10' Review

January 5, 2011

By: Matthew Bradbard

Maybe I have a bias since I run a Commodity brokerage and recently set up a CTA but I believe commodities are currently the best game in town. Please do not misinterpret me that does not mean commodities should be perceived as a get rich quick scheme or commodity trading is even appropriate for every investor. Trading commodity futures and options is extremely risky and not for the faint of heart. In my eyes commodity investors must posses two things, first the financial wherewithal and second the intestinal fortitude. We suggest conservative investors have 5% of their portfolio exposed to commodities and aggressive investors have no more than 20% of their portfolio exposed to commodities.

Reviewing what happened last year in commodities: Metals traded higher for much of 2010, standouts include copper and gold reaching record highs while silver appreciated nearly 85%. As did more obscure markets like pork bellies and cotton trading at record highs. Sugar and cocoa hit their highest level in three decades. And while oil is well off its 2008 peak near $145 trading at current level prices are higher than before the collapse of Lehman Brothers. It has been a good two years for commodities as a whole; the Dow Jones-UBS Commodity index was higher by 16.8% in 2010 after an appreciation of 19% in 2009. The run higher in commodities is largely due to unquenchable demand from China and other emerging markets. We see no let up on demand in the immediate future and identify further complications by the slackening growth in drilling, exploration, mining and farming. More money chasing fewer opportunities could also be a contributing factor. Capital is finding its way into this asset class via hedge funds, pension funds and institutional investing. According to Barclays Capital as much as $136 billion of new money may have found this space in the last two years.

There is no question bulls were in the driver's seat in the metals complex in 2010. Gold continued to shine last year marking its 10th straight positive return. Economic instability and fear of inflation were contributing factors but perhaps increased investor demand may have been the major catalyst for gold performance. Platinum and palladium were along for the ride jumping on the back of a global recovery in the automobile industry. Resurgence in industrial demand helped lift copper to record highs and aided in a near 85% appreciation in silver as well.

Last year in agriculture we started out seemingly with a supply/demand balance but circumstances quickly changed. A drought in Russia sent wheat prices soaring with corn and soybeans along for the ride. Corn ended the year up gaining over 50%, soybeans just under 35% while wheat racked up a respectable 58% appreciation. Floods in Pakistan cut the cotton harvest short and Chinese imports soared resulting in record high prices in cotton. Coffee gained nearly 80% due to some weather issues in South America, so Mother Nature played her role in 2010 increasing price instability in a number of commodities. We are not out of the woods yet as dry weather in South America currently could threaten the size of the harvest once again causing price spikes in agriculture markets in 2011. A further game changer is what decision farmers make domestically when choosing what crop to plant and how much acreage to allot.

The energy complex had its moments in 2010 but for the most part the headlines in commodities were elsewhere. Robust demand globally was tempered by record-high stockpiles. The stock market and oil for most of the year were heavily correlated so large economic forces were a bigger factor in 2010 than in years past. Prices of WTI oil remained within a $30 band in 2010 ending the year higher by just 15%. According to the IEA global oil demand was at an all-time high in 2010 and expected to expand in 2011 so it would not take much to see the price spikes in oil that we've grown accustomed to in recent years. On the supply side a number of producers have curtailed their spending due to the financial crises and have yet to come fully back on line. The distillates (HO and RBOB) followed suit tracking oil for most of the year and that should remain the case in 2011. Natural gas was among the worst performing commodities in 2010, down 20%. Prices were weighed down by increased supplies and weak demand.

Find above the major happenings in the commodities market and below the major events that shaped 2010 as a whole:

Major happenings in 2010, in no particular order:

Ø GM predicted they would make money in 2010, a bold prediction for a business that exited bankruptcy in the summer of 2009.

Ø The CBO predicted that the nation's jobless rate will not return to 5% until the middle of the decade.

Ø Ben Bernanke won Senate confirmation for a second term as Federal Reserve chairman.

Ø The Dow finished down 3.5% in January, its weakest month since February 2009.

Ø The New Orleans Saints won the Super Bowl, suggesting an up year for stocks for believers of the Super Bowl Predictor theory.

Ø European leaders refused to let Greece succumb to a credit crisis.

Ø Iraqi elections opened to violence and fraud claims.

Ø The Federal Reserve announced they will end their purchase of $1.25 trillion of mortgage-backed securities. One of its main supports for the economy.

Ø The House approved a historic healthcare overhaul.

