The Hightower Report

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The stock market enters the Wednesday trade somewhat oversold but generally seeing weakness from the Asian markets overnight. The trade was presented with a $39 billion BHP offer for Potash, but BHP tempered that offer impact with statements that they would not buy assets regardless of their price. The market might also garner some support from the prospect of a possible bidding war in the US tech sector. The market might also have garnered some lift from a better than expected German Ifo survey that was released overnight. With the added potential for a slightly positive US durable goods report later this morning, and hopes that the US Fed might shore up confidence in a “get together” later this week, it is possible that the bull camp will have some ammunition today to match up against the ongoing flow of double dip recession talk.

S&P 500: International equity markets seem to have regained some footing after general weakness was seen in Asian markets overnight. A favorable German Ifo reading and news of a possible buyout offer in the tech sector might be distracting the market from the double dip recession mentality, that seemed to be gripping the market in the prior trading session. While the markets might quickly return to double dip recession views, in the aftermath of the US Durable Goods report release later this morning, the trade is expecting to see a gain or a positive reading from the scheduled data. In short, one shouldn’t be surprised in the face of a bounce early this morning, but the real test of the bull camp could be the sustainability of the upside tilt. Our pick for a short covering target on the upside is 1055.00 basis the September S&P contract.

DOW: The September Mini Dow contract appears to have carved out a trading range above the even number 10,000 level in the overnight action. Renewed buyout news was seen from a couple different areas of the market overnight and some traders think that type of news might serve to underpin market sentiment today. Expectations for Durables and new home sales generally expect “positive” readings later this morning, but investors should be expected to remain on edge in the face of any scheduled US number release. We would expect the market to show some positive action in the face of the scheduled numbers this morning but we would also expect that optimism to wear off rather quickly and the fear of future slowing to return before the close. In conclusion, a short covering bounce is possible, but we are not sure that the market can expect to fully throw off the bearish tilt unless the numbers are much better than expected this morning.

NASDAQ: News of a possible bidding war for a tech sector asset might provide the Nasdaq with some support today, especially since the market also saw a fresh bid from BHP for Potash. As in the upper end of the market, the Nasdaq bulls really need to see scheduled US data that counters the double dip recession track somewhat, as the slowing fears appear to have become even more entrenched in the face of the massive decline in existing home sales on Tuesday morning. We continue to think that the September Nasdaq is poised for a retest of the 1750 level but the market might see a temporary bounce this morning before resuming the downside track in prices.

TODAY’S MARKET IDEAS: The market can bounce but we seriously doubt the bull camp can engineer anything beyond a temporary technical balancing on the upside. In order to stop the down trend pattern would seem to require a game changing development and without a much stronger than expected Durable goods report result later this morning, we aren’t sure where the market will get something that dramatically improves and entrenches positive macro economic sentiment.

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Big profits from the packer and the discount of futures to the cash market should help to provide some temporary support to the market, and the lower than expected slaughter pace for the past month along with suspicions that export demand remains strong are additional supportive forces. October hogs pushed sharply higher on the session yesterday, and held on to those gains to close strong. Cash hogs traded steady to $1.00 higher, as compared with trade expectations for steady to lower trade. This occurred late last week as well with traders looking for weak packer demand and lower cash on Thursday and Friday, but the cash trend and the pork cut-out value trend continues to support strong packer margins which leaves packers with the incentive to pay up in the cash market. Cash hogs are expected to trade steady to $0.50 lower for today. Packer demand has been stronger than expected. The spread between the pork cut-out and nearby futures is at the highest level since August of 2008, when China buying drove pork values to the previous record high before pork rallied to a new all-time high on Friday. The higher pork trade late Friday supported the early strong gains today. Pork cutout values released after the close yesterday came in at $97.79, up $2.30 from Friday and up from $91.19 the previous week. However, a later release of the cut-out from the USDA showed cut-out up 18 cents to $95.67. The adjustment down is still a record high, but the market remains nervous of a seasonal peak in pork values and a seasonal increase in production for the September to November timeframe. The CME Lean Hog Index as of August 19th came in at 83.78, up 1.01 from the previous session and up from 82.92 the week before. The estimated hog slaughter came in at 410,000 head yesterday. This was up from 407,000 head last week but down from 422,000 head a year ago as this time. Slaughter has been coming in below trade expectations for the past several weeks, and traders see part of the reason for the decline being due to too much heat in July and August which can slow weight gains. Pork production for the week was down 7.1% from last year, and this helped to support the market last week.

