MB Wealth Corp. Weekly Commentary
For July 2nd - July 6th 2007 By: Matthew Bradbard
As expected, the FOMC left rates unchanged at 5.25%. The Federal Open Market Committee cited moderate economic growth and still-high inflationary pressures in its statement following a two-day meeting behind closed doors. The vote was unanimous. The fed funds rate has been at 5.25% for a year, and economists said the statement signaled the FOMC would keep interest rates steady for a while longer. The FOMC acknowledged improvement in both inflation and growth prospects in recent weeks. The committee said inflation had improved modestly but said that "a sustained moderation in inflation pressures has yet to be convincingly demonstrated." Now with the USDA and FOMC meeting behind us the next focus is the Atlantic Hurricane season and what affect it may or may not have on a variety of commodities. With the peak of the Atlantic hurricane season still more than a month away, it's no wonder why all three of these commodities trade well below their year-ago levels, but that could soon change. Natural gas, FCOJ, and Cotton are among the commodities with the highest risk to production in the event of an active hurricane season in the Atlantic. We are currently long FCOJ with futures and options and are looking to get long Cotton and Natural gas on any pullbacks. With the lack of storms so far, low prices in Natural gas and FCOJ likely reflect the current fundamentals: adequate supply with moderate demand. Investors who placed bets last year on high hurricane activity forecasts got burned when nothing major hit the U.S. This probably makes various traders a little gun-shy this season. The long-term charts for natural gas and orange juice show that they both are very oversold at these levels, and seem to be poised for some big upside movements if there is a strong hurricane season. To find out exactly how we are positioning in FCOJ, Cotton, Natural gas and many other markets, Contact us today at 1-888-920-9997. ______________________________________________________________________ The crude market currently has a "hyper-sensitivity to any supply threat," and there are a number of potential threats to supply that could develop in the immediate future. Crude oil for August delivery closed $1.11 higher at $70.68 on the New York Mercantile Exchange after reaching $71, its strongest level since Sept. 11, 2006. The contract finished 2.8% above last quarter's close of $68.73, up 8.8% from the end of May, and $1.54 above last week's close. The expiration of the July petroleum products at the end of the day's session likely helped exaggerate the gains in product prices. "The demand and inventories this week were very strong," said Phil Flynn, analyst at Alaron Trading. "Seasonally, demand goes up this time of year. We also have rising geopolitical risk." In the meantime, in addition to the thwarted attacks in London, developments in Venezuela and Russia this week are also worrying investors. Russia is trying to lay claim to all the oil on the North Pole. It's the latest story in a disturbing trend of oil nationalization. Meanwhile, the next round of sanctions against Iran could make it difficult for them to export oil, and that too is supportive. The comfortable inventories so far have helped push August natural gas to the contract's lowest level since May 2005. As the season extends, if the weather remains quiet and storages grow or remain as is, prices would chop lower, but if you see storms start to form you will see natural gas start to build in some 'storm' premium in anticipation of supply disruptions. Natural gas will also be affected by increased usage for cooling if we experience extended heat waves this summer. If you want to get bullish on this market, you want to do it before the hurricanes and heat materializes. ______________________________________________________________________ The market seems to be down playing the bearish cash news and is shifting its focus to the oversold technical condition. In recent days we have seen some technical buying and decent export sales, this combined with short covering could help spark some new buying. We are looking for an entry point in Live cattle and may get it with a rally in grains. We have been higher 15 of the last 19 years in July in Live cattle and this year looks to hold true to that pattern. This has to do with the market anticipating decreasing slaughter rates at a time when retail beef demand is high (the height of the BBQ season). The hog market is probing for a near term low and it looks as if it will take a turn higher in pork values and or improving packer margins to form a low. We are not ready to get long yet but the sub 70 cent level will put a potential hog entry on our radar. ______________________________________________________________________ Stocks: The stock market is still digesting the fed decision to keep rates as is at 5.25%. We expect the indicies to stay range bound and will be a buyer near 13350 and 1500 on the Dow and S&P respectively and a seller at 13750 and 1550. Once again, on further sub prime woes it is feasible to see a 5-10% volatile move downward. Rumors are starting to be heard about the Yen carry trade as well, which would be bearish for stocks. Any confirmation that positions are being unwound would spiral a move down in stocks and move the Yen higher. ______________________________________________________________________ The USDA said that the estimated planted area for: Today's USDA acreage estimate for: After last weeks surprising acreage estimates, December corn was down 7.5 cents at $3.507 and November soybeans closed up 39.5 cents at $8.817. December wheat started the day higher, but ended down 22.5 cents at $6.105. October cotton closed up 1.60 cents at 61.50, the highest close in ten months. Now with the USDA report at our back weather, demand and fund activity will determine direction. We feel that the recent down move in corn has factored in a majority of the bearish news and we remain cautiously long. Although beans will need to trade high enough as not to loose acreage we are skeptical of this move north. July is historically the weakest month of the year and we do not believe this year should be any different. In regards to wheat we still contend that Chicago wheat should not be at a premium to Kansas City wheat and will hold our position looking for further tightening on that spread. We picked up approximately 15 cents last week and look for 10-15 this week. ______________________________________________________________________ With the Chinese raising their trading range on their currency last week and the market recently seeing signs of softening US inflation the dollar looks like the path of least resistance is down. The Fed is caught between a rock and a hard place trying to combat inflation while walking a tightrope in the housing market. Their next move is anyone’s guess at this point. Currencies across the board should find strength this week as the dollar trends towards its lows of 81.20. The wild card here is the yen, which technically on the daily and weekly charts looks like it is carving out a bottom. The Yen could violate a long downtrend channel resistance at 82.57 which would spark short covering on continued talk of carry trade; this could support a move to 84.00. The Euro Currency, Swiss Franc, Australian Dollar, Canadian dollar, and British pound should also get some support from a weak dollar. ______________________________________________________________________ Since things have been quiet on the weather front, there has been no interest in buying into the orange-juice market. We would rather be a bit early than a minute late so we started buying both FCOJ futures and options last week out until September and November. This year's orange crop is now forecasted to be a record low of 130 million boxes. However, early estimates for next year's crop were "encouraging, and most unofficial forecasts reflected 170 million boxes” -- a significant improvement to this year's actual. To impact production, the orange juice market would need a direct hurricane hit in Florida's central area like Indian River County, but the market is already so oversold, it could rally anyway with out any hurricane activity. Cotton is in the same boat as FCOJ and if there are hurricanes we should move higher. The bigger issues for cotton, though, are going to be how many acres were truly planted and how the drought has affected the current crop in the ground. Lately, cotton has been moving higher with cotton planting acreage cut this year as farmers shifted more acreage to corn earlier this month. December cotton has climbed about 20% over the past two months, trading recently as high as 64 cents a pound on Nybot. ______________________________________________________________________ With continued dollar weakness the metals may benefit. Both Gold and Silver look like they are poised for a technical bounce from oversold levels but without new market developments July is generally weak for Gold and mildly bullish for Silver. July can be used for accumulation of Gold if you are long term bullish on Gold like we are. The normal yearly low in Gold is seen near the beginning of August, before fabricators begin buying bullion ahead of the holiday season. The key factor to understanding Silver is understanding its demand schedule as Silver is demand-driven. When jewelry, industrial, and photographic demand coincide, prices rise. There are generally three strong months a year in Silver; March, July and September when demand from all three sectors begin to increase.
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