THE HIGHTOWER REPORT

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1 Any reproduction or retransmission of this report without the expressed written consent of The Hightower Report is strictly prohibited. Violators are subject to a $15,000 fine. THE HIGHTOWER REPORT this issue Fundamental Trades: Bullish: Bearish: Spreads: Soybeans Cotton Bonds Emini S&P Strangle Technical Trade: Bullish: Other: Futures Analysis & Forecasting Sugar Housing Starts/Building Permits Readings May Be an Early Warning Sign major economic events August 21 - Chicago Fed National Index August 22-German ZEW Survey August 23 - New Home Sales - Euro Zone "Flash" PMI's August 24 - UK GDP - Jobless Claims - Existing Home Sales - KC Fed Manufacturing Index - Jackson Hole Symposium August 25 - Durable Goods August 18, 2017 Next Week s Economic Focus The number of negative geopolitical issues has expanded consistently over the last two weeks, and this has undermined the long bull market in equities. Mixed economic information and renewed deflation fears by the US Fed and the European Central Bank have put many physical commodities under liquidation pressure. While the North Korean situation has not escalated over the last week, it remains unsolved and is capable of returning to the headlines at any given moment. Many commodities are also faced with more than adequate supply, and that leaves the bear camp with a fundamental edge going forward. On the other hand, the fact that the market is already concerned about a possible Hindenburg or black swan event seems to suggest that negative sentiment has already reached a significant level. On the bright side, industrial metals have shown some positive resiliency, and ongoing declines in US crude oil inventories suggest that the oversupply is being whittled down. With the oil market usually the primary focus of the commodity space, seeing crude prices stay above $46 should keep the deflationary threat at bay. We leave the short weekly market letter HightowerReport.com term bias with the bear camp until there is reason to suspect a sustained period of calm toward North Korea or until the markets are blessed with another positive US monthly nonfarm payroll result. -David Hightower Upcoming Appearances By David Hightower September 6, 2017: USSEC - Merida, Mexico September 22, 2017: USSEC-Hangzhou Feed Conference - Beijing, China September 28, 2017: Ingredion - Kohler, WI October 26, 2017: Grain Academy Varna, Bulgaria CME Market Movers Videos Click here for the latest Market Movers Video September 1, 2017: Crop Production September 22, 2017: Quarterly Hogs & Pigs Report October 6, 2017: Crop Production Page 1

2 TECHNICAL TRADE: SHORT TERM LOW IN SUGAR? While the longer-term fundamentals for sugar remain bearish, the technical setup suggests that a short term low may be close at hand. The market s setup is similar to what it was in late June, just prior rallying off of a steep selloff. Stochastics gave a buy signal late this week from an extremely oversold level. The RSI diverged when it posted a reading of 27.4 at the August 11th low and then a slightly higher reading of 28.8 at the August 16th low, and this suggests a loss in downside momentum. The COT report as of August 8th showed that managed money traders were net short 85,623 contracts, and given the surge in open interest since then, we expect the August 18th update (data as of August 15th) to show a record or near record net short position. Open interest is up 103,297 contracts for the month so far, which suggests that fund traders are building a huge net short position. This leaves the market vulnerable to short-covering if resistance levels are violated. Sugar - COT - Futures & Options Managed Money Net Position Number Of Contracts Suggested Technical Trading Strategy BUY October Sugar at with an objective of Risk 45 points from entry. -Terry Roggensack TRADERS TOOLBOX overvalued/undervalued Fundamental Technical COT OVERVALUED E-mini Nasdaq 100 Palladium Crude Oil Copper Japanese Yen Palladium Palladium Eurocurrency Cattle UNDERVALUED Cocoa Wheat Cocoa British Pound Corn Natural Gas Mini Dow Jones Coffee Sugar options scan Undervalued Buy Sep E-mini S&P Buy Oct Corn /2 Buy Nov Cocoa Overvalued Sell Oct Cattle * Sell Nov Copper $ * Sell Dec Bond * Trend Reversals Buy Nov Japanese Yen Buy Nov Natural Gas $ Buy Nov Coffee * When selling options, only risk to double the premium received. Page 2

