THE HIGHTOWER REPORT

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1 Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited. Violators are subject to a $15,000 fine. THE HIGHTOWER REPORT Futures Analysis & Forecasting this issue Fundamental Trades: Bullish: Bearish: major economic events August 27 - Midwest Manufacturing - Texas Manufacturing - Republican Nat'l Convention August 28 - Case-Shiller Home Prices - Consumer Confi dence August 29 - Pending Home Sales - Fed Beige Book August 30 - Jobless Claims 15% 12% 9% 6% 3% 0% -3% -6% Nov Soybeans Mar Corn Sep Bonds Oct Nat Gas Sep Yen Visit our Blog! hightowerreport.com August 24, 2012 Next Week s Economic Focus In spite of a pattern of positive economic readings in the U.S. over the last four weeks, the markets were given a surprise bullish jolt from the FOMC meeting minutes on August 22nd. Apparently the Fed continues to think the U.S. economy lacks the velocity to escape the choppy economic environment put in place by the sub-prime crisis. However, it also appears that the U.S. Fed is the only key central bank that is poised to undertake the heavy lifting in the near term. Moves by the PBOC have so far been very conservative, and the ECB hasn t let its attention stray beyond the management of sovereign borrowing costs. The U.S. Fed remains out in front on the need for fresh easing. Perhaps this is a result of the looming fiscal cliff or, perhaps it is a result of the US New Orders - Durable Goods Monthly Percent Change Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Most Recent: +4.23% as of Jul 2012 Souce: Census Fed's expectations for softer data in the coming weeks. In the near term, we expect to see data from outside of the US become significantly weaker, as the sharp decline in Japanese exports to China and the Euro zone and the recent evidence of slowing in the usually strong German economy are economic red flags! While the markets might be poised for a letdown off of the heightened expectations of U.S. easing fairly soon, it weekly newsletter futures-research.com could be difficult to remove the buy the rumor mentality from the markets until after the September FOMC meeting has ended. A number of markets might have become overbought, but a buying of breaks mentality might continue over the coming weeks in corn, RBOB and natural gas. As long as the September FOMC meeting looms, the expectation of central bank action could remain the primary force in the daily trade for most commodities. our opinion market by market Market * Stocks Wait for break to 1386 in Sep S&P to buy. L Bonds Ongoing evidence of international slowing is bullish. L Dollar a solid value zone in the Dollar. L Euro More slowing evidence to weigh on the Euro. S Gold Temporarily overbought off easing expectations. S Silver Potential for back and fi ll around $ S Copper A fresh sale on a return to July highs. S Crude Without hurricane threat market is expensive. S Gasoline Buy breaks below $3.03 nearby RBOB. L Nat Gas Solid value around $2.72 October. L Soybeans USDA has exports at 8-yr low but 56% sold. L Corn Lower yield and acreage; need to price-out usage. L Wheat Moisture to help planting; wheat overvalued to corn. S Hogs Big discount but cash in steep downtrend. S L Cattle Tough to hold premium with $8 corn. S Sugar Extreme oversold readings and loss of momentum. L Coffee Holds above June and Aug 17th lows; seasonal? L Cocoa Still operating under negative infl uence of reversal. S Cotton China to sell 1 million tonnes from reserve; weak. S * For traders/commercialwho need to be in a market, L = Long, S=Short Page 1

2 SEPTEMBER BONDS * Disappointing global economic data boost safe-haven appeal of US Treasuries. * Market looking for easing from Sep FOMC. * Sell the fact break could be buying opportunity. Last week we missed a fresh long entry play in September bonds by attempting to buy a rather significant spike down move. But in retrospect it still appears that September bonds have indeed found a quasi-fundamental and technical value zone around the level. While the nearby bond contract has already managed a low-to-high bounce of roughly 4 points off the potential aforementioned value zone, we still think Treasuries are poised to settle back into a higher trading range of to A recent sweep of soft PMI data from around the world and evidence that slowing is even creeping into the German economy could rekindle a measure of international safe haven buying in US Treasuries. We also think that the Treasury trade will generally anticipate fresh easing from the September FOMC meeting, especially after several Fed sources have echoed that type of sentiment with recent dialogue. Therefore, 1/2 to 3/4 point corrections in bonds and notes should be bought until the buy the rumor mentality off the upcoming FOMC meeting translates into a sell the fact reality. We would look to be a buyer of September bonds on a setback to this week, in anticipation of slack numbers outside of the U.S. providing the impetus for a retest of the level. Suggested Trading Strategy BUY September Bonds on washout down to Use an initial objective of , and risk the trade to a close below yr US Treasury Bonds TRADERS TOOLBOX overvalued/undervalued Fundamental Technical COT OVERVALUED Copper Nasdaq Corn Crude oil Corn Oats Euro RBOB Gasoline Lumber UNDERVALUED Dollar US Dollar Copper Bonds Hogs Cattle Soybean Oil Sugar Gold options scan Undervalued Buy Sep E-Mini S&P Buy Oct B-Pound Buy Oct J-Yen Overvalued Sell Oct Copper * Sell Oct T-Bond * Sell Oct Sugar * Trend Reversals Buy Nov Nat Gas Buy Dec Cattle * When selling options, only risk to double the premium received. Page 2

