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The Financials Pit Review

For the week of October 19th, 2009

By PitGuru Frank LaMantia

S&P & Currencies

Where is the market top and is there resistance? In my opinion the market is overbought and could slide 3-4% after the earnings week is complete. The market has generally shown the U.S. economy is resilient even in the hardest of times. The S&P does have small resistance in the low 1090's and had retreated once it reached that mark. I broke down a few days of earnings but listed the important ones to finish off the week. The tech market and financials both have had a positive run over the past few months. My personal opinion is that financials could slow down during the start of the 1st quarter of 2010. Techs could keep the market afloat while the financial sector sinks.

Earnings will continue this week. Hasbro (HAS) was expecting an EPS to be 0.93 and before trading today the company announced .99 cents. Actual earnings rose to 150.4 million from 138.2 million last year. The company claimed that toys for girls have been weak like toys for young boys reflected higher profits. Texas Instruments (TXN) is looking to earn .39 a share and many will be looking at this company's earnings because it is a semi-conductor. Traders tend to look at the market in sections to see if trends are forming. By breaking companies up into sectors one could try to formulate market strengths and/or weaknesses. Jeffries (JEF) is expecting an EPS of .28 a share and may hit its target due to fixed income having a positive effect on Wall Street firms. The logic behind this is non-banks tend to have fewer write-offs during times of economic hardship. Apple (AAPL) after the close today will show its earnings - expected to be 1.42 a share.[1] Like Goldman Sachs the world will wait to see its earnings. Have people been buying the new iPod? Is Steve Jobs' health affecting how the company is run? On Tuesday expect a ton of earnings to be announced. Here are a few that could create buzz on the trading floor: Bank of New York (BK) .74 and BlackRock (BLK) 1.90 will both post their earnings before the market open which could create some momentum in either direction. Financials are closely watched because over 100 banks have closed since the crisis started in 2008. Caterpillar (CAT) is expecting .06 a share and may give insight to how farmers are currently doing. Here are a few more to keep you busy for Tuesday: DuPont (DD) .33, Coca-Cola (KO) .82, and Yahoo .07 a share. Wednesday has a ton of earnings as well, but here are a few that one should keep an eye on: eBay (EBAY), Freeport McMoRan (FCX), P.F. Changs (PFCB), and Wells Fargo (WFC). Thursday earnings will be announced with McDonalds (MCD), Potash (POT), Starwood Hotels (HOT), US Airways (LCC), and UPS. Friday will be the end to a busy earnings week and eyes will be glued to the earnings of Honeywell (HON) and Microsoft (MSFT).

As the stock market climbs to new highs the dollar is falling down .035 to 75.54 on early morning trading. Investors could still see a sluggish economy that may not come around for years. Also, the government showing little interest in rates could be another reason traders and investors are bearish on the dollar. Bonds have been pressured by decent earnings and a somewhat bullish stock market, but if rates rise and the stock market falls back the bond market could see a nice boost.

The Energies Pit Review

For the week of October 19th, 2009

By PitGuru Daniel Cronin

The Energy market continued its stellar run along with the equity market and the falling dollar as Crude Oil was up 9% last week, breaking the big resistance of $75 to trade $78.75 in the November contract.  Gasoline surged the most this week  (+11.6%) as inventories fell by more than 5 million barrels sending the price up to $1.9793.  Heating Oil gained 8.7% as its inventories decreased.  Natural Gas was the laggard as it did not budge, starting and ending the week at $4.781. Inventories rose again in this market as the flatprice tries to fight the tons of cubic feet of Natural Gas in the ground.

