The Weekly Pit Review
by PitGuru.com
| Date: 01/05/10 | Estimated Update: 01/06/10 |
|---|---|
| Company: | PitGuru.com |
| Phone: | 1-866-907-5360 |
| E-Mail: | info@PitGuru.com |
| Website: | www.PitGuru.com |
The Financials Pit Review
by PitGuru Kalvin O’Brian
S&P & Currencies
Happy New Year everyone! As 2010 starts, there is optimism as well as trepidation. The stock market has been positive yet job losses and the housing market have many worried. As most of you know a recovery can take years so dips and surges could be a regular occurrence. Today, overseas markets are giving a positive direction for pre-trading. The monthly managers purchasing index (in which 16 countries are involved) showed that European countries are expanding. This index is gauged by a numerical value in which anything over 50 shows growth; it came in at 51.6. China may be another reason why the world is showing a speedy recovery. The S&P is right at the top of the trading range. In pre-market trading it is up 8 points to 1119 and hopefully it can break through, giving a new range to explore.
Today construction spending numbers and the ISM index will be announced; hopefully giving some steam for 2010. Tuesday has auto sales that will show if the consumer is getting loans to purchase vehicles. Obviously, high interest financing is hurting many and stopping people from purchasing though banks paying back TARP funds early should start freeing up financing for consumers. On Thursday, initial jobless claims may give some direction on how management is handling the economy. The market is expecting 445k or more people out of work. Friday, all eyes will be on the unemployment rate. The market expects 10.1% and could be a bad estimate.1
What can one expect from the dollar? As good news pours in from other markets the dollar index is taking an early plunge down 0.445 to 77.415. A trading range of 74.75-78 could be something that that becomes a common sight. Many think that the dollar will strengthen with the economy's growth where the opposite trend has happened in the past. The question is can the economy, stock market, and the dollar all rise together? The fact is anything is possible and if the Fed makes the right decisions it may be a possibility albeit a long shot. Delving into the past gives many economists insight into the future. Foreclosures could be a serious problem that could slow down consumer growth. The economy is expanding but if jobs are not created and consumers are losing their houses can growth really be sustained? After all, 66% of the economy is the consumer purchasing goods and services.
1 http://biz.yahoo.com/c/e.html
The Energies Pit Review
A new week, a new year as the market rolls in to 2010. Crude Oil keeps up its momentum from last week as it charges toward $80. Crude has risen for seven straight days now as 2009 closes out and 2010 opens up. The economic recovery is progressing nicely and it looks as if Crude will rally above $80 as the week unfolds. Crude dropped to a 2009 low of $32.70 a barrel Jan. 20 as the recession reduced demand, and touched a high of $82 on Oct. 21, partly because a weaker dollar bolstered the investment appeal of commodities. Futures climbed 78 percent last year and tripled over the past decade. There is definitely a big reason why Crude has gained so much the last few weeks and that has been the frigid temperatures hitting parts of the country as nor’easters roll in this winter.
The Climate Prediction Center, a National Weather Service agency, forecast below-normal temperatures across the eastern half of the U.S. from tomorrow through Jan. 13. The northeast region consumes about four-fifths of the nation’s heating oil. U.S. heating oil stockpiles have fallen for six weeks to 44.4 million barrels, the longest decline since April 2008, Energy Department data showed Dec. 30. Natural gas inventories fell every week in December to 3.276 trillion cubic feet, after rising for eight months. The falling inventories in the Heating Oil market will bolster prices this week and one may find potential to be long this and the Heat cracks as they could rally from $9.00 to above $10.00.
Natural Gas prices will continue to trend higher as prices will rise from $5.50 and test the $6.00 mark as the Cold snap in the northeast will be very fierce. Tack on falling inventories to this market and you could have a serious rally on your hands.
The Softs Pit Review
by PitGuru Jamie Fink
Welcome to 2010! Hopefully you’ve managed to celebrate New Year's Eve safely and in style and are now preparing for a potentially profitable year ahead - I know I am. As Chief Soft Market Analyst at PitGuru I am prepared to provide you with insightful commentary that will assist you in positioning yourself appropriately for what I see as an exciting first quarter. My comments will be both fundamental and technical in nature and occasionally (hopefully) witty as well. My focus is on options as that has been my business on the trading floor since I arrived there back in 1987. Subscribers to pitguru.com receive specific and timely recommendations in the soft markets from me, mainly using option positions.
As the new year begins I am especially optimistic about the potential that exists for higher prices among a few key members of the soft complex, especially given the fact that two of them (Cotton and Sugar) are positioned near their highs for the past year. Now while past performance is by no means a precursor for future price moves, it goes without saying that the established trends, combined with the desire of commodity funds managers eager to pursue profitable positions ought to consider both of those markets as offering opportunity. Let me begin by looking at them.
