MB Wealth Corp. Weekly Commentary
For August 20th - August 24th 2007
By: Matthew Bradbard The Federal Reserve lowered the discount rate from 6.25% to 5.75% in an effort to take the panic out of the markets. Their official statement acknowledged that "the downside risks to growth have increased appreciably." With worries about credit weighing on stocks the past few weeks, investors seem to be trying to force the Fed into giving them the interest rate cut they want - and well ahead of the Fed's next meeting September 18. With three scheduled Fed meetings between now and years end many outlooks have rates closer to 4.50% than the current 5.25%. I am confused to how lowering rates will combat inflation which is allegedly the feds primary concern. If inflation does become a problem in the second half of the year and the dollar weakens as we suspect, position yourself in commodities as their current prices will seem discounted come 2008. Use erratic corrections and exaggerated reductions in price as entry points to get long. Late last week commodities from gold to coffee ignored the fundamentals and sold off because funds and other speculators were forced to liquidate to cover other margin obligations. This may well be an ongoing theme where if you stay focused you should get various commodities on sale in coming weeks. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Concerns about the global economy contributed to Thursday's steep price declines in Crude. On Friday, the Fed cut its discount rate by a half percentage point, easing some investors' fears of an economic slowdown. Energy investors worry that any cooling in the economy could mean less demand for oil and gasoline. Even though oil prices have corrected from all time highs reached just two weeks ago front month September Crude has yet to penetrate $70. We would expect oil to chop sideways and start trending higher on further hurricane action and feel it will only take a surprise in an inventory report or refinery glitch or the like to get this trend moving north towards $80 once again. As a side note, be cautious of a washout attempt in the near future to $67 and back in one fail swoop. Natural gas inventories remain high but short covering will happen on a move to new highs. Currently it is all about “Dean” and what further hurricane threats you may have that potentially could disrupt supplies. At this point it is about the weather and if you feel there will be further weather get positioned in October Bull call spreads, we are! Buy dips. We remain neutral on heating oil and gasoline and if we are trading energies we are playing Crude or natural gas. ____________________________________________________________________ The U.S. Meat Export Federation said that beef exports were up 11% in the first half of 2007 from a year ago. Pork exports were actually down 5% over the same time period. October cattle closed up 1.77 on Friday at 95.47 and looks to be resuming another leg up to at least 98.00. After the close, the USDA said that there were 10.299 million head of cattle on feed on August 1st, down 4.8% from a year ago. July placements were down 17% and marketings were up 2.5% from a year ago. After the close, the USDA estimated this week's beef production at 521.0 million pounds, down 3.4% from a year ago. Pork production was estimated at 393.0 million pounds, up 2.3% from a year ago. October hogs were up .30 at 67.27. On two consecutive closes above the 100 day moving average of 68.16 we would be long. ____________________________________________________________________ Stocks: All three major US Indices traded below their 200 day moving averages this past week although it only lasted two days for the Dow and Nasdaq the S&P 500 still remains underneath. Speculators….Although we caution you to day trade the indexes we feel there is enough volatility to be in and out in the same session in most days multiple times. Get flat by the close because we do not want to hold long or shorts overnight. Stock Investors….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 on this bounce. I hope this does not fall on deaf ears because a 10% + correction in stocks, if that is how it plays out, will affect all portfolios. We expect short –term to see a bounce but do not think we have seen the bottoms yet! Bonds: The bias short term has been up but I am not recommending getting long as we are content on the sidelines currently. The trade remains stocks up bonds down and vice/versa. If we are correct with our analysis of stocks moving higher this week we should see bonds come down and test 108. ____________________________________________________________________ Corn: Weekly export sales of 58.7 million bushels was most impressive, Iran was a buyer of 240,000 MT of US corn and Korea bought US corn as well. Buying came in near contract lows and corn should remain well bid with the absence of fund led long liquidation. Corn looks cheap relative to other grains and we are long expecting higher prices competing for acreage which started last year around this time. To change trend up you need a close above the 50 day moving average of $3.60 Beans: Rains generally seen improving crop prospects although some sources indicate ongoing deterioration in parts of Ohio, Illinois, and other lingering dry areas. Trade still remains focused on the long term likelihood that US soy acreage will need to expand at least 7 million acres next year simultaneously with 5% expansion and record yields in South America to balance US 08-09 soy supply demand situation. November beans took out the 100-day moving average leaving soybeans looking vulnerable on the chart to further selling on a break of $8.00. Wheat: Trading lower in sympathy with collapsing row crops and outside financial concerns. Early season cumulative US wheat sales up a sharp 86% from a year ago with USDA forecasting annual exports up 15%. We are still under the impression wheat is starting to look heavy but need a fundamental confirmation like slowing US exports or technical support such as a close below the 20 day moving average which is yet to happen. We are trading new crop against old crop and will continue to accumulate corn/wheat spreads into next year viewing this opportunity as one of the best we have seen in the grain complex for some time. ____________________________________________________________________ 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 not 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. Sound familiar; it is the same tune we sang last week. Since then the dollar failed to hold its 100 day moving average of 81.75 and looks like it is making its way back to 80.00 If the market is right and interest rates are reduced we do not see how the dollar cannot plummet to multi decade lows. Currently the Yen is too dicey but it should be tradeable soon. Last week I spoke about a trade in the Yen against the Aussie that I ended up taking a loss on. I bring this up because a lesson should be learned; had I not taken a lost on Tuesday a bad trade would have turned into a horrible trade. Remember you will not always be right and it is better to step to the sidelines and reposition than to stay with a trade once it has reached the point of no return. I was able to lick my wounds and move on looking to recoup capital in the next trade. The Reserve Bank of Australia took advantage of last week’s big drop in the Australian dollar and bought the currency for the first time in six years. The September Australian dollar closed Friday at 79.17 and we are looking for entry points to get long but are not in an extreme rush as we would like to see how the yen and carry trade play out this week. After the dust clears the Aussie should get back to at least 85.00 on the heels of a sound economy supported by high commodity prices. ____________________________________________________________________ Buying December Cocoa is currently like catching a falling knife but it appears close to reversing from its recent sell off. Seasonally the lows are generally made in mid October but weakness in the dollar and strength in the British pound may be enough to slow the selling. Sugar went on sale Thursday after a violent sell-off on Wall Street. Although the short-term trend is down the daily chart is oversold and we will continue to accumulate March 08’ calls on anticipation of 12 cent Sugar in early 08’, if not sooner. November OJ was hit after a private estimate of crop size was released last week. The USDA will not be releasing its estimate until the October Crop Production Report. The immediate focus now is the weather and we feel satisfied being long from current lows with tight stops. We will be getting long Cotton looking for prices to rise on a bid for acreage using both futures and options in various months. Coffee was another market on sale Friday after a steep decline on Thursday; we used this opportunity to buy December bull call spreads. ____________________________________________________________________ As the economy goes, so does Copper. The recent slide in Copper prices held the 50% retracement from 07’ highs and lows for the December contract of 303.00. If the stock market can gain some traction expect Copper to trade back up to 340.00, if not, expect 290.00 by mid- September. If you are in gold and silver short congratulations if you are long like us be patient and if you can afford buy more. We expect this price reduction to be short lived and are extremely bullish in the months to come. This will not be a trade that moves overnight but we do expect higher Silver and Gold prices as the flight to quality shifts to metals as the dollar looses its value. December Silver is the cheapest it has been in 10 months trading below $12. Gold is trading well above support of $655 and we are buying December gold futures & options on this pullback. We view buying silver and gold here less of a trade but as more of a buy and hold expecting $14.50 in Silver and $720 in Gold in coming months.
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