Gauging The Financial Sector’s Health
May 30, 2008
Smart Profits Report #527
by Karim Rahemtulla, Investment Director
It’s one of the most important companies in America today…
But like any company, it’s got its share of pros and cons. For example…
Pr It holds the position of the largest private, non-governmental originator of mortgages in the US.
Con: It also holds the dubious distinction of being one of the most blatant issuers of sub-prime paper.
I’m talking about Countrywide Financial (NYSE: CFC) - the much-beleaguered bank and mortgage company.
And there is an interesting trend occurring at the bank - one that bodes well for banks and the economy as a whole…
The Importance Of “Average Joes”
As a banking institution, Countrywide accepts deposits from individuals.
While that’s an obvious point to make, it’s also a significant one, since this is the most important aspect of Countrywide’s business. Especially during the recent turbulent times.
In order for Countrywide to loan money, it must do so using available funds from deposits, which it can then leverage into loans. It makes money from the positive spread between what the money costs (deposit rates on the money from you or I) and what it charges (loan rates to customers).
Another alternative is to borrow funds from the institutional market and re-loan them. But since this requires a strong financial rating - something that Countrywide does not have at the moment - that idea is a non-starter.
Now, about that trend I mentioned…
What Countrywide’s Interest Rates Reveal About The Financial Sector’s Health
Prior to the subprime mess hitting the fan, Countrywide’s deposit interest rate was as pathetic as those being offered by most large banks.
However, once the subprime crisis and ensuing credit shortage gripped the market, Countrywide found access to easy funds very limited - meaning it could not borrow low and re-lend high.
With institutional funding not an option, Countrywide mounted a full-court press on folks like you and me - yield hungry investors seeking higher returns on cash. And as an FDIC insured bank, the funds were pretty secure, provided they didn’t exceed the $100,000 threshold.
And in January, it was evident just how tough a time Countrywide was enduring in trying to obtain funds to re-lend.
The bank’s money market rates for a minimum $10,000 deposit were as high as 6% - significantly higher than the average bank.
Even with the Federal Reserve in the midst of an aggressive interest rate-cutting program, Countrywide was still paying over 5%, while most banks were paying closer to 2%. Even Internet banks like ING Direct were paying 3% to 3.5%.
The situation stayed this way until last month…
Follow The “Countrywide Index”
Just after the “tipping point” collapse of Bear Stearns on March 17, the subprime crisis began to ease.
Around the same time, Countrywide finally started to lower its interest rates. Thursday’s Countrywide deposit interest rates were under 4% - the high end of the deposit rate range.
The days of grabbing high interest rates from troubled institutions may be over. Countrywide is not only finding money, it’s doing so relatively cheaply, considering its risky profile.
While that’s not exactly great news if you’re looking for a higher rate of return on your deposits, on a broader scale, it does bode well for the US economy and banks in the long-term.
After all, if a bank like Countrywide can borrow at lower rates, then the liquidity crisis that almost brought the financial system down is surely easing.
For future reference, go to Countrywide’s website at: www.countrywide.com and keep an eye on the deposit rates.
When they hit the same level at the major money center banks like JP Morgan Chase - or even close to the rates offered by Chase - then you’ll know that the financial crisis is almost over and the sector is ready to rally again in earnest.
Karim Rahemtulla
Sphere: Related ContentNational Gas Prices
May 27, 2008
Smart Profits Report Issue #526
Tuesday, May 27, 2008
by Martin Denholm, Managing Editor
I hope you enjoyed the Memorial Day weekend - and that your wallet still has a pulse if you did any traveling.
I managed to pack in four barbecues (or “cookouts” to put it in American lingo) over the weekend - all pretty close to home - so not too much damage done. And with soaring gasoline and food prices contributing to a projected 3.6% rise in consumer prices this year, it might be the best way to go.
Gas prices obviously remain front-and-center of the news, so let’s check in and see how it’s affecting consumers on both sides of the Atlantic, plus an industry that is arguably getting hammered even harder…
National Average Gas Price
Following a daily march higher over the past three weeks, the current national average gas price per gallon sits at an ugly $3.93. But with gas in 11 US states already over $4 a gallon, this number is now more for headlines than anything else. Bottom line: It’s expensive!
