The Weekly Pit Review for October 20th, 2008

[PitGuru]

The Financials Pit Review

U.S. Economy

It is starting to feel like we are repeating the same week over and over and it is hard to call a bottom in the markets. However, according to a quote in the New York Times, Warren Buffet is announcing that now is the time to buy US stocks. I do believe that there are some value plays available at this time but I do not believe that everyone is comfortable enough to jump right in. There are still some concerns about the bailout; it is apparent early-on that no one really understands how the bailout will exactly work. Time will tell how things end up, but it appears that there is a trickle-down effect that may hurt smaller banks. Community banks that Federal Reserve Chairman Ben Bernanke calls a key link between financial markets and the U.S. economy face a longer wait for government aid than their bigger competitors. No new news in housing; starts were down 6.3% from August pace marking the slowest month in over 15 years. Housing starts overall are down 31% from a year ago. Consumer sentiment is also unsurprisingly lower. The University of Michigan’s index fell from 70.3 to 57.5 in October, the biggest monthly drop since the survey began. There appears to be another big week ahead for day traders; I would not be surprised to see 50 to 100 point days in the S&P this week.

Currencies

The other day Canada changed the accounting rules for banks in an effort to provide them more time to offset troubled assets before having to post them as losses. This was done to help stop a mass liquidation in the short term. This may cause some long term problems though, if it allows for the banks to ignore the losses. I do not see any reason to be bullish the Canadian, especially as the Bank of Canada may be poised to lower interest rates another half a point in an attempt to jump start the economy. The manufacturing sector has been faring poorly as the global slowdown continues and this will put pressure on the exporting nation and cause another round of selling in their currency.

The euro zone is also facing a struggle as the economic conditions for the European Union face the same hurdles as Canada does. A slip in manufacturing and consumer confidence will bring more pressure to the central bank to cut rates, especially as fuel costs fall and the possible easing of inflation turns the focus back to economic stimulation. The euro will continue to trade lower.

The Energies Pit Review By PitGuru Joe Marshall

The trend for December crude oil is down. Last Thursday’s bounce off of the 69 area could give you another 1-2 days of sideways trade, but that should only build for another wave down. The number being talked about on the floor is 67 dollars and that is a very old trend line going back more than a year. We will have to see if that number is still relevant. Big swings in volatility in the options pits last week, as you saw buying and selling in big volume on both sides of puts and calls. The demand issue is still in focus as this market is watching the Dow minute to minute.

The trend for November nat gas is down, with the most recent action looking neutral. The inability to keep this market under 650 may give you a couple of days of sideways to higher trade, but only a close above 717.3 breaks the trend. It would not surprise me if you saw a week of trade kept in a range between 717 and 650. Action in the options pits was a little light last week, but you saw an indication that a trading range is upon us with selling of both at the money puts and calls.

The Softs Pit Review By PitGuru Jamie Fink

Unlike other markets in the softs sector last week, cocoa failed to spring to life. This week should present an opportunity for a rebound. Ivory Coasts port deliveries are starting to taper off and quality concerns and issues are still front and center. Lingering disputes from farmers regarding the farmgate price of beans haven't been settled entirely and the longer they withhold beans, the likelier it is that dampening and spoilage will set in.

Coffee should also have a better opportunity to climb as consumption growth in developing nations continues. Brazil alone registers a nearly steady annual increase of 4%. With such a delicate balance between beans and drinkers, any shortfall from the South American coffee giant will light a fire under this market. At current levels, roasters have also been scooping up beans at a faster rate, something which should help prices come back from recent lows.

Orange juice and sugar both posted modest gains to end the week, defying weak bullish fundamentals in each. Oversupply continues to be the headline for sugar and slipping demand on the retail level will eat into orange juice prices as supplies build. Both will have a hard time holding gains and should trade sideways.

Recent low prices helped cotton exports from the US gain 48% last week and helped prices jump to end the week. This market has plenty of room to move higher and the underlying factors should support a bullish trend. The reduced acreage that most people are aware of this year has not been felt fully in the supply numbers and it is still likely that the crops in the heartland fared poorly during summer storms.

