Global Commodities Research JPMorgan Chase Bank, NA November 22, 2011

Commodity Phase Shift

We downgrade commodities to underweight
The US Supercommittees failure changes risk outlook: the primary implication is damage to confidence in the US seriousness of purpose and the cost of that attitude. Markets must price risk of more credit rating cuts. US public debt is $15Tn (100% of GDP) and growing: Since S&P cut the US sovereign credit rating four months ago, the US public debt has grown by $455Bn, an amount larger than Greeces sovereign debt. Industrial metals and softs are deteriorating rapidly: incremental damage in physical metal and crop prices has unfolded worldwide since Thursday, when it became clear the Supercommittee would likely fail. Change in view: Policy failures in the US and Europe have darkened the 6M outlook, forcing us to downgrade commodities to underweight. We expect outright TR losses near-term and see greater value in bonds.
Commodity total return indices are making lower highs and lower lows
Index 100 = 31 Dec 2010

120 115 110 105 100 95 90

Colin P. Fenton (212) 834-5648 colin.p.fenton@jpmorgan.com Jonah D. Waxman, CFA (212) 834-2203 jonah.d.waxman@jpmorgan.com

85
Dec-10 Jan-11

SPGSCITR Index DJUBSTR Index JMCXTR Index

May-11 May-11 Nov-11 Feb-11 Mar-11 Mar-11 Jun-11 Sep-11 Aug-11 Sep-11 Apr-11 Oct-11 Jul-11 Jul-11

80

Source: S&P, Dow Jones, J.P. Morgan Commodities Research

See end pages for important disclosures, including investment banking relationships. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making their investment decision.

Industrial metals prices had found support in Oct, but are now faltering
LME 3-month copper US$ per mt
10,500 10,000 9,500 9,000 8,500 8,000 7,500 7,000
May-11 Mar-11 Feb-11

A sharp decline in LME 3-month copper in September was one of the primary real-time indicators that Europe was entering recession. A strong bid emerged from Asia between the $6500 and $6800 levels, resulting in a bounce to above $8000 per mt. Yesterday, the intraday price remained below $7500 for the first time in a month. A violation of the $6635 per mt recent low (Oct 3) would likely lead to a sharp flush lower, as Asian buyers looked for lower offer prices. We would expect consumers to seek a price closer to $5900 per mt and believe they would have good odds of getting filled.

6,500
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Jul-11

Source: LME, J.P. Morgan Commodities Research

Cobalt spot price, Shanghai CNY per mt

380000 360000 340000 320000 300000 280000 260000 240000 220000
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

Cobalt physical prices have also been choppy in a downward pattern through the year; however, they did not flush in September. That resilience is now changing. Spot cobalt in the Shanghai physical market is now priced at about CNY 252,500 per mt. Prices have declined 3.8% in the past 10 days, 6.5% in the past month, and 20.5% ytd. The trend suggests further declines.

Source: Company reports, Antaike, J.P. Morgan Commodities Research

Non-exchange-traded, physical metals prices are also rolling over

Silicon (98.5%) spot price, Hong Kong FOB US$ per mt
2700 2650 2600 2550 2500 2450 2400 2350 2300 2250
Oct-10 Sep-10

Spot silicon in Hong Kong is now priced at about $2380 per mt. This level marks a new low for 2011. Price has declined by 3.8% since Thursday Nov 17. The current level is about 9.8% off the 2011 high (mid Sept 2011).

Nov-10

Dec-10

May-11

Source: Company reports, Metals Bulletin, J.P. Morgan Commodities Research

Magnesium spot price, Shanghai CNY per mt

21000 20000 19000 18000 17000 16000 15000
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Nov-11

Jan-11

Mar-11

Feb-11

Jun-11

Aug-11

Sep-11

Oct-11

Apr-11

Jul-11

Spot magnesium in Shanghai is priced about CNY17,250 per mt. For most of 2011, this price has been rangebound. However, a notable slide began over the past 2 weeks.

