MB Wealth Corp. Weekly Commentary
For December 3rd - December 7th 2007
By: Matthew Bradbard
Many investors will be looking for Christmas a few weeks early due to the number of reports and meetings this week that will play a pivotal role in commodities into 08’. U.S. Treasury Secretary Paulson and other federal officials are meeting with U.S. mortgage lenders in an effort to prevent more foreclosures and minimize damage from the sub prime mortgage market. The Bank of Canada, BOE and ECB all meet this week as our FOMC meeting is next week. The important non-farm payroll # is due out on Friday, the market is expecting 90,000. OPEC meets on Wednesday to talk about the current condition of the oil market. Chavez and Venezuela (the 5th largest oil producer) will find out if he will be a permanently elected jack-ass. Just to list a few of this week’s highlights. Although it is only the beginning of the month, you also want to pay very close attention to what the funds do as year end profit taking is generally volatile and if not prepared one can be caught with his/her pants down. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ When bullish events take place and a market still cannot rally it generally means that market is moving lower and for now that is the case with oil. What a change in sentiment a week can bring; it seems like just last week investors were screaming $100 and we are currently trading below $90 on January Crude oil. January lost $9.57 or almost 10% on the week, on the belief OPEC will raise production 750,000 barrels per day and expectations of a slowing future demand. To date, the longer term trend line from mid August and the 50% retracement around $88.50 has held. If funds continue to exit longs between now and year’s end, which is likely after seeing the recent appreciation, we would not rule out a move to $80. On the daily chart Crude is starting to look oversold so we won’t rule out a bounce, but will most likely advise clients who aren’t already short to sell rallies unless OPEC fails to raise production or if we get a surprise in our weekly inventory reports. Traders trading oil must be nimble as this market can change on a dime, evident by the fact that we were singing about $100 dollars less than one week ago. We don’t have any new developments in heating oil or gasoline now, but will again advise traders to look for an entry to get long heating oil, whether it is outright with futures and/or options or by trading a spread similar to the long heating oil/short gasoline play we advised in recent weeks. We see on any cold weather $3 heating oil is very attainable. January heating oil is approximately 25 cents off its high and solid support is still 8-12 cents lower at $2.50ish. Natural gas followed Crude oil lower loosing 85 cents on the week and trading lower every day last week. I think the saying goes something like catching a falling knife. Needless to say March natural gas has traded higher 13 of the last 15 years in the first 2 weeks in December so we will be looking for a long entry for our customers this week. ______________________________________________________________________ Meat production was heavy last week. After the close Friday, the USDA estimated last week's beef production at 533.4 million pounds, up 8.1% from a year ago. Pork production was estimated at 487.3 million pounds, up 11.2% from a year ago and a new record high. The normal production cycle of pork puts downward pressure on February hogs, while at the same time supporting April hog futures in December and into January. Knowing this, traders may choose to get short or long an outright month or choose to play the spread. We will be advising clients on entries in the coming days to weeks. January Feeder cattle were down 3 cents on the week; we advised clients to get short at 110 looking for 107 and on a break potentially down to 104. We would currently advise to sell rallies that should be contained to 109/109.50 We are currently looking for an entry to get long April Live cattle for our clients, ideally under 96.00. Since 1987, April Live cattle have posted gains in December 13 times. January strength has followed December strength 11 times (84.6%). ____________________________________________________________________ Stocks: With November now behind us the Dow was off 4.0%, the S&P down 4.4% with the NASDAQ getting hit the hardest loosing 6.9% on the month. After 4 consecutive up days in the stock market so soon it makes us forget the current conditions in our economy. The collapse of credit, the fading housing market, the slowing of consumer spending, and the rising cost of food and energy will continue to affect us for years, these are not problems that have a quick fix. We continue to advise investors to hedge at least a portion of their portfolios; we are far from convinced that we have seen the worst yet. The current solutions will just delay the inevitable and to use an analogy, we are trying to put a band aid on an extensive wound. Bonds: The bond market is certainly signaling that all is not well. Last week marked the first time that a bank could borrow one month money through the turn of the year. Stress has not been seen in the debt market like this since 2000 when investors were worried about Y2K. This is a credit crunch that is far from over. Although when $#*@ really hits the fan the debt market will again act as a flight to quality and be bid up but for now investors are staring to feel good again and it is our opinion that the debt market is a bit overextended. We advised our clients to get short bonds and long notes looking for the spread to narrow and initiated a short position on March bonds with options as well, contact us for further clarifications. ____________________________________________________________________ The dollar has moved 1 ½ cents off its low from 11/23 and on a successful push through 76.25 