MB Wealth Corp. Weekly Commentary
For August 13th - August 17th 2007
By: Matthew Bradbard Commodities’ prices fell last week as the credit markets’ turmoil is starting to affect the broader markets, forcing hedge funds and other speculators to liquidate positions. The fears, especially in Europe, of a credit freeze, which brought two days of unprecedented central bank intervention, forced many leveraged investors to settle positions and go to cash. The worries trumped bullish projections of higher commodity prices in the medium term even withstanding the continuing global demand boom. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Crude-oil futures are feeling the effects originating from the credit markets and selling off on fears that they could be the next casualty of the risk exodus. When markets began to turn two weeks ago, traders and analysts assumed that oil markets would only be indirectly affected. The lack of information on losses from the subprime crisis could spread to the broader economy, cutting energy demand. Now, however, some say oil futures could be hit head-on. The flight to cash could force hedge funds to dump commodities futures contracts as they reduce risk. It's these hedge funds and other speculators that recently have helped drive crude to record highs. With crude prices, for both Brent and WTI, hovering just above key support at $70 a barrel, another sell off could become self perpetuating by triggering sell stops and another deep slide. However until $70 is penetrated the long term trend remains up and the recent $8 correction may be enough. Crude is oversold at these levels, holding onto the 50 day moving average and remaining above support of $71.50 is supportive. We would recommend staying cautiously long still looking for a backwardated market to soon be trading in contango. Last week gasoline stocks and refinery utilization both fell by 1.7 million barrels and 2.6 % respectively against expectations for a rise. Although highs are most likely, gasoline looks destined for a bump higher in the near term following crude’s lead. A triple bottom was formed last week on the lows and we expect to see prices back above $2.00 a gallon in the coming weeks then running into a bit of resistance at $2.10 the 50% retracement from recent highs and lows. Retail heating oil prices are projected to average $2.85 per gallon during the coming heating season (October through March), compared to $2.48 last heating season. Rising crude oil prices and projections of lower distillate inventories going into the heating season, combined with the assumption of a colder winter than last year, are the reasons for the projected increase in prices. On a close above $2.00 on front month September heating oil looks for a quick move to $2.07. The name of the game in natural gas is short covering. Remember the hurricane season runs through November 30, and current price projections remain vulnerable to potential storm-induced supply disruptions during that period. Taking into account the EIA’s current assumption about hurricanes, the Henry Hub spot price is expected to average $6.66 per mcf in the third quarter and $7.96 per mcf in the fourth quarter. Daily and weekly charts are supportive and we expect to see natural gas back at $8 levels in coming months if not sooner. If you are going to play in this market we suggest bull call spreads due to extreme volatility as natural gas can move 5.0% per day up or down. ____________________________________________________________________ Compared to last week, cash feeder and stocker cattle prices closed mostly steady. This, after the market posted some firmness early in the week and then faced mounting pressure in the last half of the trading session. Major Midwestern feeder auctions were steady to 2.00 higher on Monday with overflow support lent from last week’s higher feed cattle market. But, by Tuesday a number of bearish factors started to weigh on cattle prices and most of them were directly related to the stifling heat that plagued most of the major cattle production areas of the United States this past week. Cattle prices have backed off considerably from contract highs but do not look done just yet. Breaking the 100 day moving average like a hot knife through butter on October live cattle, we would wait to get long closer to the 92 level. As we said last week, the longer Lean hog prices stay out of the headlines the longer this up move would last. With several headlines of Chinese demand we witnessed a violent correction and a classic case of buy the rumor sell the fact. The market is oversold and if it holds the 50% retracement of 70.50 it could be bought with stops below 68 but it is not our favorite trade. ____________________________________________________________________ Stocks: The past few weeks have been ugly as the bursting of the credit bubble of this magnitude always is. To date we have seen a 6.0 % correction from highs on the S&P and Dow which in itself should be viewed as a routine correction in a bullish market, but if we are only half way done in a much broader correction how will this be interpreted? We don’t think the hurting is over. Short –term we expect sideways to up for stocks but do anticipate the slide to resume in coming weeks expecting to see another 3-5% down on all major US indices. We cannot stress enough to stock traders to lighten up and take profits on positions and we recommend getting short futures or using options as a hedge against a further correction. I hope this does not fall on deaf ears because if there is a 10% correction in stocks it will affect all portfolios. Bonds: The shorter end of the yield curve has benefited more than the long end from a flight to quality. The legend has been when stocks are down the debt market is up. This should continue until the dust settles. Bonds seem to be reacting to the swings in the stock market and look to remain range bound for now. The path of least resistance seems to be upward in light of a technical uptrend that has remained in tact. On a break lower, which would happen if the market was to calm down and the fed did not do anything to rates prior to their scheduled meeting in September, expect 107 in bonds and 105 in 10-year notes. Like the indices we wouldn’t feel comfortable being long or short this market currently. ____________________________________________________________________ Corn: Friday's USDA monthly crop production supply demand report put corn production at 13.1 billion bushels, up 24 % from last year. Based on conditions as of August 1, yields are expected to average 152.8 bushels per acre, up 3.7 bushels from last year. If realized, this will be the second highest yield on record, behind the 160.4 bushel yield in 2004. However, production will be the largest on record as growers intend to harvest the most corn acres for grain since 1933. Traders will expect to see the crop get larger into harvest. Corn should, for now, take a back seat and follow soy beans as beans move into the final two weeks of their yield development. We are expecting a grind lower to find a harvest low if it is not already in place and then will be a buyer expecting new crop corn to make higher highs than it did in 07’ in 08’. Buy dips and hold. Beans: Export numbers this past week were a friendly near term demand signal. Friday's USDA crop report projected bean production at 2.625 billion bushels and a yield of 41.5 bushels per acre. With the crop only half way through its yield development time, come August 1 it is all about the weather in coming weeks. We are not too confident of getting long or short but will continue to trade the long side of December Soymeal. As stated last week, first looking for 240.0 which was hit in less than one week from our entry and now our eyes on a gap at 260.0, buy a pullback. Wheat: Global 2007/08 wheat production is projected 1.9 million tons lower this month as reduced production in EU, the United States, Canada, Turkey, and Brazil more than offset higher production in India and abroad. Thursday's weekly export sales report showed a drastic decline in wheat being sold; down 49% from the week prior and 38% under our four week average. Keep in mind the three prior weeks were the highest numbers in ten years, so the 890 is still very high but there will be those who will say this is the first red flag that wheat's price maybe hitting price levels that has some importers backing off. Competing export producers are having a meager growing year, leaving importers to turn to the US to fill needs as we are the primary port in the world near term to buy quality and quantity wheat. Like all demand driven markets, price rations commodity. We will go out on a limb here on a volume spike on 8/8; nearly twice the average volume highs may very well be in at 710’4 December. We generally do not like to pick tops and do not recommend it unless you have extremely deep pockets and a lot of conviction, nevertheless we will continue to accumulate short wheat/long corn spreads viewing this trade as one of the best opportunities in the grain sector in years. ____________________________________________________________________ The dollar of late has served as a flight to quality but will it last? If there are signs that the recent troubles in the credit market spill over into the broader US economy the dollar may resume its slide. We do expect much more of the dollar and will continue to sell rallies until we are convinced that the trend has changed which would take a trade above 83.50. Canada's unemployment rate improved from 6.1% to 6.0% in July, the lowest in 13 years. Government figures showed a net gain of 11,300 jobs in July. The September Canadian dollar was up .37 at 95.13 on Friday and although we are currently lightening up on our trades exposed to subprime which includes all financials, getting long the Canadian if you can weather the storm is advised as we view parity in its future. Although, it is sometimes tough to hold onto positions because they do not move right out of the gate the way you anticipate. In fact sometimes out of the gate they move the exact opposite. Playing the carry trade is not for the faint hearted and over the last week I have asked myself why I am in this trade. I am short the Japanese yen and long the Australian dollar, not because I believe the carry trade does not exist, but we feel the recent jump was more of a panicked appreciation for the Yen and not the complete unwinding of the carry trade. The outcome of this transaction will depend on if the equities market can find some footing and even trade sideways this week. The trade has and will remain stocks down yen up. ____________________________________________________________________ December cotton finished down 1.18 cents at 61.24 after the USDA slightly increased its estimate of the world's ending stocks in 2007-2008. Now having corrected 8 cents from contract highs, cotton is starting to look more attractive. Patience is a virtue and with a little luck we could get long under 60 cent levels this week. The correction in cocoa has most likely run its course but with a faltering British pound and appreciating U.S. dollar we do not expect much here. We made good money in FCOJ lately but recently got stopped on longs, looking to reposition but remain content on the sidelines. A bullish engulfing candle on Friday could be the beginning of a sizeable move in Coffee. On a close above 121.00 getting long may be wise using bull call spreads for December. Our only reservation is seasonal weakness in August as we have seen an average of a 6.5 cent correction in Coffee in August 14 of the last 15 years. The charts are not too pretty in Sugar # 11 but we continue to accumulate March 08’ call options. With a break of the 100 day moving average profits were taken by speculators on the recent jump from 9 to 10.5 cents/lb. Funds remain heavy net long so do we; as rough as it is we feel our position will pay off and view the pull back as a further buying opportunity expecting to see 12 cents in the not too distant future. ____________________________________________________________________ December gold closed up $8.80 at $681.60 on Friday, boosted by the news that central banks around the world added over $130 billion of liquidity. On an upside break out of recent consolidation, look for $700 plus. During the 19 year period from 1987-2005 December Gold futures have continued their August rally into September following each of the last 7 rallies in August. Use any pullbacks as a long entry as fourth quarter is also generally friendly to Gold and with market turmoil we should see a flight to quality in coming weeks. I read an interesting article over the weekend in Smart Money on Silver and wanted to share some information. Although gold gets most of the headlines in the last six years, silver prices have nearly tripled. Global demand for silver is up 7% since 2002. Last year the world used 430 million troy ounces for industrial applications, up 28% from 332 million troy ounces in 2002. To date silver supply has kept up with demand because governments around the world have been selling their metal stockpiles. Without government sales last year, silver demand would have outpaced supply. Will this continue? Looking at the charts right now prices could go either way and we will look for the dollar for direction. We maintain that on a close above the 50 day moving average look for 50-75 cents in follow through. As stated last week on a break and close below $345.0 in Copper look for an aggressive correction. Been their done that. After closing below $345.0 on 8/8 we traded at sub 3.30 levels two days later. The problem here is you cannot hold a good market down and Copper has already reversed and is now heading higher; if you took that trade book a profit and look for a long entry. ____________________________________________________________________ |
