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Officially, Paul Krugman is not one of Obama’s aforementioned economic advisers, but technically there may be a difference.

Paul Krugman, Keynesian worshiper through and through, is always arguing for government intervention and/or defending the current administration’s policies. That alone is frustrating enough. But reading his typically short-sighted economic “thought pieces” so graciously published in The New York Times can make your head hurt.

Back to Krugman in a moment …

Economic sentiment today seems decisively negative, at least in what we read. Before, even though our bets were on a double-dip recession or at least another jut in that direction, the consensus seemed less certain that we’d revisit recession. The recovery proponents, until very recently, outweighed the doomsday forecasters.

At this point the doomsday scenario is well-known. It is whether is well-received that makes the difference. And it appears it is becoming more accepted.

We talked about it last week, and now analysts are very much stewing over the signals being flashed by US corporations. Yes they’ve done an excellent job in shoring up their balance sheets; cost cutting and productivity increases are a wonderful thing if you can pull it off. But revenues aren’t going to be increasing now that companies are finished cutting the fat. Not if they’re unwilling to take risks and invest in expansion.

US consumer confidence is in rough shape. Deleveraging continues; the urge to spend is still contained. Consumers continue to lose value in their homes. There are now risks that wages will stagnate or, even worse, deteriorate.

Asset prices, at times over the summer, have been a bright spot … with better-than-expected pieces of economic data sprinkled in here and there. But chances are the second quarter was a result of a rebound in market sentiment following a first quarter rally in the stock market. We’ve also mentioned on occasion how important the Federal Reserve believes asset prices (particularly the stock market) are to investors during harsh economic times.

So when the outlook for stocks starts to soften, what else do we have left to be optimistic about?

S&P 500 Weekly: a lot of near-term support between 1,050 and 1,000 … but not much after that; there’s certainly a target on the July low:

Last Friday, following the Jackson Hole summit, Ben Bernanke spoke and gave markets a boost. Stocks rocketed in response to his comments, which admittedly weren’t anything special. It was typical Fed-speak that made sure everything was covered with the utmost care; no sharp objects allowed.

Oddly, but not surprisingly, to us, the stock market seemed to change its tune. Investors would welcome whatever quantitative easing the Fed would be willing to dish out. Who cares what they think of the economy; they’re going to keep pumping money into the financial system which will make its way into asset markets … rather than the real economy.

But all the difference a weekend can make. The Friday move in stocks appears to have been mostly a knee-jerk reaction. Yesterday and today has seen selling return and traders are far less optimistic about Federal Reserve action.

In fact, there’s a good chance most everyone is far less optimistic about the impact of the Federal Reserve, on both the markets and the economy. With monetary policy measures pushed to the side, there’s only one other place to look.

Why do we worry about stock direction so? Well, because currencies are following it seems, the mirror-like image correlation between the dollar index (black) and stocks (red) remains pretty tight…

Cue Mr. Krugman.

Krugman is favoring a fresh new bailout, to the tune of $800 billion.

Now, it’s impossible to know the motives behind Mr. Krugman’s proposal. But we can certainly wonder about the proposal’s merit. And we can do the same regarding the merit of the already enacted stimulus.

For starters, we can’t help but recall one of the destinations of the American Recovery & Reinvestment Act: kayak tours in Hawaii. Now we don’t know if there’s a connection between the Hawaiian-born Obama and that particular stimulus check, but do we really need to be stimulating Kayak tours? There must be more productive outlets we can support.

Like building Oyster beds in the St. Lucie River. That’s right. Right here in Martin County, Florida where we call home, a stimulus check was cut to finance oyster bed restoration that would help naturally filter and clean the river water and revitalize our ecosystem. We don’t even have time to go into all of our feelings on this. Suffice it to say this too is probably not an effective use of the stimulus money.

So Mr. Krugman proposes we give Congress $800 billion to divvy up as they see fit … again. And of course that means “additional steps to generate job growth such as more tax cuts for businesses,” as Mr. Obama and his economic advisers have already said.

Yeah, right.

John Ross Crooks II
Black Swan Capital LLC
www.blackswantrading.com

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer

Crude oil’s end of the week rebound should be short lived and ultimately seen as a mild bump on the road to fresh near term lows. Target $64.50 in the near term, confirmed by a break below 71.24 on the Oct. contract this week. Heating oil and rbob both appear ready to collapse a solid 15% in coming weeks if a Gulf hurricane does not occur. The forecast was for an active season and the bottom line that is not coming to fruition, so all that excess premium is going to evaporate and shorts are going to come back into the market with confidence. Natural gas is ugly and this is a wash out, offering good long term call buying opportunities on the way down.

Financials

Stocks appear stuck in a relative mid-range but this is likely just the calm before another storm. Look for put spread buying opportunities on bounce days. Target shorts between current levels and 1084 on the S&P. Bonds should selloff during a week of calm heading into the employment report on Friday. The Friday report could be epic as the buildup to the employment outlook, recent surprises and shocking prior month revisions all setup massive volatility for the stock market, bonds and currencies. The kicker is the holiday weekend it falls on, a major trader vacation weekend that could cause a big Friday and Tuesday reaction in the financial sector. Until then I expect bond prices to retrace to 130 or so. The dollar remains bullish in the near term, pressuring the euro and pound in the process. The Canadian dollar might catch a bounce here, and if it does I would look to short at 97. The Aussie recovered well after the election concerns of last weekend and I suspect there is bullish momentum that could push the market to 9150, at which point I would recommend shorting it. The Bank of Japan eased monetary policy this evening in an effort to limit the yen’s runaway move agains the dollar. This is all part of the show as they have little choice but to intervene as Japan is an export driven economy. I fully anticipate that Japan will undergo major economic changes over the next two years and a strong yen will be the catalyst. If they continue to try and ntervene it will net out to be bullish because the BOJ will show their inability to sustain control over this runaway currency, and if they are just ‘talking the market down’ it will comeback with vengeance – either way I recommend buying the dip as the yen remains bullish, offering a quick recovery from the Friday pullback. This is likely the last real pullback before a short covering rally ensues that could be historic. I continue to stand by my forecast that:

The Japanese Yen futures will hit 140 before 80 or I will quit writing the Weekend Commodities Review.forever.

Grains

After a careful technical review of the grain sector this weekend I believe all eyes will be on wheat as a leading indicator to the grain trend. This market is offering a near perfect pennant consolidation off the post Russian wheat ban highs, and looks bullish on a technical level. My gut says don’t believe it for a second! Let the market fake breakout this week and sell into it with puts. The grain market is setting up an impressive head fake rally this week that screams put buying opportunity in beans, wheat and especially corn. Rice remains the standout long term buy, but overall that market will be trapped inside a grain selloff. A fake out rally into a big selloff may not be what you want to hear, but I strive to never hold back my opinion and to always call it like I see it – right or wrong. In this case I have some specific ways to play this forecast and subscribers to my Mound Trade Signals service will get a trade recommendation this week on this prediction. Sign up at www.moundtradesignals.com and get the report for as little as $80 a month.

Meats

Cattle has likely seen a turning point as the overbought market conditions and skewed cash prices have turned bearish on some hedgers selling to lock in some seriously overpriced meat. Hogs also showed signs of a meltdown ahead and the meat sector as a whole is strong sell.

Metals

Timing in metals has unfortunately not been my strong suit in recent years, and last week was no exception. The setup remains, however, for a strong price decline in silver and gold with significant volatility expected in both markets heading into and following Friday’s jobs data. Copper is testing some critical resistance levels and a short futures play is recommended with a stop at 342.

Softs

Coffee hit my 170 target – in a hurry – and supported out shortly thereafter. The ensuing rally leaves Monday as a critical momentum indicator day. The market must close above Friday’s high to sustain bullish momentum, after which the skies the limit. Cocoa broke through critical support and represents a strong short with puts or futures with stops above 2820. Cotton set a strong reversal pattern on Friday with the highs from Friday being a perfect area for stop placement on a short futures. Expect a mild retracement with a buying opportunity near 83. OJ is setting up an impressive failure on a break below 133, although this market is notorious for a stop triggering technical failure that has no follow through, so look for a break to 133 but wait one more day for a fresh low closing price to confirm the failure. Sugar is a sell with puts as volatility is picking up steam. Lumber remains a buy.

Past performance is not indicative of future results. **Chart courtesy of Gecko Software’s TracknTrade

*Disclaimer: There is risk of loss in all commodities trading. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Past Performance is not indicative of future results. Information provided is compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Options do not necessarily move in lock step with the underlying futures movement. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.

