MB Wealth Corp. Weekly Commentary
For July 9th - July 13th 2007 By: Matthew Bradbard
The Bull/Bear debate continues half-way through 2007 and the state of the economy is still in question. There is no doubt we remain in a secular bull market in commodities, but the instability and lack of a defined trend is present among several sectors so fasten your seatbelts we are in for a bumpy ride. When market climates change we must adapt with them. We need to stay extremely disciplined with our strategies and pick our spots. Traders who have been around a while learn to adapt and understand that all markets go through cycles of being HOT and COLD. The trick is to stay patient and use your guidelines, research, and experience to make it work for you. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ______________________________________________________________________ Crude oil futures had been knocking on the door of strong technical resistance at $70 and were successful pushing through last week. Now, the next major upside price objective for the bulls is to challenge major psychological resistance at $75 a barrel. The crude oil futures market is bullish; as an uptrend line is in place on the weekly crude chart. Crude has been on the move from the first of the year putting in an impressive rally of nearly 40% in the first 2 quarters of the year. Presently Brent Crude at $75 and West Texas at $72.50 seems a bit pricey and we expect a near term correction. We will be a buyer looking to jump on this train and ride it to the $77/78 level by mid August on a correction of 3-4%. It would take a push and multiple daily closes, in the nearby crude oil futures prices back below strong longer-term technical support at $65 a barrel to suggest that a near-term top is in place in this market which we do not think is the case. Natural gas prices have been the weakest component in the energy sector, pressured by abundant available supplies, but that may be changing. The U.S. winter turned colder in 2007 and brought gas supplies back within their five-year range. The DOE said that underground storage levels as of June 29th were down 3% from a year ago. On June 12, 2007, the DOE estimated 2007 natural gas demand in the U.S. at 22.70 trillion cubic feet, more than the 22.06 trillion cubic feet of estimated new supplies (including imports). The Henry Hub spot price is expected to average 7.83 for the third quarter of 2007, up from 6.27 a year ago. This is a far cry from the current spot price starting Q3 of 6.44. We maintain that getting long call spreads ahead of the hurricane season is a great risk/reward strategy and perhaps the best we have seen in some time. As we said last week if you want to get bullish on this market, you want to do it before the hurricanes and heat materializes. ______________________________________________________________________ Continued technical buying sent cattle futures higher last week, posting a fairly strong close on Friday above the resistance from May in Feeders and above the 100 day moving average in Live cattle for the first time since 5/31. The action lends further credence to the idea of a summer low having been established in the first week of June. The market is being fueled by last week's momentum and further expected price declines in grain futures. Limited supplies of butcher hogs met with limited demand. The cash was mixed to lower but futures managed to close 1.5 cents off the lows for the week, edging upward against the current down trend. The improving tone in the bellies could help shore up the pork cutout value in the near term. Lean hog futures closed higher but once again drifted off session highs. We bought lean hogs last week and are looking for a move to 75 in August hogs over the next 1-2 weeks. ______________________________________________________________________ Stocks: The market finished up on the week but is still range bound. Both the S&P and Dow should be at a point you could sell to get short or exit longs this week. Although we feel comfortable getting short the S&P and Dow we would not suggest selling the NASDAQ; tech is one sector that is showing strength and we will not fight the tape. We are starting to feel more bearish on stocks: there are interest rate worries, persistently high energy prices, geopolitical concerns, sub prime dilemma, and maybe the largest issue of them all; the housing market. Not only are inventories at their highest levels since the last housing market recession in the early 1990s, but mortgage rates have been rising and there is no sign of a housing bottom in sight. All of these factors plus the “what if” may lend support for more sellers to come in here and push the S&P and Dow through the bottom of this trading range to its next major support level at 1450 and 13000 respectively. Bonds: Very light volume last week but we did come down and touch 5.0% for a brief moment and then rates moved north from there quickly. Bonds and notes failed to reach our targets and after a short reprise rates should start moving back down to and below 5.0% we may need just a bit more time for bonds to reach 110 and notes to reach 107. On this current correction we will step in and buy bonds 105-15/105-25. ______________________________________________________________________ Corn: On June 29, 2007, the USDA estimated that 92.9 million acres of corn will be planted this spring, an increase of 19% and the most since 1944. It is also more than the June estimate of 90.5 million acres. That will bring about a significant increase in the USDA's next ending stocks estimates on July 12th this Thursday. On June 11, 2007, the USDA increased its estimate of 2007-2008 U.S. ending stocks from 947 to 997 million bushels, up from 987 million bushels in 2006-2007. That put the 2008 ending stocks to use ratio at a more comfortable 8%, matching the lowest level in 12 years. On the world scene, the USDA is looking for 2007-2008 ending stocks to drop from 95 to 92 million tons, or 12% of annual use. In 2006-2007, exports are expected to increase slightly and so far, they are up 3%. “Regardless of acres planted, if we are dry from July 14th to August 5th, corn's trading higher and if wet