MB Wealth Corp. Weekly Commentary
For July 30th - August 3rd 2007 By: Matthew Bradbard
I used to be amused by some quirky sayings by Alan Greenspan but now Henry Paulsen our current Treasury Secretary offered amusement with a recent comment “What we are seeing now is risk being repriced, and a different perspective on risk, which I think is healthy.” In other words shit will hit the fan and people are starting to realize things are not so rosy! We are about to experience the worst bust in housing in the nation’s history. A large percentage of American investor’s biggest asset is their homes, the depreciation that has and will continue will make the most solvent investor skittish about additional risk in his/her portfolio therefore we do not expect big things out of the stock market for the remainder of the year. As the questions remain unanswered about credit, the housing market and what the Feds next move will be volatility in the marketplace is here to stay. Stocks were crushed last week with the Dow loosing 585 points, or 4.2% and the S&P declining 4.9%. A little over a week ago, the Dow stood at a new high of 14,000. On a positive note even with this recent sell-off the Dow remains up 6% on the year while the S&P has risen 3%. It is not only the US that is experiencing a correction; stock markets around the world from Europe to the Far East are essentially flat on the year. Enough about what has happened, the question is what the future holds and how to take advantage of the impending movements? To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Crude oil closed above $77 a barrel on Friday slowly inching its way towards the $80 level. Just as the market looked as if it was due for a correction, rampant buying came in and shorts were running for the hills. On new highs expect massive fund buying. The question we are asking is: If we are to expect higher Crude prices in the future how long will backwardation last? We don’t think for long, so in addition to outright buying oil looking for higher prices we are spreading back months against the front looking for contango by months end. Our only reservation and why we are treading cautiously is Crude supplies are 5.4% above a year ago and like most commodities with oil it to is all about supply/demand. However supplies are falling in the area where the market cares about the most in Cushing. It is obvious by the market's reaction that the market judges it as a necessity not a luxury to have a cushion of crude oil supply. In the heat of mid July, natural gas distributors and utilities in cold-weather regions begin more aggressively accumulating inventories of gas as it gets later in the injection season and the end of summer approaches. Picking a bottom in Natural gas is a dangerous sport but we are going to make an attempt. Prices have come off 25% in the last 2 months and we feel current prices are 5-7% from a bottom and feel on edge but will be getting long. We will be recommending bull call spreads and for our more risk averse traders buying futures. Remember last week we hinted of a short squeeze which we believe to become a reality in the next few weeks. Large speculators in the natural gas futures market added a significant number of short positions during the week ended July 24, remaining net short and setting a new record for the number of short positions held for the week, the Commodity Futures Trading Commission reported Friday. Similarly, the heat of summer is one of the better times of the year to price heating oil. September is a so-called shoulder month, when consumption of energy is lower; but the market takes the opportunity more aggressively to accumulate inventories. During August, the focus of refiners remains on gasoline at the expense of heating oil. Despite rising by 1.5 million barrels last week, over all supplies are 8.6% below last year's supply. The technicals have not set up to confirm a buy yet but by the time they do you may be 20 cents higher. ____________________________________________________________________ Japan's Ag Minister will be visiting the U.S. in early August to discuss beef trade, among other things. October live cattle closed up 1.45 at 98.65, just shy of the contract high. As stated last week we are looking for 100 plus on this move. Chicago Mercantile Exchange hogs closed higher Friday on short covering, and bear spreading out of August into October, December, and February trading months. That, along with cash hog price weakness, capped spot-August advances but pushed up back months. Pork bellies also ended higher and should start the week up making their way to 93.50 on August. ____________________________________________________________________ The payrolls number is due out on Friday August 3rd estimated at 130,000…….will it be supportive or the nail in the coffin and cause further pressure on stocks? Stocks: Two weeks ago the cover of Barron’s read: How long until we hit Dow 15,000? This week Dow slides down 4.2%. What a difference a week can make. The selling in stocks broke volume records at all three major US stock exchanges. The market’s “fear gauge” as measured by the CBOE VIX volatility index, spiked above levels reached in June 2006 reaching 24.17, well above the 12 to 13 level just a few months ago. Between Thursday and Friday 1,111 stocks hit 52-week lows. It did not take long to get the 400 points on the Dow and 70 point hit on the S&P we were looking for and spoke about just last week. We remain cautious taking on new positions long or short in the indices but will once again advise stock traders to hedge your stock portfolio with shorts in futures or put options on the indices. Bonds: Rates are below 5.0% and we hit our targets of 107 in the ten-year notes and 109 in the 30-year bonds. Current price of ten-year notes is 107-17 and 30-year bonds at 109-29. We think that the market has overdone itself, if you are looking for a short term correction selling call options seems like the way to go as selling futures doesn’t leave much room for error with so many unanswered questions. Even though you are bumping against resistance the trend is still