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The Financials Pit Review
For the week of June 1st, 2009
By PitGuru Frank LaMantia
Monday, June 1st, we have data being released about personal income and spending; which the market expects to be -0.2%. Consumers have been buying luxury goods, but let's see if they are spending money. If people's wages have dropped, then this number will not improve. Consumer confidence does not show physical numbers like income and spending. Side note: People maybe spending money on credit cards before the new laws are amended by Obama, for fear of a decrease in lines of credit. Tuesday, June 2, we have pending home sales, auto sales, and truck sales. Home sales are expected to come in at around 3.2%, which may be accurate. Auto and truck sales are expected to sell on average of 3.6 million vehicles. We should not expect a fire sale and everyone rushing to pick up a new car or truck. Leasing has come to a halt and APR is extremely high; supposedly over 6.5%. Wednesday, June 3rd, we have factory order numbers coming which are expected to be around 0.5%. This number has been slowly increasing and includes non-durable goods such as tobacco and food. We should expect a small increase that may spark a rally in the market. Thursday initial jobless claims are forecasted to be 610k which has been slowly moving downward. If this number beats the forecast and is lower we will see a bullish run. I believe either way the market will pull back to wait for non-farm payroll numbers on Friday. Friday, June 5th, non-farm payrolls will be announced and should come in at -525k. This gives us a healthy look at job losses in different sectors; sort of a snap shot. The market will likely fluctuate the entire week!
Bonds
Currencies
The Energies Pit Review
For the week of June 1st, 2009
By PitGuru Daniel Cronin
We saw some key data points helping energies rally last week as consumer confidence shot up to its highest levels since September '08, bringing crude up from below $60 to close out at $62.50 on May 26th. On Thursday, May 28th, we saw inventories fall for a fourth straight week as crude drew 4.5 million barrels and OPEC deciding to hold steady leading oil higher again to where it stands now $66.31, good for a + 7.5% gain in 5 days. Heating Oil also rallied 7.2% to $1.6776 as distillates built less than expected. Gasoline gained, but not as much as the aforementioned markets, +4.7% to $1.8953 on the news RB inventory drew less than expected, under 1 million barrels. Natural Gas again gave us a head fake to over $4.00 only to get knocked down under that number by, again, another weak inventory report of builds.
Crude oil rose to the highest since November as China's manufacturing expanded for a third month, signaling that fuel demand in the world's second-biggest energy consumer will increase. Crude has now blasted through all the major technical points including the continuous contracts 200 day moving average ($62.75), July Crude's own 200 day moving average ($66.50), and Friday's high of $64.47. Throw in a weakening USD (EURO/USD $1.4150) and there is a serious rally that should not be taken lightly. I thought Crude might try and have some profit taking occur late in the Friday session/weekend but not the case as we are now + $1.19 from that close trading above $67.40. The next stop I see here is the technical number $70 and that is not too far away. Front WTI spreads have stayed relatively unchanged with July/Aug trading right at -.75 but the back spreads have gained some significant strength with the December09/December10 spread trading at -$3.10 right now. This has gained more than $2.00 in the last two weeks alone.
Heat cracks have gained slightly last week as July trades at $4.00 while gas cracks have came off a bit as that spreads trades at $12.90. Gasoline has been the weaker of the two products and I suspect that this may continue on this week as the summer driving season hype has now passed.
The Softs Pit Review
For the week of June 1st, 2009
By PitGuru Jurgens H. Bauer
"Spreads Will Roll"
The moving of positions from the front month into the next active month (principally by long only index funds, but also by spec funds and specs), will dominate the action in several members of the soft markets this coming week. "The Roll", as it is often called, occurs because these traders do not desire to be involved with the delivery process. In other words, they do not wish to make, or take, delivery of the actual underlying commodity. Therefore, they need to shift their positions out of the front month, or roll them forward, as delivery approaches and convergence takes place. Convergence is the mechanism where the spot month mirrors the cash market price because they appear to become one and the same. It is the feature that makes the markets viable as a useful tool for those who actually deal in the underlying instrument, as "hedgers" can legitimately find it to their likely advantage to make or take delivery of their position. There is basis risk to this kind of trading.
Since long only index funds will be actively rolling long positions there is sufficient reason to suggest the front month will receive selling pressure while the next active month buying. When combined with additional longs being rolled (when spec funds and specs are also rolling forward longs) the net effect can create a bias in the spread between those two months. Hedgers and other market participants anticipate this action and the movement in these spreads becomes a market focus and volume typically changes hands as the roll takes place in earnest. We are seeing the impact of this already in several of the soft markets. Given that the soft markets show net longs among speculative positions, it is likely we will see these spreads become more active in the coming week.
As a result of rolling the N/U spread in coffee, it ought to be expected to tend toward widening. Since the differential in that spread is sometimes used as a signal for market direction, (widening when bearish, narrowing when bullish), one must realize that any signal from this spread during the roll period may be obscured. In cotton, where the N/Z spread has already widened out over the last two weeks, Friday's action in the N/Z cotton spread didn't react as one might have expected. When prices dramatically moved up (it is customary when the market makes a big move the front month moves more rapidly), one might have anticipated the spread narrowing. It didn't. I believe this is due to the offsetting impact of the "roll." Bottom line is to be aware of the potential influences of the "roll" on the markets.
This past week the soft markets received a firmness resulting from the dollar weakness. This was true of commodities in general and is likely to continue as all are, in effect, plays on the dollar. Is this a signal of the beginning of hyperinflation from the flood of money? At the very least confidence in the dollar's relative safety is waning and that alone should prove supportive to the softs. Note increased option activity among the softs and strong outside markets.
Cotton: Prices broke down early in the past week, but came roaring back with Friday's action dominated by specs and funds considering the ramifications of the US dollar. July locked limit up and traded synthetically up to 5760, then backed off. So on the whole, Cotton has corrected and shown itself able find support. Exports not a story, keeping pace with last year; but since the crop is reduced and the majority of the US crop is now being grown in West Texas weather concerns there are beginning to grab attention. Watch for the impact of any weather stories to grow. Prices found needed support on the trip down which leads toward a likely range now being between 54 and 60 cents basis July. Will May highs get tested?
Cocoa: Big up move last week, with July registering a 168 point gain. Bullish ICO numbers regarding supply and demand estimates reaffirmed, so anticipated deficit partly responsible for the strength. Yet weaker dollar forces and technicals also at play with nearby resistance levels taken out. Look for supportive forces (weaker dollar, friendly economic view) to carry weight in the coming week. Still the potential range could be as wide as 2200 to 2900.
Coffee: Another week of gains, but at a slower pace than previous. Supply side concerns still suggesting higher values, while historical data and timing suggesting bearish forces. Traders still seem leery of setbacks, as indicated by put premiums holding better than customary. In fact, there are some traders looking for downward pressure flatly saying it's overbought, yet even if that camp isn't aggressively short they certainly aren't overtly long either. Cooler temps are forecast and the potential for a freeze is keeping longs interested. Coffee seems a bull market headed higher and capable of seeing 145 in July this first week of June. Technically, a further move up has potential. Will coffee see $1.70?
Sugar: Sideways week as the market remains range bound. Time to shift focus from July (N) into Oct (V), and funds will likely do the same. We've already seen the V/N spread widen by 50 points in the past three weeks. More may be in store. Outright the market has stayed in a range, but should be followed on a break out upward. Support has held. Favor the long side.
OJ: The rains came and yet prices still managed a new high. Although prices backed off from the new high the trend remains upward and inflationary concerns are continuing to play a role.
The Metals Pit Review
For the week of June 1st, 2009
By PitGuru Daniel Cronin
Gold and silver continue to march higher and higher as the USD weakened significantly against other major currencies last week. The Euro/USD has now just crossed the $1.42 mark and looks to test the $1.44 level we have seen last on December 17th, 2008. Gold rallied + 2.0% to close out the week at $980 while Silver gained more than +6% to trade at $15.65/oz during Friday's session. Silver, like I have said for the past several weeks, is the likely better play as it is outpacing the yellow metal so far here. Platinum had a monster day on Friday, rallying some $50 to close at $1,196/oz good for a 3.1% gain on the week. Copper had an outstanding week to follow equities as July HG traded up to $2.20/pound, +4.7%.
Monday morning we will likely wake up to a big rally in the metal markets as the dollar continues to weaken and equities are called much higher. Gold is up $9 and is testing the $990 level, inching closer to that $1,000 mark. Silver trades higher by .30 cents to $15.91/oz. Platinum broke the $1,200 number and is now up $30 on the day to $1,230. Copper has leaped to $2.26/pound and is now at its highest levels in 2009 and is possibly headed much higher. Not a bad day to take a little profit off the table, but this rally really does look for real here - especially in the Copper sector. Any news about the US getting out of the recession is great news for copper and we are seeing that today in the equity markets. Let's keep a keen eye on the USD and see if it can trade higher than the mark from early December. If we do break $1.44 in the Euro/USD, Gold will likely trade higher than $1,000.
The Grains Pit Review
For the week of June 1st, 2009
By PitGuru Matthew Pierce
The previous week we saw a large amount of cash move into commodities as the entire sector, agriculture and softs saw huge gains in open interest. This is helped by a weakening US dollar and a good upside move in crude. The latter factor is important in that where crude goes so goes corn. The market is also looking at planting delays as a bullish factor with wheat and corn gaining the most from this factor. The delays are less important for beans due to a shorter maturation cycle. Wheat is gaining interest due to problems in both the HRW as we approach harvest and spring wheat during planting. Watch conditions on Monday afternoon for any bullish impacts for both markets.
Looking to the week ahead the market has little new news. We are playing with the same factors as last week with the new month the only real early factor. As mentioned, look to crop progress on Monday afternoon for early fundamental direction with export sales on Thursday the only other report. Weather is a constant issue with planting delays becoming a major issue as we enter June. Corn should have a majority of the crop in the ground following another good stretch of dry weather. Beans and spring wheat are the new features as corn conditions are the feature for that market.
On the macro side, look to the US dollar, crude, and equities with the anticipated GM bankruptcy coming on Monday. With a new month and OPEC feeling crude is fair value at $75.00 there seems to be little to stop the upside move...at least to start the week.
On the technical side we are looking at drastically overbought short term indicators. Both daily and weekly RSI, S. Stochastics and B. Bands are at the upper end of the ranges but that is no reason to go short as we have seen for the past couple of weeks. The market is well overdue for a pullback so look to get long OTM puts to take advantage. This is a short term move so look to either July or August options as your best bet.
Looking at spreads we have to roll period on the immediate horizon. This will affect intramarket spreads with Goldman moving on Friday. Barclays and AIG will start tomorrow. This makes N/X in beans interesting with a massive inverse still priced in. With delivery starting this week keep an eye out for bean receipts for best direction here. Wheat corn is trading at the upper end of the range as well with Dec sitting in the low 230's. I feel this is as far as it will go in the immediate future making this a market to watch.
Overall the bullish sentiment remains but everyone feels a bit more leery this week than last. I feel the market will start the week strong due to macros and the new month but a downside correction is looming making recent length a risky proposition.
Frank LaMantia (S&P and Currency trader), Matthew Pierce (Grain Floor Trader), Daniel Cronin (Energy & Metals Broker) and Jurgens Bauer (Softs Floor Trader) are the Gurus for the Weekly Pit Review published on http://www.pitguru.com/ by Futures Press, Inc. - hear their audio market commentary, learn more about them and sign-up for the Weekly Pit Review by visiting http://www.pitguru.com/
Disclaimer: Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading.
