Weekly Outlook: Investors Seem Willing to Take Some Risk

January 26, 2009

The softs have been one of the best performing sectors year to date. I hate to say I told you so, but look at recent commentaries and blogs. We also have some currencies plays that are just getting underway, see currency section below. Gold and silver should be in every portfolio, all things considered, whether it is via equities, ETFs, physical, or futures and options. Bottom line, whether it is a turnaround commodity wide we are getting at least a tradable bounce in multiple commodities and we suggest you take advantage of it.

Livestock

After the close Friday, the USDA said that there were 11.234 million head of cattle on feed as of January 1st, down 7.1% from a year ago and less than expected. December placements were down 3% and marketings were up 2% from a year ago. Additionally, the USDA estimated the week's beef production at 494.1 million pounds, up .4% from a year ago. The report was viewed as friendly, however cattle will presumably take guidance from the stock market to start the week. The USDA also said that "higher slaughter levels will almost certainly lead to a reduced US cow inventory and will affect beef production through 2010-11."

The semi-annual inventory report is due out on January 30th. April live cattle were down .85 last week, trading at their lowest level in 7 weeks. Support is seen at 84.00 with resistance at 86.50 followed by 87.50. April feeder cattle lost 1.575 cents with an early week breakdown but prices held up to close the week, failing to make new lows. Support is seen at 92.00 with resistance at the 9 day moving average at 94.70. Update on the recent spread recommendation: long August live cattle and short April feeder cattle, we are up approximately $400 per (profit in feeder cattle and loss in live cattle). Depending on Monday’s action we may book the profit in feeder cattle and hold onto the live cattle looking to trade out of those positions at higher levels. If one wanted to stay with the spread we think it could trade up to -550, your entry should have been -950.

Last week the USDA reported there were 549 million pounds of frozen pork in storage on December 31st, up 20% from a year ago and more than expected. There were also 51.7 million pounds of frozen bellies in storage, down 6% from a year ago and less than expected. The USDA estimated pork production at 455.4 million pounds, down 2.8% from a year ago. Stretched consumer budgets will likely constrain increases in pork and hog prices this year, despite reductions in production predicted by the December 1 Quarterly Hogs and Pigs report. April hogs were down 1.20 closing lower the last 3 weeks, losing 9.6% in that time to new contract lows. We are down, but remain in April calls with customers looking for prices to come back, but we advised clients to cut loses on their June futures on a trade below 76.50 and wait for confirmation of a bottom.

Currencies

The UK's said that real GDP was down 1.5% in Q4, weaker than expected and the first official recession since 1991.The pound dropped 10.56 cents to a new contract low losing 7% last week as the British economy looks to be in serious trouble. Further interest rate reductions are expected over the next few months. With the Prime Minister launching a second rescue package for troubled banks and talks of nationalization, investors were dumping their UK assets. Although we expect lower pricing in the medium term, short term we are expecting a rebound, albeit a dead cat bounce, to 1.4250. We advised clients to buy March 150 calls for 100 ($625) points looking to exit between 175-200 ($1150) this week.

The Euro was 3.53 cents lower last week and is now trading back at levels not seen since mid-December. It appears the path of least resistance is lower as we expect to see a trade down to 1.24/1.26 in the coming weeks. Between now and then look for resistance at 1.3150/1.32 and support at 1.2725/1.2650.

The Swissie gave up 3.17 cents or 3.5% last week closing at a 5 week low. Resistance comes in at .8750 followed by the 9 day moving average at .8828. Support comes in between .8400 and .8500 but we cannot rule out a trade to the contract lows at this point, just under .8200.

The Aussie lost 2.01 cents and has now closed lower for the last 3 weeks. Support is seen at .6325 with resistance at .6610 followed by .6760. We have had 3 bullish suggestions for clients over the last week that are still applicable: buy the 65/70 March call spread, buy the 68 outright and short the 65 call while simultaneously getting long the futures.

The BOC cut its interest rate from 1.50% to a record low 1.00% in an effort to avoid negative growth this year. The currency still traded 62 ticks higher on the week largely led by gains in energies and metals. Prices traded at a new contract low and were rejected, showing signs of a reversal ending the week, back above the 9 day moving average. Support is at .8000 and resistance is at .8200 followed by .8325.

The Kiwi gave up 2.00 cents last week and has lost 9.5% over the last 2 weeks. There is a RBNZ meeting this week where they will likely trim rates 50-100 basis points. Last Wednesday a new contract low was made on the March contract but prices held. We would suggest going long futures with a stop-loss below .5100 looking for a trade up to .6000 in the coming months. Prices may meet some resistance at .5475 on their way up.

The Japanese yen gained 2.61 cents last week but at its highs may have formed a double top just under 115.00. That level was reached last week as well as the third week in December and prices were not able to push higher. With talk of intervention, it may be a challenge for the yen to push to higher ground, unless we see actual monetary intervention as opposed to verbal intervention. If the risk aversion trade continues on a trade through 115.00 we would probably see 120.00. The last three days of trading last week saw prices retreat from their highs, closing on average 1.74 cents off. Support is seen at 1.1100 and resistance between 1.1380 and 1.1400.

The dollar index gained 1.91 cents last week and has been higher now for the last 4 weeks. It appears the recent move may be running out of gas with the violent sell-off on Friday, prices closing 122 ticks of their highs. Play the breakout if prices close above 87.25 or below 85.75. We favor the downside although will wait for Monday to make a final determination. On a move lower if we form an island top, that would be extremely bearish.

Metals

February gold picked up $51.70 last week gaining 6%. The week’s trading range was $80.20 or just over $8000 per contract so like most commodities the volatility remains widespread. We ended the week just below $900, but were able to trade above that level trading at a 15 week high. Flight to safety buying is apparent with investors. We like $100 call spreads in June, ideally looking to pay $2500-3500 per spread looking for a double. Early last week we recommended the $850/950 for $3300 and as of Friday’s settlement it was $4160. Taking the high and low from the last 13 months, prices should remain between $824 and $910. On a move out of that range look for prices to find their way to $700 or $1000. Last Tuesday, Inauguration Day, we saw a new high in volume trading, almost 170,000 contracts with gold up $11. Does this say anything about the new Administration or was it just a coincidence? Gold may be the new currency of choice in these difficult times. According to Bloomberg News, SPDR Gold Trust, the world’s largest exchange-traded fund for gold is experiencing record volume.

March silver was 64 cents higher also gaining 6% last week. Prices traded above the recent resistance point at $11.65. We see next resistance at $12.45 followed by $12.90. The $15/20 December call spreads that we have been recommending since late October are now trading above $3000 per spread. We were buying these positions for approximately $1700 for clients and even now we still have 300 days of time left. We will be looking to lighten up on a move to $4000 if silver starts looking heavy. We are also advising clients to move their March futures and options out to July. For new entries look at July $2 call spreads for $1750 and $3 spreads for $2500. The reason for moving from March to July is you now have 5 months instead of just 1 month and you can weather a pullback that could come at any point. As long as March stays above $10 on setbacks, we like being long.

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