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Grains
Remain Weak
Although
wheat caught a ride on the back of another Chinese buying rumor, corn
and soybeans had little empathy. After a series of
here-again/gone-again rallies and dips, soybeans are under the influence
of Southern Hemisphere prospects and lack luster global demand.
Despite several attempts to bring China, India, and a relief effort into
the fundamental picture, nothing substantial has materialized… yet.
My
strategy was eerily on target when we bought soybeans on the initial
bounce in anticipation of filling the gap. Unfortunately, early
November volatility and a lack of courage caused our stop to be touched
just before the objective was achieved. Thus, a correct forecast
was thwarted by a slightly inaccurate implementation. Now, beans
are challenging powerful support exhibited above $4.25 seen last spring
and this fall. Understand that we are looking at the January 2002
contract that has the carrying charge premium built into the earlier
pricing. The actual lows challenged $4.20 before prices rocketed
in response to weather fears. All things remaining equal, I see a
similar pattern this coming year. In particular, bumper Southern
Hemisphere production is likely to add more pressure this spring.
On
the other hand, wheat has different fundamentals. Ignore China for
the moment. Last year’s crop was healthy, but the planting was
limited. Farmers were reluctant to work for such little pay.
The year before was similar. We have not seen a substantial wheat
expansion and supplies are tight relative to any production disruption.
This is why I opted for the bull spread that we were able to execute at
8¢ July over March. March has inverted over July by almost a
nickel and we have locked in a 4¢ profit. I love these spreads!
Even
when we have not faired well, the maximum exposure is just a few
pennies. Yet, the March/July spread has exploded to premiums
exceeding $1! Even a mild squeeze has produced 20¢ to 30¢
premiums that translate into $1,000 and $1,500 on margin of about $150.
Of course, the most delicious time to place the spread is when March is
under July by carrying charges or more. This was the case this
year when we placed the position at 8¢. It was not the widest,
but it is good enough.
By
the same token, we took the bull spread in March/July soybeans at 10¢
July over. Even with the precipitous decline in beans, the spread
has narrowed below our entry to approximately 7¢. While this
could easily widen back to 10¢ and more, the amount of exposure is
limited because an excessive premium on July would allow traders to take
delivery of March and re-tender to July for an automatic profit... the
beauty of a bull spread
The
portfolio of grain spreads goes beyond spring deliveries as most
long-term subscribers understand. Essentially, we are dealing with
old crop/new crop differentials for wheat, corn, soybeans, oats, and
cotton. While there are also seasonals for other commodities like
cocoa, sugar, and coffee, the main focus has been on U.S. crops.
The wheat crop year ends with the May contract. July is new crop
winter wheat. The soybean crop year ends with August.
September is the “transition” delivery because it spans old and new
crop. Corn ends in September, but July receives the most attention
because September is too close to harvest. Since the Russian grain
embargo imposed by Jimmy Carter for (of all things) their invasion of
Afghanistan, South America and Australia have played increasing roles in
world grain trade to the point where their crop year creates a double
old crop/new crop consideration.
While
there can be a squeeze on old crop soybeans moving into the July
delivery, South American supplies can alleviate some of the pressure
that was formerly available. (Thank you Jimmy Carter!)
Still, the U.S. crop remains dominant. The mid-November
announcement that China was purchasing U.S. beans is an example of how
prices can strengthen despite their ability to purchase non-U.S. beans.
Fundamentally,
the Midwest is finally getting a reasonable storm system that should
blanket several winter wheat areas with 4 to 6 inches of snow.
Although not widely publicized, a winter drought threatens this year’s
crop. Coupled with potential export escalation and an unusual
cycle of warm and cold snaps, we could see very interesting developments
before the March wheat contract expires.
Meats
The
same winter storm was supposed to “stress” cattle with cold
temperatures and lots of snow. Whoever reported this story for
Futures World News is not particularly familiar with conditions that
stress cattle. A couple of feet of snow would be a problem.
Four inches is a dusting. Actual temperatures of –10 and –20
can slow weight gains, but wind chills in these areas are not as
detrimental. With our stop at 6977, we managed to avoid the most
recent pop higher.
