MB Wealth Corp. Weekly Commentary
For July 23rd - July 27th 2007 By: Matthew Bradbard
Inflation….Someone gets it. China’s central bank signaled concern over the recent pickup in inflation by announcing its third increase in interest rates this year. On Thursday, the Chinese government said that real GDP increased 11.9% in the second quarter from a year ago, the fastest growth in 12 years. China’s continued growth as will as India’s and other emerging markets will continue for years to come. The insatiable demand for raw materials, i.e. commodities coupled with the weakening dollar should mean higher commodity prices. The challenge though is that not everything goes up in a straight line so pick your points and pay attention to the ebbs and tides of global supply and demand fluctuations. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Brace yourself for high energy prices for years to come. By 2012 production is expected to fall short of global demand. Global oil demand is projected to expand 2.2% a year, reaching 95.8 million barrels per day by 2012, up from the current 86.13 million barrels per day. This forecast is based on global economic growth of about 4.5% annually. While economic growth is expected to spur demand, the IEA sees OPEC’s spare capacity narrowing and expects growth from non-OPEC sources to dwindle after 2009. After reaching an 11 month high on Friday, August Crude went off the board above $75 and now September is the front month. We are expecting a slight reprise in prices and are looking to get long between $72/73. The closer to $70 we can get in the better as we see that as major technical and psychological support. Production began flowing Friday from the world's deepest natural gas platform, Independence Hub in the Gulf of Mexico. The project is expected to produce 1 billion cubic feet of natural gas per day by the end of this year. September natural gas fell 25 cents this week to a new contract low of $6.523. Without a significant draw or low injection number in this week’s AGA number, expect Natural gas to make a new contract low. These lows will be used as an entry for us to get long still believing that we will see $7.50 in Natural gas this summer. Not only is Natural gas oversold on the charts but we are not even halfway thru hurricane season and there is a record spec short position that we expect to get squeezed when this market turns. ____________________________________________________________________ On Friday, the USDA said that there were 10.737 million head of cattle on feed as of July 1st, down 1% from a year ago and a little less than expected. June placements were down 15% from a year ago and marketings were down 3% from a year ago. Friday the USDA said that there were 47.7 million pounds of frozen bellies in storage on June 30th, up 3% from a year ago. Frozen pork totaled 470 million pounds, up 14% from a year ago. Live Cattle has been range bound trading between 96 and 97.50. With a friendly number Friday from the USDA and historical seasonal strength, expect to see October make a run at 100 over coming weeks. The USDA's Livestock, Dairy, and Poultry Outlook said Friday that "third-quarter 2007 prices for 51-52 percent live equivalent hogs are expected to range between $51 and $53 per hundredweight (roughly 70 cents lean), close to third-quarter prices a year ago." October lean hogs gained 3.25 cents to a new contract high of 73 with traders hoping that high pork prices in China will result in more U.S. exports. Increasing U.S. beef exports to Japan and Korea continue to provide positive pressure on beef prices and the cattle/beef complex as these two countries slowly increase beef imports. ____________________________________________________________________ Stocks: We were above 14000 in the Dow for about one minute. We think the downward move that started on Friday June 20th is the beginning of a bigger move down. Maybe a buying opportunity in a much broader bull market but we expect at least another 300 points in the Dow and 40-50 in the S&P on this move. Data just released showed margin borrowing in May at an all-time high of $353 billion, above its peek early-2000 level and up 11% from April. Need I remind you what happened shortly there after? Bonds: The September bonds ended the week up 1.14/32nds at 108.13/32nds, the highest close in over a month, from concerns about a slow U.S. housing sector and problems in the sub prime mortgage market. We maintain that rates should trend lower and be under 5.0% by month’s end putting the 30-year close to if not at 109 for September with the 10-year approaching 107. If our targets are reached this week we might not be there for long so trail stops and potentially look to reverse on signs of weakness. Federal Reserve Chairman Bernanke told Congress on Wednesday that he expects real GDP to increase between 2.25% and 2.50% in 2007 and between 2.50% and 2.75% in 2008. He also expects the core rate of inflation to drop under 2.0% in 2008. He further added that "the pace of home sales seems likely to remain sluggish for a time." ____________________________________________________________________ All about the weather! Corn: December corn dropped 35 cents on the week to $3.335, the lowest close in eight months. Unpredictable trade with weather forecasts changing day to day has traders apprehensive of taking a big position after a significant weather surprise followed last weekend. Pockets of extremely dry conditions remain scattered across the Corn Belt but many areas saw crop “making” and crop “saving” rains this week. If good/excellent crop ratings could stabilize now into August, the 64 % rating would be above the ten year average of the 61% rating as of