MB Wealth Corp. Weekly Commentary
For November 5th - November 9th 2007
By: Matthew Bradbard
If you are not involved in commodities as of yet, you must ask yourself “what exactly am I waiting for?!” I am not advising you to blindly enter commodities and throw down a couple dollars to “take a shot” but rather view this as an asset class that you want to devote 10% of your portfolio to. Take your pick: metals, currencies, or energies are at multi decade highs…what will be the next commodity to make a significant move? We believe that not enough attention is given to the agriculture and soft sectors and they’ll be major movers in the years to come as ag’s and softs offer some of the best value within commodities. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ The anxiety in the crude oil market is overblown and it’s likely that prices have gone up too high too quickly. The energy sector has been keying off anything bullish from weather to reports of Middle Eastern disturbance. Mid-week the U.S. Energy Department caught the market off guard reporting inventories were down 3.9 million barrels, the second week in a row seeing draws due to low imports. December crude oil closed up $4 on the week at a new contract high just shy of $96. There is little doubt $100 will be reached but the longer we do not get there the less likely this will be the leg that pushes us to that momentous price level. December natural gas closed higher 4 out of 5 days, closing at $8.418, the highest weekly close in over two months. Prices were up this week in sympathy with crude oil, but do not be mistaken there is plenty of gas in storage for winter. The Energy Department said that underground supplies were up 8% from the five-year average. This was good for a trade as we hit our targets from last week on a $1.30 rally off the lows. We will look to re enter on the current pullback for another trade getting long from lesser levels. As crude goes so do the distillates. In this most recent price appreciation in energies, gas has gained on heating oil but we expect this trend to soon be reversed. We will look for an entry long heating oil with a combination of futures and options or spreading heating oil against gasoline; the current spread for January is 14.30 cents in favor heating oil. We expect this spread to reach at least 25 cents by the first of the year. ____________________________________________________________________ On one hand, a cheaper dollar makes U.S. exports more attractive to foreign buyers. On the other hand, investors are concerned that a slow U.S. economy will hurt overall meat demand. December cattle survived the week down about a ½ cent at 94.72 saved by a rally on Friday. Feeder cattle were virtually unchanged on the week with little market direction and looking for guidance from outside markets. There is no clear sign of a market bottom in either yet, but we would expect live cattle to bottom before feeders just based on the charts being more constructive. December lean hogs dropped over 2 cents to a new weekly low of 52.42. The past five weeks have seen record hog slaughter levels. We do not like to pick bottoms but we will try anyway; we started lightly buying lean hogs last week if not for a reversal at least for a short covering rally. ____________________________________________________________________ Stocks: If volatility is not for you do not even attempt to trade the indices. 150 point swings in the Dow and 25 point swings in the S&P are now commonplace every day and if we have a day that this doesn’t happen it is now more rare than if it does. We favor the short side of all indices with the NASDAQ falling the least. Although it is counter cyclical in Q4 we expect the equities to break the October 22nd lows and make their way to the August 16th lows by years end. We would caution new money to find its way into securities presently, at least domestically, and would advise stock investors, as we have been for months, to hedge their portfolios. Contact us for details on options and futures strategies on NASDAQ, S&P, and Dow depending on portfolio size and risk tolerance. Bonds: The bond market spoke and the fed listened. Answering the call, the fed delivered a 25 basis point cut in rates and a 25 basis point cut in the discount window. Regardless on what end of the curve debt prices went up last week reflective of the change in policy by the fed. For now the trend remains up as the market tries to digest the current environment and check the temperature to see where we go from here. We are currently on the sidelines but may decide to spread 30 year bonds against 10 year notes if we can get a little better entry. ____________________________________________________________________ Interest rates will continue to favor Australia as they are widely expected to continue raising rates into next year. This, in combination with the rising prices of commodities will support a move to parity for the Aussie as we have said in previous newsletters. Buy setbacks that hold support. On a failure this week to gain on last week’s high of 0.9324, look for a profit taking lead pullback to the 0.8950 area. The Canadian dollar continues to hit new record highs. After Friday’s unemployment rate improved from 5.9% to 5.8% in October, helped by the addition of 63,000 new jobs and six times more than expected, the December Canadian dollar jumped up intraday above $1.0700. The trend will remain up but the loonie is in serious need of a correction and should get it if oil rolls over. The December Euro gained just over 1 cent this past week to a new high of $1.4507 after the unemployment rate for the Euro area improved from 7.4% to 7.3% in September. Euro stats also said that it expected consumer prices to be up 2.6% in October from a year ago, adding to notions that the interest rate may have to soon be raised. The next scheduled ECB meeting is this Thursday, to combat inflation rates that may be adjusted higher. The Swiss franc made a new contract high last week of 0.8729 for December and should remain well bid as a flight to quality play. The old resistance of 0.8650 should now serve as support. Japan's economy continues to struggle and the latest problem is from a new housing regulation that makes obtaining approvals more expensive and difficult. Because of this, housing stats were down 44% in September from a year ago. This past week the unemployment rate in Japan climbed from 3.8% to 4.0% in September and the Bank of Japan lowered its GDP forecast for the current fiscal year from 2.1% to 1.8%. Even with a weak dollar, the December yen could not get out of its own way. Unlike most of the international currencies, the yen is looking to the equities for guidance as opposed to the dollar, mindful of the yen carry trade, and investors waning appetite for risk. The British pound was up every day last week advancing almost 4 cents also reaching a new contract high. On another leg down in the dollar if this upward move was to gather momentum remember the cable traded at 2.4550 back in the late 70’s early 80’s which is a far cry from the current 2.0790. Do not fight the tape! The dollar index continues to post lower lows and lower highs and does not seem like a rally is in its immediate future. What scares us is that everyone is short the dollar and that is usually a recipe for a reversal; in this case we are just looking for a short covering bounce