2009 August | The Hightower Report

Archive | August, 2009

Bond Market Commentary – 2009.08.26

by Dave Hightower on August 26, 2009

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The Treasury market mostly remains well bid on the charts and has managed to remain within close striking distance of the recent highs, despite a rally in the equity markets yesterday morning and generally favorable economic news. In fact, in addition to discounting a series of up beat economic readings in the prior session, the Treasury market also managed to digest an auction result that might not have been up to recent standards. Furthermore, a portion of the trade thinks that the upcoming auction of $35 billion in Five year Notes might be the strongest tranche of the current auction cycle.

Apparently the market is anticipating slightly bearish US scheduled data flow again this morning, with the US Durable Goods and New Home sales figures both expected to post improvements later today. However, with overnight equity market action mostly non-descript, the Treasury market doesn’t look to have as much outside market pressure facing the trade in the early going today as was seen yesterday. Clearly the Treasury market was at least partially undermined yesterday by recently revised US budget deficit projections, as ramped up debt projections served to rekindle forward supply fears again. Therefore, the upcoming auction results probably takes on an added level of importance today and the bull camp in Treasuries has to hope that investors will show increased attention at the longer end of the market. Therefore, unless the auction goes off better than expected, we suspect that any bullish bias will be short lived.

Certainly seeing a disappointingly bad scheduled report slate this morning could revive the bull’s case, but without help from the numbers, or a sharp setback in equity prices, the bull camp could be fortunate to claw its way back to this week’s highs. In the early action today, it would seem like the bull camp has a slight edge, perhaps off of news that Toyota was set to trim production by 10%. Countervailing the Japanese auto maker news, were reports that the German August IFo reading climbed to 90.5 from just 88.8 in the prior monthly reading. In the end, we would think a noted gain in Durable goods and a modest gain in new home sales would be enough to cap the upside. However, some traders have suggested that the Durable goods report could be a surprise reading today and the trade might see that report as the primary reading of the session.

Initial support is pegged at 119-01 and then again at 118-16 basis December bonds. In December Notes, initial support is seen at 116-07 and then again down at 116-01. Some players suggested that a sharp decline in energy stocks, in the prior trading session prompted some players to conclude that inflation was going to remain under control in the near term, but that seems to be an overly bullish interpretation. At least into the scheduled data this morning we see resistance in December bonds at 119-16 and then again up at 119-21. Similar resistance in December notes is seen at 116-21 and then again up at 117-00.

Stock Market Commentary – 2009.08.26

by Dave Hightower on August 26, 2009

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Typically the S&P doesn’t seem to perform impressively in the wake of a consolidation that follows a key high. In looking at the action in equities this week, it would seem like the market has lost a bit of upside momentum and that could be troubling a portion of the bull camp. In fact, while the US and international data flow over the last 24 hours has been supportive of the bull case, one gets the sense that the market is either running low on buying fuel, or that there is some lingering doubt about the double dip recession fear. With almost every economist on the talk show circuit being asked, what shape the recovery will take, it is clear that many anticipate recovery, but that most are still skeptical. In fact, with favorable economic news seen from the German IFo and the trade generally expecting positive readings from the US later this morning, the macro economic outlook would seem to be clearly favoring the bull camp. However, overnight equity markets showed a noted up tick in volatility, before posting only minimal gains. Therefore, the market is behaving somewhat suspect into the US Wednesday trade action. With weakness in oil sector stocks yesterday and choppy to lower action being seen in some commodity stocks a portion of the bullish bias in the market is extracted and that could make the US scheduled news flow today even more critical. In short, the market needs all the help it can get from the numbers just to avoid some back and fill profit taking action.

S&P 500: With a series of closes in the September S&P around the 1025.70 level it would appear as if the market is in the midst of a pause. In other words, the market seems to be in need of some retrenchment before another leg higher is seen. In fact, if the bull camp were poised to push prices even higher today, we would have expected overnight data from the German Ifo to have put prices in a more definitive upward track. Initial support in the September S&P is seen at 1018.40 but we suspect that level will fail to hold in the afternoon action.

