The first half of the year started with extreme market volatility spurred on by major fund buying and a spectacular commodity bull run. However, as in most market rallies, the turn was even more severe than the rally. Then about the start of the second quarter something unexpected happened (well unexpected for me at least). The volatility that was so prominent for the first three months of the year fell out of the market and only reappeared a handful of times throughout the quarter, just enough to tempt traders to play overpriced options and suffer a major volatility decay in their respective premiums. The year has begun as one with wild swings in underlying volatility and epic commodity price moves. It has been furthered by global commodity shortages and fund buying. The only question that remains is will it continue?

I remember when the Gulf War began and oil prices spiked to nearly $40, but almost to the day of our troops hitting the desert sand the market reversed and put oil on the road to $11 prices (man that seems like a long, long time ago!). The point is that the market's psychological tendency to buy the rumor and then sell the fact is repetitive throughout history and now is no exception. Is the economy at its worst point? While the answer is likely no the expectation is likely at its most severe fear level. The fear level will diminish as the economic downfall is realized and the stock market and U.S. dollar will benefit from a more even view on a global perspective. This is not a U.S. problem, but rather a global problem that has seen the first hit taken by the U.S. When the market perceives a more beneficial investment scenario in the U.S. as opposed to abroad the market will correct. The same holds true for oil and grains.

Energies
Without doubt, crude oil continues to dominate headlines. Inflation and a weak U.S. dollar put petroleum on a bull trend that seems never-ending. Continuing geopolitical tensions in the Middle East still light a significant fire under this market. Any attempts to call a top in crude oil were quickly squashed when faced with the buying frenzy that followed any hint of a supply disruption. Pakistan, Nigeria, Iraq, Iran - the list of hot button news stories is almost endless and the fever pitch of recent military practices seem to point to continued tensions in the centers of oil production. Stocked reserves and pledges to increase production in Saudi Arabia have done nothing to quell the supply fears. China's early year imports ahead of the Olympics and India's domestic demand increase have given rise to the notion that growing Asian markets will far outstrip production abilities. Crude oil has risen nearly 50% since the new year dawned. As fingers quickly do some pointing at everything from speculation in the markets to regulations on where to drill next one thing remains clear; the rest of this year will not lack excitement.

Not to be out shined, gasoline made a few headlines of its own. During February, the President reacted with surprise when a member of the press suggested $4 a gallon gas was possible and even anticipated. A short time later, RBOB surged ahead, leaving a wake of empty wallets at the pump. Late winter storms and unseasonable cold also set alight heating oil and natural gas. Delayed replenishment of inventories ahead of the next cold season could spell disaster, so watch for inventory numbers. Even though stockpile counts have done little to bring sanity to hysteric markets in this sector so far this year, a preemptive buildup could bring some stability.

Outlook for the remainder of 2008
Oil prices lack sustainability at current levels outside of a world war breaking out or a horrific hurricane in the Gulf. The reality is the market premium is not geopolitical. It is not what I like to refer to as Bush premium. It is not seasonal. It is not supply or demand. It is not due to fund buying. It is all of the above. Trying to attribute prices to one specific cause gets you nowhere. The general panic is priced in and the market has topped. Expect a severe correction in energies through September, creating a commodity industry-wide price relief.

Financials
To say that this year has been a bit of a roller coaster for the financial sector would be an understatement. 2008 dawned under the heavy shadow of the mortgage crisis that began in 2007. The sub prime loan meltdown had a ripple effect which seemed to have a life of its own. While many pundits tried to reassure us that they could see light at the end of the tunnel, it would soon become clear that the fallout was far from over. A sharp slide in Asian markets in the second week of the year was mirrored in an equally sharp down day in the American markets. The following week, the Fed would hold an emergency meeting that resulted in a three-quarter point interest rate cut in an attempt to prevent credit fallout. The market felt reassured and tried to remain buoyant. Banks and investment companies continued to announce write downs. Within the first ten days after the New Year, shake-ups in management at Bear Stearns pointed to deeper issues with sub prime mortgage entanglements and associated write-downs. Three months later, the investment company was still insisting all was well only hours before the emergency buyout by JP Morgan was broken to the press.

Since then, the Fed has aggressively cut the interest rate back to 2.0% and left the back door open to the issue of inflation. As prices for goods rose and the dollar seemed locked in a tailspin, the most recent Fed action was to leave things alone for the time being. In an effort to promote well-being, the government even planned and then executed the mass delivery of "stimulus" checks to millions of taxpayers hoping to prevent economic atrophy.

As we head into the second half of the year, the general consensus points to a gradual raising of interest rates to stunt inflation and give some strength to a much beleaguered U.S. dollar. The unsteadiness that has plagued the first half of 2008 has left more than a few tangled nerves in its wake and it seems likely that the jitters associated with the mortgage crisis, credit issues, and high inflation in many countries will keep advisers guessing and investors wary. The recent IndyMac failure and the possibility that Freddie Mac and Fannie Mae will need federal intervention only confirm this sentiment.