up so govern yourself accordingly. We do believe that a short term pullback may become a reality this week as long as the stock market can find some footing. Fed Funds traders increased the odds of a rate decrease from 44% to 66%. If we opt to go short futures we will put stops above last week’s highs. ____________________________________________________________________ The US House of Representatives passed a farm bill last week including a 1 million dollar adjusted gross income restriction on subsidies compared to the White house’s proposed $200,000 dollar restriction. Other provisions place hard caps of $250,000 dollars total subsidies compared to the last farm bill of $360,000 cap without figuring in loopholes. Mostly the House’s farm bill is unreformed and is virtually 2002 part II. The senate has yet to pass their own version of the farm bill. Get positioned ahead of the next USDA crop report on Friday August 10th. Corn: We have about 15% of our key yield time to go then it’s everyone’s guess on total crop size. Corn futures finished strong as domestic and world coarse grain weather was projected to be unfavorable to crop growth. Weather forecasts call for mostly dry weather for the next two weeks leaving the dry 20% of the corn belt to continue to see crop conditions accelerate lower in their areas. We expect in line to lower yields and although supplies are burdensome we expect the market to remind traders of the vast future corn demand. We are long corn out rights and are spread long against Chicago wheat; contact us for a more thorough explanation. Beans: About 60% of our key yield development time lies ahead as the beans fill in the pod to maturity. Prices collapsed on a mild weather outlook for the US and on fund liquidation. Soy’s decline being attributed to an improved weather outlook is puzzling as little of the recent rally was attributed to expectations of low US soybean yields. Lower prices now do nothing to address the sharp reduction in US and global soybean supplies in 2007/08. Lower prices will stimulate consumption and discourage increased seedings in S. America. A significant break in the Brazilian currency which improves domestic prices of soybeans to the Brazilian producer added some hope of increased acreage growth in Brazil. Some private analysts projected no more than a 5%increase or 3 mmt production but a stronger dollar against the currency could significantly change all of that. Soybeans are oversold and last week managed to fill a downside gap formed back at the end of June, so we are buyers. Although we may have one washout attempt to the 100 day moving average of 826’0 on November beans we are lightly getting long and will add to our longs on a confirmed move higher. As beans start to get legs we are also curious about buying December meal as the daily chart looks friendly and seasonal strength into years end off it’s summer lows. Expect bumps in the road as the bull market in Soy meal does not officially kick off historically until mid-September. Wheat: Our fear is technicals are over bought and month end is Tuesday and funds could take profits. We took profits on our wheat last week, maybe a bit early as wheat is currently making new contract highs. I would rather be a week early than a minute too late. Prices were mixed due to higher prices in Europe, stronger-than-expected exports, and concern over the impact of high temps on US/Canadian spring wheat. There are reports that abandonment in Kansas and Oklahoma will be larger than currently estimated and that low quality further reduces the supply of “milling” wheat. The EU wheat contract still holds a $1.12/bu premium to Chicago wheat. The strength of the dollar has helped a little but something will have to happen to put prices back in line to a more normal 30 cent spread. ____________________________________________________________________ On Thursday the Bank of England is expected to hold rates steady at 5.75% as well as the ECB ought to leave rates at 4.00%. Both the Cable and Euro are presently moving lower but we are viewing these pullbacks as buying opportunities on a broad advancement against the dollar and feel we are in the midst of a major dollar depreciation. We established longs on September Euro on Friday at 1.3670 or thereabouts which is the 38.2% retracement from the June low of 1.3306 and June high of 1.3878. Although the market is currently trending down we feel the 100 day moving average will serve as support and this currency will benefit greatly from any bearish surprises in the dollar which could happen at any point. We are currently looking for an entry long the Pound but feel it could get a tad cheaper. The unwinding of the carry trade may have started. The yen is finally showing some strength against the dollar. The short term trend remains positive although we are getting a bit overbought after a 2.5% appreciation last week. Should the Nikkei 225 continue the sell-off, traders could continue to unwind the carry trade, pushing the yen higher. With the election this weekend, we could see some volatility on Monday, depending on the outcome, be cautious. We are on the sidelines expecting a pull back and ready to get long through futures and options. In the Canadian dollar some clients got stopped at a loss on a hotter than expected retail sales. This is an example where a stop may have cost us money but if I had to do it over again I would have done nothing different. More often than not stops will get you out of a trade that is not working and in isolated circumstances, stops will get you out of a trade that had a rash reaction to an uncanny report; case in point. After a pop in the Loonie, it fell out of bed and we are enjoying a decent correction; over 3 cents in the last four days on a currency for months seemed like the only direction was up. This trade is not over and we will be reversing soon on an expected move to parity. A bounce in the energy/metals sector will aid in the Canadian dollar’s recovery. ____________________________________________________________________ December cocoa dropped $72 to 1965, the lowest close in over a