CTI Sector Overview for October

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Joan Bertha Henderson
5 years ago
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1 November 4, 2010 CTI Sector Overview for October Energy The CTI was flat the Energy sector for the month of October. As equities rallied due to hopes of further Federal Reserve stimulus (via QE2 ), Crude Oil traded in a choppy range, caught between hopes for increasing demand and the poor economic data (and ample stockpiles) currently in effect. Natural gas continued to see plenty of liquidation, until the last week of October when fund buying and short covering gave it enough strength to actually finish the month about unchanged. We believe inventory levels, global demand, further developments with Iran or North Korea, the direction of equities and the U.S. Dollar, Federal Reserve activity, and any surprises in economic data are the most important factors in the market. The Energy sector is now long for November. Industrial Metals The CTI was long Copper for October. Copper ended the month higher, following equities on their upward path. However, some tangible selling was seen during the last week of October, especially after China raised interest rates. We believe the global economic situation, warehouse supplies, any news on Chinese demand, and the state of the housing market remain the major factors in this market. The sector remains long for November. Precious Metals The CTI was long the Precious Metals sector for October. Gold and Silver both traded sharply higher for the first half of the month, until a bounce in the U.S. Dollar led to fund selling and profit taking. Both metals still saw good support and buying late in October, finishing up (and with Silver not that far from its October high). We believe QE 2, any developments with the Federal Reserve calling for more inflation, the global economy, potential conflict in Iran, the direction of the U.S. Dollar, and the results of the recent mid-term election are the major factors influencing the Precious Metals markets. The sector remains long for November. Grains The CTI was long the Grains sector for October. Poor crop results helped the Grains turn in a strong showing for the month. Corn and Soybeans led the way, while Wheat already having made a tremendous move a few months back, continued to rally in sympathy while still recovering stability. We believe the sector will remain sensitive to Russia s export policy, any additional acreage or planting news, Asian demand, the direction of the U.S. Dollar, and the global economy. The sector remains long for November. Livestock The CTI was long Livestock for October. Cattle finished the month about unchanged, trading higher during the first half of the month before fund selling and weakening demand brought prices back down. Hogs were weaker throughout the month, dropping more Page 1 of 5

2 than 10% due to poor demand both domestically and internationally. We believe demand, herd sizes, movements in the cost of grain, and the direction of the U.S. Dollar will be the main influences on the sector. The sector is now short for November. Softs Soft trading in October was trend-driven. Sugar continued its dramatic rally, moving more than 15% higher as international shortages persist (we were long for October and remain long for November). Coffee was quite choppy, but rallied for most of the month, breaking through recent highs (we were long for October and remain long for November). Cocoa was range-bound, finishing a quiet month slightly lower (we were short for October and remain short for November). Cotton rallied nearly every day, except for two sharp reversals when profit taking flooded the market (we were long for October and remain long for November). In summary, we remain long Coffee, Sugar, and Cotton but short Cocoa for November. Page 2 of 5

3 News Interpretation and November Outlook The two grand events in the U.S. on November 3 rd were the results of the mid-term elections and the Federal Reserve s announcement of their QE 2 strategy (aka printing money) to "stimulate the economy. Although both events were very well discounted, the equity markets sold off immediately after the Fed announcement (as expected). However, they were then bought into the close to finish up on the day. This type of price action always looks suspiciously like some underhanded effort to make the Fed's action appear to be positively received by the markets. As it turned out, the US Fed Chairman published an editorial in the Washington Post the morning of November 4 th outlining his reasons for printing money that had not been mentioned in the Federal Reserve press release the day prior. His comments on the benefits of rising equity prices are why the S&P 500 is trading up about 1.75% today as I complete this (November 4, 2010). The "don't fight the Fed" mentality is held in religious regard by most professional traders. This is one reason why we all should adhere to this mantra, as this Bernanke editorial is a first in history! Moreover, the issue is that QE 2 will do very little to create real growth rather, I believe it will create a bubble in financial assets, especially U.S. government bonds. I believe the true winner as a result of QE2 will be commodities. In the last month and a half commodities have rallied, anticipating future inflation and reacting to the decline of the U.S. Dollar. Commodity and financial futures are all moving higher and after a very long drawdown are finally looking like they will continue their current trends instead of the choppy movements we have seen for far too long. Crude Oil is finally trending upwards, and our indexes are now long the Energy sector, which has been positioned flat for 5 months (or since the end of May). The upward momentum and price action looks like $90 to $100 oil by the end of the year is a real possibility. Of course, the choppy action has a way of reoccurring just when things appear the best. The economy faces gridlock from the very opposite ideologies in Congress. The only odds-on bet is that inflation will return in the current cycle. The Fed has even talked of hitting 4% inflation as a desirable event! We have had a debt bull market and an equity bull market, and now commodities are just beginning to look like it might be their turn, thanks to the Fed Chairman Ben Bernanke, aka Helicopter Ben. One should take note of the fact that Libor in Europe made its low on Match 19 th, 2010; at that time 1-month Libor rates were at 36 basis points, and 3-month at 58 bps, while Page 3 of 5

4 US Libor for 1-month and 3-month were 25 and 28 bps respectively. Currently, Europe Libor is at 81 bps and 99 bps (1-month and 3-month, respectively) while US Libor is 25 bps for 1-month and 30 bps for 3-month. This tells you why the U.S. Dollar is only approximately 5% above its 70- year low. While individual portfolio needs and circumstances will vary, I personally believe that inflation will occur, and that it is time to reduce long debt futures and stock index futures holdings, and to add to commodities. We believe we ll see a continuation of the in-force trends for our indexes during November until the Bush-era tax cuts are ruled upon. That is the big unknown. If the top marginal rates are not extended, we look for a double dip recession! In all, the economy has all negatives at the moment, but with an outlook of increasing inflation, things are actually likely to get worse if the Fed gets it right a scary thought. Good luck. Page 4 of 5

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