Crude oil prices slid last week, as anticipated, with more downside ahead as long as hurricanes continue to be a non-issue. There is still an opportunity to play a bear move in oil and I recommend bear put spreads or ratio put front spreads to capture the downtrend. Natural gas is a long term buy, despite near term technicals looking quite ugly. Buy heating oil against a short rbob (1 to 1).

Financials

Stocks continue to show signs of weakness and the potential for a volatile failure. Bonds have rallied significantly as the Fed moves to buy back bonds. Overall I do not expect the market to truly test the 2008 highs and therefore anticipate a top between current levels and 138-14 on the 30yr. In this week’s Mound Trade Signals premium report I will release a trade recommendation to play this downside – to see the trade alert you can subscribe by clicking here. The dollar remains a buy after developing strong support. The Australian dollar still needs to break 8780 to confirm a downtrend, but that is likely along with some serious volatility as a hung parliament (the first in 70 years) from this weekend’s elections puts the country in a bit of a panic. The Canadian dollar is range bound, but I continue to be bearish long term. The euro and pound are both shorts on dollar strength. The Japanese yen is pressing up against recent highs as it makes a push to test the all-time high levels at 125. While a bullish US dollar forecast should theoretically slow the yen play, I do believe they can both rally in tandem and offer a price breakout in the yen. I continue to stand by my forecast that:

The Japanese Yen futures will hit 140 before 80 or I will quit writing the Weekend Commodities Review. forever.

Grains

Do you find yourself cheerleading a grain rally? After all, grain prices were relatively stagnant for some time and there are some serious fundamental reasons to be bullish. There is the Russian drought and wheat ban, the growth in ethanol demand for corn and the potential for China to step in and be a corn importer. However it is not what we know or expect but rather what is priced in and what will ultimately occur that matters. The worst of the Russia wheat crisis is likely over. Rumors of China needing to import corn is, shall I say, unrealized. The USDA’s report of spiking ethanol demand does not take into account one-time factors or seasonal demand that may have created an imbalanced outlook. The bullish news is behind us, and without further credible fundamental news the grain sector is likely to see congestion or downside ahead.

Meats

Cattle prices surged last week, sparked by cash buying ahead of Labor Day’s anticipated demand spike. Pork bellies offered a front month all time record high, although this is misleading as back months were nearly 30% below this price. Meat prices as a whole are nearing market hysteria buying levels. Utilizing long puts I believe this represents one of the best reversal plays I have seen this year. Start scaling into long term put plays – early 2011 – and use this volatility expansion to play what will likely be a sharp price decline once the short covering panic subsides.

Metals

Gold’s declining volatility is combining with a mild uptrend and relatively low volume to ultimately set up a strong price decline over the next two weeks. I anticipate $40 down in gold with silver down over $1. Copper should sell off on different merits as global growth fears damper the copper demand outlook. Strong sells are recommended across the metals sector.

Softs

Coffee’s breakout last week does not appear to have legs to me, and therefore a near term profit grabbing opportunity exists on longs and a possible short to 170 is worth a look. I would recommend selling anything between 185-196, above which the market would regain a bullish technical outlook. Long term, coffee remains bullish with a buy in the 170 area recommended on the dip. Cotton has developed a bull flag on a daily and that compliments my longer term bullish stance – buy the dip. OJ remains a sell. Sugar is also a sell with a dead cat bounce top likely in place. Lumber is starting to pickup momentum and I expect a bull run here over the next couple of months. Cocoa is on the cusp of a massive technical failure but has two critical support levels nearby that need breaking in order to confirm the failure. First the market must break last week’s low this week, a seemingly easy task considering we settled 22 points from that mark on Friday, but nevertheless absolutely critical. Second, cocoa must penetrate the bottom support low of 2761 on a weekly chart prior to penetrating 2948 to the upside in order to establish confirmation of the downside momentum. I believe both of these supports will be penetrated this week and a quick move to 2620 is likely. Even more downside below that first target is expected longer term.

Past performance is not indicative of future results.
**Chart courtesy of Gecko Software’s TracknTrade

*Disclaimer: There is risk of loss in all commodities trading. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Past Performance is not indicative of future results. Information provided is compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Options do not necessarily move in lock step with the underlying futures movement. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.

