MB Wealth Corp. Weekly Commentary
For November 12th - November 16th 2007
By: Matthew Bradbard
With stocks getting beaten down globally, a compassionate central bank, weakening dollar, rising energy prices, and a steeping yield curve, what is an investor to do? Our suggestion is not to make any rash decisions; stay diversified, lighten up on your winners and let some of your losers go. Additionally, re-evaluate your time horizon for fixed income, keep a portion of your portfolio in cash (maybe not dollars) and of course do not ignore what is happening in commodities. We feel the investors that do not position a portion of their portfolio in commodities do so at their own peril. Commodities are one of, if not the best performing asset class in times of inflation. According to Fed chairman Ben Bernanke “the economy faces the risk of a sharp slowdown from the housing-market contraction, but that sharply higher crude-oil prices and a weaker dollar could cause an inflationary surge.” To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ The crude oil market was relatively calm last week, although with some intraday volatility on the week we closed up only 40 cents on December. The conflict between Turkey and the Kurdish rebels has eased. A storm in the North Sea eventually passed by, causing no significant damage. The Department of Energy said that crude oil supplies were down 800,000 barrels last week, not as much of a drop as expected. With roughly 41,000 $100 call options set to expire Tuesday, speculators will try to get prices to $100 early next week. If prices are unable to get to this crucial level look for heavy liquidation to ensue, that could take oil down $7-10 swiftly. Continuing with the same theme as last week, 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 18.20 cents in favor heating oil. We expect this spread to reach at least 25 cents by the first of the year, last week when we initiated this recommendation the spread was 14.30. Without spillover strength from the crude oil market, natural gas prices for January dropped 41 cents this past week to $8.29. U.S. supplies are now up 9% from the five-year average with the winter drawdown season about to begin. As we said last week we will enter a long position on a pullback. We recommended going long the futures market and to sell a $9.00 call against our futures for protection. We are looking for a move back to $9.00 in coming weeks, if this plays out we could profit approximately $1500 per position by exiting both the futures and option at the same time. ____________________________________________________________________ Brazil said that it’s ranches are now free from foot and mouth disease and China's government said that it has made significant progress in eradicating blue ear disease in its hog population. Concerns about a slow U.S. economy were not enough to hold down prices last week. January feeder cattle closed up 1/3 cent on the week, still not forging a significant bottom. February live cattle were up 3/4 cent on the week now back above the 200 day moving average. On average for the November through February period, Feb live cattle futures have had an average winter rally of 4.35 cents finishing February above its end of October level 15 times since 1987 (78.9%). On Friday, the move we have been looking for in December hogs may have started. Although we stepped in a couple days early it appears a bottom is in and we will keep you posted if this is just a short covering rally or a trend reversal. Stochastics and MACD confirmed a move higher and our first target is 58.00. ____________________________________________________________________ Stocks: Well we were right with our prediction of a sell off but as for the NASDAQ dropping the least, we were a bit off. In weeks past the NASDAQ had almost served as a flight to quality for stock traders but with a multitude of tech stocks falling out of favor, the NASDAQ had its worst week in years. The S&P 500 falling 4.0%, the Dow falling 3.5% and the NASDAQ loosing almost 8.0% on the week. We still favor the short side of all indices; now through the October 22nd lows we should make our 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 should continue to have an inverse relationship to stocks at least for the short term. Additionally prices are reflecting another possible rate reduction for the December 11th meeting. As a side note, the US Treasury conducts a refunding auction during the second week of the second month of each quarter. The market tends to soften going in and then to rally coming out. Prices during this fourth quarter have then often continued higher into deliveries against December futures. On new contract highs, look for momentum traders to join the party on the long and short end of the yield-curve. ____________________________________________________________________ Unless Henry Paulsen and the US government intervene we see no extended rally in the dollar and a dead cat bounce should be sold. Monitor the dollar trend closely for 2 reasons: many commodities are moving off the dollar and most investors are on the same side of this trade so on a change in sentiment the dollar could move up in a hurry. The Bank of England met and kept the interest rate unchanged at 5.75%. The British pound has run higher against the greenback from late November to late December in 14 of the last 15 years, the last 13 consecutively. Subject to corrections, of course, all trends are favorable. On the current move down the 2.0500 level should hold for December. The European Central Bank also met and kept its interest rate unchanged at 4.00%. During its existence as a futures market, the Eurocurrency has always run higher from late November into early December. In doing so, it has suffered a daily closing drawdown in only six of those eight years. So although current prices seem high, remember when $80 crude seemed too lofty. On Wednesday, the bank of Australia raised its interest rate from 6.50% to 6.75%, the highest in 11 years. On Thursday, they discovered that the unemployment rate increased from 4.2% to 4.3% in October, with a gain of only 12,900 jobs. Short term prices may come off but use this as an entry as we think the possibility of this currency reaching parity is very likely all things considered. One of the high points for Canada this year was that their housing activity has been unaffected by the slump in the U.S. that ended on Friday. Canada's housing sector was looking good until last week’s report showed that housing starts were at an annual rate of 219,500 units in October, down 22% from September's pace. The December Canadian dollar finished the week at $1.0648 almost 4 cents off the weeks high on Wednesday. The Canadian dollar may make its way to parity once again. The Swiss franc has served as a flight to quality and after getting through the upside resistance of 0.8650 in past weeks, we have seen an acceleration upwards with current prices approaching 0.9000. We see this trend as ongoing and dips should be bought for a position trade. The