DOW: While the September Mini Dow has retained a pattern of higher lows, we fear for a noted correction in the aftermath of the news flow this morning. Certainly the market can continue to feed higher off positive momentum and the upcoming data, but traders should be on the alert for more bearish talk about market valuations from a noted economist later in the trading session today. In fact, a number of noted economists think that the market is in effect on a “sugar high” or simply running too far ahead of reality. Therefore, we suspect that prices will attempt another push up today and that profit taking action could end up dominating before the close. Initial resistance and perhaps a morning target in the September Mini Dow is seen at 9,576, with afternoon support and a potential target seen down at 9,430.

NASDAQ: While the market would seem to have plenty of bullish fundamental stories to support ongoing gains on the charts, we just get the sense that the market is starting to see the gradual recovery theme as a bit stale. In fact, without a rise above yesterday’s high of 1655.50 in the early trade today, we suspect that the September Nasdaq will return to consolidation support of 1627. In conclusion, we think the bulls need a perfect storm of data and auction demand to push stocks to another higher close today.

TODAY’S MARKET IDEAS: The bulls would appear to need better than expected US data today to keep the upward tilt in place.

Cocoa Commentary – 2009.08.25

by Terry Roggensack on August 25, 2009

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Once again December cocoa failed near the $3,000 price level on Monday and with volume levels declining on the rally last week, it looks like the cocoa market may need a fresh bullish catalyst before a push above critical resistance is successfully made. The bull camp must be disappointed by the performance yesterday since the market failed to take out the prior session’s high, despite ongoing optimism toward the economy and a fairly impressive range up extension in the US equity market. But it seemed as if the market was more influenced by the currency action on Monday as a weaker Pound and firmer Dollar seemed to prompt some traders to take profits. We also suspect Dec cocoa is having difficulty moving above the $3,000 price level since the market appears to be fundamentally over valued given the prospects for a larger Ivory Coast main crop next season while the outlook for a recovery in cocoa demand remains uncertain. In fact, the cocoa market might have been undermined by news of a setback in Chinese cocoa bean imports which fell 78% on the year through July and that may have diminished optimism for a recovery in chocolate demand going forward. Part of the selling in cocoa yesterday may have been tied to traders raising the supply outlook on reports of good weather conditions in the Ivory Coast this month promoting crop development. Therefore, some long position holders in cocoa may be getting cold feet near the $3,000 price level and that may mean a stronger macro economic view may need to take hold before the market can move to the next higher price range. Since rising investor risk appetite and macro economic optimism have been the main drivers behind cocoa price gains, we suspect Dec cocoa will need to see strong bullish influences from both equity and currency market trends in order to pull cocoa even further above its fundamental value. Otherwise, there will be a natural tendency for the cocoa market to be pulled lower.

TODAY’S GUIDANCE: In the early overnight action Dec cocoa seems to have found chart based price support after an initial test of Monday’s lows held. Better first half profits from Lindt may be raising hopes for a recovery in chocolate demand. The cocoa market so far hasn’t been undermined by the ICCO narrowing their global 2008/09 deficit forecast to 73,000 tonnes, down from an 84,000 tonne deficit, perhaps since the trade is now focused on the 2009/10 season. Chart based buying has lifted the market back toward the critical $3,000 price level, but today’s US reports on housing, consumer confidence, retailer sales and regional manufacturing could test the bull camp’s resolve. We suspect the cocoa market will need to see a stronger equity market and weak Dollar reaction to the US data to provide a fresh dose of macro economic optimism that triggers enough of a speculative buying incentive in order for Dec cocoa to make another attempt to push through $3,000. Otherwise, if today’s scheduled reports raises doubts about the macro economic recovery, cocoa could be pulled back to test critical support at $2,900.

TODAY’S MARKET IDEAS: Dec cocoa looks to be at a critical juncture with the market rallying back towards the $3,000 price level in the overnight trade. If the market again fails at this price level it could start to break down the bull camp’s resolve. Today’s US reports could be influential on cocoa price direction. If the data undermines the economic view, look for the market to give back at least some of the overnight gains.

