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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
February 24th, 2008
Energies
Despite abundant inventory growth, crude oil marched
straight to $100, setting up an epic double top or one heck of a fake
out. Fears of OPEC supply cuts have
fueled fund buying and spec interest in a market overbought and under
criticized for being inflated beyond reason.
One thing about market hysteria is that it is far from predictable by
nature of its very existence. Thus a
market that is functioning in a non-rational way will likely have a reversal
that equally lacks rational forecasting.
How perfect would it be if this historic run ended with a double top
at $100? Get short with June bear put
spreads and play a solid risk to reward ratio because a fall from this height
would have some serious gravity behind it.
Financials
The stock market has found some temporary support offering
a consolidation pattern before further declines. Sell calls.
Bonds hit a perfect price support just above 115 suggesting the longer
term trend line support will hold and offer a test of 120 or higher. Overall, the premiums in the bond market
are ripe for the selling as the Fed has offset the shock of potential
unlimited rate cuts with a more cautious verbiage in their last FOMC policy
statement. Fed speak by Chairman
Bernanke on Wednesday and Thursday should setup an intermediate term
congestion pattern. This sets up some
fundamental topside resistance but limits the downside exposure. Try some short condors here or a naked
strangle as far out as June.
The dollar is choppy and the euro is bouncing despite the
ECB suggesting declining growth for 2008 and beyond. However I suppose some growth is better
than no growth at all. I continue to
see a long term dollar rally in the cards and recommend taking this bounce in
the euro and jumping short with bear put spreads. The yen broke trend with a solid break off
from a perfect setup for a top and crash.
Get some straight puts for June and play a volatile and unexpected
break to the downside. The Canadian
dollar is likely to see some pressure as Canadian banks showing first quarter
numbers atart reporting next week, many of which will show significant write
downs from mortgage fallouts. Bank of
Canada governor Mark Carney suggested that his first move in office will be
to cut rates at the next meeting to help will the worst export crisis in the
country’s history. This is monetary
policy speak for saying the currency is too high and they need some selling
to come in so exports pick up. Jump on
the train ahead of the cuts and get short the Canadian.
Grains
Continued strength in beans and
corn have sustained a grain rally that is just about topped. Surely many of
the shorts have been forced to cover and what remains are relatively new
positions offset by funds that are long and very profitable. The collapse will be hard and fast and put
options in any of the grains are the way to go here. Granted, the exposure to plantings and
acreage numbers are present, but the market has about a one month reprieve
here in which they can sell ahead of the report and react to this week’s USDA
ag forum forecasts.
In those forecasts1,
wheat acreage in 2008 is expected to increase 3.6 million acres to 64
million. Winter wheat area is up 1.6 million acres and spring wheat
(including durum) is expected to gain 2.0 million acres. Corn acreage for 2008 is expected to
decline 3.6 million acres from 2007 to 90 million acres, the second highest
on record since 1944.
Soybean area is projected to hit 71 million acres in 2008, up 7.4 million
from last year, supported by higher prices. Increased area is expected to
come from reduced corn and cotton plantings, as well as from increased double
cropping. Rice planted acreage for
2008 is projected at 2.70 million acres, down 61,000 acres from last year.
The drop in production is attributed to higher prices for competing crops and
expectations of another year of high fuel and fertilizer costs.
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Meats
Annual cattle data this week
showed a major drop in cattle on feed due to high slaughter in 2007. At the same time this implies high
inventory with exposure to supply issues later into 2008. This has helped to keep cattle prices up,
but ultimately will lead to the market’s ultimate top as grain prices push
slaughter numbers higher throughout the year.
Hogs had their first negative profit quarter in the 4th
quarter of 2007 as prices dropped.
Recent price support should continue, however as supply is held back
in hopes of higher prices. Buy the
dips.
Metals
Metals prices continue to climb,
making their epic move through critical historical price levels. Silver is due for a serious price
correction and if you are long futures orshort put options you could be on
the wrong end of a volatile collapse.
While gold is showing bullish technicals this market climbing a very
slippery slope. Vertical formations
like these do end smoothly. Copper and
platinum are both aggressive shorts that carry a bit too much risk at this
point for the reward. Palladium is no
longer a strong buy at these levels and should be left alone until a
significant price retracement is seen.
Softs
Coffee continued its solid climb
through critical price resistance, supported by short covering and
skyrocketing Robusta prices. Robusta
coffee prices hit levels not seen in over 10 years as reports of farmers
hoarding crops and rising spec demand have forced a major price rally. Rising demand for coffee has setup a year
in which supply is expected to barely meet demand, leaving loads of exposure
to supply problems and a potential shortage.
Expect a pullback over the next few weeks, but buy the dips
aggressively as this market has more upside in the long term.
Cocoa volatility is at historic
levels as it continues to set fresh all time highs and take shorts out
seemingly every other day. I bailed
out of the long side of this market a bit early, although I do feel the move
has little left to it. Accumulate some
long term puts and avoid short calls or futures exposure.
Cotton caught a strong bid after
a major double lock limit technical bottom fueled a rally supported by
concerns over U.S.
planted acreage. This was confirmed by
this week’s USDA report sighting reduced acreage forecasts for 2008 amid a
rollover to planting other more profitable grains.
Sugar is riding a crude oil run
and a few fundamentally supportive news pieces, but rising acreage in Brazil
is likely to limit the run as forecasts for a mega 2008-09 crop year stunt
rally hopes.
OJ prices have tumbled of late as
ideal winter weather in Florida
setup a solid crop, but a bid this week occurred as funds entered the market
on value buying and concerns over yield continue to be heard in the whispers
of traders. Get long ahead of the
bounce.
1Source: USDA http://www.usda.gov/oce/forum/2008Speeches/Commodity/GrainsandOilseeds.pdf
*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
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