surprise of the week was the big jump in the Japanese yen. The economy has not had much good news to cheer about, but investors bought the yen this week, assuming that the problems from sub prime mortgages will hit the U.S. and Europe harder and the carry trade is being unwound. The December yen jumped almost 3 cents on the week to .9054, the highest close this year. The inverse relationship between equities and the yen will continue. ____________________________________________________________________ Corn and soybean prices don't normally go up at harvest time, but they do this year, thanks to the weak dollar and rising energy prices. Corn: Weekly exports for corn were 1.505 m.m.t. Demand remains strong and will continue into spring as China keeps more corn home for expanding feed lots and a growing population, leaving the U.S. to fill the void. Friday's U.S.D.A. crop report put corn production at 13.168 billion bushels, 150 m.b. under last month's report. Ending stocks for September 1.2008 were at 1.897 b.b. 100 m.b. under October's report. The numbers came close enough to expectations that the market shrugged them off. Once again corn will be looking at crude oil, the dollar, and metals for direction. A weak dollar index and strong crude is bullish while the opposite would be bearish. If crude attempts a run to $100, March corn could be slightly higher but we will not be sucked into a long here. Failure of crude to rally is the scenario we favor and March corn will pullback and should be bought closer to 385’6 which serves as the 38.2 Fibonacci retracement from the October low and current November high. Beans: Weekly exports for beans were 614 t.m.t. Friday's USDA crop report put production at 2.594 b.b. 4 m.b. under the October report. Ending stocks for September 1, 2008 were at 210 m.b. 5 m.b. below the October report. Like corn, the bean numbers there was too little of change to get excited over but they at least confirmed the bullish long term psychology. In previous weeks we have said to look for crude and outside markets to guide beans higher or lower and that will still be the theme. Although soybeans are at a contract high we would not suggest getting long here, however we are not brave enough to get short even though we are expecting a drop back near $10 on January beans. On any sign of weakness in soybeans and crude oil look for an entry to get short bean oil as we sense prices are due for a correction after an 18% price appreciation in about 6 weeks. Wheat: Weekly export sales for wheat were a marketing year low 14 t.m.t. which was 98% under the four week average. Countries that panicked and purchased at and over 9.00 now sit back and buy only as needed and average down their cost with the opinion that the highs are in and cheaper wheat prices are in our future. Friday's USDA crop report had no production numbers for wheat but did address ending stocks. World ending stocks came in at 109.8 m.m.t. up from 107 last month and domestic ending stocks for June 1, 2008 at 312 m.b., 5 m.b. over the October report. This was viewed as bearish for the market and the trend towards lower prices should persist. March resistance is now at 8.00 while downside support lies at 740 ish. Before reaching that level, a gap from late August needs to be filled at 757 on March. If we do see selling in corn and beans, it’s feasible to reach our downside objective of $7 by month’s end. ____________________________________________________________________ Brazil's coffee crop has finally been getting the rain that it needs, but it may be too late to prevent some yield damage. March coffee closed up 2.75 cents at $1.2580 on the week. We are getting weak buy signals here but it is far from our favorite trade; we expect 130 and would use a stop close only of 124.40, just below the 200 day moving average on March and below Wednesday’s low. Orange juice prices rallied after the USDA predicted that Florida's orange crop will total 168 million boxes back on October 12th, but they have not stayed up. This week, March orange juice closed down 6 cents at $1.3390, the lowest weekly close in a month. Seasonally FCOJ rises at this time but we do not like the way charts look so we will stay on the sidelines for now. We would like to see a close above the 200 day moving average this week on sugar at 10.29 on March. We continue to build long positions with both futures and options as we see sugar as one of the best values in commodities. This is a boring market although we feel it will pay dividends if you are patient; eventually sugar will get moving and if you are not in when it does you will be fighting yourself to get in. The margins remain low and options affordable so buy some sugar and forget about it. Cocoa could go either way, trading between the 38.2 and 61.8 fib numbers currently. On a break below the 200 day moving average or any sign of dollar strength, look for an aggressive move to the 1800 level on December cocoa. We will remain a spectator here. Both the RSI and stochastics favor a move lower in cotton. On a break of 74 which serves as minor support for December 08’ we will get the entry we have been patiently waiting for, closer to 70. Ideally this will turn into a position trade awaiting 80-something next year on the run for acres. ____________________________________________________________________ As long as the economic outlook is soft and the dollar is weak, gold and silver prices will continue to climb. December gold added $25 this past week trading as high as $848. December silver closed up over 80 cents well above $15 and trading as high as $16.27. We expect to see prices trend higher into 08’ but for now it appears that some profit taking will take place. This makes sense being that both these metals have virtually moved straight up from mid August with very little pause. December gold could move down to $790 without doing any longer term chart damage, if we are so lucky we’ll get long with futures and/or options as this appreciation we see is far from over. For years silver has been the laggard to gold, but of late silver has started to gain on gold; since the mid August lows silver has moved roughly 35% in value while gold in % terms has moved 25%. Because of this, silver’s correction may be more dramatic but we do not expect prices to penetrate $13.60. We would strongly suggest buying this contraction as we see the prospect of silver reaching well beyond $16 into 08’. Remember as prices get higher be prepared for more dramatic price swings. A weak economic outlook has been hard on copper prices. December copper fell almost 20 cents last week to $3.1455, the lowest close in over two months. Copper prices are often seen as a barometer for economic health because of its industrial applications in everything from pipes to electronics; so with a decline of 17% in 2 months what is that telling us? If $3.0500 is taken out on a closing basis look for $2.9000 to soon follow.
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.
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