The Energies Review October 24, 2011

By Daniel Cronin

What a crazy week it was in the energy markets as crude rallied in the early part of the week to the resistance of $89.50 but fell big on economic uncertainty to $85 along with the stunning news of Qaddafi's death. The flat price is now higher on the Sunday night session to over $85 in Dec CL as this market just does not want to give up. Every time it gets knocked down it keeps getting back up and the $89.50 level is in jeopardy this week. The Euro/USD is looking to creep back up and break the resistance of $1.39 and if it does I believe Crude will try and test $90. The equities markets have broken the old high of 1225 and I believe this could have more to run on the upside. The DOE numbers will be very interesting so look for these coming out on Wednesday. For right now crude is stuck in a bit of range but I believe the price will have look to try and climb higher with all of the major resistances being breached.

Source: Pitguru.com

who Has Gold

News outlets have been all abuzz with the gold acquisitions of countries like China and Iran, and speculation over the size of Libya’s gold reserves. The potential motivation for buying gold, as well as the possibilities over what to spend it on, fuel stories that range on hot button topics. Is the US dollar so weak that oil producing nations are moving to precious metals as currencies? Will the availability of gold prolong the crisis in Libya and give Gaddafi a lifeline? Moreover, who else has gold in significant quantities?

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

The global recession appears to have brought another round of exploration of gold as an alternative asset, however, the official purchases of gold for central bank reserves have remained somewhat muted. The idea behind a limited gold holding is that other assets are a better investment, offering interest payments over time. To put it blandly, gold holdings take up space, are clumsy and awkward to hold and move easily, and don’t offer interest payments. Creative ideas like leasing gold may offer some returns, but usually not at the rate some banks are pursuing.

So which countries were holding the most metric tons of gold heading into the close of 2010? According to the World Gold Council, the United States led the pack with over 8,100 tons. Germany came in with over 3,401 tons. The rest of the notable holdings are shown in the following chart:

Prior to the civil rebellion, Libya was holding a reported 143.8 tons of the shiny stuff. And the trick with gold holdings is that they cannot be seized or frozen by foreign entities. If they could be sold, the Financial Times is estimating that the gold holdings in Libya could fetch over $6 billion, and pay a private army or mercenaries for “months or even years.” Unlike other central banks that may hold their gold in international vaults in New York, London, or Switzerland, the bullion of Libya is reportedly in country, and available to the embattled leader. The other boon seen for Gaddafi is the same that other investors strive for – gold’s value cannot be set by other governments, and its appeal is universal. Of course, like other investors, moving nearly 150 tons of gold would not be an easy task. If the International Monetary Fund reports on transactions as small as 10 tons, can someone quietly buy upwards of $6 billion worth of gold without anyone noticing?

If nothing else, current unrest and persistent economic troubles have highlighted the opportunities in precious metals as asset preservation, in times of uncertainty as well as potential inflationary hedges. The latter is sought when it appears that central banks are pushing the envelope with stimulus programs. Iran is another news focus, allegedly adding to their gold reserves in an effort to protect their holdings and shift financial assets away from the US dollar. Unfortunately, the same table from the IMF doesn’t show Iran’s holdings. The basis for many news stories about these transactions appears to be from a Bank of England official and a note on Wikileaks.

Iran would not be alone in increasing holdings, potentially as a movement of assets away from the US dollar. Since the first part of the year 2000, several nations have added to their coffers rather than emptying them. Russia has added 366 tons. India picked up 200. China loaded up on 659 additional tons. Saudi Arabia squeezed in 180 more. Switzerland, France, IMF, and the Netherlands were among the ones shedding tonnage over the last decade.

Summary

Besides central banks, ETFs and other investment holdings have increased since the onset of the financial crisis in 2008. So potentially Gaddafi, Iran, China, Russia, and other countries are feeling the same thing that other investors are. Gold can be a good idea to add to your holdings when things get shaky. Precious metals appear to be an even better idea when things get messy. Governments can’t manipulate them. Central banks can’t add more at will. And if fiat currencies continue to weaken or you are placed in a situation where a universal currency is required, gold seems to fit the potential bill. It isn’t unusual then to see that a variety of buyers exist for gold.