The fundamental portrait of Sugar strongly suggests that supplies are tight and will remain so. The focus upon India (demand) and Brazil (supply) have me believing that additional gains are likely since available supplies will not be in abundance until some time goes by. Technically, sugar prices have advanced to significant new highs during the last month and may be involved in a form of correction. The trend is up and fundamentals are in place for further advances, therefore I look for sugar prices to move higher and believe that scaling into long positions makes prudent sense. As a result, owning wide call spreads (like the SBH call spread I recommended) are attractive. Understand that a couple of closes below 23.90 basis SBH will negate this view, but until that happens I think sugar offers excellent opportunities for those willing to position themselves appropriately on the long side using dips to secure long positions.
Recent demand numbers for cotton (via exports) have shown improvement at a time of year when prices are also near their highs. Supplies are growing tighter. Demand remains in the hands of China, and the available information suggests China has adequate supplies available - but that can change. Ultimately cotton prices will dictate plantings as it competes with other row crops for acreage. Funds too have expressed an interest in cotton as an asset-based market. Technically, cotton prices have found progress difficult and volatility is relatively low as a result. The trade has an established short hedge position on which allows them the option of buying dips. I think this market favors investment by fund managers and is a likely candidate for advance. As a result, I believe the downside price risk somewhat limited (CTH 7200-7000) and upside potential good and therefore consider a combination of selling out of the money puts and purchase of out of the money calls appropriate as risk tolerance allows.
Believing that the fundamentals of coffee are favorable has me interested in the long side of that market; however recent price action has obscured the positive technical appeal. This is not unusual for coffee as it has always maintained a tendency to "shake the trees" before advancing. The picture for Cocoa and FCOJ are cloudier and raise questions regarding their true underlying fundamentals. So while they too may experience advancement, a lot hinges upon the attitude provided by the sector leaders. An important point to make here is that the fundamentals in all of Soft markets must also consider the active supply and demand for the futures themselves and not just that of the underlying cash commodity. This is due to increasing impact that speculative investment monies are having and the much more active role they play. Knowing what's attracting speculative positions is key going forward.
Lastly, I feel it necessary to comment on the direction of the US dollar as it carries vast influence upon the soft markets that I follow along with all dollar denominated commodities. The dollar has trended lower much of last year, and the market saw the impact of some short covering near year's end. Now if a serious concern gets raised causing a shift towards the dollar as a safe haven, that impact will likely hurt commodity prices and the prices of softs markets will fall as a result, but with no major US based recovery expect the dollar to again receive pressure. Yes, there certainly is reason to expect that US interest rates may at some point start to rise should the economy show signs of improvement, but that time is likely down the road. Therefore, I believe that the Soft markets should provide some good trading opportunities and in the first quarter of 2010 believe prices stand to increase as the dollar remains in disfavor.
The Metals Pit Review
by PitGuru Frank Martin
The precious metals were under pressure at the end of ‘09 as the USD reversed its trend trading from $1.52 vs the Euro to $1.42 sending Gold lower to $1,070/oz and Silver below $17.00. I believe that Gold hit a very nice bottom at the second support level of $1,070 and will rebound this week as the USD will trend lower to bring in the New Year. Interest rates remain low for the time being and that is a good thing for the metals so look to be buyers on dips here. Gold will try and break the trend to the upside and rally over $1,100 this week.
Copper climbed five straight days last week to its highest level in 16 months, adding to the biggest annual gain in more than two decades in 2009 on speculation supplies may not keep pace with demand in a global economic recovery. Copper broke above the $3.25 resistance last week and now prices look to be headed to $3.45 as this market has shown no bumps on its move higher.
Grains Review
By PitGuru Matthew Pierce
Welcome to 2010. This is the year of the Iran conflict, Ethanol Mandates, Chinese buying, Inflation and debt acknowledgement. These are the biggest factors with fundamentals taking a back seat to start the year with ample supplies of all commodities…right now. Domestic bean carryout is a concern if the USDA changes anything on the Jan report due out on Jan 12th. This will offer the trade either a reason to continue a first half buying spree or reverse and sell out of weak length. Overall I feel the trend for 2010 is higher with volatility ownership a good place to start your buying interest.
From a trading perspective you have to look at SH volatility as a buy at 32%. Corn is buyable at 35.5% while wheat volatility over 40% could be used as a short leg for aggressive traders while more conservative should simply leave it alone. Bean oil and bean meal volatility under 30% is interesting more for oil than meal with expectations that oilshare will widen well beyond the current 39.6% (basis March). Flat price looks higher to start the week with all technical factors in corn, beans and wheat pointing higher. There are resistance levels quickly approaching so weak length should look to exit on any exaggerated bounce early this week. Via spreads I love owning the front end of the beans curve; I like beans versus corn and wheat versus corn. Subscribers can see the recent trends on the daily wires out this morning.
The trends for 2010 depend on macro factors with Sugar, Crude, Gold, the USD and equities having as much or more of an impact than fundamentals alone. Start the year off friendly looking for speculative capital to pull the market higher forcing commercial end users to come into covering upside exposure. Look for wing volatility to bounce better than ATM as long term speculative capital targets “cheap” options.
Overall be a bull to start but do not get married to positions. Look at relationships as best opportunity early in the year limiting your exposure to individual moves. Sell WG time value while buying deferred volatility.
Disclaimer: Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading
