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The Financials Pit Review
For the week of December 29th, 2008
By PitGuru Kalvin O'Brian
U.S. Economy
We are half way through the holiday season and the fireworks are already starting. The Israeli air strikes in Gaza have amplified concerns about the Middle East's instability. The immediate impact that the markets have seen is a rise in metals and, more importantly, crude oil. If this instability continues inflating the price of energy, the bullish outlook many investors are praying for after the New Year could be just that - a prayer. As for the close of the year, consumer spending was unsurprisingly down from a year ago in both November and December according to a report by MasterCard. President Elect Obama's plan to infuse the economy through infrastructure building is still a ways away. However, Congressional Democrats continue to look for ways to expand funding through a new tax break for municipal bondholders. The plan is to make private activity bonds more appealing by exempting the interest on them for the alternative minimum tax. This new proposal would re-write 23 years of policy. It would attract mutual funds and individual investors to private activity bonds who often avoid them due to the high taxes and complicated paperwork. This could be another step in the right direction if it goes through. We are finishing up another holiday week though, and despite the Middle East I would expect the markets to be relatively quiet.
Currencies
The dollar undoubtedly felt the negative effects of the problems in the Middle East and the possible disruption of oil to the US. It appears that this trend could continue in the short term. I would look to play short dollar trades through the end of the month. In addition to the Middle East crisis the dollar also dropped against the yen, this coming before the housing and manufacturing reports due out this week that should show a further slide into recession for the US.
Across the pond the British pound dropped to a record against the euro. This comes out after a report announced that UK house prices are most likely going to continue declines in 2009. This would increase the odds of further interest rate cuts from the Bank of England. With oil and metals up there I would look for the Canadian and Australian dollars to gain ground.
The Softs Pit Review
For the week of December 29th, 2008
By PitGuru Jamie Fink
Cocoa gained a lot of attention prior to the holiday trading week as prices gained back significant ground. Bean arrivals at port in Ivory Coast have not been stellar, prompting another warning from Fortis that there will likely be a supply deficit for the third year in a row. Global stocks are already low and supply deficits will not go unnoticed. Although the holiday trading period has seen sharply lower volume and the market appears to be consolidating at recent price levels, the question of dampening demand amid global economic slowdown could bring in a bearish tone to end the year.
Coffee suffered a dip in prices amid lower holiday trading volume but should hold above recent lows heading into this week. The new forecast for the upcoming Brazilian coffee crop is not due out until after the new year but consultants are estimating a total far above the production achieved this year. They may be at cross purposes since the new crop should be the smaller of the two year production cycles for coffee in the South American coffee giant and, since credit is tight, farmers may be facing a tough year for all agricultural products.
Cotton is on a gentle rise higher as traders approach the market with a measure of timidity since demand is forecast to fall so sharply. Domestic prices for the fiber in several producing nations including India and China are being supported only by state intervention. With prices so low, it appears as though farmers may reconsider planting cotton and that could mean we are seeing the beginning of a long term price trend higher.
Orange juice, on the other hand, has seen a definite tumble in actual consumer demand and as a result the amount of concentrate in cold storage jumped over eighty percent over last year. Whatever production decline is possible in Florida will be more than compensated for in production from Brazil - the leader in global orange juice production. Sugar should also see some selling pressure from the apparent decline in fuel demand however; recent gains in crude oil prices will lend support through the end of the year.
The Metals Pit Review
For the week of December 29th, 2008
By PitGuru Frank Martin
Action across many markets was quiet as the year rolls to an end and holidays lower trading volume. Tensions in the Middle East will be the main headline for gold and silver this week as crude oil rises and investors turn to precious metals. Gold may not be at the same highs we saw earlier this year, but prices are still going to end the year on a high note. Precious metals continue to offer the possible haven in troubled financial times and geopolitical tensions will help too.
Platinum and palladium have struggled due to automaker troubles, but the low prices look like bargains as the US dollar declines. Prices have also cut into mining budgets and companies like Anglo Platinum will have to cut production as they try to slash expenses. Their early estimates suggest that they will produce 300,000 fewer ounces of platinum next year. Other South African mining companies are likely to do the same to try to boost prices which have fallen deeply this year. Copper prices also fell heavily and will likely lead to lower production from major centers. This, plus the falling dollar, should boost prices. Be aware of lower volume and high volatility with the holiday this week.