TODAY’S GUIDANCE: With a new high in pork cut-out, new sellers might be tough to find and short traders are vulnerable to covering. Look for support for October hogs at 77.47 and 76.70, with 78.75 and 79.30 as good resistance.

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October cattle pushed to a new contract high overnight, before slipping lower for the session. Weakness from outside markets helped pull futures back under 100, but the rally was supported by strong beef prices this week and expectations that packers will pay-up for live inventory with strong margins. October cattle closed sharply higher on the session yesterday, and closed at a new contract high. With talk of higher cash cattle trade this week and continued strength in the beef market, short-covering and some new speculative buying helped to support. Sellers for much of the past week have been waiting for a top in the beef market, and this has not yet occurred. A lack of surprises in the USDA Cattle-on-Feed report, which came out with a bearish tilt on Friday afternoon, was offset by continued strong gains in the beef market. Traders await cash cattle news this week, with offers at $102 to start the week and no bids as compared with $100 trade last week. A 12-week high in beef prices has traders leaning to the positive side for cash cattle this week, and October is trading at a discount. The estimated cattle slaughter came in at 128,000 head yesterday, which was well above trade expectations and suggests stronger than expected demand from the packer for live inventory. The surge in beef prices has helped improve packer profit margins, and this may have boosted packer demand. Slaughter was up from 124,000 last week, and up from 127,000 a year ago as this time. Boxed beef cutout values were up $1.37 at mid-session yesterday and closed $1.16 higher at $162.93. This was up from $155.62 the prior week, and is the highest beef price since June 2nd. The COT report as of August 17th showed Non-Commercial traders (funds) were net long 115,824 contracts, which is a historically high level.

TODAY’S GUIDANCE: Exports remain strong and the uptrend in beef prices remains intact, but the huge net long of the funds is a concern for the bulls. The upside break-out on record volume is impressive and with beef prices moving higher again yesterday, the market appears to be in a position to attract more buying. The market is extremely overbought, but there is still no technical sign of a peak. Support for October cattle is back at 97.90 and 97.25.

TODAY’S MARKET IDEAS: Any sign of a near-term top and/or significant weakness in the financial markets could spark a correction.

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OUTSIDE MARKET DEVELOPMENTS: With equity markets in Asia and Europe generally weaker, U.S. stock indices are trading lower during the early Friday trade. The Dollar is stronger against most of the major currencies during overnight trading. A member of the European Central Bank council stated that assistance to Euro zone banks should continue through the end of 2010. The Finance Minister of Japan stated that they are communicating with other G7 nations about the strength of the Yen. The Chinese government will officially encourage more foreign institutions to issue Yuan-denominated securities. A private survey of Japanese retail investor sentiment fell to an 8-month low, mainly due to the strength of the Yen. There are no major US economic numbers to be released this morning.

GOLD MARKET FUNDAMENTALS: With the slowing mentality in place this morning, the gold market still seems to be underpinned by the fear of further slowing but there doesn’t appear to be much in the way of fresh economic news from the overnight headlines. Some traders have suggested that gold is supported by statements from the ECB, that they would leave easing in place through the 1st quarter of 2011. With some rather significant gains already posted this week, the gold market might be showing some technical balancing action this morning with the initial setback in prices. With a mostly empty US economic report slate today, the gold market might have to take its cues on the economy from the action in the US equity markets. It is also possible that part of the early profit taking in gold this morning is the result of a recovery in the US Dollar against the Euro and a host of other currencies. At least in the near term, the gold market looks to embrace the fear of slowing and the flight to quality angle as the primary market focus. Comex Gold Stocks were unchanged at 10.964 million ounces. Stocks have declined 11 of the last 20 days.

SILVER MARKET FUNDAMENTALS: The failure to see September silver contract forge new highs for the move this week, in the wake of the range up action in the gold market, has apparently disappointed some traders as silver this morning is flirting with new lows for the week in the early Friday trade action. Apparently silver is feeling its physical commodity market roots this week, in the face of the recent economic letdown. With the US Dollar also showing signs of strength this morning, it is possible that silver and other physical commodity markets are feeling some currency related pressure as well. Comex Silver Stocks were 110.992 million ounces down 37,482 ounces. Stocks have declined 12 of the last 20 days.

PLATINUM: October platinum comes into the trading session in a technical chart failure and at the lowest price level since the August 12th spike low. Like silver, the platinum market is concerned about unchecked economic slowing. Therefore, we see little reason for October platinum to avoid a slide back to even numbers at $1,500. In fact, in the face of a downside extension in equities, October platinum might fall all the way down to consolidation support at $1,489.

