MB Wealth Corp. Weekly Commentary
For August 27th - August 31st 2007
By: Matthew Bradbard With talk of recession what is next to come? The vix has moved down from a high of almost 40 to settle in at 20 over the last week or so, but does that mean the worst is behind us? The Fed meeting is just weeks away and the market is expecting and pricing in a fed cut but will the fed deliver? Does a slow down domestically equate to a slow down globally which in turn would slow the insatiable demand for raw materials? With so many unanswered questions it would be wise to re-evaluate your portfolio and to remain quick and nimble because although volatility has died down of late we feel that we are only in about the third or fourth inning of a nine inning game and are not convinced the worst is behind us. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Crude oil generally peaks in August/September and then slides down through the end of the year but will that be the case this year? Crude oil bounced off the 38.2% Fibonacci retracement taking the 07’ lows and highs this week and has reversed. If we find some buyers in the stock market this reversal should take us to at least $74.00. Heavy volume came in on 8/22 under $69 of nearly 250,000 aiding in the reversal. On a trade above $72 look for $74 this week. With plenty of weather concerns in the imminent future we would be buying dips with stops below recent lows. Natural gas prices declined over $1.00 last week and with record inventories it is a bold prediction but we expect buying to come in very soon and short covering will aid to a quick volatile recovery to $7.50 in coming weeks. We are buying bull call spreads on this correction and even getting long futures is starting to look attractive. Although we believe unleaded gas has seen its high this summer we would not rule out a 10-15 cent advance this week. Daily and weekly charts are extremely friendly with a strong reversal with front month gas closing 14 cents off its weekly low last week. The heat of summer is one of the better times of the year to price heating oil. September is a so-called shoulder month, when consumption of energy is lower; but the market takes the opportunity more aggressively to accumulate inventories. During August, the focus of refiners remains on gasoline at the expense of heating oil. That being said if you have the staying power and patience we would recommend buying heating oil a couple months out on pullbacks looking for a grind higher in prices in coming months. ____________________________________________________________________ The South Korean government said that it will begin accepting U.S. beef again for inspection on Friday, but not from the four meat plants that sent banned material earlier this month. The U.S. meat industry in general, has done a poor job of shipping quality product on a consistent basis and it has cost the industry millions in lost revenue. October cattle hit our target of 98 but backed off on Friday. Ideally we will fill the gap from Thursday and resume a move to the recent highs of 100 over the next 2 weeks. Rumors have been flying about China for weeks, but on Friday, Smithfield Foods announced that they received an order to deliver 60 million pounds of pork to China by the end of December. October hogs shot up 2.17 to 70.65, as the news surprised the markets at a time when analysts have been concerned about heavier production rates this fall. We view this as the beginning of a move to at least 76. ____________________________________________________________________ Stocks: Buying returned to the equities globally this week shrugging off recent subprime and credit concerns. We believe this to be short lived and fear will soon return! Use this bounce to position your portfolio in a defensive manner for another rout in equities. We expect another 100-150 points in the Dow and another 20-30 points in the S&P before significant selling comes in again. Consider yourself warned that a housing bubble and credit mess do not go away overnight and are not forgotten just because a discount rate is lowered. Bonds: We will be a buyer of bonds on the breakout. On a trade above 111’10 on September bonds expect a test of 113’00. With the volatility in equities one would expect more action in the bonds. Regardless of what end of the curve September is generally bullish for the debt market so one may want to use dips as a buying opportunity. Buying the long end selling the short has worked well over the last week. ____________________________________________________________________ Corn: Weekly export sales report showed 1.100 m.m.t. of corn was sold last week vs. 1.186 the week prior, a good demand signal for the second consecutive week. Corn closed up approximately 15 cents on the week but is starting to show signs of weakness. We do not expect much out of old crop corn but view a pullback in the new crop corn as a buying opportunity as the run for acreage should begin soon. Roll any longs out to at least March 08’ and preferably December 08’. Beans: Weekly export sales report showed 960 t.m.t of beans were sold last week. Like corn, beans too had a good