The Grains Pit Review
For the week of December 29th, 2008
By PitGuru Matthew Pierce
The previous week saw the beginning of the commodity rally as light bullish volume and a lack of selling allowed technical momentum to build. Many feel there is plenty of upside in commodities due to impending weakness in the US dollar and growing problems with the S. American crop. Both Brazil and Argentina are suffering from early season drought and stress lowing crop estimates dramatically in the previous weeks. Growing momentum also does not quantify growing Chinese interest in US beans and corn with the latter import structure looking more and more like the 5 MMT talked about over the past two months. There was little in the way of fresh macro or fundamental information with a majority of the world out due to the Christmas and Boxer holidays. Export sales were weak, as expected, while equities inched higher but the latter will not last if weak early sales results hold. The fundamental market is helped by horrible weather across a majority of the central US putting the remaining corn and beans left in the fields at grave risk of total loss. With the recent rains, snow, ice and winds there is little chance we see any of the remaining 400+ million bushels of corn and uncounted bushels of beans come off. Driving through NW IN recently I was shocked to see how many fields of corn remained uncut. I wish I could explain the delays that far south but I cannot. This is an issue worth noting but until we get a better handhold on the total quantity there is little we can do to prognosticate ending stocks. Not even figuring this, there are major changes needed on the Jan WASDE report with the DEC report not changing much as the lame duck administration sat on their hands. With the Jan WASDE supposed to be the "final" report I have to ask all readers, what changes will the Bush administration bother making? Taking that into account I feel the March report will be far more pivotal considering we will have a better grasp of the 2009 RFS, crude oil prices, Obama's stance on Ethanol and S. American production expectations. At that time we will also have a three month look at the "bailout" with the US dollar a key indicator for commodities heading forward. With interest rates basically at zero, there is only one way to go and with billions in fresh US debt, inflation is sure to hit. Inflation is a commodity bull's best friend offering ample opportunity in the new calendar year.
Looking ahead, we have another short week with a noon close on Weds, no trade on Thursday and a ghost session on Friday. What I mean by ghost session is no one will bother showing up due to New Year and expectations that the year really begins the following Monday. On Jan 5th, I expect fireworks to begin with plenty of fresh money moving into the market with many of my personal clients warning me that starting that day the "game is back on". Billions in stagnant capital is looking for opportunities so with faith in equities falling well short of par, money has few choices with bond rates all but non-existent. The energy sector is in trouble due to diminishing demand and growing stocks with no immediate end in sight The agricultural world at a crossroads; will the "green" movement continue with crude plunging to, if the pundits are correct, $25.00? What will Obama do with failing Ethanol after winning the entire Midwest by promising to support the industry? I feel the latter is less of a question of "green" versus energy independence. I would rather pay US farmers than Saudi Sheiks any day. If someone can find a convincing argument for the opposite I would gladly listen. On the same soapbox, if the US government wants to "lead" let them change all new USPS vehicles to E85 fuel. This centralizes distribution costs, storage costs and stops all talk of Brazilian imports to meet the US needs...if we decide to follow constitutional law and raise the RFS from 7.7% to 10.1%. This is not a choice, just like paying taxes is not a choice. Why stop an industry in its infancy when there are so many changes being made? Look at the breakthroughs made in cellulitic fiber destruction and increased expectations for MPG upcoming. Stopping now would do a disservice to all Americans down the line. It would equate to stopping the Internet after the bubble popped. Who would that have served?
Looking at spreads, with basis continuing to pop the rally is well supported from the fundamental side. There is little interest in bear spreading with many feeling demand will come back as many countries have been hand to mouth over the past many months. Why bear spread to make a few cents when you can bull spread and take advantage of any snapback in the market. Just remember established risk allows you to sleep at night. The best options are in beans with carryout figures looking tighter and tighter by the day but this does not eliminate corn and wheat from a distinct tightening stance.
In options we have a shift in the works. There is little new interest in owning puts with only those covering established shorts buying into the market. Call OI is proof of the changing stance with many getting upside coverage in July and Nov09/Dec09. Volatility also shows growing interest with the skew shifting in favor of calls for the first time in weeks, if not months. This is a good sign for bulls come the new year. I have been a fan of buying small upside calls for months in deferred options and there are starting to pay off. Options can be a long term or a short term game. It all matters on how you want to play it and what your risk parameters are. We can buy calls, call spreads, upside combos, upside volatility plays, upside gamma plays and many more. The best way to take advantage of parabolically oversold conditions is to buy far out of the money calls with small deltas and small out of pocket expenses. Please remember that when everyone in on the same side of the boat it has a habit of tipping over. Reference June 2008
In closing, the opportunities are there for the savvy investor to recoup part of any 2008 losses. It was a rough year for many but when things are bad we need to look for opportunities, not hide and lick our wounds. With the new year comes reasons too many to count to rejoin the fray. While equities remain in trouble there is no reason to jump in and buy stocks. With energy stocks growing there is no reason to fight the collapse in crude, but keep a close eye on the middle east with Israel raising tension as I write. With gold retaining a good majority of last year's gains the upside appears limited. Corn, wheat and beans have fallen out of bed losing will over 50% of total value with the recent rally (two weeks) offering a good insight to the upside potential of our markets. Ending stocks may look bearish right now but there are far too many questions concerning world demand, world stocks, production estimates and changing geopolitical concerns for me to favor anything but a bullish stance starting off the new calendar year.
Kalvin O'Brian (S&P and Currency trader), Matthew Pierce (Grain Floor Trader), Joe Marshall (Energy Option Broker), Jamie Fink (Softs Industry Insider), & Frank Martin (Metals Trader) are the Gurus for the Weekly Pit Review published by www.PitGuru.com - hear their audio market commentary, learn more about them and sign-up for the weekly Pit Review by visiting www.Pitguru.com
Disclaimer: Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading
