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Announcements
Check Out Our Featured Blog Posts!
Effective Habits of Successful Traders: Why Do I Trade?
by Tim Chilleri
Why do I trade? It’s a simple question, yet the vast majority of traders have not outlined why they trade. …
To read this blog post in its entirety, click here.
Strike Gold: Trade Silver Using Bull Call Option Spreads
by Kurt Pfafflin
Turbulent. Violent. Ferocious. Vicious.
These are frightening terms many unsuccessful traders would use to describe their experiences when attempting to trade the Silver futures market. …
To read this blog post in its entirety, click here.
How to Diversify Your Investment Portfolio with Commodity Futures
by Scott Westergren
With the ever changing economic conditions, considering new investment opportunities has never been more important. Diversification using the commodity futures markets has been a very popular avenue investors have turned to with goals of reducing portfolio risk and realizing positive gains on their overall investment portfolios.…
To read this blog post in its entirety, click here.
Seasonal Futures Spread Trading
by Craig Turner
Seasonal futures spread trading is one of the best futures trading strategies that most futures traders have never heard of or just don’t know much about. Sometimes people see “spread trading” and automatically think about options or currency trading. …
To read this blog post in its entirety, click here.
We value your feedback and comments. Please feel free to comment on these posts and view and comment on other dt Futures Trading Blog posts.
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Commodity Outlook
World Continues to See Pattern of Tightening in Global Food Supplies
The World Food Organization, the EU, and a long list of natural resource-strapped countries continue to claim that food and energy prices are too high! Some claim that speculation is driving up prices, even though the world continues to see a pattern of minor production setbacks and a tightening in global food supplies. However, we maintain that keeping prices down by mandate would encourage to even greater consumption, lower production and fewer conservation efforts.
A chart of inflation-adjusted corn, soybean and wheat prices reveals that that grain prices are actually very cheap from a historical perspective. The thought that billions of human beings will continue to enjoy expanded caloric intake without a significant tightening of supplies is foolish, especially if prices aren't allowed to rise to a level that tempers demand, expands production and spurs technology along at a pace that is capable of offsetting periodic setbacks from Mother Nature. Instead of complaining about rising prices, the world would be better served by realizing that food supplies need to be highly valued. To avoid shortages, the world needs to encourage greater investment in food production, and the best way to do that is to allow prices to rise on occasion. Recently, even minor production setbacks have given rise to very significant shortage threats.
Clearly, rising food prices hurt a number of poor, underdeveloped countries, but there doesn't seem to be much a realization that wheat, corn, soybean and rice prices have remained relatively cheap when compared to crude oil prices (see charts). Apparently there isn't a disconnect between images of a starving people and cell phones in Africa, but that highlights society's misguided focus. In Kenya alone there have been $34 billion in telecom merger activity in the last two years, and we dare say that nothing of that magnitude has been invested in food production in that country in the same time frame. Another disconnect is the lack of realization that state-sponsored hoarding by China, and to a lesser degree India, are likely to result in even greater tightness of basic food staples and even sharper gains in prices in the months and quarters ahead. The idea that QE2 and low interest rates are spurring rising commodity prices highlights the failure to realize the basic fact that physical demand is stripping physical supply and the world is slowly realizing that commodities will eventually have significantly more value than financial instruments, cell phones, urban real estate, internet apps and clothing.
In the meantime one has to acknowledge the potential for a huge run up in rice and wheat prices in the event that weather in the US and China remains detrimental to wheat production! With the nonreportable and non-commercial combined positioning in Chicago wheat spending most of the last year in a net short position, one might even suggest that speculative forces have actually held wheat prices down, but again speculative influences are ultimately run over by fundamental realities. France, Tunisia, Algeria, Turkey, Egypt and the World Food Organization think lower prices are the solution, but in reality the opposite is true. In the meantime price action in wheat and rice might be the focal point of many physical commodity markets.
Keep a pulse on the industry and access more commodity news.
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Markets to Watch
RBOB Strategies
At times the energy complex has become overdone, as was seen into the early January highs. However, the return to the vicinity of $94 per barrel crude oil sends a signal that overall global energy supplies remain current with demand.