Aug 1. This is prompting ideas of a yield potential at least coming in at last year’s 149 bushels’ per acre maybe greater allowing US stocks to build at least moderately into next year. This for now would limit upside potential into a record fall storage demand situation. Trade remains aware of the potential for substantial additional loses in eastern European feed grains where as much as 30 + mmt are in extreme hot and dry conditions. August weather will drive soy prices and indirectly corn values. August USDA crop estimate will be interesting but any decision by the Sec of Ag after that report regarding opening CRP plantings will be more critical for long term price prospects. Trend following funds are net long approximately 120,000 contracts down from 312,000 in February on the highs so there is significant room for both buying and selling. World supplies are tight, the stocks to usage is low and demand remains robust but Corn may be stagnant until the next ethanol movement, which we expect in the fourth quarter on higher energy prices. We remain long December but are getting beat up; unless you are patient and prepared to weather a volatile storm you may want to go elsewhere with your capital. Beans: Traders are apprehensive after hot and dry projections last Friday gave way to surprising midweek rains. Trade also focusing on talk of much more death loss of hogs in China to further slow already diminished Chinese imports in the last month or two. Current pace does suggest that USDA could likely be overstating Chinese demand this year after years of rapidly growing feed demand and soy imports. Higher costs of producing corn however keeps the trade guessing what type of bean/corn price spread we need next year to maintain needed corn plantings, yet also switch acres to satisfy the new crop soybean S/D. The conservation reserve acreage planting release decision is expected by Sep 1, after the Aug crop report, will be key to soy price ideas. Only opening at least some of this set aside acreage or a huge final corn yield can free up enough acres to stabilize the new crop soy S/D after buffer stocks will be depleted this year. The progress of the US soybean crop tends to become apparent in mid July, but the bulk of the US crop sets pods in early/mid August when yield is determined and the crop thereafter needs merely to dry and ripen. Thus, new-crop soybeans tend to slide in late July but can accelerate lower into early August. We are currently long November beans looking for a gap to be filled at 923’0. On a break lower we will stay long unless 855’0 is breached; current 875’2 as writing. Wheat: With EU wheat prices surging to new highs on lower crop ideas US prices soon may follow. Chicago Wheat is at a record discount to Paris futures and we are experiencing a record wide wheat – corn spread. Trade debating ideas of fair value for wheat with record tight world supplies with fears of an even smaller final US crop with more acreage abandonment and less then stellar EU crop conditions. The un-harvested wheat in Kansas and Oklahoma could turn out to be significant and we have a chance of coming in close to our 95/96 stock to usage ratio when wheat traded to $7.00 +. Also because of the different growing cycles around the globe, Australia does not have harvest until November and Argentina is all but out of wheat. The state of the US crop is critical with global supplies being so tight there is little room for error. We are long December wheat currently and have a buy breaks mentality into harvest expecting higher prices. Food for thought………The wheat/corn spread last week widened to over $3/bushell, its widest level in at least 30 years, triggering some traders to unwind the spread. If CBOT wheat makes a run at its all time high of $7.50 will the spread widen to $4.00 or will corn get pulled higher? ____________________________________________________________________ The short-term trend remains negative with the Dollar index even with over-sold technical indicators. With the Fed on hold at 5.25% for the near-future, traders will continue to look for opportunities to higher yields in a favorable global environment. Use this week’s dead cat bouncer as an opportunity to sell dollar rallies or get long the Australian dollar and Japanese yen. The Canadian dollar has tended to rise against the US dollar throughout the second calendar quarter - the first Canadian fiscal quarter. But by early July, demand for it has often been exhausted and the Loonie has usually suffered a sometimes sharp decline into August. Getting short near the recent high of 0.9627 with tight stops seems like a good trade to us. With the Euro-currency the short-term trend remains positive even with over-bought technical indicators. Can or will traders push through the knock-out strike prices and move to the next level? We say yes and believe 140 is in our not too distant future. Talk of a possible 3.5% increase in the Yuan to cool the economic expansion may get further attention. The Japanese yen ended the session at .8307, up 57 tics. This could be the beginning stages of a bigger move to .8500. Keep an eye on the Nikkei 225 as a key to direction for the yen. Higher Nikkei 225 should equal a lower yen. We missed the initial pop but we are looking to get long September futures on a setback and purchasing December out of the money call options. ____________________________________________________________________ The cocoa market closed slightly higher on the week finishing up 59 dollars closing Friday at 2099. The Chocolate Manufacturers Association said that the U.S. cocoa grind totaled 95,608 tons in the second quarter, down 9% from a year ago. Funds and specs have been holding a