I mentioned last week that if the equity markets could see solid earnings from the big named companies than Crude Oil could retest the $75 level.  Not only did some of the banks have good earnings, but the likes of Google and Intel[2] helped shoot Crude much higher.  The USD also helped out as this market was weaker again, trading at $1.4950 vs. the Euro - its highest level this year.  It is getting into a bit of an overbought territory here as it approaches the $80 level.  The trading range has moved now from $65-$75 to $70-$80 as it approaches the November expiration tomorrow and the December contract takes the lead.  WTI spreads have gotten stronger with the Nov/Dec trading -39 and the Dec/Jan trading -47.  The Dec9/Dec0 contract also got very strong trading -450 now from a low of -540 last week. Look to take some profit in the Crude Oil market this week as it tests $80.  Big name technology companies are coming out with earnings with the likes of Apple leading off on Monday morning so it will be much of the same as last week.  It will only go so far as the earnings growth will take it.  Natural Gas is very unappealing here, struggling to get above $5 - I recommend staying away for right now.

The Softs Pit Review

For the week of October 19th, 2009

By PitGuru Jurgens H. Bauer

Outside markets acted supportive in assisting the soft complex higher this past week. Will that continue? There is a lot of talk circulating that re-allocation of assets among ETFs will be in full force this week and soft markets are expected to be a focus. At week's end the CRB is at a high for the year and the US dollar was still under pressure. Both have been a key resulting in the flow of money into commodities. Unless outside markets receive news that will halt the dollar's decline and stimulate a bout of short covering it looks like a strong fourth quarter is developing for commodities and in the soft complex. One concern might be that the relative strength of individual markets in the complex is running high.  

Coffee acted strangely backing off on efforts to move above 139 basis KCZ for much of the week, but after Monday's trip down that held 134 it never did get back below 136.30. On Friday prices took off blasting through 139 and then 140 and 141, and eventually challenging 143 just prior to the option close - a classic case of the old axiom to "never sell a quiet market short". Now KCZ is in position to reach the objective of 149.50.  Funny thing is prices could open 200 points either way and still get there. Most interesting on Friday, which saw the biggest volume in futures in quite a while (over 30,000 futures changed hands) option volume was light, with less than 4,000 options in total changing hands. The weekly breakout was accompanied by strong volume and this market is strong. It's doubtful that failure is ahead; rather, look for higher values.

Cotton had a powerful move up last week in which specs will likely end up net long over 20%. Open interest has grown, along with trading volume leading one to believe that there is more to go here on the upside. Clearing the 65-cent hurdle was key and momentum is obviously in favor of longs. The trade is short in a big way and one cannot help but wonder if they have saved bullets. Of course those sales are offsetting long physical positions, but should mills decide to acquire fresh longs and merchants need to buy, who's going to sell?

Then there is crop. Rain in the Mid-South and parts of the Southeast have served to damage the quality and reduce yields - and with a late crop (will the weather in Texas hold?), NY futures gather increasing focus. Already this is one of the smallest crops in two decades, so the amount of potential tenderable grades is another threat. Sources among the trade remain confident that they will be able to thwart the spec longs by possibly delivering a sizeable amount of certified stock to the board. The certified stock has grown again and is approaching 375,000 bales. The futures market is paying a better price than any mill at the moment, and yet if mills get nervous and seek coverage CTZ will bust a move. Logic suggests pressure should materialize, but history shows that cotton doesn't stay in the 70 handle so a move is likely. Subscribers should expect a recommendation early this week.

OJ finished correcting after the breakout a week ago from the crop numbers. Cocoa prices moved higher again adding over 100 points on the week. Grinding numbers were issued with some revisions. I remain a skeptic of the demand side for cocoa, and as such remain without a position although I am considering opportunities from the short side. My lack of confidence prevents commitment.

Sugar prices surged for much of the week, pausing Friday as they received some profit taking. Volatility remains high, but why not with ranges of 100 points or more most days... Rains in Brazil are expected and a move over 25 cents may result. Keep an eye on Indian developments as global deficits continue.[3]

The Metals Pit Review

For the week of October 19th, 2009

By PitGuru Daniel Cronin

Precious metals had a very dubious week as they had all of the makings to achieve new highs with the USD getting hammered and crude moving higher, but actually traded flat in Gold to $1,050 and down 1.5% in Silver to $17.40.  Platinum was also unchanged as the market trades at $1,340.  Copper was the best performing of the base metals as the market rallied up to $2.90 as equities grew stronger.