Certainly many players continue to be concerned with the record high supplies of oil at the Cushing, Texas facility, but with Brent crude oil prices reaching a historic premium to WTI crude (see chart) it is clear that the world supply situation is starting to take on a more important role. News that Brazil has plans of building a new plant capable of producing 400,000 cars per year, that Ford will begin adding a third shift to some of its plants, that GM's January auto sales in China rose by 22% and that auto sales in India rose by 26% in January suggest that the focus of the energy complex is destined to shift to the gasoline market by mid year. Recent analysis of fuel consumption patterns suggest that US diesel use is only half way back to what would be considered "full capacity" in a recovered economy. Therefore incremental gains in demand are likely to be seen in the months ahead. For example, the latest report from the Association of American Railroads noted that January rail traffic was up 8.0% from year ago levels.
In the near term, April RBOB prices around $2.65 per gallon seem a little expensive, especially when one considers the relatively high level of US gasoline stocks (see chart). Part of the build in US gasoline stocks was thought to be the result of slackened demand due to adverse weather in North America, but with April unleaded prices having fallen by as much as 13 cents a gallon from the February highs, it is clear that prices are likely to continue to see strong volatility. With the RBOB market seeing a spike up in volume and open interest on the big reversal day of February 8th and the RBOB chart presenting a well-defined uptrend channel since the August 2010 lows, we have to think that unleaded prices will see a continued march toward $3.00. However, given the prospect of periodic overbought conditions, concerns that the Middle East could trip up the global recovery and sporadic rate hike events, traders should attempt to buy on trend channel support levels or employ long futures with long put strategies.
Receive daily information on RBOB strategies.
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10-Year Note Strategies
The threat of inflation, along with expectations that the US economy is showing noted progress, has wreaked havoc on the Treasury market. As signals began to turn in favor of an economic recovery, sentiment changed from the need for more economic stimulus to one concerned over how the US Fed will drain excess liquidity out of the system to lessen the threat of inflation. As a result, yields on 10-Year Notes have surged 38 basis points since the start of 2011 and have now reached their best levels since May 2010. While there has been some chatter from Fed officials over the recent week suggesting that they re-evaluate the current bond buying program, in his latest testimony in front of the House Budget Committee, Fed Chairman Bernanke suggested that the cause for the surge in interest rate yields had more to do with future expectations of economic growth rather than inflation. The Chairman reiterated that US inflation rates remain low and that unemployment rates are too high.
Meanwhile, falling 10-Year Note prices and the subsequent jump in yields have also stemmed from concerns that it has become increasingly more difficult for the Treasury to sell maturities without price concessions. While the short-dated 2, 3 and 5-Year Notes have been generally well-received, the 10 and 30-Year maturities have struggled.
But that changed with the latest Treasury auction of $24 billion in 10-year notes. The auction received high marks across all measurements, including very active indirect bidding participation, yields that fell below the when-issued rate and an above average bid to cover ratio. It seemed that the move up to 3.70% in the 10-Year Note Yields on the day of the auction helped to stoke demand and turn prices higher (and yields lower). Meanwhile the technical picture had become extremely oversold, exacerbated by a 3.0% decline in prices during the first week of February. After breaking below the December through January congestion zone, March 10-Year Notes seemed to find support at the May- June 2010 highs at 117-22.
The steep decline in prices sent the market down to a key support level, as evidenced by the favorable 10-Year Note auction. March 10-Year Notes became extremely oversold on their decline below 118-00. For this reason we look for March 10-Year Notes to recover back to the 121 area or higher.
Receive daily information on 10-Year Note trading strategies.
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Corn Strategies
For the ninth monthly USDA Supply/Demand reports in a row, US corn ending stocks have been revised lower, this time to what many traders see as below pipeline minimum levels. The data confirms traders' suspicions ahead of the report that there has been no demand destruction so far this season. The news should help drive prices sharply higher to ration supply and slow demand for the old crop season and to assure increased plantings this spring. This may still require a sharp rally for new crop futures, as soybeans, cotton and wheat are also showing high rates of return for growers.