Source: Company reports, Antaike, J.P. Morgan Commodities Research

Incremental weakness is in Asia: expect buyers strikes for lower offers

Nickel plate spot price, Shanghai CNY per mt
240000 220000 200000 180000 160000 140000 120000 100000
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Nickel is a highly reliable leading indicator of industrial production. The nickel plate price in Shanghai has dropped by about 8.0% mtd. The current level is down 41% from the ytd high (Feb-2011). Momentum is negative. Sentiment is negative.

Source: Company reports, Antaike, J.P. Morgan Commodities Research

Tin spot price, Shanghai CNY per mt

240000 220000 200000 180000 160000 140000 120000 100000
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Tin demonstrates less predictive power than nickel for IP cycles. However, it is a reasonably good coincident indicator. Spot tin in Shanghai has been generally falling since May 2011. In Oct, prices were stable around the CNY182,000 per mt level. However, a slide began around Thursday Nov 17, down 2.7% mtd.

Source: Company reports, Antaike, J.P. Morgan Commodities Research

Platinum group metals (PGMs) are also downshifting

Platinum spot price, Asia US$ per troy ounce
2000 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Spot platinum prices had exhibited strong upward momentum ytd. After a 20% swoon in Sept, Asian prices stabilized and rebounded. However, physical prices are deteriorating again. The current spot level in Asia is $110 per oz off the recent high. This price has slipped by 4.3% since Thursday Nov 17.

Source: Company reports, Johnson Matthey, J.P. Morgan Commodities Research

Palladium spot price, Asia US$ per troy ounce

900 800 700 600 500 400 300
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Spot palladium prices had appreciated more strongly than platinum. The spot price in Asia gained by 73% between Aug-10 and Feb-11. Today, the price is below $600 per oz again, at about $590 per oz. The year-to-date low (Oct 20) is $588 per oz, just $2 per oz away. Prices could deteriorate very quickly from here.

Source: Company reports, Johnson Matthey, J.P. Morgan Commodities Research

Aluminum inventory is well offered, depressing benchmark premia

Aluminum spot price, Shanghai CNY per mt
19000 18500 18000 17500 17000 16500 16000 15500 15000 14500 14000
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Spot aluminum prices in Shanghai have been sliding since August. Across the world, anecdotal reports are material is readily available. The CNY16,000 per mt price level was violated yesterday. This is the lowest price since December 2010. Spot prices are down 15% from the midsummer high.

Source: Company reports, Antaike, J.P. Morgan Commodities Research

Aluminum Ingot P1020 US Midwest spot price US cents per pound

130 125 120 115 110 105 100 95 90 85 80
Nov-10 Dec-10 May-11 Nov-11 Oct-10 Jan-11 Feb-11 Mar-11 Jun-11 Sep-10 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

Physical market weakness is also evident in the US Midwest. Benchmark P1020 ingot is at the lowest price since Sept 2010. This price is down 7.3% mtd. Negative trend despite 9.05MM light vehicle output SAAR (Oct-11). The US Midwest premium has been steady at 8.5 cents per lb.

Source: Company reports, Metals Bulletin, J.P. Morgan Commodities Research

Scrap steel prices are not yet in danger zone, but US path is threatening
Heavy melt scrap steel, China US$ per mt
700 600 500 400 300 200 100
Jul-09 Jul-10 Jul-08 Apr-08 Apr-09 Apr-10 Oct-09 Oct-10 Apr-11 Jul-11

A strong advance in Chinas heavy scrap steel prices has halted. The decline began in late September, following the copper swoon. Scrap steel then dropped by 17% through end of October 2011. Prices have stabilized just above the recent low.

21Nov11 $527

A new advance would be welcome evidence of soft landing. A renewed decline would be very ominous for global mfg. growth.

