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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
December 7th,
2008
General Comments
This week’s change in the
correlation between the stock market and commodity prices makes for an
important side note. A strong
correlation has existed in recent weeks and months and this week that
connection seemed to disappear – the stock market rallied and commodities, in
general, fell. I believe we are
experiencing a second wave of fund liquidation in commodities. This second wave is likely to be short and
swift and offer a last buying opportunity into many commodity sectors. Remember that for much of 2008 I was a
commodity bear, not an analyst that has hung on for this plunge. When I turned bullish last month it was
because there is a rubber band effect that m in my opinion, must occur in
this industry, which will create a whip-back result to the upside. There is opportunity in that whip-back and
timing it to the day is not realistic.
Position with multiple time frames and play the spike in the coming
days, weeks and months.
Energies
An
unexpected decline in inventories did little to stop the sector from seeing
fresh lows amid a continued fund liquidation of commodities. Expect a swift cycle shift here as a
perfect storm creates a sharp bottom.
Declining inventories should continue as we approach the Dec. 17th
OPEC meeting where additional supply cuts are
expected. A cold weather snap is all
this sector needs to see $60 in a blink of an eye. Remember this market has essentially broken
from $147 to $44 with little to no price support. That means a single leg down in crude has
plunged the market over 70%! Buy
futures or straight calls at these bargain basement prices, with a bottom likely
in or in early this week ahead.
Financials
Stocks offered a quick rebound from the sharp decline
earlier in the week, and shook off the worst employment report in recent
history (remember next month that these numbers often get revised). The market is likely going to look past
lagging economic indicators like employment, which often trails the real
economy by about 6 months. Can Obama’s rhetoric pre-Presidency save the market? Yes.
The market is looking for stability and to be able to say the worst is
over and he will give it to them. Well,
in my opinion, the worst is over.
There I said it. Sure we will
have another bank fail or maybe even see a U.S. automaker go under before it is all said and done. However, the likelihood is we will see a
government bailout of the auto industry, a declining rate of job loss, bank stability and corporate consolidation create a
change in market sentiment. Get long
the stock market and short one of the most outrageous bond price moves in
history!
Bonds broke out through the spike high from the previous
month, but at this point is rallying based almost entirely on a short squeeze
and foreign demand. A
big December stock market rally with thwart this bull run and turn
bonds back towards 122. The dollar
remains choppy, a scenario I saw and continue to see as likely through year
end. This does offer a short term
potential rally in the euro as the dollar hovers near the year’s highs. The yen is overbought but is technically
difficult to short. Buy some extremely
skewed puts which are trading at a discount to equidistant calls.
Grains
Grains fell through any
conceivable support and plummeted this week on fund selling ahead of the
WASDE report this Thursday. The thrust
behind this selloff is undeniably a wave of fund
liquidation, but is also being helped by strong Canadian supplies, arguably
the best crop in decades. Can the
grains support? Yes. When?
Now. Expect a huge grain rally
through month end, sparked by renewed fund interest and rising oil
prices. The focus should be on corn
and soybeans, with ratio call backspreads
recommended.
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Meats
Cattle is getting beaten up by declining demand and fears of a
negative demand cycle ahead as the global economy falters. A shift to chicken and pork may in fact
occur, but the rise in grain prices that I anticipate will give a big boost
to cattle prices in the short term. Hogs
should also see some upside in coming weeks.
Metals
Gold and silver have been in a
choppy range, following along with a congesting U.S. dollar. This week ahead should mark an important
turn in the dollar, where a quick chop down to end the year occurs and
supports metals prices in the process.
Play a spike in silver with a ratio call backspread
and straight calls for a rally in gold.
**Chart courtesy of Gecko Software's TracknTrade
Softs
Cocoa
caught a strong bid as Ivory Coast
supplies are shockingly low, but expect that to stall as dry weather helps
shift supply and disease issues away from the mind of traders.
Coffee broke through key support
but not quite below my bottom support figure of 98 cents. This market is a
strong long term buy, supported by declining supplies in Vietnam
and a small crop year in Brazil. This market is about to experience a
massive cycle shift and a supply shortage – get on
the bull bandwagon early.
Cotton continues to get whacked
by fund selling despite a global government effort to buy supplies at these
low levels. The world is on the cusp
of forcing an industry failure which would ultimately leave us with supply
shortages for years to come. This
political effort to buy supplies, seen in India,
China and
other nations, should create a floor above 38, and a great buying opportunity
even at current levels.
Sugar broke key support and is failing
along with corn and oil. A good
reduced premium call buying opportunity exists here if in fact we get a late
year rally in commodities, which I anticipate.
OJ will be in the news in coming
weeks and months as Brazil
tries to get the WTO to review the U.S.’s
practices against importing supplies possibly boosting demand for Florida
oranges. Current supplies peg us at
levels around pre-2004 numbers, showing over 6 months of inventory. However, this market is susceptible to
frost and I like it as a general value buy after falling hard and fast from
210.
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