THE HIGHTOWER REPORT

Transcription

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: Spreads: major economic events September 24 - Chicago/Dallas Fed Indices September 25 - Case Schiller Home Prices - Consumer Confi dence September 26 - New Home Sales September 27 - Jobless Claims - GDP - Durable Goods Cattle September 28 Stock Market BUY May Soybean Volatility Spread - Chicago PMI - Consumer Sentiment Source: Reuters 2001 September 21, 2012 Next Week s Economic Focus Last week the flow of slack international data seemed to shift sentiment back into a negative track for many physical markets. With evidence of slowing bringing the US Dollar back into vogue, a host of commodity markets might become even more sensitive to the ebb and flow of the economic outlook. When one also factors in a slightly reduced chance of fresh easing from the US Fed (because they recently supplied QE3) it is possible that commodity and equity markets could be set to fly without a net. In our opinion, the markets are now likely to see negative economic news as a negative to prices, instead of seeing weak data as a sign of even more easing action from the Fed. With definitive slowing evidence from China and Europe already China GDP - Year-Over-Year Change laying the ground work of global slowing, it is possible that international data could take on an even more important role than US data. Therefore the markets will certainly pay attention to the Case-Shiller home price survey and to US Consumer Confidence, but the really critical influence on the markets may be the German IFO business survey on Sept 24th, Italian retail sales report on Sept 26th and even the Chinese PMI report on Sept 28th. weekly newsletter futures-research.com We are of the opinion that almost everything physical is likely to favor a downside price track over the coming week of trade. Grain traders face a stocks report Friday which has seen a recent history (the last two years) of showing higher than expected corn stocks due to harvested corn ahead of Sept 1st. The USDA Hogs and Pigs report will indicate if there is a liquidation or culling trend from US producers. our opinion market by market Market * Stocks Support from QE to wane, election fears to rise S Bonds More gains ahead as global slowing returns L Dollar Renewed fl ight to quality fears favor the $ L Euro More evidence of slowing to rekindle debt issues S Gold Defl ation & slowing to trump easing hopes S Silver Physical commodity infl uences to weigh on prices S Copper Chinese slowing without easing is bearish S Crude Overdone washout to foster bargain hunting buying L Gasoline Increased refi nery operating rates are bearish S Nat Gas Wait for a decline to $2.80 to buy November gas L Soybeans Strong demand news but short-term supply S Corn Looks cheap but harvest; S America cheaper S Wheat US expensive vs. rest of world; exports sluggish S Hogs Increased supply ahead and futures at premium S L Cattle Supply tight in 4th quarter but consumer demand? L Sugar Surplus production but ethanol exports? S Coffee Brazil sellers active last week but long-term? L Cocoa May see more pressure into start of main harvest S Cotton Economic sensitive market to follow stock market S * For traders/commercialwho need to be in a market, L = Long, S=Short Page 1

2 DECEMBER S&P * After all the easing is done, where will the bulls get their assistance? * Global slowing evidence on the rise again. * Expect US polling results to foster increased volatility in the stock market. Now that several key central banks have fired another salvo of easing at the marketplace, it is possible that US equities will look at soft scheduled data from the US and abroad as a negative. In other words, the prospect of fresh easing from the US might be reduced in the near term and therefore the net impact of soft data could be to scare investors. It is also possible that polls showing the incumbent with a significant lead could be a cause for an extension of US stock market s recent corrective action. While there is debate on the ultimate ramifications of a successful re-election of the President, assumptions of higher taxes, increased government spending and little respite from government regulations is something that may cause some money to move to the sidelines. Certainly a surprise easing move from China and/or a surprise plan to avoid the fiscal cliff could return the stock market to the bull track leading up to the September 14th peak. Our bet is that evidence of global slowing, political rancor and a heaping measure of US fiscal uncertainty is likely to set the stage for a late September/early October swoon. Historical action in the month of October presents its own challenges to the bull camp, and given the looming ultra critical election, we think the smart play is to buy puts that will hold some time value into the early November election results. Suggested Trading Strategy BUY December S&P 1410 puts for or better, with an objective of Risk the play to a close below TRADERS TOOLBOX overvalued/undervalued Fundamental Technical COT OVERVALUED Japanese Yen Gold Canadian $ Lean Hogs Hogs Platinum Stock Market Copper E-Mini Nasdaq UNDERVALUED T-Bonds Soybeans Natural Gas Soybean Meal US Dollar Coffee Cocoa Cattle Euro Currency options scan Undervalued Buy Nov Canadian $ Buy Dec E-mini S&P Buy Dec Cotton Overvalued Sell Dec T-Bond * Sell Dec Crude Oil * Sell Dec Lean Hogs Trend Reversals Buy Dec Wheat Buy Dec RBOB * When selling options, only risk to double the premium received. Page 2