Little wonder that AAA projected a drop in Memorial Day travelers this year - the first decline since 2002. Many have also scaled back their plans, due to rising gas prices. And MasterCard reported a 7% drop in gas sales in the week leading up to the holiday.
But it wasn’t just Americans feeling the pressure at the pump this weekend…
Truck Jam
Like in the US, Monday was also a holiday in Britain, with the long weekend giving Brits a similar chance to hit the road for a short break.
Trouble is, UK gas prices are 17% higher than this time last year, with diesel prices almost 30% higher. The national average is currently $1.14 a liter and $1.26 a liter respectively. In US terms, that’s about $10.16 and $11.23 per gallon.
You can see why 16% of respondents to an Automobile Association survey said they plan to use their cars less.
What bothers many Brits, though, is that about 60% of fuel costs go into the government’s coffers in taxes. And today, the nation’s truckers took their protest to the streets.
In a mass demonstration against high prices and the government’s planned 2 pence per liter fuel tax rise (set to come into effect in October, having been postponed from April), hundreds of truckers set off from various parts around the UK and conducted a “go-slow” along the motorways.
One convoy ended at London, where the truckers handed a petition to the government at Downing Street. The other convoy, starting from further afield, handed its petition to the Welsh Assembly in Cardiff because (ironically), the trip to London would have cost too much.
The underlying problem that the trucking industry faces today is certainly not exclusive to Britain, though. High fuel prices are hammering both British and American truckers. So could America see a similar backlash?
America’s Big Rigs Have Big Problems
Actually, it already has. You may remember some truckers driving their rigs to the Capitol in Washington, D.C. in early April to protest against high fuel prices and imploring Congress to provide some relief measures.
You can see why. While diesel prices are up 30% in Britain over the past year, the price has blasted 80% higher in the US - from $2.50 a gallon this time last year to $4.50 today, according to the New York Times.
When it costs $1,125 to fill up a 250-gallon fuel tank, that clearly crushes any kind of profit margin that trucking companies hope to generate.
In fact, the American Trucking Association says times are so tough today that during the first quarter, 935 companies with fleets of five trucks or more went out of business. That’s up an astonishing 143% from the 385 in Q1 2007 - and is the worst quarterly “bust rate” since 2001.
In total, 45,000 trucking vehicles have permanently pulled off America’s highways since early 2007, according to America’s Commercial Transportation Research.
The domino effect of this is far-reaching. Reduced profits can erode employee wages, decrease supplies of goods, and create more potential for failing companies. In turn, that can cause bankruptcy and dents GDP growth.
So is there a way to play these developments?
Hit The Road (The Railroad, That Is)
In a desperate attempt to offset some of the costs, some trucking firms are turning to rail companies.
While trucks can only haul so much and are directly impacted by rising gasoline costs, rail companies can absorb soaring oil prices more easily, as they can haul more goods. A few of the biggest names in this area include:
Burlington Northern Sante Fe (NYSE: BNI) - a firm that Warren Buffett has invested heavily in… Union Pacific Corp (NYSE: UNP)… and CSX Corp (NYSE: CSX).
All three are also members of the Dow Jones Transportation Average (^DJT), which is a remarkable story itself…
Transports Bust The Trend
Remarkably, despite the march in oil prices to over $130 a barrel, that hasn’t stopped the Dow Transports from surging, too.
This is a major reversal in the historical trend. Oil prices and the Dow Transports usually move in opposite directions - and you’d think that with fuel being the biggest expense for Transportation Index companies and high oil prices pressuring so many areas of the transportation sector, the index that represents these firms would also be under severe pressure.
Not so. The DJT is actually up 15% in 2008, and as my colleague Jim Stanton reported in his bi-weekly “Sector Watch” column last Monday (May 19), the index raced to an all-time high of 5,550.17 on the same day. Jim applied some technical analysis to the index - and how to play the next move profitably through the index’s ETF - so take a look.
