The Hightower Report

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The rate cut news from China and a continued push by China to support domestic prices by purchasing grain and cotton to boost state reserves has been seen as a positive force. However, to expect that a significant low is in place, traders would have to assume that the worst of the demand news may have passed. This is brave assumption given the readings on consumer spending and the weak outlook for housing, employment and discretionary spending. Consider bearish strategies on the technical rally and watch for at least a test of the November lows. March cotton advanced on Friday extending the rally against a backdrop of stronger stock indexes and mixed results in commodities.

Traders said that strength in stocks for the fourth session in a row helped eased economic concerns somewhat from the near panic levels of recent weeks, and that this in turn had eased cotton traders’ concerns over longer term demand destruction. Some analysts say that pent up demand after months of retrenchment by consumers is combining with lower gas prices and the advent the Christmas shopping season to brighten the near and intermediate term outlook for apparel. Other buying was credited to short-covering ahead of the holiday. The US agricultural attaché in Egypt projects this year’s planted area there to fall by 50% with imports expected to rise 50%. Traders look for weekly export sales news this morning to show sales above last week’s impressive level of 203,100 bales. This seems to open the door for bearish news today. Open interest was at 220,037 contracts on September 15th and has fallen to 128,157 contracts as of Tuesday. The upside appears limited due to the potential for further reductions in demand for the market ahead.

TODAYS GUIDANCE: Look for a return to deflationary pressures on the economy and for weak demand news to begin to pressure cotton prices again.

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While it appears that international equity markets have managed to discount the Indian terrorist attacks and several key markets managed gains overnight, the early US action was somewhat mixed to weaker. Apparently the stock market is capable of discounting a certain measure of slowing evidence, but we also fear that a dose of pre and post holiday euphoria has served to carry prices upward and that once the market gets back to the normal day to day grind, the market might begin to view prices as expensive, especially when the trade is presented with more evidence of slowing next week. In fact, given the magnitude of the gains over the prior 4 trading sessions and the obvious ongoing deterioration of the US economy, one has to be surprised in the performance of the stock market this week.

Clearly the presence of more US government assistance and the announcement of an even bigger than expected US stimulus plan was beneficial to the bull camp early this week, but now that prices have climbed all the way back to the middle of the last two months trading range, we are becoming increasingly more skeptical of the bull case. However, even though the US market is showing some initial weakness this morning, we can’t rule out some initial optimism toward the shopping season kickoff early in the day today. On the other hand, if and when it becomes apparent that the holiday sales are indeed disappointing that could facilitate a profit taking mentality. The market might be up higher today, but prices are short term overdone from a technical perspective and prices are beginning to look very overdone from a fundamental perspective.

DOW: With the Mini Dow already climbing above the 50% retracement of the November range and closing in on the .618 retracement up at 8,794, we suspect that the market is poised to run into some overhead resistance. Initial support today is seen at 8,602 and then again down at 8,497. We wouldn’t rule out an attempt to rally this morning and perhaps the holiday euphoria will even be able to carry the market into an early close today, but we would like to ultimately be short this market for a look at a possible setback next week.

NASDAQ: The December Nasdaq seemed to run into some resistance at the 50% retracement of the November range at 1201.90 early today, but it is possible that the market might exhibit some positive action due to the lingering proximity of the US holiday. Higher resistance is also seen up at 1245.75, which is the .618 retracement level off the November trading range. Much has been made of the positive action of the stock market in the day before and the day after Thanksgiving but toward the close today, traders might also note that in the past, the stock market has generally exhibited weakness in the Monday after Thanksgiving. Therefore, we would respect this markets capacity to rally at some point today, but on strength today, traders should consider getting short or consider purchasing puts.

S&P 500: The December S&P has managed to entrench itself above the 50% retracement of the November range, which is pegged at 873.60, with the .618 retracement of the November range seen up at 905.36. In fact, while we can’t argue against a possible test of levels above the 900 level early today, we like the idea of getting short on a rally, or simply looking to get short just ahead of the early close today. Failure to hold above 875.10 this morning could be enough of a technical failure to turn a thin trade environment more negative. However, in the end we would watch press coverage of the holiday sales kickoff closely this morning for direction in the equity market into its early close today.