this week 77.50 should be the next stop. As previously stated, this should only be a temporary bounce as prospects are favoring another rate cut in 2 weeks, a further 25bp cut would extend the yield-gap with most other foreign currencies and could weigh on prices. The pound traded lower last week on concerns that the slow-down in the housing sector would prompt a decision to lower rates in Q1 of 08'. In fact there is even speculation that a cut could happen this Thursday. Prices remain choppy and far from our favorite currency, at these levels we would suggest selling rallies expecting 2.0300 to be breached in coming weeks. The Canadian dollar as we had predicted is back to parity, off from 1.100 just 3 weeks ago. This pressure should continue as long as profit-taking in the energy/metals sector persists. There is a chance of a rate cut on Tuesday because of the slowing of exports as the Bank of Canada meets on rates. With a cut we won’t rule out a move below .9500, without a cut look to enter a long position around .9700 as long as the decline in metals and energies slows. The Euro finally started to roll over on weaker German consumer confidence and technicals that have started to weigh on prices. The first support is 1.4625 which serves as the 61.8% Fibonacci retracement from October’s low and December’s high, which if broken should open up the doors for 1.4500. As we have been saying, perhaps prematurely, 1.4400 followed by 1.4000 by years end. The ECB also meets on Thursday and is expected to keep rates steady. The yen retreated this past week and should continue to come under pressure as the stock markets globally find their footing. Carry-traders will look for a continuation of higher equity prices to take on more risk and buy higher yielding foreign currencies. The play remains higher equities equals lower yen and vice versa. Next support is eyed at .8940, resistance at .9200. Technical patterns do not always reign supreme, but readers of our last week’s newsletter must be encouraged by the move lower in the Swissie this past week that we forecasted in large part due to the doji formation on 11/23. The market has exceeded our first target and as of this writing is 4o ticks from our second target which should be realized this week. The easy money on this short has been made and we will advise on repositioning short as the week progresses, contact us for exact entries and targets. The Australian dollar traded modestly higher on the week, still yet to exceed .9000 as we had expected. We would suggest remaining long as we feel the .8650 level will hold and the gap at .9071 from 11/12 should be filled by years end. ____________________________________________________________________ Corn: Weekly export sales showed 1.8 m.m.t. of corn was sold last week. Demand remains strong and should continue through year's end with cash bids holding as farmers sit on remaining corn until after January 1 to divert tax liabilities and hold as much in reserve for higher prices expected next spring. Currently funds rule the roost predominantly trading off the charts and maintaining $4 for March corn. They are bullish longer term as am I but sense a profit led correction is soon to come, so stay on your toes. Although past performance is not indicative of future results last year around this time corn saw its winter high give way to a 40 plus cent year end break followed by a mid December low before rebounding. While it may be premature to turn negative on the charts, first we need a close under 3.95 basis March futures. This would set up a test of 3.91, then 3.84 and next 3.72. A close over 4.09 sets us up for 4.30. A December correction would be a welcome to get positioned for a rally into spring as the run for acres heats up. Beans: Weekly export sales showed 1.1 m.m.t. of beans were sold last week down from our year's high the week prior of 1.8. Like corn, beans saw its week's high Monday with the rest of the week starting to show signs of a tiring market. Last year this week we saw beans hit their winter high then broke 50 cents to a mid December low before rebounding. Similarly to corn we would not be surprised to see funds book profits on there longs before year’s end in beans. Friday delivered a close under 11.00 for March futures which is starting to turn charts technically bearish. On follow through, next stop should be 10.70 then 10.48. Resistance remains 11.30 for the week which is the high trade on 11/26. A December correction too would be welcome to get better positioned before the March planting intentions. Look for highs potentially around 12.50/13.00 in the spring as soybeans seek a price high enough to insure more acres will be planted or run out of beans in 2009. If in fact beans have been trading off outside markets such as gold, Crude oil, and the dollar index we should see a decent correction as prices have reversed in the aforementioned commodities; albeit temporary. Wheat: Weekly export sales showed 407 t.m.t. of wheat was sold last week. Like corn and beans wheat too finds itself technically over bought at month’s end, with back to back exhaustion tails on the daily chart wheat looks heavy. Last year March wheat broke 75 cents into November followed by short positioned profit taking up 40 cents before selling off in December. Dejavu this year, March futures broke $2 into the November low followed by fund profit taking back up $1.50. The magic question is since the funds have mirrored last year's trading pattern will they continue with a break into December? A close this week under 8.48 basis March futures sets up a test to 8.00. The bulls on the fundamental side say Argentina's frost may have caused more damage than thought while Russia contemplates a rise in their export tax. Both of which is suggesting more wheat purchases from the US. Maybe a bit contrarian we would still suggest selling rallies or buying put options.
