MB Wealth Corp. Weekly Commentary
For December 17th - December 21st 2007
By: Matthew Bradbard
After cutting rates and the discount window, then not liking the markets reaction, the Fed stepped in again with yet another “rescue” plan. In the biggest coordinated show of international financial force since September 11, 2001 the Federal Reserve joined four other central banks in a plan aimed at coaxing banks to lend more readily. Sounds reassuring…..right! I just don’t get what alarms need to sound; yes the housing market and credit problems cannot be ignored but neither can inflation. The November CPI was up 0.8% and the PPI rose 3.2%, the biggest monthly advance since 1973. If you are as convinced as we are that inflation is rearing its evil head again, position a portion of your portfolio in commodities as they historically have been a terrific inflation hedge. Remember past performance is not indicative of future results. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ The International Energy Agency increased its estimate of 2008 world oil demand to 87.8 million barrels per day, higher than the U.S. Department of Energy's estimate of 87.2 mbd. Either way, it’s going to be interesting to see if producers can keep up. January crude moved $3 higher on the week and if current support holds at $90 we could take another stab at $100 before years end. Fasten your seatbelts if you’re trading crude and be prepared for $3-5 daily ranges as volatility should stay with year end positioning. We see on continued cold weather that $3 heating oil is very attainable. January heating oil looks to be forming a bullish flag and pennant formation, which if confirmed should take this contract to new highs. Our clients entered the January spread long heating oil short gasoline this past week at around 25 cents premium to the heating oil looking for a potential trade up to 30 cents on the spread. The last trading day is 12/31 so we will most likely look to roll this play into February in coming days for them. The current February spread is 22 cents, look for an entry closer to 20 cents and target of 26 cents in coming weeks. US EIA data showed that 146 bcf of gas was taken out of storage, bringing total US gas inventories to 3.29 tcf, 1% above last year’s level and 8.5% above the five-year average. Our clients traded out of their March Natural gas longs at a profit just in the nick of time and hindsight being 20/20 we should have not only recommended an exit of their longs but we could have reversed as there is a seasonal sell through the rest of December on February natural gas. We chose not to take this trade for our clients because of the upcoming cold weather and uncertainty on how that will affect the storage levels in coming weeks. ______________________________________________________________________ After the close Friday, the USDA estimated last week's beef production at 515.2 million pounds, up 2.1% from a year ago. Pork production was estimated at 482.4 million pounds, up 10.6% from a year ago. February lean hogs closed down almost 2 cents on the week and could make their way to November lows. Most likely we’ll be advising longs the first of the year but will remain on the sidelines in hogs and bellies until then. 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%). We got closer to our target as cattle gave up a little ground closing at 97.70 on the week. ____________________________________________________________________ Stocks: You can put whatever spin on the current stock market performance you would like to, but the bottom line is the NASDAQ, Dow, and S&P all traded down in the last week after the all mighty Fed failed to deliver enough to the market. We are currently pricing out put option strategies for our clients and don’t have much confidence in seeing any sustainable rallies in the immediate future. We expect upward movement to be contained at 2150 for the NASDAQ 100, 14000 for the Dow, and 1530 for the S&P. We would not rule out new lows by year’s end if not shortly thereafter. The only feasible explanation we can provide for an up movement in stocks is year end window dressing. We would strongly suggest using any rally to establish short positions to hedge ones’ stock portfolio. Bonds: The Fed is determined and will not go down without a fight, choosing to lower rates by a quarter point and leaving the door open to further cuts as “the strains in financial markets have increased over recent weeks.” We will continue to advise short entries but be wary because bonds could once again serve as a flight to quality if equities fall apart. Look for March bonds to be range bound from 113 to 116-16 and March notes 110 to 112-16 between now and year’s end. ____________________________________________________________________ The dollar index put in an impressive showing last week gaining over 1 cent or 1.5%. As previously stated we were looking for a rally and it is our feeling that we’re about