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Growing Financial Success

Contents

Published By Hackett Financial Advisors, Inc.

Shawn Hackett, President 9259 Equus Circle

Boynton Beach, FL 33472 (888) 535-5525

Email: [email protected] www.HackettAdvisors.com

Special SOFTS Report-The Hard

CCI Spot Index

Down Phase Continues

This is the kind of price pattern I expect to see in the CCI index as the final phase of the sovereign debt bubble comes to an end. My expectation is that global QE3 will occur in August and the commodity markets will begin to anticipate this in July. The initial reaction to this will be for an initial surge up to the ongoing downtrend line that has been in place since March 2011. Such initial bullish fever over QE3 will quickly give way to the fear that a lame duck post election congress will be willing to send the U.S. over the fiscal cliff with inaction and allow for the implementation of massive tax increases and fiscal austerity to win political points. I fully expect that in the last midnight hour the lame duck congress will surprisingly act to delay such massive fiscal

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drags on the economy until the new congress can reassess. This will lead to a massive relief rally in stocks and commodities as everyone celebrates that the fiscal cliff has been avoided for now. However, over time it will become clear that the new post election political engine has no plans in solving the long term fiscal problems that the U.S. faces. It will become clear that quantitative easing is a failed policy and that monetary policy has reached the end point of no more bullets left in the gun. This will lead to an understanding that we are heading over the fiscal cliff whether we like it or not so batten down the hatches and sell everything until the end game completes. Once the system breaks down yet again, it will finally be time for the politicians and the Federal Reserve to make a major change in policy. That change in policy should look something like this: 1) Social security, Medicare/Medicaid and state pensions will have to be paired back substantially to only those in the greatest need. Most Americans will have to accept the fact that all the monies that have been paid out over the last 30 years for these entitlement programs were nothing more than an extra tax in the end. Promises were made that cannot be kept and that is the hard truth of the matter. 2) U.S. sovereign debt will have to be restructured by a combination of debt forgiveness and the swapping of much of our current debt with the creation of long term (I am thinking 50 years) bonds. These long term bonds would only require principal and accrued interest to be paid at the end of the 50 year period thereby freeing huge amounts of cash flow to be diverted to more economically productive endeavors. 3) The U.S. Dollar will be devalued against all major currencies to rebalance the global economy so that the U.S. can reestablish a competitive fiscal balance with the rest of the world. I am thinking a Dollar index value near 50 would likely be what is required to regain a global balance. This should start the beginning of the next super cycle bull market in stocks, the global economy and set off the next big move in overall commodities. The large rally that I see taking place in overall commodities from now into the first half of 2013 will be large money maker for sure but the bigger money maker will be to get short commodities in the late spring of 2013 to participate in the last great crash of this sovereign debt crisis. The good news with all of this is that we are only a few years away from getting back to boom times. The bad news is that the next 2 years are going to be some of the most unpleasant times in our history. The economy is only going to be getting worse through this toxic period and hence one should be focused on owning those commodities that the world needs and not owning those commodities that the world wants. The “NEED” commodities will be the place to be.

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That means own agriculture and more specifically own rice, oats, wheat and milk. The other theme is to own those commodities that represent a low price point for daily enjoyment and cheer. In the SOFTS this would be coffee and Cocoa. These 5 commodities are my focal point for the long side of the market as the bear market rally begins in the months to come. In this report, I will be discussing milk, lumber (unique commodity theme), Lean Hogs and Cattle. I will also be going over some past trade ideas. As always let’s get started. MILK Commercial shorts as a % of open interest has proven to be a very valuable tool in timing ideal times for a cycle low to occur. Such a bottom/buy signal was recently achieved and likely sets the stage for the beginning of the greatest milk bull market in history.

As all of you know, I am very bullish milk and my forecast was that expiring spot prices would not close below $15 during the first half of 2012. That forecast has proven correct. I also suggested that a bull market would begin by June+/- 1 month. The likely low in Milk prices occurred in May 2012 which was also consistent with my forecast.