After
touching through the 20-day and 40-day moving average at approximately
6925, prices backed off yesterday and today. The series of upward
consolidations did raise my eyebrows on Tuesday when prices soared
through the formation to suggest a technical turn. In fact, I must
admit that I might have covered today if prices had sustained about the
40-day. However, the lack of follow-through provides a technical
basis for testing below 6700.
Referencing
the November 17th Report, October placements were 5% lower than last
year, but 3% above 1999. According to my sources, retail has been
sluggish coming into Christmas. In response, chains have not
restocked as heavily and I would not be surprised to see a backlog
coming into the February delivery. In addition, I have talked with
feedlot operators who are not inclined to pay high prices for calves at
this time. Even with low feed costs the possibility that prices
could slide coming into the spring is fresh in the minds of many.
A
bust below 6700 support is likely to generate a move to former November
lows. If these are breached, don’t be surprised to see February
live cattle touch 5800 before finding support. My take is that
milder temperatures already produced moderately higher weight gains.
Unless weather patterns appreciably change, we are already ahead of the
curve. Let’s not forget that live and feeder prices have been
pretty healthy relative to the past five years.
The
“other white meat” has been all over the place. While I
usually have positions in hogs or pork bellies, recent action was simply
too erratic. It is easy to discern an upward channel in February
pork bellies on the chart, but trading this market is another story.
I have been evaluating the hog/belly spread because I feel more bellies
were put into storage than prices indicate. Prices have been
relatively high for pork over the past two years. The breeding
cycle and slaughter numbers point to a belly price in the 60s rather
than 70s. The build-up in capacity since bellies touched $1 was
rapid. Usually, the cycle swings more than 25¢.
Some
view 7550 as support/resistance. This has already been breached.
My focus is upon 7350 which challenges the 40-day average and the lower
channel line. I was tortured too many times when bellies were
trading above 9000. It’s one thing to know bellies are going to
come down. It’s another thing to know when!
Without
a definitive technical bust, I do not feel comfortable selling here.
Observe the ranges within the channel. From 7500 to 6850 and from
7550 to 7100 are extremely wide. There are other commodities that
offer similar profit potentials with less volatility!
Metals
We
were obviously not the only traders buying silver on the setback.
After being stopped at breakeven last week. We reentered on Friday’s
gap open. Unfortunately, our exposure is considerably higher than
it would have been if we bought the Thursday close. That’s
commodity trading!
Overall,
I am encouraged by silver’s recent performance. Technically, the
market appears to be ready for a test above $4.50. Silver
advocates are screaming, “It’s about time.” Yet, caution is
in order. The apparent driving force behind silver is interest
rates. Warehouse supplies have been drawn down, but I am confident
producers have plenty of silver waiting for a home. I do not see
any change in fundamentals except for lower short-term interest rates
and higher inflation potential.
We
do not want to buck this trend. Even if there is no good reason
for a silver rally, the consensus is that a rally is over due.
Further, the bounce in copper prices and good news on the U.S. housing
front adds to optimism in silver and gold. Eventually, a higher
copper price could cause silver to stumble because it encourages higher
copper output and hence more silver byproduct.
My
long copper and silver positions are based upon technical pictures.
I am still a fundamental bear. The lack of growth in copper wire,
copper electronic components, and auto sales leads me to a skeptical
fundamental copper outlook. Housing starts are static relative to
copper demand because the “up” is from a previous down. All
told, housing demand is static.
Some
view the March chart as a large “triangle” formation while others
struggle with a head & shoulders. It’s not a head and
shoulders because the right side has no formation. I can see
copper settling into a 68/6900 trading range as indicated by the brief
August consolidation. A breach of 6700 ends the recent rally.
Interest
Rates
After
penetrating below 100, T-bonds have come back. Traders argue that
easing is over. Thus, so is the bull market in bonds.
Although prices are well below the 20-day and 40-day averages, I am
inclined toward the long side after waiting out this past week.
It
was a wise decision since bonds spiked below my assumed 9916 support to
test 9800. My assumption would have been for a further decline to
9710. All the while, I would be seeking a recovery. With
March prices teasing the 20-day average, I believe there is the
potential for a rally back to the 40-day average at 10416. Beyond
that, I believe bonds are in a trading range.
Stock
indices have the same technicals. This is the “sleepy”
season. People are packing bags for the Christmas week and I
cannot see a major move occurring until after the New Year.
Email:
Phil@commodex.com
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