MB Wealth Corp. Weekly Commentary
For December 10th - December 14th 2007
By: Matthew Bradbard
There is a difference of opinion not only with what the Federal Reserve will do with rates, but also their reasoning for further cuts or a reprieve from recent policy. The Fed remains vigilant about fighting off recent scares in the economy over housing, sub prime, and credit, but apparently chooses to ignore inflation. It is our view that just lowering interest rates may not fix the problem at hand and the coming flare-up in inflation may be a predicament that just doesn’t go away. The nail in the coffin that puts us into a recession, in our opinion, will be the lack of consumer spending. I found it comical that a gauge used to see if the consumer is spending is used to see what the trend is in plastic surgery. Apparently over the past five years or so, the volume of plastic surgeries has closely tracked the Conference board’s consumer confidence index. Who says we do not live in a vain society, my personal opinion is that investors should be very concerned about what 08’ will mean to their portfolios as opposed to the dark circles under their eyes or wrinkles on their brow. 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 news doesn’t cause a jump in prices a market will continue to drift lower, as is the current environment in crude oil. Prices chopped lower ending the week 50 cents lower on volatile trading. If Thursday’s low of 85.82 is breached, look out below as 81.50 should be the next stop. OPEC failed to increase production on December 5th as the market had hoped for. The cartels ministers did however signal their concerns over volatile market conditions in a time of supply worries and concerns over global economic growth. OPEC ministers remain convinced that market factors, rather than their actions, are driving current pricing and expressed “the need for extreme vigilance” going into next year. 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 that $3 heating oil is very attainable. January heating oil is approximately 25 cents off its high and support is seen at 2.4600 and then 2.3900. If crude continues to decline, that weakness most likely will spillover to distillates as well, that being said there is no rush to pick a long entry. We are currently advising clients to be long March natural gas on a seasonal trade looking for a push towards 8.00 but we are currently under water entering at approximately 7.15. As stated last week our clients are in this because of a strong seasonal tendency, however the charts are not extremely supportive and as of this writing they are making contract lows so be cautious. March natural gas has traded higher 13 of the last 15 years in the first 2 weeks in December. ______________________________________________________________________ After the close Friday, the USDA estimated last week's beef production at 523.3 million pounds, up 4.0% from a year ago. Pork production was estimated at 484.4 million pounds, up 13.1% from a year ago. So far in 2007, beef production is up 1.1% and pork production is up 3.9% from a year ago. At current pricing we are suggesting to be flat in bellies and hogs. January Feeder cattle traded down on the week; we advised clients to get take their shorts off from 110 and book profits. If you remember from previous weeks we were looking for 107 and then potentially 104. We are still 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: We are getting mixed signals. The U.S. Labor Department said that the unemployment rate remained at 4.7% in November with a gain of 94,000 non-farm payrolls, more than expected by some, but much less than the ADP estimate. The University of Michigan's index of consumer confidence fell from 76.1 to 74.5 in December, the lowest since Hurricane Katrina. You may call it a Santa Claus rally but we would prefer to call it a dead cat bounce. There are fewer and fewer stocks participating in this rally which leads us to believe this is a short lived bounce in a bear market. It is entirely possible for this rally to take prices up to the contract highs we saw in October but we’re becoming increasingly skeptical and will be starting to price out put options and look for short entries for our clients in the Dow and S&P. Additionally we would strongly suggest using this rally to establish short positions to hedge ones’ stock portfolio. Bonds: The fed-futures market still implies a roughly 60% probability that the Federal Reserve will cut the fed-funds rate by .25 of a percentage point to 4.25%, and a 30% possibility that it will cut the rate by a half-point when it meets on Tuesday. There’s also speculation the Fed will slice the 5.25% discount rate it charges banks that borrow directly from the central bank. Although we are most likely leaving money on the table, we prefer the sidelines into the Fed decision and took profits on our clients’ futures and options plays short the debt market late last week. We will continue to advise short entries as we feel the most recent highs should hold, but only after the dust settles from the FOMC decision. ____________________________________________________________________ The LTD for December currencies is December 17 so look to roll into March this week. The dollar is holding it’s own against major rivals and should remain range bound until the Fed’s decision on rates Tuesday. The market is currently overbought and may drift lower but should be supported around 75.50 unless the Fed delivers 50 basis points. 