This is a sample entry from Craig Turner’s weekly market analysis newsletter, Turner’s Take.
IN THIS ARTICLE:
- Macro Markets: G-20 urges Europe to take “all necessary policy measures”
- EURO: Bounces will be short lived
- EMINI S&P 500: We may be range bound from 1275 to 1425 for the rest of 2012. We like selling the July 1350 Straddle
- CORN: Weather rally for new crop corn
- SOYBEANS: Soybeans are tight but we have a new trade like SH3/SX2.
- GOLD: Consolidation before the breakout
- CRUDE OIL: We like CLQ/CLZ as a nice risk/reward to play a bounce in Crude
1) MACRO MARKETS:
The G-20 met in Mexico and world leaders are urging Europe to take “all necessary policy measures” to resolve their debt crisis. Last weekend’s Spanish “bailout” and this weekend’s Greek elections have done little to calm the financial markets. Spanish bond yields are now over 7% and Greece is in no real better position than they were before the most recent elections.
There are two solutions being kicked around in Europe right now. The first is the concept of the euro zone bonds, which will effectively pool the debt of 17 euro zone nations. Germany does not want this solution because they know they will ultimately be responsible for any bad debts. The second is to have more fiscal integration that would involve handing over budget control to Brussels and the European Parliament. The French, Italians and Spanish governments will certainly balk at this prospect, along with many other Euro nations.
Germany does not want to foot the bill without being able to have a say on how the money will be spent. The European nations “in need” want the cash with no strings attached.
So where do we go from here?
Here are my thoughts on the road that lies ahead. Europe doesn’t just have a debit crisis, they have a solvency crisis. When nations reach the point of insolvency, they generally have two choices. They can default or print money. Defaulting on debt is difficult for Europe as a whole because everyone owns each others debt. One man’s debt is another man’s asset. If you wipe out the debts for one nation, you are wiping out the assets for another. It is a lose-lose situation for Europe and would lead to certain economic depression.
The second option is to print money. The problem with this solution is that individual Euro zone nations don’t have control over their currency and interest rates. Euro nations that have been following the rules and have been fiscally responsible don’t want to devalue their currency because their neighbors have been spending irresponsibly.
I think the inevitable solution is the Euro zone is forced to print money, devalue the currency, and save the Continent from otherwise certain economic depression. It is going to take a lot of pain to get there. It is the solution of last resort.
The Euro spiked higher on Sunday night after the Greek elections but could not hold the gains. If you look at the chart below you can see the big open above 1.2750 and the reversal downward. While the spec market is short a massive amount of Euro contracts, I still think you can sell the rallies in the Euro. I also like selling out of the money calls on rallies too. Now that 1.2750 has been reached and rejected, I like that level for resistance and 1.2400 for support.
3) EMINI S&P:
The Emini S&P 500 trading range is 1275 to 1425. That is 150 points in the past few months. For now the momentum is higher for the stock market. The selling pressure from Europe should be maintained for a while. The market will be able to grind higher as long as economic reports and earnings allow it to do so. The market has been so volatile I do like selling premium. I like selling calls as we get to 1425 and selling puts as we approach 1275. Selling the 1350 Strangle also sounds attractive. The big premiums allow for a lot of room for error.
If you are worried about Europe bringing the stock market to 2009 levels, please don’t get involved in the S&P right now. You are most likely better to sit on the sidelines. Those that do trade during this period should be aware of the upcoming “Complete European Sovereign Event and PIIGS Bond Issuance Calendar for June and July” compiled by Zero Hedge: http://www.zerohedge.com/news/complete-european-sovereign-event-and-piigs-bond-issuance-calendar-june-and-july
Trade Idea: Sell the July Emini S&P 500 1350 Straddle for 52 pts or better ($2600). This gives us a range of 1298 to 1402 (1350 +/- 52 pts collected). Margin $3300 per spread. Expiration is 32 days away on July 20, 2012.
Emini SP 500 Charts:
July Corn has rallied from 575 to 610 in the past week. I can’t get that excited about July Corn right now. Harvest from southern states, starting in SE Arkansas, will begin in about a months’ time, so anyone who doesn’t need corn right this minute will be able to wait for the new crop. We have been making lower lows and lower highs in July Corn since March (see the chart below). I think resistance comes in at 625’0. At that point I would rather be a seller of corn (sell futures, buy puts or sell calls). Unless there is serious activity in the cash market for old crop corn purchases, I want to sell the rally.
December Corn is very bullish. For months the market has been pricing in a mammoth new crop corn production number. With 96 million acres of corn and a 166 bushel/acre yield, the USDA was projecting a carryout of 1.881 billion bushels and a stock to usage ratio of 13.7%. This gives the US plenty of Corn and we can expect $4.50 corn with this type of production.
Dec Corn is going higher because that 166 yield looks like it has to come down to at least 160, and has the potential to get to 155 based on the weather this summer. Hot and dry conditions have already hurt the corn yields and now it is a question of how far the yields will drop.