do for a pause. We do not expect much more than 77.50 on this move, as this serves as resistance on both daily and weekly charts for the March contract. Our forecast would change only if we saw a change in Fed policy; assuming the Fed will continue to lower rates into 08’ the dollar should not trade much higher. Inflation is rising in Europe. Consumer prices in the Euro area were up 3.1% in November from a year ago, up from a 2.6% gain in October. The March Euro closed down almost 2 cents to $1.4435, the lowest close in seven weeks. Support exists just below 1.4400, if it gives way expect 1.4100. The Bank of Japan's survey of business sentiment, the Tankan survey, fell from +23 to +19 in the fourth quarter, the lowest in two years. Additionally the BOJ begins a two day monetary policy meeting on Wednesday. The yen has suffered recently but we expect to see a reversal of trend soon as this market is oversold and should benefit from depreciation in US equities as we see this inverse relationship to carry on. Although we do not advise playing a further move south, it could trade down to support of .8850 on March before we reverse, once it turns around expect 300-400 points relatively quickly. We are currently advising clients to be long March Canadian dollars. Daily stochastics are oversold and it appears the MACD is about to turn higher. We are looking for a confirmation that would be delivered on a trade above the 100 day moving average of .9951. The seasonal tendency for December into January is strong and this recent correction we feel was too quick, we are not looking for much more than 1.0200. We maintain our bullish bias in the Aussie but some minor chart damage was done last week and it is possible to see further movement down in the short term. We would favor the sidelines looking for an entry to re-position longs still ultimately looking for new contract highs into 08’. The Swiss franc slid 11/2 cents last week but ended the week near support, we don’t see the decline continuing much more. Where exactly the line in the sand is remains to be seen but we would prefer if you play this from the long side with tight stops on any confirmation of a reversal. The target over the coming sessions is .8900 to .8960 for March. The British pound appears to be stair stepping lower and on a break of Friday’s low we would expect to see a push below 2.0000. This market is still showing signs of weakness with technical’s supporting a lower trade, if you are not already short we would suggest looking elsewhere as the risk to reward in establishing shorts at current price levels is not favorable. ____________________________________________________________________ Corn: Weekly exports showed 1.466 m.m.t. of corn was sold last week. Corn continues to trail beans in their mission to buy back some of the 11 million acres they lost to corn planting this year. Demand overall remains robust with Asian markets buying heavy before Asian and U.S. holiday closings set in. This week simply added more fuel to the bull market rally. Last Tuesday’s crop report showed further declines in ending stocks and even with higher prices last week our export sales increased. Current thinking is much higher prices are in store in 2008, traders need to be watching for any month or year end profit taking as an entry to get long. Any pullback should be viewed as an opportunity to get positioned for long term spring contracts but small under margined traders need to be aware of the near term risks the next 1 to 3 weeks. March corn sees resistance at 4.43; June 18th overnight high and support at 4.31 and then 4.20. A close above 4.43 for whatever reason signifies an upside breakout. Beans: Weekly exports showed 899 t.m.t. of beans were sold last week. Tuesday's U.S.D.A. crop report lowered ending stocks for next year. Thursday's export sales showed an increase in demand even on high price gains, dryness continues over the drier than normal bean fields in S. America. Like corn, beans too look to see much higher prices into spring but small low risk traders need to be aware of a near term correction. Profit taking corrections will always exist in a true bull market, so a year end correction should be used to reposition long into spring contracts. March beans start the week with resistance of 11.75; Friday’s close. A close over 11.75 sends a bullish signal to add longs and the psychological $12 is now in sights and whispers will continue to be heard “beans in the teens.” Support is 11.63 and then 11.50. A close under 11.50 and 11.20 should be the next stop with major resistance at 11.00. Wheat: Weekly exports showed 513 t.m.t. of wheat was sold last week. As I have voiced in past reports, wheat's move from the November low to 9.00 was largely short covering or profit taking from the previous 2.00 break but the most recent move beyond 9.00 towards the 10.00 area in March futures is new long positions entering as concern over the possibility of spring wheat acres being lost come spring plantings to beans. With ending stocks of wheat near 30 year lows, we can not afford to lose acres of wheat. What was resistance now becomes support. 