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Not a great time to be an asset appreciation investor.  But for option sellers, it’s just what the doctor ordered.  Flat, balanced, status quo – those are often Profit words for sellers of premium.

It’s also a good way to describe Crude Oil prices these days, as crude is often a “quick glance” indicator of the state of the global economy.

US demand for crude should stay flat in the second half of 2010 – right along with the US economy.

Even if one considers the precipitous drop in prices from May, Crude oil remains stuck in a roughly $20 trading range. However, take out May’s “attitude adjustment” on the US economy, and the range narrows considerably. It appears that crude has settled into a comfortable trading range near where it’s true value should probably be.  By our analysis, there is a good chance it could stay there for awhile.

Headwinds for Prices

While it has never been our intention to attempt to pick market direction (option sellers don’t have to), you can increase your odds of success on option selling trades by doing an analysis of what factors could move prices higher or lower. And it appears at this time that there are more forces aligning to keep prices in check than there are to push them higher.

Most notably:

1. Demand should level off as the US economy finds itself bracing for a “slower rate of growth” in Q3 and Q4 of 2010. Despite this month’s headlines that China surpassed Japan as the world’s second largest economy, the US still dwarfs the Chinese in overall oil consumption.  That means the direction of the US economy is still one of the biggest factors in driving oil demand.  First time claims for unemployment benefits unexpectedly increased last week to 500,000, the highest since last November. Unemployment has been a stubborn thorn in the side to economy bulls and this latest figure is undoubtedly disturbing to them.  While the US still appears to be creeping along at a slow rate of growth led by indicators such as manufacturing, consumer spending is expected to slow again in the fall and winter.  Housing figures remain discouraging. Even the Federal Reserve is telling the public to expect a more “modest” rate of growth in the second half.  Slowing rates of growth do not typically boost energy demand. Remember that 2/3 of oil demand in the US comes from the industrial sector.
2. Supplies remain burdensome: Despite this week’s 818,000 barrel drop in crude oil stocks, EIA figures still show US inventories running about 8.2% over the five year average at 354 million barrels. BP may have made an oily mess of the Gulf. But there remains plenty of oil above ground in US facilities.

US Crude Oil Stocks remain burdensome at 8.2% over the 5 year average.

Flat demand and oversupply are typically not a solid recipe for bull markets.

The Counter Argument

However, before you start short selling crude oil with both fists, know this: We do not expect oil prices to fall out of bed. While in our opinion, the prospects of a new bull market remain unlikely, we see it equally unlikely that crude prices will decline precipitously.

The BRIC nations (Brazil, Russia, India, China) continue to experience solid rates of growth. The Chinese economy is expected to grow by another 10% this year. China has recently displaced Japan as the worlds second largest economy.

While expected to slow, US gasoline demand remains above 2009 levels. Year to date fuel consumption for 2010 is running at 0.9% over 2009.

Conclusion/Option Selling Strategy

There is nothing spectacular in anything you have read above. And that is exactly the point. “Regular” investors have to seek out the extreme; the markets with “potential”; the big movers.  For option sellers, range bound markets are your bread and butter. In commodities, that can mean some pretty wide ranges – and some good reasons for selling options.

Our expectation for Q3 2010 is for oil prices to remain in the $70-$80 range with a $5 margin for error on either side. This should work out just fine for investors wishing to bank some solid premium by strangling the crude oil market (selling puts far below the market and calls far above.) With calls now available in the $120 per barrel range and puts near the $50 range, we see opportunities for option selling investors this month.

Liberty Trading Clients are now positioning for the 3^rd and 4^th quarters of 2010. If you would like more information about having James Cordier manage your option selling account, feel free to give us a call at 800-346-1949 or request one of our Free Option Seller Information Packs at www.OptionSellers.com ($100,000 minimum investment).

James Cordier is the founder of Liberty Trading Group/OptionSellers.com, an investment firm specializing exclusively in selling commodities options. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television News and CNBC.  Michael Gross is an analyst with Liberty Trading Group/OptionSellers.com. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling 2^nd Edition (McGraw-Hill 2009) is available at bookstores and online retailers now.

*Fundamental Chart Courtesy of Hightower Research

** Price Chart Courtesy of CQG, Inc.

***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.