3 BONDS: TECHNICAL DIVERGENCE AND OTHER BEARISH FACTORS Clearly, the fundamental condition of the global economy has deteriorated, and low inflation threats remain in place. It isn t surprising that the US Fed has more than likely pushed back its rate hike timing, once again. However, Treasury prices have already made a significant rally off the early July lows, and the ultimate trend arbiter could end up being the August nonfarm payroll report on September 1st. Suggested Trading Strategy SELL September US Bonds at with an objective of Risk 1-00 from entry. -Dave Hightower Overall global sentiment has deteriorated, but it appears to have reached excessive levels. Political conditions in the US are so poor that it is hard to conceive of them getting much worse. The nearly 5-point rally in bonds and the return to within one point of the June 2017 highs has factored in a fairly negative outlook. Issues that should be considered bearish for bonds are prospects of the Fed starting to reduce its balance sheet next month and evidence that US energy demand has been keeping pace with persistent gains in US oil production. The fact that bond futures have not seen a blip up in volume during the rally of the past 30 days suggests to us that a peak in bond prices could be directly ahead. The September US Bond chart shows slow stochastics have been trending higher since they crossed over to a buy signal on August 1st. The slow stochastics continue to point higher but are in extreme overbought territory at this time. If the market crossed over to a sell signal, it could portend a price break similar to the ones seen in mid- April and late June. US Unemployment Rate - Percent Page 3

4 SOYBEANS: DRY WEATHER IN EASTERN BELT COULD LOWER YIELDS This week s rains in Iowa have certainly been timely. Some traders are even calling them $100 million dollar rains. However, the 7-day and 14-day percent of normal precipitation values still show eastern areas of Iowa behind normal for the month of August. Still, the rainfall has stabilized the crop for now, and there are forecasts for another system to move through early next week. But what stands out is how far Illinois and Indian have fallen in their percent-of-normal precipitation readings. While many analysts and traders have scrutinized the latest USDA yield estimates, they should keep in mind that last year s yield outperformed most estimates due to advancements in seed technology. Furthermore, last year s weather was nearly perfect for the entire growing season, while this year s weather has been considerably less so. These regions saw very warm temperatures and below normal precipitation in July, and they are on track for below normal precipitation in August. Last August, the USDA pegged US soybean yield at 52.1 bushels per acre. This August the estimate came in at The good/excellent (G/EX) ratings were 72% at this time last year versus 59% this year. The poor/very-poor (P/VP) reading is 12% this year versus 7% last year. With Iowa, Illinois and Indiana representing 30% of the total US soybean area and most of this region suffering from below normal precipitation so far this month, further declines in yield potential are possible. The Illinois yield estimate of 58 bushels per acre in the August USDA report was very generous given the current condition rating at 63% G/EX. Last year, Illinois final soybean yield was 59 bushels per acre, but conditions were up at 80% G/EX. The current yield estimate could be 2-3 bushels per acre too high given current weather conditions. Iowa s yield was estimated at 56 bushels per acre in the August report, compared to the final 2016 yield of 61 bushels per acre. The G/EX ratings for Iowa are at 56% versus 83% last year, but with the recent rains, the current yield estimate seems reasonable. Indiana s yield was estimated at 55 bushels per acre in the August report, compared to a final 2016 yield of 58 bushel per acre. Indiana s current G/EX rating is 56% compared to 71% at this time last year. Given the dryness this month, that state s yield potential seems to Continued on Next Page... Page 4

5 SOYBEANS: DRY WEATHER IN EASTERN BELT COULD LOWER YIELDS Continued from Previous Page be on the decline, and a yield closer to bushels per acre seems reasonable. Don t be surprised if pod counts and bean size estimates come in low in next week s Farm Journal Tour. While we do not expect a disaster-type yield in the US this year, we do think the USDA may have been a little too optimistic in the August 10th report. Trend line or slightly below trend line could be more likely this year, especially if the recent longer term weather outlooks calling for a cool and dry stretch through the end of the month prove true. An average yield closer to 47.5 bushels per acre could pull 2017/18 ending stocks down towards 300 million bushels from the current 475 million-bushel estimate. With the recent slide in futures most likely due to heavy selling on the part of traditional trend-following funds, these traders have flipped from a small net long to a net short position in soybeans. Open interest increased nearly 40,000 contracts this past week. Not much fanfare was given to the recent agreement by the Chinese delegation in Omaha, Nebraska to buy 3.8 million tonnes of soybeans in 2017/18. New crop export sales are running behind the normal pace for this time of year. As of August 10th, new crop sales had only reached 13.6% of the USDA s export forecast for the entire year versus a five year average of 34.5%. We look for new crop sales to pick up in earnest soon, as the Chinese are short-bought for the fall months. Another potential bullish input is the dicamba-drift problem. Dicamba is an herbicide that can be used on soybean fields that have been planted with genetically-modified, dicamba-resistant seeds, but it can cause significant damage if it drifts over to fields planted with non-resistant seeds. This problem has been primarily occurring in the Delta region, but there have seen increased instances in Illinois as well. We feel a corrective bounce up to the $9.70-$9.85 level basis the January contract is possible prior into the September 12th USDA Crop Production report. Suggested Trading Strategy BUY a January Soybean $9.60 call, SELL a January Soybean $11.00 call, and SELL a January Soybean $8.80 put for a net cost of 9 ½ cents on the entire position. Use an objective of 24 cents on the trade, and risk a total of 6 ½ cents. -Matt Connelly Page 5