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CRUDE OIL MARKET FUNDAMENTALS: Fears over a double-dip recession are having their way with the crude oil market this morning as it looks poised for a further slide toward $72. The initial morning trade for October crude oil is lower after posting fresh lows for the move on the back of a stronger U.S. Dollar. The greenback penetrated upside resistance this morning to trade at the highs of the week, and that is tugging down physical commodities like crude oil. The energy markets continue to grapple with hangover effects of poor U.S. economic data that once again highlighted concerns of a further economic slowdown. The threat of escalating tensions in Iran has provided little support to crude oil recently and that underscores the market’s focus on the slumping demand outlook. Additionally, analyst forecasts for OPEC’s sea bound exports pointed to a 1.0% drop over the previous month to 23.24 million barrels per day. Overnight data from South Korea showed their crude oil imports were up 5.5% in July, but that does not seem to have much bearing on trade this morning. Finally, keeping with the merger and acquisition buzz of late, Korea’s state run oil corporation made a hostile bid for a UK petroleum concern in an attempt to secure additional oil supplies, but that does not appear to be embraced by the market this morning as a supportive element. In short, October crude oil is in the process of pricing in a double dip recession and probably needs an outside catalyst to turn the tape positive. Another factor that could inject further volatility into today’s trade is the expiration of the September crude oil contract, especially after an 11.4% breakdown in prices in August. Technically, the lead October crude oil contract remains in a pattern of lower highs and lower lows and action so far this morning broke down out of recent congestion. While short term momentum is reaching oversold territory, the primary driver behind the trade appears to be slow down fears, and that should provide the market with more negative power. Over the last four months, economic slowdown fears have formed a support zone for October crude oil below and around $72.00, and that looks like the next downside target for crude oil.

GASOLINE: October RBOB traded lower overnight and registered their lowest prices since July 7th. This also marks a breakdown out of the $1.92-$1.86 support zone, which now leaves the market on track to challenge the July lows down at $1.8417. A deteriorating global growth scenario coupled with a stronger U.S. Dollar is seen as the primary culprit to slashing demand expectations and weighing on prices. Storage data released Thursday from the Amsterdam-Rotterdam-Antwerp (ARA) storage hub saw a 4.26% jump in the latest week to 906,000 tonnes in response to slackening demand. Additionally, as a result of the trade sanctions on Iran, their gasoline imports were down about 90% in July compared to year ago levels, but that probably does not carry much weight in the Friday morning trade. The bears have the definitive edge this morning in October RBOB with some minor close in resistance above at $1.8850.

HEATING OIL: October heating oil saw a game changing trade on Thursday after eking out a new five day price high, as that positive action was followed by a negative price reversal on the charts. That shift in tone is being carried out again this morning, and that has pushed heating prices below recent congestion lows and into new six week lows. Obviously heating and distillate stock levels were very burdensome before yesterday, but seeing demand hopes crushed has clearly shifted sentiment in the market to a very negative condition. At least in the early action today, nearby heating oil prices have reached the lowest levels since July 7th.

TODAY’S ENERGY MARKET GUIDANCE: Expectations of rising supply and declining demand leaves the bear camp with the edge again today. In the event that equities weaken traders should expect to see fresh new lows for the move and perhaps a track toward the early July lows. The July lows would seem to equate to double dip pricing!

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The market remains in a tight consolidation near the low end of a 5-month trading range and seems to have the supply fundamentals to move to another lower price level ahead. December cocoa continues to have difficulty with mounting a recovery from this month’s heavy sell off, as prices ended the day with a minor loss. Farmers from the Ivory Coast are projecting this season’s cocoa production will show a large increase over last year. Even the late season production may see a minor jump in production as some of the new crop may be ready early. The shift to a world production surplus for the coming season after a few tight years is likely to keep the price trend down unless there are developments in outside markets or the supply disappoints. For now, however, the market is pricing in a large main crop harvest which normally begins in September. Tightening exchange stocks continue to provide some support. While this season’s cocoa production from Cameroon will have nearly a 4% decline from last year, there are expectations that this shortfall will be fully recovered by the end of next season’s crop year. Yesterday was the first notice day for the September cocoa contract at the ICE with deliveries of 513 contracts posted. Arrivals for the week ending Sunday from the Ivory Coast increased to 9,000 tonnes from 2,022 tonnes for the same week last year. ICE cocoa warehouse stocks came in at 3.685 million bags, down 9,391 bags on the day.