The February USDA Supply/Demand report showed very little changes for soybean and wheat data, but the corn data was supportive enough to drive all of the grains into new highs on the day of the release. US corn ending stocks were revised lower to just 675 million bushels, down from 745 million bushels estimated last month. This was a bigger decline than was expected. Total usage numbers were revised higher with a jump of 50 million bushels in ethanol usage and another 20 million in industrial usage to a total of 13.5 billion. This was up 434 million bushels from last year. This leaves an ending stocks/usage ratio of just 5%, which matches the record low set in the 1995/96 season (going back to at least 1960). This represents only 18 days' worth of supply and opens the door for a dramatic rally in prices if there is any threat to future supply. Even late plantings resulting from a wet spring could put the market in a difficult position as it could hinder the crop size and delay the harvest.
In the USDA report, world ending stocks came in at 122.5 million tonnes, down from 127 million last month and 145.16 million last year. Argentina's production was revised down by 1.5 million tonnes to 22.0 million. More importantly, world coarse grain ending stocks (corn, sorghum, barley, oats, rye, millet and mixed
grains) are now projected at just 154 million tonnes for the 2010/11 season, down from 195.8 million last year. This leaves the ending stocks at just 50 days worth of supply, which is the lowest since 1973.
The market's "job" over the near term will be to send prices high enough to curtail demand. Export sales are on pace to reach the USDA projection for the marketing year, but the increased availability of feedwheat from Australia and the possibility of reduced demand from South Korea after that nation culled 24% of their hog herd could help slow the demand for US exports. Still, reports from the National Grains Council recently that China may import as many as 9 million tonnes this year due to tight supplies provide another reason for export demand to stay strong. China normally keeps about 30% of its needs on hand, but currently they have a little more than 5%. If they do purchase 3-9 million tonnes of corn this year (118-354 million bushels) US ending stocks could fall even further.
Cattle and hog producers have reduced their herds over the past few years, but record or near record high livestock prices, expanding meat exports and stong meat prices should encourage livestock producers to expand, not reduce herds going forward.
Ethanol margins are just turning negative after the strong usage and production pace of the past several months. It may take a rally to the $7.50-$8.00 level in corn to see a significant setback in ethanol demand, and this assumes that gasoline prices due not turn higher. If gasoline moves higher, then it will take even higher corn prices to curtail corn usage for ethanol production.
Receive daily information on Corn trading strategies.
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Cocoa Strategies
The major storyline in the cocoa market continues to be the political situation in the Ivory Coast, which has now gone on for over two months without a solution. Incumbent President Gbagbo refuses to relinquish control of the Ivory Coast government, even though United States, the European Union and the United Nations have concluded that the opposition candidate Ouattara was the victor in last November's Presidential election. While the conflict has produced relatively low levels of violence, one of the main casualties has been the nation's cocoa industry in what has consistently been the world's largest producing country. Although the original impact on the global cocoa market was small, last month's announcement of an export ban from the Ivory Coast produced a sharp rally that took prices up towards 12-month highs. The original intent of preventing the Gbagbo government from receiving cocoa revenue was underscored when the Ivory Coast defaulted on a $2.3 billion Eurobond at the end of last month.
The one market factor that has not changed throughout this conflict is that West African cocoa producers are widely expected to have a bumper crop this season. In fact, cocoa port arrivals in the Ivory Coast were running more than 100,000 tonnes above last season's pace even with the general acceptance of the export ban. A large amount of cocoa had already been approved for export at the time of the ban, which would have satisfied normal shipping levels for several weeks. Ghana, the world's second largest cocoa producer and a neighbor of the Ivory Coast, is running far ahead of last season's pace and may yet reach their target of 1 million tons this season with the additional contribution of cocoa smuggled across the border from the Ivory Coast. The African Union has assigned several heads of state to put together a solution to this crisis. Should another risk flare-up spark a rally back to this month's highs, it may be an opportunity to enter the cocoa market from the short side.
Receive daily information on Cocoa trading strategies.
