"If you tell the truth, you don't have to remember anything."
-Mark Twain
Commentary
Last Thursday I put out a study that suggested The US dollar would top June 1 plus/minus a day and by looking at the US$ chart, that appears to have happened. Granted a retest high could occur, but by the looks of it, that was a spike high on Friday that should hold for two weeks. This will allow commodities to recover and focus on the bullish stories that they have been ignoring like Chinese exports and weather south of I-80.
Last week's rainfall was deemed generally less than expected for the driest areas of the southeastern 2/3rd of the corn belt, with many areas seeing 0.5" or less and few over 1". The trade expects a 2% decline in the weekly US corn good to excellent rating to 70% and expects the first soybean rating to come in 65-70% good to excellent range. Traders are obviously on edge about dryness in the US grain belt. The USDA said last week that major US crop areas have the 7th lowest soil moisture for that week going all the way back to 1895, down from the 14th driest the previous week. However, a study published on DTN on Friday noted that there is little correlation to dry soils in May and final corn/soybean yields, with August soil moisture much more indicative of final yields as would obviously make sense.
With funds having liquidated a large part of the their corn long, the market appears vulnerable to a quick pop to the upside, although in the current macro-economic environment, the weather must remain very, very poor to sustain rallies. With that in mind, while cash corn traders will be watching the skies for short to intermediate direction, a report over the weekend from the well respected firm CIS, Inc. openly questioned whether recent action in commodities is indicating the end of an era regarding viewing commodities as an asset class which if true, could have a huge impact on commodity prices in the longer term. Cash corn markets have traded from 30 to 60 cents above futures in recent months. However, futures have fallen nearly $1.20 since March. A drought in Russia pushed wheat futures sharply higher in May, but prices took back a large portion of the gain this week. Crude oil prices advanced to $110 per barrel in February, but have collapsed in recent weeks just as the summer driving season began. South America experienced one of the worst soybean crops in years this spring, but prices have fallen $1.69 per bushel over the past five weeks. What's happening? Are Central Banks tightening? Are we headed for another recession? Commodity prices bottomed in 1998 following decades of sideways price trends. Congress passed legislation in the late Nineties allowing Wall Street to sell derivatives tied to commodity prices. Exchange Traded Funds (ETF's) based on commodity prices began to trade on major stock exchanges around the world. Wall Street provided investors with commodity index funds following popular indexes. Eventually, these new investment vehicles gained in popularity. Pension funds, college endowments, professional advisors and institutional investors poured billions of dollars into this newly formed class of investment. Although these investments pay no dividends and many charge a premium when futures are rolled forward, commodities became an "asset class" for the first time in history. A flood of money poured into this new "asset class" and the Goldman Sachs Commodity Index experienced an unprecedented rise of 599% from 1998 to 2008. A price collapse followed into early 2009 due to the financial crisis. However, prices regained 78% of the losses into 2011. Now, values are beginning to retreat again even though central banks have pumped out trillions of dollars to stabilize world economies.
Are commodity markets losing their appeal as an asset class? Pension funds are reportedly reassessing their fondness for commodity investments following recent poor performance when compared with stocks. The soundness and basic principle of the diversified, long only approach of index funds is now being questioned by many investment advisors. Even the argument of utilizing commodities as an inflation hedge is in question. Investors are beginning to realize money devoted to index funds and ETF's have failed to perform as originally expected. In fact, some investment banks are now downsizing or eliminating their commodity divisions. It appears commodities are indeed losing their reputation as an "asset class." If pension and endowment funds downsize allocations to commodities, price spikes and crashes could become even more prevalent in individual commodity markets. Eventually, commodity markets may return to their original purpose of price discovery rather than a gambling vehicle for investment banks. Imagine that - Commodity markets could rise and fall on their own merits rather than the surge and withdraw of outside investment dollars.
US Dollar Weekly Chart
Corn
Through the worst of the month of May, December corn held $5.00. One would expect that Dec corn should be able to retest 5.50 if the US dollar is in fact going to retreat for at least two weeks. Of course, that is dependent on weather south of I-80 staying questionable.
December Corn Daily Chart
Beans
Support for November beans is last fall's highs now turned support , which also matches the 50% retracement value at 1250.
November DailyBean Chart
Wheat
Wheat failed miserably at the 650 value which had major technical support. So much for tough wheat weather conditions in the world. The US dollar was rallying and nobody wanted to own anything. Look for wheat to now find resistance on recoveries to 650-655.
Chicago Wheat Daily Chart
Live Cattle and Feeder Cattle
It was a consolidation day for cattle futures as they managed to close higher on the day. A typical early week no action day for cash, but cattle are generally being priced at $123. Choice beef is hovering at historical highs (197.50), and the choice / select spread is over $12, reflecting grilling season demand. We'll see if retailers eventually crack, and pay up over the all-time $200 BSE high. Lower gas prices may facilitate that happening, putting more money in consumer pockets, but the advance in the US dollar is not helping exports. Fundamentals are still bullish for later in the year.
August Live Cattle Daily Chart
August Feeder Cattle Daily Chart
Gold created an amazing chart on Friday. Trading from support to resistance in one day. Now that gold is back above 1600, look for that to be support. If and when gold can get through 1630-32, look for 1680-1690 to be the talk.
Gold Daily Chart
Crude
Two weeks ago I showed you a study when oil was at 91.00, that oil was likely to continue falling and test 79.00-80.00. Last night's low was 81.21, and if the US $ does not do a re-test high, then oil may have been washed out for now. Later this summer , without a hint of QE 3, oil will still fall below 80.00, as the US $ will rally more this summer after the setback that it is due to take.
Crude Oil daily Chart
05-21-12
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NOTE: With the exception of livestock, all trades will be entered in the electronic markets unless otherwise noted. Hedge recommendations and Trade recommendations are totally separate, and may sometimes conflict with one another. It is strongly suggested that Spec trades and Hedge trades be done in separate accounts.
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A word to the Wise
Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable to Heartland Investor Capital Management , Inc. but accuracy cannot be and is not guaranteed. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is SIGNIFICANT RISK of LOSS involved in trading futures and / or options on futures and may not be suitable for all investors. Investors should consider these RISKS and evaluate their suitability based on their financial conditions. No one should ever consider trading futures or options on futures with anything other than RISK CAPITAL . NO LIABILITY on the part of the author exists for any trading loss you may incur in the use of this information. The information contained in this newsletter is privileged, confidential and protected from disclosure. Any further disclosure or use, distribution, dissemination or copying of this message or any attachment is strictly prohibited.
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