large net-long position over the last month. If the market holds this higher level, we could see more long liquidation. Sugar prices were firmer on the week reaching a three month high on a break above the 100 day moving avg. and thru the physiological 10 cent a lb level. Producer selling has been present above 10 cent basis October. The supply and demand situation remains the same with sufficient supplies of sugar available in the market and little demand. This should continue to limit the upside in the immediate future. If crude prices begin to move lower, we could see sugar prices pressured but at 9.50/10 cents a lb this could be viewed as a value play as sugar is one of the commodities that have not seen significant price appreciation in 2007. Viewing the most recent COT there remains significant buying capacity and 12 cent sugar should be attained in early 2008 if not sooner. The coffee market continued its technical bounce as prices pushed to a new monthly intra day high of 115.45 basis September on Thursday but has failed to close above the 100 day moving avg. of 114.55. The market has been supported by a cold front through Argentina that could reach Brazil. There have been no freeze threats in the last month as this period will come to an end at the end of July. The Brazil harvest has been progressing and is over 60% complete. Based on the cycle and the lack of any freezing temperatures in Brazil, next year's crop should come in significantly higher. On a break this coming week we are still confident of a sub 109 trade for September Coffee. On Friday, the USDA said that there were 910 million pounds for frozen orange juice concentrate in storage on June 30th, down 18% from a year ago. OJ prices climbed to their highest level in one month trading as high as 137.00. On a breach of 137.00 we should fill a gap at 148.50. The hurricane season opened on June 1st but there have been no weather threats to the Florida crop. August through October is the period when weather can have more of an impact in Florida. August is also the time when we get our first estimates from private firms for the upcoming Florida crop. The USDA's first estimate will not be released until October. December cotton closed just shy of 63.00 after trading at 61.84 on Friday. Prices have fallen from the contract high of 68.80 made earlier in the week as the market was overbought and weakness in the CBOT grain complex most likely contributed. Your patience is starting to pay off and we will get long cotton as we get closer to 60.00 on the December contract. The market is approaching a seasonal period when prices have the tendency to move lower. The weather premium that has been built into the market will be taken out. Looking at the big picture to be price-competitive with a crop like soybeans, cotton would need to rise to the 75 cent level. This move is supported by the fact that cotton acreage is expected to be down 28% year over year and poor weather has trimmed even that acreage. Cotton will need to achieve and maintain higher prices to entice farmers not to reduce acreage further to corn and beans. ____________________________________________________________________ On Wednesday, the International Copper Study Group said that in the first four months of 2007, world copper demand exceeded production by 157,000 tons. World mine production is up 7% from a year ago, but usage is up 11%, thanks to big increases in China, India, and Russia. One year ago, the copper market showed a 143,000 ton production surplus. September Copper closed up 13 cents on the week and looks poised to make a new contract high. Industrials metals prices pushed higher as China - a major source of global demand - reported faster-than-expected economic growth in the second quarter, while the U.S. dollar weakened further. Both the industrial and precious metals market also found support in a falling dollar, which can make commodities appear more attractive to foreign investors. The long-term story for the base metals remains the same: Demand for metals continues to increase steadily and production growth is constrained by the long lead times to develop new production and by the shortage of high-quality development projects. Gold remains solidly entrenched within the uptrend from the recent lows putting on 40 dollars in the last month. The declining US dollar spurring strong demand continues to support gold prices along with rising crude prices, and recent fund activity. The latest sessions have seen a slow grinding move as the market chops higher making its way to 700 basis August. There seems to be a revival of interest in Gold and both short and long term traders are embracing the bullish case in gold as a flight to quality, an inflation play and continued dollar weakness in the USD against major currencies. Traders must remember that the gold market typically makes a major low in the late June/early July timeframe, and this is why we have been and will continue to recommend getting long December Gold. Any dips at this point should be viewed as opportunity to build long positions as we believe the low for the summer is in. Although Silver is playing off strength in Gold we are not as confident in this move. We have put on an impressive $1.25 in the last month off the lows seen in mid-June but we may be running out of gas. Both overhead resistance and the 100 day moving average lies at 13.60 which is the current price of December Silver. In the last 19 years silver has been down 14 times and up only 5 times in the month of August so we would not be shocked to see a temporary retracement back to 13.00 before the bigger move to 15.00 gets underway.
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