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Swiss Franc Strategies
While the recent pattern of Dollar volatility remains intact, overall market direction may have started to shift over the past few weeks. A surge in US longer-term yields has helped the Dollar recover from 2" month lows, but this recovery appears to have reached a plateau, as many in the market remain unconvinced that a "seismic shift" in Dollar sentiment has occurred. Recent US economic data has been relatively strong, and the trend of disappointing US employment numbers may have been broken with this month's surprising fall in the jobless rate. However, the 9.0% unemployment rate remains historically high, and the weak payroll numbers over the past few months continue to dampen enthusiasm for the US economy. As long as the potential for further Fed quantitative easing remains on the table, the Dollar may have trouble turning this recovery bounce into a full-scale longer-term rally. There may well be another Dollar pullback during the next few weeks, but many of the other major currencies are going through the same difficulties with projecting a positive outlook for the next several months. The recent flight to quality into the Dollar from the political crisis in Egypt may have provided a strong clue as to which currency may benefit the most during the next few weeks.
When the Egyptian crisis first started in late January, it was the March Swiss that saw the most tangible benefit, due to its traditional role as a safe-haven currency. Already finding support from the ongoing sovereign debt problems with peripheral EU nations, the March Swiss started out this month by coming close to the record high prices levels that were set at the end of 2010. As events in Egypt have remained relatively peaceful so far and more importantly have not had an impact on oil shipments through the Suez Canal, there was a sharp selloff in the March Swiss, as safe-haven support evaporated quickly. A key factor to remember is that there have been few changes in the comparatively strong Swiss economic conditions during this period, with low unemployment levels providing a particularly sharp contrast with its European neighbors. In addition, concern over possible Swiss National Bank intervention has been diminished by the recent pullback from the highs. If the Dollar is unable to sustain this month's recovery, then the March Swiss will likely see a quick turnaround in sentiment. A retest of December's record highs may be more of a longer-term goal, but a return to the early February highs could be attainable over the near term.
Receive daily information on Swiss Franc trading strategies.
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***This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited.
Discuss Trading Strategies with Us!
If you'd like to discuss trade strategies to determine the best execution strategy for you regarding the market, contact us or call us toll free at +1.800.800.3840.
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| In This Issue |
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Don’t use the markets to feed your need for excitement.
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| Did You Know... |
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the markets (and Daniels Trading) will be closed Monday, February 21st for the President’s Day Holiday? For the full 2011 holiday calendar, please click here.
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Free Report: Commodity Outlook 2011
Download this Comprehensive Insider Market Advisory Special Report Now!
This special report addresses the following topics and more:
- Why is the US economy expected to remain an integral part of the global economy despite seeing its dominance slip?
- Why is Chinese economic activity anticipated to be much more stable than initially perceived?
- Why is it believed 2011 global economic growth may be comparable or slightly better than 2010?
- Discover what is predicted to be in store for each of the major markets in 2011.
Get a market by market breakdown in this detailed 16 page report!
*Please note that trading recommendations are often time sensitive and should be discussed with your Daniels Trading broker prior to execution.
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Featured Video
Automated Trading Strategy Execution
We know you’re busy. Automated Trading Strategy Execution (ATSE) allows traders to be active in the markets without the time commitment and knowledge typically required of full-time traders.
Click here or anywhere on the video image below to launch the “Automated Trading Strategy Execution” video page on the Daniels Trading web site.
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Kurt Pfafflin |
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dt Pro 201 - Intermediate Order Entry, DOM & Chart Execution Techniques |
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Maximize your trading potential by harnessing the power of our flagship dt Pro platform. You'll trade with ease and increased confidence as you learn powerful order entry and position management tactics. Bracket orders, trailing stops, OCOs and many others will be covered. |
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dt Pro 101 - Get Started with Our Flagship Trading Platform |
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About Daniels Trading
Daniels Trading is a relationship-focused commodity futures brokerage located in the heart of Chicago's financial district. Founded in 1995, we have a history of providing effective and reliable trade executions to both individual traders and institutional investors around the globe. In addition to our focus on relationship and execution, Daniels Trading is a leader in providing ongoing education opportunities and resources for our customers.
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