Outlook for the remainder of 2008
The stock market needs a meltdown badly to finish this correction. The key area for me is between 1100 and 1150 on the S&P, above that there is little market value. Now history has proven that Fed intervention has prematurely supported the market and forced a delay in the ultimate market failure. Look for a fake out rally to sucker value hunters in through much of July and then watch out! The dollar on the underhand is creating a rounding bottom that will be supported by a global meltdown. The world needs to catch up to the U.S. failure - we took the beat down early and will see dollar strength as the European and Asian markets feel the effects in their own right. Look for a dollar run to near 80 by year end. The yen, euro and Canadian dollar are shorts with a key level on the Canadian at 9675 and 152 and change on the euro. Bonds will remain choppy with a range between 119 and 112. The Fed has to make up their mind and bonds are stuck until they do.



Grains
Last year's shocking reduction in wheat acreage combined with weather issues in some of the major areas of production and gave the wheat market all the reason it needed to rocket higher. Starting the New Year with record low ending stocks meant that widespread winter wheat plantings were inevitable as farmers looked to cash in on the high price of the essential cereal. As we pushed into February, prices neared $13.35 per bushel ahead of March when the prospective plantings showed wheat acreage up an estimated 6 percent.

Corn, operating under the heady influence of ethanol demand, trudged slowly upwards, bolstered by the news that potential planted acreage had come down 8 percent from last year's record crushing numbers. Soybeans marked the highest acreage increase from prospective plantings at an 18 percent increase. As far as estimates went, however, mother nature had other ideas as late cold and wet weather delayed plantings. Once progress had begun, the Corn Belt couldn't get any relief and persistent rains ushered in some of the worst flooding in over a century. The low price of the dollar made U.S. grain exports a bargain and domestic ending stocks were projected lower often enough to keep support under the high prices.



Global food shortages surged and food riots were noted in several countries. Ethanol and bio-fuel mandates came under fire from the UN as talking heads were quick to blame the corn ethanol policy of the U.S. for the critically higher grain prices worldwide. From the heat of the hunger issue rose one of the biggest surprises in the grain complex in years. Lower world supply and higher prices colluded to bring the sleeper rice market to the forefront. In late April, rice reached a price which was almost double the historic contract high.

After Cyclone Nargis made landfall in Myanmar at the beginning of May, concern over rice shortages caused several Asian nations to restrict or ban exports. The storm had devastated the rice cultivation center of that nation, leaving scores dead in its wake. The USDA even included a special paragraph on the cyclone's impact in its May 9th WASDE report. Once the full effect of the storm was assessed, this grain market slipped quietly into the background once more, though it will likely never be completely forgotten.

As we approach the middle of the summer season, the full impact of flooding across the heart of the U.S. and what late plantings may have on grain yields still remains in question. High fuel costs and weather issues still remain in play before harvest season begins.

Outlook for the remainder of 2008
Grains are reeling from a post global shortage panic high and heading south in a v-shaped market reversal. They bought the rumor and sold the fact. There is still a growing and harvest season in front of us with known crop problems, and yet there is little left to create a reason for fresh highs. This means Sell! Sell! Sell! The rubber band effect in grains will be spurred on by a mass fund exodus and the end of the ethanol craze.

Meats
Grain prices put heavy financial strain on livestock producers from 2007 through to this year. Higher slaughter rates and reduced head counts are expected. For cattle, the higher feed prices have resulted in heavier weights being placed on feed lots. Lower farrowing for hogs is forecast in the most recent WASDE to be partially offset by larger litters. U.S. exports remain strong as the growing meat markets in Asia bolster demand. Heavy political back and forth has finally paid off in South Korea which has now opened itself up to import U.S. beef. Overall, North American meat production is estimated to be on the decline not only through the rest of this year but also into 2009.

Outlook for the remainder of 2008
Cattle is simple right now - falling grain prices means plummeting cattle prices. Hogs remain in a wide intermediate range and nothing sets up a change in the second half of 2008. Buy the high 50s and sell the high 70s.

Metals
Gold has long been revered as a haven during times of financial uncertainty and the first quarter of this year was no exception. A steady climb took gold to record highs and left more than a few gold bugs saying "I told you so". However, towards the end of March gold - like many other commodities - started to dip as concern over a global economic slowdown led to the conclusion that demand would fail. Gold has regained some ground through the second quarter as prices between $850 and $900 look like bargains to inflation hedgers. Silver has ridden on the coattails of gold prices, hitting highs above $20 an ounce. Copper prices have flown in the face of critics who suggested that the housing boom going bust would cut demand for the building applications of the base metal. Holding well above $3.50 for most of the first half of this year, copper has also seen price movements on copper mining strikes in Peru, Papua New Guinea, Mexico, and Zambia.

Gold and platinum continue to face mining issues associated with the failure in South Africa to secure continuous and full power to mines. How much this will affect supply has not been determined, but the issue seems to be exasperated as mining safety causes strife between miners unions and mining companies.

Platinum especially has benefited from the news. The classically supply-challenged metal is up almost 33 percent since the end of 2007. Questions arise on the demand side and the chance that automobile sales and therefore consumption of platinum for auto-catalysts might slacken in the current economic situation in the U.S., but hope remains for platinum bulls that Asian demand will balance a U.S. slowdown.