Coffee Commentary – 2009.08.25

by Terry Roggensack on August 25, 2009

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Weak technical action and a continued sharp drop in open interest has quickly driven coffee prices back down to the lower end of the 5-month trading range. The market lacks new buying interest from end users which should seasonally begin to pick-up soon and a lack of a supply threat from Brazil has added to the short-term bearish concerns for the market. While the market is probing for support and a near-term low, there is still no sign of a low and buyers seem patient. We are moving past the period of largest supply as the Brazil harvest is winding down. Too much rain in the past week or so in some of the key producing areas of Brazil may cause an early flowering for next years crop which would not be a good start to the 2010/11 season. Ideally, the region stays dry until September and hefty rains all at once spark a major flowering. However, some years there are two or three flowerings spread out over a few months which tends to cause lower yield for the coming crop. In this case, the moisture could also be seen as a quality issue for the old crop season for the coffee which has not been harvested. December coffee closed sharply lower on the session yesterday and pushed to the lowest level since July 22nd. The market saw an early bounce but there was a lack of new buying interest and a firm US dollar helped pressure. Open interest continues to fall significantly and traders believe we are seeing a steady flow of long liquidation selling and a lack of new buying interest as a reason for the decline. In addition, producer selling has slowed. Open interest is down to the lowest level in 3 1/2 years to 95,047 contracts which is down from near 145,000 in early June. Traders see the Vietnam 2009/10 production down near 6-7% from last year as compared with the government forecast of a 20% drop. ICE certified deliverable coffee stocks were up 1,813 bags to 3.445 million with 35,865 bags pending review.

TODAY’S GUIDANCE: The market is probing for a near-term low but it may take more of a supply threat than an early flowering to help support a low. The next chart support is at 121.15 and then 118.05 with resistance at 125.10 and 126.20.

Cotton Commentary – 2009.08.25

by Terry Roggensack on August 25, 2009

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The cotton market has seen a 5-day consolidation after a sharp break off of the mid-August peak and this is typically a continuation pattern so watch for another leg down soon. Traders remain bullish on the theme of global expanding economies but China has been slow to begin imports for the coming season and some traders see China using part of the reserves built up last year before more active imports resume. A slight deterioration of crop conditions and a firm tone to the stock market helped support a bounce overnight. December cotton closed slightly higher on the session yesterday but well off of the mid-session highs. The market found early support from a sharp rally in soybeans, talk of the oversold condition of the market after last week’s sharp losses and from solid gains in the stock market. The late weakness in the stock market and ideas that cotton crop weather is favorable helped to limit the advance. A firm dollar and talk that China has been very quiet so far this year in cotton but active buyers of soybeans was also seen as limiting factor for the bounce. The weekly Cotton Conditions report showed that 52% of the US cotton crop was rated good/excellent compared to 53% last week and 48% last year. The 10 year average for this time of year is 51%. Texas crop conditions slipped 1% to 42% good to excellent while Georgia conditions improved 2% to 58% good to excellent. Crop conditions seasonally decline at this time of the year through the end of September as the 10-year average slips from 51% this week to 47%. The COT report from Friday showed a moderate selling trend from fund traders which is a potentially negative force. Trend-following funds reduced their net long position by 2,193 contracts for the week and index funds were also net sellers of 1,701 contracts and the selling trend is another short-term negative force.

TODAY’S GUIDANCE: The market seems to be in a position to see further weakness over the short-term with a lack of interest from China and decent growing conditions. The weak technical action leaves 58.15 and maybe 55.86 as downside targets for December cotton with 60.26 and 61.20 as resistance.

