2008 was clearly one of the most significant years in the history of our country, and while noteworthy enough to spend pages upon pages recounting the year's events, this report will look at the year quite differently. Instead of becoming one of the multitudes of sources that recaps the What in 2008, this report will look at the Why. In looking ahead to 2009 you will find some stunning forecasts in this report, not so different from the dramatic forecasts that accurately predicted much of this year's market action in the 2007 Review and 2008 forecast issue from this past January. For example I will tell you why the low in the stock market is in and let you prove it to yourself. I will show you the 5 markets to rally in 2009 and the 5 that will fail. But first let's take a look at why it all went haywire.

The Rubber Band Effect

Why did 2008 go down in history as one of the most volatile collapses in both stocks and commodities? You can point fingers at economic cycles, banking regulation, the housing collapse and questionable accounting but there is only one real reason this all happened the way it did - the bursting of commodity bubble. A massive influx of fund and institutional investor interest in commodities sparked what was perhaps the biggest industry price surge in history in the first quarter of 2008. The problem lies in the disproportionate amount of money in the futures industry as compared to the stock market. Commodities are in the process of becoming a mainstream investment. We are not there just yet, but international media coverage and a general demand for alternative investments merged with emerging country demand increases (namely China and India) to exponentially expand the interest in this industry. However when the multi-billion dollar hedge funds, institutional investors, speculators and emergence of CTAs all threw their respective chips into the pot at the same time it overwhelmed many market sectors.

Remember these investors are mainly comprised of buy and holders, something the futures industry is not used to. A lot of longs with no one exiting on dips make for a strong bull market. When volume expands in markets like wheat and cocoa and all that extra volume is coming in the billions from buy and hold investors there is little to stand in the way of that market experiencing massive price expansion. Then the tides turned.

Fannie, Freddie and Bear Stearns began a panic of epic proportions. A perfect storm of sorts that brought the housing market, access to credit, a possible run on the banks and a liquidation of investor assets all in one shot. All these investors bailed on the buy and hold in commodities and all those buyers ran for the exits. Even worse, the buy and hold fund managers had little choice through the process of investor redemptions (cash outs) and some of the biggest short term market meltdowns in history took place in the second half of 2008. The same disproportionate volume that rode the bull on the way up bailed and took the bear slide all the way back down.

The rubber band finally snapped back. While there is no telling how long the fund liquidation will last, there have been two noticeable waves of selling in a matter of five months and the end result is a wipeout of almost all of 2 years of rallying. When a rubber band is stretched as far as possible and then released it snaps back beyond its original state, only to recoil once again (not quite extending as far as the original stretch). This is what 2009 will bring to commodities traders - the recoil.

Top 5 Bull Markets for 2009

1. Coffee
2. Cotton
3. U.S. Dollar
4. Lumber
5. Orange Juice

Top 5 Bear Markets for 2009

1. Japanese Yen
2. Cocoa
3. Rice
4. Euro Currency
5. Gold

Energies

One Seriously Stretched Rubber Band

Let's talk numbers:

86 to 147 in 6 months (February to July), or about 70%

In 2007 we went from 50 to 100 or about 100% gain

These were some of the biggest moves in the history of crude oil.

If that wasn't enough price action, from July to mid-December we plunged from 147 to 35!

When we were at 147, crude oil was overbought to say the least, supported by buy and hold fund managers and general market exuberance. The arguments were there, nonsense as they were, for peak oil, long term demand growth from China and India, supply problems in Russia, Venezuela, and Nigeria and let us not forget all of the Middle East. History has always proven, however, that the rubber band can only stretch so far then it snaps back hard and fast. Using history as a reference this collapse was truly beyond anything I have ever seen, comparable to the silver Hunt Brothers collapse or other references to market manipulation. I like the rubber band analogy because it works to describe all three elements - the stretching on the way up, the snap back and then the current state we are in - the recoil. The market is likely to recoup some of the selling we have seen, either because of renewed geopolitical issues in the Middle East or because of reinvestment of funds and specs into the market. We might even see OPEC cuts impact supply.

OPEC Schmopec

OPEC has shown in 2008 that not only is there no intent to control prices on the upside (rather just on the downside), but intent or not their influence no longer has real impact on the market. Supply cuts will come now not because of OPEC but due to the price exhaustion to the downside. What supplier sells their oil at $35 when they were selling it for $140 six months ago? Expect the short squeeze with a supply holdback to spark a rally to $58 in January, and then a choppy bottom to be tested and hold for 2009. Ultimately oil may even make a run at $90, but don't hold your breath.

