MB Wealth Corp. Weekly Commentary
For July 16th - July 20th 2007 By: Matthew Bradbard
I am not a believer! As stock markets around the world make new highs I am looking for an entry to get short the Dow and S&P 500. In an article in the WSJ on Wednesday July 11 we echo the author’s thoughts questioning if Fed officials eat or drive? We believe the Fed is seriously underestimating inflation risks. The Fed does not believe that rising food and energy prices are causing inflationary pressures defending their stance with the consumer continues to spend. This logic to me is backwards because life as we know it without food and energy would not exist; in other words we have no choice. Furthermore the consumer continues to consume as our nations debt increases. Thank God for credit. As the United States debt continues to balloon so does the debt of the every day working citizen. I don’t know what the catalyst will be, but when the consumer either runs out of money or runs out of credit then what? The two things that have kept the United States economy robust of late has been consumer spending and the housing market and you all know where we stand on the housing market, ugly and getting worse. The reason we are skeptical of continued stock market gains and remain bullish on the commodities market is that remember commodities are booming because global growth not just US growth. To find out exactly how we are positioning in commodity futures and options, ______________________________________________________________________ The tight world oil supply/demand balance, which is responsible for the rising crude oil prices, is expected to continue in 2008 boosting the annual average price by another $1.60 per barrel. West Texas Intermediate crude oil prices are projected to average $65.56 per barrel for 2007 and increase to an average of $66.92 per barrel in 2008. Current prices on front month Crude are $74 and we are positioning to get long the September contract but only on a pullback which we feel is over due. Motor gasoline inventories during the first half of the summer (April-June) were tight and are expected to remain so during the rest of the season. At the end of June total gasoline inventories were 205 million barrels, 8 million barrels below the average of the previous 5 years. The low-inventory situation is expected to persist, with end-of-season (September 30) stocks at 198 million barrels, 7 million barrels below the previous 5-year average and 17 million barrels below last year. With out supply disruptions it is more than likely that the highs are in for wholesale gasoline prices this summer. We are 20 cents off the $2.450 level reached in May but do expect wild price swings until we get through the driving season and hurricane season is at our back. The Henry Hub natural gas spot price is expected to average $7.91 per thousand cubic feet (mcf) in 2007, a $0.98-per-mcf increase from the 2006 average, and expected to average $8.39 per mcf in 2008. ______________________________________________________________________ The longs ran for the exit as for fears of rising corn prices and lighter beef demand will most likely result if the excessive heat lingers into August around the nation. Technically the market is overbought and there could be some follow-through selling as traders look for further signs from the cash market. We are currently on the sidelines for Feeder and live cattle. Breaks still look like buying opportunities. With meat slowly starting to make its way to Japan and South Korea, given the cheap US dollar meat exports could do very well in the months ahead. As meat slowly starts to make its way to Japan and South Korea, meat exports could do very well in the months ahead thanks to the cheap US dollar. As discussed last week Lean hogs hit our target of 75. It happened a lot quicker than we anticipated on rumors of China looking to buy pork. These rumors sparked short covering from fund traders and allowed hogs to close nearly 4 cents higher on the week at 73.45 on the August contract. Although we rarely, if ever trade Pork bellies, a move higher is supported both technically and fundamentally. ______________________________________________________________________ Stocks: The higher we go the harder we fall. Although taking a contrarian view we believe it is time to either lighten up on your longs or start to hedge off some risk. We are looking for a 3-5% correction in the indices over the next 3-4 weeks. We are looking for 13500 in the Dow and 1505 on the S&P. Bonds: We maintain that rates should trend lower and be under 5.0% by months end putting the 30-year close to if not at 109 for September with the 10-year approaching 107. ______________________________________________________________________ Beans: Reading into the most recent USDA numbers, the supply/demand outlook suggests that the market could get extremely tight if the yield comes in under the trend line forecast. There is no doubt that conditions are tight and we cannot tolerate any type of weather problem or yield reduction, real or imagined. With yields estimated to come in around the critical 40 bushel/acre level, the weather now thru August is key. An increase to 42 or reduction to 38 in yield correlates to a $2.00 difference in the price beans. Although the soybean crop is not made until pods set in early/mid August, the market tends to anticipate its success in mid July while the corn crop is pollinating. With anxiety over weather tending to peak by then, the