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Corn:
For the week, May corn lost 29 cents. The Commitment of Traders Report, which is tabulated on Tuesday and released on Friday showed that in the money managed category speculators liquidated 2,295 contracts, and added 1,369 contracts to their short positions. Commercial interests added 7,473 contracts of their long positions, and liquidated 7,301 contracts of their short positions. Although the fundamentals are far more constructive for corn, wheat lost only 15 cents compared to the 29 cent loss for corn. As the week closed, May corn sold at a 5 3/4 cent premium to May wheat. During the second quarter wheat has weakened significantly when compared to corn.
Futures First Quarter Quarter Two
May corn -1.64% -2.29%
May wheat -1.56% -5.64%
Soybeans:
For the week, May soybeans added 2 3/4 cents. The Commitment of Traders Report showed that in the money managed category, speculators added 9,494 contracts to their long positions, and added 1,699 contracts of their short positions. Commercial interests added 14,899 contracts their long positions and liquidated 3,206 contracts of their short positions. The buying by commercial interests is extremely bullish. The reporting period for the Commitment of Traders Report was from April 3 through April 10 and during that time, soybeans traded in a range of $14.08 1/4 to $14.52 1/4. The fact that commercial interests were buying at these lofty levels while liquidating their short positions as the market moved higher is atypical commercial behavior. Usually, commercial interests put on short positions as the market moves higher to hedge their cash inventories. In prior reports, I have remarked about consecutive days of open interest increases, which has carried open interest to record levels. Obviously, commercial interests have been participating in this build. Despite this, the market remains overbought, and speculators should continue to stand aside until a correction occurs.
The untold story in the bean complex has been the significant outperformance by soybean meal versus soybeans. See the table below.
Futures Year to Date April 9-April 13
May soybean meal + 25.33% +1.00%
May soybeans +18.01% +0.19%
May soybean oil +7.09% -0.21%
Sugar #11:
For the week, May sugar lost 1.21 cents. The Commitment of Traders Report showed that in the money managed category, speculators liquidated 6,985 contracts of their long positions, and added 2,448 contracts of their long positions. Commercial interests liquidated 4,279 contracts of their long positions, and liquidated 3,736 contracts of their short positions.
Crude oil:
For the week, May crude oil lost 48 cents. The Commitment of Traders Report showed that in the money managed category, speculators liquidated 12,872 contracts of their long positions, and added 7,663 contracts of their short positions. Commercial interests added 8,514 contracts to their long positions and liquidated 2,715 contracts of their short positions.
Gasoline:
For the week May gasoline added .56 cents, which is close to being unchanged for the week. The Commitment of Traders Report showed that in the money managed category speculators liquidated 6,688 contracts of their long positions, and also liquidated 609 contracts of their short positions. Commercial interests added 12,097 contracts of their long positions, and added 4,042 contracts to their short positions.
Copper:
For the week May copper lost 16.85 cents. The Commitment of Traders Report showed that in the money managed category speculators liquidated 8,507 contracts of their long positions, and added 7,180 contracts to their short positions. Commercial interests added 113 contracts to their long positions and liquidated 6,988 of their short positions.
A Special Report on Copper:
This week copper closed at $3.6270 per pound, which was the lowest close since January 11,
2012 when the market closed at $3.5570. As I have pointed out in previous posts, May copper generated a short term sell signal on April 9. An intermediate term sell signal has not yet been generated, but it looks increasingly likely, and may occur as early as this coming week.
The big story behind copper (which is not new) has been the massive stockpiling of the metal to be used for speculative purposes, not only in official Shanghai warehouses, but stockpiled by private speculators who are not required to issue inventory reports. According to emetalprices.com, Shanghai warehouse inventories of reported stockpiles are at the highest level since July 2002. A portion of this inventory is used as collateral for loans by speculators to fund speculation in other areas. The Financial Times has written many excellent pieces on the subject and I quote from an article written by the Times on March 10 2011 in order to provide some background.