Financials Review on Feb 22, 2011

Trouble overseas and the question is, what will happen to the global production of oil? Libya is seeing air force pilots defect and New Zealand had a large earthquake which has negatively affected the country's currency. Let's talk numbers so it is easier to see why traders might be fearful this morning. Libya creates an estimated 1.8 million barrels of crude a day which is 2% of the world global output. The other kicker is Libya sits on the biggest oil reserves in Africa. Investors may become concerned due to raw materials growing and of course the word some are fearing, inflation. When consumers have to pay more at the gas pump they have less money to spend on essentials. The U.S. Dollar Index and gold could see buy orders over the next few days if the events overseas worsen. This could put pressure on the stock market today. (1)

Over the past 21 months Wal-Mart has posted drops in sales and is blaming dollar stores as to why they are losing money. Sales overall have risen 2.5% to $115.6 billion which did not meet the expectations of Wall Street.(2) Home Depot beat sales and quarterly profit estimates as more and more people took on maintenance improvements. Net income rose over $240 million from last year at this point. (3)

Today the Case-Shiller 20-city Index is forecasted to come in at -2.2% and consumer confidence is expected to grow from 65.6 to 67.0. Wednesday existing home sales are forecast to be 5.40m which is up from the last announcement of 5.28m. Thursday initial claims will be announced and are forecast to be the same as the last announcement of 410k. Durable orders are forecast to grow to 3.6% which is revised from -2.5%. New home sales are expected to be 310k and forecasts might come in higher at 335k. Friday, there will be a GDP estimate that is expected to be raised by 0.2% to 3.4%. Michigan sentiment is forecasted to 75.5 up from 75.1 when last announced. (4)

- Frank LaMantia, Financials Guru

1 http://finance.yahoo.com/news/Libyan-turmoil-hits-stocks-as-apf-1471605558.html?x=0&sec=topStories&pos=main&asset=&ccode=
2 http://www.cnbc.com/id/41702728
3 http://www.cnbc.com/id/41702997
4 http://biz.yahoo.com/c/e.html

Grains Review on Jan 13th

Calls: Following WASDE the beans and corn trades touched limit twice before backing off slightly on the close. There was plenty of selling into the rally early with front end corn vol dropping by a whopping 18% to 34% basis Feb. March dropped by 6.5% on the day due to a lack of follow though once we touched limit. Also, this report offered a great exit for entrenched longs looking for an exit early in the year. The report offered no momentum for wheat after raising world stocks leaving the trade in the dust as compared with row crops. Outside momentum helped all session with talk of an Argentine farm sector strike starting on Jan 17th and running for 7 days. This is in protest of changing export parameters for corn and wheat. This is another brilliant political move by Kirchner that I think will blow up in her face. Bull spreads carried the day in corn and beans with the N/Z and N/X (beans) widening on the day. Paper was an aggressive seller of the N/Z 100p CSO for 20-cents. This is a bullish play commercials should love. Overall it was a day of many exits with few fresh positions put on. The strangest and most interesting one was in Beans with ADM buying 3,000 SN 23.00 calls for 8-cents. This smells of fund business going through a commercial. Heading into the afternoon, the trade is waiting for further word concerning the Argentine strike possibilities with confirmation seen late in the day. The strike is a no selling stance by farmers for corn, beans and wheat between Jan 17th-24th. This helped the market into the overnight with corn continuing to lead the way with oil losing to meal but this looks short lived due to production problems in Malaysia and India looking to eliminate their palm import tax. Heading into the day session export sales were nothing to get excited about and macros are having only a minor impact so far with both the Euro and crude chopping on either side of unchanged. This is a big pullback for the Euro so watch this factor closely.

Beans are called 6-8 Higher to start moving above the daily contract high and into no man's land on the weekly chart. The only comparative year is 2008 but I think the market actually has a major world production and consumptive problem. Indicators on the weekly chart remain in the upper end of the range with no overt signs of weakness. Corn is called 8-10 Higher breaking above contract highs with indicators turning positive following a week long pullback. A perfect picture for bulls, I think. Wheat is called 6-8 Higher holding the most upside ground to gain. There is nothing to stop the wheat except a lack of excitement. I favor KC and Minni over Chicago and ride this horse all season long. Meal is called 2-3 dollars Higher breaking above contract highs yesterday and continuing this overnight. There is no reason to be bearish from a technical standpoint. Indicators are at the upper end but they have been for weeks. Oil is called Flat/Mixed looking for momentum for crude and palm oil. A break above 59.10 is needed to spark fresh interest.


Fundamental: Argentine weather is looking at bit wetter through the weekend with the southern and central regions favored over the far northern regions. BA and surrounding areas look to receive .50-1.00" with 70% coverage through Monday. This will help overall prospects but the north remains too dry for anyone to be comfortable. Brazil remains in good shape overall with only the far south of any concern at the moment.

Open interest shifted as follows: Corn +27277, Beans +12701, Wheat +3633, Meal +8310 and oil +9485. Rebalancing is a major factor right? I feel the population of new ETF's and fresh allocations from CTAs is the major factor. Add commercial fund money and this looks to continue, not abate. Commodities are a hot topic that will continue to garner media attention potentially pulling more money into the trade. It's a beautiful circle.

China bought 40 TMT US bean oil yesterday for second quarter delivery.

Pakistan has sold between 200-2500 TMT of wheat to Bangladesh and Myanmar. This is their first sales in three years due to floods and drought ravaged crops. This is a mildly bearish impact but Pakistan will not export to anyone not abutting the country so the world impact is minimal.


The 6-10 day maps continue to show below average temps in the Midwest but there is ample coverage following the recent snows to cause no worry. The worry still lies in the HRW regions with no precipitation expected with the current 3-4-days system moving through the northern half of the US. This only adds to woes for farmers in that region. The trade impact is minimal today due to this being a known factor but it offers no relief for shorts nor any threat to those long KC versus CHI.

Jordan tendered for 100 TMT Hard milling wheat. Bad timing I think.

Following yesterday's WASDE report the corn stocks to use ratio is down to 5.5% (Thanks MaryAnn). This is shockingly low forcing more and more corn users to sweat against shorts July forward. If Argentina continues to show problems I believe corn has no choice but move higher due to world supply concerns. The corn carryout at 745 million is the lowest in 15 years...want to get short this? I don't.

Palm oil traded 44 Higher overnight on production concerns. Couple this with India talking of eliminating their palm import tariff and you can start to paint the tight world situation that I talked about in the preWASDE report. The US is swimming in oil but the world is not, the world will win.

Talk has Chinese crush margins back to even and possibly turning positive shortly. This is a major swing from the talked about 20/tonne loss just a month ago.

Export sales came in as follows: Corn 439.2 10/11 and 68.3 11/12 with 613.7 TMT shipped. Beans 495 10/11 and 180 11/12 with 950.2 TMT shipped. Most of the sales and shipments were, of course, to China. Wheat 147.3 10/11 with 27.9 11/12 with 613.7 shipped. Meal 26.2 TMT sold with 278.2 shipped (none to China) Oil 7.5 TMT sold and 57.2 TMT shipped with 29 TMT heading to China.

Overall disappointing but the trade was still in holiday mode. I look for these numbers to pick up dramatically in the coming weeks.

Options: Yesterday the market learned how volatile cereal options can be with an amazing drop of 18% in CG options. This was due to a lack of follow through following WASDE with March taking a 6% hit now sitting at 39%. May was down 3% lower with deferreds down about 2%. This is a solid drop but still expensive enough to make buying it scary but I would not sell any vol. If you want to own vol, look to beans. Following yesterday's drop, SH vol is down to a scary low level of 31%. This is 8% under corn or wheat in March with July sitting at only 32%. I like looking at owning upside calls in beans and straddles with vol ownership advised. Corn bulls may want to simply buy calls or invert 1X2 call spreads looking for an explosion. There is no slope so buying call spreads is not advised.

The following chart includes my observations:

***chart courtesy Gecko Software
Past performance is not indicative of future results.

MACROS:Are mixed but support from a surging Euro following good bond sales in Spain and Italy helps the upside momentum. Crude remains choppy with metals on the sideline so far. Cotton is 200 higher with sugar inching its way higher helping even more.

Gold is trading 4.20 Higher sitting at 1,390.00.
Crude is trading .20 Lower sitting at 91.66 as of 8:25 CST.
The Euro is .0148 Higher against the USD trading at 1.3276.
The Yen is .22 Lower against the USD trading at 82.74.

Daily Wisdom: A peace is of the nature of a conquest; for then both parties nobly are subdued, and neither party loser. - William Shakespeare

- Matthew Pierce, Grains Guru