The Fed has really backed itself into a corner as they walk the tight rope looking to aid in growth and fight inflation. Unfortunately, by lowering rates to assist in growth they have, in effect, fueled inflation by weakening the greenback. Whether it be inflation or stagflation the price of raw materials are moving higher, as investors you should have 5-20% of your portfolio positioned to take advantage of higher commodity prices as we believe this is an ongoing theme for at least the next few years. Stop blaming speculators and become one, make commodities a part of your portfolio.
Energies
For such a volatile week to finish up only 81 cents doesn’t tell the entire story. We printed a new record high as oil continues its march towards $150/barrel. Additionally, crude had its biggest 1 day drop in dollar terms since 1991, followed by the second largest advance in dollar terms in Nymex history. After dancing around the trend line mid-week, buyers came in supported by further unrest in Nigeria, activity in the Middle East, and comments from the IEA saying inventories will be relatively low for the next few years as demand from the developing world and limited growth in production will keep prices at historically higher prices. Momentum has shifted up again with support under Friday’s close at the 9 day moving average at 141.90 with resistance at the mythical 150 level. If and when we reach that level, expect buy programs to kick in causing another leg up. If you are trading oil keep your eye on the ball with increasing volatility and we would only play from the long side for the moment.
Heating oil and RBOB both traded higher following Crude’s lead. Even though gasoline demand has declined domestically for the first time since 1991, we’re not seeing prices come down because of the insatiable demand for diesel and crude. Heating oil stayed contained between 4.10 and 3.80 for August, which has served as the recent range for the last 2 weeks. For aggressive traders, you may have taken our recommendation from last week to buy a 15-20 cent correction. If so, trail a stop and look for the market to take you out of your position, because with this volatility and the fact that we’re at record highs, who knows where this path leads? RBOB, like heating oil, acted like a ping pong ball last week trading down early in the week only to close back near the highs by week’s end for August. Even with big intra-day movement prices closed less than 1 cent higher on the week. We continue to feel that RBOB will be the weak sister in the oil complex and would prefer trading crude and diesel.
Natural gas traded lower last week; believe it or not we had prices back off $1.60 or 12% for the first losing week in six. The most recent ascent higher started in late March, from those levels we have seen a 40% move with the most recent move pulling back to the 38.2% Fibonacci retracement level assuming a $9.50 low and $13.50 high. We will look to see if last week’s low holds and start probing longs with futures for clients. Furthermore, we will start working orders for 50 cent call spreads in September, once a low is confirmed. Be cautious as we may get more movement south on weather, ultimately the 100 day moving average at 11.30 should support a further pullback.
Livestock
The USDA reduced its estimate of 2008 beef production from 26.83 to 26.57 billion pounds and increased the average price estimate of choice steers from 91 to 92.5 cents per pound. After months of protests, South Korea is officially open to import U.S. beef from cows that are 30 months or younger. After the close Friday, the USDA estimated the week's beef production at 533.7 million pounds, up 1.0% from a year ago. In the markets, August feeder cattle was virtually unchanged still trading on both sides of the 50 day moving average. It appeared the market was breaking out, but we ran into stiff resistance at 114, which will need to be penetrated before we make it to higher ground. We will be buying setbacks looking for higher prices to come. August live cattle lost a little over 2 cents on the week closing at the 50 day moving average of 101.25. As we said last week, we would look to add length closer to 102 and being that prices are a bit lower, you could lightly buy live cattle, but if forced to choose between the two, we prefer longs in feeder cattle.
The USDA increased its estimate of 2008 pork production from 23.38 to 23.48 billion pounds and kept the average price estimate of barrows and gilts at 47 cents per pound (63.5 cents lean). Pork production was estimated at 426.7 million pounds, up 10.4% from a year ago. Lean hogs along the curve started trending higher last week which bodes well for our recent purchases of October and December for clients (see recent commentaries). We are positioned long via futures and options and expect to see a stair step higher in prices into the fall. As we forecasted, we filled the gap from 2 weeks ago with October gaining just better than 2 cents, our next target is 73.50. December put on just under 1 cent and should make its way to 77 on this leg.
Financials
Stocks: Although we got a close above 11000 on the Dow, we traded below that threshold for the first time in 2 years last week. The S&P and NASDAQ fell last week for the sixth straight week while the Dow’s loosing streak is only four weeks. The Dow ended the week down 188 points, or 1.7% to 11101. The S&P lost 23 points or 1.9% to 1239. The NASDAQ held up the best, but still gave up 6 points or 0.3% to end at 2239. We are looking for a 5-10% bounce that should be used to exit longs or to establish fresh shorts as we do think there is more to the downside. We think the S&P will have trouble maintaining a price above 1300 on a rally and the Dow could fill a gap from 3 weeks ago, taking prices to 11800, but we would not expect much more than a dead cat bounce.