0
Jan-08

Oct-08

Jan-10

Source: Company reports, Metals Bulletin, J.P. Morgan Commodities Research

Heavy melt No. 1 scrap steel, USA US$ per mt

700 600 500 400 300 200 100
Jul-08 Jul-09 Jul-10

Jan-09

Jan-11

Oct-11

This is one of the classic price signals for monitoring US IP cycles. Heavy melt scrap steel price fell through $400 per mt on Nov 3. This is the first sub-$400 price since January 2011. Price is down 9% in the past three weeks. Slope of price descent not yet comparable to 4Q2008.

21Nov11 $373
Apr-08 Oct-08 Oct-09 Oct-10 Apr-11 Apr-09 Apr-10 Jul-11 Jan-09 Jan-10 Jan-08 Jan-11 Oct-11

However, if US slides into recession, it will be visible here early.

Source: Company reports, Metals Bulletin, J.P. Morgan Commodities Research

Broad commodity indices are weakening

China physical metals price index Index 100 = 1 Jan 1997
390 340 290 240 190 140 200d mavg 321.96
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11

This is an equal-weighted chart of physical metals prices in China.

21-Nov-11 290.40

After several months of consolidation, the chart capitulated in Sept. The rollover underway now is potentially very bearish. An important tool in our arsenalthis chart bears monitoring.

17-Mar-08 337.60

15-Jul-08 318.74

Source: Company reports, Metals Bulletin, J.P. Morgan Commodities Research

CRB Raw Industrials Index

650 600 550 500 450
Feb-11 Mar-11 Sep-10 Nov-10 Dec-10 Oct-10 Jan-11

This veteran signal has been telling a bearish story since April. The spot price has made new ytd lows in the past 3 days.

Last 50 day
May-11 Jul-11 Apr-11 Jun-11

20 day 200 day

Aug-11 Sep-11 Nov-11 Oct-11

Source: Commodity Research Bureau, J.P. Morgan Commodities Research

Softs are also starting to break down after a period of stabilization

ICE No. 2 Cotton (CT1) US cents per pound
250 230 210 190 170 150 130 110 90 70 50
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

After a spectacular price surge that brought cotton prices above $2 per lb, spot cotton prices corrected by 56% from the high. After moving sideways for the past few months, the prompt ICE futures price appears to have begun a downside breakout this week.

May-11

Mar-11

Feb-11

Jul-11

Source: ICE, J.P. Morgan Commodities Research

ICE Cocoa (CC1) US$ per mt

4,000 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

Prompt ICE cocoa futures tracked lower in Sept, then stabilized. Price began a significant slide two weeks ago, from $2728 per mt. Today, price has reached $2250 per mt, down 17.5% in 2 weeks. The trend looks negative.

May-11

Feb-11

Mar-11

Jul-11

Source: ICE, J.P. Morgan Commodities Research

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

Grains and oilseeds are also looking weak

CBT corn (C 1) US cents per bushel
900 800 700 600 500 400
May-11 Mar-11 Feb-11

Strong upward momentum through the first half of 2011 brought prompt prices towards $8 per bushel. The start of the US corn harvest in September helped drive spot prices lower, before reversing trend in October. However, since the end of October, spot prices have fallen by 7.6%. Momentum is negative.

300
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Jul-11

Source: CBT, J.P. Morgan Commodities Research

CBT soybeans (S 1) US cents per bushel

1,500 1,400 1,300 1,200 1,100 1,000 900
May-11 Feb-11 Mar-11

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

Prompt CBT soybeans appreciated sharply from 4Q2010 into early Feb 2011, then remained rangebound through August. After an increase of 7% in August, spot prices declined rapidly during September, falling by more than 18%. Following a trend reversal in the first two weeks of October, prompt prices have broken through to the downside.

