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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
August 3rd,
2008
Energies
Wednesday’s bullish inventory numbers shocked the energy
sector off its recent lows, creating what could be yet another false retracement. The
market has been experiencing this for three years – 3 steps forward and one
quick step back. Hurricane season is
upon us with exposure to weather, a Congress that just went away for a month
and a weakening grain sector offering a spike in global buying and shipping
based oil usage. Sometimes the gut is
the only way to go and the gut says don’t get caught up in this bounce. Crude is on its way to 105 and below,
taking the rest of the sector with it.
Natural gas inventories are stronger than expected and the play here
is also to the downside with puts.
**Chart courtesy of Gecko Software's TracknTrade
Financials
The stock market is choppy amid a weak economic picture,
and is offering great premium collection opportunities during a period of
decent volatility premium. Short
condors are recommended. Bonds are
choppy as well, with a test of 112 likely on the next stock market
bounce. Overall bonds offer great
premium collection with an intermediate time frame first standard deviation
strategy. The dollar is on the rise, but this sector is about as choppy as I
have seen in years. Options will just
chew the time value away as it could take a few months to see the dollar make
a serious bull run. Long term puts in
the euro and pound are recommended and the Canadian is teetering on the edge
of a major technical breakdown below 9675.
Grains
Wheat is holding some technical
support despite an improving supply situation. This market is still susceptible to longer
term supply issues as reduced acreage and low inventories create excessive
upside exposure. Alternatively, corn
is in a clear bear trend, confirmed by a break through July lows sometime in
the next two weeks. Corn ethanol is in
the decline cycle of its demand life, if for no other reason then the
deflation of the government’s subsidization program due to the obvious cause
and effect relationship that demand had on global grain and livestock
prices. This is cycle shift in a
market that was at price extremes.
What it sail down to 4.50 and take beans with it on a lagging
ride. Beans are the place for put
plays, with ratio breakdown spreads recommended along with straight put plays
in both markets. Rice is still on a
run to 1450.
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Meats
Cattle on feed numbers came in line with estimates, but
the mid-year numbers should create a bearish supply indicator to bring prices
down along with corn’s collapse.
Unfortunately that corn-cattle correlation is stuck in hyper drive
until corn fully retraces. Hogs remain
a sell at these levels.
Metals
Gold and silver remain choppy amid a back and forth U.S.
dollar and a somewhat supported oil market.
Gold has three dynamics at the moment:
1)
Inverse
U.S. dollar correlation – gold is priced in U.S. dollars on a global scale. The cheaper the dollar the stronger foreign
currency is to buy gold at what they perceive are discounted levels. However, if the dollar rallies this has the
opposite effect and foreign buyers are stuck paying inflated prices. The single biggest reason that gold will
fail from these levels is the dollar’s strength over the next 6-12 months.
2)
Oil
inflation – inflated oil prices, or commodity prices in general, create a
much higher annual inflation rate (9% sound about
right?) than what the Federal government wants us to think. Gold is the world’s inflation gauge so it
would seem that as goes inflation, gold will follow. However, when prices in gold far exceed the
annual inflation rate (by anyone’s calculation) over the past 5 years or so,
then it would seem that there is less of a true correlation and more of an
exposure to the downside for the potential of a declining inflation rate in
the months and years ahead.
3)
Flight
to quality – the reeling stock market is getting beat up on what many would
argue is a complete economic meltdown – the perfect storm of inflation, bank
failures and collapsing real estate market.
When the normal source for investment disappears and investors become
concerned over how to make a return on their money they turn to bonds and
gold. However, this resilient market
is not a screaming sell anymore. It is
clear the Fed will take excessive and unlimited measures to support the
financial markets, despite its long term negative affect.
So a strong dollar means declining commodity inflation
and will likely be supported by strong economic numbers (at least compared to
our friends overseas) which means there will be little, if any, flight to
quality. This equates to a strong
price retracement in metals over the next 6-12
months. Jump on board with straight
put plays in silver and gold – even copper if you can find a bargain.
Softs
Coffee is getting beat up after a
solid harvest in Brazil
and nearly half of frost season gone by without much of a reason to buy. This is not the coffee market of old as it
has become more globally diversified from both a supply and demand
perspective. However, the trend is
bullish and suggests a value entry at these levels. Cocoa
is catching a bid as strong Ghana
exports to China
and a big time election in Ivory Coast
in November gets closer and closer. I
am a bear at these prices but this may not be an easy market to time. Long term puts or strangles would be the
only way to go in my mind. Cotton
remains a strong buy on low acreage and harvest issues in Texas. OJ is a value buy but is technically
getting very ugly. Expect the
unexpected there as a Florida
hurricane is just around the corner.
Buy the dip with straight calls.
Sugar caught a very strong bid this week and reversed an ugly chart
pattern. Can it break through 1450 and
turn into a bull breakout? Time will
tell, but this counterintuitive market is no long following corn prices. Long strangles here are a good idea after
the market volatility drops for a few days.
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