MB Wealth Corp. Weekly Commentary
For November 19th - November 23rd 2007
By: Matthew Bradbard
Inflation…what inflation? If government reports (CPI & PPI) say we do not have inflation then we must not have inflation. My only question is what will be the catalyst: inflation, the current state of housing or the credit crunch that sends this economy into a recession. Under the current environment we feel it’s unavoidable that we don’t see a major contraction in our domestic economy; housing prices are falling, credit is tougher to come by, the consumer is spending less, our currency is weakening, and the prices of food and energy are moving higher. If all of these circumstances go away, then yes we can avoid the inevitable. He who does not learn from the past is destined to repeat it. Be prepared for some volatility as this week is a shortened trading week for the Thanksgiving holiday. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ In the first two trading days last week crude oil dropped $5, spooked by OPEC's comments that they would consider adding oil to the market, a lower estimate of fourth quarter demand from the International Energy Agency coupled with December options expiration. Prices rebounded later in the week after the Oil Ministers from Algeria and Iran said that they see no need for a production increase and OPEC will not likely discuss it before their December 5th meeting. Supplies are still relatively tight and traders are nervous about winter. January crude oil finished the week at the 9 day moving average down $1.46 at $93.84. Moving forward expect volatile movement with the debate intensifying on which is next $90 or $100. As a trader I would like to see a move back to support at approximately $86.50 before the next leg ensues up. Cold weather is slowly approaching the U.S. and Thursday's inventory report from the Department of Energy showed the first weekly drawdown of the season for natural gas. In spite of last week's drop of 9 billion cubic feet, supplies are still up 8% from the five-year average and look plentiful for winter. January natural gas closed up 6 cents at $8.29 aided by a 31 cent move higher on Friday. As previously stated we are looking for a choppy move higher to $9 in coming weeks and will try to take advantage of this with a combination of futures and options. Although we still do not like playing gasoline or heating oil by its lonesome we will recommend re-entering the heating oil vs. unleaded spread we spoke of on a widening of the spread back to 17-18 cents. Two weeks ago when we issued this recommendation the spread of January heating oil over January RBOB was just over 14 cents and currently as of 11/18 at 23 cents nearly reaching our target of 25. It is not important to us how the distillates move, higher or lower, but more importantly how the spread moves. ____________________________________________________________________ February cattle stayed in a narrow range this week, finishing the week slightly above the 200 day moving average at 97.90. We recommend selling rallies short term until we see a trade above 99.00. Longer term, as we mentioned last week, the seasonal tendency for higher prices so one may want to get situated on pullbacks that hold support for a position trade. President Bush met with Prime Minister Fukuda Friday and, among other things, tried to persuade him to accept more U.S. beef. After Friday's close, the USDA said that the number of cattle on feed on November 1st was down 1.7% from a year ago, a little more than expected. Presently we are not getting any clear signals on market direction for feeder cattle, so we recommend remaining on the sidelines for now. Hog slaughter rates continue to run high and this trend does not look to abate until at least January. The weak dollar helps meat exports, but concerns about a slower U.S. economy could discourage buying. We are currently advising holding longs in the month of December and February, looking for the recent lows to hold and a nickel advance on the trade. We would have to re-evaluate your positions if new lows were made. ____________________________________________________________________ Stocks: The stock market seems to be taking one step forward and two steps back. Stocks have slipped in six of the past eight trading sessions amid more mortgage losses at banks and brokerages. Continue to sell rallies and although we do not necessarily like to day trade for our clients, we are seeing enough movement to be in and out of the indices both long and short, sometimes in the same day. We caution new money to find its way into securities, 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 Fed says no for the December 11th meeting but the market has already priced in another 25 basis point cut…who is right? The trend is your friend. If you are long, stay long and trail stops, if not the train has left the station and if you are not already onboard find another train to trade. If we start to get signs that the Fed may not ease up at their next meeting we recommend looking for a short entry. ____________________________________________________________________ The December U.S. dollar index