The most recent pressure in the commodities market is attributed to the fear of a severe global recession. Even China is slowing, as China's Bureau of Statistics said that real GDP was up an annual rate of 9.0% in Q3, down from an annual rate of 10.1% in Q2. Furthermore, as long as the forced liquidation continues we will continue to get erratic movement, so be cautious picking your points. There is no telling where exactly we are in this ongoing liquidation process, but what we do know is that it is a finite event. When the selling finally stops, we will be left with a US dollar that is substantially overvalued due to all the repatriation of assets, while many commodity prices will be severely undervalued. The market should react to these circumstances with a pronounced countertrend move, during which a falling dollar is likely to boost nominal prices of commodities, in spite of their fundamentals.
December Crude closed $8.55 lower on the week and at levels not seen since February 07’. Prices have now plunged $84 off the record highs or 56% in just over 3 months. Even with OPEC cutting 1.5 million barrels, the path of least resistance remains down with prices potentially reaching the $50 level, unless we see a break in the US dollar. We said last week that we expected $65 to hold, but after further research we expect $65 to be an equilibrium level in the weeks ahead, we cannot currently rule out a quick probe lower. We don’t think lower levels will be sustainable and would be a buyer on a further break. December heating oil reached a new contract low trading 19.91 cents lower last week, closing below $2/gallon. If energy prices turn higher, which we do expect as demands picks up for the winter, heating oil could bounce significantly.
For now, we are content on the sidelines watching prices move south. RBOB for December was 21.03 cents lower last week closing below $1.50/gallon for the first time in 08’. Prices have lost $1.12 in the last 4 weeks, but the frustrating thing is consumers are not seeing a similar beak in prices at the pump. Although prices have come off at the wholesale level on many foods and energies, the consumer is still feeling the pinch. Much like heating oil we are content on the sidelines on RBOB for the time being.
After a breach of the 9 day moving average, the flood gates opened and sell orders hit the natural gas market. On the weekly chart a bearish engulfing candle is evident, so we may not have seen an interim low as of yet. December natural gas was 69 cents lower closing at $6.46 on the week. With warmer weather projected and a build in inventories prices are currently below the cost of production with many of the newer projects that have come on line. We expect these prices to be short lived and are suggesting that we will get a quick bounce to at least $8 relatively soon.
On this bounce we would look to trade out of the December calls, most likely at a small loss for those who averaged in as we suggested in past commentaries. We like the idea of being long, but right now you are not trading natural gas you are trading the lack of confidence, so until we see more stabilization we will be sidelined here as well.
Stocks: The VIX or fear gauge is now at record levels and has moved 400% higher since the beginning of September. We are experiencing forced selling as lower prices lead to more selling since the equities globally got trampled last week. The Dow ended the week 5.4% lower at 8379, below the October 10th low and over 40% down from its October peak. The S&P fell 6.8% to close at 877, its lowest close since April 03’. The NASDAQ fell 9.3% on the week to 1552, down almost 46% from its multi-year high last year. As bad as things are here domestically, markets around the globe have been hit harder. I don’t know how comforting that is to those of you who have lost a good chunk of your 401(k) and retirement. I will not say I told you so, but I again will beat the drum and advise stock investors to use options to hedge their portfolios as the pain may not be over.
The good news is that in the short term, November into the beginning of 09’, we expect a significant rally. I have spoken to many stock traders that are citing lunar cycles, technical waves, old wives tales, etc. that are looking for an additional 20-30% decline thereafter. We suggest looking at managed futures as a way to diversify one’s portfolio, suggesting 5-20% of their portfolio becomes allocated between 2-4 different CTAs.
Bonds: Based on the futures market the FOMC is certain to cut rates 25 basis points to 1.25%, while there is a 92% probability of a 50 basis point cut to 1.0% when the Fed meets on Wednesday. As the distress level amplify in global markets the likelihood of further rate cuts increase. From the short end to the long end the debt market could go either way and we will wait for a clearer picture before making any recommendation and are flat in this complex for our clients currently.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees