MB Wealth Corp. Weekly Commentary
For October 1st - October 5th 2007
By: Matthew Bradbard
Raw materials continue to surge higher. Gold, wheat, and oil have been in the spotlight along with various other grains, metals, energies, and currencies that have made historic moves in recent weeks. It is our opinion that commodities are foreshadowing a rise in inflation. Although it appears inflation is tame from most recent economic reports, if you look at a weakening dollar and rising prices, the true purchasing power the dollar is certainly not the almighty buck it used to be. With the third quarter now behind us, will the bull market continue in commodities in the fourth quarter? To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ We started the week feeling pretty good about our pullback prediction in oil. After hitting another record high on Friday, of almost $84 a barrel, it looks like oil should take another stab at a slight correction. By no means do we think this run is over, especially with the impressive demand in the fourth quarter, but we do think it would be healthy for this bull to take a breath. Assuming a high of $83.76 we think $78 is doable for a pullback, but as we suggested last week on new contract highs, be ready to cover with another month or to exit the position because ultimately we do foresee higher prices. Numerous storms came and went last week, but none hurt oil or gas production in the Gulf of Mexico and most of the rigs that were closed were operating by the end of the week. Natural gas traders will be watching storms this week, but with more U.S. natural gas supplies available (only down 1% from last year's high level), there is little supply concern. At present prices we prefer the sidelines as Natural gas could break either way. We like getting long closer to $6.40 on November. I am going to reiterate our outlook on heating oil because this is a trade you want in if given the right opportunity. Consumer’s major distress in the energy sector could soon be heating oil. Prices have already hit all time highs months before the first snow flake is expected to fall. Refiners have yet to fully switch over and are still devoting efforts toward RBOB gasoline while peak demand is fast approaching. We have to hope to see a warm winter to avoid some real economic pain that could make this summer’s gasoline prices look cheap. Again, looking for a pullback into our buy zone about 10-15 cents lower than current prices. Our advice here would be to buy pullbacks that hold support and look to build a position. Because of the extreme volatility in this contract you must be well funded, start small, and parlay the position. ____________________________________________________________________ Last Friday's USDA report said that the number of U.S. cattle on-feed on September 1st was down 6.2% from a year ago, but U.S. beef production is up .5% from a year ago. Until more markets can be found for U.S. beef, the current situation seems to be keeping prices steady. In the December live cattle on a break below 99.50 which serves as support and 50 day moving average look for a quick move to 97/97.50 which will provide as a good entry to get long. Feeder cattle are trading sideways and currently, without a short term trend, we will stay away until we can figure it out. On a break in grains you could see higher pricing, but presently we can find better plays for our money. December lean hogs are apt to trade lower next week continuing on weakness that has taken 6 cents off in the previous two weeks. Disappointment that China is not buying more pork has been pressuring prices lower and then on Friday afternoon, the USDA said that hog and pig inventories were up 2.8% on September 1st from a year ago, more than expected. So far in 2007, U.S. pork production is up 2.5% from a year ago and will probably go a little higher by the end of this year. ____________________________________________________________________ Stocks: Traditionally, October offers the best opportunities of the year to buy into the stock market. Why? The market has tended to decline during September into October as mutual funds sell out losing positions before their fiscal years end October 31. Thereafter, however, that selling pressure ends and participants begin looking for opportunities to buy. I point this out because this is the norm and we are not expecting normal market conditions this year because of the housing market problems, credit crunch, and inflationary concerns. We would continue to sell rallies and maintain that the Dow and S&P is one shoe drop from testing the August 16th lows. HEDGE YOUR PORTFOLIO! Bonds: Market-driven US interest rates tend to decline into the new US fiscal year beginning October 1, with prices rising inversely. But after a correction into mid/late month, instruments at the long end of the yield curve tend to begin rising again into year end. The overall direction will largely depend on how the Fed reacts to current markets situations. The bottom line is that the most recent jockeying by the Fed has created no new liquidity, no new reserve, and very little new purchasing power so we do expect more credit problems in the very near future. ____________________________________________________________________ Most currencies gained against the dollar last week, thanks to the half-percent rate cuts from the Federal Reserve. Although a week premature, we would expect to still see a bounce in the dollar but not enough to get long, rather set up for another sell and allow an entry to get long some of the other currencies. On a weaker than expected jobs number on Friday the dollar slide could accelerate. In Europe, France showed stronger consumer spending in August than expected and Germany's unemployment rate improved to 8.8% in September, the best in 14 years. Recent numbers suggest that the European Central Bank will eventually have to raise rates again. The December Euro climbed to a new record high of $1.4293. Currently the Euro looks heavy and we are looking for a retracement to $1.4050. The December Canadian dollar ended the week up .71 at a new contract high of $1.0072. On Friday, real GDP was shown to be up 2.5% in July from a year ago, a little less than expected. A speech by Bank of Canada’s Governor Dodge also suggested that Canada's rates may hold steady for now. On a pullback in oil look for the Loonie to follow. On Tuesday, Japan chose 71 year old Yasuo Fakuda to be the next Prime Minister. His challenge will be to try to restore positive growth to the world's second largest economy, avoid deflation, and not take on any more public debt. Investor’s appetite for risk is re-emerging so you could see the return of the yen-carry trade. After hitting and exceeding our 88 target, the Aussie looks destined for a retraction. After 9 straight days of gains the Australian dollar is showing signs of being overbought, assuming a high on Monday October 1st look for re-establishing longs closer to 86. ____________________________________________________________________ Corn: December corn had a nice gain Monday-Thursday, but gave it back on Friday after the USDA said that it counted 1.30 billion bushels of corn stocks on September 1st, more than was expected. This news means that the USDA will likely raise its next ending stocks estimate on October 12th. December corn ended the week down 3.5 cents at $3.73. Corn is overbought and we should experience a 20 plus cents correction on harvest pressures before establishing longs for 08’ contracts. With all attention on wheat, remember corn cannot afford to loose acreage into 08-09 and will need to trade higher to encourage farmers to plant corn. Beans: November soybeans have been impressive lately, but lost a little on Friday after the September 1st stocks came in at 573 million bushels, more than expected. Even so, November soybeans finished the week up 12.25 cents at a new weekly high of $9.912. The market is doing its job by trading high enough to encourage acreage in South America. Look for new crop 08’ contracts to gain on old crop. We are currently short Bean oil for December with stops above the contract highs with a target of 37.50; a 50% retracement from recent H/L. US soybean harvest is most intense in October, with basis typically widest (cash price under futures at its most extreme) by mid month. But once past the midpoint of harvest activity, supply pressure begins to ease. Demand surges as both exporters and domestic processors buy aggressively. Furthermore, as producers deliver, short hedges against futures are lifted. The market enjoys a post-harvest recovery. Wheat: December wheat continues to be the strongest grain, marching up 65 cents this week to another new contract high of $9.39. On Thursday, the USDA said that, so far, 2007--2008 wheat exports were up 61% from a year ago. Also, the Ukraine said that it would begin limiting wheat exports on November 1st to protect their domestic supplies. The primary export season for US wheat continues into December, when crops in the Southern Hemisphere are harvested. But, by the time the new US winter wheat crop is mostly planted in October, the potential for excess old-crop supply usually begins to burden the market. Thus, May Wheat, best representing carryover as the last old-crop contract, has tended to peak in October and decline into deliveries. Technical’s are still not showing signs of a top but we like buying put options here with some time because we contend that although wheat prices may stay historically high, present prices should be unsustainable for an extended period of time. ____________________________________________________________________ U.S. cotton exports for 2007-2008 are strong up 121% from a year ago, says the USDA but December cotton closed the week down 1.08 cents at 65.00. U.S. ending stocks remain high and the fall harvest is progressing. As we’ve said in previous weeks, Cotton will need to trade higher or loose acreage and we are looking for an entry long December 08’ closer to 70 cents. Dow Jones Newswires reported that the quality of the new cocoa harvest has so far been mediocre to poor. Many have already been wondering how serious the presence of black pod disease is in West Africa. December cocoa closed the week up $53 at $2,036, the highest weekly close in two months, also helped by the weak U.S. dollar. A technical set up with a potential triple top at 2055 has convinced us to get short December with stops just above 2055 looking for a pullback to 1900/1950. Coffee traders are in a waiting game to see if and when rain will come to Brazil. Brazil's coffee crop needs adequate rain sometime in the next four weeks to have a good flowering process. So far, there is not much rain in sight. December coffee should be firm until rain is delivered. March sugar gained slightly on the week to 10.15, the best weekly close in over a month. World sugar production is expected to be higher this year, but so is the demand for ethanol. As long as we stay above the 100 day moving average Sugar can be bought. The options are fairly priced and we will continue to accumulate longer term calls thinking the ethanol trade will once again emerge. FCOJ traders had their eyes on several potential storms this week, but none of them damaged Florida or oil rigs in the Gulf of Mexico. The USDA will make its first official estimate of the Florida orange crop on October 12th. January orange juice was up 1.35 cents to $1.2940, the best weekly close in a month. As the U.S. housing slump drags on, the North American lumber industry must reduce production and close some mills permanently to fix its financial mess, said analysts who follow the industry. Demand for lumber dropped in 2007 from 2006 and will drop again in 2008 largely because of the slowdown in home building so sell rallies in lumber. ____________________________________________________________________ Just weeks after the Fed made its big half-percent rate cuts, December gold added another $11.10, closing at $750.00, its highest level in 16 months. U.S. economic news remains weak and Friday's inflation report was low, giving the Fed plenty of room to keep rates down - just the way gold and silver investors like it. December silver closed up 30 cents at $13.92, the highest close in over three months. We are expecting this trend of higher metal prices to continue but would like to see a pullback to establish new longs and current premiums in options are expensive because of the unrelenting rally. For gold buy $10-15 pullbacks, for Silver buy 30-50 ¢ pullbacks. December copper was up 4.75 cents to $3.6400 with investors showing a little more caution about a weak U.S. housing industry and general economy. Also note a potential triple top at $3.7000 which could serve as significant resistance. Platinum has been playing catch up to silver and gold after the fed’s rate cut hitting a record high last week. Several disruptions at South African metal producers have helped support higher prices coupled with overall investment in precious metals by funds.
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