25 basis points is currently factored in, so if this is the outcome Tuesday we would expect 77.50 in coming weeks but not much more. Prices drifted lower in anticipation that the ECB may deliver a rate cut, but after keeping rates unchanged at 4.0% the Euro pared losses drifting around 1.4630. With the BoC and BoE lowering rates, the EC yield gap has decreased and becomes more attractive to traders. The ECB will likely hold the current rate going into Q1 08'. The short term trend remains negative with mixed momentum indicators. We will advise traders to sell rallies that are contained by 1.4900 and keep our negative bias until we start to see things fall apart with the US dollar. The British pound exceeded our target of 2.0300 trading as low as 2.0167 on Thursday after the BoE cut rates by 25 points to 5.50%. Recent economic data mandated the move ahead of the Q1 anticipated date. The short term trend remains negative with weak momentum indicators. We would expect the pound to stay contained between 2.0167 and 2.0530. The Canadian dollar opened the week lower after the BoC lowered rates but recovered by the end of the week closing virtually unchanged on the week. Look for further short-coverings should commodity prices increase or the U.S. economic outlook improves. Current support stands just below .9800 and rallies should be contained by the 38.2% Fibonacci retracement of 1.0273. The Japanese yen continues to trade in opposition to the equity markets; we should continue to see an inverse relationship with security prices and the yen as the carry trade is still alive and well. Carry-traders will look to increase their risk-appetite and pressure JY on higher equity prices. When stock markets begin to suffer again look to get long the yen. For now the trend still points down as another 100-200 points lower looks like it’s in the cards, unless we get a surprise with the Fed. The Swiss franc did a whole lot to end the week only 13 ticks off where we started the week. We see no reason to be long or short and will look for a trade in coming weeks. We are still looking for the Australian dollar to trade to higher ground. To date, the support of .8650 has held and we expect the resistance of .8900 to be penetrated in coming weeks. One thing we did notice was of all the major currencies traded for our clients, the Australian dollar is in backwardation and all other crosses are trading contango. Translation; March is at a lower price than December futures, what does this mean? We will suggest rolling December longs to March this week. ____________________________________________________________________ Corn: Weekly exports showed 1.0 m.m.t. of corn was sold last week. Corn continues to follow beans on their quest to not lose acres to beans. Corn divorced itself from the dollar and crude oil last week in preparation for Tuesday's USDA monthly crop report. The corn market has started to price in the belief the government will lower ending stocks on better than expected demand. Last month's ending stocks were put at 1.897 billion bushels down from 1.997 the month prior. To reiterate prior comments a close over 4.09 would set up a potential move to 4.30 for March. On a bullish crop report Tuesday expect 4.30 and most likely new contract highs to follow. To negate the near term trend we need a close under 4.07. For it to be probable of a near term correction we would need to see a bearish USDA, fund profit taking, or a convincing breach of 4.00. We are currently advising clients to be patient and buy breaks on new crop. Beans: Weekly exports showed 803 t.m.t. of beans were sold last week. Beans like corn, separated itself from outside markets like crude oil last week as they get positioned for Tuesday's crop report. Last month’s ending stocks were at 210 m.b. January beans were up 36 cents on the week, closing convincingly above $11. With little resistance beans could continue to rally higher. If Tuesday's report cuts carry over we could test 12.00 quickly. Support now lies at 11.00. We had a sharp drop the last week of November into our December 3rd low. If we get a spike rally off the report, watch out for another break on month and year end potentially putting in a temporary top. Expect December weakness in January beans following November rallies (8 out of 12). 