800
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Jul-11

Source: CBT, J.P. Morgan Commodities Research

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

10

Gold was weak on the Supercommittees failure. Bad sign for growth.
CMX gold (GC1) US$ per troy ounce
2,000 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Prompt CMX gold dropped by more than $50 per oz yesterday. The direction and magnitude of this move surprised us: not because we think gold is a safe haven (we do not), but because it implies gold's first impulse was to see weaker growth before higher inflation. This is a bad signal for global markets, as it suggests the collective wisdom of market participants is not as complacent about US sovereign credit rating risks and the potential for weaker US growth in 2012, despite the cooings from credit ratings agencies. The prompt gold price rebounded today and the long-run trend upward is secure in an abnormally high vol environment for gold. If the 200-day is tested and holds, we would view is a strong confirmatory signal of weaker USD ahead. We continue to believe gold should be held in the portfolio and with this report roll our paper idea from GCZ1 to GCF2 at about an 19 pct return (holding period has been nine months). Implied volatility did tick upward yesterday. At 27 percent annualized, it remains around 2X the level that prevailed from January through July.

May-11

Mar-11

Feb-11

Jul-11

Source: CMX, J.P. Morgan Commodities Research

CMX gold (GC1) ATM implied volatility Percent annualized

60 50 40 30 20 10
May-11

0
Feb-11 Mar-11 Sep-10 Nov-10 Dec-10 Apr-11 Oct-10 Jan-11

Jul-11

Aug-11

Sep-11

Source: CMX, J.P. Morgan Commodities Research

Nov-11

Jun-11

Oct-11

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

11

US public debt has increased by size of Greek debt in less than 4 months
Total debt outstanding, USA US$ trillions
15.10 15.00 14.90 14.80 14.70 14.60 14.50 14.40 14.30
12-Aug-11 19-Aug-11 26-Aug-11 16-Sep-11 23-Sep-11 30-Sep-11 5-Aug-11 9-Sep-11 2-Sep-11

Total US public debt breached $15Tn on November 15. US public debt-to-GDP ratio is 100%, when including intragovernmental transfer. With debt levels today at $15.04Tn, US public debt has increased by $455Bn since S&P cut the US sovereign credit rating in August. This incremental debt is about 8 percent larger than Greeces sovereign debt.

4-Nov-11

7-Oct-11

11-Nov-11

Source: U.S. Treasury, J.P. Morgan Commodities Research

Share of US public debt held outside US govt Percent

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

18-Nov-11

14-Oct-11

21-Oct-11

28-Oct-11

The share of the US public debt not held by the United States government is 68.7% as of today, a new high. Outstanding US public debt subject to the debt limit is $19.9Bn away from the current debt ceiling (percent of debt ceiling used is 98.7%).

Source: U.S. Treasury, J.P. Morgan Commodities Research

12

US credit risk is deteriorating, but still ok, leaving UST as viable safe haven
Sovereign CDS, United States of America
70 65 60 55 50 45 40
May-11

Credit default swaps on USA sovereign debt have risen by 16bp since October 27, 2011. That date marked the low since August 2010. CDS level on US is now 52.

Last 50 day

20 day 200 day

35
Feb-11 Mar-11 Sep-10 Nov-10 Dec-10 Apr-11 Oct-10 Jan-11

Jul-11

Aug-11

Sep-11

Source: Bloomberg, J.P. Morgan Commodities Research

US 10-year yield %
4.0 3.5 3.0 2.5 2.0 1.5 1.0
Feb-11 Mar-11 Sep-10 Nov-10 Dec-10 Apr-11 Oct-10 Jan-11

Nov-11

Jun-11

Oct-11

The yield on the US 10-Year has declined by about 43bp since October 27, 2011. The yield is back below 2.0%.

Last 50 day

20 day 200 day

May-11 Jul-11 Aug-11 Sep-11 Nov-11 Jun-11 Oct-11

Source: Bloomberg, J.P. Morgan Commodities Research

13

Liquidity risk is rising: commodity TR indices likely decline in short run

3-month US LIBOR OIS spread Basis points
45 40 35 30 25 20 15 10 5 0
Jan-11 May-11 Mar-11 Feb-11 Jun-11 Aug-11 Sep-11 Oct-11 Apr-11 Jul-11

The 3-month US LIBOR OIS spread continues to march smartly higher, crossing above 40bp today. Though nowhere near the levels achieved in the heart of the crisis in 2008, this chart signals a growing liquidity risk, not only in Europe.