was up just under 50 ticks on the week to 75.84, the overwhelming tone remains negative. U.S. Treasury Secretary Paulson can say that he supports a strong dollar all he wants, but until the market detects strength in the U.S. economy, little will change. Our only reluctance for getting short here is that almost every investor is leaning the same way, and as previously stated, that’s a recipe for a bounce. The only argument that makes sense to us that could reverse this five year down trend in our currency is if $#%& was to really hit the fan the dollar would serve as a flight to quality. We are currently positioning our clients long the December Australian dollar, looking to get out of this sideways consolidation and back to contract highs in coming weeks before the December futures LTD of 12/17. First resistance is just under .9000 which on a break thru should lead to .9140 shortly thereafter. Last Tuesday, Japan's Cabinet Office said that real GDP was up 2.1% in the third quarter from a year ago, up from its .4% loss in the second quarter. This economy still has a lot of problems, but the December yen ended the week up at .9055. Again we will remind you that the yen is currently the barometer for risk in the market and will continue to have an inverse relationship to equities. Of all the major currencies that have been trouncing the dollar lately, the Canadian dollar is looking the most vulnerable. Since the December contract hit a high of $1.1043 on November 7th, it has fallen almost 7.0%, ending at $1.0262 on Friday. Last week's drop in metal and energy prices and last week's news of a 20% drop in October's housing stats did not help. We exited our client’s shorts on Thursday, although we would still not rule out a downward move to parity but we didn’t want to overstay our welcome after seeing 6 cents in one week. The December Euro was down marginally on the week to $1.4665, but is currently the strongest major currency as it looks like the ECB will have to keep raising rates. Currently the market is heaving trouble remaining above 1.4700; 5 of the last 8 days we had our clients trade above 1.4700, but thus far we have not seen a close above 1.4676. On any weakness we would not rule out a correction to 1.4300. The December Swiss franc made another high last week trading as high as .8980. The trend remains up but this currency is starting to look a bit heavy. If you got long on the breakout of .8650 that we previously spoke about trail your stop up and let the market determine your destiny. On a break below .8800 we would expect to see a move back to .8600. The support we mentioned last week held the early week pullback but was not able to support the late week pullback that took the December pound down to 2.0334. We expect this market to be range bound between 2.0200 and 2.0600 and prefer other currency plays at the moment. ____________________________________________________________________ Corn: Exports on the week were 1.4 m.m.t. March resistance just above 4.00 held again this week. With no new highs in crude oil and a pullback in the metals, the outside forces that have aided in corns appreciation were lacking. With large index funds heavily long crude and metals, it is pretty clear-cut why we keep telling you to use those outside markets as the lead to corn's daily price direction. With a potentially late November and/or early December sell off in crude and metals, look again for corn to be a follower not a leader if index funds balance year end positions. This week is a shortened trading week because of the Thanksgiving holiday and may be volatile, so don’t fall asleep at the wheel. Long term into spring we are still bullish new crop corn. Near term a close under 3.90 March could set up a move to 3.72 which if we are so lucky should be bought aggressively for a position trade. Beans: Exports on the week were 1.3 m.m.t. which was a new marketing year high. We saw a big advance in bean prices Tuesday on the rumor China had been buying beans not yet reported and this report helped support that. Longer term beans should out price all the grains in search of acres but near term beans are at the mercy of the index funds portfolio of energy, metals, and the dollar index. Beans traded to new contract highs on almost all contracts last week. The $11 psychological level should serve as tough resistance on January beans for now. We again will look to outside markets first for direction as beans seem to be trading on outside market fundamentals as opposed to their own. Minor Support is 10.75, if support is broken get short if you are brave enough because next support is 10.50. It is way too premature to call a reversal but if we were to see an island top which could be in the making, expect a significant pullback, perhaps as much as $1.00. Wheat: Exports on the week were 416 t.m.t. The wheat market is currently trading off the charts which currently show this market oversold so a bounce should be expected. Sell rallies! The trade tries to make early winter wheat emergence here an issue as conditions have declined with dryness in the southwest but wheat is at its least vulnerable stage before late November dormancy