With the index made up of airlines like American (NYSE: AMR), Continental (NYSE: CAL), JetBlue (Nasdaq: JBLU) and Southwest (NYSE: LUV), plus shipping companies FedEx (NYSE: FDX) and UPS (NYSE: UPS) - all of which are buckling under the weight of high oil and gas prices - economists are now hotly debating whether it’s throwing the market a curveball.
Traditionally seen as a sign of US economic strength and turnarounds, the fact that the index is soaring while consumers and the economy are struggling is a source of confusion.
Some speculate that because airlines hold less influence in the price-weighted Dow Transports index these days, the other firms’ stronger performances are offsetting the losses from the airline industry. However, some also agree that the index needs to be rebalanced to boost diversity and better reflect the economy.
Yes, consumers are wilting under inflationary pressures as we head into summer. And yes, the trucking companies are some of the hardest hit firms.
But against the odds, the Dow Transportation Index is one of the market’s best performers, with some of the companies within it still going strong. Choose wisely and you could grab profits from a sector that many investors wouldn’t even consider at the moment.
Best regards,
Martin Denholm
Sphere: Related ContentBiotech Pharmaceutical Industry Update
May 24, 2008
Biotech Beauty Is In The Eye Of The Big Pharma Beholder… And Big Pharma Is Smitten
Smart Profits Report Issue #524
By Marc Lichtenfeld Investment Director, Smart Profits Report
The Pharmaceutical & Biotech Licensing and Deal Making Summit.
Sounds like a pretty grand title, doesn’t it? But it’s actually a rather intimate gathering of business development leaders and investors in the sector.
And in terms of the healthcare sector’s future growth potential, this a major opportunity to showcase strengths, build relationships, and discuss deals and developments.
Companies of all sizes were represented - from tiny startups to pharmaceutical giants such as Merck (NYSE: MRK). And although Merck didn’t admit it, the trend was abundantly clear throughout: Big Pharma needs new drugs in its pipeline - and firms are willing to pay for them.
Here’s an inside look at the conference… the scoop on the M&A deals done already… and the next potential deals in the works…
How Much Would You Pay To Get What You Want? Ask Glaxo…
Although I made a speech at the conference, there was also plenty of time to discuss deals. And in this arena, beauty really can be in the eye of the beholder.
For example, several of us were chatting about GlaxoSmithKline’s (NYSE: GSK) recent acquisition announcement of Sirtris Pharmaceuticals (Nasdaq: SIRT).
Here’s a deal where Glaxo paid 80% more than Sirtris’ closing price to buy the company. Many of us speculated that a bidding war must have taken place in order for Sirtris to attract such a high price, given that its technology is unproven.
Finally, a gentleman who had been silent during the conversation spoke up. He’s the head of business development for one of the major pharmaceutical companies and revealed that Sirtris had courted him about a buyout deal.
He passed on the offer, but informed us that there was actually no bidding war for Sirtris. Glaxo merely paid the price that it believed was necessary to get the deal done. Perhaps the firm feared other companies were interested, or maybe just wanted to be certain that its offer would be the best.
But 80% is a serious premium to pay. And it’s not even the highest…
With Piddly Pipelines And Expiring Exclusivity, Big Pharma Is On The Prowl
When I was in my early twenties, I had one friend who was always on the prowl for Mrs. Right (or at least Mrs. Right Now) whenever we went out.
The evening would kick off with him boasting about how he would end up with the most beautiful girl in the bar. As the night wore on, though, he gradually lowered his standards. By the end of the evening, fueled by desperation (and perhaps a little Jagermeister), he was willing to be with any woman that had a pulse.
The healthcare M&A picture right now reminds me of that situation - with one exception. Some Big Pharma companies have become even more desperate than my buddy!
With patents expiring and pipelines empty, they need to add some in-house research and development stat! That’s why you’re seeing firms like Glaxo pay premiums of 80% to acquire their object of affection.