6 COTTON: A STRONG US CROP AND HEAVY COMPETITION A technical bounce in December cotton could be a selling opportunity. The market looks to remain in a shortterm downtrend, and this could spark increased long liquidation selling from the large number of speculators who are still trying to hold onto long positions. The USDA report on August 10th was bearish, the weather has been improving, and crop conditions are improving. The most recent crop conditions report for cotton showed that as of August 13th, 61% of the crop was rated good to excellent, up from 57% the previous week and 48% last year at this time. For Texas, 51% was rated good to excellent, an increase of 6% in just one week and well above the 20-year average at 36%. The data suggests that the yield outlook is improving and that the most recent USDA yield estimate as of August 1st could be adjusted higher in the upcoming USDA production reports. In the August report, the USDA pegged 2017/18 US cotton production at a whopping million bales, up from million in the July report and up from million bales for 2016/17 and million bales for 2015/16. This represents an 11-year high. US ending stocks are now pegged at 5.8 million bales, 1 million bales higher than the average estimate going into the report and up 3 million from 2016/17. It represents a nine-year high. The USDA raised world usage by nearly 400,000 bales, but it also revised world production higher by 1.95 million bales to million. World ending stocks are now pegged at million bales, up from in the July report and up from million for 2016/17. Total ending stocks for the major world exporters is forecast at million bales, up from million in 2016/17. This is another bearish development, as it suggests that the US will see heavy competition from other exporters in the coming year. China s production was revised up by 500,000 bales to 24.5 million bales. Suggested Trading Strategies 1) SELL December Cotton at with an objective of Risk the position to ) BUY a December Cotton put at 105 with an objective of 335. Risk a total of 65 points on the trade. -Terry Roggensack Texas Cotton Conditions - Good/Excellent US Cotton Yield - Actual vs. 20 Year Trend US Cotton - Ending Stocks vs. Stocks / Usage Ratio Page 6