sets in, so for now weather is not an issue. Although this market is trying to rally it appears to run out of gas every time it reaches resistance, which on March is around 7.90. Each time we hit resistance, funds are adding to their shorts. If we learned anything in August, be on the same side as the funds and do not fight the trend. If we do not take out resistance soon then our next target is 7.30 and then 7.00. If funds decide to cover shorts for the holiday then get out of shorts on a close over resistance as a break of resistance could take March to 8.38 which is the 38.2 Fibonacci retracement. ____________________________________________________________________ March cotton suffered a serious breakdown last week after failing to close above 70 cents which now appears to be a double top. On Tuesday, the USDA said that 74% of the U.S. cotton crop has been harvested, well ahead of schedule. Additionally exports that were strong early in the new season have slowed lately. March ended the week down nearly 3 cents and just below the 100 day moving average. The correction we have been waiting for is finally underway and this is a classic case of how patients pay off in trading commodities. We will position our clients long December 08’ on this correction and will also use this opportunity to work an order for July 08’ call options as we believe 80 cent cotton will become a reality in the next 6 months. Given all the negative news about sub prime mortgages and a weak U.S. housing sector, you would not expect lumber prices to rise, but they did. March lumber closed up $8.10 at $286.60, the highest close in a month. Lumber has advanced almost $20 in the last 2 weeks. We are looking for cocoa to remain range bound although we have a negative bias and would expect to see prices closer to 1800 as opposed to 1900 for March cocoa. Without a more defined trend we would advise you to remain on the sidelines here, although buying cocoa on a pullback to 1800 or thereabouts may be in our newsletter in coming weeks. Given sugar's strong link to the ethanol market, you would think that crude oil prices near $100 per barrel would mean something, but apparently not. March sugar drifted down to 9.84 last week, the lowest close in a month. Although it must sound like a broken record, get long and forget about this position as we see an advance in prices imminent. After making a high on October 17th, orange juice prices have dropped 26 cents. This past week January orange juice was down 1 penny at $1.3160, approaching the lowest close in six weeks. We do not see the market trading too much away from the 100 day moving average of $1.3280 and do not see any trade at the present. As stated last week the chart supports a move to 130 on March coffee which was attained on Friday trading as high as 130.10. Although prices could continue to advance, if you are long based on our analysis we would advise you to get out on the first sign of weakness as the risk to reward dynamic at current levels is not favorable. ____________________________________________________________________ Hello volatility! Copper prices shot up 18 cents on Tuesday after a strong earthquake hit northern Chile, but quickly fell back on Wednesday when it appeared that Chile's copper mines escaped significant damage. Currently, copper traders are torn between positive news of strong demand from China and negative concerns about a slowing U.S. economy. December copper finished the week up 9 cents at $3.1615, just below the 9 day moving average. We still expect below $3 in the not to distant future. With two days last week seeing $25 moves if you do not have an iron stomach you may want to sit on the sidelines in gold for now. On Monday, the price drop was attributed to profit-taking and a bounce in the U.S. dollar. On Wednesday, the World Gold Council said that world demand was up 19% in the third quarter from a year ago, thanks to investors fleeing the dollar. On Thursday, gold fell another $30 with no apparent reason other than investors are worried that prices have gone up too far. December gold closed the week down $44 at $787. After seeing just a few more dollars down we will advise getting long February futures and we have started pricing out $50 bull call spreads in April gold. December silver finished the week down 96 cents at $14.51 and will continue to follow gold. Support at $14.20 to date has held, a trade below $14 if $13.60 is held should be bought. On new entries we would be advising to trade March. Silver has tended to find its seasonal low by November and to begin slowly rising into February. Is it partly due to year-end weakness in the US dollar? Is it in anticipation of Chinese New Year celebrations, with its tradition of giving jewelry as gifts, in the first week of February? Platinum has regularly been in great demand during April deliveries. But prices have usually begun rising as early as November and trended persistently higher into the New Year. The trend is certainly up but be cautious as buying near an all time high can be dangerous. 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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