TODAY’S GUIDANCE: While the market is attempting to form a base of support near the 2860-2850 level, the declining open interest during the consolidation phases is not a good sign for the bulls with speculators still holding a net long position in the last COT report. The market is in a short-term oversold condition so we can not rule out a recovery bounce but the pattern is typically considered a continuation of trend pattern and we would keep 2828 and maybe 2682 as downside objectives for December cocoa. Resistance is 2917 and 2979.

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If outside markets were to signal some short-term weakness in commodity markets, sugar looks vulnerable to a significant downside correction as speculators continue to hold a massive net long. Keep in mind, the large and small specs combined held a net long position of 148,950 contracts in the last COT report which is a historically high level and last years high prices might translate into higher world production ahead. In fact, even last year’s major world importer, India, is exporting white sugar on the world market for the first time in two years. India is offering sugar on the market at $90 premium to the London white futures market which is well below Thailand offers near $200 premium. Thailand offers hit a peak near $250 premium in July. Traders see India production near 25 million tonnes this season from 18.8 million this past season and compared with consumption which is thought to be near 23 million tonnes. Recently, however, there is talk that India production could be even higher with trade house rumors this week indicating that key producing regions in India saw a jump of up to 35% in planted area. October sugar closed moderately higher on the session yesterday and near the highs of a 64 point trading range. Futures were sharply lower early in the day under pressure from weak commodity and energy markets and choppy trade in the US dollar. The market is continuing to find supply concerns out of Europe and Eastern Europe/FSU beet growing regions and from ideas that import demand will increase in this region and from Pakistan import demand as well. There is also increased talk, however, that India will be supplying white sugar to Pakistan this year. Talk of the potential oversupply from India and Brazil helped to pressure the market early.

TODAY’S GUIDANCE: While the market has inched back up to near the early August highs, the supply fundamentals seem to be shifting more toward the bear camp as tightness in India supply has shifted to the country moving to an exporter for the first time in a few years. The market is also in a very overbought condition when looking at the spec net long position and if India production is higher than expected, fund and speculative longs might begin to search for other markets to “buy and hold”. Resistance for October sugar comes in at 19.60 and a move back under 19.18 might be considered a negative technical development. Key support is back at 18.22 and then 17.15.

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The market may continue to run out of sellers on breaks as we approach harvest and crop conditions remain under mild, ongoing pressure. This is true because a substantial percentage of the crop may already be hedged and importers keep buying despite higher prices. Temperatures remain warm across major growing regions of the southern US. Scattered areas of over 100 degrees should remain in Texas today with a larger area of 100s starting to reform there by tomorrow and expanding into southern Oklahoma. Scattered showers and thunderstorms are expected from Texas to the Southeast, although they will not be a major factor outside the Delta, Mississippi and Alabama. Rains may persist up to 5 days in the SE, but all of this should come with continued above normal temperatures that may last through the end of next week. The USDA will issue its latest Export Sales report this morning and traders are expecting a figure below last week’s strong total of 341,800 bales. However, the total is expected to be above the average of 163,600 bales that is needed each week to reach the USDA’s current export forecast for 2010/11. The pace of exports so far stands at a brisk 39.8% of the USDA’s projection versus the 5-year average of 21.8%. In yesterday’s action, December cotton sold off to start the day session and remained moderately lower for the rest of the day. Private crop forecasters in China indicated yesterday that the important cotton producing province of Xinjiang in NW China should produce a bumper crop this year, although one that may be delayed by about two weeks. This follows Tuesday’s reports from India that they may increase cotton exports by as much as 5 million bales from previous expectations of 3 million. Stocks registered for delivery against the ICE contract remained unchanged for the second day in a row yesterday at 19,394 bales. Open interest in cotton continues to rise, up by another 1,976 contracts on Tuesday to its highest level since September, 2008.

TODAY’S GUIDANCE: The dual rise of open interest and prices just ahead of a big harvest would be troubling in most years, but the very strong pace of export demand is the reason for the rally in the first place and recent Export Sales reports have indicated that buyers are not afraid to keep booking as prices go up. India’s increased exports could also put a damper on the market, but they may not export as much as 8 million bales when all is said and done, especially if inflation accelerates in the domestic apparel market. The expansion of middle classes in Asia translates into increased demand for clothing, and this will likely occur at much the same rate in Asia whether China’s economy expands at an 8% or an 11% rate over the coming year. First support in the December contract is above 81.78. First significant resistance is at 85.71.