Sugar Commentary – 2009.08.25

by Terry Roggensack on August 25, 2009

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The weather in Brazil and actions in India to resolve tightness look to be the key factors in the short-term. After a week of scattered rains in Brazil sugar areas, the region looks to be drier for later this week. This could be seen as negative as long as it stays dry into the weekend and early next week. The supply side of the sugar market set-up still looks quite supportive to the bull market case for sugar but high prices and health concerns are still seen as a potential to help reduce demand. Switching to other sugar substitutes due to high prices, especially developing countries who may be more sensitive to price may begin to eat into demand. In addition, the American Heart Association has recommended to cut back dramatically on sugar consumption and while consumption of soft drinks began to slow in 2005 in the US, sales volume last year was said to have fallen near 3%. October sugar closed slightly lower yesterday with an inside trading day. News of wet weather in Brazil was not enough to spark buying to exceed Friday’s highs and some light long liquidation selling helped to pressure. A strong dollar helped to offset the news of Pakistan tendering to buy 300,000 tonnes. A European Bank production forecast of India sugar production down to 15 million tonnes or lower failed to provide much support. In the spring, the USDA pegged India production at 20 million tonnes and usage at 23 million but trade forecasts for production have been pushed down to the 16-17 million tonnes forecast in the last few weeks. India imposed rules to limit the amount of storage for large end users as a way to prevent stockpiling. End users can only hold stocks for up to 15 days of demand. India consumes about 2 million tonnes per month and newspapers in India report that stocks have dipped to just 4.5 million tonnes. The new crop crush season usually begins in October but the late monsoons may cause the crushing season to start late as well. Some believe that stocks are higher but if they are only 4.5 million tonnes, imports may be needed before the new crop season begins. In addition, if production is only 15 million tonnes, imports needs might be as high as 8 million tonnes for the coming season. A second year in a row of a significant world production deficit would be a factor to provide solid underlying support to the bull trend.

TODAY’S GUIDANCE: The market seems to have the fundamental set-up to see another leg higher without help from outside market forces. A close back over 22.27 and especially 22.53 for October sugar will be necessary to assume a resumption of the uptrend with 24.08 and 24.14 as next upside objectives.

Wheat Market Commentary – 2009.08.24

by Terry Roggensack on August 24, 2009

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NEAR-TERM MARKET FUNDAMENTALS: Wheat moved moderately higher overnight in conjunction with a significant further advance in soybeans and a similarly modest advance in corn. This comes in the face of an advancing harvest under mostly good conditions across the Northern Hemisphere. The main concern remains the lateness of the crop in the US and Canada although there is still no forecast of a major frost. India’s Farm Minister said late last week that India is aiming to increase winter grain output this year due to the drop in summer monsoon rains. This will include a program to ensure the timely sowing of wheat which can compensate to some degree for expected tightness in rice supplies. In Australia, rains boosted the already favorable crop conditions in SW and SE growing areas, but the NE wheat belt remains dry. Further dryness could begin to stress the crop there but, for now, most crop forecasters are calling for a good crop of about 22 to 23 million tonnes which is about in line with last year’s production. The Commitments of Traders Report for the week ending August 18th showed mixed activity by funds in wheat. Index funds were net buyers of 5,034 contracts despite renewed worries that the CFTC may force liquidation some of their very large long position. As of last week, index funds held nearly 47% of the total net long position in Chicago wheat which compares to about 29% each in corn and soybeans. Activity by trend-following funds continues to be at an opposite extreme from the index funds. Trend followers were net sellers of 3,440 contracts to extend their net short position to a new record large at 57,636 contracts. An Israeli firm is tendering for 25,000 tonnes of feed wheat. This is likely to be from Europe.

CASH NEWS AND TENDERS: An Israeli firm is tendering for 25,000 tonnes of feed wheat.

WEATHER: The northern Plains should see warmer weather with showers this week. This may be followed by intermittent cooling into the end of next week. A shower system moved along the US/Canada border overnight. Weather in the Black Sea region has been mainly favorable over the past week with rains in Russia aiding in late development and dry weather in Ukraine aiding in the harvest. In Australia, beneficial rains fell along the southern tier of the country, aiding the wheat crop in both western and eastern growing areas. However, dryness continues to persist in the NE.

TODAY’S GUIDANCE: The wheat market is trying to decide whether to continue pushing lower or whether it should participate in the short covering rallies now underway in soybeans and corn. We still look for the downtrend to continue with a possible short term acceleration to the downside. However, if that does not happen today, or at the latest by tomorrow, traders should consider covering shorts. First support in the December contract remains near 483. Resistance remains at 508 to 510.