lower.” Tim Hannagan –Alaron Also remember that we have a bearish planting number that is factored in but we do not have a harvested acreage number and the crop will be made in the next few weeks so hold your breath for the yield. Soybeans: The expected shift from planting soybeans to corn this year is bigger than expected. On June 29, 2007, the USDA estimated that 64.1 million acres of soybeans will be planted this spring, down 15% from a year ago and the smallest area since 1995. That will result in smaller ending stocks estimates in the next USDA report on July 12th. On June 11, 2007, the USDA said that there will be 320 million bushels of soybeans at the end of the 2007-2008 season, down from 610 million bushels of ending stocks in 2006-2007. The resulting 2008 ending stocks to use ratio is a comfortable 11%. Worldwide, the USDA estimated that 2007-2008 ending stocks will drop from 64 to 54 million tons or 23% of annual use. Brazil and Argentina's soybean harvest was up 8% this spring, but is only expected to increase 2% in 2008. Wheat: Due to dry conditions around the globe, world wheat stocks in 2007-2008 may be the smallest in 30 years. On June 11, 2007, the USDA reduced its estimate of 2007-2008 U.S. ending stocks from 469 to 443 million bushels. The result is a U.S. ending stocks to use ratio at 20%, matching its lowest level in 11 years. Worldwide, the USDA is expecting 2007-2008 ending stocks to fall from 122 to 112 million tons, or 18% of annual use. The USDA expects wheat exports to be up 10% in 2007-2008 and so far, they are up 3% from the previous year. On June 29, 2007, the USDA estimated that 60.5 million acres of wheat will be planted for 2007, up 6% from a year ago. It is also slightly more than the June estimate of 60.3 million acres. 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. ______________________________________________________________________ This week could be the week that support in the Dollar is penetrated and the move south gathers momentum. Thursday the trade deficit number is expected to widen in May from $58.5 B to $59.5 B after narrowing in April by 6.2%. Even in the face of relatively strong economic data last week the dollar had a sell rallies mentality. Amid concerns about the economy and shrinking US interest-rate differential abroad, the dollar if breaking 81.20 should be at 79.50 in a hurry. The Euro is within striking distance of an all-time high and the Canadian dollar is at a 30 year high with the BOC meeting on Tuesday largely expected to increase rates from 4.25% to 4.50%. The Loonie has advanced 11% this year against the dollar and should be bought on pullbacks as it will most likely reach par this year. We will be a buyer of the Aussie and the Cable on breakouts and have interim targets of 87.00 and 2.0250 respectively. The weakest link in the currency sector remains the Yen. It is debatable what the BOJ will do with interest rates at their next meeting on Thursday, largely expected to keep rates as is at 0.5%. It may be to early to call a bottom but we still have this on our radar because when the Yen reverses it will do so abruptly and before you know we will be at 85.00 not 81.00. ______________________________________________________________________ Sugar continued to trade sideways, 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 is bouncing and we are targeting a move back up to the mid 150’s before the middle of August. Cocoa has confirmed its upside break out by staying above 2000 for a number of days now. On a move downward to fill the most recent gap that was formed at 2065 we would be a buyer if 2040 held on the September contract. We would advise people to enter into long call spreads in Cocoa at that time in September and December. Coffee is making its way to our 106.50 target. Cotton is fairly strong and shows potential for this market especially with plantings down as much as they are this year for continued strength. We are targeting a move up to 70 within the next 3 months on the December contract but will establish new positions only on a pullback to 60/61. U.S. cotton farmers are in a tough position. There is growing political pressure from the World Trade Organization and the U.S. government to cut grower's subsidies. Also, trade relations with China appear to be getting more contentious. Unfortunately, without China, U.S. growers do not have much of a market for their cotton. Because of these political problems, the current USDA estimates look suspiciously optimistic. China altered its cotton-buying practices this year to encourage more domestic use, with provisions forcing mills to purchase domestic cotton. But dwindling domestic stockpiles are forcing Beijing to import cotton at a faster pace to keep up with demand, and Beijing has even had to dip into its strategic reserve of cotton. ______________________________________________________________________ The key here is inflation, or the lack there of and the dollar’s direction. As unpatriotic as it is we are currently dollar bearish and regardless of what the CPI and PPI say we think inflation exists. Let’s get serious here; have you been to the grocery store or gas station lately? Fed Chairman Bernanke is speaking on Tuesday and we will be looking for clues on his current stance on inflation. Gold and Silver are both moving out from the recent sideways congestion. Silver should not encounter much resistance until 13.25 which should be attained within the next two weeks. Gold is above its 200 day moving-average and with a close above 662.0 we should pop to 675.0 this week. On a dollar break look for Gold and Silver to get to these targets sooner rather than later. We are currently positioning in call spreads out to December for both Gold and Silver. Copper, used extensively in construction, has tended to rise along with consumption into mid/late July. But then it has often set back into late August - perhaps as long speculative or hedge positions are liquidated prior to deliveries against September futures. The chart is supportive with Copper currently posting a four week high and looks poised for a jump to the September contract high of 380.
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