MB Wealth Corp. Weekly Commentary
For November 26th - November 30th 2007
By: Matthew Bradbard
It is not about pointing fingers anymore on why things are the way they are, we would much rather figure out a solution on how to take advantage of the current situation. In the past five years oil prices have more than tripled and at the same time the US dollar has lost 30%. So we ask this, is one really affecting the other as much as the media would like us to believe? The housing market is according to experts about to be the worst in several decades, yet everyday we debate on when we will bottom……not soon enough is our stance. Credit is getting tighter and although “Black Friday” delivered to the consumer, many expect this holiday season to be less than gratifying for retailers. Q3 earnings have been less than stellar to say the least. We have seen two 10% corrections over the course of 6 months in our stock markets. The prices of food and energy are still creeping higher without an end in sight. As opposed to debate on what is to come, position your portfolios to take advantage of stock market volatility, rising food and energy prices, rising inflation, a weakening dollar, and other macro trends that are ever evolving. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ All members of the petroleum complex tend to decline into December, in part because refineries are operating at capacity to produce heating oil for winter but also because refiners are subject to tax on year-end inventories. Thus, they have financial incentive to pump as much product into the pipeline as possible. Additionally, gasoline has the added pressure of consumption slowing as driving conditions worsen into winter. Crude oil has not penetrated $100 yet, but it is close, helped by a weak dollar and slow response from OPEC. January crude oil closed up over $4 at a new contract high of $98.18. Last week the Energy Department said that U.S. refineries were running at 87.0% of capacity, even though more heating oil is needed for winter. Currently for crude we would suggest clients to be cautiously long as the market is still exhibiting a buy dips mentality, but we will continue to voice that the longer oil does not reach $100 the less likely it will. Following up on the heating oil over gasoline spread (long Jan. HO / short Jan. XROB), we’ve been speaking about in previous newsletters, the spread exceeded our initial target of 25 cents and traded as high as 27.75 cents. If you took this trade, we would recommend booking a profit and we most likely will advise this trade again as it appears the spread is now narrowing. Our initial target for re-entering this trade is 17-19 cents. Much of the U.S. got its first taste of cold weather last week, but January natural gas still dropped 34 cents to $8.01 with plenty of supplies available. We stay committed to our earlier prediction of seeing $9 for January natural gas in coming weeks. Ideally traders used last week’s pull back as an entry to get long as daily charts are supportive, as long as last week’s lows hold at $7.77. The market has tended to rally during the first two weeks or so of December perhaps because temperatures can seriously cool and stocks are heavily consumed. In some years, in fact, the seasonal high actually comes in December. However by mid-December those stocks surge into the marketplace. Barring an extreme condition, mid December tends to see the last interim peak in futures as distributors become progressively more aggressive in order to liquidate stocks by the end of winter. As far as this winter we will re-evaluate the situation in weeks to come to decide if we will stay long or look elsewhere to put money to work. ____________________________________________________________________ So far in 2007, U.S. beef production is up 0.9% from a year ago and pork production is up 3.5% from a year ago. The weaker dollar is helping exports, but concerns about a slower U.S. economy are keeping investors cautious. February live cattle ended the week up .80 at 98.70, the highest weekly close in a month. January feeder cattle closed above the 200 day moving average and just under 1st resistance of 111.00, the 61.8% Fibonacci retracement from the last 60 days H/L. Currently short term cattle prices look friendly but we do not expect much in the way of higher prices. February lean hogs were up 2.42 to 62.82, also the highest weekly close in a month. We advise remaining long December and February pigs looking for a little more, but encourage traders to trail stops. ____________________________________________________________________ Stocks: The extent of losses from sub prime mortgages continued to dominate the markets last week. On Tuesday, the Federal Reserve lowered its estimate of real U.S. GDP growth for 2008 from 2.62% to 2.15%. Later in the week, the Organization for Economic Cooperation and Development predicted that losses from U.S. sub prime mortgages could eventually total $300 billion, based on a 14% default rate. The S&P 500 closed down 18.30 at 1441.90, the lowest weekly close in eight months but well above the low of 1417.20. The Dow also finished the week lower closing below 13,000 for the first time since April on a weekly basis. At their lowest point midweek, both the Dow and S&P were about 10% off their October records. The NASDAQ also lost 1.5% on the week closing at 