Oil, Oil Everywhere!

The biggest trend shift in oil came on the supply level, proving yet again that this market trails long term trend changes in the supply picture. The last 6 months of 2007 brought us a drop in U.S. crude oil inventory stocks of 61 million barrels, helping to surge oil higher through '07 and all the way into July of '08. But in January supply shifted, recouping 37 million barrels in 4 months and when the lagging market caught on it helped to turn the tides. Bottom line is supply didn't plunge this market into the abyss, fund managers did and the world economy did its part too. However, going forward the supply picture will be critical in determining the ultimate trend, and keeping an eye on the monthly U.S. inventory is a great way to get ahead of a curve that lags the supply numbers by 4-8 months. Right now the trend is choppy, showing shifts in inventory both up and down for the past 8 months, but that choppiness is unlikely to continue much longer.

Financials

Lemme Prove its Over

Sure there are going to be more banks with problems and there will be fallout from the $50 billion Madoff scam, and there will probably be further swings in unemployment. However, the rule of thumb is when the psychological worst has past, the bottom is in. Is there more or less pessimism than the weeks and months following the Fannie, Freddie and Bear Stearns fallouts? Less. Is there more or less panic about a banking system failure? Less. Is the biggest wave of fund liquidation over? Yes (we think). The horrible retail sales from the holiday period is in the past, accepted employment declines are priced in, and a bailout for the automotive industry with a new President coming in that will support that industry is in place. A plan for Roosevelt style (think Tennessee Valley) infrastructure renewal has the makings of a massive employment fix. Bottom line is the worst is over, at least psychologically speaking, and that means a recovery for the stock market in the first quarter or two of 2009 (watch out for the first week though).

Get Paid to Borrow Money

Bonds broke out of a tight long term trading range between 120 and 112 and took off like a bat outta hell. The driver? Pressure from Fed policy including, but not limited to, interest rates, treasury sales, the bailout and a stronger dollar. Also, let's not forget that if the world is cutting rates along with the U.S. demand for our treasuries remain supported. That being said, there comes a point where borrowing money is free, assuming there is any money to borrow - hence our current dilemma. Bonds are in the same boat as the stock market - we rallied because of the panic of zero money at zero interest and now that we are there it leaves only one place to go. It is worth noting that the Fed has said recently something along the lines of the current rate is likely to be around for a while, but that does little to push bonds higher. Sell call premium and then look to sell some puts after we test 130. This market just set a new potential range between 144 and 126 and the outrageous volatility premium in options offer good leg-in short strangles and naked premium collection as long as you can handle the risk (which is about as high as they get in this market).

Don't Get Carry-ied Away

The yen found a way to correlate almost perfectly with bonds during the breakout rally in both markets. There is always talk about the carry trade but few people truly get it - so bear with me for a minute. The Japanese have had nearly a zero interest rate for a long, long time. So Japanese investors would borrow in Japan and buy treasuries in the U.S., thereby making a positive return on the borrowed funds. Sounds genius, right? Well to purchase U.S. treasuries you need U.S. dollars so all this borrowed money was in dollars. When the Fed started cutting rates the profit margin disappeared and the investors bailed to pay back their loans. This meant selling dollars and buying yen. As bond prices rose in the U.S. (reducing the effective interest rate) it squeezed these investors to run back to the yen, thus the correlation between the yen and bond prices. At this point I wonder if the correlation is more implied than a real relationship, but the bond rally is likely over, leaving the yen to normalize and fall dramatically in 2009. In the end the Japanese economy is completely dependant on its export industry and needs a weak currency to attract foreign buyers.