The Metals Pit Review By PitGuru Frank Martin

Last week let us know that the ride isn't over. Gold might have fallen when inflation fears looked to be dropping off, but the economy still isn't settled and gold might look cheap at twice the price. Falling below $800 will bring in more buyers and this week we will see another run higher. The real question is what silver will do. The other investment haven has not moved with gold and the industrial slowdown has kept price low. Silver can and should move higher. These low prices are appealing to consumers for jewelry and investment.

Platinum and palladium are still lower on the struggling auto industry. Economic slowdown has brought both markets low and they will stay there or trade lower until things start to look up. Copper will also trade sideways as the housing market struggles. Construction use of the base metal will slow or cease in plenty of markets and that will keep prices from running up.

The Grains Pit Review By PitGuru Matthew Pierce

The previous week I mentioned a bottom was near. There was early weakness then further proof that we have seen or are looking right at the market bottom. Volatility continues to dominate as the agricultural markets followed equities all over the map early before divorcing Thursday and Friday with small fund buying and commercial interest supporting the technical and macro rally. There was little fresh out there early in the week to support the trade with weak macro factors and improving crop conditions and harvest pace. The market gained a bit of strength from strong basis as the week progressed with front end spreads tightening slightly with X/F showing the greatest move. Heading into the weekend the market rallied due to short covering and value shopping with more security seen in equities in spite of the continued volatility levels. The VIX index hit 85 (1-100) this week marking an all time high showing just how out of control things are.

On the fundamental front we are looking right into the teeth of harvest with only minor delays possible. Having driven throughout central IL this weekend I can attest they are out in force with many fields complete or in progress. The current weather model has far below average temps with above average precipitation in the Northeast. There is no real threat of delay in MN, MO, NE and SD, which have been the states of concern. OH, MI and IN are worth watching but a minor concern compared with the Northwest. The situation in Australia remains choppy with production expectations remaining steady in the upper teens while Argentina remains a mess with production estimates falling by the day with only minor rainfall expected in the coming week. Continue to watch US basis with any rally supporting a macro led rally which has started on the overnight session.

On the macro front, OPEC is the biggest factor this week with major production cuts in discussion. The recent drop in prices has forced their hand with worldwide consumption deflating due to the credit crisis. With the world economy in stasis consumers curtail demand to shrink costs increasing stocks, further decreasing prices. Outside of this we need to be very cognizant of the US dollar with further strength hampering any major upside rally. Equities will be the best directional indicators this week so continue to watch for major moves there.

Looking at technicals this market remains oversold with plenty of potential with all indicators showing distinct signs of a strict positive turn with plenty of room to move to the upside before approaching oversold territory. Looking at corn I feel a move to 494 (CZ9) is very probable if basis remains supportive with a widening stance in the CZ8/CZ9 helping here. This is just the first level if S. America continues to shed corn acreage due to high planting costs. This is again supported by Argentina stating they are increasing soy plantings by 8% due to high input costs for corn. In beans look at 1024 (SX9) with this representing the bottom end of a daily chart gap. In wheat look at 667 (WN9) marking a recent high and the bottom end of a major chart gap between 667-688.50.

Looking to the week ahead, the market should continue the strength of Sunday’s overnight session as long as outside markets support the move, which they are. Oversold technicals and front end basis support a bullish stance. Bull spreads in old crop should continue to work with Nov options expiring on Friday making this a play for risk tolerant traders. Selling wheat volatility seems like the best bet with corn the second best sale. Look at buying call spreads once again or adding to long delta positions. I cannot support selling any puts to support the move unless you are a consumer and are content with ownership at current levels. Overall the market should rally this week with a major disclaimer. Watch equities for better direction with this outside factor the major directional impact for any market.

Kalvin O’Brian (S&P and Currency trader), Matthew Pierce (Grain Floor Trader), Joe Marshall (Energy Option Broker), Jamie Fink (Softs Industry Insider), & Frank Martin (Metals Trader) are the Gurus for the Weekly Pit Review published by www.PitGuru.com - hear their audio market commentary, learn more about them and sign-up for the weekly Pit Review by visiting www.Pitguru.com

Disclaimer: Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading