The US Treasury market seems to be running out of steam here in spite of supportive data from economic fundamentals. Canadian long term bonds have kept pace with the trend to lower yields in the US market and seem to be poised for a breather as well.

The cream of the financial crop is relentlessly taking turns at blowing up. Last week it was Fannie and Freddie – the largest mortgage companies in the world, this week it was Lehman Brothers - another one of the largest investment dealers on the planet, next week it looks like it could be AIG – not long ago the largest insurance company around – that might be on the bankruptcy block. I keep getting asked the question when this crisis will be over and the news indicates that the financial boat just keeps on springing new leaks. It seems to me that this might be good time to replace Bozo Bernanke and Powerless Paulson with a bunch of octopi as more hands might have a better chance of plugging up more leaks in that sinking financial boat.

The Treasury market streaked to 3 positive weeks in a row even after higher than expected inflation data.

On the financial sector front, write-offs have now exceeded $500 Billion. Conservative estimates from established organizations such as the IMF are forecasting the final tab to be over a trillion dollars. Meanwhile more pessimistic forecasters such as Nouriel Roubini are looking for double that figure by the time it is all done. The take away from this story is that the write-offs are nowhere close to being finished. The flavour of the past week was auction rate securities. A number of the leading banks and dealers have agreed to buy back billions of these securities to add to the inventory of impaired assets on their books. Capital requirements will be an ongoing issue in the financial sector. As long as they need to raise massive amounts of capital, financials will struggle to put in a long term bottom. On-going problems on this front are likely to support the bond market.

Short term rates lead the decline in yields globally again last week. The majority of commodity charts now look like blow-off tops. Bond markets world wide are starting to realize that inflation is a lagging indicator, so the high CPI and PPI readings are discounted as yesterday’s news. While PPI is close to 10% at this time, I would not be surprised to see a negative sign in front of it 12 to 18 months from now. The credit crunch is still gaining momentum. In a recent survey over 80% of bank lending officers indicated that they plan to further tighten lending standards. The bond market has been in a trading range for the most part of this year with the 10 year Treasury note yield stuck around 4%. While the Fed has eased aggressively over the past 12 months, their efforts to increase liquidity and get the Treasury to print boatloads of new money have failed miserably. They are pushing on a string. Staying safe in the short end of the Treasury market has been and continues to be the most stable investment out there. At the expense of repeating myself, I would like to reiterate that as time passes by I remain convinced that the Fed will not raise rates in the foreseeable future.

The Treasury market managed to make it 2 positive weeks in a row even in the face of a stronger stock market.

Last week it was Fannie Mae and Freddie Mac’s turn to report losses that were out of this galaxy. Both of those stocks are now trading comfortably under $10 per share, but the Administration still maintains that there is no bailout necessary to save these mortgage behemoths. Credit spreads remain under pressure and liquidity is not improving. The Wall/Bay street analyst community is slow to react but the torrent of downgrades keep poring in as a result. On-going problems on this front are likely to support the bond market.

The Treasury conducted a couple of quarterly refunding auctions: 10 year notes on Wednesday and 30 year bonds on Thursday. The auctions were both very well received by both domestic and international investors. As a matter of fact, the 10 year Note was so aggressively bought that the bond market rallied strongly into the 30 year auction. The other event of some significance was the FOMC policy meeting last Tuesday. As expected, the Fed left its overnight rate unchanged at 2%. As per my previous comments, I am standing by my forecast that the Fed is months if not years away from changing the Fed Funds rate and when they do, they will be more likely lowering - not raising rates as the consensus would have you believe at this point. In addition to the Fed meeting, a couple of European Central Banks held policy meetings as well on Thursday. Both the ECB and the Bank of England acknowledged that the European economies have slowed considerably and they have no immediate plans to raise rates at this point. The US Dollar had its best week in years in reaction to the dovish chatter from Europe’s leading central bankers. Add to the pile the weak economic reports coming out of even countries that have resource based economies such as Canada and one gets a picture of a significant slowdown not only in the USA but also across the rest of the globe. As a result a number of bond markets are now discounting further Central Bank rate reductions. In Canada for instance, the Central Bank Rate is 3%, but the 2 Year Bond Yield last traded at 2.72%, indicating that in the bond trader’s opinion the Bank of Canada rate is artificially high and it should be lowered sooner than later in spite of the concerns expressed about inflationary pressures after the last couple of BOC meetings.

Buy bonds; wear diamonds! The Treasury market rallied a couple of points last week.

In spite of the bounce in the financial stocks, the negative news continues to pour in on the earnings (or lack thereof) front in that sector. Last week we saw Merrill Lynch in the news again as they wrote off another $5 billion+ in assets. Leading basket cases Fannie and Freddie will be rescued by the government but that will not be much help to the shareholders. Ongoing problems on this front are likely to support the bond market.

Next week the Treasury market will have a slightly different focus from the second tier economic data and the other markets such as stocks, energies and currencies. The Treasury will conduct a couple of quarterly refunding auctions: 10 year notes on Wednesday and 30 year bonds on Thursday. The auctions usually have a negative effect on the bond market, especially in the case of long term supply such as the upcoming issues.

The other event of some significance will be the FOMC policy meeting on Tuesday. The Fed has never raised rates in a rapidly deteriorating employment environment like the one we are experiencing now. Last week’s employment news pretty much ensured that the Fed will leave rates unchanged next week. In spite of the fighting words, I don’t think the Fed is about to change tactics on that front, especially heading into a presidential election campaign. The shorter maturities of the yield curve remained well supported. I am standing by my forecast that the Fed is months if not years away from changing the Fed Funds rate and when they do, they will be more likely lowering - not raising rates as the consensus would have you believe at this point.

Consolidation and pullbacks are normal and should be viewed as healthy for the sustainability of a bull market in commodities. This may be the perfect time to load up on commodities that have lost their luster where the fundamentals are still sound. The recent correction was attributed to the shifting market sentiment that we may have a global slowdown and threats from regulators as opposed to a change in supply and demand characteristics. Instead of exiting commodities completely, the smart money is likely to move from the more high profile contracts such as energies to more innocuous contracts such as livestock and softs. In the case of crops, any substantial increase in the supply of one crop is invariably at the cost of some other. The world’s arable land is diminishing, while demand driven by population and incomes are increasing. The world has consumed more food than it has produced for the past five years. That being said we are still friendly to agriculture if one can deal with the volatility.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

The U.S. Department of Energy said that crude oil supplies were down 1.6 million barrels last week to 295.3 million barrels and 100,000 barrels were added to the Strategic Petroleum Reserve. September crude oil fell $6.24 to $123.26, with prices now almost $25 off their highs. We have yet to give up on seeing $150 but the path of least resistance for now remains down. Presently, we are not interested in trading oil long or short as the volatility is a bit rich. Support comes in at $122, which is the 100 day moving average in addition to being the level where the last run started in early June when prices rose from $122 to record levels. If that level was to give way the next stop should be $116 followed by $106 on a total collapse. If we were to change direction once again resistance comes in at $132 followed by $135.

Supplies of gasoline were up 2.9 million barrels, while heating oil supplies were up 1.2 million barrels. Over the past four weeks, gasoline demand was down 2.4% from a year ago while distillate demand was up 3.6%. Gasoline and heating oil will continue to look for guidance from crude and where crude goes they will follow. September RBOB lost 14 ½ cents last week and closed under the 100 day moving average for the first time since August of 07’ for this particular contract. Prices have come off 17% from their highs just 2 weeks ago, but with continued demand destruction we could see prices come off more. Heating oil gave up ground as well as prices in September lost virtually 20 cents on the week closing at the lowest level in 12 weeks. We could find some moderate support at last week’s lows, but if we trade south and break support we may not see any buying emerge until we get closer to $3.32 on September. First resistance comes at $3.74. We would stand clear of gasoline and heating oil until we get a clearer picture on crude.

Natural gas suffered the same consequence as prices were hit particularly hard giving up $1.56 in September; in the last 3 weeks prices have come off 33% or in dollar terms $44,000 per contract in the futures market. EIA reported an injection of 84 BCF which was greater than the 5 year average of 57 bcf and higher than last year at 70 bcf. Total gas in storage stands at 2.396 trillion cubic feet which puts stocks 12.7% under last year’s levels and 0.9% below the 5 year average. We want to be a buyer of call spreads into September and October but have exercised patience as opposed to try and catch a falling knife. If we start to see signs of a bottom we will be quick to act as we think this correction may be a bit overdone and on any signs of increased demand or perhaps a hurricane we could see prices pop back $1-2 relatively quick. Although on the daily chart we are oversold we did trade below the 200 day moving average last week, which is not particularly bullish. We expect the selling to not necessarily abate, but to slow this week. Support comes in just below $9 with resistance at $9.80 on September. If probing for a bottom make sure to use stops as this market is unforgiving because of the massive leverage and sporadic movements.

The talking heads are calling a top in commodities and claiming the bubble has burst, we prefer a pullback in an ongoing bull market to explain the recent slump in commodity prices. Remember that whether they are bull trends or bear trends, long-term trends don’t die easily. Based on current market conditions the current corrections are just that, corrections and nothing more. That being said you may want to wait for the volatility to subside before repositioning.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

The U.S. Department of Energy said that crude oil supplies were up 3.0 million barrels last week at 296.9 million barrels, more than expected, and 100,000 barrels were added to the Strategic Petroleum Reserve. September crude oil dropped $15.88 or 11% to $129.47 to post its largest one week drop in history. The prognosticators fail to point out that even with the recent sell off prices are still up over 60% ytd, so we are not out of the woods just yet. Next support comes in between $122 and $124 with resistance at $133, followed by $139 on September. We would caution traders to throw in the towel for higher prices and to shift to a bearish bias as the recent decline has taken prices to over sold levels and we still would not rule out a trade above $150 in coming weeks to months. For now we would stand clear until the sell off has fully run its course.

After extending its gains for a 4th week in a row, the Treasury market pulled back as equities recovered from the abyss.

The trend of bonds and energy trading in lock-step remained intact as bonds now sold off as energy prices corrected sharply. There was a recovery in stocks – especially financials during the latter part of the week, so the reverse safe-haven flows pressed bonds lower. The sharp increase in headline inflation also added fuel to the sell-off. Real returns on Treasury bonds are now negative across the entire yield curve, as even 30 year bonds provide a -.35% return after adjusting for inflation. That is great news for spenders and the government (who gets to borrow massive amounts of money at ultra low rates) but not so good for savers.

The drumbeat of anti-inflationary rhetoric continues from various Fed officials. The Fed has never raised rates in a rapidly deteriorating employment environment like the one we are experiencing now. In spite of the fighting words, I don’t think the Fed is about to change tactics on that front, especially heading into a presidential election campaign. The shorter maturities of the yield curve remained well supported. I am standing by my forecast that the Fed is months if not years away from changing the Fed Funds rate and when they do, they will be more likely lowering - not raising rates as the consensus would have you believe at this point.