Dollar Distraction

When 2008 began I forecasted dollar strength for the year with a year target of 80-82. The surge in the dollar can mainly be attributed to a simple miscalculation by the general trading public. What was once considered a U.S. problem quickly turned global, and to some extent the pendulum swung the other way as many European countries face what might just be a more severe failure than the U.S. I apologize to pundits like Peter Schiff and the rest of the dollar bears, but the dollar is likely to have another stellar year in 2009 as it reverses its long term downtrend and heads to 98. January may give some dollar bears a reason to cheer as a last gasp run in the euro is not out of the question, but as the year progresses it will become apparent that not only is the U.S. leading the charge for economic recovery but also that we progress faster than the rest of the world. The Canadian dollar has set a strong base, and while the gut says the bear move is not over long term, there is a strong enough chart to justify a long for Q1 of this year. The Australian dollar has got an ugly uptrend and could experience a severe break to 50 before it is all said and done. The pound diverged from the euro in December but that spread is unlikely to tighten much further, thus a long pound short euro makes sense for a long term play.

Grains

Why Would You Think This Time Was Different?

Throughout the history of the grain markets there have been many 2-5 year cycles in supply and a few demand surges, but the Bush induced ethanol craze gave fund managers, farmers and speculators all they needed to rally grain prices to epic levels. Yet there is that nagging thing called history repeating itself that everyone seemed to forget in 2008. Whether it was the new oil era or the permanent grain demand from growing alternative fuel needs, the market felt there was no upside limit. History shows these spikes end in a furious selling spree, and this move was different in the reason but the same when it came to the end result.

New President New Approach

As Bush makes his way out of office Obama steps in with one serious problem (well maybe more than one). He must figure out a way to boost employment in this country without destroying the farming industry. So do you kill ethanol and kill the industry or find another way? Interestingly enough soybean derivatives are becoming commonplace in things like fast food oil and biodiesel alternatives. So what if this country switched gears to bean production and moved away from corn? Well we can't just walk away from corn but we can normalize the market to create balanced supply. Brazil and the U.S. are about to run into a credit problem that will seriously hurt the average farmer's ability to produce at efficient rates. More importantly it may leave out some critical disease control measures and leave the industry susceptible to crop damage. I say don't get so caught up in the ethanol collapse, which is likely to happen (or has it already?) but focus more on production as a whole across the sector. If you do that there are plenty of reasons to buy relative value down here. Look at long beans against short corn and definitely scoop up some oversold wheat.

The Chinese New Year

China is in an unusual position. They enter the new year with a huge bailout program to revitalize their infrastructure but also have a great opportunity to stock up on supplies with reduced grain prices and a massive drop in the cost of transportation. Throw in a strong Yuan and they have all the reasons in the world to spike demand in the short term, leaving the carryover inventory into next year's crop in question. Long term bull call spreads are recommended in wheat and beans.

Sashimi

Rice exploded to epic highs in 2008 as a global shortage and panic squeezed prices in this thinly traded market (still one of my favorites though). The reality is the panic is over and the market is heading south for the winter. Puts remain extremely underpriced for the potential retracement I expect to see as I look for a move into single digits by year end. Soon you will be able skip the sashimi and go for the sushi with the rice underneath (actually they use short grain rice with sushi but you get the point:).

Meats

Meats to be Classified as a Grain

The overwhelming trend in meats in 2008 was its locked in correlation to grains. Fair as it may be since grains, used for feed, rose in price to historic levels, meats had there own issues in 2008. If a market is that correlated you might as well trade grains. While I expect strength in grains in 2009 (rice excluded), the correlation should weaken and meats should begin to trade on their own merits.

The Year of the Falling Cow

2009 will be the year cattle prices tumbled, as it is a lagging indicator of the global economic crisis we are facing. Global demand will slow and ranchers will pump up supply as grain costs remain 'manageable'.

Can You Say "Trading Range"?

Hogs are holding a relatively stable supply and demand balance and have been stuck in a very wide long term trading range. While there is some risk to breaking below that bottom side I expect the range to hold through 2009, leaving traders to buy near 55 and sell near 75.

Metals

Angry Bugs

So what do you think gold does during an economic collapse and zero interest rates? Apparently nothing. If gold is in fact tied to inflation fears then rate cuts around the world should make gold rally. If gold is a flight to quality then perhaps one of the worst years for the stock market in history would cause gold to fly high. Maybe, just maybe, the fear of a banking collapse would cause people to move into gold. Well, what happened? What happened is gold bugs don't know what they are talking about.

Gold trades with the longer term trends of the U.S. dollar because gold is priced globally in U.S. dollars. This means if you have euros and you are buying gold, when the euro dropped about 30% to the dollar you just felt like gold went up 30%. This means your demand for gold would likely drop. Imagine if at the same time gold went up 20%, it would feel like a 50% move to you. Sure all those issues I mentioned at the beginning play a role, but when the dollar is trending everything else takes a back seat. That is why when the euro bounced back in December gold also went on a nice run to end the year, and if the euro makes another run in January gold could test $1000. However, when the dollar rallies to fresh highs in 2009 gold will sail down to $500 and that is the play.

The Silver Piggyback Ride is Over

Metals traders have watched silver piggyback the gold run for years, but after the recent plunge silver seems to be having a much tougher time keeping up the pace. Silver is being hurt a bit more than gold with this global slowdown and will get creamed when the dollar rallies again. In the meantime sell ratio call spreads on rally days to grab premium from those bugs that still think silver is going to $1000.

Do They Still Trade Copper?

It was not too long ago I was screaming to short copper at just under $4, but then I realized that the copper market really doesn't exist anymore. It has gone the way of platinum and palladium and is soon to be a forgotten futures market. I wish there were ways to trade options here, but the market makers skipped town, the floor is basically gone and the 3 people in the world that still trade this market want nothing to do with fair bid/offers because they do not want volume - they want arbitrage. Copper is likely to break to new lows in 2009 but it is not worth the upside risk or the ripoff getting in or out.

Softs

Since When Does a Happy Meal Cost Less Than a Cup of Jo?

Coffee had its ups and downs in 2008 but gave us bulls a solid uptrend for much of the year, only to fall to the commodity liquidation. The year also brought some solid Brazilian supplies, but sets up an explosive 2009. The market is about to get a serious supply squeeze as Vietnam is producing garbage crops and Brazil is in the low end of a biennial supply cycle. This means a supply shortage during a period of solid demand. This market represents the best value buy in 2009 and can be done with futures (stops below 97) or bull call spreads.

I Thought We Had Enough Sugar for the Next 10 Years

It wasn't that long ago we had the biggest oversupply situation on record in sugar, and yet if the world just destroys the inventory and stops making the stuff then I guess we might run out. If you get upset trading a particular commodity because you feel the fundamentals are manipulated then you might as well stop trading. You should accept the fact that the forces that control a market's supply and demand structure are part of the fundamentals. That being said the cycle in sugar has likely shifted to bullish as production dies down and Brazil uses more supply for ethanol production.

Did the USDA Say We Don't Need Our Vitamin C Anymore?

OJ supplies are good after a couple of years of some nasty hurricanes and citrus greening. Demand is flat lined and maybe even on the decline. Yet there is that trader part of me that looks at a market that has plunged from 210 to 75 and wonders, did I miss the dead cat bounce? This market is going to experience a severe cycle shift if this trend doesn't reverse very quickly. The OJ market is a great value buy down here and a solid commodity bull play for 2009. It is thin and just above the tradable market category, but if you are buying straight calls (which is the way to go) then don't worry about it.

Does Rayon Breathe?

Last time I checked, cotton was still in major global demand. Cotton supply in the U.S. was at a multi-year low this year, with a major drop in acreage due to increased grain production. India started implementing a government program to buy back cotton at bottom levels to support price and that trend may be what bottoms the cotton market. This is a bull market for 2009 with a value buying opportunity on dips here in January.

Cuckoo for Cocoa

Let's remember that not too long ago the cocoa rally took off when funds started buying into the global demand theory for cocoa, because gourmet chocolate was the next big trend. So the Ivory Coast is having problems, disease is rampant, demand is solid - I get it. Cocoa is at historic highs only seen a couple of times in history and there is little fundamental or technical rationale for it to stay there for very long. Put premiums have dropped a bit and looking at some straight put plays with loads of time value is a great play for 2009.

How you Know When the Recession is Over

A lot of analysts are looking at things like GDP and employment for indicators of the bottom in the recession. These are lagging indicators and if you use them to find a bottom you will be 6 months behind the trend. When we start building is when the worst is behind us. That means lumber can be used as a potential leading indicator of the bottom in the recession. When Obama hires a zillion people to fix the employment crisis he needs to put them to work, and what do you think he is going to have them work on? Infrastructure. Roads, bridges and buildings. Raw material prices are going to skyrocket and lumber is going to go along for the ride. Not to mention zero interest rates is a great catalyst for investment into the housing industry. Lumber is at rock bottom cycle lows as the housing market is in a credit crisis freeze and is a great play with straight call options for 2009.

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.