Energies

Crude oil is in a freefall following the stock market’s collapse as the global economic outlook turns ugly. This is the volatility collapse I wrote about in my mid-year forecast and it is quite possibly just the beginning. Look for sub-$80 crude oil prices in the near term and a major collapse in rbob and heating oil that could see 5% declines or more this week alone. Natural gas remains a contrarian buy on this selloff, accumulating deep out of the money calls with loads of time to expiration.

Financials

Stocks collapsed as anticipated on the debt ceiling resolution that has now led to Standard & Poors downgrading U.S. debt to AA from AAA. This is a first move and the PR that is downplaying the importance of this event should be ignored. Moodys and Fitch may be late to the party, and could abstain from the downgrade after being beaten to the punch by S&P, but it will do little to prevent a shift in portfolios, global investments and general confidence in the U.S. A recent article suggested that the U.S. would be relatively unaffected by the credit downgrade because all it does is make AA rating the new AAA, suggesting that there is no better place for investors to purchase debt than the U.S. and there is no more stable institution than the U.S. government. I hate to be anti-American but the facts are the facts – we are not the best bang for the buck at the interest rates provided here at the good old U.S. Treasury and investors will demand more for the increased risk – and get it. Bonds spiked on the stock market destruction but I do not expect further upside. The dollar should trade opposite fundamental logic here – this is a screaming buy in the U.S. dollar and the euro should see fresh near term lows. The Japanese yen intervention feels like a replay of a previous poorly conceived sitcom and will likely not last the week before testing and potentially breaking the highs. Using the last intervention as a guide, the market could chop around a 300-500 point range for a few weeks before breaking out, but I do believe the market will expedite the process and break out sooner rather than later. I remain confident in my forecast that:

The Japanese Yen futures will hit 140 before it hits 80 or I will quit writing the Weekend Commodities Review...forever.

Grains
The corn/wheat spread has flipped on the September contract and is dangerously close on the December contract – suggesting this historical spread is offering an excellent opportunity to play long wheat and short corn. Grains in general offer a bearish outlook backed by lower prices in oil and a weakening global economic outlook. Soybeans and corn offer strong shorts and wheat may be a value play by comparison, offering a good corn/wheat spread or just straight put plays in corn and soybeans. Rice remains a sell.

Meats

Cattle and hogs both chopped last week, offering congestion ahead of likely market failures that should begin during the week ahead. Straight puts are recommended in cattle while a short hog future is recommended with stops above the recent highs.

Metals

Gold and silver continued to surge amid the stock market meltdown and realization that the U.S. is not as safe of a haven as once believed. The escalation of upside volatility is the type of market action that is needed to squeeze buyers out of the market. Countries like India are entering a heavy demand period and this is a recipe for demand-side disaster as prices skyrocket and buyers disappear from the market. This is the time when last minute investors think they are getting into a runaway bull market when they are likely just popping the bubble. Copper should see long term downside on weak global buying demand.

Softs

Coffee prices bounced on frost concerns out of Brazil, but the market will likely be unable to sustain prices amid a general commodity selloff and Vietnam supply holdback hitting the supply lines. Cocoa supplies are surging this year and it should not be a shock to anyone that follows commodity cycles. The reality is that 3rd world countries find a way to produce more during periods of sustained high prices, and cocoa has maintained incredibly high prices for an extended period. However, a key support level above 2850 must be penetrated to continue the downtrend, something I expect to happen this week. Cotton remains a sell but is avoidable based on the risk exposure to volatility with futures and overpriced option premiums. Sugar and OJ are strong sells with straight puts recommended.

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James Mound
James Mound Trading Group LLC.

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