market has usually fallen - often hard - into early August. Soy products have tended to decline along with soybeans, but soy oil has usually done so hardest and most reliably. Once the market feels secure with the new crop likely to be made, it deserts the long side of old-crop soy oil for fear of deliveries. Corn: The bulk of the US corn crop pollinates in mid/late July. (Remember this year that corn went in the ground one/two weeks late in many areas.) Once it does so, yield is essentially determined. Thereafter, the crop needs simply to mature and dry into harvest. Thus, once the crop is made, new-crop production potential is (except on rare occasion) assured and the excess old-crop, or carryover as represented by the September contract, can become increasingly burdensome. That being said we will be paying very close attention to the weather in the Corn-belt over the next few weeks. It seems very elementary but if weather gets wet corn should move lower and if the weather is hot and lacking precipitation we should see December corn back at $4.00 over the next several weeks. We remain cautiously long and are looking for the funds to become active buyers over the next two weeks. Our targets remain 371 then 383 then we expect the gap at 395 to be filled, which was formed on the break downward from the contract highs. Wheat: This market certainly has not lacked volatility. Wheat continues to push a decade high in price but has yet to discourage selling. Export demand continues to surprise traders as end users continue to buy US wheat. Much like corn and beans the focus will be on crop size and yield outlook over the coming weeks as the crop moves through a critical growing period. With the current ending stocks forecast at a 12 year low and the world ending stocks at a 26 year low it is ever so critical to see a good crop this season. With recent breaks being bought by commercials it is too early to say that prices are high enough to slow export demand. If you are not already in, consider buying Kansas City wheat against Chicago wheat looking for KC Wheat to trade at a premium to Chicago in coming weeks. ______________________________________________________________________ As we predicted, the dollar made lower lows this week on a breach of support. Amid concerns about the economy and shrinking US interest-rate differential abroad, the dollar broke 81.20 and presently is one cent below that. We expect to see continued chop down and will use rallies as selling opportunities. Along the same lines, with expected continued dollar weakness, use pullbacks in Swiss, Cable, Ozzie and Loonie to get long with relatively tight stops because these markets are getting overbought. We are beginning to wonder if the end of the carry trade will soon come as a result of improving economic conditions in Japan. We are still looking to pick our point of entry long the Yen believing we are close to making a significant bottom. On a fresh high above last week’s trade of 0.8338 on Wednesday we want to be long. Once we get moving on short covering, carry trade unwinding, and fresh buying we could put on a quick 3-4% appreciation in the Yen. ______________________________________________________________________ Although it is tough being on the sidelines when a market is making three year highs, it is all about being disciplined. If you are not on the Cotton train yet we suggest waiting for setbacks to position yourself on an extended move to 80 cents/lb. Sugar hit a three month high on rumors of a smaller crop out of Brazil and intra-day traded above 10.00 cents but closed below at 9.87. As we said last week we remain patient and wait for a close above 10.00 before getting long futures but feel comfortable buying March 08 calls as is. OJ has been in a sideways coiling pattern and we view gathering momentum for an impending move back to the mid 150’s before mid- August. We would prefer to be on the sidelines on Cocoa as we are getting mixed signals. An island top may confirm a short-term top but with early reports of black pod disease and a tight supply situation in Nigeria we are not ready to get short. Coffee should hit our target of 106.50 this week and we will use this as an opportunity to exit our shorts. ______________________________________________________________________ The metals complex expects the dollar to remain in a downward trend and the trade is also anticipating strength in the energy complex and that should mean that the outside market impacts on metals are widely expected to remain supportive. The only worry we have on a massive stock correction there will most likely be metals liquidation to cover margins. The Gold bulls including us continue to maintain the trend in the dollar will continue lower and the move higher in gold in recent weeks is justified by the currency situation. Being above the 50 and 200 day moving averages is supportive but we expect sideways choppy action in the short-term before a bigger move towards $690 ensues starting in early August. It appears the bull camp has an edge in Silver as well. The macroeconomic picture of late has improved with Silver’s imports and exports increasingly dramatically in May. On the charts Silver is running into some resistance around the $13.20 level but should be able to overcome that level this week on a push to $13.50. With a close above the 40 day moving average on Friday a penetration above $13.50 could support a quick move to $14.00.
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