“On Wednesday, we drew attention to a Standard Chartered Report which claimed that as much as 550 kilo-tons of copper was stockpiled in bonded warehouses in Shanghai by late February — the majority of it being used as collateral for securing financial deals.”
“Now, if Chinese copper imports are more about inflation hedging and financing deals then production demand, that dramatically changes the function of the data in ascertaining the health of the global economy.”
“While the whole copper as collateral story is not new, it still hasn’t penetrated market consciousness deeply enough to change attitudes. It’s also still a story that relies on anecdotal evidence rather than cold hard facts, and consequently deserves a lot more investigation.”
“That said, among the total evidence that does exist is this rather illuminating Bloomberg story from February 23 — which seems to have slipped by the wayside. It echoes exactly the Standard Chartered view, while adding some important additional details.”
Feb 23 (Bloomberg) — “Copper held in bonded warehouses in Shanghai has jumped as more traders import the metal to use as collateral to obtain funds, either for re-lending or to finance corporate development, according to analysts and traders.”
“Inventories have climbed to about 600,000 metric tons, said Zhao Kai, an analyst at the futures unit of Jiangxi Copper Company, China’s largest producer. Bonded warehouses are used to store shipments before duties are paid and official data on levels of holdings aren’t issued.”
“Traders in China can still use copper as collateral to obtain money from banks, which can then be re-lent to third parties, said Jia Zheng, a trader at Shanghai East Asia Futures Co.”
“It appears that the practice of using copper to obtain financing is increasing as companies start to feel the effects of the tightening measures, said Liang Lijuan, an analyst at Cofco Futures.”
Fast-forward to February 28, 2012 and I quote from the Financial Times and Bloomberg News about the copper collateral problem.
Feb 28 (Bloomberg) “Some Chinese banks have stopped approving loans to companies using warehouse receipts of copper as a pledge, the Oriental Morning Post reported today, citing an unidentified executive at a state-owned bank. Approval will only be given to companies that have fixed buyers of downstream products, the newspaper said, citing the bank executive. The suspension came after banks found that companies used the same collateral to apply for loans from more than one bank, posing risks amid volatile metal prices, according to the report.”
“As we’ve reported on FT Alphaville, it’s hard to know exactly how extensive the overuse of copper collateral for bank loans has been in China. And also to what degree it’s been responsible for encumbering large sums of copper in dark inventory stores invisible to the official LME monitored market.”
“Anecdotal reports suggest that the practice has been a key provider of additional liquidity into the Chinese system for more than a year. Importantly too, they suggest the practice has had a major false demand effect on copper prices themselves.”
There are three principal reasons and a number of peripheral reasons why the above information is crucial for speculators in the copper market. First, it is readily apparent that copper assets are highly leveraged, and are collateralized at lofty prices. For example, the 156 week (3 year) moving average for copper is $3.48, which means that speculator holdings of copper are priced at the upper end of the multi-year trading range. As of Friday’s close, May copper is only 14 cents above the 156 week moving average. Second, copper, inventories of record in Shanghai are at 10 year highs, while stocks held by bonded warehouses of the Commodity Exchange of New York are only at year ago levels. London Metal Exchange stocks of copper are at 2 year lows, which means that the extraordinarily high level of copper inventory in Shanghai is not offset by extremely low inventories in New York and London. In short, global supplies of copper are plentiful. Third, it is apparent that the Chinese economy is slowing down, along with Europe and whether China endures a hard or soft landing, copper consumption by end-users (not speculators) will be slowing as well.
It has been speculated that the amount of copper held by all sources in China could be 3 to 4 times the official Shanghai number. A sharp decline in copper prices would have major financial repercussions in China and in a variety of markets. As copper prices gain downside momentum, more and more speculators who have investments that are collateralized by copper will be forced to sell copper and other speculative assets at ever decreasing prices. The snowball effect will force more speculators to sell at lower and lower prices. When it comes to speculative markets, a good rule of thumb is when everybody is on one side of the boat (holding large copper inventories), move to the opposite side of the boat quickly by selling inventory as quickly as possible.