2597. We wouldn’t recommend getting short any index at these levels as it appears we’ll get a corrective bounce, but would still suggest stock traders to hedge at least a portion of their portfolio in case the unexpected happens and we see an absolute collapse. Bonds: A flight to safety pushed down the yield on the 10-year Treasury at one point to 4.01%, its lowest level in two years. The December U.S. T-bonds gained almost 1½ basis points to end the week at a new contract high of 116’28. With over 2 weeks until the next FOMC decision on rates, the contract highs may not be in but we are starting to lean towards a sell rally mentality here. If we are correct in our evaluation of stocks and do see a meek rally and the dust settles even if only temporarily notes and bonds should give back 2 ½ to 4 points in a hurry. As an aggressive trade one could buy January puts although we will most likely recommend a play in March futures playing an outright short or a bearish spread playing the yield curve. ____________________________________________________________________ The dollar looks destined for a bounce mainly because no one thinks it will. It appears a base is building around 75.000 in the almighty buck and a move to 78.000 is our forecast. This is by no means a trend reversal but a bounce in a bear trend that we view as about half-way done. With a growing trade, current-account deficit, and a Fed seemingly destined to further lowering of rates on fear of a full blown recession, we refuse to call a longer term bottom yet. The Japanese yen continues to attract buyers looking for refuge from sub prime mortgage problems. The December yen climbed modestly to .9230, the highest close in over a year. The yen is starting to look top heavy and on a move downward our first target is .9050. On Friday, the U.K.'s Office for National Statistics reduced its estimate of real GDP growth in the third quarter from .8% to .7%. The December pound was up .0074 on the week at $2.0585. Current pricing could go either way so we’ll stay on the sidelines here. While it has been a painful trade we stay short the Euro in futures and are confident we will get some value back on our December put options that are currently cabinet. Although our December put play may have been about 30 days too early we believe that the Euro is grossly overvalued and is due for a correction down to 1.4400 and potentially 1.40000 on any US dollar strength. With the carry trade unwinding last week, the Australian dollar was a victim of circumstance and our long positions were effected. Needless to say we expect this week will erase all of that and put us in the green as we expect to see this oversold market fight its way back to .9000 on December by month’s end. This currency should be bought as we think the assault on parity is well under way. On a daily chart you saw a doji star (refer to your candle stick charts) on the December Swiss franc Friday, combine that with it being extremely overbought two words “get short.” Our initial target is .8912 followed by .8823. The December Canadian dollar finished the week down just over 1 cent at $1.0144, the lowest weekly close in nearly two months. The Canadian dollar, having now exceeded parity with the US dollar, has tended to run into a peak in mid November and then to decline all the way into mid December. The charts are extremely oversold and the Loonie may rally in sympathy with energies and metals but we sense a move below parity should happen relatively soon; sell rallies on day trades and look to other currencies for position trades. ____________________________________________________________________ Corn: Export sales showed 1.8 m.m.t. of corn was sold last week which was more than expectations. Demand remains robust as end-users and importers load up on freshly harvested U.S. supplies. It should slow in December but demand will remain strong into early spring planting intentions; when corn acres to be planted will surface and we learn to what degree of acres will be lost to beans. We still expect crude oil and dollar index trends to lead March corn. At current our thought is the next move will be a late November or early December sell off in the crude and slight dollar rally. Additionally, corn could be weighed down as large index funds take year end profits before positioning for the coming fight for acreage price surge. Support remains at 3.90 and resistance at 4.05. A close over 4.07 would be very friendly with next stop at 4.13 then potentially 4.25. A close under 3.90 and next stop is 3.82 then 3.70. Ideally, we want to see a pull back to the 3.70 area before year end to be used as a buying opportunity expecting 4.60 to 4.80 in the March contract before expiration. If a correction was to play out it would also set up a long entry in December 08’ closer to 4.00. Beans: Export sales showed 1.8 m.m.t. of beans were sold last week. We do not expect bean demand to weaken until mid-January; if the Brazilian crop looks good, then China will begin to cancel overbooked U.S. sales and switch to cheaper Brazilian beans. Like corn we are still looking for influence from outside markets in beans. A year end correction could come with profit taking from crude, metals, and the dollar index. Front month beans traded at the highest levels since 1973 but on very unconvincing volume because of the holiday trading schedule. With little to no upside resistance on spillover strength from outside markets, beans could continue to trade up. Major support on March soybeans is at 10.85 and then below at 10.50. A close under support and our next stop is 10.10 to 10.20. A year end break to the low $10 area would be an opportunity to get positioned for the fight for acreage that should price beans $12 plus before March expires. 