3 SOYBEANS AND CORN *Grain market volatility on the rise. *Additional reduction in corn yield and harvested acreage? *Soybean demand not letting up. Grain market volatility is on the rise again after a calm period following the August production and supply/demand reports. The focus will likely shift to the possibility of further production declines for corn in the September reports, with many traders believing yield and harvested area could be lowered further. While there appears to be some evidence of slower corn demand in the face of corn priced at $8.00-$8.50 per bushel, further declines in production would mean the market would have to move higher in order to drive demand down another million bushels. The USDA has already lowered its demand forecast down by billion bushels from last year and down 1.85 billion bushels from two years ago. Reducing demand further could be a difficult task, with the export forecast already down to a 27-year low and the feeding demand forecast at a 23-year low. There may be some additional consolidation in prices as we move into the heart of the harvest, but the realization not only of a further loss in production but also of the poor quality of the crop due to the drought (which would require more corn to produce the same amount of ethanol and to produce the same weight gain in cattle) should leave the price trend up. We look for $8.66 and $9.44 to be the next upside targets for March corn. Soybeans also look likely to remain in a bull trend, but for different reasons. So far, there has been a lack of any news to suggest that recent record high prices have curtailed demand. In order to maintain a pipeline minimum ending stocks of 115 million bushels in the August supply/demand report, the USDA was forced to cut their forecast of soybean demand by 396 million bushels. But non-u.s. production fell 800 million bushels in 2012/13, and as a result, most of the world will be looking to the U.S. to meet its needs between September and March. With meal demand strong in the U.S. and export sales also strong, soybean crush margins are profitable. This should keep the monthly U.S. crush pace running well ahead what is needed to meet the USDA forecast for 2012/13, which is set at a 15- year low. U.S. soybean exports are projected to be the lowest in eight years, but cumulative export sales for 2012/13 have already reached 55.7% of the USDA projection for the year. This compares with the 5-year average for this time of the year at 25.6%. The market s "job" over the next few months will be to send prices higher and slow demand enough to keep ending stocks above a pipeline minimum. Suggested Trading Strategies 1) BUY a November Soybean $18.50 call at 34 cents. Use an objective of 79 cents, and risk 17 cents from entry. 2) BUY the March Corn $8.30/$9.70 bull call spread for 38 cents, and SELL the March Corn $7.20 put at 28 cents. Look for a net gain of 63 cents for the entire position. (It should take test of 950 in next 40 days.*) Risk a total of 18 cents. *Options values are based on pricing models and are not guaranteed. 120% Soybeans: US Weekly Export Sales As % of USDA Forecast 180 World Corn - Days of Supply 100% /13: Hightower Estimate of Ending Stocks 108.3MMT 80% 60% 40% Days ' % 0% Jul Sep Nov Jan Mar May Jul Source: USDA 12/13 5 Yr Avg 60 ' Crop Year Beginning Most Recent: As Of 08/10/2012 Source: USDA Page 3

