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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
December 14th,
2008
This will be the last Weekend Commodities Review for
2008. Our staff will be hard at work putting
together the Mega 2008 Year in Review and 2009 Outlook issue that we are
proud to provide free of charge to all registrants – look for this critical
report the first week of January.
General Comments
Week 1 of the last month of
perhaps the most volatile year in commodities industry offered what appeared
to be extreme fund selling. Week 2
showed that the fund selling might very well be short lived and a commodity
rally through year end is likely to occur as the dollar takes a break from
its monsterous second half of 2008 price surge. Week 3 should offer much of the same, as
follow through from last week’s EU stimulus package strengthens foreign
currency against the dollar and surges commodity prices higher.
Energies
OPEC
OPEC OPEC. December 17th
marks a critical OPEC meeting when the oft referred to oil cartel has the
opportunity to shock energy prices higher with a supply cut in excess of 2
million barrels. Show me 3-4 million
and watch out! Throw in a shocking
Russian interest in coordinating with OPEC, along with other oil producing
nations, and we could have a massive supply cut to force prices higher. Now take that all with a grain of salt
because what OPEC says and what OPEC does are normally two entirely different
things. In the end it will be
mid-January before we see what the real deal is, but buy the rumor and worry
about the facts later. Supplies last
week were ignored as rising inventories were pushed aside due to greater
interest in the U.S. dollar trend and upcoming meeting.
Financials
Stocks surged off of overnight lows following a Senate
shutdown of the auto bailout. Leave it
to our government to establish the true bottom in the market. When the banks began failing the market
panic ensued, showing the fear destruction in the market. If wave two is the auto industry the market
has shown it will take a lot more to recreate the panic that we have seen
over the past few months. Plus we are
shaking off ugly employment data and a continuing credit crunch. If this isn’t the end of the collapse then
something incredibly horrific lies ahead.
Bonds continue to see spiking demand and are reaching
epic levels. Option premiums remain
sky high and futures are very risky at current volatility levels, but the
call skew remains strong so look to sell OTM calls and buy OTM puts for a
synthetic short play.
The dollar has begun to fall as anticipated, but do not
expect too much more downside between now and year’s end. Look for 82 or so as a settling point,
which still offers more upside in the euro.
They say the trend is your friend but the yen is riding a bond surge and
both markets are on the cusp of collapsing.
The yen option skew is one of the most extreme option price skews I
have ever seen. Look at selling a 120
March call against a boatload of OTM puts for an even money ratio leveraged
synthetic short. A little too complicated? Take a look at this week’s Week Ahead for more details.
Grains
Last week’s ratio call
backspreads in corn and soybeans should look impressive after a strong move
up to and following the crop report.
Bottom line here is just that – we hit bottom. Buy grains across the board. Wheat supplies from Argentina
look to be on the decline and plantings for next year should offer a quick
cyclical shock for a second wave sector wide rally through March.
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Meats
Hog demand from Russia may be minimal as a 200k ton drop in imports is expected
on strong internal supplies. This
demand drop is not the end of the world but may be just the beginning of
declining global pork demand as cattle prices have dropped dramatically and
possibly shifted demand to the not-so-white-meat. On the flip side cattle production is
dropping and may see a strong price rally as grains are on the move higher.
Metals
The world gold council is putting
out some Q3 numbers that would make physical gold demand appear sky high, but
the focus should be on the lack of a flight to quality amid a stock market
collapse. It shows that a strong
dollar trend ultimately controls gold price movements and the current
pullback in the dollar may be just what metals need to make its bull run to
finish off 2008 in style.
Softs
Coffee may have set a long term
low with its recent test of support above 102. I expect 98-102 to hold as a support band
for a long, long time. The chairman of
the Vietnam Coffee and Cocoa Association was talking about lower yields cutting
production by about 4%. Throw in a Brazilian
Ag Minister forecast of more than a 20% drop in production (year-over-year)
from the world’s largest producer and you may just have the ingredients for a
mega rally in coffee in 2009. Cocoa
is rallying on low supplies in Ivory Coast
and a beneficial move off a dollar pullback.
Buy puts into this move.
OJ is out to get a boost from a
low yielding reduced acreage crop.
Bottom line for OJ is that it is at a level that makes it a value buy
with a two season supply exposure (frost and hurricane) and an epic
retracement that has caused a more than 60% plunge in under 2 years!
**Chart courtesy of Gecko Software's TracknTrade
Cotton didn’t get much help from
the most recent crop numbers but the fact still remains that we are
significantly under historical acreage and supply numbers and the world is
buying the carryover to support prices.
Buy the dips. Sugar is getting
a big report on Monday and should see strength in coming weeks with a corn
rally underway. Lumber remains a value
cyclical long term buy at these levels.
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