3 BRAZIL SOYBEANS Weekly South American Row Crop Update Brazil Soybeans The soybean planting season kicked off earlier this week in Brazil. So, many traders will begin monitoring weather patterns closely. The global oilseeds market is counting on a record Brazil harvest next year after its production fell to just 66.5 million tonnes in 2011/12. The USDA is currently projecting Brazilian soybean production at 81 million tonnes, an 18% increase year/ year, and a record high. Farmers are just beginning to plant early season soybeans so the weather will have increasing influence. Recent rainfall has been disappointing for areas of northwestern Brazil (Mato Grosso) and north central Brazil where early planting occurs. Southern Brazil has been the beneficiary of adequate rainfall. In fact, areas of Parana should begin planting right away due to improved soil moisture levels. Early Season Soybeans Full Season Soybeans * October and November peak period for full season soybean planting in central and southern Brazil. Northeastern Brazil also begins planting in November and finishes by December. * January through February soybeans are flowering and setting pods; weather sensitive time frame. * March is considered busiest harvest month and by April soybean harvest is coming to an end. * April through May exports of soybeans is normally in high gear. Current Weather Update Weather models are beginning to shift towards more normal/seasonal patterns for most of Brazil, and may turn out to be perfect timing. Showers were seen in areas of Mato Grosso, Mato Grosso do Sul, and Sao Paulo last week which should bolster soil moisture levels for soybean planting. Some private weather watchers are suggesting important soybean growing regions may see another 2 inches of rain before the end of September. Others suggest that much of Matto Grosso, northern Matto Grosso do Sul, Goias, and Bahia may see a return to drier conditions in the 15 day period just ahead. The northwest portion of the soybean belt remains drier than normal, and rain will be needed soon to avoid serious planting delays. Despite the immediate improvement in conditions last week, weather forecasts remain highly variable and will need to be monitored closely. * Planting September through October for areas of Mato Grosso, central/southern Brazil. * Flowering may begin to develop in November * In December, soybean flowering finishing up and pod setting begins. This is a sensitive time frame for yield. * January through February harvest begins and early export shipments may be seen in February. * State-Level Production (as % of total) Mato Grosso Parana Rio Grande do Sul Goias Mato Grosso do Sul Minas Gerais Bahia Sao Paulo Maranhao Santa Catarina Tocantins Other * 2005 to 2009 Average Source: IBGE Brazil ~2 Soybean crop calendar for most of Center-South Brazil Flower Fill Harvesting JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Agricultural Weather Assessments World Agricultural Outlook Board Brazil Soybeans Acre Amazonas Planting Roraima Rondonia Mato Grosso Santa Catarina Mato Grosso do Sul Parana Rio Grande do Sul Para Tocantins Goias Sao Paulo a Ceara b Rio Grande do Norte c Paraiba d Pernambuco e Alagoas f Sergipe Maranhao a b c d e f Soybean Production *Average ( ) Minor Piaui Minas Gerais Bahia Production Intensity *Source: IBGE Major Page 3

