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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
October 5th,
2008
Energies
A choppy energy market sector hovers near the recent lows
as a strong inventory report combined with mild weather and a strong dollar
to push prices lower in the near term.
Natural gas remains a value buy, however this
market sector as a whole is susceptible to wild swings in coming weeks, which
means avoid futures in the near term.
A possible Pakistan/Afghanistan issue might be brewing after reports
on Friday of a U.S. missile strike.
Financials
The bailout finally goes through and the market reacts
with continued selling. The Fed needs
to, and likely will, cut rates in the very near future to turn this mess
around. One would think that they have
little choice given the lack of a rate cut last meeting and the poor initial
response to the bailout package. Look
for a great buying opportunity in stocks after this washout early next week. Calls are the play as upside volatility is
still undervalued given the potential.
Stay short term and deep out of the money. Bonds will likely test the highs as the
rate cut mentality sets in, but I do not expect much of a push past 121 (if
that) as the stock market rebounds and takes the inverse correlation to force
bonds south from here. The dollar is
rallying on the same concept we discussed before – the ECB cannot play catch-up
to the U.S. which means a far worse European recession than U.S. fallout and the market is starting to see we are ahead
of the curve by comparison. The ECB
cannot, by its very structure, create a comparative bailout package and
therefore is exposed to a far worse downside. The UK meets next week on a critical
interest rate policy meeting and should cut rates, but too little too late in
my book. Nevertheless the upside in
the dollar is limited in the short term and is likely to stay range bound for
the next couple of months, say for a few volatility spikes given the daily
price action we are seeing.
Grains
Grains took it on the chin this
week as the dollar rally put the kibosh on foreign demand, and bean
inventories look quite strong. Throw
in a solid wheat crop and we may have seen the highs in this sector after all. Another strike in Argentina
may cause a little supply panic in coming weeks, although this is an ongoing
issue that seems to have little influence on the grains. Long strangles remain a solid play as puts
are undervalued and calls are losing premium during this sell off. As we dive into harvest I am suspect of the
ahead of the curve selling we are seeing and would be biased to the upside
simply as a contrarian ahead of the news. Rice remains a sell and is very unlikely to
test the highs again anytime soon.
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Meats
The quarterly hogs and pigs
report showed a lot of supply hitting the market between now and year
end. However, the market is likely to
get ahead of what appears to be a supply trend shift as we approach what
could be a multi-year supply high.
Long term hogs are a buy and don’t get too caught up in the long term
price chart – we are not heading to the 40s anytime soon. The market is waiting for a value entry and
I just do not think they are going to get it.
Long calls are recommended.
Cattle remains weak as grain
prices falter. Seek a value buy short
term as an anticipated corn turnaround should boost prices through October.
Metals
The metals sector plummeted this week as the dollar
surged ahead of bailout Friday. This
is one wild swinging market and, as much as I expected the downside, I would
not expect too much more of it. There
is an outside chance that gold will plunge early next week to the 700-740
area and if it does I would scoop up some long term bull call spreads. Otherwise this market is a buy right after
Wednesday to give this exposure to the downside a chance to subside. Silver is the best value in the metals and
is a buy in the $10 area with straight calls for July ’09. Copper is long term bearish in my view as
demand dwindles and supply remains relatively constant.
Softs
Cocoa
is tanking on the general commodity pullback, or so it may seem. This market is begging for a retracement to 2000 and this move looks like it may be
its time to do it. Puts remain a value
buy. Coffee is testing some important
long term trend line lows and is a strong buy at these levels with futures
(with put protection) or bull call/straight call approaches. Cotton is showing the potential to bottom
in the mid-50s and I expect to see some strong upside in coming weeks. This market represents a great long term
buy at these levels. Sugar is coming
off and out of a bull channel in a very bearish way. This market is not worth trading at the moment. OJ got beat up this week and there is
obviously more value here than the last few weeks that I have suggested a
value buy. I am not dissuaded by the
selling, but you need some patient money here to play this dip. Lumber is a strong buy with calls or even
futures for the high risk taker.
**Chart courtesy of Gecko Software's TracknTrade
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