It was puzzling to see Gold, Silver, and Platinum all lag last week as the Euro/USD traded up to a high of $1.4965, its weakest point for the USD year to date.  It was most likely due to profit taking from the huge run, but still you have to have concern up here now.  Let's digest the earnings of some big tech names coming this week and see if they have an effect on the USD and go from there.

Copper seems very comfortable at the $2.85 level right now with the equity markets holding here at the Dow's 10,000 level.  I would still recommend being a buyer on pullbacks. These markets do need to make some sort of correction though as the charts seem too good to be true for longs out there. 

The Grains Pit Review

For the week of September 28th, 2009

By PitGuru Matthew Pierce

A different weekend than usual. Today I am talking about all the fundamental factors, blatantly ignoring the macro side just to expose the underbelly of what's moving the agriculture market.

Corn has the least realistic reason to rally. Ending stocks estimated on either side of 1.6 billion does not inspire bullish attitudes. It does have delayed harvest with some analysts looking for losses approaching 400 million bushels. This would concern me if the crop wasn't estimated over 13 billion. Looking at Ethanol, I see growing demand but the political question here is the battle between subsidies and mandates. I feel the mandate battle will win as the government itself starts to increase usage over the next 6 years. This should maintain Ethanol's presence as a demand component. Concerning demand seen on front end loading by Mexico and Korea I would look for exports to continue to decline as seen over the previous weeks. Mentioning macros briefly, this is weak dollar driven. The USDA has high expectations for exports so I cannot see good sales as a bullish scenario. S. American planting and expectations are both bearish. Recent rains have recharged both top and sub soil moisture levels setting the stage for a big crop. Whether the lofty 115 MMT (using soy as a baseline) combined for Brazil and Argentina is reached has yet to be seen.  Domestic basis is undeniably bullish due to delayed harvest with the pipeline very thin. The demand for HFCS continues to support the cash market and will install a consistent bid on any drop. Overall the picture appears far rosier than I feel it really is. The short term (2 weeks) may continue the bullish attitude, but I feel a drastic (30+ cents) drop is on the horizon so don't marry bullish positions while looking to build a short delta position or while looking to bear spread Z/Z10 when harvest starts to really roll.

Beans have the more compelling story with harvest delays eating into already small carryout expectations. Hefty planting and production expectations limit the upside with China the biggest component of demand. As seen in recent weeks, China is turning to S. America for beans on the flat price run up. This is not a signal of unconditional demand but with rumors flying concerning a continuation of the stockpile program in China the chance for unlimited demand still exists. The bull stance is more acceptable for beans even with the lofty expectations for Latin America. Once we get our harvest off, as mentioned above for corn, the domestic bid will collapse. I like beans due to relative carryout levels as compared with corn or wheat for that matter. My concern here is everyone's leaning into the bean bull. I can't find someone who is bearish from current levels making me leery of following any real rally from current price levels. Remember that the market has a habit of screwing the most people possible. The market seems very comfortable on either side of 920.

I hope this discussion sheds a bit more light on the underlying factors. Corn has a good bid but ending stocks and a massive Chinese crop will limit upside potential. Beans have limited and shrinking supplies countered by rampant demand. As mentioned here, beans are leaning too bearish which will cause nasty corrections as weak length is flushed out. These are the times for bean bulls to strike. Corn bulls needs to play short term positions looking small hits. Bears should settle into corn using this as the weak leg of spreads while also looking for volatility to come back in line with the rest of the floor.

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.

[1] http://news.cnet.com/8301-31021_3-10377195-260.html

[2] http://www.bloomberg.com/apps/news?pid=20601087&sid=afR6To42CWGc

[3] http://www.bloomberg.com/apps/news?pid=20601086&sid=aygStSLX.Lrk