month, with the Ivory Coast still a month away from its next crop. So far the International Cocoa Organization expects a world production surplus in 2007-2008. U.S. cocoa futures dropped to six-week lows as heavy speculative liquidation over the last two sessions took December to a 1941 bottom before a combination of industry buying and local short-covering helped pare losses at the closing bell on Friday. Trading was heavy as an estimated 30,000 lots changed hands. Speculators were thought to have liquidated more than 20,000 long positions on the two-day sell-off. As we said last week, with a bit of liquidation expect lower prices and that is exactly what we got. Sugar prices lost about ¼ cent on the week and front month October Sugar closed just shy of 10 cents a lb on Friday. Prices stayed well above the 100 day moving average of 9.75 and failed to reach support of 9.90 which should hold. We will continue to accumulate March 2008 calls and will get long futures as soon as this correction runs its course. We expect this down move only to last as long as the dollar can fight off the bears which we do not feel is for long. We will be looking for COT for clues of additional fund buying and still expect to see 12 cent sugar in early 2008 if not sooner. Arabica coffee futures rose on the New York Board of Trade Friday from Thursday's 1 ½ week low but stayed in the prior day's range as traders eyed cool forecasts for Brazilian growing areas next week. We still remain short September but are running out of time and with out a move towards the 107 area will most likely take a loss this week. We would like to see a move lower for two reasons: to book a profit on our September shorts and to get long December. The last of Brazil's coffee crop is harvested in August. Even though Brazilian coffee is not deliverable against NYBOT futures, the crop is sufficiently large so as to greatly affect world prices. Thus, the last of the old-crop coffee, represented by September futures, becomes burdensome and prices typically decline going into deliveries, with this year's First Notice Day on 8/23. But for new-crop December coffee futures, the aforementioned selling pressure creates opportunity. Buyers step into hedge new supplies for the next season of heavy consumption, North American winter. September FCOJ futures climbed to six-week highs on speculative buying and improving technicals Friday, as prices are now trading above their major moving averages. Talk that the Florida crop may be smaller than previously thought continued to provide support. Most-active September juice rose 200 points to settle at $1.42 a pound. Traders attributed most of the gains to technically linked buying, fueled by a strengthening chart setup. Traders are also anticipating that the brunt of the 2007 tropical storm season will be here in a few weeks and they are establishing long positions incase storms threaten Florida's orange crop. With or without hurricanes the FCOJ market continues to move higher advancing almost 10 cents a lb last week and now 20 plus cents off prices from just one month ago. With a bit of luck we should see the gap we have been looking to get filled at 149 filled in the month of August. Use set backs in this market to get long. The National Cotton Council said Friday that if press reports are true that the WTO has largely ruled against the U.S. in a claim by Brazil that Washington has failed to eliminate illegal subsidies to cotton growers, the finding would be "contrary to the facts in the world cotton market and unsupportable.” The U.S. has already taken actions to scrap subsidies by eliminating the government's Step 2 program, which has had a significant impact on U.S. cotton and cotton producers. As a result, U.S. cotton planted acreage is down 28% in 2007, U.S. exports have declined significantly and production is predicted to be only around 17 million bales, the lowest since 2002. On the charts cotton has pulled back 5 cents from its highs and stands at 63.48 about 40 ticks above the 38.2 retracement from the May lows and June highs, but is that enough of a setback to get long? We would be more comfortable closer to 60 cents a lb and are patiently awaiting that trade on the sidelines. Your patience has allowed 5 cents why not wait for 3 more. ____________________________________________________________________ The metals complex was hit last week on a bout of profit taking. This movement is particularly abnormal since speculative funds were known to have been significant buyers in recent weeks; based on weekly data from the CFTC you would not expect this move down to last for long. A dead cat bounce in the dollar may have attributed to some metals weakness as well but by no means do we think this vigor in the dollar will continue. We are using this reprise in prices to get long Gold and Silver with various option strategies in October and December contracts. Nothing has changed in our views and we still expect $720 plus on Gold and $14.50 plus on Silver by years end. The sharp price decline in palladium was described by several analysts as a knee jerk reaction to the Nissan news; they developed an auto catalyst that uses half the amount of the precious metals of the conventional catalysts. We would use this over-reaction as an entry point to get long and involved in a market that if one is patient could ride Palladium to $500 over the next few years. Because so much copper is used in construction, the end of the building season tends to reduce demand. Thus, prices for September delivery have often peaked by early August and then weakened going into First Notice Day as speculative long positions are liquidated and commercial consumers slow their purchases. That being said on a break of the 345.00 on the September contract which serves as support and the 50 day moving average you will most likely see a breakdown in Copper prices. Although we expect to see this happen on a break of 345.00 we would most likely not be involved because the options are not fairly traded and the trend is up and it would be a counter trend play.
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