7 LONG TERM TRADE: E-MINI S&P APPROACHING AN INFLECTION POINT After weeks of resiliency, equity markets appear to have succumbed to the everexpanding list of geopolitical and economic concerns. While the North Korean situation appears to have been the primary force halting the impressive 2017 rally, concerns over a lack of acceleration in global growth, lingering low inflation fears and ever-worsening US political conditions have put stocks into their most bearish environment since March. Some sources are already floating the idea of a massive meltdown or as the trade suggests, a Hindenburg event, and that would seem to suggest that negative sentiment has expanded quickly. If we were to adjust the COT spec and fund positioning in most equity indices to the lows posted this week, we would probably see a moderate net short position. The 429-point slide in the Dow Jones Industrial Average has factored in the growing threat to the economy and has also started the process of lowering prices that were deemed to be overvalued as recently as the August high. Unfortunately, the markets might have further downside ahead, as the prospect of tax reform is becoming less likely by the day due to the nearly complete loss of political capital by the Trump administration. One might suggest that Washington politics have managed to reach an unprecedented low point, and that means consumer and investor sentiment are likely to deteriorate before they improve. On the other hand, the lack of alternative investments, the market s potential to overprice the negatives, and the likely spec and fund net short in many stock index markets could set the stage for reversals similar to July 18th, June 29th and May 18th. The path of least resistance is down, but a spike low recovery could come ahead of the August non-farm payroll report due out on September 1st. Long Term Trading Strategy BUY 1 September E-Mini S&P 2435 put for 28, and then BUY 2 September E-Mini S&P 2455 calls for 14. Look for a near term objective of 40 for the 2435 put, and hold the calls for a recovery to 2450 in the September futures. Risk a loss of 15 on close basis for the entire position. -David Hightower eminis&p500 COT Futures&Options NonCommercial&NonReportableCombinedNetPosition NumberOfContracts our opinion market by market Market * Stocks Valuations to slide until political winds change. S Bonds Economic doubt remains, but top soon? L Dollar Defl ation fears & political angst is bearish S Euro Expect the ECB to talk the Euro down. S Gold The bulls control, but volatility to rise. L Silver Modest spec & fund long down, more gains ahead. L Copper Deteriorating global sentiment to favor the bears. S Crude Buy Oct crude oil break to $ L Gasoline Least long energy component; buy breaks. L Nat Gas Increased hurricane action to weaken bear resolve. L Soybeans Enough yield & weather uncertainty for a bounce. L Corn Illinois & Iowa yield expectations are slipping. L Wheat Extreme oversold as Black Sea moves excess. L Hogs Basis back to a wide level; too far, too fast. L L Cattle Probing for low; OI down sharply; China demand? L Sugar May have already priced-in big surplus production. L Coffee Short-term trend down & focus shift to new crop. S Cocoa Better weather sparks break to key support. L Cotton Oversold bounce possible but downtrend to persist. S * For traders/commercials who need to be in a market, L = Long, S=Short These reflect our opinions for the next 7 days. They may contradict longer term viewpoints expressed elsewhere in this publication. Page 7

8 Housing Starts/Building Permits Readings May Be an Early Warning Sign While global markets found their footing going into the weekend, they were unable to fully repair the damage they sustained from Thursday s downdraft. The events in Barcelona and the turmoil in Washington were clearly important factors, along with thin summer trading conditions. However, there was another item that occurred Wednesday that may be giving traders pause for thought and may be seen as an early warning sign - housing data. A recent source of strength for the US economy has been the housing sector, but that may be about to change. While remaining well below their highs during the real estate boom of the last decade, housing starts and building permits have tracked close to the US economic recovery over the past few years. However, Wednesday s readings on July housing starts and July building permits both came in below market forecasts and well below their June readings. Of the two, the building permits reading may be considered the more forward looking, as it reflects sentiment both from consumers and from builders. Very low interest rates have been a critical factor in the US housing sector recovery, so the potential for future Fed rate hikes may already be having an impact. After reaching 9-year highs earlier this year (building permits in January, housing starts in February), both of these reading have seen notable downticks. If they continue to disappoint, it could be an early sign that sentiment and risk appetites are about to make a longer-term, negative shift. US Building Permits Monthly Annualized Rate / Thousand Units US Building Permits Monthly Annualize Rate / Thousand Units - Stephen Maass Page 8

9 Longer-Term Investment Trades updates to prior longer-term trade strategies Original Trade Date Trade Action Corn 3/17/17 Long a December Corn $4.10 call at 22 1/2 cents. Previously short a December Corn $3.30 put at 7 1/2 cents that was bought back at 1 1/2 cents for a profi t of 6 cents, and previously short a December $5.10 call at 6 1/4 cents that was bought back at 2 3/4 cents for a profi t of 3 1/2 cents. Hold the December Corn $4.10 call for now. Soybeans/Corn 4/28/17 Short 2 December Corn $3.50 puts at 9 3/4 cents each. Previously long a November Soybean $9.00 put at 19 cents that was SOLD at 5 3/8 cents for a loss of 13 5/8 cents. Look to BUY BACK the December Corn $3.50 puts at 1/2 cent each. Risk a total of 12 cents on the entire trade. Hogs 6/2/17 Short and August Hog call from 185 and long August Hog put at 155 for a net credit (premium received) of 30 points for the combination. Both the short August Hog call and long August Hog put expired at 0 for a net gain of 30 points ($120.00) on the entire strategy. Coffee 7/7/17 Long a December Coffee / bull call spread and Short a December Coffee put for a net credit of 30 points. Sold the December Coffee call at 1346, bought back the December Coffee call at 430, and bought back the December Coffee put at 146 for a profit of 800 points ($3,000) on the entire strategy. Soybeans/Corn 7/21/17 Long 2 November Soybean $11.40 calls and Short 1 December Corn $4.10 call for a net premium outlay of 14 cents. Risk the strategy to a net loss on a closing basis of $800 and wait for an objective projection in an upcoming report. Crude Oil 8/11/17 BOUGHT October Crude Oil at $ Use with an objective of $50.07, and risk the position to $ Crude Oil 8/11/17 BOUGHT a November Crude Oil $50.00/$53.50 bull call spread for 94. Use an objective of 250 on the spread, and risk it to a close below 65. Emini S&P 8/18/17 BUY 1 September E-Mini S&P 2435 put for 28.00, and then BUY 2 September E-Mini S&P 2455 calls for Look for a near term objective of for the 2435 put, and hold the calls for a recovery to 2450 in the September futures. Risk a loss of on a closing basis for the entire position. Trade recommendations are only suggestions. This is not to be construed as a trading system or tracking account. No representation is being made that any account will or is likely to achieve profits or losses to those shown. By reading or following this report, you acknowledge and accept that all trading decisions are your own sole responsibility, and The Hightower Report or anybody associated with The Hightower Report cannot be held responsible for any losses that are incurred as a result. Trade fills are hypothetical. Traders may not be able to enter or exit the trades exactly at the prices indicated due to liquidity or market slippage. Page 9