Soybean Commentary – 2008.08.24

by Terry Roggensack on August 24, 2009

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NEAR-TERM MARKET FUNDAMENTALS: The soybean complex advanced above last week’s highs overnight despite mixed to slightly weaker outside market influences. Traders indicate that fears of an early frost may not be fully priced into the soybean market at this point, with this contributing to the recent strength along with last week’s buying by China. For now, weather forecasters are calling for a beneficial warm up in the Midwest to start the week with increased showers later in the week and a gradual cooling that may start late in the week and into next weekend. Cooling may become more pronounced by the end of next week, but there is no forecast of a frost at this point. The Commitments of Traders Report for the week ending August 18th showed substantial net selling by funds across the soybean complex. In soybeans, index funds were net sellers of 2,544 contracts while trend-following funds were net sellers of a large 21,879 contracts. This increased the trend-followers’ net long position to just over 45,000 contracts. In oil, index funds were net sellers of 1,676 while trend followers were net sellers of just 32 contracts. In meal, large non-commercial traders were net sellers of 7,190. China’s Ministry of Commerce expects China’s soybean imports to drop to 2.39 million tonnes in August compared to 3.83 million tonnes in August last year. They are expected to fall even further to 2.11 million tonnes in September which is down almost by half from last year. Chinese soybeans imports have been over 3 million tonnes every month this year through July. China imported 4.39 million tonnes in July, up 25.3% from last year. The USDA announced another sale of US soybeans to China on Friday, the 5th straight day that they have done so. The latest sale was for 233,000 tonnes and it was again for 2009/10 delivery. This brings total sales to China last week to 896,000 tonnes. Statistics Canada released its latest crop estimates on Friday. They pegged their canola crop at 9.54 million tonnes, down 24.5% from last year. Traders had been expecting a big drop, but the new total was about 1.0 million tonnes below trade estimates.

WEATHER: Weekend weather was mainly as expected – drier and cooler. Forecasters are expecting a warm up this week with increased shower activity that may start to usher in the next cooling period in the Midwest by late this week and into this weekend. More significant cooling is possible by the end of next week. There is still no killing frost in the forecasts despite intermittent cooling into the first week of September.

TODAY’S GUIDANCE: The lateness of the crop may be the overriding fundamental concern at this point and continued buying from China (896,000 tonnes last week alone) has added to the positive tone. US soybeans are still at considerable risk in the event of an early frost even though none is forecast at present. The fact that all elements of the complex along with corn and wheat are all moving higher suggests that the grain markets may still be oversold ahead of big upcoming harvest. First, light support is at 982 in the November contract this morning with the next support near 958 to 959. Resistance is at 1005 and again near 1030.

TODAY’S MARKET IDEAS: Selling resistance for November soybeans comes in at 1003 1/4 and then 1018 with 918 1/2 as next downside objective.

Corn Market Commentary – 2008.08.24

by Terry Roggensack on August 24, 2009

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NEAR-TERM MARKET FUNDAMENTALS: The corn market continues the modest rally that began last week after the December contract made another new low for the move last Monday. Traders indicate that the rally may be a combination of short covering and carryover strength from soybeans, with some concern being registered that the market has not fully priced in the risk of an early frost. For now, there is no frost in the forecast for major growing areas. In fact, this week is expected to start with a warm up to above normal temperatures followed by a moderate cooling and showers later in the week and into the weekend. More extensive cooling is possible by the end of next week. The Commitments of Traders Report for the week ending August 18th showed significant net selling by funds. Index funds were net sellers of 1,861 contracts while trend following funds were net sellers of 21,132. This took the trend-followers’ net position back into negative territory at net short 1,485. Taiwan’s Maize Industry Procurement Association is tendering on Tuesday of this week for 56,000 to 60,000 tonnes of corn from either the US or Brazil.

CASH NEWS AND TENDERS: Thailand is tendering to sell 790,000 tonnes of corn today according to officials there. Of that total 500,000 tonnes is intended for export while the remaining 290,000 tonnes could be sold domestically.