10.00 is likely in the cards in coming sessions unless a profit taking correction starts immediately. Our current customers are long March wheat and short May wheat looking for this spread to widen. Our clients entered at even money looking for the spread to trade to 20 plus cents. Full carry being roughly (15) cents we view this as a great risk/reward ratio as this spread traded well over $1.00 back in mid September. We would think it would be ok for new entries to venture in at a 5 cent premium to March. ____________________________________________________________________ According to the latest news, the Brazilian 07/08 coffee crop totals 33.7 mln bags. Brazil, the world's largest producer and exporter of coffee, harvested 42.5 million bags in 2006/07. Coffee could go either way from here so we prefer the sidelines for now. The sleeping giant may have awoken. Hopefully you have executed some patience with this market and you are now being rewarded. Sugar broke out after months of sideways action and March sugar had its highest close in over four months ending the week almost 7% higher at 10.60 cents /lb. Much of this move can be attributed to short coverings by funds and speculators alike but charts are starting to look bullish. The 200 day moving average should now become support and on a move above 10.86 on March we should get more momentum. If you got long the futures as some of our clients did trail your stops and we will keep you abreast advising on option orders but for now just hold your calls. If you are just in March you soon may want to roll out and get more time. The cotton market of late seems to have been keying off outside markets rather than news of its own. Cotton traded up on the week perhaps partly due to Informa issuing a bullish acreage estimate for the coming season of 9 million. That projection, along with yet another rally in grain markets set the tone for a momentum based rally that spilled over, helping cotton close near 66 cents on March; our target from prior weeks. Longer term we are extremely bullish. March orange juice finished just about 2 cents higher on the week at the 200 day moving average of 145.93. Being that current charts are overbought and that from mid December to mid January 15 of the last 15 years March orange juice has traded lower on average giving up 10 cents, we are looking for a short futures entry. After trading out of our bullish ratio spread for clients just over one week ago we have been on the sidelines in cocoa. Looking at the charts we would expect a move back to 2000 to be bought, 2012 is the 38.2% Fibonacci retracement 1976 is the 50.0% Fibonacci retracement. As we hinted at last week there is a seasonal tendency for lumber prices to find a bottom around this time and trade about $20 higher into early February. The chart looks constructive but with the current housing dilemma we have not yet decided if we will take this trade for our customers. We only bring this up to make you aware as this is a decent move; on average $1863 per contract. ____________________________________________________________________ Gold prices traded off $6.50 for February closing just shy of $800/ounce. Prices could go either way from here as there is generally higher pricing into year’s end, but with some additional US dollar strength and potential year end positioning, we would not get too heavily committed to either the long or short side. We would expect further inflation concerns to support a move higher but if the stock market really gets hit as we anticipate, investors may need to sell metals to cover margins. We have devised a strategy for our clients to be cautiously long by implementing the simultaneous sale and purchase of options in addition to buying futures. Inquire for a further explanation. Silver will most likely follow its big brother but we are more comfortable the way the chart looks on March silver than in February gold so we are starting to advise clients to get long ideally, looking for this to develop into a larger position in silver. We started nibbling just above the $14 level for customers and feel that the consolidation level from October of 13.60ish should hold if challenged. Furthermore seasonal strength indicates that 13 of the last 15 years March silver has traded up from mid December to late February on average of 47 cents. Although we feel copper prices are ultimately moving lower, just as a trade we suggest buying March copper and putting in a stop below recent lows at 285.00. Currently prices are 290.00, looking for 307.00 to 311.00. Traders should have at least $25,000 in their commodity account to trade copper as moves can be extreme.
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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