this time. Use the same numbers. I think this market could give us some great oscillations this summer. Here is the scale updated for you below:
| September Copper Buy Level | Buy Price | Sell Price | # of Contracts Held | Losing Contracts | Loss Per Contract | Possible Cumulative Loss Per Contract | Possible Cumulative Loss-All Contracts | Cumulative Required Margin | Minimum Account Funds |
| 1 | $76.00 | $79.00 | 1 | 0 | $0.00 | $0.00 | $0.00 | $1,000.00 | $1,000.00 |
| 2 | $73.00 | $76.00 | 2 | 1 | $750.00 | $750.00 | $750.00 | $2,000.00 | $2,750.00 |
| 3 | $70.00 | $73.00 | 3 | 2 | $750.00 | $1,500.00 | $2,250.00 | $3,000.00 | $5,250.00 |
| 4 | $67.00 | $70.00 | 4 | 3 | $750.00 | $2,250.00 | $4,500.00 | $4,000.00 | $8,500.00 |
| 5 | $64.00 | $67.00 | 5 | 4 | $750.00 | $3,000.00 | $7,500.00 | $5,000.00 | $12,500.00 |
Cattle
This market has clearly been a demand-led bull. The supply is huge and as such it is dangerous to scale. The reason is, that should demand falter the huge supply would cripple the price structure. Cheap corn and high prices have conspired to make the cattle feeding business very lucrative. In the last issue I canceled our scale because we were waiting for so long to get into it. Now you should be alert for an exciting opportunity should it come up. Current corn price are in the $2.40 per bushel area - cheaper if you pick it up at the farm, which most feed lots do. This is less than half the 1996 highs. This year the US Government issued its first-ever drought warning for the Midwest. Should they be correct, the price of corn would soar, making the business of feeding cattle much less profitable. Many operators will be forced into bankruptcy. Their cattle then are sold as a herd to packers at discount prices by the bankers. These kind of liquidation breaks only occur about once in 5 years. The following scale is for those who would like to participate in a liquidation break, should it occur. I love scaling in this environment because the tendency is very strong to have a deep plunge in prices followed by a sharp rally once the herd liquidation slows. This gives us the chance of buying lots of contracts that get sold quickly at a profit. Take a look at the 1996 cattle market and then consider entering into the recommended scale.
| August Live Cattle Buy Level | Buy Price | Sell Price | # of Contracts Held | Losing Contracts | Loss Per Contract | Possible Cumulative Loss Per Contract | Possible Cumulative Loss-All Contracts | Cumulative Required Margin | Minimum Account Funds |
| 1 | $65.50 | $66.50 | 1 | 0 | $0.00 | $0.00 | $0.00 | $425.00 | $425.00 |
| 2 | $63.00 | $64.00 | 2 | 1 | $1,000.00 | $1,000.00 | $1,000.00 | $850.00 | $1,850.00 |
| 3 | $60.50 | $61.50 | 3 | 2 | $1,000.00 | $2,000.00 | $3,000.00 | $1,275.00 | $4,275.00 |
| 4 | $58.00 | $59.00 | 4 | 3 | $1,000.00 | $3,000.00 | $6,000.00 | $1,700.00 | $7,700.00 |
| 5 | $55.50 | $56.50 | 5 | 4 | $1,000.00 | $4,000.00 | $10,000.00 | $2,125.00 | $12,125.00 |
| 6 | $53.00 | $54.00 | 6 | 5 | $1,000.00 | $5,000.00 | $15,000.00 | $2,550.00 | $17,550.00 |
Silver
For the last couple of months this has been a shining star for us. Since the last newsletter you had the opportunity to cash in on four $400 oscillations. At this point you should have 1 contract in your inventory and you also should be in July contracts. I recommend that you change all your buys to Septembers at this time. I am reprinting the scale for your convenience. There has been a lot of discussion about the future of silver prices in a world of ever growing digital photography use. There appear to be 2 considerations here. Digital is growing rapidly and the process does use less silver but its growth is also directly leading a growth in the overall interest in photography so that more photographic paper and other photosensitive products are being used. The net result is that despite the growth of digital photography, photographic use of silver in the US appears to be stable. Meanwhile the use of film is growing worldwide leading to a growth in total world demand for photographic silver. What is happening is that the people of developing nations are buying cameras, many for the first time. As the people of India, for instance, gain a little money, it is far easier to buy a $20 camera that uses film than a $250 digital camera that needs a computer you don't own. As long as the world economy remains strong this trend promises to continue and should support silver prices for the next few years.
| September Silver Buy Level | Buy Price | Sell Price | # of Contracts Held | Losing Contracts | Loss Per Contract | Possible Cumulative Loss Per Contract | Possible Cumulative Loss-All Contracts | Cumulative Required Margin | Minimum Account Funds |
| 1 | $5.05 | $5.13 | 1 | 0 | $0.00 | $0.00 | $0.00 | $1,500.00 | $1,500.00 |
| 2 | $4.95 | $5.03 | 2 | 1 | $500.00 | $500.00 | $500.00 | $3,000.00 | $3,500.00 |
| 3 | $4.85 | $4.93 | 3 | 2 | $500.00 | $1,000.00 | $1,500.00 | $4,500.00 | $6,000.00 |
| 4 | $4.75 | $4.83 | 4 | 3 | $500.00 | $1,500.00 | $3,000.00 | $6,000.00 | $9,000.00 |
| 5 | $4.65 | $4.73 | 5 | 4 | $500.00 | $2,000.00 | $5,000.00 | $7,500.00 | $12,500.00 |
| 6 | $4.55 | $4.63 | 6 | 5 | $500.00 | $2,500.00 | $7,500.00 | $9,000.00 | $16,500.00 |
For those clients unable or unwilling to commit over $16,000 to a single scale, consider the use of the CBOT's little silver contract. The most liquid months are June and December. Here is a suggested scale for December little silver.
| December 1000 Oz Silver Buy Level | Buy Price | Sell Price | # of Contracts Held | Losing Contracts | Loss Per Contract | Possible Cumulative Loss Per Contract | Possible Cumulative Loss-All Contracts | Cumulative Required Margin | Minimum Account Funds |
| 1 | $5.10 | $5.30 | 1 | 0 | $0.00 | $0.00 | $0.00 | $250.00 | $250.00 |
| 2 | $5.00 | $5.20 | 2 | 1 | $100.00 | $100.00 | $100.00 | $500.00 | $600.00 |
| 3 | $4.90 | $5.10 | 3 | 2 | $100.00 | $200.00 | $300.00 | $750.00 | $1,050.00 |
| 4 | $4.80 | $5.00 | 4 | 3 | $100.00 | $300.00 | $600.00 | $1,000.00 | $1,600.00 |
| 5 | $4.70 | $4.90 | 5 | 4 | $100.00 | $400.00 | $1,000.00 | $1,250.00 | $2,250.00 |
| 6 | $4.60 | $4.80 | 6 | 5 | $100.00 | $500.00 | $1,500.00 | $1,500.00 | $3,000.00 |
Corn
This has been a fine scale in which we have been able to get a couple of oscillations. All the same I am canceling it. The reason is that the market has performed as expected but from here it is far less certain what will happen. We were scaling this market to take advantage of the relative pricing structure and overall cheap prices for corn. Corn's price back in early March was too cheap relative to beans and needed to rally both to buy acres away from beans and to build in a weather premium for the coming growing season. Both of those things have occurred. From here, one of two things are likely. We will get a poor growing season resulting in ever higher prices giving us no chances to accumulate inventory. Or, we will get a great growing season resulting in much lower prices and a languishing market. This will likely to load us up with inventory we will be forced to rollover a couple of times. Given these two possibilities, I see no reason to continue with this scale. I recommend canceling any further buys.
Cocoa
I'm very fond of cocoa as it was the first market I scaled back in 1992. Back then we were at the end of seven consecutive years of surplus cocoa production. Prices had been falling relentlessly and were below $1,000 a tonne for the first time since the 70's. They eventually made a low just below $800 a tonne. We then had underproduction for pretty much the rest of the decade. After years of deficit production we are now expecting a surplus and it is a modest one, 91,000 tonnes. Prices are cheap, cheaper than in 1992. The reason is that the Asian and Russian crisis hurt demand resulting in a current glut of cocoa in the world. The small surplus we are expecting only adds to the current large supply.
Given all of this, why would I be interested in cocoa? The reason is the price. Recent prices in the $750 a tonne range are below the cost of production in many areas of the world. Further declines from here would likely be disastrous for cocoa farmers. At this point we have one of our two factors necessary to scale - low prices. We would like to have evidence of production cutbacks to go along with it but we recognize that prices are such that going much lower will give us that. Rather than wait to find out if we are going any lower to get those production cutbacks, I think we can take a risk and start scaling.
| September Cocoa Buy Level | Buy Price | Sell Price | # of Contracts Held | Losing Contracts | Loss Per Contract | Possible Cumulative Loss Per Contract | Possible Cumulative Loss-All Contracts | Cumulative Required Margin | Minimum Account Funds |
| 1 | $900.00 | $945.00 | 1 | 0 | $0.00 | $0.00 | $0.00 | $600.00 | $600.00 |
| 2 | $880.00 | $925.00 | 2 | 1 | $200.00 | $200.00 | $200.00 | $1,200.00 | $1,400.00 |
| 3 | $860.00 | $905.00 | 3 | 2 | $200.00 | $400.00 | $600.00 | $1,800.00 | $2,400.00 |
| 4 | $840.00 | $885.00 | 4 | 3 | $200.00 | $600.00 | $1,200.00 | $2,400.00 | $3,600.00 |
| 5 | $820.00 | $865.00 | 5 | 4 | $200.00 | $800.00 | $2,000.00 | $3,000.00 | $5,000.00 |
| 6 | $800.00 | $845.00 | 6 | 5 | $200.00 | $1,000.00 | $3,000.00 | $3,600.00 | $6,600.00 |
| 7 | $780.00 | $825.00 | 7 | 6 | $200.00 | $1,200.00 | $4,200.00 | $4,200.00 | $8,400.00 |
| 8 | $760.00 | $805.00 | 8 | 7 | $200.00 | $1,400.00 | $5,600.00 | $4,800.00 | $10,400.00 |
| 9 | $740.00 | $785.00 | 9 | 8 | $200.00 | $1,600.00 | $7,200.00 | $5,400.00 | $12,600.00 |
| 10 | $720.00 | $765.00 | 10 | 9 | $200.00 | $1,800.00 | $9,000.00 | $6,000.00 | $15,000.00 |
Sugar
I have steadfastly avoided putting sugar in this newsletter. The Asian crisis took sugar down to prices not seen since 1986. The reason prices have not recovered significantly has to do with the coincident increase in world production. Scaling into increasing world production just did not seem like a good idea. In retrospect a little anticipation, as I am trying to apply to cocoa above, would have served us well. Sugar bottomed last year just below 4 cents and has stayed above that since.
The world still has plenty of sugar but prices have been crippling to many producers worldwide. While Brazilian production remains high, the rest of the world is starting to cutback. Currently Russian importers are buying large quantities ahead of the June 15th enactment of a 40% import tax. Once the Russian buying binge is over, prices can be expected to drop, but given the decline in world production I have no expectation that prices will drop back to last year's levels. Given that, I am recommending the following scale.
| October Sugar Buy Level | Buy Price | Sell Price | # of Contracts Held | Losing Contracts | Loss Per Contract | Possible Cumulative Loss Per Contract | Possible Cumulative Loss-All Contracts | Cumulative Required Margin | Minimum Account Funds |
| 1 | $5.75 | $6.20 | 1 | 0 | $0.00 | $0.00 | $0.00 | $500.00 | $500.00 |
| 2 | $5.45 | $5.90 | 2 | 1 | $336.00 | $336.00 | $336.00 | $1,000.00 | $1,336.00 |
| 3 | $5.15 | $5.60 | 3 | 2 | $336.00 | $672.00 | $1,008.00 | $1,500.00 | $2,508.00 |
| 4 | $4.85 | $5.30 | 4 | 3 | $336.00 | $1,008.00 | $2,016.00 | $2,000.00 | $4,016.00 |
| 5 | $4.55 | $5.00 | 5 | 4 | $336.00 | $1,344.00 | $3,360.00 | $2,500.00 | $5,860.00 |
| 6 | $4.25 | $4.70 | 6 | 5 | $336.00 | $1,680.00 | $5,040.00 | $3,000.00 | $8,040.00 |
| 7 | $3.95 | $4.40 | 7 | 6 | $336.00 | $2,016.00 | $7,056.00 | $3,500.00 | $10,556.00 |
Value Investing Versus Values Based Investing
A little confusing here. The term "Value" is being used in two different ways. In my book, Invest Like the Pros: Value Investing in Commodity Futures, I laid out our method of buying commodities when they are cheap. This is a modest twist on the classic stock investing idea of buying good companies when their price is low. Value Investing in the stock market was virtually a forgotten idea over the last few years as the market moved ever higher.
Values Based Investing is an entirely different idea. The term "Value" is being used here to denote one's personal set of values, whether we are discussing moral, political, spiritual, ethical or some other kind of personal values. Values Based Investing has two objectives: 1) make a good return on your money, if possible an above average return; and 2) invest your money in such a way so as not to conflict with your personal beliefs and values and also invest in such a way so as to make a contribution to advancing your beliefs and values and maybe improve the world in some way.
I have listed these two objectives in order of importance. Your own prosperity and well being is the benefit of the first objective and the well-being of the world is the benefit of the second objective. These might seem to be in conflict with each other but we at Iowa Progressive Asset Management (IPAM*) view these two objectives as compatible and maybe even synergistic. After all, isn't what is good for the world good for the individuals who comprise that world? I know that the answer could be, "Not always." That is true. Conflicts do arise.
Aligning your portfolio with those situations that are compatible rather than in conflict should result in achieving both of our goals if the ideals of IPAM are correct. I am happy to tell you that the history of this approach has produced superior returns.
Crown Value Investment Portfolio Recommendations
August cattle
July platinum: Be patient, we may get another chance to scale this market yet.
Wheat: Sell if you get the chance but no buys please.
July silver: Place all buys in September now.
Gold: Cancel any further buys but hold inventory
September cocoa
October sugar
July copper: Move buys to September now.
July corn: Cancel scale.
May, 2000 Hal Masover, Editor Crown Futures Corporation 607 West Broadway, Fairfield, Iowa 800-634-9650