Outlook for the remainder of 2008
The dollar rally and oil decline in the second half of 2008 will end gold's bull run. Expect a plunge to as low as 700 by year's end. Silver could be the worst hit as it is over inflated beyond that of gold and could see a move to $12 on a shocking collapse. Copper's hold at these levels is not likely to sustain itself and it has a long way to fall on a technical level if support gives way. Platinum also lacks sustainability but is so difficult to trade it may not be worth the risk.

Softs
Sugar still bears the hallmark of a market which has abundant supply. The use of this commodity in South American ethanol production has tied it to the energy complex price movements, albeit loosely. For the most the greatest correlation for sugar is corn prices and the recent plunge in prices of both commodities illustrates just how intertwined this markets really are. Bolstered by the push for alternative fuels after the recent sticker shock at the pumps, sugar may have the chance to redeem itself. Farmers in Asia have been turning over sugar acreage in favor of higher monetary yield in food crops. As the planting cycle plays out, production numbers will be almost as important as ethanol demand in determining price direction for sugar.

Cocoa's steady rise was broken in March as the possibility of global recession separated the must haves from the luxury items. Price quickly rebounded on the same news which seems to support all commodities - Asian demand is on the rise. Questionable bean quality in cocoa deliveries in West Africa provided the catalyst to bring prices back up to 3000. Weather, pest, and mold concerns are never ending for this market and the International Cocoa Organization still projects the stocks-to-grindings ratio at around a 22 year low. Since weather dictates harvest times for both the main and mid-crop in cocoa, rains or a lack thereof will remain the most important fundamental factor for this market.

Cotton enjoyed a first quarter surge in price as fund buying and production questions caused a spike in price to over 90 cents. A quick retracement followed as U.S. exports were lowered and demand and consumption pared back. Often regarded as a potential sleeper of the agricultural sector, cotton found fundamental support to keep it from staying below 65 cents for long. Lower production is forecast to be offset by reduced consumption.

Coffee has also remained fundamentally strong, even after losing value under pressure from the potential for economic unease. The Brazilian harvest, only recently begun, is forecast to be the larger of the two-year yield cycle but consumer demand has kept the balance between supply and production a delicate one. Any tip of the scales from yield or weather could bring turmoil.



With another year of grove recovery from hurricane damage under the belt of orange producers, forecasts for higher orange numbers brought selling pressure. A price drop of over 28 percent through May sets up the beginning of this year's hurricane season. Almost two months into the storm season, only two named hurricanes have made their debut. With the most active time for the tropics in the months to come, weather issues will remain the top concern. However, the continuing impact of citrus greening on orange groves in the U.S. and Brazil should remain a top priority, too.

Lumber prices fell at varying intervals on the sluggish housing market. As builder demand subsides, the price for lumber has slipped almost 50 percent from its highs in 2004. Demand collapse in the U.S. has led to mill closures in the U.S. and Canada. Private estimates from the western states point to the worst year for new construction since the last world war. Since new construction normally accounts for around 40% of lumber use, the slowdown has dramatically impacted this market. A large drop in demand is buoyed by the logic that the worst may be over - or is it?

Outlook for the remainder of 2008
Sugar is selling off the topside of resistance from a long term pennant and in sympathy with corn. When corn stabilizes sugar will be the one to watch but steer clear of this market through the third quarter and reevaluate as a value play around 850-900. Coffee continues to be the market to watch in 2008 as its momentous rally to 170 showed the level of fund buying and general price volatility this market is capable of when the bulls gain control. Take advantage of the recent pullback to get long with long term bull call spreads. Cocoa prices are inflated for good reason - horrendous crops and rising demand puts this market in high flying mode. Look for a pullback to about 2250 then play a wait and see for a possible second run up. Cotton is not the bear market we are seeing on the charts right now. The lowest acreage for plantings I can ever remember seeing and wind and weather damage in west Texas scream harvest time rally. Cyclically speaking cotton is a long term buy and this is the breakout year. OJ is a market that has seen its bottom and is a value buy on dips with peak hurricane season fast approaching. Target 160 or higher by year's end. Lumber is near a cycle low but I would rsk missing the rally in order to wait for one final thrust down to about 180 or 190 then look at some long term call plays.


Conclusion
2008 began with a bang and will end with a thud. The dynamic of oil's collapse will send commodity prices reeling through the majority of the rest of 2008, with the dollar's surge being the icing on the cake. Look for short bursts of volatility expansion in markets like gold, oil and soybeans as the price collapse happens in a blink of an eye. Wheat and rice are good examples of what many of the other markets will look like when they begin to truly break down. Option traders should seek out low volatility long put option opportunities using only a 6-8 month historical volatility reference. Futures traders should avoid some of these over priced markets because there is nothing worse than getting wiped out by a shake out. The year is just a little more than half over, but the fun is just beginning for us contrarian bears.

James Mound is the head analyst for www.MoundReport.com, and author of the commodity book 7 Secrets. For a free email subscription to James Mound's Weekend Commodities Review and Trade of the Month, click here.