Ø President Obama signed the healthcare overhaul into law.

Ø Greece won support for a deal that could lead to a bailout, as leaders of the 16-nation euro zone backed an accord that the IMF would serve as a back drop should the nation's debt intensify.

Ø President Obama proposed more oil drilling in the Gulf of Mexico.

Ø Q1 ended on a positive note with the Dow gaining 4.1%, in a volatile three months.

Ø Alan Greenspan came under criticism as the former Fed chairman for his role in the financial crises.

Ø President Obama and Russian President Dmitry Medvedev signed an arms-control pact, dubbed New Start.

Ø World leaders pledged to secure nuclear fuel by 2014.

Ø Ash from an eruption of a volcano in Iceland drifted across Europe causing the largest airspace shutdown in years.

Ø The Dow closed above 11000 for the first time since September 26, 2008.

Ø A BP operated oil rig in the Gulf of Mexico exploded and sank spewing oil for months.

Ø Greece's credit crises spreads to Portugal.

Ø New York's Time Square was evacuated as a car-bomb plot was evaded.

Ø Flash Crash Dow closed down 3.2% after an apparent trading glitch sent the index down nearly 1,000 points intra-day.

Ø President Obama picked Elena Kagan as his Supreme Court nominee.

Ø The European Union agreed upon a $955 billion bailout plan for the euro-zone.

Ø Goldman Sachs reported they did not have one single daily trading loss in the Q1.

Ø David Cameron took over as Britain's prime minister.

Ø General motors reported its first quarterly profit in three years.

Ø Germany banned some types of naked short-selling in an attempt to avoid excessive price movement.

Ø BP came out reporting that the oil leak was far bigger than originally estimated.

Ø The Dow dropped 7.9% in May, its weakest May since 1940.

Ø BP began its top kill operation to stanch the oil flow.

Ø The SEC signed off on new circuit breaker rules designed to tame volatility in individual stocks.

Ø The UK government unveiled a shake-up of its financial regulatory system that will consolidate power within the Bank of England and dissolve the FSA.

Ø China's decision to make its exchange rate more flexible showed a desire by the government to set its economic diplomacy on more sustainable footing.

Ø President Obama relieved Gen. Stanley McChrystal of his Afghanistan command.

Ø House and Senate Democrats took a decisive step toward a historic remapping of financial regulation, reaching a legislative compromise that will put the banks and financial institutions under tighter government control.

Ø Russian and US officials completed a spy swap.

Ø The US issued a new ban on deep water drilling until November 30th.

Ø Congress approved an overhaul of financial regulation, its biggest expansion of government power since the Depression.

Ø China passed the US to become the world's largest consumer of energy.

Ø European banks passed a round of government stress tests.

Ø US bank failures topped 100 for the second consecutive year.

Ø July became the deadliest month ever for US troops in Afghanistan.

Ø Wheat prices surged 8% after Russia announced a ban on grain exports.

Ø Japan's Nikkei slipped into bear market territory.

Ø Dow fell 4.7% in August; it's worst August in nearly a decade.

Ø Five year anniversary of Hurricane Katrina.

Ø Central banks around the world laid out Basel III; intended to ratchet up capital requirements.

Ø US poverty rate hits 14.3%; a 16 year high.

Ø Silver traded to levels not seen since 1980.

Ø Gold closed above $1300/ounce for the first time ever.

Ø BP's Gulf of Mexico well was declared as permanently sealed.

Ø The Dow had its best September since 1939; ending Q3 up 10.4%.

Ø The White House lifted its ban on deep-water drilling in the Gulf of Mexico.

Ø The GOP took back the House and the Democrats held the Senate.

Ø The US military began accepting openly gay recruits for the first time ever.

Ø The Fed announced it will buy $600 billion of Treasury's over the next eight months in a bid, known as quantitative easing hoping to stimulate the economy.

Ø A key gauge of US inflation date fell to its lowest level since 1957; when record keeping began??

Ø Gold topped $1400/ounce for the first time ever.

Ø General Motors went public.

Ø Europe issued a $90 billion bailout of Ireland and crafted a blueprint for its rescue.

Ø Silver traded to a 30-year high approaching $30/ounce.

Ø The Treasury sold the last of its Citigroup common shares.

Ø President Obama announced a tax deal that would extend the Bush cuts, reduce payroll taxes, extend jobless benefits and set the estate tax at 35%.