10 2017 calendar encyclopedia almanac hightowerreport.com southeast asia: the next china? commitments of traders Market Data As of August 15, 2017 Non-Commercial & Non-Reportable Combined Futures & Options Net Position Net Change 4-Wk Net Change Grains CBOT Grains , , Corn 68,098-43,133-77, KC Wheat 54,437-16,026-28, Minn Wheat 7,718-3,071-3, Oats 4, Rice 2, Soybeans -43,165-23,614-50, Soyoil 62,562-20,150-15, Wk Ranking can grain production keep up with demand? Commodity Trading Guide 2017 Calendar Encyclopedia Almanac Futures and Options Expiration Dates Ten Years of Suppy and Demand Tables Government & Industry Report Dates All-Time Contract High and Low Prices Global Crop Calendars Over 350 Charts & Graphs Contract Specifications Only $20 each! Go to futures-research.com or call Soymeal ,038-23,234 8 Wheat -24,076-13,036-44, Livestock Cattle 85,857-11,122-22, Feeder Cattle 3, Hogs 58,384 5, Metals Copper 36,804 3,233 13, Gold 200,356 39,741 95, Platinum 32,294 2,535 17, Silver 48,226 8,753 17,477 7 Softs Cocoa -19,702-4,472 11, Coffee 5, , Cotton 36,897-6,292 8,570 6 Lumber 1, Milk 3, ,100 3 OJ -3, Sugar -72,636-38,154-15,659 1 Currencies Canadian 70,440-17,211 28, Dollar 4, ,009 4 Euro 108,240-11,430-6, Energies Crude Oil 526,277 1,525 59, Gas (RBOB) 71,298-4,835 12, This report includes information from sources believed to be reliable, but Heating Oil 49,946 5,117 32, no independent verification has been made, and we do not guarantee Natural Gas -15,211 31, its accuracy or completeness. Opinions expressed are subject to change Financials without notice. This report should not be construed as a request to Bonds 50,369 11,535 13, engage in any transaction involving the purchase or sale of a futures E-Mini S&P -5,060 53,525-3, contract and/or commodity option thereon. The risk of loss in trading Dow Jones $5 86,132 16,499 19, futures contracts or commodity options can be substantial, and investors S&P ,540 2,863 1, should carefully consider the inherent risks of such an investment in light T-Notes 36, , of their financial condition. Any reproduction or retransmission of this Extreme Ranking 1 = Shortest Short report without the expressed written consent of The Hightower Report 5% of Extreme 52 = Longest Long is strictly prohibited. The data contained herein is subject to revision; independent verification is recommended. Any third party opinions THE HIGHTOWER REPORT regarding 141 West Jackson this report Suite are not 4002 necessarily Chicago, those Illinois of the authors Due to the weekly market info@hightowerreport.com volitile nature Trading of futures and contracts options and markets, commodity the information options involves contained substantial Subscriptions: risk of loss, $25 and per thus Month is not appropriate for all investors. herein may be outdated Investors upon should its carefully release. consider the inherent risks of such an investment in light of their financial condition. Page 10