The latest Crop Production showed the percentage of corn that was rated good to excellent down 4% last week. 13% of Illinois corn and almost a quarter of Indiana corn are considered poor or very poor. These are not good numbers for this time of year. The market is starting to price in a decrease in expected yields per acre.
Finally, just to give you an idea about the Yields, take a look at the balance sheet below for Corn. The middle orange column is the WASDE report’s latest numbers for new crop (2012-2013). The forth column (yellow) has a 160 yield. The last column has a 155 yield. As you can see, the ending stocks and stock/use ratio (red cells) suggest $5.00 corn at 160 and $6.00 corn at 155 if demand is not adjusted. Obviously, the higher the cost of corn, demand will come down in the margins, so the market will price ratio on its own. With price rationing a given, the balance sheet does give the analyst a good idea of how fast falling yields can change the supply/demand for corn and new crop corn prices. I did not add my table for 150 yields or 147.2 (old crop’s yield) because it basically shows the US running out of corn.
US CORN SUPPLY/DEMAND BALANCE SHEET IN MILLIONS OF BUSHELS
|USDA||USDA||WASDE||Turner’s Take||Turner’s Take|
|Avg Price||$5.18||$6.10||$4.60||$5.00||$ 6.00|
We are in a seasonal futures trade. Long May Corn and Short Sept Corn. We continue to like this spread for its seasonal trend and the fact we are long new crop and short old crop corn.
Open Position: Long May 2013 Corn and Short September 2012 at -13’0. Margin is $675 per spread. Stop on Close -3’0. Initial target -33’0
If you think Corn is looking tight for new crop, just wait until you see Soybeans. They are already in a tight forecast and if the weather gets worse and acres or yields come down, it could create a massive shortage of soybeans. The June 18th Crop Progress Report confirmed that Soybeans progress is deteriorating.
July Soybeans were almost limit up today. July and November were up 50 cents for most of the day. I like the new crop November Soybeans going forward. We had a big run up this week (almost $1.00) and at $13.85 SX may hit some resistance at $14.00 (see chart below). I like buying beans on weakness down at support levels and I also like getting long on a breakout above $14.00.
Here is the Balance Sheet for New Crop Soybeans. As you can see, we don’t have the Beans to lose. The corm market can afford to lose bushels but that is not the case with soybeans. The orange column is the USDA from the latest WASDE report. The yellow column is Turner’s Take estimates.
US SOYBEANS SUPPLY/DEMAND BALANCE SHEET IN MILLIONS OF BUSHELS
As bullish as I am on Soybeans, I really can’t get over that November 2012 is trading 40’0 cents OVER March 2013. November and March are the same crop year. South American beans don’t really come into the picture like they do with May and July. In theory the cost of carry is about 5 cents a month, so November should be trading 20 cents UNDER March 2013.
As you can see on the chart below, November was trading 15 cents UNDER March 2013 early in 2012. Now it is 40’0 OVER. That is a 55’0 difference in the same crop year. Historically, November will trade higher than March if new crop rallies. The fund money (managed futures) and institutional money (Wall Street) come into the market and buy November. The amount of volume and open interest this creates in November sends it higher over March.
This is the kind of spread where you have to be able to weather the storm. In that respect, it reminds me a little of Sept vs. Dec Corn. You can get in at 35’0 and you know it is a good price, but you might have to sit through 20 or 30 cents of pain as the market volatility shakes out the weak players.
Trade Idea: Buy March 2013 Soybeans and Sell November 2012 Soybeans at 40’0 or better to November GTC. Be prepared to risk 20’0 cents to 60’0 over ($1000). Target is -15’0 carry ($2750). Margin is only $405 per spread, which in my opinion is ridiculous and an example of the exchange not keeping up with market volatility in the spread market. This spread has the potential to have a 15 cent range on extremely volatile days. If you are trading the max margin of 8 cents per spread you are just asking to be blown out of the water.
SH13/SX12 Spread Chart:
As I wrote in the Macro Markets section, I believe that Europe is going to have to print their way out of their insolvency debt crisis. This is bullish for Gold and the US Dollar. As things stand, Japan and the United States will most likely have to print more money to solve their debt issues too. Long term I love the gold market. I understand we will have declines and consolidations along the way. If you look at the daily chart of Gold below, I think we are heading for a breakout to the upside sooner rather than later. I like buying gold when we trade below $1600 ($1550 looks to be the sweet spot). Swing trader can sell when we hit that $1635 to $1650 resistance area, but position traders can look for higher prices. I think we can hit $1700 by the end of the year. The trick is to be able to hold on if the market
panics because of a financial meltdown.
7) CRUDE OIL:
I still think Crude Oil can bounce higher from these levels, but I don’t want to risk a lot on that kind of trade. I continue to like the CLQ/CLZ bull futures spread at -130 and risk $200 to -150. If we are wrong about a turn around in crude, it is a low risk trade. If we are right, it could trade to -80 to -30, which is a range of $500 to $1000. Crude has come down so much I like the idea of taking a shot and getting long. It is a small trade but a good risk/reward in the futures spread market.
CLQ/CLZ spread chart:
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