May copper will generate a sell signal if the daily high is below the pivot point of $3.6049. The problem with trading copper futures is their extreme volatility. Although liquidity in the futures contract has improved since the CME Group bought the New York Mercantile Exchange, price swings can be horrific. The options market is illiquid and I suggest the safest way to make a bearish trade would be through the ETN (JJC), and/or one of the big copper producers.
I did an analysis to see how JJC tracked with copper futures, and it performed quite well. The following table is constructed to show the performance of JJC and May copper year to date, first quarter of 2012, the second quarter to date, and the week of April 9 through April 13. Rarely does an ETF or an ETN track a commodity as well as JJC tracks copper. Please consult with your investment advisor or broker before entering any trades.
Instrument Year to Date Quarter 1 Quarter 2 April 9-April 13
JJC…………………+5.20% + 11.42% -5.58% -4.67%
May copper……..+4.95% +10.94% -5.40% -4.49%
Gold:
For the week, June gold added $30.10. The Commitment of Traders Report showed that in the money managed category speculators liquidated 7,177 contracts of their long positions and added 1,633 contracts to their short positions. Commercial interests liquidated 694 contracts of their long positions and also liquidated 8,488 contracts of their short positions.
Silver:
For the week, silver lost 34 cents. The Commitment of Traders Report showed that in the money managed category speculators liquidated 2,220 contracts of their long positions, and added 1,451 contracts to their short positions. Commercial interests added 1,562 contracts of their long positions, and liquidated 156 contracts of their short positions.
Euro:
For the week, the June Euro gained 15 points. The Commitment of Traders Report showed that in the leveraged funds category speculators added 9,491 contracts to their long positions, and added 23,881 contracts to their short positions.
Australian dollar:
For the week , the June Australian dollar added 1 cent. The Commitment of Traders Report showed that in the leveraged funds category speculators liquidated 6058 contracts of their long positions, and added 4165 contracts to their short positions.
S&P 500 E mini:
For the week, the June S&P 500 E mini lost 25.20 points. The Commitment of Traders Report showed that in the leveraged funds category speculators added 4,082 contracts to their long positions, and also added 38,399 contracts to their short positions. Long put protection should already be in place.
I have a great deal of admiration for John Hussman PHD who runs the Hussman Funds. Each week, he writes about the economy, market climate, and his overall view of how the two interact. The reports are issued each Monday and in my view are mandatory reading. In his latest report dated April 9, he wrote a short piece within the report about: “How QE works.” It is compelling reading because Mr. Hussman clearly and concisely explains the madness of the money printing machine propping up financial markets.
“Keep in mind that the U.S. banking system has trillions of dollars sitting in idle deposits with the Fed already. Quantitative easing simply does not relieve any constraint that is binding on the economy. Rather, QE is a method by which the Fed hoards its longer-duration higher-yielding securities like U.S. Treasury bonds and replaces them with cash that bears zero interest. At every moment in time, somebody has to hold that paper. The only way for the holder to seek a higher return is to trade it for a more speculative asset, in which case whoever sells the speculative asset then has to hold cash. The process stops when all speculative assets are finally priced so richly and precariously that the people holding the cash have no further incentive to chase the speculative assets, and are simply willing to hold idle zero-interest cash balances.
“Why does the Fed want this? Simple. Chairman Benanke believes that by creating a bubble in speculative assets, people will “feel” wealthier and keep consuming – regardless of the fact that real incomes are stagnant and debt burdens are already intolerable, and despite the fact that there is extremely weak evidence for any such “wealth effect” in the historical record. Undoubtedly, it would be difficult for Bernanke to refrain from these reckless policies when everyone is crying “do something!” But the unwillingness to tolerate short-term criticism in the interest of of long-term benefit is part of what separates leadership from cowardice.