STOCKS: Give the market some initial respect but be short before the close
BONDS: The bullish bias remains in place but ranges might narrow today
CURRENCIES: Look to be long the Yen on any weakness today
COPPER: Renewed fears of slowing give the bear camp the edge today
METALS: Profit taking could be accentuated by month end book squaring
CATTLE: Weak demand tone may support more back and fill action; chop for now
HOGS: Futures at stiff premium but cash news positive and trend up
BEANS: The 1-week rally based on improved economic sentiment is unimpressive.
CORN: Upside momentum in wheat & soybeans is slowing. Corn may make new lows.
WHEAT: Buy on a move through resistance levels or simply stand aside.
ENERGY: Early weakness may give way to sht covering if OPEC signals big cut
COTTON: Bounce helped ease oversold condition but demand news to weaken; down
COFFEE: Watch for bounce but not much more; 122.30 as key resistance for March
SUGAR: New news slow, weak demand from Russia; recovery bounce near complete?
COCOA: Up as the global supply/demand outlook turns bullish

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Despite a lower close yesterday, a decent bounce off of the lows offers some idea that the market is proving more resilient to the global economic uncertainty. The supply side fundamentals are improving, but with the economic recession expected to extend well into 2009, the demand outlook is discouraging. Additional stimulus efforts in the US and abroad offer some hope of improving the demand outlook, but concerns over the ultimate cost of these efforts weigh against the optimism. The hog market pushed lower on the session yesterday and closed slightly lower but managed to recover much of the early losses and to close above the open, which could be a positive technical factor today. Iowa/Minnesota average hog prices jumped $1.80 to $53.48, which was seen as positive, but the stiff premium of futures to the cash was a limiting force. Ideas that the sharp break in the dollar could support better meat exports helped provide underlying support, but this was offset by weakness in pork prices late Monday.

The pork cutout, released after the close yesterday, came in at $56.34, up 27 cents from Monday but down from $56.70 a week ago. The CME Lean Hog Index as of November 21st came in at 52.04, down 21 cents from the previous session and down from 52.27 a week ago. The estimated hog slaughter came in at 439,000 head yesterday, which was a little bit above trade expectations. This brought the total for the week so far to 872,000 head, up from 870,000 last week at this time and up from 866,000 a year ago. Cash hogs are expected to trade stronger again today. Gains in cash hog prices in the Midwest over the past couple of sessions help alleviate some of disparity with the futures. That is needed to support the futures, otherwise the premium to cash could pressure the market.

TODAYS GUIDANCE: A decent bounce off of an early break yesterday and the close above the open suggest the hog market could gain today. Reduced hog supplies into the next year are a supportive factor, but demand is a concern with the global economic situation so tenuous. Yesterday the World Bank cut its forecast for China’s 2009 growth to 7.5%, which would be its slowest growth since 1990, but China adding additional stimulus overnight by cutting interest rates could help alleviate some concerns and improve the export outlook for US pork.

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DOLLAR: The Dollar has been able to trade firmer overnight on safe haven support as weaker global equity markets reflects doubt over whether the latest government stimulative plan would help resolve the credit crisis and avert a protracted and severe recession. With money market conditions still tight, the Dollar’s status as a safe haven currency still seems to be in tact and ongoing concerns over worsening economic conditions certainly seems to have lowered investor’s risk tolerance overnight as the market euphoria over the latest government stimulus efforts seems to be fading. In fact, with a wide range of US economic reports being released today, the Dollar’s stature as a safe haven currency will certainly be tested today since economic news is likely to show a deepening recession taking hold in the 4th quarter and that has the potential to trigger a strong rally in the dollar if equity markets slide sharply on the news. But we also think there is a rising risk that the appeal of the Dollar as a safe haven asset could start to diminish given the huge amount of US debt being used to pay for these massive economic stimulus plans. In fact, the governments quantitative easing and jitters over the cost of these stimulative efforts could limit the upside potential in the Dollar and very low US yields could also start to work against the currency. With plenty of other factors working against the Dollar, a loss in the currency’s safe haven status could send the Dollar sharply lower. Therefore, today’s economic report flow could be a critical test of the bull camp’s resolve.

EURO: The Euro has seen a two sided trade overnight, but it looks like some risk aversion has crept back into the market as yesterday’s optimism tied to the latest US government stimulative plan seems to have faded a bit. So far, news of another rate cut from China and expectations for a European Union stimulative plan of at least an 130 billion euros to be announced today hasn’t provided too much price support to the Euro. And with the market likely to to be faced with more bearish economic news, a potentially sharp slide in US equity markets this session is likely to drag the Euro down as well.

YEN: The Yen has firmed overnight as a lower investor risk tolerance amid ongoing concerns over the depth of a global economic recession has encouraged more profit taking on carry trades. News that China cut interest rates overnight seemed to pull the Yen off overnight highs. But there seems to be more upside potential in the Yen since economic confidence remains low and the optimism seen in the US equity market rally yesterday off the latest government stimulative program appears to have fizzled overnight. In fact, with a string of US economic reports out today there is the potential for the Yen to trade sharply higher if the news flow depicts a considerable worsening in US economic conditions.

SWISS: The Swiss has seen a mostly lower trade overnight as the currency continues to be tied to the ebb and flow of the Euro. Expectations for a large EU stimulative package have done little to improve sentiment. Since investors have not yet sought out the Swiss as a safe haven, the market remains vulnerable to further selling this session if today’s US economic reports raise the risk aversion of investors.

POUND: The Pound has pulled back on profit taking which is not too surprising considering the sharp upward push the currency has made this week. Weaker global equity markets overnight have lowered investor risk tolerance and expectations for the UK 3rd qtr GDP to show a .5% contraction is also working against the Pound this morning. There is also the potential for the market to give up more ground today since the large number of US economic releases are likely to show economic conditions worsening in the US which has the potential to pull the Dec Pound back towards the 150 level.

CANADIAN DOLLAR: The Dec Canadian has seen a two sided trade overnight as rising risk aversion and a firmer Dollar have been somewhat offset by firmer oil prices. But we suspect there is more downside potential in the Canadian today since the US economic reports are likely to show a deepening economic recession. Weakening US demand will certainly undermine the outlook for the Canadian Dollar considering that Canada is a major US trading partner.

In observance of the Thanksgiving Holiday, The Hightower Report will not be publishing any commentary. Below are links to some exchange holiday trading schedules.

• CME Group
  
• ICE
• KCBOT
• MGEX
• NYMEX

Have a safe holiday!

The Hightower Report

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January soybeans were 7 cents lower overnight. Palm oil futures in Malaysia were up more than 2.1%. The dollar was mixed and crude oil was lower.

NEAR-TERM MARKET FUNDAMENTALS: A sharp rally in the soybean complex yesterday was credited to a sharp break in the dollar and a sharp rally in crude. This lifted a broad range of commodity markets with traders indicating that some optimism over proposed economic bailouts and stimulus packages also provided support. Funds were buyers of at least 3000 contracts into midday. Prices were modestly lower overnight with soy oil leading the way to the downside despite gains in Malaysian palm oil overnight. China’s General Administration of Customs agency said yesterday that its October soybean imports were down 25% from last year to 2.13 million tons. However, overall soybean imports rose 26% over last year during the Jan-October 2008 period. This week’s export inspections for soybeans were strong again at 36.276 million bushels. Inspections stand at 30.3% of the USDA’s projection for 2008/09 compared to a 5-year average of 30.8%. Inspections need to average just 17.5 million bushels each week to reach the USDA projection. Conditions in Argentine growing areas remain dry overall, but some relief has already occurred since Sunday in central growing areas and more widespread scattered relief is expected through Friday. However, the soybean crop is expected to remain under stress after these rains due to the severity of long term dry conditions.

CASH NEWS AND TENDERS: Iran is in the market for up to 25,000 tonnes of soy oil and up to 20,000 tonnes of sun oil. India is in the market to buy 26,500 tonnes of edible oils by mid-November.

WEATHER: Lingering snow is expected in the eastern Midwest today followed by mostly dry conditions in the Plains and Midwest into Thanksgiving. More rain is expected in major growing areas of Argentina through Friday, but this may only be scattered.

TODAY’S GUIDANCE: The soybean market is positioned very differently from corn. It did not make a substantial new low last Friday which means that the powerful recovery rally yesterday was able to take the January soybean contract back up near the middle of the October-November price range. This strongly suggests that the lows are in place barring a rally into new highs by the dollar or, perhaps, sharp new losses in the stock market. Export demand remains strong and farmers are not likely to start selling at an accelerated pace any time soon. Also, the old and new administrations in Washington are signaling that bailouts and stimulus packages will be the order of the day in coming weeks and months. This does not support the idea of a continuation of the downtrend, rather, it supports the idea that commodity inflation is lurking somewhere down the road.

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March cocoa closed with solid gains on Monday, and with the global supply outlook tightening, the market may have more upside capacity if outside markets remain supportive. Cocoa certainly benefited from broad based commodity fund buying yesterday tied to the sell off in the Dollar. And with the Dollar waffling on both side of unchanged overnight, March cocoa has seen a stronger trade. If investors continue to reverse safe haven currency purchases in the Dollar, it will likely provide additional price support to March cocoa. It is also impressive to see cocoa moving higher overnight despite weak action in both the gold and oil markets, as such action normally tends to diminish the appeal of commodities as an inflation hedge. Even a weaker Pound overnight hasn’t appeared to undermine cocoa in the early going, which may mean the market’s fundamentals may be having more influence. Certainly the cocoa market was seeing spillover buying in connection to the strong rally in equity markets yesterday. If an easing of financial market anxiety is sustained, a lifting of the extreme negative sentiment in the financial markets seen last week could entice more investors back to commodities, especially to markets such as cocoa which have improving fundamentals. Despite the gyrations in the Dollar since mid November, March cocoa has been trending higher, which we suspect reflects an improvement in the market’s supply side setup. Ivory Coast cocoa arrivals for the 2008/09 season through Nov 23rd were down nearly 50% below the pace of a year ago, and this is beginning to raise concerns of a possible cocoa deficit in contract to widespread trader expectations at the start of the season for a cocoa surplus. We also suspect the cocoa market has been able to trade higher since the aggressive selling by index funds seems to have ebbed.

TODAY’S GUIDANCE: The technical action in March cocoa has continued to improve with yesterday’s gains. More aggressive chart based buying will likely be seen in March cocoa on a push through key overhead resistance points near $2,015 and then at the 40 day moving average which comes in near $2,136 today. In order to push through these key chart levels, March cocoa may need the support from bullish outside market influence, particularly a weaker Dollar. The promise of more economic stimulus from US, European and Asian governments seems to have revived some economic optimism. However, weaker than expected readings in today’s US economic data also has the potential to be a critical stumbling block for the bull camp.

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NEAR-TERM MARKET FUNDAMENTALS: The March wheat contract made a small new low on Friday amid general weakness in grains and the soybean complex. However, prices recovered overnight and finished near their highs following a sharp break in the dollar. Traders said that many markets are reacting positively this morning to news that the US will bailout Citigroup along with expectations that the US may also move forward on another substantial economic stimulus package. The tender calendar remains moderately active with demand mainly coming from North Africa, the Middle East and South Asia. A government official in Iran has confirmed that his country is buying US wheat through secondary channels after indicating in recent months that they would not buy any wheat from the US. Growing conditions for Indian wheat which is planted in October are said to be good with a possible increase in production over last year. The Commitments of Traders Report for the week ending 11/18 showed mixed trade by funds. Index funds were net sellers of 5,890 contracts while trend-following funds were net buyers of 6,966 contracts to reduce their net short position to just under 30,000. Index funds are still net long 130,195 contracts. The USDA will issue its latest Export Inspections Report this morning. Iraq is tendering to buy 50,000 tonnes of wheat.

CASH NEWS AND TENDERS: Tunisia bought 75,000 tonnes of optional origin wheat on Friday. Bangladesh is tendering for 100,000 tonnes of wheat with a closing date of December 15th.

WEATHER: Mixed rain and snow is expected today in a broad north-south band of the central and east-central Midwest. Conditions are then expected top be mostly dry into mid week in the Midwest and on the Plains. Scattered rain with widely scattered thunderstorms are forecast in major growing areas of Argentina through the end of the week, but this should not cause significant harvest problems.

TODAY’S GUIDANCE: The dollar is the deciding factor this morning, but we are looking for more two-sided trade this week with decent export sales being the factor that may prevent wheat from sliding into significant new lows. Support is at 508 to 512 in the March contract with resistance at 537 to 539.