____________________________________________________________________ March cocoa closed at 1980, up 14 points on the week. Cocoa found support at the 100 day moving average trying to close below and failing on 3 occasions. Support for March is at 1920, resistance is at 2000. On a close above 2000 we expect to see 2080 and we recommended getting long last week with a bullish ratio spread, contact us for further details. March coffee closed at 128.65, up just over 1 cent on the week. We are content for now on the sidelines in coffee. There is increasing chatter that the Brazilian crop could be reduced due to the lack of rain in September and early October, if this is confirmed get long as coffee would most likely move back above 140. Current support for March is at 125.50, resistance is at 130.00. Orange producers in Florida dodged a bullet this year as hurricane season has officially come to a close with out any damage. January OJ remains range bound between 130-140 and until we get a clearer picture on direction we are content just drinking OJ as opposed to trading it. Once again sugar fooled us with a head fake and it’s back to watching paint dry again. Although this sideways consolidation is boring we recommend continuing to maintain a buy and hold mentality as sugar is at a value level and the funds continue to accumulate longs. The market continues to be pressured by the lack of demand and the surplus of supply in the world market. We do not know what or when the catalyst will be but eventually sugar should get out of this funk so be patient! We would suggest buying at the money calls with a lot of time or look to buy dips in May or July futures. March Cotton pushed to a 2-1/2 month low trading down to the 200 day moving average of 63.45. Light speculative selling continued to pressure this market as longs have been liquidating positions after prices hit a monthly high of 70.30 on 11/7. The market is oversold as prices have dropped almost 700 points in the last couple of weeks so we could see a bounce in the near-term. Longer-term, we should see prices move higher as this market tries not to fight for acreage next year. Support for March is at 62.25, resistance is at 66.00. ____________________________________________________________________ Taking a step back and accessing the situation in both gold and silver, it is very probable that you could see a profit taking led correction between now and years end. If it does play out, this in our opinion, would be a great entry to get long into 08’ where we forecast significantly higher prices in these two metals on inflation concerns, a flight to quality play and the resurgence of the weaker US dollar trend that has been ongoing for the last five years. We would not rule out a wash out in February gold to $740 and March silver to $13.40. To put things into perspective this would be roughly a $110 or 12% correction in gold from its highs. This of course is after advancing from $660 to $850 or 28% from mid August. For silver a move lower to $13.40 while $3 off recent highs in November consider we were trading at $11.50 just in mid August. Copper has climbed on the back of a rallying stock market and should continue to trade up as long as the stock market marches higher. First resistance is seen at 3.2400 followed by 3.3300 on March. Our opinion here is the same as the stocks, this is a dead cat bounce that should be sold and we will advise of an entry to get short as we feel the coming demise of the housing market and slowdown in the auto sector will lead copper to prices well below $3.0000.
If a portion of your portfolio is not already in gold or silver we highly suggest you diversify into these metals as we expect to see much higher prices in coming months due to inflationary concerns.
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