Ø Moody's warned about Spain's ability to service its debt.

Ø Congress approved the new tax legislation.

Ø All the major US indices finished the year in the green; the Dow higher by 11%, the S&P ending higher by 13% and the NASDAQ jumping 17%.

Many other important events took place during the year, but a generation from now, as we read the history books we will see these as the highlights.

Find attached the 2010 high, low, open and close data for the major commodities.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

            

COMMODITY OPEN CLOSE HIGH LOW CHANGE IN 2010 CURRENT
ENERGIES            
CRUDE 79.63 91.38 92.06 64.24 14.76% 90.30
HEATING OIL 2.1380 2.5437 2.5508 1.8272 18.98% 2.5422
RBOB 2.0750 2.4532 2.4628 1.8241 18.23% 2.4451
NAT GAS 5.705 4.405 6.108 3.212 -22.79% 4.473
METALS            
GOLD 1099 1421.4 1431.1 1045.2 29.34% 1373.7
SILVER 16.94 30.94 30.98 14.65 82.64% 29.198
PALLADIUM 409.85 803.3 804.9 391.2 96.00% 775.3
PLATINUM 1477.2 1773.3 1811.8 1446.2 20.04% 1730.3
COPPER 3.35 4.447 4.452 2.72 32.75% 4.408
CURRENCIES            
EURO 1.4323 1.3364 1.4276 1.1874 -6.70% 1.3146
SWISS 0.9677 1.0714 1.0762 0.8562 10.72% 1.0347
AUSSIE 0.8923 1.0141 1.0168 0.8049 13.65% 0.9913
YEN 1.0763 1.2328 1.0532 1.2466 14.54% 1.2010
LOONIE 0.9549 1.0044 1.0069 0.9213 5.18% 1.0024
CABLE 1.6118 1.5581 1.6295 1.4227 -3.33% 1.5485
KIWI 0.7220 0.7752 0.7954 0.6551 7.37% 0.7561
DOLLAR 78.355 79.288 88.80 75.235 1.19% 80.538
GRAINS            
CORN 4.1575 6.29 6.30 3.245 51.29% 6.1925
SOYBEANS 10.43 13.9375 13.945 9.00 33.63% 13.86
BEAN OIL 40.35 57.74 57.91 35.75 43.10% 57.25
BEAN MEAL 318.60 370.30 371.80 249.20 16.23% 369.30
CHI WHEAT 5.4475 7.9425 8.41 4.255 45.80% 8.0825
KC WHEAT 5.395 8.51 8.635 4.5525 57.74% 8.7325
OATS 2.7625 3.94 4.075 1.8825 42.62% 3.0925
RICE 1475.5 1399.50 1530.0 930.0 -5.15% 1382.50
DEBT            
30-YR 115'00 122'04 136'31 114'6 6.20% 119'15
10-YR 115'06 120'14.0 128'01 114'26.5 4.56% 119'07.5
5-YR 114'08 118'23.0 121'11.5 113'28 3.91% 117'00.05
EURO-DOLLAR 99.7350 99.6900 99.7512 99.1950 -0.05% 99.69
SOFTS            
COCOA 3288 3035 3234 2562 -7.69% 2852
SUGAR 27.00 32.12 34.77 13.00 18.96% 32.20
COTTON 75.90 144.81 159.12 66.55 90.79% 145.20
FCOJ 127.50 172.35 175.95 126.05 35.18% 181.95
COFFEE 136.00 240.50 242.25 126.55 76.84% 233.00
LUMBER 204.00 302.00 327.50 175.50 48.04% 313.00
LIVESTOCK            
LIVE CATTLE 86.50 107.90 108.15 84.75 24.74% 106.625
FEEDER CATTLE 95.830 121.875 122.475 95.175 27.18% 120.975
LEAN HOGS 86.50 79.75 104.45 85.13 -7.80% 78.025
 PORK BELLIES 88.80 106.50 145.50 80.00 19.93% 106.00
INDICES            
DOW 10360 11513 11564 9506 11.13% 11664
S&P  1114.60 1249.50 1258.50 1003.10 12.10% 1271.75
NASDAQ 100 1865.5 2216 2239 1698 18.79% 2269.75
CCI 489.17 629.53 630.45 447.39 28.69% 622.39
             
*Assuming open 1/4/10 and close 12/31/10         
**Assuming current as of close 1/5/11          
***Assuming Continuation charts