There is talk of government intervention, banning of institutional investors from commodities, and recently on the CFTC website they released “emergency authority” which has been only used four times in history and not since 1980. The Commission has exercised its emergency powers in response to extreme events, such as manipulation or a specific disturbance that caused a sudden shock to the markets. The CFTC has never exercised emergency powers based on price trends that have developed over months or years. As opposed to speculators causing the dramatic increases in commodities prices, is it not possible that demand from emerging markets and the lack of investment by suppliers has created a structural change in commodity markets fueling higher prices? For the government to get involved at this point they would essentially be manipulating prices, or doing the same thing that they blame speculators are doing, Isn’t that ironic? They should not interfere and let supply and demand determine price. If this media attention does anything, we hope it informs investors on how serious of an issue we have at hand and the fact that prices of commodities may be rising for years to come.
Energies
Late in the week, crude oil broke out of the sideways consolidation we have been in for the last 15 days. On the week, August gained $4.36 and intra-day Friday we traded just below $143/ barrel. With continued weakness in the dollar, increased investor participation, and the lack of some type of intervention, $150 appears to be a self fulfilling prophecy. After 5 weeks of seeing draws in inventory we finally got a surprise build in oil inventories and even with
that, prices were able to move higher. Generally when bearish news is ignored and prices trade higher it should tell you that prices are moving north. At this juncture we’re still content on the sidelines, but we do have a friendly bias being that prices have now broken out of the sideways consolidation. The 20 day moving average just above $134 should serve as support in August with the market now having its eyes on $150.
August RBOB traded 7 ¼ cents higher on the week ending at $3.1572. Although prices traded higher on the week, the move was only a 2% advance while crude and heating oil gained a more convincing 3%. As we stated last week, as long as the 3.55/360 area serves as resistance, we see a move back to 3.10 in coming weeks. August heating oil gained 14 cents on the week ending at 3.9331 after making a failed attempt at the $4 level. If crude continues higher we should see a new high in diesel, but for now resistance comes in at the contract high just below $4.05. Like RBOB we think a move down is long overdo, but we’d be bucking the trend and we’ll wait for a move lower to develop before committing client funds.
Some of you may have used the break last week to get positioned long August natural gas, if so we were advising the purchase of 13/13.50 call spreads for $1750 o/b and 13.50/14 call spreads for $1300 o/b. You should have been able to get those prices on Wednesday and maybe Thursday morning. By Friday settlement we closed at $2270 for the 13/13.50 and $1650 for the 13.50/14, so look for intraday breaks this week for pricing. The strategy would be to exit closer to expiration looking for either both or at least your lower leg to be intrinsic. The expiration is July 28 so from today you have 28 days. We do not expect a settlement below 12.50, which serves as the trend support line, but on a challenge of that level we may explore getting long futures with a relatively tight stop.
Livestock
After the close Friday, the USDA said that there were 67.661 million hogs and pigs in inventory on June 1st, up 5.8% from a year ago and more than expected. The March to May pig crop was up 4% from a year ago. Pork production was estimated at 425.8 million pounds, up 10.3% from a year ago. August hogs ended virtually unchanged on Friday ahead of the report, but on the week prices were off 6.2 cents or 8%. Going into last week we felt we did not have enough longs on, but after the week any longs were too many. Prices backed off hard and if you thought you missed the move higher which we do think will happen you now have a better opportunity to get long. Do not get in too heavy as a gap lower from early April may get filled taking prices in August down to 70.40. The market priced in a bearish report and being that there were no surprises, we are okay buying, looking for prices to gain in coming weeks. We expect a move back to the 100 day moving average in coming weeks at 76.75. August bellies look supported if last week’s lows hold and we could see a trade back to 78 in coming weeks.
After the close Friday, the USDA estimated the week's beef production at 538.7 million pounds, up .6% from a year ago. August cattle closed up 15 ticks on the week at a new contract high of 105.10, helped by talk of good demand for cash beef. Prices appear to be moving higher with support coming in at the 9 day moving average at 104.28. August feeder cattle lost fewer than 3 cents on the week and seem to be supported at the 50 day moving average, as we were unable to go through that level on a closing basis. If we were to see a trade below 111, the trend line should be supported at 109.50 and the closer we get to that level the more aggressive buyers we would be. As we have voiced in previous weeks we are looking for higher prices in both live and feeder cattle so continue to buy dips.
Financials
Stocks: What’s worse than panic selling? An orderly decline, you will generally see a capitulation that could hint at a bottom and that is not happening as stocks continue to slide. The Dow lost nearly 8% in the last 2 weeks alone and with one day of trading left we could have the worst June since 1930. We ended last week 496 points or 4.2% lower on the Dow to 11347. The nearly 20% decline from its October peak puts us dangerously close to a bear market by definition. The S&P shed 40 points or 3% to 1278. The NASDAQ slipped 90 points or 3.8% to 2316. As we have been expressing, there will be more shoes to drop and we are not advising getting long yet. Again we ask, why are investors so loyal to their stocks? The time has come to start giving commodities more respect and making them a larger percentage of your portfolio.