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Producer buy signals. With the sell signal line nowhere in sight, expect higher Milk prices for the rest of the year

Sell signal level




Although a near term correction is possible that will make a higher low, the bull market in Milk has begun in my view. My forecast remains that all time record high milk prices will be seen in the first half of 2013 and could hit $30/hwt if Mother Nature gets involved. The fundamentals for milk starting in the 4th quarter of this year are some of the most bullish in history in my humble opinion. Despite all the bears in Milk, they are all wrong once again just as all the bulls were all wrong in early fall.

Relative milk prices to the CCI are tracing out a classic reverse head and shoulders bottom and is confirming the likelihood that milk will be a bullish outlier as the bear market rally begins to gain traction.

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Relative prices are tracing out a classic reverse head and shoulders pattern. Very bullish for an eventual breakout later this year.




Seasonal lower Production in Both the U.S. and New Zealand Bode Well for higher Prices

During the summer months both the U.S and New Zealand witness a seasonal slowdown in milk production. This will allow for the current oversupply in the U.S. to subside and to also have current high inventories reduced substantially. This should also keep U.S. exports to Asia on the strong side as New Zealand typically has very little to sell over the summer months. The key to New Zealand however is to follow what happens during the peak production part of their season from September to January. Last year New Zealand was blessed with very docile weather that kept dairy cow stress to a minimum and also allowed for new record pasture growth for feeding. This created a bulge in milk per cow efficiency that is not likely to be repeated during this cycle. Normal weather should inflict more normal stress and yield average pasture growth. Of course should the weather turn out worse than normal then the effects could be extremely deleterious to their production capacity. I will assume normal weather to be conservative. With normal weather it is very likely that New Zealand will be looking at negative year over year production growth in the range of 1% to 2%. Poor weather and a 4% decline could easily be seen. When the largest exporter of milk in the world to Asia sees lower exportable supplies then Asia comes rushing to the U.S. to fill the gap. This is a very bullish set up for much higher milk prices.

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Weather will play an important role during the high production part of the season. Special care should be given to the health of overall pasture growth during this period.




In the U.S., seasonal production reaches a peak in May and heads south until September. So once again this takes the oversupply weight off the shoulders of the Milk market and allows for the market to tighten and rebalance to a more normal structure.

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Negative milk production growth in New Zealand for 2013 bodes well for higher U.S. exports to Asia and higher Milk prices.




The other element that must be understood is that hot summer weather can further exacerbate this seasonal decline in production. It has been a very hot June so far and should this hot dry weather pattern persist throughout the summer expect further erosion in milk production than expected as the extra stress placed on dairy cows at a time of poor economics for dairy will take its toll. Similar to New Zealand, the U.S. had ideal weather during the November through March timeframe as a very warm/dry winter allowed for minimum dairy cow stress and record high milk per cow efficiencies. It is highly unlikely that such a warm, dry winter will be seen again with an El Nino entering full swing by that time. A normal winter will not allow for milk per cow to grow through this period and will likely be negative at times. This likely retardation of milk per cow rates when coupled with a decade high slaughter rate of dairy cows through June 2012 sets the stage for negative year over year milk production growth of at least 1%.

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A likely decline in U.S. milk production in 2013 bodes well for higher prices




LUMBER

Local building permits reached an historic low at the beginning of 2009 and have moved up smartly ever since. I expect one more move down to another higher low before taking off to over 1 million permits by 2015. With Canadian lumber production on a long term downtrend due to the mountain pine beetle infestation over the last decade, U.S. lumber supply will be incapable of making up the difference without a dramatic rise in prices.

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Lumber strong relative strength to the CCI is a bullish sign of the historic bull market to come.




The speculators remain well below levels that have preceded major intermediate highs in the past. This leaves ample capacity for them to pile in once the current correction subsides and the super cycle bull market continues from the generational lows seen in 2008. Money Flow Chart of Spec Net Positions

The speculators have plenty of room to panic buy lumber based upon history.

This export demand from China will remain in place despite the popping of their Coastal housing bubble. The acute shortage of housing in rural china will keep construction in these areas at a fevered pitch




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The chart on the prior page showing the parabolic rice in Asian lumber imports of Canadian lumber against the inability of Canada and especially British Colombia to increase lumber production due to the mountain pine beetle infestations leaves the U.S. in an enviable all be it impossible position to meet a resurgent U.S. housing market after having fully adjusted to a depression economy. All time record high prices will be needed to allow the U.S. to make up for Canada’s historic shortfall.