Even that sky-high amount wasn’t the highest. Last week, Intercell paid a whopping 126% premium to acquire Iomai (Nasdaq: IOMI).
With small firms able to garner such high prices, it puts virtually every small-cap biotech in play. Here’s my favorite…
Top Of My Biotech List
Already recommended to Xcelerated Profits Report readers back in August 2007, BioMarin (Nasdaq: BMRN) is a profitable biotech company.
Let me repeat that: BioMarin is a profitable biotech company - a rarity in the sector.
Therefore, a deal for BioMarin would be accretive (i.e. would add profits to the buyer’s bottom line). And even if BioMarin doesn’t get bought, we can just continue to watch the company grow its profits and revenues, as well as watching our investment grow.
Since recommending it in August 2007, we took 99% gains on the first half of the position on December 14, 2007 and are currently up 116% on the second half.
I love the long-term prospects of this company. It has three marketed products that treat rare diseases. And although the patient populations are small, the drugs carry a hefty price tag - well into six figures per year - and insurance companies have signed on to pay for it.
But BioMarin isn’t alone…
The Key To Finding Biotech 10-Baggers
There are several other companies on my biotech watchlist that I’m very excited about. Some could easily be acquired in the next 12-24 months. However, buying a stock hoping that the company gets sold is not a great investment strategy.
The very best healthcare and biotech firms are the ones that have game-changing technologies or drugs. If they get acquired along the way, so be it. But if not, these kinds of companies can double, triple, or more.
So how do you find them? Stay tuned. On Thursday, I’ll give you more details on my selection process for finding stocks poised to double (and that’s a minimum expectation), taught to me by two of the greatest contrarian investors in recent decades.
Meantime, suffice it to say that I’m very bullish on biotech right now. Promising new drugs, combined with Big Pharma’s desperation for growth, should enable the sector to outperform over the next several years. If you can handle a little risk, you’d be wise to add some exposure to the sector in your portfolio.
Marc
Sphere: Related ContentMoney Making Opportunities in Transportation
May 19, 2008
Sector Watch: Taking Aim At The Record-Setting Dow Transports
by Jim Stanton, Technical & Quantitative Analyst
Monday, May 19, 2008
Since the Bear Stearns blowup on March 17, two stock indexes have clearly led the way ahead.
The first is the S&P 400 Midcap Index (^MID), which closed well above its 200-day moving average last week. It’s not entirely surprising that this index has performed well, given investors’ major wariness with large-caps in the wake of the Bear mess.
But the other strong performer is something of a surprise. Not only did it also close well above its 200-day moving average, it also made new all-time highs this morning.
I’m talking about the Dow Jones Transportation Index (^DJT). This is a remarkable feat, given the huge oil price runup to record highs, and the underperformance of airline stocks.
I’m going to dig a little deeper into this index today, using the ETF that represents it - the iShares Dow Jones Transportation Average (NYSE: IYT)…
Understand The Theory To Unlock The Profits
In order to understand the current movement of the Dow Transports - and where the index might go next - we need to apply a quick bit of theory. Dow Theory, to be exact…
Last week, all the stock indexes traded at new recovery highs. All except the most widely followed one, of course - the Dow Jones Industrial Average (^DJIA), which is trading just a few points shy of its May 2 high.
This creates a minor “Dow Theory” divergence. Simply put, this means that both the Dow Industrials and Dow Transports have to make new highs together in order for a bull market to stay intact. The same theory goes for a bear market - both indexes have to make new lows around the same time (allowing some time for the lagging index to catch up) in order for a bear market to continue. When one index does not confirm the other, within a reasonable amount of time, there is a good chance for a reversal in both indexes.
While you’ll find a few different interpretations of Dow Theory and how it triggers buy and sell signals, I prefer to use this simplest form of it to guide my analysis. So let’s get to it…
Dow Theory In Action
Since last July, we’ve seen a Dow Theory sell signal and Dow Theory buy signal on the Dow Industrials and Dow Transports.