Source: Bloomberg, J.P. Morgan Commodities Research

DJ-UBS Total Return Index Index

370 350 330 310 290 270 250
Feb-11 Mar-11 Sep-10 Nov-10 Dec-10 Apr-11 Oct-10 Jan-11

Nov-11

After peaking in late April at +7.5% ytd, the DJ-UBS total return index has made a series of lower highs and lower lows. The index has produced a total return of 3.9% mtd and 11.5% ytd, making it the weakest performer of the major commodity indices.

Last 50 day
May-11 Jul-11 Jun-11

20 day 200 day

Aug-11 Sep-11 Nov-11 Oct-11

Source: Dow Jones, J.P. Morgan Commodities Research

14

Metals and ags are weaker than energy, leaving GSCI relatively stronger
JPMCCI Total Return Index Index
600 550 500 450 400
Feb-11 Mar-11 Sep-10 Nov-10 Dec-10 Apr-11 Oct-10 Jan-11

The J.P. Morgan Commodity Curve Index produced about a 12% total return between early Oct and last Wednesday (Nov 16, 2011). This result compares against a +14% total return ytd through the end of April 2011. This index was flat ytd as of Wednesday Nov 16, 2011the last settle before the Supercommittees imminent failure became apparent. As of last nights close, the ytd total return is 3.9%.
Last 50 day
May-11 Jul-11 Jun-11

20 day 200 day

Aug-11 Sep-11 Nov-11 Oct-11

Source: J.P. Morgan

S&P GSCI Total Return Index Index

6,000 5,500 5,000 4,500 4,000 3,500
Feb-11 Mar-11 Sep-10 Nov-10 Dec-10 Apr-11 Oct-10 Jan-11

The S&P GSCI index has produced a 2.0% total return ytd through last nights close, beating the JPMCCI by 190bp on that horizon. The ytd total return was +3.3% as of the Nov 16 close. The relatively higher weight of petroleum in the S&P GSCI has led to higher highs and lower lows than the JPMCCI in ytd returns.

Last 50 day
May-11 Jul-11 Jun-11

20 day 200 day

Aug-11 Sep-11 Nov-11 Oct-11

Source: S&P, J.P. Morgan Commodities Research

15

Petroleum markets are stronger than other commodities

Jan-12 ICE Brent crude oil (COF2) US$ per bbl
130 125 120 115 110 105 100 95 90 85 80
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Current prompt contract in the ICE Brent curve is Jan-12 (COF2). Open interest yesterday was 181,716 contracts (19.5% of total OI). COF2 made its ytd peak on April 28 at $123.52 per bbl. Then, the contract progressively made lower highs and lower lows through Oct. Both fundamentals and technicals had appeared stronger over the past 8 weeks, leading to a stronger tone in the market. Yesterday, COF2 settled below the 50-day moving average price, a negative technical signal. Reversal from here requires $112 per bbl.

May-11

Mar-11

Feb-11

Jul-11

Source: ICE, J.P. Morgan Commodities Research

Feb-12 ICE Brent crude oil (COG2) US$ per bbl

130 125 120 115 110 105 100 95 90 85 80
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

The second prompt contract in the ICE Brent curve (COG2) made its ytd high at $122.99 per bbl on April 29. It too settled below its 50-day moving average price yesterday. An emerging bear trend has been in place for about 10 days.