The bottom line is the current correction will provide another opportunity to buy lumber near the long term uptrend line trajectory. The very warm winter this past year stole future demand and pulled into a front end loaded 2012 lumber cycle. As such, the warm winter demand hangover starts now and will remain into the fall. This period should create a great buying opportunity near the $240 spot price area.

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The mountain pine beetle will cause a 10 year decline in BC lumber production at least. This should provide for one of the greatest bull market in lumber history.




Spot Price Futures-Lumber

Lean Hogs The hog market is likely going to see a challenged supply environment over the next cycle as many factors are conspiring to maintain herd expansion restraint. The first being the porcine reproductive and respiratory syndrome (PRRS) breaks this winter which were very significant and should lead to their typical supply restraining effects starting about now. PRRS lowers efficient feed conversion in pigs thereby lowering ideal weights and increasing mortality rates. Of course the other issue that seemed to be on the mend was a likely lower feed price regime for the fall of this year but now what appears to be a third year in a row of poor weather seems to have removed this positive potential for higher margins. The hog to corn ratio remains at or below 15:1 and that has never and will not lead to meaningful herd expansion.

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The $240/1000 bd feet area near support should offer a great long term entry point.




With poultry supply way down and with beef supply also down there is simply no available substitutable protein product in the market at this time. This means domestic demand should remain strong for pork. On the international front, Spain hog prices remain near 8 year highs, Chinese hog prices are 40% higher than U.S. prices and Russian hog supplies are about 2 times U.S. hog prices. As China hits the economic wall over the next year, they will desperately try to keep their people nourished with affordable staple products of which pork is top shelf. Do you really think they are going to pass up cheap U.S. pork prices with corn prices remaining high? They will continue to be large buyers of U.S. pork products. Spot Futures Prices Lean Hogs

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Spot hog prices have broken out above a 38 resistance level near $.80/pound. This is a very bullish long term pattern




Commercial Net Positions

You can see that there was panic commercial buying into the May low to near record long positions. Very bullish indeed suggesting that the May low could be the bottom for the correction. October 2012 Lean Hogs

I will be looking for a buying opportunity near the May low at 78.50.

Panic buying by commercials bodes well for higher prices later this year.




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Live Cattle

The bullish supply side story to beef cattle is well understood and fully priced into markets. What is not priced in is the likely fall off in demand that I see coming. The global economy will be in deep recession over the next 12 months and that means the world gets’s back down to basics in its meat choices. Beef demand is very economically sensitive. This leaves the beef market in a tug of war between bearish demand and bullish supply. I expect weak cattle demand to win out and keep this market on the defensive. Hogs, poultry and milk are much more attractive protein markets to own at this time.

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I expect export demand to be down in 2013.




October Cattle Futures

Trade Review July 2012/Sep 2012 Bull futures Spread This bull spread has been one of the more spectacular upside explosions you will ever see. For those that acted upon my recommendation to put this spread on in response to very tight North American supplies and constrained Canadian acres have done very well indeed. If you have not taken profits yet please do so now.

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Support is likely to be broken as grilling demand ebbs




July 12/Sep 12 bull oats spread

Jan 13/Jul 13 Bear Bean Spread A panic weather market resulting from a very hot dry weather pattern June has set the grains on fire and has overrun rationality in what should ultimately be a very lucrative spread in beans. I have no doubt that this spread will end at parity or negative spread territory come December 2012. The problem is that it is impossible to say how high this spread will go over the short term given the panic nature of the current grain environment. Best to lighten up on risk here and wait for the spread to start coming back down from the mountain. I did not expect weather would be this unfavorable and I did not expect beans to play weather this early when late July/August is more critical for timely rains. The highest this spread has ever been was a +80 in 2003 after the failed U.S. crop due to aphids. Time will tell whether this +80 will prove to be resistance or not. The profit opportunity here remains immense when the weather market euphoria calms down. A great test case for this spread is the July 12/Dec 12 bull futures spread in corn that I recommended earlier in the year. Despite record tight U.S. corn supplies and despite awful growing conditions this spread is in crash mode near +27 down from +115 earlier this year. I expect the same to happen to the bean spread.