The Sell Signal: The Dow Industrials went on to make new closing highs in October 2007, but the Dow Transports were lagging badly and set up a Dow Theory sell signal, which led to more than a 2,000 point drop in the Dow Industrials.
Over the final part of 2007, both indexes sold off and made new correction lows in late January. This signaled that they were still under a Dow Theory sell signal.
The Buy Signal: In mid March, the Dow Industrials made a new closing low for the year, but the Dow Transports fell well short of doing the same. As a result, the indexes reversed course, due to a new Dow Theory buy signal, which so far is still in force.
Dow Theory signals do not occur that often, but it’s well worth your time to check on them occasionally for potential reversal points. So with that in mind, let’s break down the Dow Transports a little more, using the index’s ETF…
Follow The Leader - The Dow Transports
I consider the Dow Transports to be a leading index indicator. For example, more often than not, it’s the index that creates the divergence (although I’ve seen it occur in reverse on more than one occasion, too).
This morning, IYT traded above its July 2007 high, which is also a record high for the stock. Having run some analysis through my ESP Profit System trading platform, the next intermediate-term upside target for the stock is up around $107.85.
However, since we’re dealing with a weekly chart, it could take weeks (and possibly longer) for IYT to reach its resistance area.
But here’s the thing: Because the Dow Industrials are currently more than 8% below their October highs, the Industrials will have to play catch-up in order to avoid another Dow Theory sell signal.
However, as long as the Dow Industrials are moving higher, or even go into a sideways consolidation pattern, without triggering a daily sell signal, we have to allow some time to confirm the move. In this case, it could take a matter of weeks.
Shorter-Term Outlook
As I mentioned, there is a minor Dow Theory divergence in place at the moment. But if the Dow Industrials can trade above 13,133 - its May 2 high - the rally should continue. In addition, because the S&P 500 and NYSE Composite are at new recovery highs, the Dow is likely to follow suit.
However, if it fails to get above 13,133, and instead closes below its uptrend line around 12,860 (the line drawn off the March lows), be very cautious. A move below 12,715 would trigger a minor Dow Theory sell signal.
Bear in mind that because some of the indexes have rallied over 20% since the mid March lows, they’re getting overbought, so we’ll probably see a more meaningful correction once the rally runs out of steam.
Until next time…
Jim Stanton
Sphere: Related ContentThe U.S. Dollar Rallies
May 17, 2008
Sector Watch: A Chance To Play Euro Downside As The Dollar Rallies
by Jim Stanton, Technical & Quantitative Analyst
According to a well-known investment adage, the past six months was the best time to be invested in the stock market.
Really? Tell that to Wall Street and the millions of investors who saw their portfolios get hammered between November and April. According to the Stock Trader’s Almanac, although April was stronger, it concluded an otherwise wretched six months, in which the Dow Industrials lost 8%. It was the worst “best six months” for stocks since 1973, when the Dow fell over 12% amid the OPEC oil embargo.
But as the phrase, “Sell in May and go away” alludes to, we’re now historically into the “worst six months” of the year for stock market investments. However, in an unusually tough year, when the housing and credit crises have sent the economy into a tailspin, plus the added factor of the presidential election in November, this old indicator may not apply.
Speaking of presidential elections, some good news…
Stocks Love Elections
Given that the stock market hates uncertainty, you might assume that it would perform poorly during election years.
On the contrary. Despite the unknowns and prospect of a new political regime, stocks actually tend to rise in presidential election years, no matter who wins.
For example, Dow Jones Industrial Average has posted positive returns in nine of the past eleven presidential election years. Since 1948, the benchmark S&P 500 index has gained an average of 9.3% during election years.
So what does the immediate future hold?
Smooth Sailing, Or Just A Teasing Bear?
Since it bottomed out in January, the Dow Jones Transportation Average (DJT) has performed the best of all the “leading indexes.”
For example, when JP Morgan (NYSE: JPM) and the Federal Reserve bailed out Bear Stearns on March 17, most of the indexes tested, or traded below, their January lows. But the Dow Transports didn’t even come close to doing so.