4 JAPANESE YEN * Poor Japanese economic data may force BOJ to ease. * Low Japanese interest rates reduce incentive to hold funds there. * Rally off of Euro-zone debt anxiety could be a selling opportunity. After bouncing around a fairly wide trading range during the early part of August, the September Yen broke sharply to the downside two weeks ago. Positive rhetoric from Euro-zone officials and better than expected US economic data were the likely catalyst for the Yen s downdraft, as a flight to safety out of the Euro zone has been the main supportive factor for the Yen since the mid-march lows. The recent strength in the Yen has created severe problems for the Japanese economy, as export related industries represent a large portion of their GDP. The September Yen is likely to make an extended downside move during the next few weeks if risk appetites start to show consistent improvement. Japanese interest rates remain comparatively low throughout their yield curve, which gives investors little incentive to hold funds in Japan if and when global risk aversion starts to recede. While some Japanese economic numbers have shown improvement from last year s levels, Japan s CPI has fallen back into negative territory for the past two readings. Although the Bank of Japan has held off with fresh intervention to weaken the Yen recently, Japanese officials may be more inclined to start up fresh measures if Euro zone debt problems start to calm down. Last week s rebound after the FOMC meeting minutes release may be extended by a fresh flare-up of Euro zone debt anxiety, which will lead to a near term opportunity to enter the short side of the Japanese Yen. A decisive move down through the August low of could lead to a much larger selloff during the next few weeks. Suggested Trading Strategies 1) SELL the September Japanese Yen at with an objective of Risk the trade to a close above Percent Source: Reuters Percent Source: Reuters ) Bear Put Spread: BUY the October Japanese Yen Put/SELL the October Japanese Yen put at a net premium of 32 ticks. Use an objective of 160 ticks on the spread and risk the entire premium paid. Long-Term Sovereign Debt August 2012 / 10-Year Yield in % France Canada USA UK Germany JAPAN 3.3 G7 Nations Consumer Price Index Year Over Year % Change - June Italy UK France Germany USA Canada JAPAN Page 4

5 NATURAL GAS *Weekly injections running below average *Power sector consumption up 12.5% *Hurricane season could interrupt output Weekly natural gas storage injections have fallen short of both their year-ago and five average levels for 16 consecutive weeks. This has reduced the threat of there not being enough storage space available to withstand the seasonal stock building period that ends in November. It also suggests that demand is keeping pace with supply, unlike last year when burdensome supplies and a lack of storage space forced producers burn off their excess production. U.S. nuclear plant outages have been running above their five year average in recent weeks, and that has provided a modest boost in natural gas used for power generation. Falling natural gas prices have also boosted the incentive for utilities to adjust their power generation operations away from coal in favor of natural gas. As of the week ending August 22, total US natural gas consumption was more than 5% above year ago levels, helped by a 12.5% jump from the power sector. Temperatures across the US have been running above their 30-year averages in August, and that trend is expected to continue into September 6th. This could provide another lift to power demand for air conditioning May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 The Hightower Report Weekly Crude Oil vs. Natural Gas Prices in MMBtu Crude Another positive force for the natural gas market comes from increasing storm activity in the Atlantic. Last week, one forecaster raised their projected number of named storms during the 2012 Atlantic hurricane season. The latest figures from the EIA indicate that total 7% of total US dry production comes from the Gulf of Mexico and about 30% of total US natural gas processing plant capacity is located along the Gulf coast. A significant storm moving into the Gulf could interrupt a significant portion of US natural gas production and possibly cause extensive damage to facilities. The potential for U.S. to export liquified natural gas (LNG) is a long-term bullish factor, with Exxon Mobil recently announcing plans to build a new LNG export terminal near Port Arthur, Texas in a joint venture with Qatar Petroleum International. The fact that natural gas is still a bargain compared to crude oil is also supportive. October Crude Oil measured in MMBtu is nearly six times more expensive than October Natural Gas. This should support demand for natural gas. Nat Gas MAX / MIN: / Last Spread: October natural gas has been consolidating its sharp, 17% decline earlier this month and has found support at the $2.70 area. With a number of positive forces worthy of lifting natural gas prices, we think the recent weakness presents a low-risk trading opportunity. Suggested Trading Strategies 1) BUY October Natural Gas at $2.710, with an upside objective of $ Risk a close on the trade below $ ) BUY a November Natural Gas $3.20 call at $0.120, with an objective of $ Risk half of the premium paid on a closing basis. Page 5

6 HURRICANE SEASON The official Atlantic hurricane season began on June 1, 2012 and ends on November 30, Currently, Tropical Storm Isaac is on track to reach the southern tip of Florida by early next week. Some weather watchers suggest it could then move into the Gulf of Mexico and impact the Gulf Coast, Delta, and Southeastern US. Hurricane Season is of great importance to those in the commodity trading business. For instance, powerful storms can negatively impact refining and oil drilling operations in the Gulf of Mexico. In this instance, the possibility of increased rainfall in the southeast may help fall planting for Soft Red Winter Wheat, while at the same time the heavy rain and high wind could adversely affect maturing row crops. We are beginning to enter into an extremely active period for hurricane and tropical storm activity. The below data provides detailed, historical analysis of Category 3 through Category 5 Hurricane activity in the last 153 years: Between , 30 CAT 3-5 Hurricanes reached either the Louisiana or Texas/Mexico Gulf of Mexico Coasts 22 out of the 30 CAT 3-5 Hurricanes occurred after August 27th 16 out of the 30 CAT 3-5 Hurricanes occurred between August 27th and September 15th 15 out of the 30 CAT 3-5 Hurricanes tracked to the Louisiana Gulf Coast 15 out of the 30 CAT 3-5 Hurricanes tracked to the Texas/ Mexico Gulf Coast Historical Hurricane Tracks National Oceanic and Atmospheric Administration Page 6

