Commodity Prices

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Sally Limantour

Commodity prices have been moving higher as all three indices are up. While many of the markets are higher, the grain prices are lower. Many of you have emailed me asking why in last week’s class I was liquidating all of my grain positions. What technical indicators were telling me it was over? Other than RSI being over bought and trading near the top of the BB it was really a money management decision. All of these markets – corn, wheat and soybeans are up exponentially since first accumulating long positions in September and with the USDA report looming ahead of us on March 30th, I felt it was prudent to say “Thank You” and stand aside. It is not often that prices double in a matter of months as we saw in the corn market. A lot is riding (both politically and economically) on this report, so why be a hero? We can always get back in and hopefully at lower prices.

The energy markets are all moving higher and crude oil is 1.0% higher, while RBOB gasoline is 3.4% higher. The world is watching the situation with Iran and the UK and concerns over the Persian Gulf and the Straits of Hormuz are moving to center stage.

The weather is getting warmer and driving season is upon us as the nation’s refineries are low on gas! The spreads are reflecting this tight supply as the nearby spreads are trading to a premium to the deferred spreads. This does not look like a tight situation that is going away anytime soon.
Any breaks into last week’s range I would be looking at buying. Also the May/ June spread at 8 cents/gallon looks possible with stops under 5 cents. (note you can look at the mini contract and the symbol is QU).

Finally with commodity inflation heating up it is looking more and more to me like the bonds could trade to the 109 area. I will be looking for set ups to go short.

SP500, Grains, Cotton and Base Metals

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Sally Limantour
February 6, 2007

In stock land we have little data this week, but keep your eye on budget headlines coming from Washington. The bears are gun she and rightfully so. That said, as mentioned last Friday, my short-term proprietary model is signaling a sell for early this week. This does not mean a top, just a short tem correction and with that in mind, I will look to short ESH 1458-1460 with stops over 1464.

The grain markets and cotton, my two favorite sectors for 2007 continue to act well. We have corn (March) trading over $4.00 a bushel and new crop beans (November) trading over $7.75 a bushel. Corn did fill its gap from 1/12/07 and long positions were re-established last Friday in the $3.95 area. With the $4.00 level for new crop corn, farmers are going to plant more corn this spring which will take away acreage from soybeans. The new crop beans are outperforming due to this and with the bean to corn ratio at 2.1 this creates a huge incentive for the farmers to plant corn.

Cotton has been sleeping, but woke up yesterday to close up +1.32%. I am still holding long positions from December (52.50) and with talk of reduced acreage (13.2 vs. 15.2 year ago) we may see the fund buying especially if we start to see prices breakout above 56.00.

There were reports last Friday that the large hedge fund, Red Kite (a $1 bn metals-trading fund) had hit trouble and copper prices fell 4.8%. Nickel and zinc were also down in London and perhaps that could explain the $19.00 sell off in gold (from Thurs. high to Friday’s low). It was a buying opportunity in silver and gold and I continue to think the precious metals will outperform.

Red Kite has brought out some speculation concerning the base metals. One report put the London firm down as much as 20 per cent in the first 3 weeks of January, leading to forced liquidation of copper, zinc and other base metals. In an attempt to prevent a stampede for the door among their investors, the fund requested approval for an amendment to extend 45 days from 15 the notice required for investors to withdraw their money. As the FT reports, “that smacks of the proverbial horse having already bolted.”

This has prompted the question on the role of commodities funds in driving up prices – and how that picture might unravel. Questions from the Markets Risk blog are, “What happens when the hedge funds who bid up prices in global assets start to get investor redemptions because of poor performance? What happens when the leverage unwinds and managers with little experience managing systemic or core market risks are faced with “improbable” risks?”

Answer: massive liquidations. It is estimated that more than 500 hedge funds specializing in commodities have started in the last 2-3 years. These funds represent a large percentage of the trading volume of base metals financial derivatives and it makes you wonder just how much of the 146% rise in copper prices from late 2005 to May 2006 was due to physical demand (China?) and how much was due to leveraged hedge fund derivative speculation. Perhaps a bit of both.

Remember to use stops!