Since then, it’s led the other indexes higher and as of last Friday’s close, all the indexes had traded above their February highs, while the Dow Transports traded to within 100 points of breaching its all-time high of 5,487.
Does this mean it’s clear sailing ahead or are we just witnessing a bear market rally?
So far, the indexes have performed admirably since March, but when you look at the daily charts of the Nasdaq Composite and S&P 500 (the most widely followed indexes), both are approaching their 200-day moving averages.
The only indexes that are currently above their 200-day moving averages are the Nasdaq 100 and S&P 400 (Mid Cap). In order for the rally to continue, the S&P 500 and Nasdaq Composite need definitive closes above their 200-day moving averages.
At the moment, those levels are 1,432 on the S&P 500 and 2,523 for the Nasdaq Composite. If these indexes can close above these levels, while the Dow Transports goes on to set a new all-time high, the presidential cycle should have more influence.
Let’s dig a little deeper…
Sizing Up The Spread For Clues To The Market’s Direction
One chart that I watch closely in order to gain clues to market direction is a daily chart that plots the difference (spread) between the daily closing prices of the Nasdaq 100 and S&P 500.
When the price is moving up, it means the Nasdaq 100 is outperforming the S&P 500 and that the markets are generally moving higher.
The past two weeks have seen the spread between the two indexes not only close above the downtrend line drawn off the October highs, but also above the uptrend line, drawn off the 2006 lows.
In addition, the 50-day moving average is above the 200-day moving average and the price action is currently above them both.
But don’t rush out to buy stocks en masse just yet. Although this spread chart currently paints a bullish picture, the indexes are pushing into overbought territory, so I’m expecting a pullback sooner rather than later.
In order for the bulls to maintain control, the spread must not close much below the uptrend line off the 2006 lows on the first decent pullback. This level comes in around the 548-550 area.
We’ll finish today by looking at the currency sector…
Dollar Up, Euro Down On Speculation That The Fed Is Finished With Its Rate Cuts
Is the Federal Reserve finished with its interest rate-cutting program for the time being? Word on the trading floors is that this might be the case, after the bankers lowered rates by a further 0.25% last week.
Speculation that the Fed will now sit back and wait for its moves to kick in caused the U.S. Dollar to close at its highest level in two months. In turn, that led to some selling pressure in many of the commodities, as well as the other currencies.
The drop in currencies has triggered some sell signals in the euro, so let’s take a look at the ETF that represents it - the CurrencyShares Euro Trust (AMEX: FXE). Below is a daily chart.
As recently as April 22, FXE hit its all-time high just above $160 a share. Since then, however, it’s endured some selling pressure, closing below its 50-day moving average.
The chart pattern suggests that the stock should undergo at least an “A-B-C” wave correction:
The “A” Move: This is the stock’s current performance - headed downward.
The “B” Move: Once the initial selloff dries up, we’ll see a “B” wave rally.
The “C” Move: The selling will resume again, taking the stock down to new correction lows.
From current levels, a 38% Fibonacci retracement would take the stock back up to the $156.40 area and a 50% retracement would take it up to the $157.20 area - very close to the middle of the trading channel.
If the stock rallies back up around $157 and then struggles in that area, it would present either an opportunity to short the stock, or put options, as it moves down to new correction lows.
If the stock moves lower from here, you can recalculate the retracement levels, but be careful. The “B” rally only has to stay above the lows for a little more than a day before the “C” wave can begin.
Catch you here again in two weeks.
Jim Stanton
Sphere: Related ContentThe Crude Oil Trend Is Your Friend
May 12, 2008
Smart Profits Commodities Corner
Monday, May 12, 2008
by Lee Lowell, Futures Options & Commodities Specialist
To most people, the idea of sitting in front of a screen all day sounds pretty darn boring.
But to a former pit trader like me, nothing could be further from the truth. Given that I was one of the guys who set the price for crude oil when I worked on the trading floor at the NYMEX, I can tell you that watching the consistent upward march of oil prices today is absolutely fascinating.
To see this market in action on a daily basis is just amazing. Oil is king of the jungle and its ability to set new all-time highs almost daily is impressive.