May-11

Feb-11

Mar-11

Jul-11

Source: ICE, J.P. Morgan Commodities Research

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

16

WTI term structure strengthened on Seaway reversal, but now pulling back
ICE Brent crude oil forward curves (now and -1w) US$ per bbl
115 110 105 100 95 90
Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19

Petroleum forward curves have been very strong in recent months. These term structures have reflected tight fundamental oil balances. Even with Europe in recession and 25MM U-6 unemployment in the US, spot Brent crude oil prices have sustained above $105 per bbl. However, the return of Libyan barrels, coupled with the risks spurred by the debt policy mistakes, is weakening front structure. With this report, we lower our projections for 4Q2011 and 1Q2012 Brent crude to $108 per bbl and $105 per bbl, respectively (from $115).

85

21-Nov-11
Source: ICE, J.P. Morgan Commodities Research

14-Nov-11

NYM WTI crude oil forward curves (now and -1w) US$ per bbl
105 100 95 90 85

WTI term structure rotated into backwardation suddenly in late October 2011, for the first time since late 2008. Structure strengthened further on the announced reversal of the Seaway pipeline that connects Cushing, OK with the US Gulf Coast. However, backwardation ultimately lasted only about three weeks. The curve began slackening 7 business days ago. The 1-to-2 month spread expanded from $0.08 per bbl contango a week ago to $0.26 per bbl on Friday Nov 18. Flat price is below $100.

Source: NYM, J.P. Morgan Commodities Research

Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19 Dec-19

21-Nov-11

14-Nov-11

17

Stagflation risk also still present, though these prices too are softening
ICE world raw sugar #11 forward curve US cents per pound
24.5 24.0 23.5 23.0 22.5 22.0
Nov-12 Nov-13 Jan-13 May-12 Jan-14

The ICE world raw sugar #11 forward curve is in backwardation. Physical spot price has significantly beaten consensus forecasts. Between May and August this year, prompt ICE increased by 56%. However, today the prompt contract fell through 24 cents per lb. Momentum is negative.

21.5
Mar-12 Jul-12 Sep-12

May-14

May-13

Mar-13

Mar-14

Jul-13

Sep-13

Jul-14

Source: ICE, J.P. Morgan Commodities Research

Potato chips indicate real inflationary pressures Natural log of original price series (US$ per 16 oz.)
1.80 1.60 1.40 1.20 1.00 0.80 0.60
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Sep-14

We watch the price of potato chips as a consumer inflation signal. This series provided useful warnings of price instability in 1987. After a policy-driven surge in 2008, this price quieted in 2009. However, recently it has been breaking out to the upside.

Breakout

Stable price level Black Monday 1987 Stable price level Great Recession Peso Crisis and Asian prompts ease Financial Crisis prompt ease

Challenging FOMC claims, this measure is up about 9% oya.

Stable price level

Source: BLS, J.P. Morgan Commodities Research

18

Equities could have had a huge spurt in Dec, but now look challenged
S&P 500 futures (SPZ1) US$
1,400 1,350 1,300 1,250 1,200 1,150 1,100 1,050
May-11 Mar-11 Feb-11

Yesterday, the US Deficit Supercommittee announced its failure. The S&P 500 settled below 1200 for the 1st time since Oct 11, 2011 Near-term price momentum has turned negative. Longer-term price momentum has been negative since Aug 2011. The chart does not appear consistent with higher commodity prices.

1,000
Nov-10 Dec-10 Sep-10 Oct-10 Jan-11

Jul-11

Source: CME, J.P. Morgan Commodities Research

Dec-11 CME S&P 500 puts (k=1100, SPZ1) US$

$90 $80 $70 $60 $50 $40 $30 $20 $10 $0
Jan-11

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

Puts on the Dec-11 CME S&P contract surged in Aug and in Oct. The 1100-strike puts bottomed at 6.80 on Nov 8. The 1100-strike puts surged by more than 50% intraday yesterday. The closing price yesterday was 12.30, up 80% from the recent low. Trend for these premia appear to be turning toward the upside.

May-11

Feb-11

Mar-11

Jul-11

Source: CME, J.P. Morgan Commodities Research

Nov-11

Aug-11

Sep-11

Apr-11

Jun-11

Oct-11

19

The darker near-term outlook forces changes in our views

With this report, we remove the long TR swap idea we introduced on Sept. 30, 2010. SP-GSCITR has gained 13.1%.
Marked as of: 21-Nov-11 Long Dec-11 CMX Gold Roll into Feb-12 CMX Gold Long CY2013 Brent call options (k = 125) Long put on Spring 2012 NYM natural gas (k = 3.50, contracts NGH2, NGJ2, NGK2) Long Cal 2015 straddle in NYM natural gas (k = 5.00) Date of recommendation 25-Feb-2011 22-Nov-2011 23-Feb-2011 10-Nov-2011 10-Nov-2011 Cost* 1421.10 1681.60 7.30 0.17 1.54 Last closing price 1678.60 6.69 0.24 1.52 Change since recommendation 18.1% -0.61 0.07 -0.02

Source: Exchanges, J.P. Morgan Commodities Research. *Unit cost is the official close on the day before the date of publication. All ideas and calculated changes are for informational purposes to track the performance of ideas. None are actual investments. Today we: (1) exit the TR index swaps we introduced as an idea on September 30, 2010, (2) Exit the Bull commodity basket, and (3) Roll CMX gold to Feb-12 from Dec-11.

Commodity total return forecast tables

2008 -46.5 -52.4 -31.1 -49.0 0.5 -28.9 -27.4 -35.0 -42.3 -27.4 -45.8 -4.6 -21.1 -24.3 -41.1 -35.7 2009 13.5 11.2 16.9 82.4 25.1 3.8 -14.1 20.5 10.4 30.3 80.6 28.2 10.1 -12.7 21.6 18.9 2010 9.0 1.9 26.3 16.7 34.5 34.2 10.5 13.8 0.6 27.8 16.1 39.0 35.5 15.3 12.2 16.8 2011YTD -1.5 4.6 -13.8 -23.1 15.0 -18.7 1.3 -3.9 2.6 -9.5 -21.6 12.3 -12.0 2.4 -0.1 -11.8 Forecast Next 12 Months 10.0 8.0 -8.3 -17.5 1.0 -5.0 -10.0 8.0 14.0 2.2 -5.5 8.0 6.0 2.0 12.0 6.0

S&P GSCI Energy Non-Energy Industrial Metals Precious Metals Agriculture Livestock JPMCCI Energy Non-Energy Industrial Metals Precious Metals Agriculture Livestock S&P GSCI Enhanced DJ-UBS

Source: S&P, Dow Jones, Exchanges, J.P. Morgan Commodities Research. Note: total returns are gross returns before fees. Data as of 21-Nov-11.

20

Colin P. Fenton, Head of Global Commodities Research and Strategy colin.p.fenton@jpmorgan.com (1-212) 834-5648

Oil
Lawrence E. Eagles (1-212) 834-8107 lawrence.e.eagles@jpmorgan.com David G. Martin (44-20) 7777-0211 david.g.martin@jpmorgan.com Jeff G. Brown (65) 6882-2215 jeff.g.brown@jpmorgan.com Ryan F. Sullivan (1-212) 834-3935 ryan.f.sullivan@jpmorgan.com Upadhi Kabra (44-20) 7777-2841 upadhi.x.kabra@jpmorgan.com

Metals
Michael J. Jansen (44-20) 7325-5882 michael.j.jansen@jpmorgan.com Yubin Fu (44-20) 7777-2902 yubin.fu@jpmorgan.com

Natural Gas
Scott C. Speaker (1-212) 834-3878 scott.c.speaker@jpmorgan.com Shikha Chaturvedi (1-212) 834-3245 shikha.x.chaturvedi@jpmorgan.com

Agriculture and Strategy

Jonah D. Waxman, CFA (1-212) 834-2203 jonah.d.waxman@jpmorgan.com Megan V. Hansen (1-212) 834-3747 megan.v.hansen@jpmorgan.com Elizabeth M. Volynsky (1-212) 834-4021 elizabeth.m.volynsky@jpmorgan.com 21

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