2008 could well be the year we see “beans in the teens” on increased demand from China or any weather issues in South America and/or domestically. Wheat: Export sales report showed 510 t.m.t. of wheat was sold last week. Demand remains a weak note and should continue weak into year's end. After a week of sideways consolidation with prices holding the 7.50 level, shorts got nervous and wheat prices broke through resistance picking up buy stops. Next resistance is 8.65 for March which serves as the 50.0% Fibonacci retracement from the contract high and the November lows. The market is currently overbought and we are looking to re-establish short positions and expect 7.50 on March to be penetrated in December. ____________________________________________________________________ The USDA increased its estimate of 2007-2008 world ending stocks of sugar from 45.1 to 46.6 million tons, or 28% of annual use. If the estimate holds true, it will be the highest stocks to use ratio in seven years. This in itself is a good reason why sugar has failed to rally while a multitude of other commodities are making multi-decade highs. Remember there are two sides to the supply/demand equation and we will continue to accumulate longs in sugar for our patient clients who would rather be early than late. We still see value and expect 13 cents at a minimum on sugar next year. After the close on Wednesday, the USDA said that there were 582 million pounds of frozen orange juice concentrate in storage, down 19% from a year ago. The USDA is expecting this year's Florida orange crop to be 30% larger than a year ago. January orange juice remained around the $1.35 level all week. Orange juice prices tend to rise into November as physical supplies reach their annual lows going into winter, when consumption is heaviest and the risk of a killer freeze is highest. But orange harvest and juice production begins in December, and the market has regularly declined into deliveries against January, the first new-crop contract. We are on the sidelines. Lumber prices normally decline into the fourth quarter as the US construction season ends and demand declines sharply. But winter weather in the rainy Pacific Northwest and snowy Rocky Mountains slows timber harvest and increases the difficulty of building supply in the months before the new construction season begins. Lumber prices are cheap but look to get cheaper in coming weeks. The USDA said that 80% of the cotton crop was harvested and 2007-2008 cotton exports are up 92% from a year ago, but exports have been slower in recent weeks. December 08’ cotton lost ¾ cent last week to 72.73 and is nearing our target entry to get long at 70 cents. Our clients were filled on a limit order to buy July cotton call options last week, contact us for further details. Cocoa prices traded higher on the week, but as we stated last week, we are looking for a move to 1800 in coming weeks and we aren’t convinced with this rally. Although we will not get short here we will probably look to get long March at lower levels. The 100 day moving average is 1932 and we would need to see a trade early this week to convince us we were right, if not we will sit out this trade and most likely miss a trade as cocoa will move north to 2000 plus without us. Currently coffee is not on our trade list as we feel it could go either way and wish to get a clearer picture of crop size from Brazil. ____________________________________________________________________ Gold was back in favor last week, helped by a poor economic outlook, a weak dollar, and higher oil prices. February gold jumped up almost $40 to $831.80. As previously stated we are recommending $50 bull call spreads in April gold and using pullbacks as buying opportunities to get long futures in February as much higher gold prices are in our future. Gold supply was 16% higher (in the third quarter) than a year earlier at 1,045 tones. This sharp rise was primarily caused by reduction in mining company de-hedging and higher central bank sales, and not by a rise in mine output. (World Gold Council. November 14, 2007) That being said rising supply is not always a bearish indicator. Silver followed gold higher but to a much lesser extent as volatile trade had silver gaining only 7 cents on the week closing at the 20 day moving average of 14.93. We expect silver prices to find their way to 15.30-15.60 this week and will be recommending $1.00 bull call spreads in March options as well as an entry long March futures. March copper dropped 17 cents last week to $3.0295, falling in tandem with expectations for the U.S. economy. March copper has lost 67 cents in the past seven weeks. Short term copper could bounce from an oversold standpoint but the trend and downward descent is far from over and March should find its way to $2.4000 or another 20% price reduction.
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.
____________________________________________________________________ |
