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The Weekend Commodities Review

By Head Analyst James Mound

For the Week Ending May 17th, 2009

Energies

Declining inventories surprised many analysts this week, which helped to further the trend of short covering amid a solid bounce in the global economy. In the end energy prices are composed of Middle East supply and consumer usage/demand. The latter is mainly determined by travel and general spending habits, which have both been severely hampered during this recession. As the economy turns and supply remains static it will push prices higher. Throw in some short covering due to declining supplies heading into seasonally exposed summer driving season and hurricane season and you have a recipe for further upside in energy prices.

Financials

Stocks took it on the chin a bit this past week as key economic reports had a strong negative influence on market sentiment. CPI and PPI both came in about in-line, but renewed fears of poor consumer spending habits. Furthering that fear was a nasty retail sales figure and previous month revision, which showed the continued slowdown in consumer spending on the retail level. It did, however, show that the rate of decline slowed month over month. Retail sales, CPI and PPI are all lagging indicators to a certain extent, and should not be overanalyzed. The important elements remain consumer confidence and telltale signs of increased business and consumer spending. These critical components of an economic recovery continue to be strong and therefore buying the dip is recommended. Downside support target for me is at 865 on the S&P.

Bonds remain bearish, although last week's economic data gave it a temporary reprieve. The dollar continues to get beat up a bit and that should continue for at least a couple of weeks, however I remain a sideline player here as the opportunity will be buying the botttom as opposed to playing the short term move. Therefore the euro and pound remain bullish but avoidable. The Canadian dollar still has more upside. The peso remains bearish. The yen is a strong sell at 105.

Grains

The focus for grains continues to be on the weather and most of the news is bullish. While beans are the leader, corn and wheat have reason to run in their own right, and I am leaning towards a spread play here. Look to Sell 2 July Soybean, Buy 2 July Wheat, and Buy 3 July Corn on a bullish spread at or near Friday's closing levels for the week ahead. Rice remains the ugly duckling, exposed to a flood of inventory and a lack of buyers coming in. The shorts have control of this market in the near term.

Meats

Cattle remains a buy as grain prices and general buying interest supports prices. Hogs unfortunately cannot seem to get away from the swine flu stigma and will likely be a short for months due to global stupidity.

Metals

Mild price support is congesting metals near recent highs, but do not be fooled by the current action! Gold and silver remain strong shorts and this price movement is almost entirely due to a weak dollar and some short lived supply concerns. Take this opportunity to establish put positions in gold and silver. These options remains pricey, but relative to the potential downward price action I anticipate in the near future - they should be considered a bargain! Copper is getting support by rising China demand as they stockpile inventory at value prices. This type of buying is likely to dissipate as prices near 2.50 and therefore there is a better downside play here than an upside one. Get short.

Softs

Coffee continues to garner strength amid a short covering rally and growing concerns over the true supply side problems coming out of Vietnam. Rains hurt this crop, mainly comprising of robusta beans, but overall this is setting up a big move in coffee in coming weeks. Cocoa has seen its highs and remains a strong short with puts, as demand is plummetting during this global spending collapse. Cotton remains a strong buy on dips, supported by India subsidies at prices substantially higher than U.S. prices which has created a bit of an arbitrage amongst global players. OJ is catching a bid due to drought in Florida, and is a buy on dips. Lumber remains a buy as an early indicator play to a bottom in housing. Sugar is at a critical technical juncture, but is likely to break through to new highs in the near term.




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