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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
February 10th,
2008
Energies
Talks of OPEC possibly cutting production at the upcoming
March 5th meeting, along with production issues in the North Sea
and Africa helped to spike crude oil nearly $4 on Friday, reversing
a several week downtrend. While many
market players would suggest that a $4 rally on an OPEC cut is an
overreaction, it is less about the cut and more about the psychology of the
market and the industry. Let’s not
forget that OPEC may be a group of delegates from oil producing countries,
but we are not talking about a nonprofit business here. These countries are getting rich on our
thirst for black gold and are not forcing supply to bring prices down. They are pumping out massive amounts of oil
to capitalize on current prices, and if a little PR gets them another $4 a
barrel then so be it. The market hysteria is at such a level that
we could easily see a run to $110 or even $120 a barrel, but that does not
mean this market is bullish. Energy
prices are t or approaching the top end of this very stretched out rubber
band of a market, and the band is about to snap back in the opposite
direction. A $4 surge means volatility
is expanding, something that could bring this market back down just as fast
as it ran up. Heating oil continues to
offer a good short against rbob (1 to 1
ratio). Natural gas is stuck between
$7 and $8.50 and long strangles are recommended.
Financials
Stocks offered some end of the week price support after
plummeting earlier in the week on fears of recession, inflation and an
unpredictable Fed. This market remains
bearish with continued choppy trade expected.
Sell premium on large one day price moves. Bonds have likely set the high and should
see 116 shortly.
The dollar spiked as the European Union did not cut rates
but the U.K. did and fears that European countries are getting way
too far behind the curve caused weakness in those currencies against the
dollar. Expect a choppy but strong
dollar rally in the months to come.
The Canadian dollar remains an enigma as independent economic strength
remains and technical support around par is holding. Wait for a break to fresh near term lows
before getting short, otherwise this market may have something left in its
tank. Long term the Canadian dollar is
setting up a major price retracement, but it is
difficult to stand in the way of this up and coming (and I get choked up
saying this) economic powerhouse. The
Japanese yen looks ready to turn, having benefited from the carry trade
(bringing investors back to the yen), the market appears to have a technical
top in place with a strong U.S. dollar to help spur a selloff
in the yen in coming weeks.
Grains
Dynamic volatility and market hysteria has all but engulfed
the grain sector as a major wheat shortage has the market seeing all time
highs in lock limit fashion. The wheat
market is about to expand limits, likely raising margin and signaling the
beginning of the end for this historic run.
Get bearish grains now and get ahead of what will likely be a very
steep vertical curve offering a v-shaped reversal. Surpisingly,
despite a string of lock limit days in wheat, France announced a strong production year ahead in 2008. China just simply controls these grain markets, and funds are
getting way too greedy. One noticeable
change in commodities over the past several years has been the impact of
funds on volatility and price trends.
Within that change it is clear that price moves are stretching farther
than they have in the past and whipping back harder than ever before. These grains are overextended and you don’t
need an analyst to tell you the obvious.
Be smart and buy some long term puts.
History shows us these moves end with a bang and often times there is
more money to be made on the downside then there was to make on the
upside. Rice made the move I was
looking for over the entire course of 2008 in about 5 weeks, so it is time to
turn on this market buy some puts ahead of a major correction.
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Meats
Hogs have surfaced in
the news quite a bit lately as supply issues abound. Blue ear disease and rising grain prices
have pushed prices higher. China, a major source of global demand, has had
a severe winter which has inhibited deliveries and caused the country to tap
into its pork reserves – I know, I took a double
take on that too the first time I heard it.
China apparently has an emergency reserve for pork during supply
emergencies. This market hit a
critical bottom but is now mid-range and is not offering a clear trade. Sell around 75 and buy around 55 until the
market breaks out of the long term congestion.
Declines in
Australian beef exports from rising supply from the U.S. to Asian countries
is a sign that this market may finally be ready to give up on these long
standing extreme prices. This may
coincide perfectly with the top in grains which had previously helped to
support beef prices because of high feed prices. Stock up on straight puts.
Metals
Gold and silver surged back this week with a vengeance
despite a U.S. dollar rally. The
correlation between gold and the U.S. a simple one – gold is priced in U.S.
dollars so as the dollar rises gold becomes more expensive to foreign buyers
because they have to make up for the drop in value of their currency. However, this does not prevent gold from
rallying if other forces are pushing it higher. Fears of recession along with what some see
as aggressive rate cutting by the Fed, which may spark inflation, combines
with a declining stock market to create a flight to quality in gold. However, if the U.S. dollar continues to
gain ground then that correlation will ultimately take hold of the gold
market and send demand into a tailspin.
This will ultimately break the metals and take surging markets like
platinum and silver with it. Copper
inventories are down as China demand picks up because of weather forcing production
issues. Platinum is on a lightning
pace to $2,000 because of power issues in the world’s largest producing
platinum nation, South Africa.
Softs
Coffee has broken out above
recent highs and is seeing some short covering rallies amid a global
commodity run. Overall this market is
beginning to shows signs of a more vertical pattern than what we have seen in
recent years, suggesting the market is about to get volatile on its road to
$2.
Cocoa is holding near its
contract highs as dry weather in the main growing regions of Ivory Coast and
Ghana have created the perfect storm with the political turmoil wreaking
havoc on exports and production. This
market really has unlimited upside but the gut says stocking up on some puts
may payout in the long run.
Cotton stayed congested through
the week’s end but is on the brink of price breakout and is worth a long
strangle to play the expansion in volatility that is to come. Otherwise buy some straight long calls –
July 80s?
OJ broke below key support at
132 but the ugly chart pattern is unlikely to hold, suggesting that scooping
up some futures at this value may be a worthwhile risk for the reward of
being long heading into the hurricane season.
Ideally you would want to do this around May, but the seasonality
trend is forcing the entry a bit earlier.
Sugar skyrocketed on Friday as
news of a major sugar plantation in Georgia exploded, leaving wreckage in its wake. Throw in a $4 crude oil bounce and
questionable India supply numbers and this market is looking pretty
bullish. The gut says we break through
13.10 and then collapse back to 11.50 or so.
*Disclaimer: There is
risk of loss in all commodities trading. Please consult a James Mound
Trading Group Broker before you trade for the first time. Losses can
exceed your account size and/or margin requirements. Commodities
trading can be extremely risky and is not for everyone. Some option
strategies have unlimited risk. Educate yourself on the risks and
rewards of such investing prior to trading. James Mound Trading Group,
or anyone associated with JMTG or moundreport.com, do not guarantee
profits or pre-determined loss points, and are not held monetarily
responsible for the trading losses of others (clients or otherwise).
Past results are by no means indicative of potential future returns.
Information provided are compiled by
sources believed to be reliable. JMTG or its principals assume no
responsibility for any errors or omissions as the information may not be
complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or
distribution of this report of any kind is prohibited without the express written
consent of James Mound Trading Group LLC.
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