rally this week advancing almost 40 cents with a little more drive as flooding Midwest rains could be more harmful to beans as the last 10% of the crop was still developing the pod. Trying to understand this year's corn and soybean crops is an especially difficult task, thanks to this summers' highly unusual weather patterns. Heavy rains in parts of the Midwest produced serious flooding while the southeastern U.S. is experiencing an intense drought. November beans look destined for 877’0 and then 894’0 this week unless weather dramatically changes or the funds shift their stance which does not seem apparent looking at the most recent commitment of traders. Wheat: Weekly export sales report showed 1.200 m.m.t of wheat was sold last week and to date exports are still not declining even with the recent surge in prices. December wheat finished the week up 50 cents at a new contract high of $7.42. Weather problems around the world have analysts looking at the lowest world ending stocks to use ratio in three decades. In the meantime, consuming nations continue to buy aggressively. So far in the new 2007-2008 season, U.S. wheat exports are up 30% from a year ago. It remains all about the US being the only port to purchase high quality milling wheat and quantity until other countries begin harvest and compete against us for world export share. Canadian wheat harvest begins shortly, Argentina harvest begins in November, Brazil's begins in September and Australia October. We are looking for signals of a top but have not found any as of yet. We anticipate a technical chart formation, slowing of exports, substantial commercial or speculative selling, fund selling on months end to book profits will create a top and violent reversal as there has already been talk of price rationing. We continue to sell wheat against corn into 08’ and although currently under water still remain extremely optimistic. We are weathering this storm only because we view the inevitable of this spread returning back to the norm and picking up approximately $10,000 per spread from these levels. ____________________________________________________________________ “Dollar down, international currencies up.” That is our quote of the week. Since then the dollar failed to hold its 100 day moving average of 81.50 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. Money is flowing back into the carry trade; if this continues expect more down for the yen and more up for the Aussie. The Yen is just above the middle of the Bollinger band and the Australian is just below on a break expect follow through with the Aussie moving to 86.00 and the yen to 84.00. We are friendly to the Canadian, Euro, Swissie, and Cable but stress using stops because if the flight to quality re-emerges with the dollar all these currencies will suffer. ____________________________________________________________________ A stronger Pound and weaker Dollar equal higher Cocoa prices. December Cocoa found support at 61.8% Fibonacci retracement and we are long with stops below recent lows looking for a move to 1850-1900. After the close on Friday, Brazil's Ag Ministry (Conab) estimated the current coffee crop at 32.6 million bags, little more than expected, but notoriously less than most other estimates. December coffee traded in a 2 cent range for the week and remains a buy looking for 130 in coming weeks. Long FCOJ is not our favorite trade but with stops below recent lows we view the risk/reward favorable; risking 5 cents ($750) looking to make 20 ($3000). Stay short lumber. We like Cotton from the long side but only on a close above the 200 day moving average as the run for acreage should soon begin. For 08/09 demand it should be 3-5 M bales more than the crop size. Although trading Sugar of late has been like watching paint dry we still continue to accumulate March 08’ calls. ____________________________________________________________________ Strong Asian demand continues to dominate the copper market. Last week, the International Copper Study Group said that in the first five months of 2007, world usage of copper outpaced production by 300,000 tons with most of this year's increase in demand coming from China, India, and Russia. On Friday, December copper closed just below its 20 day moving average on favorable new home sales report and looks poised for a move to $3.50 followed by $3.70. Palladium has been hit hard of late and we feel has moved down too much, we are recommending getting long looking for a move back to $360 for December. The ratio for gold/silver over the last few years has been 50:1 and it is currently at 56:1. Is gold to expensive or silver to cheap, we think the latter. Silver is setting the stage for a major breakout to the upside and we would recommend to start building a position looking for a move to $14 by years end and $20 into next year. Looking at a daily and weekly chart on Gold it is forming a wedge and the apex is fast approaching. This wedge has been in the working since the beginning of 06’ and within the next 2-4 weeks we should see a major breakout; we are betting to the upside.
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