and then a continuation of the dollar demise. Technical indicators are extremely overdone and if Hank Paulsen actually practiced what he preached the government would try to support the dollar. Pay close attention to this trend because many markets are currently keying off the US dollar. ____________________________________________________________________ Crop production report out Friday 11/9 Corn: Export sales report showed 635 t.m.t. of corn was sold last week down from the 7 consecutive weeks of 1.0 m.m.t. + sales. We wouldn’t read too much into this and would expect sales to pick up again in coming weeks. Corn continues to look for guidance from outside markets such as crude oil and the dollar index. This week we look for corn to be mainly influenced by crude oil as the funds will continue to try to push oil to $100. If they fail, look for a pullback in oil and corn that should be bought. Corn also will watch the dollar index decline to assure the exchange rate remains favorable for foreign importers to buy U.S. corn. March corn rallies have been failing as we closed 3-10 cents off daily highs last week. March support lies at 3.80, which if broken, should provide a buy in March closer to 3.65 with 3.94 1st resistance and then 4.04. Buy breaks as the run for acres should take corn to new contract highs. Beans: Export sales report showed 740 t.m.t. of beans were sold last week. Even with higher prices here we continue to see hedge buying of U.S. beans for fear that South American beans may perhaps continue to experience dire weather. Late September through October was hotter and drier than normal over much of Brazil until recent rains helped bring much needed precipitation. Like corn, beans too have determined their daily direction based on crude oil, the dollar index, and metals. Beans are trading near contract highs and we could see new highs if and only if Crude continues to move towards $100. There are really no other fundamentals that should keep beans at these lofty levels this time of the year considering current supply/demand. We favor the idea of a break into November and December that should be bought for a January to March rally to buy acres. Wheat: Export sales came in extremely light at 180 t.m.t. sold last week. This should confirm that the panic buying and over booking is over and only hand to mouth as needed buying will occur. New winter crop seeding increases suggest low world inventories will grow sharply come late spring when harvest begins. As we have reported before we expect to see a significant shift in acreage and a large jump in wheat plantings globally. We hit our goal of filling the gap at 8.00 on March and as of Sunday night we are trading below the psychological level of 8.00. We are now gunning for our ultimate target of 7.00. With the break in the month of October of 1.50 behind us, the easy money in shorting wheat has been made and now we may need to get creative trading spreads and implementing some option strategies. Currently we are looking for a short covering profit taking rally to sell. March has resistance at 8.40 with our eyes on 7.50 this week on continued selling. ____________________________________________________________________ December Cocoa closed slightly higher on the week as the “W” we spoke of in recent weeks is starting to become more pronounced. The trend will remain up as long as the dollar continues down and the pound continues up. If you took this trade, trail a stop tight and liquidate call options because for now we think you could see a setback to reposition. Spread trading will be getting more active as first notice day is on November 15th. December Coffee closed down 360 points at 119.90 on Friday, closing below the 200 day moving average. The market moved lower as longs began liquidating their positions after resistance held of 124.00. This market has been consolidating after a pullback on rain in Brazil. It's too early to tell if the rain helped save the crop. There is still talk that some of the crop could be lost. Support for December is at 118.00, resistance is at 121.00. January OJ was mixed on the week, ending on Friday at 139.70. The bounce we have seen this week has been technical in nature; with daily indicators oversold and Tuesdays low of 135.10 serving as the 50% retracement from recent H/L. We are approaching the time of year when prices have the tendency to move higher as the market builds a weather premium ahead of the winter. Traders are going long the market or buying call options in anticipation of a freeze. The freeze period usually begins mid to late December and runs through mid to late January. Crude oil prices keep pushing higher and that is good for ethanol demand, but sugar prices are not rising. March sugar finished the week down 21 ticks at 9.94. We are expecting higher prices and using pullbacks as long entries. Quality options with intrinsic value and a good amount of time are very reasonable and the margins remain below $1000. Since 1987 March sugar futures have rallied 12 times, following these 12 advances, sugar futures have continued to gain through November and December 10 times (83%). Cotton remains on our radar but we still feel we can buy it cheaper so we will remain on the sidelines for now. The weaker dollar has kept cotton afloat and any correction in the dollar would result in heavy selling in cotton, taking December 08’ to our target entry.
____________________________________________________________________ Gold set a fresh 28-year high on Friday with December gold hitting $811, up $18 on the day. Gold cut thru psychological resistance at $800 like a hot knife through butter supported by record low USD/EUR and record high oil prices. Gold prices ignored a strong U.S. employment report, creation of 166,000 jobs would normally argue against further rate cuts, which in turn would tend to support the USD and weigh on gold. The fact that gold ignored a bearish U.S. employment release is evidence of the strong underlying bullish sentiment here. We have a target of $850 that we expect to see early next year but first we are expecting a pullback. As previously stated, use 15-25 dollar pullbacks as entries. You have many choices to play with; we will enter with $50 option spreads and both mini and large futures contracts depending on the account size and risk tolerance. A pullback should be eminent. Silver should continue to follow gold higher, but we feel there should be some down before any significant up. Although overnight it appears we will make a run for $15 on December we would not rule out a healthy pullback before getting too long on silver. Historically we get a break in silver in October and that did not happen so we sense you could get that break in early November. This should not be viewed as a trend reversal but a move back below $14 should be bought. The triple top we spoke of in past newsletters is becoming a reality and looking at the weekly chart, unless something shifts dramatically with inventories in London or the domestic housing market miraculously picks up, copper should make its way to $3.00 in coming weeks.
If a portion of your portfolio is not already in gold or silver we highly suggest you diversify into these metals as we expect to see much higher prices in coming months due to inflationary concerns and the “smart” money moving into this sector.
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