4 DECEMBER CATTLE *Cattle slaughter continues to grind lower *Beef rises to highest level since June *"If" weights drop into 4th quarter, cash may need to rally! The short-term technical action for the cattle market looks a bit negative. If the economic news early this week is bad enough to spark a break in the stock market, and many other commodity markets, December cattle could quickly look undervalued. Million Pounds Data Updated: 09/12/2012 US 3rd to 4th Qtr Beef Production Change The continued decline in slaughter seen into November and December would suggest limited downside potential from a supply perspective. Beef production typically declines by about 250 million pounds from the 3rd to the 4th quarter. This year however, the USDA is forecasting beef production to decline by 505 million pounds, which would be the third largest decline on record (see chart). Analogous-year data suggests that the cattle market could remain in a general uptrend into November. For example, the largest 3rd-4th quarter production decline occurred in 2003, and December cattle that year hit a contract high on December 3rd. Another similar year was 2000, when the market posted a contract high on December 29th. In 2008, there was also a significant decline in production for the quarter but a collapsing economy drove the market lower in contra-seasonal fashion. When the situation is opposite, the market tends to break into the end of the year. In 2001, the beef production decline was minor and December cattle put in a contract low on November 11th. In 2007, also a small beef production decline year, December cattle put in a contract high on September 5th and broke into the end of the year. We have a longer-term bullish attitude for cattle. Between the Cattle-on-Feed report outcome (released after this writing) and the potential for demand concerns if there is a "risk-off " tone for stocks and commodities for early next week, the corrective break may run its course. This may represent a buying opportunity. Suggested Trading Strategies 1) BUY December cattle at with an objective of Risk to ) BUY December cattle 130 call at 137 with an objective of 367. Risk 75 from entry Est Souce: USDA December Live Cattle & December Live Cattle & cents / lb cents / lb cents / lb cents / lb Jul 29-Jul 26-Aug 23-Sep 21-Oct 18-Nov 16-Dec Jul 22-Jul 12-Aug 02-Sep 23-Sep 14-Oct 04-Nov 25-Nov 58 Source: CRB Source: CRB Page 4

5 SOYBEANS * 2013 Grain Price Volatility - One for the Record Books! * No margin for error on production * Increased odds of Bad policy decisions regarding ethanol, GMO, RFS and Commodity fund trading and taxes. More than likely the end result of this year s Northern hemisphere soybean production setback will mean that incentives to expand global soybean production will be significant. The net reduction in global soybean supply, tightness in ending stocks and the potential to see supplies fall below pipeline minimums on even minor production problems should keep traders and commercial buyers on edge. In our opinion, the late season slight abatement of the severe growing conditions in the US, an overly aggressive downward adjustment in soybean demand and noted fears of Chinese slowing is what kept soybean prices below $20.00 a bushel. Further more, stiff competition for acres between corn and soybeans, strong Chinese soybean import demand, the entrenchment of energy prices at two, three or four times their historical level should keep the grain market conditions intense. Anyone with a deep understanding of the Chinese commitment to aggressive expansion of their feeding industries sees the soybean import pace from China as a new normal, even if some of the buying by China could be the result of re-stocking. Key Volatility Events for May Soybean Futures 1) Planting figures from South America 2) Mostly final USDA numbers for US production and ending stocks in January. 3) Early harvest figures from Brazil Mid February early March. 4) Initial US planting intentions April We have developed the following volatility trade for the speculator, but there is no reason why end users or producers should not strongly consider the strategy as a hedging tool. End users who need coverage for the spring Continued On Next Page... On the other side of the coin, soybeans are expected to see aggressive expansion of acres in South America. There is also the potential to see overtly bearish soybean price policy decisions, livestock disease, improved weather and a collapse in the global economy. Any of those developments could send soybean prices sharply downward from the proximity to historic high level. Page 5