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Treasury markets traded higher this morning in reaction to the Fed’s quasi move at quantitative easing. The Fed’s decision to reinvest the proceeds from maturing mortgage securities to purchase longer term treasuries has provided a bid throughout the yield curve. As a result, September 10-Year Notes forged another new contract high overnight, and that has pushed yields out to new 16-month lows of 2.717%. Yields on the 2-Year Note have registered a new record low this morning to trade under 0.50%. Global equity markets traded lower overnight led by a 2.36% decline in the Nikkei while European shares traded around 1.0% lower as they factor in recent measures by the Fed along with a downgrade to the U.S. economic outlook. Tuesday’s 3-Year Note auction was very well bid even though it registered a new record low yield of 0.844%. The bid to cover ratio was well above the recent average at 3.31 to 1, at the same time the final yield was one basis point under market levels at the deadline. Perhaps this positive demand will again surface in today’s $24 billion 10-Year Note auction.

The recent decline in yields (rally in prices) since Tuesday afternoon has the potential to make this auction a market mover. Additionally, part of the Fed’s treasury purchase program targets the 2-Year to 10-Year maturities and will be interesting to see how the market absorbs today’s supply. In fact, a noted bank analyst team indicated that the Fed’s purchase of Treasuries under the new plan could total $300 billion over the next 18-months, based on their current portfolio of mortgage securities. In other words, it is a far cry from the Fed’s tone just months ago when they sought out exit strategies.

Spread differentials between the 2-Year and 10-Year notes have continued to flatten out in response to the Fed decision and have come in to 221 basis points (settled 227 Tuesday).September bond futures continue to hold the uptrend pattern with key support levels that have ratcheted higher after Tuesday’s surge to stand at 129-03. There is a similar pattern in the September 10-Year notes, which now has support below at 124-09. However, of concern are technical momentum indicators that have become overbought during the recent advance and have begun to diverge from current high price levels.

The bulls have the edge to start this morning, but a favorable reading in this morning’s economic statistics or a disappointing result in today’s 10-year Note auction could disrupt the advance.

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Fears of softening domestic growth in China and the lack of a positive reaction to the FOMC meeting in the US leaves international stock markets under some pressure overnight. Shanghai stocks were up slightly but Hong Kong was down. The market seemed to “need” good reasons to see a continued uptrend above 3 1/2 month highs but economic data remains sluggish and traders see a slower growth pace out of China as a concern. Tuesday morning’s flow of U.S. economic data did little to relieve the negative tone. In fact, U.S. 2nd quarter productivity showed the first decline in six quarters to post results that were below expectations. Both June Wholesale Inventories and Sales figures came in below expectations and served to add to the already fragile sentiment. The post FOMC meeting comments made note of the recent slowdown in economic data, and that the Fed would use proceeds from maturing mortgage securities to purchase longer term treasuries in an effort to support the economy. While stocks saw a rally on the decision, the market failed to move higher. Many traders see quantitative easing as “pushing on a string” as weak demand for credit has helped keep economic numbers sloppy even with low interest rates and plenty of liquidity. Perhaps news that the House passed the $26 billion state bail-out package helped to add to the bearish tone for the market as funding is coming from increased taxes on multinational companies. US Trade data will be monitored today.

S&P 500: The market spent part of seven trading sessions in a fairly tight consolidation and a surge higher in the US dollar and sluggish growth news from China are seen as negative forces and the market failed to find good reasons to attract new investors. Look for selling resistance today at 1108.50 and 1111.40 for September S&P with 1088.80 and 1082.40 as downside objectives.

DOW: Moving below yesterday’s lows in overnight action could show the sensitivity of the market to the global economic tone. September e-mini Dow futures even took out Friday’s lows overnight. The technical action looks weak and the market looks vulnerable to give back a portion of the solid gains seen since the July lows. Selling resistance for the September e-mini Dow is at 10,550 with 10,403 and 10,315 as next support.

NASDAQ: There were a number of company downgrades from major Wall Street banks, with the most notable a downgraded of Intel’s 2010 growth outlook, and that seemed one of the catalysts that weighed on the tech sector. A build up in PC components at various Asian locations was also seen as a concern and Advanced Micro Devices was also cut from “overweight” to “equal weight” from another bank. Failure to move over Monday’s highs and penetration of the July-August uptrend channel turns the technical picture bearish for September NASDAQ. The market should encounter stiff resistance near 1880.00 today with 1833.60 as downside target.

TODAY’S MARKET IDEAS: The market needed reasons to attract new buyers but economic news is turning a bit more negative and some long liquidation selling appears likely over the short-term. The market may face a period of uncertainty regarding policy, taxes and employment and uncertainty normally sparks selling.