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Time to take profits on this lucrative spread.




Timing is everything and I bought this spread too soon given what has happened with Mother Nature. July 12/Dec 12 bull corn spread

Jan 13/July 13 Bear Bean Spread

Currently in crash mode despite awful weather and record tight U.S. supplies. The same will happen to the bear bean spread




How high will this spread go before crashing back down??




15 year seasonal pattern for Bean Jan/July bean Spread

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We tested the all time high on this spread today. Will it hold this rally?? Time will tell.

With the seasonal pattern down powerfully into the end of July any sign of rain and this spread will likely enter crash mode.




Rice Bull Spread The July/sep rice spread has done very little since my recommendation despite the last two USDA reports slashing U.S. ending stocks to the largest 2 report differential ever. Time is running out for this spread to work. Having said that I remain very bullish rice. Here is why:

In the USDA reports on Friday, we are likely going to see rice acres lowered to 2.4 million and quarterly rice stocks also lowered. This is very well supported by the current cash market trading as much as $.70/hwt premium over July futures suggesting that old crop rice supplies are far less than current USDA expectations.

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The 42 year low in U.S. rice ending stocks occurred in 1972 at 6%. I currently believe that U.S. rice ending stocks will fall below 5% in 2013 and possibly as low at 2%. This is quite serious indeed.




Remember, U.S. long grain rice is exported to the Middle East, Central America and South America. As of yet none goes to Asia. In South America, Brazil is the largest long grain rice exporter and sells their rice to Africa, Central America, Europe and South America. As of yet none goes to Asia. Thus the U.S. rice futures contract has very little to do with Asian rice and has all to do with the amount of rice available in the western hemisphere. While rice in Asia is currently adequate, in North/South America rice supplies will be some of the tightest in 40 years. If rice futures prices do not turn up soon the rice industry in the western hemisphere will disappear altogether. The stocks to usage ratio in the western hemisphere for long grain rice will be less than 7% in 2013: razor thin to say the least. If we look at the global rice market, ex China and India, the stocks to usage ratio is only 12%. Once again also razor thin. With China now a major importer of rice in 2012 that will continue for the foreseeable future, the only country that is keeping the lid on global rice prices is India. When India placed an export ban on rice in 2007 the stage was set for the epic rise of rice prices to the $24/hwt level. All it would take now would be a poor Indian monsoon season or a change in Indian government policy towards feeding the poor versus farmer subsidies and this market would go into a runaway mode. Any major production problem in China, Thailand, and Vietnam etc would set this market into orbit. Nonetheless, rice can still move up appreciably just on the China importation structural change alone as well as the need to stem the tide of the current disappearing western hemisphere rise production. With the current poor weather in the U.S. Midwest, corn and bean prices will remain elevated well into the growing season in South America. What will they plant? I can assure you it will not be rice given the better returns afforded these crops. If the global economy get’s as bad as I expect over the next 12 months, rice will be in high demand as everyone buys what they can afford that can keep them well nourished. I think flat screen TV’s will be secondary. The chart on the next page shows commercial shorts and speculator shorts as a % of open interest. This has been a great tool in timing good entry points into the rice market. Currently we are staring at the most bullish money flow set up only seen once before in 2005 before the epic run to $24/hwt. The chart shows that producers are not selling and that speculators are extremely over committed to the short side. When these guys start to buy back there will be no rice to sell back to them. This sets up the potential for an epic rally in rice as a result. Someone is going to blink here folks and the odds favor the speculators will given the incredibly bullish western hemisphere fundamentals as well as the precarious global state of rice supply and demand ex Chindia.

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I would be looking to go long September rice at current prices. Spot Rice Prices

Jul 12/Sep 12 Rice Spread

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This spread has done very little and is running out of time.




If you have any questions about any of the content in this report, please call me at (888) 535-5525 or e-mail me at [email protected] . Thank you for reading and I hope your future investment decisions turn out to be prosperous ones.

Best Regards,

Shawn Hackett, President

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