TODAY’S GUIDANCE: The short covering rally in corn is being boosted by strength in soybeans and fair-to-strong export demand in corn, but it looks to be just a temporary pause on the way down. Barring an early frost, supportive demand is about to be overwhelmed by a near record large new crop. And despite some improved economic sentiment in recent weeks, consumer demand for meat is likely to remain soft which will keep a heavy lid on feed profitability. These are major, long term bearish fundamentals that go beyond any temporary oversold conditions. The selling that will be needed to take us lower will come from farmer hedgers and, possibly, trend-following funds. Light, first support remains near 318 to 320 in December corn with the next support at 311 1/2 and then 302 1/2. Resistance is at 344 and 349 1/2.

TODAY’S MARKET IDEAS: Traders can still sell either December futures or December calls on a bounce to the 342. The next downside objective remains at 291 1/2.

Gasoline Outlook – 2009.08.24

by Dave Hightower on August 24, 2009

Below is an excerpt from our most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!

Just ask Congress, the President and perhaps even the regulators and they will assert that energy prices are too high. While the bears will cite speculation as the main cause for inflated energy prices, they might also throw up the fact that US crude oil stocks in 2009 have generally run roughly 50 million barrels above year ago levels. Naturally, seeing such a large physical supply surplus as the front end of the energy manufacturing chain leads many pundits to suggest that there is no reason for such lofty prices.

Of course focusing on the level of crude oil available to be refined into typical consumer usable products is a justified angle, but in a deeper analysis one might discover that a number of bull moves over the last 10 years have been the result of tightness in product stocks, which at times have taken place even though there was plenty of raw material supply available. With the recent “non operating” rate of US refineries drawing close to 1/5 of all US refinery capacity, it is clear that we might be in the early stages of a product-led rally in energy prices.

In the wake of 9/11 when the rest of the world was staggering under the weight of the temporary standstill in the economy, one big oil company managed an unheard of quarterly profit of $30 billion. With the press recently hyping up a nine-figure salary made by an oil trader, it is clear that a certain angle of reasoning is entrenched in conventional wisdom. Not surprisingly, the press and the Administration gave almost no credence to a CNN Money survey that showed 6 of the top 10 CEO’s in 2008 compensation were energy-related companies. While sectors of the oil industry will suggest that high oil prices are the result of surging world demand, geopolitical supply threats and other fundamental issues, we suspect that some refiners and or oil companies have the ability to meter the ebb and flow of profitability and in turn have an inordinate amount of influence on energy prices.

In looking ahead to Labor Day, this summer’s last “driving” holiday, we suspect that the US refinery operating rate will rise in an effort to meet demand. But it also seems as if refiners are using classic supply and demand techniques to either enhance or protect the amount of profit they can earn from turning crude oil into gasoline and other consumer friendly products. While we are not saying it is true, we see no difference between financial services companies being aggressively compensated for packaging risky mortgages and a refiner pre-buying crude oil and then announcing to the market that they intend to shut down refinery operations for extensive maintenance. While no one expects a private company to buy crude oil and refine products at a loss because the US consumer needs gasoline, it is a little odd that those capable of benefiting from the refinery operations also have the capacity to game the system. In a hypothetical situation a refiner could decide to shorten its refinery operations just to the days that are necessary to meet minimum sales requirements. If that position was also put in place at other refiners, the industry could achieve significantly higher rates of return on much smaller production runs. In the face of reduced US refined product runs, the profitability of the crack (the refinery operating margin) would expand greatly. This suggests to us that the refiners usually have an incentive to produce just enough product supply to keep some measure of tightness in place.

The US refinery operating rate currently sits at just 84%. In the past, a decline in the operating rate to the vicinity of 83% has preceded a product-led rally in energy prices. However, with the nearby crude oil market sitting roughly $5 above last month’s midpoint, a seasonal decline in energy demand expected over the next seven weeks and the outlook for the economy weakening again, we suspect that oil prices are destined for a setback. But in the event that the refinery operating rate continues to decline, we will be in the hunt for a purchase of the November unleaded or the November heating oil contract in anticipation of a recovery in energy prices before the end of September. Our picks for value zones are $1.69 for November gasoline and $1.77 for November heating oil.

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DISCLAIMER: This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited.

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