7 out of 8 December rallies have reversed in January basis March beans. Wheat: Weekly export showed 235 t.m.t. of wheat was sold last week. Not a particularly strong demand signal for U.S. wheat, but world wheat sales remain strong with Egypt and India bidding for wheat near term while world stocks are still at historic lows. Canada also came out last week confirming just how bad their 2007 wheat crop was off 20% from the year prior. We are almost ready to admit we are wrong with wheat as we have not bought into all the hype but with impressive volume March wheat has advanced $1.70 off the November low and it does not look like it will be stopping any time soon. What started as a short covering rally and is now turned into a bull market. After trading above 9.12 for March, wheat’s next resistance is at 9.40 and then 9.60. On Tuesday's crop report traders should focus on world and not US ending stocks as most of the wheat buying is off foreign ports and that is were cuts can come from. Last month's world ending stocks were put at 145 m.m.t. and U.S. at 312 m.b., both historically low. The current market feels that unless wheat keeps a price high enough to beans it may lose acres to beans as beans continue in search of a price high enough to insure 6 - 8 million acres more are planted or we may run out of beans in 2009 with expected demand and a low carry over. ____________________________________________________________________ According to Dow Jones Newswires, the International Sugar Organization said that India's sugar production will fall 20% in 2008-2009 as farmers switch to other, more profitable crops. March sugar ended the week just below the 100 day moving average closing at 9.94 up 19 ticks on the week. Short term indicators and seasonality are calling for a push to 10.40. We remain long with our clients but you must be patient as this trade continues to be like watching paint dry. For new entries we suggest at-the-money options or buying May futures below 10 cents. March coffee closed up 2.10 cents at $1.3115 on the week. We are not fond of the long or short side here and will be looking for a clearer picture this week as we feel prices could go either way. On a push through last week’s high, next resistance is 134.00 on a break lower 125.50 should hold. After the close Friday, the USDA estimated 2007-2008 world coffee production at 122.9 million (60 kg) bags, up from its June estimate of 119.8 million bags. 2007-2008 ending stocks totaled 18.3 million bags, or 14% of annual use, down 4.0 million bags from the previous year. No forecast was made for next year's crop. Cocoa broke above the 2000 psychological level last week trading as high as 2086 exceeding our target of 2080 from previous weeks. If you took our trade recommendation trail stops as we expect sideways action and you could see backing and filling as traders digest a gain of $72 last week. We would suggest adding to the position on pullbacks that hold 2040 still looking for higher prices. The technical picture shows an overbought market so a profit led pullback is likely shorter term. Cotton prices experienced buy side interest that could turn into more than just a short covering rally as the 200 day moving average of 63.59 in March held up well. We don’t expect much more than 67.00 on this leg unless export data shows a pick up in sales. Spill over strength in other grains also probably aided in cotton strength. OJ traded a nickel higher on the week but should stay contained below the 200 day moving average, 146.17 on January. The market is overbought, and with a seasonal sell signal next week, we will look for a short entry closer to 146.00 for clients, but for know it remains on our no trade list. Although we are certainly not of the opinion the housing market has bottomed lumber is starting to get our attention as prices have come off 8% in the last 3 weeks and is nearing contract lows. The previous 3 times we were at these levels buying came in and prices traded higher 55, 15, and 26 dollars respectively. We have yet to see any confirmation of a bottom, on any evidence we would advise positioning long futures in either March or May. ____________________________________________________________________ Gold cannot settle on a direction as it traded slightly higher on the week but not drifting too far from either side of $800/ounce. The 4th quarter is generally friendly to this metal but without help from the US dollar or outside forces we see this market drifting sideways. As we allude to last week we would not rule out a wash out before year’s end that would be followed by as resumption of the uptrend. For now prices should remain between 785 and 817 for February. We have advised clients to cautiously enter longs prepared for a correction utilizing both futures and options out until at least April with options. March silver held 13.96, which serves as the 50% Fibonacci retracement using the August low and November high. Momentum indicators are friendly and would support a chop higher that should be contained at around 15.50 unless the Fed does 50 basis points which would cause a dollar slide and metals appreciation as the trade currently has factored in 25. Much like gold we would not rule a wash out on profit taking between now and years end as you have seen an impressive rally off summer lows. Copper continues to look for guidance from the stock market and expectations of future growth or lack there of. Resistance is seen at 3.2400 and support is seen at 3.0300 for March. Our opinion here is the same as 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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