When I last wrote to you two weeks ago, crude prices had just eclipsed the $120 a barrel mark. But as I’ve noted here before, you need to be very careful if you’re thinking about any kind of oil-based investment…
Beware The Pullback In Any Market… But Particularly This One
For several weeks now, the general trend in the oil market is pretty straightforward: A steady climb higher, but with large, profit-taking pullbacks along the way. After that, the rising trend continues, most likely setting new highs in the process.
If you know what to look for, you can almost set your watch by this trend. And after hitting another psychologically important mark at $120, the market didn’t disappoint.
Prices then hit the skids and shed a quick $10 a barrel - $10,000 for each futures contract.
But just as quickly as it fell, all the subsequent trading days have seen upside moves, culminating in oil now sitting at another all-time high of $126 a barrel. You can see the moves on this chart.
That $16 swing from pullback to new high added another $16,000 on every single futures contract held. So you can see just how lucrative the commodities market can be.
Unless some monumental incident occurs that turns it to the downside for good, this trend will continue for the foreseeable future.
Speaking of strong trends…
Gassing Up: Two-And-A-Half Year High For Energy’s Other Big Driver
Story Continues Below…
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What’s that old adage about how “the trend is your friend?”
Oil certainly isn’t alone in establishing a tradable trend. Natural gas futures have also enjoyed big moves over the last two weeks.
Since my last update, the front-month natgas futures contract slumped 1,000 points from a two-and-a-half year high of $11.400 per mmbtu, only to scream back higher and set even newer two-and-a-half year highs.
Right now it’s topping out at $11.600 per mmbtu - an $11,000 per contract move in the last two weeks. If you want action, the energy market will certainly provide it.
Oil and natural gas continue to be best buddies at the moment, moving in tandem, despite relying on very different underlying fundamentals. This upside momentum is because large hedge funds have their hands all over the market like vultures.
Don’t expect to see a long-lasting selloff in natural gas any time soon, especially with hurricane season heating up in June.
Not So Much Heavy Metal Here
Having enjoyed a furious price runup, only to get smashed back down again over the past month, it appears both gold and silver prices have started to stabilize.
In truth, a pullback wasn’t likely to last long, as many investors love to keep hard assets like gold and silver in their portfolios during times of both financial and geopolitical uncertainty. These metals are one of the ultimate safe havens - and now is no different.
In fact, it looks like these two markets may be getting ready to continue on with their eventual march higher. In the short-term, however, I believe we’ll see more consolidation at current levels.
Soft Relief
If it’s relief you want, the “softs” market (coffee, sugar, cocoa, orange juice and cotton) is providing it.
These commodities continue to tread water at price levels that have held over the last few weeks. However, this “basing” pattern is usually a precursor to large, sustained moves once it breaks out in one direction or the other, so prepare for some action here soon.
Specifically, coffee and sugar seem primed for the best upside breakouts, since they’re both sitting close to near-term lows.
As for cotton and orange juice, we’ll have to hang tight on these for a little while yet, until they decide which way they want to move.
But we’ll be monitoring the weather for the next few months. You may wonder what that has to do with commodities investing - but it’s a hugely important factor.
Since supply and demand and weather patterns are two major drivers of commodities prices, we’ll be paying attention to how the Brazilian frost season affects coffee prices and how the US hurricane season affects orange juice market.
Grains Try To Go 3-For-3 To The Upside
As for the grains, we’ve seen divergent moves in its three main components - corn, soybeans & wheat.
Wheat is hovering just above its 200-day moving average line - a very reliable support level. If it can hold here and start a renewed uptrend, it could present some opportunities.
Meanwhile, corn continues to trade near the top of its recent range, while soybeans prices are still bouncing between large moves both up and down. This is an erratic market at the moment, but it does appear tilted towards the upside.
I’ll be back in two weeks with the latest roundup of the commodities world. But these are the trends to keep in mind if you’re thinking of investing. Remember that with such volatile swings, it’s important to cap your risk.
Lee Lowell
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