7 Longer-Term Investment Trades updates to prior longer-term trade strategies Original Trade Date Trade Action Treasury Bonds 4/30/2012 Long 1 Sep Bond Futures at Long 3 Sep Bond 136 Puts at 1-18 each. Treasury Bonds 7/16/2012 Short 1 Dec Bond 151 Put at Long 3 Dec Bond 144 Puts at Short 1 Dec Bond 145 Put at Liffe Robusta Coffee 8/3/2012 Long a November Liffe Robusta Coffee 2200 call at 63 and short a November Liffe Robusta coffee 2400 call at 21. Took a $3, profi t on futures. Puts expired worthless, but profi t on long futures kept entire loss on trade to just $31. Covered 151 put for a profi t of $1625 Profi t on 151 put lowers cost on the three 144 puts to $ Risk $1400 on entire trade. *Look to cover 145 Put at Look for a gain of 170 ticks on the spread. Risk $420, the entire premium paid, on the spread. Live Cattle 8/10/2012 Long 2 June cattle 140 calls at 225. Use an objective of 450 on one call and 1400 on the second. Risk the entire premium paid. Is it Too Early to Think About an Autumn Frost? As soybean crops complete pod-setting and begin to drop leaves, some attention must be paid to the drastic change in temperatures that could occur over the next couple weeks as we move into autumn. Current weather models call for below normal temperatures in the day forecast for North Dakota, two-thirds of South Dakota, and the northern half of Minnesota. While the chance of freezing temperatures may seem unlikely, this crop year s summer weather has proven that unlikeliness can drastically impact crop conditions and yield potential. Page 7

8 141 West Jackson Suite 4002 Chicago, Illinois commitments of traders Data As of August 24, 2012 Non-Commercial & Non-Reportable Combined Futures & Options Market Net Position Net Change 4-Wk Net Change Grains CBOT Grains 592,075 65,383 65, Corn 291,523 36,317 51, KC Wheat 41,854 2,525 6, Minn Wheat 6, Oats 4, Rice Soybeans 253,798 26,604 13, Soyoil 34,383 22,888 23, Wk Ranking Soymeal 109,436 8,712 17, Wheat 46,754 2, Livestock Cattle 18,903 3,969 1,793 8 Feeder Cattle -8, Hogs 19,163-2,488-4, Metals Copper -19,345 6,210 4, Gold 182,570 32,123 21, Platinum 29,446 7,558 8, Silver 34,041 9,996 11, Softs Cocoa 25,643-1,286 9, Coffee -14,513-5,921-14,129 1 Cotton 29,330 8,012 15, Lumber 2, , Milk 3,507 1,082 1, OJ 3,225 1,688 2, Sugar 70,746-36,202-98, Currencies Canadian 74,408 29,125 52, Dollar 42, , Euro -152,172 19,190 25, Energies Crude Oil 277,096 34,879 53, This report includes information from sources believed to be reliable, but no independent verification has been made, and we do not guarantee Gas (RBOB) 84, , its accuracy or completeness. Opinions expressed are subject to change Heating Oil 33,313 6,409 24, without notice. This report should not be construed as a request to Natural Gas -34,876-5,443 4, engage in any transaction involving the purchase or sale of a futures Financials contract and/or commodity option thereon. The risk of loss in trading Bonds 32,885-11,413-18, futures contracts or commodity options can be substantial, and investors E-Mini S&P 89,947-4,646-2, should carefully consider the inherent risks of such an investment in Dow Jones $5 33,973 2,757 3, light of their financial condition. Any reproduction or retransmission of S&P , this report without the express written consent of The Hightower Report T-Notes 37,635 9,792 42, is strictly prohibited. The data contained herein is subject to revision; Extreme Ranking 1 = Shortest Short independent verification is recommended. Any third party opinions 5% of Extreme 52 = Longest Long regarding this report are not necessarily those of the authors. Due to the volitile nature of futures and options markets, the information contained herein may be outdated upon its release. Page 8