6 Soybeans Continued from Page 6 will be in a position to buy May soybeans for coverage and enter the bear put ratio back spread as a hedge for the long futures. The initial cost of the position is rather cheap and the spread will act as good protection for the downside. A producer who is holding soybeans into the spring could enter the bear put ratio back spread for downside protection but will not need to buy the futures contract. Suggested Trading Strategies *This is a complicated option and futures combination strategy for advanced traders with a thorough understanding of options! Read and understand the strategy in its entirety before entering this trade. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. 1) BUY a May Soybean futures at $15.20 or better 2) After purchasing the May futures, SELL 1 May Soybean $15.20 put for $1.15 and use that capital to partially fund the purchase of 5 May soybean $13.40 puts. The net cost of options premium is roughly 35 cents. The initial overall delta of the position is net long approximately 50% of one soybean futures contract. Traders should implement a strict risk on this combination play of $2,000. Trades should exit the entire combination as of the middle of March 2013 unless the May futures are trading outside of the $14.00 to $16.20 range. We would use an initial minimum objective on the long May futures of $1.90 from entry. Use an initial objective on the short May $15.20 put of 35. One should not exit more than 2 of the long $13.60 puts unless the short put and long futures positions have been liquidated. The point of maximum risk on this combination strategy would be seen in the event that soybean futures prices fell sharply but prices fail to fall below $13.40 and the $13.40 puts fail to expand in value due to waning time value and/or declining volatility levels. As of this writing, the May options had 217 days until expiration and theoretically the out of the money puts will remain sensitive to declines in futures prices until the market approaches 50 days prior to expiration. Therefore, the put spread should be a decent hedge against the long futures into the end of February, when the market should be closer to an opinion on the South American crop. *Option values are based on pricing models and are not guaranteed. Longer-Term Investment Trades updates to prior longer-term trade strategies Original Trade Date Trade Action Treasury Bonds 7/16/2012 Short 1 Dec Bond 151 Put at Short 1 Dec Bond 145 Put at Long 3 Dec Bond 144 Puts at Liffe Robusta Coffee 8/3/2012 Long 1 November Liffe Robusta Coffee 2200 call at 63 and short 1 November Liffe Robusta coffee 2400 call at 21. Covered 151 put for a profi t of $1625 Covered 145 Put at 1-10 for a profi t of $1234 Exit 1 Dec Bond 144 Put at 2-34 or better. Hold the other 2 for now and risk entire premium paid 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. Page 6

7 141 West Jackson Suite 4002 Chicago, Illinois commitments of traders Data As of September 18, 2012 Non-Commercial & Non-Reportable Combined Futures & Options Market Net Position Net Change 4-Wk Net Change Grains CBOT Grains 464,170-56,638-83, Corn 223,004-26,150-48, KC Wheat 45,845 1,429 4, Minn Wheat 8,191 1,676 1, Oats 5, Rice -1, , Soybeans 203,739-29,857-36, Soyoil 53,356-11,603 2, Wk Ranking Soymeal 87,836-4,917-12, Wheat 37, Livestock Cattle 37,341 14,527 22, Feeder Cattle -6, , Hogs 8,989-5,225-4, Metals Copper 280 2,997 14, Gold 280,768 20,337 64, Platinum 41,754 2,231 8, Silver 56,885 3,995 15, Softs Cocoa 39,084-5,470 9, Coffee -7,568 9,234 8, Cotton 35,907-1,502 3, Lumber , Milk 4, OJ 7,770 1,447 3, Sugar 44, ,563 8 Currencies Canadian 139,332 9,421 55, Dollar 5,076-30,251-33,588 1 Euro -94,921 23,277 38, Energies Crude Oil 335,845 22,263 34, This report includes information from sources believed to be reliable, but no independent verification has been made, and we do not guarantee Gas (RBOB) 83, its accuracy or completeness. Opinions expressed are subject to change Heating Oil 41,038 2,414 6, without notice. This report should not be construed as a request to Natural Gas -56,624 15,218-9, 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 -8,724-49,362-19, futures contracts or commodity options can be substantial, and investors E-Mini S&P 89,210-60,476-30, should carefully consider the inherent risks of such an investment in Dow Jones $5 45,194 5,477 2, light of their financial condition. Any reproduction or retransmission of S&P ,390 21,470 27, this report without the express written consent of The Hightower Report T-Notes 99,692-27,626 44, 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 THE HIGHTOWER REPORT volitile nature of futures and options markets, the information contained herein may be outdated upon its release. weekly newsletter Trading futures contracts and commodity options involves substantial Subscriptions: risk of loss, $25 and per thus Month is not appropriate for all investors. Page 7